Rockwell Automation
Annual Report 2001

Plain-text annual report

73487-ROCKWELL AR01 COVERrv1 12/4/01 01:14 Page 1 / R O C K W E L L A U T O M A T I O N / 2 0 0 1 A N N U A L R E P O R T & F O R M 1 0 - K / ROK 2001 / ANNUAL REPORT & FORM 10-K / 73487-ROCKWELL AR01 COVERrv1 12/4/01 01:09 Page 2 VISION. TO BE THE MOST VALUED GLOBAL PROVIDER OF POWER, CONTROL AND INFORMATION SOLUTIONS. Financial Highlights CONTINUING OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 2000 2001 SALES $4,665 $4,656 $4,279 SEGMENT OPERATING EARNINGS INCOME FROM CONTINUING OPERATIONS* DILUTED EARNINGS PER SHARE* 725 283 1.47 696 344 1.81 474 173 0.94 *Before special items in 2001. Special items include charges of $91 million ($60 million after tax, or 32 cents per share) for costs associated with realignment actions which were partially offset by a gain of $18 million ($12 mil- lion after tax, or six cents per share) resulting from the favorable settlement of an intellectual property matter. Sales by Segment (IN MILLIONS) CONTINUING OPERATIONS 1999 3,646 2000 3,677 2001 3,359 782 202 35 762 168 49 710 150 60 $4,665 $4,656 $4,279 CONTROL SYSTEMS POWER SYSTEMS ELECTRONIC COMMERCE OTHER ROK 2001 / 02 / LETTER TO SHAREOWNERS LETTER TO SHAREOWNERS Dear Shareowner: 2001 was a pivotal year for Rockwell. With the successful spin-off of Rockwell Collins, we transformed the company into one primarily focused on automation. At the same time, we responded aggressively to an unprecedented industry downturn in the manufacturing economy while preserving our investments in future growth. Today, as Rockwell Automation, we have the fullest range of industrial automation products and platforms and a growing portfolio of value-added services and manufactur- ing solutions tailored to meet our customers’ needs. We have the global market presence, people and know-how to capture significant revenue and profit opportunities when business investment in the manufacturing sector improves. We are intent on being the most valued global provider of power, control and information solutions for industrial automation. This past year was very difficult as capital spending in the manufacturing economy suffered a sharp pull-back across / 03 / the markets we serve. Business activity in served markets was weak but stable during the first half of the year, but the third quarter saw a pronounced decline in demand, most notably in North America. This unstable environment was further weakened by the uncertainty that followed the tragic terrorist events of September 11th. We have taken action to respond to the persistent weakness of our markets and continued economic uncertainty. Since June, we have consolidated and closed facilities, realigned administrative functions and reduced our worldwide work- force by approximately 9%. We remain committed to maintaining our competitive strength by balancing the appropriate level of cost reduction with investments in future growth. In fiscal 2001, Rockwell Automation earned $0.94 per share, before special items, on revenues of $4.3 billion. These amounts are down significantly from the prior year, due almost entirely to the adverse market conditions. At the same time, however, we managed to generate $178 million of free cash flow, maintained operating margins of 11% and invested over $170 million in R&D and new growth initiatives. We also benefited from the relative strength of our international operations, which accounted for 33% of total revenue. ROK 2001 / 04 / In sum, after 39 years in this business, I can tell you this environment is the toughest I have ever seen. I can also tell you that it will improve, and when it does, we will be ready. We are confident in the significant upside we will realize as we capitalize on Rockwell Automation’s considerable operating leverage. We have made significant investments in our Global Manufacturing Solutions business including the addition of new people and expertise. This investment lessens our dependency on the industrial capital spending cycle, and we will benefit from a strengthening economy. We remain focused on our strategy for profitable growth. We will continue to drive the Rockwell Lean Enterprise throughout our organization. We are investing to optimize our core automation product and platform offerings, and we are making good on our commitment to expand that core by taking decades of manufacturing know-how and transforming it into a high value-added and fast-growing services business. We will continue to seek out strategic partnerships and acquisitions that will enable us to expand our reach into new markets, new customers and new regions of the world. I have spent a lot of time over the past year talking with our customers. What I have heard, consistently, is that they are focused on ways to reduce time to market, increase asset productivity, outsource non-core functions and activ- / 05 / ities, cut energy costs and increase their efficiency and reliability. As a company focused on industrial automation products, services and solutions, those are the areas where we bring value to our global customer base of world leading manufacturers. Our customers also tell us that they require integrated control and information solutions that seamlessly connect automation products, both at the plant level and with their business systems. We have the building blocks in place to help manufacturers around the world. Over the past several years, we have invested over $100 million in our Logix integrated control and information architecture. It has been successfully deployed and well received by our customers as evidenced by a growth rate of over 50% in 2001. Our expanded services capabilities now include technical support services, human performance/training, asset management, engineered solutions, manufacturing information, software and consulting services. Finally, following a return to profitability in 2001, Rockwell Electronic Commerce’s contact center business is well- positioned to meet the current and future needs of our customers. In planning for the year ahead, we have taken great care to base our forecasts and strategies on what we know and what we can control. It’s a fact that we cannot control the ROK 2001 / 06 / economy. But Rockwell has never been about what we cannot do - it’s about what we can do. We can control our costs. We can control the strength of our customer relationships. We can control the quality of the integrated products, services and solutions we are developing for the next wave of our company’s growth. My commitment to you is that what we can do, we will do. Our industry is in the midst of a transformation. In the early 1970’s Rockwell was at the forefront of the industry with our electro-mechanical products. In the 1980’s we were at the forefront of the move toward the PLC platform and related products and systems. Rockwell Automation today is at the forefront of the movement to integrated services and solutions. We remain confident in Rockwell Automation and optimistic about the future. Thank you for your continued support. Sincerely, Don H. Davis, Jr. Chairman of the Board & Chief Executive Officer Rockwell Automation Control Systems Rockwell Electronic Commerce Power Systems Rockwell Scientific Company LLC ROK 2001 / 08 / Control Systems Rockwell Automation’s largest segment, Control Systems, offers a unique combination of Allen-Bradley and Rockwell Software brand products, control and information manage- ment platforms, and global manufacturing solutions. Our comprehensive suite of industrial automation solutions makes us a global industry leader with $3.4 billion in annual sales. Control Systems employs 17,900 people, operates 38 manufacturing plants and maintains more than 600 sales and support locations serving customers in over 80 countries. Through a comprehensive network of global research centers, service centers and more than 3,500 authorized distributors, representatives and solution providers worldwide, Control Systems is there with its customers around the globe, helping them to reduce time to market, increase productivity, improve quality and cut costs. Control Systems enjoys a balanced exposure to different industries with a variety of world-class customers. Major industries served include consumer products, food and beverage, transportation, metals, mining, pulp and paper, petroleum, specialty chemicals, pharmaceuticals, electric power, water treatment, electronic assembly and semiconductors. Control Systems The Components and Packaged Applications Group The Automation Control and Information Group Global Manufacturing Solutions ROK 2001 / 10 / Control Systems THE COMPONENTS AND PACKAGED APPLICATIONS GROUP (CPAG) is comprised of Rockwell Automation’s industrial components, power control and motor management products, as well as our packaged and engineered products. CPAG provides a broad portfolio of innovative solutions to improve the productivity of leading manufacturers worldwide. It maintains global leadership positions across many electro-mechanical and solid-state product segments, including motor starters and contactors, push buttons and signaling devices, termination and protection devices, relays and timers, discrete and condition sensing, and variable speed drives for HVAC, material handling and packaging applications. CPAG is also aggressively expanding its market leading portfolio of machine safety components. THE AUTOMATION CONTROL AND INFORMATION GROUP (ACIG) has introduced a powerful new, open architecture that integrates information and multiple types of control disciplines including discrete, motion and process control across various factory floor operating platforms. This architecture provides a unified, scalable approach that allows companies to standardize multiple automation and information applications on one platform. The Integrated Logix Architecture has been received very positively by our customers and represents another key driver for long-term growth. This architecture encompasses our Logix control, NetLinx communications and ViewAnyWare visualization, enabling customers to reduce their total cost of ownership by creating a seamless electronic manufacturing environment. ACIG also produces distributed I/O platforms, high performance rotary and linear motion control systems, as well as electronic operator interface devices and plant floor industrial computers. GLOBAL MANUFACTURING SOLUTIONS (GMS) leverages Rockwell Automation’s decades of know-how to help manufacturing companies deliver quality products faster and at a lower cost. It provides multi-vendor automation and information systems and solutions for manufacturing, multi-vendor customer support, training, software, consulting and imple- mentation, integrated predictive maintenance, asset management, energy solutions and services, batch manufacturing and regulatory compliance solutions. GMS tailors solutions to meet each customer’s specific needs, using tools from a wide range of manufacturing and service disciplines. / 11 / NEW PRODUCTS AND SERVICES • Integrated power control capabilities with demand for energy efficiency by introducing next generation PowerFlex™ Drive, DrivesLogix™ and medium voltage IntelliCENTER™ technology • Executed on safety market strategy by extending portfolio with the successful introduction of Safety Light Curtains and the GuardPLC™ for machine safety applications • Continued to expand on component offerings with the introduction of push buttons, motor starters and sensor products BRAND NAMES • Extended ControlLogix® platform and introduced CompactLogix™, FlexLogix™, SoftLogix™ and DriveLogix™ to create a common, scalable integrated control architecture to help customers reduce design, installation and maintenance costs and improve cycle time • Enhanced the Integrated Logix Architecture with the introduction of SERCOS™ digital motion interface for application in the demanding packaging, converting and assembly processes • Introduced EtherNET/IP networking based on industry standard EtherNET technology to help manufacturers establish seamless information flows • Introduced Rockwell Automation Asset Management Portfolio to provide repair and re-manufacturing services to assure top performance of plant floor equipment • Expanded scope of Manufacturing BusinessWare Software to help customers’ e-Manufacturing solutions, tying plant floor information into enterprise and supply chain business systems and converting plant floor data into useful, decision-making information • Launched remote monitoring to improve uptime of critical plant assets and to provide technical support faster and at a lower cost ROK 2001 / 12 / Power Systems Power Systems offers Dodge® brand mechanical power transmission products and Reliance Electric™ brand indus- trial motors and drives found in almost every industrial and commercial application. Dodge and Reliance products have been powering industrial plants since the early 1900’s, providing the best total-cost-of-ownership solutions with Power Matched™ products. Sales for fiscal 2001 were $710 million. Power Systems employs 4,500 people within 13 manufac- turing facilities and 12 service centers in the U.S., Mexico, Canada, Germany and China. Power Systems incorporates world-class design, engineering, manufacturing and logistics techniques to provide products and services that ensure long life, low maintenance, service excellence and lowest long-term cost. Supporting this commitment to excellence is an extensive network of over 5,000 distribu- tors and OEM partners worldwide. Major industries served include mining, aggregate, food/beverage, forestry, transportation, petrochemicals, metals, unit handling, air handling and environmental. In each industry, Power Systems active participation and total commitment to customer satisfaction allows it to be a key partner in its customers’ success. Power Systems Mechanical Power Transmission Business Industrial Motor and Drive Business Power Services Business ROK 2001 / 14 / Power Systems THE MECHANICAL POWER TRANSMISSION BUSINESS has helped increase the produc- tivity and profitability of industrial applications around the world for over 120 years. By offering a complete line of mounted bearings, gear reducers, standard mechanical drives, conveyor pulleys, couplings, bushings, clutches and motor brakes, we can respond quickly and effectively to our customers’ industry or unique application-driven requirements. THE INDUSTRIAL MOTOR AND DRIVE BUSINESS has been an industry leader for more than 90 years, providing industrial and engineered motors, and standard AC and DC drives, that ensure optimum durability and performance in the most demanding applications. We have the capability to engineer standard, modified or custom motors in all types, styles and sizes, ranging from fractional to 15,000 horsepower motors. Reliance Electric sets the standard in the design and production of energy efficient motors and continues to achieve new profit initiatives within the manufacturing process. THE POWER SERVICES BUSINESS positions Power Systems as the premier motor, mechanical and maintenance service provider for OEMs, end-users and distributors. Power Services offers these customers a complete line of service modules including product repair, motor and mechanical maintenance solutions, plant maintenance, training and consulting services. / 15 / NEW PRODUCTS AND SERVICES • Introduced TORQUE-ARM II™, new generation of shaft mount speed reducers to address customer demands for increased torque and horsepower ratings • Launched IMPERIAL™/ISAF mounted spherical roller bearings to improve installation and removal efficiency BRAND NAMES • Extended wide range of motor and power transmission products to its key markets, including: - Large AC G-30 motors for global applications - SABRE™ small AC motors for OEM and MRO customers - TORQUE MAX™ AC motors to meet Aggregate Industry requirements - V*S MASTER™ line of inverter-duty, constant-torque motors for application in the paper, metals and printing industries • Introduced SP-600™ standard AC drives for a broad range of speed-regulated applications • Extended service offerings to include Power Lean™ assessment programs, Total Cost of Ownership-TCO Appraisal™ services and TCO TOOLBOX™ software to improve customer productivity ROK 2001 / 16 / Rockwell Electronic Commerce Rockwell Electronic Commerce provides contact center solutions to industry leaders in a wide variety of industries worldwide. With a current installed base of more than 1,100 systems, Rockwell Electronic Commerce enables businesses to interact with their customers reliably, field- ing millions of contacts everyday around the world. Through a partnership approach, Rockwell Electronic Commerce combines advanced, scalable and open plat- forms, innovative applications and unique value-added services to help businesses effectively leverage the revenue generating potential of their existing customer contact and IT infrastructures. Solution suites from Rockwell Electronic Commerce are respected for their ability to enhance overall system functionality and value while providing clearly defined paths for system migration and growth. Major industries served include service, transportation, energy, healthcare, retail telecommunications and financial. NEW PRODUCTS AND SERVICES • Accelerated transition from an embedded hardware platform, extending open software environment penetration to greater than 35% of customer base • Implemented a professional services model focused on consulting and application devel- opment to provide sophisticated solutions for customers / 17 / Rockwell Scientific Company LLC Rockwell Automation has a 50% ownership interest in Rockwell Scientific Company LLC, the former Rockwell Science Center. Rockwell Scientific Company conducts advanced research programs which support the strategies of Rockwell Automation’s operating businesses. Rockwell Scientific Company also provides research and development services to Rockwell Collins, The Boeing Company and the U.S. Government. ROK 2001 / 18 / Rockwell Automation — 2001 Business Highlights • Control Systems • Acquired batch process capability to deliver flexible, cost-effective solutions to a variety of industries • Established Rockwell Automation as a leader in machine safety through new product introductions • Penetrated the Marine industry with significant wins on U.S. and U.K. naval programs by applying global support services with commercial industrial hardware • Achieved 50% increase in Integrated Logix Architecture global sales • Established brand labeling strategic alliance with Omron to expand presence in Asia Pacific and strengthen product portfolio • Created custom panel assembly capability to address OEM customer outsourcing requirements • Initiated nearly 200 Lean Enterprise projects related to product revenue streams, new product development and functional support • Launched Power and Energy Management service initiative to help customers be more competitive by addressing power and energy management needs • Increased international sales to 38% of total sales CONTROL SYSTEMS POWER SYSTEMS ELECTRONIC COMMERCE / 19 / • Power Systems • Electronic Commerce • Established Power Systems Shanghai for assembly and service of power transmission products tailored to the Asia Pacific market • Established an industrial services strategic alliance with Fluor Global Services • Established new distribution agreements, both domestically and internationally, increasing channel revenue by 46% • Implemented Power Lean operational excellence initiatives within 13 manufacturing locations and at Power Systems Group Headquarters • Opened an offshore development center in India to augment software development, improve time to market and reduce costs by 33% • Realigned the business to focus on products and solutions targeted to maintaining our leadership position in the high-end customer market and penetrating the small- and medium- size business market • Formed Colinx LLC and Endorsia (Europe) e-business platforms that combines e-business with logistics ROK 2001 / 20 / Mary Jane Hall Vice President, Human Resources Thomas J. Mullany Vice President & Treasurer Keith D. Nosbusch Senior Vice President & President Rockwell Automation Control Systems James P. O’Shaughnessy Vice President & Chief Intellectual Property Counsel Rondi Rohr-Dralle Vice President, Corporate Development Joseph D. Swann Senior Vice President & President Rockwell Automation Power Systems Rockwell Automation Corporate Officers Don H. Davis, Jr. Chairman of the Board & Chief Executive Officer Carl G. Artinger General Auditor Michael A. Bless Senior Vice President & Chief Financial Officer William J. Calise, Jr. Senior Vice President, General Counsel & Secretary John D. Cohn Senior Vice President, Strategic Development & Communications Michael G. Cole Vice President, Corporate Information Technology Kent G. Coppins Vice President & General Tax Counsel David M. Dorgan Vice President & Controller / 21 / Bruce M. Rockwell Vice Chairman First of Michigan Division of Fahnestock & Co. Inc. Joseph F. Toot, Jr. Retired President & Chief Executive Officer The Timken Company Rockwell Automation Board of Directors Don H. Davis, Jr. Chairman of the Board & Chief Executive Officer Betty C. Alewine Former President & Chief Executive Officer COMSAT Corporation George L. Argyros Chairman & Chief Executive Officer Arnel & Affiliates J. Michael Cook Retired Chairman & Chief Executive Officer Deloitte & Touche LLP William H. Gray, III President & Chief Executive Officer The College Fund/UNCF William T. McCormick, Jr. Chairman & Chief Executive Officer CMS Energy Corporation John D. Nichols Retired Chairman & Chief Executive Officer Illinois Tool Works, Inc. ROK 2001 / 22 / General Information Rockwell Automation World Headquarters 777 E. Wisconsin Avenue, Suite 1400 Milwaukee, WI 53202 414.212.5200 www.rockwellautomation.com Investor Relations Securities analysts should call: Thomas J. Mullany Vice President & Treasurer 414.212.5210 Corporate Public Relations Members of the news media should call: Donald J. McGrath Director, Media Relations 414.212.5313 Annual Meeting The company’s annual meeting of shareowners will be held near its World Headquarters at The Pfister Hotel, 424 E. Wisconsin Avenue, Milwaukee, Wisconsin, at 10 a.m., Wednesday, February 6, 2002. A notice of the meeting and proxy materials will be mailed to shareowners in late December 2001. Shareowner Services Correspondence about share ownership, dividend payments, transfer requirements, changes of address, lost stock certificates, and account status may be directed to: Mellon Investor Services LLC PO Box 3316 South Hackensack, NJ 07606-1916 800.204.7800 or 201.329.8660 www.melloninvestor.com Shareowners wishing to transfer stock should send their written request, stock certificate(s) and other required documents to: Mellon Investor Services LLC PO Box 3312 South Hackensack, NJ 07606-1912 Shareowners needing further assistance should call Rockwell Shareowner Relations: 414.212.5300 For copies of the annual report (including Form 10-K) and Form 10-Q, please call Rockwell Shareholder Direct: 888.765.3228 / 23 / General Information Continued Investor Services Program Under the Mellon Shareholder Services Investor Services Program for Rockwell shareowners, shareowners of record may select to reinvest all or a part of their divi- dends, to have cash dividends directly deposited in their bank accounts and to deposit share certificates with the agent for safekeeping. These services are all pro- vided without charge to the participating shareowner. In addition, the program allows participat- ing shareowners at their own cost to make optional cash investments in any amount from $100 to $100,000 per year or to sell all or any part of the shares held in their accounts. Participation in the program is voluntary, and shareowners of record may participate or terminate their participation at any time. For a brochure and full details of the program, please direct inquiries to: Mellon Bank, N.A. c/o Mellon Investor Services LLC PO Box 3338 South Hackensack, NJ 07606-1938 800.204.7800 or 201.329.8660 Independent Auditors Deloitte & Touche LLP 411 E. Wisconsin Avenue, Suite 2300 Milwaukee, WI 53202 414.271.3000 Transfer Agent and Registrar Mellon Investor Services LLC PO Box 3316 South Hackensack, NJ 07606-1916 800.204.7800 or 201.329.8660 120 Broadway, 33rd Floor New York, NY 10271 800.204.7800 or 201.329.8660 Stock Exchanges Common Stock (Symbol: ROK) United States: New York and Pacific United Kingdom: London FORM 10-K > / ROCKWELL AUTOMATION / SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended September 30, 2001. Commission Ñle number 1-12383 Rockwell International Corporation (Exact name of registration as speciÑed in its charter) Delaware (State or other jurisdiction of incorporation or organization) 777 East Wisconsin Avenue Suite 1400 Milwaukee, Wisconsin (Address of principal executive oÇces) 25-1797617 (I.R.S. Employer IdentiÑcation No.) 53202 (Zip Code) Registrant's telephone number, including area code: (414) 212-5299 (OÇce of the Secretary) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1 Par Value (including the associated Preferred Share Purchase Rights) New York, PaciÑc and London Stock Exchanges Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ The aggregate market value of registrant's voting stock held by non-aÇliates of registrant on October 31, 2001 was approximately $2.5 billion. 183,793,520 shares of registrant's Common Stock, par value $1 per share, were outstanding on October 31, 2001. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in this Proxy Statement for the Annual Meeting of Shareowners of registrant to be held on February 6, 2002 is incorporated by reference into Part III hereof. Item 1. Business. PART I Rockwell International Corporation, now doing business under the name Rockwell Automation (the Company or Rockwell), a Delaware corporation, is a leading global provider of industrial automation power, control and information products and services. The Company was incorporated in 1996 and is the successor to the former Rockwell International Corporation as a result of a tax-free reorganization completed on December 6, 1996, pursuant to which the Company divested its former aerospace and defense businesses (the A&D Business) to The Boeing Company (Boeing). The predecessor corporation was incorporated in 1928. On September 30, 1997, the Company completed the spinoÅ of its automotive component systems business (the Automotive Business) into an independent, separately traded, publicly held company named Meritor Automotive, Inc. (Meritor). On July 7, 2000, Meritor and Arvin Industries, Inc. merged to form ArvinMer- itor, Inc. (ArvinMeritor). On December 31, 1998, the Company completed the spinoÅ of its semiconductor systems business (Semiconductor Systems) into an independent, separately traded, publicly held company named Conexant Systems, Inc. (Conexant). On June 29, 2001, the Company completed the spinoÅ of its Rockwell Collins avionics and communications business into an independent, separately traded, publicly held company named Rockwell Collins, Inc. (Rockwell Collins). As used herein, the terms the ""Company'' or ""Rockwell'' include subsidiaries and predecessors unless the context indicates otherwise. Information included in this Annual Report on Form 10-K refers to the Company's continuing businesses unless otherwise indicated. For purposes hereof, whenever reference is made in any Item of this Annual Report on Form 10-K to information under speciÑc captions in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations (the MD&A), or in Item 8, Consolidated Financial Statements and Supplementary Data (the Financial Statements), or to information in the Proxy Statement for the Annual Meeting of Shareowners of the Company to be held on February 6, 2002 (the 2002 Proxy Statement), such information shall be deemed to be incorporated therein by such reference. Products and Services Rockwell is a provider of industrial automation power, control and information products and services. The Company is organized based upon products and services and has three operating segments consisting of Control Systems, Power Systems and Electronic Commerce. The Control Systems business is a supplier of industrial automation products, systems, software and services focused on helping customers control manufacturing processes. Products include controllers, I/O (input/output) systems, drives, sensors, packaged control products, operator interface devices, software products and services and network monitoring products. These products are primarily marketed under the Rockwell Automation, Allen-Bradley, and Rockwell Software brand names. Major markets served include consumer products, food and beverage, transportation, metals, mining, pulp and paper, petroleum, specialty chemicals, pharmaceuticals, electric power, water treatment, electronic assembly and semiconductor fabrication. The Power Systems business is a supplier of industrial automation mechanical power transmission products and industrial motors and drives. Products include power transmission components, gear reducers, speed drives, shaft mounted reducers, conveyor pulleys, shaft couplings, clutches, motor brakes, mounted bearings and motors. These products are primarily marketed under the Dodge and Reliance Electric brand names. Major markets served include mining, aggregate, food/beverage, forestry, petrochemicals, metals, unit handling, air handling and environmental. The Electronic Commerce business is a solutions supplier for companies that interact with their customers via the telephone, the internet, or both. Products include automatic call distributors, computer telephony integration software, information collection, reporting, queuing and management systems, call center systems and consulting services. Major markets served include service, transportation, energy, healthcare, retail, telecommunications and Ñnancial. 1 Financial information with respect to the Company's business segments, including their contributions to sales and operating earnings for each of the three years in the period ended September 30, 2001, is contained under the caption Results of Operations in the MD&A on pages 11-13 hereof, and in Note 19 of the Notes to Consolidated Financial Statements in the Financial Statements. Competitive Posture The Company has competitors which, depending on the product involved, range from large diversiÑed businesses that sell products outside of automation, comparable to or greater than the Company in scope and resources, to smaller companies specializing in niche products and services. Factors that aÅect the Company's competitive posture are its research and development eÅorts, the quality of its products and services and its marketing and pricing strategies. The Company's products are sold by its own sales force and through distributors and agents. Acquisitions and Divestitures The Company regularly considers the acquisition or development of new businesses and reviews the prospects of its existing businesses to determine whether any should be modiÑed, sold or otherwise discontinued. During 2001, the Control Systems segment acquired the batch software and services business of Sequencia Corporation. The acquisition expanded Control Systems' portfolio of Manufacturing BusinessWare solutions into the batch application space. During 2000, the Control Systems segment acquired Entek IRD International Corporation (Entek), a provider of machinery condition monitoring solutions, and acquired substantially all the assets and assumed certain liabilities of Systems Modeling Corporation (SMC), a developer of shop Öoor scheduling, simulation and modeling software. The total cost of these acquisitions was $70 million. The acquisition of Entek has increased Rockwell's ability to provide value-added services that reduce customers' downtime and mainte- nance costs at their manufacturing facilities. The acquisition of SMC complements Control Systems' Manufacturing BusinessWare strategy by providing additional capabilities. During 1999, the Control Systems segment acquired Anorad Corporation, EJA Engineering Ltd., substantially all of the assets of Enterprise Technology Group, Inc. (ETG) and certain assets, principally intellectual property, of Vancouver-based Dynapro. The total cost of these acquisitions was $185 million. Anorad is a supplier of linear motor equipment and its acquisition positions Rockwell to capitalize on motion control opportunities in the semiconductor fabrication market. EJA, based in the United Kingdom, is a manufacturer of integrated control and safety systems in the industrial safety market. The ETG acquisition enhances the technological capabilities of Control Systems while the Dynapro acquisition expands Control Systems' human-machine interface software and hardware capabilities. On June 29, 2001, the Company completed the spinoÅ of its Rockwell Collins avionics and communica- tions business into an independent, separately traded, publicly held company by distributing all of the outstanding shares of Rockwell Collins to the Company's shareowners on the basis of one Rockwell Collins share for each outstanding Rockwell share. Commensurate with the spinoÅ, Rockwell Collins made a special payment to the Company of $300 million. Following the spinoÅ, each of Rockwell Collins and the Company has a 50 percent ownership interest in Rockwell ScientiÑc Company LLC (RSC) (formerly a wholly-owned subsidiary of Rockwell known as Rockwell Science Center). On December 31, 1998, the Company completed the spinoÅ of Semiconductor Systems into an independent, separately traded, publicly held company by distributing all of the outstanding shares of Conexant to the Company's shareowners on a pro-rata basis. The Company sold its North American Transformer business during 1999. 2 The results of operations for Rockwell Collins for 2001, 2000 and 1999 and for Semiconductor Systems for 1999 have been presented in the Company's Consolidated Statement of Operations included in the Financial Statements as income from discontinued operations. Additional information relating to acquisitions and divestitures is contained in the MD&A on page 14 hereof and in Notes 2 and 4 of the Notes to Consolidated Financial Statements in the Financial Statements. Geographic Information The Company's principal markets outside the United States are in Australia, Brazil, Canada, China, Denmark, France, Germany, Italy, Japan, Mexico, Singapore, Spain, Sweden, Switzerland, The Netherlands and the United Kingdom. In addition to normal business risks, operations outside the United States are subject to other risks including, among other factors, political, economic and social environments, governmen- tal laws and regulations, and currency revaluations and Öuctuations. Selected Ñnancial information by major geographic area for each of the three years in the period ended September 30, 2001 is contained in Note 19 of the Notes to Consolidated Financial Statements in the Financial Statements. Research and Development At September 30, 2001, the Company employed approximately 2,400 professional engineers and scientists and 1,000 supporting technical personnel. In addition to research and development activities conducted by each of the Company's businesses, the Company has a 50 percent ownership interest in RSC. In addition to other activities, RSC conducts advanced research programs which support the strategies of the Company's operating businesses. The Company compensates RSC for such services. The Company spent $169 million and $209 million in 2001 and 2000, respectively, on research and development. In addition, customer-sponsored research and development was $61 million in each of 2001 and 2000. Employees At September 30, 2001, the Company had approximately 23,100 employees, of whom approximately 6,700 were employed outside the United States. Raw Materials and Supplies Raw materials essential to the conduct of each of the Company's business segments generally are available at competitive prices. Many items of equipment and components used in the production of the Company's products are purchased from others. Although the Company has a broad base of suppliers and subcontractors, it is dependent upon the ability of its suppliers and subcontractors to meet performance and quality speciÑcations and delivery schedules. Environmental Protection Requirements Information with respect to the eÅect on the Company and its manufacturing operations of compliance with environmental protection requirements and resolution of environmental claims is contained in Note 18 of the Notes to Consolidated Financial Statements in the Financial Statements. See also Item 3, Legal Proceedings, on pages 4-6 hereof. Patents, Licenses and Trademarks Numerous patents and patent applications are owned or licensed by the Company and utilized in its activities and manufacturing operations. Various claims of patent infringement and requests for patent indemniÑcation have been made to the Company. Management believes that none of these claims will have a material adverse eÅect on the Ñnancial condition of the Company. See Item 3, Legal Proceedings, on pages 4-6 hereof. While in the aggregate the Company's patents and licenses are considered important in the 3 operation of its business, management does not consider them of such importance that loss or termination of any one of them would materially aÅect the Company's business or Ñnancial condition. The Company's name and its registered trademarks ""Rockwell'' and ""Rockwell Automation'' are important to each of its business segments. In addition, the Company owns other important trademarks applicable to only certain of its products, such as ""Allen-Bradley'' and ""A-B'' for electronic controls and systems for industrial automation, ""Reliance Electric'' for electric motors and ""Dodge'' for mechanical power transmission products. Seasonality None of the Company's business segments is seasonal. Item 2. Properties. At September 30, 2001, the Company's businesses operated 61 plants and research and development facilities principally in the United States, Europe, Africa, Asia PaciÑc, South America and Canada. These businesses also had approximately 300 sales oÇces, warehouses and service centers. These facilities had an aggregate Öoor space of approximately 16 million square feet. Of this Öoor space, approximately 59 percent was owned by the Company and approximately 41 percent was leased. At September 30, 2001, approximately 520,000 square feet of Öoor space was not in use, most of which was in owned facilities. A summary of Öoor space of these facilities at September 30, 2001 is as follows: Location and Segments United States: Owned Facilities Leased Facilities Total (in millions of square feet) Control SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe: Control SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ South America: 4.8 3.4 0.1 0.4 0.1 Control SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 Canada and other areas: Control SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate OÇces ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3 0.1 Ì 9.3 2.2 1.1 0.2 1.1 Ì 0.5 0.9 0.2 0.3 6.5 7.0 4.5 0.3 1.5 0.1 0.6 1.2 0.3 0.3 15.8 There are no major encumbrances (other than Ñnancing arrangements which in the aggregate are not material) on any of the Company's plants or equipment. In the opinion of management, the Company's properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. Item 3. Legal Proceedings. Rocky Flats Plant. On January 30, 1990, a civil action was brought in the United States District Court for the District of Colorado against the Company and another former operator of the Rocky Flats Plant (the Plant), Golden, Colorado, operated from 1975 through December 31, l989 by the Company for the Department of Energy (DOE). The action alleges the improper production, handling and disposal of radioactive and other hazardous substances, constituting, among other things, violations of various environ- 4 mental, health and safety laws and regulations, and misrepresentation and concealment of the facts relating thereto. The plaintiÅs, who purportedly represent two classes, sought compensatory damages of $250 million for diminution in value of real estate and other economic loss; the creation of a fund of $150 million to Ñnance medical monitoring and surveillance services; exemplary damages of $300 million; CERCLA response costs in an undetermined amount; attorneys' fees; an injunction; and other proper relief. On February 13, 1991, the court granted certain of the motions of the defendants to dismiss the case. The plaintiÅs subsequently Ñled a new complaint, and on November 26, 1991, the court granted in part a renewed motion to dismiss. The remaining portion of the case is pending before the court. On October 8, 1993, the court certiÑed separate medical monitoring and property value classes. EÅective August 1, 1996, the DOE assumed control of the defense of the contractor defendants, including the Company, in the action. Beginning on that date, the costs of the Company's defense, which had previously been reimbursed to the Company by the DOE, have been and are being paid directly by the DOE. The Company believes that it is entitled under applicable law and its contract with the DOE to be indemniÑed for all costs and any liability associated with this action. On November 13, 1990, the Company was served with a summons and complaint in another civil action brought against the Company in the same court by James Stone, claiming to act in the name of the United States, alleging violations of the U.S. False Claims Act in connection with the Company's operation of the Plant (and seeking treble damages and forfeitures) as well as a personal cause of action for alleged wrongful termination of employment. On August 8, 1991, the court dismissed the personal cause of action. On December 6, 1995, the DOE notiÑed the Company that it would no longer reimburse costs incurred by the Company in defense of the action. On November 19, 1996, the court granted the Department of Justice leave to intervene in the case on the government's behalf. On April 1, 1999 a jury awarded the plaintiÅs approximately $1.4 million in damages. On May 18, 1999, the court entered judgment against the Company for approximately $4.2 million, trebling the jury's award as required by the False Claims Act, and imposing a civil penalty of $15,000. If the judgment is aÇrmed on appeal, Mr. Stone may also be entitled to an award of attorney's fees but the court refused to consider the matter until appeals from the judgment have been exhausted. On September 24, 2001, a panel of the 10th Circuit Court of Appeals aÇrmed the judgment. The Company intends to seek further appellate review. Management believes that an outcome adverse to the Company will not have a material eÅect on the Company's business or Ñnancial condition. On January 8, 1991, the Company Ñled suit in the United States Claims Court against the DOE, seeking recovery of $6.5 million of award fees to which the Company alleges it is entitled under the terms of its contract with the DOE for management and operation of the Plant during the period October 1, 1988 through September 30, 1989. On July 17, 1996, the government Ñled an amended answer and counterclaim against the Company alleging violations of the U.S. False Claims Act previously asserted in the civil action described in the preceding paragraph. On March 20, 1997, the court stayed the case pending disposition of the civil action described in the preceding paragraph. On August 30, 1999, the court continued the stay pending appeal in that civil action. The Company believes the government's counterclaim is without merit, and believes it is entitled under applicable law and its contract with the DOE to be indemniÑed for any liability associated with the counterclaim. Hanford Nuclear Reservation. On August 6 and August 9, 1990, civil actions were Ñled in the United States District Court for the Eastern District of Washington against the Company and the present and other former operators of the DOE's Hanford Nuclear Reservation (Hanford), Hanford, Washington. The Company operated part of Hanford for the DOE from 1977 through June 1987. Both actions purport to be brought on behalf of various classes of persons and numerous individual plaintiÅs who resided, worked, owned or leased real property, or operated businesses, at or near Hanford or downwind or downriver from Hanford, at any time since 1944. The actions allege the improper handling and disposal of radioactive and other hazardous substances and assert various statutory and common law claims. The relief sought includes unspeciÑed compensatory and punitive damages for personal injuries and for economic losses, and various injunctive and other equitable relief. Other cases asserting similar claims (the follow-on claims) on behalf of the same and similarly situated individuals and groups have been Ñled from time to time since August 1990 and may continue to be Ñled from time to time in the future. These actions and the follow-on claims have been (and any additional follow-on 5 claims that may be Ñled are expected to be) consolidated in the United States District Court for the Eastern District of Washington under the name In re Hanford Nuclear Reservation Litigation. Because the claims and classes of claimants included in the actions described in the preceding paragraph are so broadly deÑned, the follow-on claims Ñled as of October 31, 2001 have not altered, and possible future follow-on claims are not expected to alter, in any material respect the scope of the litigation. EÅective October 1, 1994, the DOE assumed control of the defense of certain of the contractor defendants (including the Company) in the In re Hanford Nuclear Reservation Litigation. Beginning on that date, the costs of the Company's defense, which had previously been reimbursed to the Company by the DOE, have been and are being paid directly by the DOE. The Company believes it is entitled under applicable law and its contracts with the DOE to be indemniÑed for all costs and any liability associated with these actions. Russellville. On June 24, 1996, judgment was entered against the Company in a civil action in the Circuit Court of Logan County, Kentucky on a jury verdict awarding $8 million in compensatory and $210 million in punitive damages for property damage. The action had been brought August 12, 1993 by owners of Öood plain real property near Russellville, Kentucky allegedly damaged by polychlorinated biphenyls (PCBs) discharged from a plant owned and operated by the Company's Measurement & Flow Control Division prior to its divestiture in March 1989. On January 14, 2000, the Kentucky Court of Appeals reversed the lower court's judgment and directed entry of judgment in the Company's favor on all claims as a matter of law. On November 16, 2000 the Kentucky Supreme Court granted plaintiÅs' motion for discretionary review of the Appellate Court ruling. On March 24, 1997, the Circuit Court of Franklin County, Kentucky in Commonwealth of Kentucky, Natural Resources and Environmental Protection Cabinet vs. Rockwell, an action Ñled in 1986 seeking remediation of PCB contamination resulting from unpermitted discharges of PCBs from the Company's former Russellville, Kentucky plant, entered judgment establishing PCB cleanup levels for the former plant site and certain oÅsite property and ordering additional characterization of possible contamination in the Mud River and its Öood plain. The Court deferred any decision on the imposition of Ñnes and penalties pending implementation of an appropriate remediation program. On August 13, 1999, the Court of Appeals aÇrmed the trial court's judgment, a ruling that the Supreme Court of the State of Kentucky has let stand. The Company has been proceeding with remediation and characterization eÅorts consistent with the trial Court's ruling. Other. In July 1995, a federal grand jury impaneled by the United States District Court for the Central District of California began an investigation into a July 1994 explosion at the Santa Susana Field Laboratory operated by the Company's former Rocketdyne Division in which two scientists were killed and a technician was injured. On April 11, 1996, pursuant to an agreement between the Company and the United States Attorney for the Central District of California, the Company entered a plea of guilty to two counts of unpermitted disposal of hazardous waste and one count of unpermitted storage of hazardous waste, all of which are felony violations of the Resource Conservation and Recovery Act, and paid a Ñne of $6.5 million to settle potential federal criminal claims arising out of the federal government's investigation. Investigation under other U.S. and California laws continues. While the Company has no information on the status of these investigations, further civil sanctions could be imposed on the current owner of the facility, Boeing, for which the Company would be required to indemnify Boeing. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to the conduct of its business, including those pertaining to product liability, environmental, safety and health, intellectual property, employment and contract matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes the disposition of matters which are pending or asserted will not have a material adverse eÅect on the Company's business or Ñnancial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of 2001. 6 Item 4a. Executive OÇcers of the Company. The name, age, oÇce and position held with the Company and principal occupations and employment during the past Ñve years of each of the executive oÇcers of the Company as of October 31, 2001 are as follows: Name, OÇce and Position, and Principal Occupations and Employment Age Don H. Davis, Jr. Ì Chairman of the Board of Rockwell since February 1998 and Chief Executive OÇcer since October 1997; President and Chief Operating OÇcer of Rockwell prior thereto ÏÏÏÏÏÏ 61 Carl G. Artinger Ì General Auditor of Rockwell since June 2001; Director, General Audit of Rockwell from October 2000 to June 2001; Manager, General Audit of Rockwell from October 1998 to October 2000; Manager, Planning and Analysis of Cone Mills (textile manufacturer) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 Michael A. Bless Ì Senior Vice President and Chief Financial OÇcer of Rockwell since June 2001; Vice President of Rockwell from February 2001 to June 2001; Vice President, Finance of Rockwell Automation Control Systems from June 1999 to June 2001; Vice President, Corporate Development and Planning of Rockwell from August 1997 to June 1999; Director, Investment Banking of Merrill Lynch & Co., Inc. (investment banking) from April 1997 to August 1997; Senior Vice President of Dillon, Read & Co. (investment banking) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ William J. Calise, Jr. Ì Senior Vice President, General Counsel and Secretary of Rockwell ÏÏÏÏÏÏÏÏ John D. Cohn Ì Senior Vice President, Strategic Development and Communications of Rockwell since July 1999; Vice President-Global Strategy Development of the avionics and communications business of Rockwell from February 1997 to June 1999; Director, Global Business Development and Strategic Planning of the avionics and communications business of Rockwell prior thereto ÏÏÏÏ Michael G. Cole Ì Vice President, Corporate Information Technology of Rockwell and Vice President and Chief Information OÇcer of Rockwell Automation Controls Systems since September 2000; Vice President, Corporate Information Systems of Rockwell from July 1999 to September 2000; Director-Information Systems of Rockwell prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kent G. Coppins Ì Vice President and General Tax Counsel of Rockwell since June 2001; Associate General Tax Counsel of Rockwell from November 1998 to June 2001; Senior Tax Counsel of Rockwell prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ David M. Dorgan Ì Vice President and Controller of Rockwell since June 2001; Director, Headquarters Finance of Rockwell Automation Control Systems from April 2000 to June 2001; Director, Financial Reports of Rockwell from June 1999 to April 2000; Manager, Financial Reports of Rockwell from April 1998 to June 1999; Senior Manager, Deloitte & Touche LLP (professional services Ñrm) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Mary Jane Hall Ì Vice President of Rockwell since June 2001 and Senior Vice President, Human Resources of Rockwell Automation Control Systems since January 2001; Vice President, Human Resources of Rockwell Automation Controls Systems prior theretoÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thomas J. Mullany Ì Vice President and Treasurer of Rockwell since June 2001; Vice President, Investor Relations of Rockwell from May 1998 to June 2001; Treasury Operations Executive of the avionics and communications business of Rockwell from March 1997 to May 1998; and President of Rockwell International Credit Corporation prior theretoÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Keith D. Nosbusch Ì Senior Vice President of Rockwell and President, Rockwell Automation Control Systems since November 1998; Senior Vice President-Automation Control and Information Group of Rockwell Automation from February 1996 to November 1998; Vice President-Control Logic Business of Rockwell Automation prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ James P. O'Shaughnessy Ì Vice President and Chief Intellectual Property Counsel of RockwellÏÏÏÏÏ Rondi Rohr-Dralle Ì Vice President, Corporate Development of Rockwell since June 2001; Vice President, Finance of Rockwell Automation Control Systems, Global Manufacturing Solutions business from September 1999 to June 2001; Treasurer and Investment Controller of Applied Power, Inc. (manufacturer of tools, equipment, systems and supply items) from October 1998 to September 1999; Vice President and General Manager of Caltern, Inc. (a subsidiary of Applied Power, Inc.) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36 63 47 53 48 37 58 52 50 54 45 7 Name, OÇce and Position, and Principal Occupations and Employment Joseph D. Swann Ì Senior Vice President of Rockwell since June 2001 and President, Rockwell Automation Power Systems since June 1998; Vice President of Rockwell from June 1998 to June 2001; Senior Vice President and General Manager-Dodge Mechanical Group of Rockwell Automation prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Age 60 There are no family relationships, as deÑned, between any of the above executive oÇcers. No oÇcer of the Company was selected pursuant to any arrangement or understanding between him and any person other than the Company. All executive oÇcers are elected annually. PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters. The principal market on which the Company's common stock is traded is the New York Stock Exchange. The Company's common stock is also traded on the PaciÑc and London Stock Exchanges. On October 31, 2001, there were 46,635 shareowners of record of the Company's common stock. The following table sets forth the high and low closing price of the Company's common stock on the New York Stock Exchange Ì Composite Transactions reporting system during each quarter of the Company's Ñscal years ended September 30, 2001 and 2000: Fiscal Quarters 2001 2000 High Low High Low First ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SecondÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47.63 48.62 47.00 16.96 29.94 35.99 35.95 12.20 54.06 51.94 44.63 41.06 45.00 38.38 31.50 28.13 (1) The high and low closing prices of the Company's common stock for the fourth quarter of 2001 reÖect the spinoÅ of Rockwell Collins on June 29, 2001. On December 6, 1996, each Rockwell shareowner became entitled to receive .042 share (presently .084 share) of Boeing common stock for each share of Rockwell common stock or Class A common stock owned. On September 30, 1997, each Rockwell shareowner received one-third of a share of Meritor common stock for each share of Rockwell common stock owned. On July 7, 2000, Meritor and Arvin Industries, Inc. merged to form ArvinMeritor. Under the terms of the merger agreement, each share of Meritor common stock was converted into the right to receive three-quarters of a share of ArvinMeritor common stock. As a result, the one-third of a share of Meritor common stock received by Rockwell shareowners on September 30, 1997 now represents one-quarter of a share of ArvinMeritor common stock. On December 31, 1998, each Rockwell shareowner received one-half of a share (presently one share) of Conexant common stock for each share of Rockwell common stock owned. On June 29, 2001, each Rockwell shareowner received one share of Rockwell Collins common stock for each share of Rockwell common stock owned. At September 30, 2001, such fractional or whole shares of Boeing, ArvinMeritor, Conexant and Rockwell Collins common stock per Rockwell share had values of $2.81, $3.57, $8.30 and $14.20, respectively. Rockwell's current stock price does not reÖect the value of the Boeing, ArvinMeritor, Conexant and Rockwell Collins shares. During the year ended September 30, 2001, the Company repurchased, through open-market purchases, approximately 1.7 million shares of common stock. 8 The following table sets forth the aggregate quarterly cash dividends per common share (comprised of the common stock and, until February 23, 1997, the date of its automatic conversion to common stock, Class A common stock) during each of the Company's Ñve Ñscal years in the period ended September 30, 2001: Fiscal Year Cash Dividends per Common Share(1) 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.93 1.02 1.02 1.02 1.16 (1) Upon the spinoÅ of Meritor on September 30, 1997, the Company's annual $1.16 per share dividend was set at $1.02 for Rockwell and $0.14 for Meritor. EÅective with the spinoÅ of Rockwell Collins, the Company anticipates that it will pay quarterly cash dividends which, on an annual basis, will equal $0.66 per share and Rockwell Collins will pay quarterly dividends which, on an annual basis, will equal $0.36 per share. However, the declaration and payment of dividends by the Company and Rockwell Collins will be at the sole discretion of their respective boards of directors. Per share dividend amounts indicated do not include dividends paid on the shares of Boeing, Meritor and Rockwell Collins received on December 6, 1996, September 30, 1997 and June 29, 2001, respectively, by Rockwell shareowners. On July 31, 2001, the Company granted nonqualiÑed stock options to purchase 7,000 shares of common stock of the Company at an exercise price of $16.05 per share to each of the following directors: B.C. Alewine, G.L. Argyros, J.M. Cook, W. H. Gray, III, W.T. McCormick, Jr., J.D. Nichols, B.M. Rockwell and J.F. Toot, Jr. The options vest in three equal installments beginning on July 31, 2002. The grant of these options was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. 9 Item 6. Selected Financial Data. The following sets forth selected consolidated Ñnancial data in respect of the Company's continuing operations. The data should be read in conjunction with the MD&A and the Financial Statements. The consolidated statement of operations data for each of the Ñve years in the period ended September 30, 2001, the related consolidated balance sheet data and other data have been derived from the audited consolidated Ñnancial statements of the Company. 2001(a) Year Ended September 30, 1999(c) (in millions, except per share data) 1998(d) 2000(b) 1997(e) Consolidated Statement of Operations Data: Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings (loss) per share from continuing operations: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheet Data: (at end of period) Total assets-continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Data: Capital expendituresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,279 83 125 $4,656 73 344 $4,665 84 283 $4,790 58 (169) $4,714 27 280 0.69 0.68 0.93 $4,074 4,074 922 1,600 $ 157 196 76 1.83 1.81 1.02 $4,397 5,289 924 2,669 $ 217 193 77 1.49 1.47 1.02 (0.85) (0.85) 1.02 1.30 1.28 1.16 $4,627 5,292 911 2,540 $ 250 184 67 $4,392 5,857 908 3,151 $ 265 169 71 $5,160 6,572 156 4,716 $ 264 157 78 (a) Includes special items of $73 million ($48 million after tax, or 26 cents per diluted share). Special items include charges of $91 million ($60 million after tax, or 32 cents per diluted share) for costs associated with the consolidation and closing of facilities, the realignment of administrative functions, the reduction in workforce and asset impairments which were partially oÅset by an $18 million gain ($12 million after tax, or six cents per share) resulting from the favorable settlement of an intellectual property matter. (b) Includes a gain of $32 million ($22 million after tax, or 12 cents per diluted share) resulting from the sale of real estate, a loss of $14 million ($10 million after tax, or six cents per diluted share) on the sale of a Power Systems business, and income of $28 million ($19 million after tax, or 10 cents per diluted share) resulting from the demutualization of Metropolitan Life Insurance Company. (c) Includes a gain of $32 million ($21 million after tax, or 11 cents per diluted share) on the sale of the Company's North American Transformer business and a loss of $29 million ($19 million after tax, or 10 cents per diluted share) associated with the write-oÅ of the Company's investment in Goss Graphic Systems, Inc. preferred stock. (d) Includes charges of $521 million ($458 million after tax, or $2.32 per diluted share) for costs associated with asset impairments and a comprehensive restructuring program. The diluted and basic per share amounts for 1998 are identical, as the loss from continuing operations resulted in stock options being antidilutive. (e) Includes a charge of $23 million (before and after tax, or 11 cents per diluted share), relating to the write-oÅ of purchased research and development in connection with an acquisition. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Summary of Results of Operations 2001 Year Ended September 30, 2000 (in millions) 1999 Sales: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,359 710 150 60 $3,677 762 168 49 $3,646 782 202 35 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,279 $4,656 $4,665 Segment operating earnings(b): Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 426 38 7 3 $ 640 65 (16) 7 $ 642 53 12 18 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill and purchase accounting items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General corporate Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Loss) gain on disposition of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 474 (79) (53) Ì (83) (91) 168 (43) 696 (82) (20) (14) (73) Ì 507 (163) 725 (72) (163) 32 (84) Ì 438 (155) Income from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 125 $ 344 $ 283 (a) Other represents the sales and segment operating earnings of Rockwell Science Center through the third quarter of 2001. Beginning with the fourth quarter of 2001, the Company's 50 percent ownership interest in RSC is accounted for using the equity method, and the Company's proportional share of RSC's earnings or losses are included in general corporate-net. (b) Information with respect to the composition of segment operating earnings is contained in Note 19 of the Notes to Consolidated Financial Statements in the Financial Statements. 2001 Compared to 2000 Sales were $4,279 million in 2001 compared to $4,656 million in 2000. Income from continuing operations in 2001 was $125 million, or 68 cents per diluted share, compared to $344 million, or $1.81 per diluted share, in 2000. The 2001 results from continuing operations include special charges of $91 million ($60 million after tax, or 32 cents per share) for costs associated with realignment actions which were partially oÅset by an $18 million gain ($12 million after tax, or six cents per share) resulting from the favorable settlement of an intellectual property matter. Control Systems Control Systems' sales in 2001 were $3,359 million compared to $3,677 million in 2000, reÖecting principally depressed market conditions for automation products in the United States during 2001. Shipments 11 outside of the United States, before the eÅect of currency rate Öuctuations, were higher and included increases of six percent in Europe, 13 percent in Asia PaciÑc and 13 percent in Latin America. Sales in 2001 were reduced by approximately $96 million due to a stronger dollar in 2001, particularly against the euro, relative to the foreign currency exchange rates for the same period a year ago. Segment operating earnings were $426 million in 2001 compared to $640 million in 2000. The decrease was due to lower volume and costs resulting from planned lower capacity utilization. Control Systems' return on sales in 2001 was 12.7 percent compared to 17.4 percent in 2000. Power Systems Power Systems' sales in 2001 were $710 million compared to $762 million in 2000, with an increase at the motors business more than oÅset by lower volume in mechanical products as distributors continue to pare inventories. Segment operating earnings in 2001 were $38 million compared to $65 million in the same period a year ago primarily due to lower volume and unfavorable product mix. Power Systems' return on sales was 5.4 percent in 2001 compared to 8.5 percent in 2000. Electronic Commerce Sales at Electronic Commerce were $150 million in 2001 compared to $168 million in 2000. The decrease was due to depressed market conditions. Segment operating earnings were $7 million in 2001 compared to an operating loss of $16 million in 2000. The increase was due to the successful implementation of cost saving initiatives and the absence of approximately $10 million in charges related to such initiatives which are reÖected in the results for 2000. Other EÅective June 29, 2001, each of Rockwell Collins and the Company has a 50 percent ownership interest in RSC (formerly a wholly-owned subsidiary of Rockwell known as Rockwell Science Center). Results of Rockwell Science Center are included in continuing operations through the third quarter of 2001. Sales of Rockwell Science Center for the Ñrst nine months of 2001 were $60 million compared to $49 million for the full year in 2000. The increase was primarily due to higher sales to the United States government. Segment operating earnings decreased to $3 million for the Ñrst nine months of 2001 compared to $7 million for the full year in 2000 due to lower royalty income. General Corporate Ì Net General corporate-net in 2001 included a gain of $18 million resulting from the favorable settlement of an intellectual property matter. General corporate-net in 2000 included a $32 million gain on the sale of real estate and $28 million of income resulting from the Metropolitan Life Insurance Company demutualization. Special Charges The Company recorded charges of $91 million ($60 million after tax, or 32 cents per diluted share) for costs associated with a realignment of its business operations to reduce costs in response to the continued decline in demand in industrial automation markets. Total cash expenditures related to the realignment actions are expected to be approximately $51 million, with substantially all of the spending to be completed by the end of the Ñrst quarter of Ñscal 2002. Management expects that the annual pre-tax savings resulting from these actions will be approximately $150 million, a portion of which is expected to be reinvested in growth initiatives. The special charges are related to the business segments as follows: Control Systems, $76 million; Power Systems, $5 million; and Corporate, $10 million. See Note 3, Special Charges, in the Notes to Consolidated Financial Statements in the Financial Statements. 12 2000 Compared to 1999 Sales were $4,656 million in 2000 compared to $4,665 million in 1999. Earnings per diluted share from continuing operations in 2000 of $1.81 were up 23 percent over comparable 1999 earnings of $1.47. The related income from continuing operations increased $61 million to $344 million from $283 million. Earnings per share for 2000 reÖect the beneÑts of the Company's stock repurchase program and a lower eÅective income tax rate. Control Systems Control Systems' sales of $3,677 million in 2000 were slightly higher than in 1999 despite continued sluggish North American markets, particularly automotive related spending projects, and a weaker euro. The increase in sales attributable to businesses acquired in 2000 was more than oÅset by the absence of sales from the North American Transformer business disposed of during the fourth quarter of 1999. Operating earnings were $640 million in 2000 compared to $642 million in 1999. During 2000, Control Systems made investments in new product development and experienced material cost increases resulting from certain parts shortages. Operating earnings in 2000 include approximately $15 million of charges associated with ongoing process improvement and productivity initiatives. Operating earnings as a percent of sales was 17.4 percent in 2000 compared to 17.6 percent in 1999. Power Systems Power Systems' sales decreased $20 million between 1999 and 2000 primarily as a result of lower volume at the motors business. Segment operating earnings increased to $65 million in 2000 from $53 million in 1999 due to the beneÑts of manufacturing process improvements and material cost reductions. Operating earnings as a percentage of sales was 8.5 percent in 2000 compared to 6.8 percent in 1999. Electronic Commerce Sales for Electronic Commerce were down $34 million to $168 million in 2000 from $202 million in 1999. Electronic Commerce experienced an operating loss of $16 million in 2000, compared to operating earnings of $12 million in 1999. The results for 2000 include approximately $10 million of charges associated with a realignment which was aimed at sharpening market focus, better responding to customer needs and optimizing operating performance. Other Sales at Rockwell Science Center increased by $14 million between 1999 and 2000. Segment operating earnings decreased to $7 million in 2000 from $18 million in 1999. Operating earnings in 1999 included a $14 million gain resulting from the favorable settlement of an intellectual property matter. General Corporate Ì Net General corporate-net in 2000 included a gain of $32 million on the sale of real estate in Colorado Springs, Colorado and $28 million of income resulting from the demutualization of Metropolitan Life Insurance Company. Corporate expenses in 2000 included $5 million related to strategic investments in SourceAlliance.com. General corporate-net in 1999 included charges of approximately $37 million for costs incurred in connection with the Company's relocation of its corporate oÇce and a $29 million loss associated with the write-oÅ of its investment in Goss Graphic Systems, Inc. preferred stock. Disposition of Businesses In 2000, the Company recognized a $14 million loss on the sale of a Power Systems business. In 1999, the Company recognized a $32 million gain on the sale of Control Systems' North American Transformer business. 13 Discontinued Operations On June 29, 2001, the Company completed the spinoÅ of its Rockwell Collins avionics and communica- tions business into an independent, separately traded, publicly held company. In connection with the spinoÅ, all outstanding shares of Rockwell Collins, Inc. were distributed to Rockwell shareowners on the basis of one Rockwell Collins share for each outstanding Rockwell share. Commensurate with the spinoÅ, Rockwell Collins made a special payment to the Company of $300 million. The Company recorded a decrease to shareowner's equity for the net assets of Rockwell Collins as of June 29, 2001 of approximately $1.2 billion (including $300 million of debt incurred to make the special payment to the Company). Included in 2001 income from discontinued operations was $21 million of costs related to the spinoÅ. On December 31, 1998, the Company completed the spinoÅ of Semiconductor Systems into an independent, separately traded, publicly held company by distributing all of the outstanding shares of Conexant to the Company's shareowners on a pro-rata basis. Acquisitions During 2001, Control Systems acquired the batch software and services business of Sequencia Corpora- tion. The total cost of the acquisition was $6 million, which was allocated to intangible assets, including developed technology and assembled workforce, and the excess of the purchase price over the amounts assigned to intangible assets was recorded as goodwill. The acquisition will expand Control Systems' portfolio of Manufacturing BusinessWare Solutions into the batch application space. During 2000, Control Systems acquired Entek IRD International Corporation (Entek) and acquired substantially all the assets and assumed certain liabilities of Systems Modeling Corporation (SMC). Entek is a provider of machinery condition monitoring solutions and its acquisition has increased Rockwell's ability to provide value-added services that reduce customers' downtime and maintenance costs at their manufacturing facilities. SMC is a developer of shop Öoor scheduling, simulation and modeling software. The acquisition of SMC complements Control Systems' Manufacturing BusinessWare strategy by providing additional capabili- ties. The total cost of these acquisitions was $70 million, of which $61 million was allocated to intangible assets, including developed technology, and the excess of the purchase price over the amounts assigned to tangible and intangible assets was recorded as goodwill. Income Taxes The Company's eÅective income tax rate declined to 28.0 percent (excluding the tax eÅect of special items) in 2001 from 32.3 percent in 2000. This improvement reÖects the beneÑts of the development and implementation of strategies to achieve meaningful and sustainable tax rate reductions as well as certain tax refund claims in 2001. These strategies include utilization of foreign tax credits, lower state income tax rates and lower taxes associated with tax eÅective structuring of our international business. In addition, the eÅective income tax rate continues to beneÑt from the conversion of the Rockwell Salaried Retirement Savings Plan to a tax-advantaged employee stock ownership plan. Management believes the Company's eÅective income tax rate will continue to beneÑt in 2002 and beyond from ongoing tax planning initiatives. Outlook for 2002 Due to the continuing weak manufacturing environment, the Company is assuming a further sequential three percent sales decline in the Ñrst quarter of 2002. In this event, earnings per share are expected to be modestly higher than fourth quarter earnings due to the continued implementation of the cost reduction actions. Longer term results continue to be diÇcult to project given uncertain market conditions. Financial Condition Cash generated by operations was $335 million in 2001 compared to $645 million in 2000. Free cash Öow in 2001 was $178 million compared to $428 million in 2000. The lower cash generation in 2001 was driven primarily by lower earnings which was partially oÅset by reduced capital expenditures. The Company deÑnes 14 free cash Öow, an internal performance measurement, as cash provided by operating activities reduced by capital expenditures. The Company's deÑnition of free cash Öow may be diÅerent from deÑnitions used by other companies. Cash provided by investing activities was $153 million in 2001 compared to cash used for investing activities of $228 million in 2000. Investing activities in 2001 include a special payment of $300 million received from Rockwell Collins in connection with the spinoÅ on June 29, 2001. Capital expenditures in 2001 were $157 million, $60 million less than in 2000, and consisted primarily of investments in facilities, machinery and equipment, and integrated information systems to facilitate growth and increase operating eÇciencies. Capital expenditures in 2002 are expected to approximate 2001 levels. In addition to internally-generated cash, the Company has access to existing Ñnancing sources, including the public debt markets and the Company's approximately $1 billion of unsecured credit facilities with various banks. The Company's debt-to-total-capital ratio at September 30, 2001 was 37 percent compared to 26 percent at September 30, 2000. During 2000, the Board of Directors approved a $250 million stock repurchase program. The Company spent approximately $63 million to purchase approximately 1.7 million shares during 2001 in connection with this program. At September 30, 2001, there was approximately $104 million remaining on the Company's current $250 million stock repurchase program. Cash dividends to shareowners were $170 million, or $0.93 per share, in 2001 compared to $192 million, or $1.02 per share, in 2000. EÅective with the spinoÅ of Rockwell Collins, the Company anticipates that it will pay quarterly cash dividends which, on an annual basis, will equal $0.66 per share. However, the declaration and payment of dividends by the Company will be at the sole discretion of the Company's board of directors. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk during the normal course of business from changes in interest rates and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and Ñnancing activities and derivative Ñnancial instruments in the form of interest rate swap contracts and foreign currency forward exchange contracts. Interest Rate Risk In addition to using cash provided by normal operating activities, the Company utilizes a combination of short-term and long-term debt to Ñnance operations. The Company is exposed to interest rate risk on these debt obligations. The Company had short-term debt obligations consisting of bank borrowings with a carrying value of $9 million and $15 million at September 30, 2001 and 2000, respectively. The Company's results of operations are aÅected by changes in market interest rates on these short-term obligations. If market interest rates would have averaged 10 percent higher than actual levels in either 2001 or 2000, the eÅect on the Company's results of operations would not have been material. The fair values of these obligations approximated their carrying values at September 30, 2001 and 2000, and would not have been materially aÅected by changes in market interest rates. At September 30, 2001 and 2000, the Company had outstanding Ñxed rate long-term debt obligations with carrying values of $923 million and $925 million, respectively. The fair value of this debt was $887 million and $843 million at September 30, 2001 and 2000, respectively. The potential loss in fair value on such Ñxed-rate debt obligations from a hypothetical 10 percent increase in market interest rates would not be material to the overall fair value of the debt. The Company currently has no plans to repurchase outstanding Ñxed-rate instruments and, therefore, Öuctuations in market interest rates would not have an eÅect on the Company's results of operations or shareowners' equity. 15 Foreign Currency Risk The Company is exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. The Company's objective is to minimize its exposure to these risks through a combination of normal operating activities and the utilization of foreign currency forward exchange contracts to manage its exposure on transactions denominated in currencies other than the applicable functional currency. In addition, the Company enters into contracts to hedge certain forecasted intercompany transactions. These contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is the policy of the Company not to enter into derivative Ñnancial instruments for speculative purposes. The Company does not hedge its exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars. A 10 percent adverse change in the underlying foreign currency exchange rates would not be signiÑcant to the Company's Ñnancial condition or results of operations. The Company records all derivatives on the balance sheet at fair value regardless of the purpose or intent for holding them. Derivatives that are not hedges are adjusted to fair value through earnings. For derivatives that are hedges, depending on the nature of the hedge, changes in fair value are either oÅset by changes in the fair value of the hedged assets, liabilities or Ñrm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineÅective portion of a derivative's change in fair value is immediately recognized in earnings. At September 30, 2001 and 2000, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $738 million and $852 million, respectively, primarily consisting of contracts to exchange the euro, pound sterling, Canadian dollar, Australian dollar and Swiss franc. Notional amounts are stated in the United States dollar equivalents at spot exchange rates at the respective dates. The use of these contracts allows the Company to manage transactional exposure to exchange rate Öuctuations as the gains or losses incurred on the foreign currency forward exchange contracts will oÅset, in whole or in part, losses or gains on the underlying foreign currency exposure. A hypothetical 10 percent adverse change in underlying foreign currency exchange rates associated with these contracts would not be material to the Ñnancial condition, results of operations or shareowners' equity of the Company. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 addresses Ñnancial accounting and reporting for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, goodwill and certain other intangible assets will no longer be systematically amortized but instead will be reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair value. SFAS 142 is eÅective for Ñscal years beginning after December 15, 2001, with early adoption permitted for entities with Ñscal years beginning after March 15, 2001. The Company expects to adopt SFAS 142 eÅective October 1, 2001. Management expects that the eÅect of ceasing amortization of goodwill will increase net income by approximately $41 million after tax, or 22 cents per diluted share, in Ñscal 2002. The Company has not completed its assessment of the additional eÅects of adopting SFAS 142. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses Ñnancial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS 144 is eÅective for Ñscal years beginning after December 15, 2001, with early adoption permitted. Management is currently evaluating the provisions of SFAS 144, but believes there will be no eÅect on the Company's Ñnancial position, results of operations or shareowners' equity resulting from the adoption. 16 Cautionary Statement This Annual Report contains statements (including certain projections and business trends) accompanied by such phrases as ""believes,'' ""estimates,'' ""expect(s),'' ""anticipates,'' ""will,'' ""intends,'' ""assumes'' and other similar expressions, that are ""forward-looking statements'' as deÑned in the Private Securities Litigation Reform Act of 1995. Actual results may diÅer materially from those projected as a result of certain risks and uncertainties, including but not limited to economic and political changes in international markets where the Company competes, such as currency exchange rates, inÖation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; demand for and market acceptance of new and existing products, including levels of capital spending in industrial markets; successful development of advanced technologies; competitive product and pricing pressures; the terrorist attacks in New York City and Washington, D.C. on September 11, 2001 and their aftermath; and the uncertainties of litigation, as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company's Securities and Exchange Commission Ñlings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. The information with respect to the Company's market risk is contained under the caption Quantitative and Qualitative Disclosures About Market Risk in MD&A on pages 15-16 hereof. 17 Item 8. Consolidated Financial Statements and Supplementary Data. CONSOLIDATED BALANCE SHEET (in millions) Assets Current Assets Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables (less allowance for doubtful accounts: 2001, $43; 2000, $39) ÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net current assets of Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PropertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net long-term assets of Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 30, 2001 2000 121 680 600 152 144 Ì 1,697 1,075 1,192 110 Ì $ 170 737 610 153 201 551 2,422 1,194 1,255 77 341 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,074 $ 5,289 Liabilities and Shareowners' Equity Current Liabilities Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 388 189 74 206 867 922 338 171 176 $ 16 478 196 119 215 1,024 924 281 199 192 Commitments and contingent liabilities (Note 18) Shareowners' Equity Common stock (shares issued: 216.4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted stock compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock in treasury, at cost (shares held: 2001, 32.7; 2000, 32.9)ÏÏÏÏÏÏÏÏÏÏÏÏ 216 981 2,242 (162) (1) (1,676) 216 967 3,363 (166) (2) (1,709) Total shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,600 2,669 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,074 $ 5,289 See notes to consolidated Ñnancial statements. 18 CONSOLIDATED STATEMENT OF OPERATIONS (in millions, except per share amounts) Year Ended September 30, 2000 2001 1999 Sales and Other Income: Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,279 44 $4,656 66 $4,665 48 Total sales and other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,323 4,722 4,713 Costs and Expenses: Cost of sales (Note 3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative (Note 3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,031 1,041 83 Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,155 Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168 43 125 180 3,102 1,040 73 4,215 507 163 344 292 3,173 1,018 84 4,275 438 155 283 276 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 305 $ 636 $ 559 Basic earnings per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.69 0.98 $ 1.83 1.55 $ 1.49 1.45 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.67 $ 3.38 $ 2.94 Diluted earnings per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.68 0.97 $ 1.81 1.54 $ 1.47 1.42 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.65 $ 3.35 $ 2.89 Average outstanding shares: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 182.9 187.8 190.5 Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 185.3 189.9 193.6 See notes to consolidated Ñnancial statements. 19 CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) Year Ended September 30, 2000 1999 2001 Continuing Operations: Operating Activities Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to arrive at cash provided by operating activities: $ 125 $ 344 $ 283 Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gain on dispositions of property and businesses (Note 15) ÏÏÏÏÏÏÏÏÏ Loss on investment (Note 15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special charges (Note 3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax beneÑt from the exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in assets and liabilities, excluding eÅects of acquisitions, divestitures, and foreign currency adjustments: Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Provided by Operating Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 76 2 (6) Ì 91 14 31 (3) (84) (37) (52) (18) 335 Investing Activities Property additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions of businesses, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special payment from Rockwell Collins (Note 2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investment in aÇliate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from the dispositions of property and businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (157) (6) 300 (3) 19 Cash Provided by (Used for) Investing ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153 Financing Activities Net (decrease) increase in short-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from the exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) (63) (170) 44 Cash Used for Financing ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (197) EÅect of exchange rate changes on cashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9 Cash Provided by (Used for) Continuing Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash (Used for) Provided by Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Decrease) Increase in Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300 (349) (49) 170 193 77 142 (15) Ì Ì 7 (13) (86) 43 66 (54) (59) 645 (217) (70) Ì Ì 59 (228) (173) (325) (192) 13 (677) 35 (225) 59 (166) 336 184 67 (5) (36) 29 Ì 37 3 32 70 26 (92) 162 760 (250) (185) Ì Ì 111 (324) 35 (172) (194) 88 (243) 8 201 52 253 83 Cash and Cash Equivalents at End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 121 $ 170 $ 336 See notes to consolidated Ñnancial statements. 20 CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY (in millions, except per share amounts) Common Stock (no shares issued during years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 216 $ 216 $ 216 Year Ended September 30, 2001 2000 1999 Additional Paid-In Capital Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained Earnings Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends (per share: 2001, $0.93; 2000 and 1999, $1.02) ÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SpinoÅ of Rockwell Collins (Note 1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SpinoÅ of Conexant (Note 1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 967 14 981 3,363 305 (170) (53) (1,203) Ì Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,242 Accumulated Other Comprehensive Loss Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SpinoÅ of Rockwell Collins (Note 1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted Stock Compensation Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted stock grants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (166) (26) 30 (162) (2) 1 Ì (1) 960 7 967 2,937 636 (192) (18) Ì Ì 3,363 (153) (13) Ì (166) Ì Ì (2) (2) Treasury Stock Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,709) (63) 96 (1,420) (325) 36 Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,676) (1,709) 923 37 960 3,603 559 (194) (118) Ì (913) 2,937 (135) (18) Ì (153) Ì Ì Ì Ì (1,456) (172) 208 (1,420) Total Shareowners' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,600 $ 2,669 $ 2,540 See notes to consolidated Ñnancial statements. 21 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive loss: Net unrealized (losses) gains on cash Öow hedges (net of tax (beneÑt) expense Year Ended September 30, 1999 2000 2001 $305 $636 $559 of $(4) and $6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) 12 Ì Currency translation adjustments (net of tax expense (beneÑt) of $2, $0, and $(3)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension adjustments (net of tax (beneÑt) expense of $(2), $2 and $(1)) ÏÏÏÏÏÏ Other comprehensive loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15) (4) (26) (29) 4 (13) (16) (2) (18) Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $279 $623 $541 See notes to consolidated Ñnancial statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies Basis of Presentation Except as indicated, amounts reÖected in the consolidated Ñnancial statements or the notes thereto relate to the continuing operations of Rockwell International Corporation, now doing business under the name Rockwell Automation (Rockwell or the Company). Certain prior year amounts have been reclassiÑed to conform to the current year presentation. On June 29, 2001, the Company completed the spinoÅ of its Rockwell Collins avionics and communica- tions business and certain other assets and liabilities into an independent, separately traded, publicly held company (the SpinoÅ). In connection with the SpinoÅ, all outstanding shares of Rockwell Collins, Inc. (Rockwell Collins) were distributed to Rockwell shareowners on the basis of one Rockwell Collins share for each outstanding Rockwell share. Commensurate with the spinoÅ, Rockwell Collins made a special payment to the Company of $300 million. The net assets of Rockwell Collins as of June 29, 2001 of approximately $1.2 billion (including $300 million of debt incurred to make the special payment to the Company) were recorded as a decrease to shareowners' equity. Following the SpinoÅ, each of Rockwell Collins and the Company has a 50 percent ownership interest in Rockwell ScientiÑc Company LLC (RSC)(formerly known as Rockwell Science Center). On December 31, 1998, the Company completed the spinoÅ of its former semiconductor systems business (Semiconductor Systems) into an independent, separately traded, publicly held company by distributing all of the outstanding shares of Conexant Systems, Inc. (Conexant) to the Company's shareowners on a pro-rata basis. Consolidation The consolidated Ñnancial statements of the Company include the accounts of the Company and all majority-owned subsidiaries over which the Company has control. All signiÑcant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The consolidated Ñnancial statements have been prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that aÅect the reported amounts of assets and liabilities at the date of the consolidated Ñnancial statements and revenues and expenses during the periods reported. Actual results could diÅer from those estimates. Estimates are used in accounting for, among other items, allowances for doubtful accounts, excess and obsolete inventory, product warranty costs, workers compensation, product and other self-insurance liabilities, employee beneÑts, reserves and contingencies. Revenue Recognition Sales are generally recorded when all of the following have occurred: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is Ñxed or determinable, and collection is reasonably assured. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 1. Accounting Policies Ì (Continued) Cash and Cash Equivalents Cash and cash equivalents includes time deposits and certiÑcates of deposit with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market using Ñrst-in, Ñrst-out (FIFO) or average methods. Market is determined on the basis of estimated realizable values. Property Property is stated at cost. Depreciation of property is provided generally using accelerated and straight- line methods over 15 to 40 years for buildings and improvements and 3 to 14 years for machinery and equipment. SigniÑcant renewals and betterments are capitalized and replaced units are written oÅ. Mainte- nance and repairs, as well as renewals of minor amounts, are charged to expense. Intangible Assets Goodwill and other intangible assets generally result from business acquisitions. The Company accounts for business acquisitions under the purchase method by assigning the purchase price to tangible and intangible assets and liabilities. Assets acquired and liabilities assumed are recorded at their fair values, and the excess of the purchase price over the amounts assigned is recorded as goodwill. Goodwill is amortized using the straight-line method over periods ranging from 5 to 40 years. Trademarks, distributor networks, patents, and other intangibles are amortized on a straight-line basis over their estimated useful lives, generally ranging from 5 to 40 years. Impairment of Long-Lived Assets Long-lived assets, including goodwill, are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, and for all assets to be disposed of. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash Öows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using discounted future cash Öow analysis or other accepted valuation techniques. Investments Investments in aÇliates over which the Company has the ability to exert signiÑcant inÖuence but does not control, including RSC, are accounted for using the equity method of accounting. Accordingly, the Company's proportional share of the respective aÇliate's earnings or losses are included in other income in the Consolidated Statement of Operations. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 1. Accounting Policies Ì (Continued) Derivative Financial Instruments The Company uses derivative Ñnancial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts to manage foreign currency and interest rate risks. Foreign currency forward exchange contracts are used to hedge changes in the amount of future cash Öows associated with intercompany transactions generally forecasted to occur within one year (cash Öow hedges) and changes in fair value of certain assets and liabilities resulting from intercompany loans and other transactions with third parties denominated in foreign currencies. Interest rate swap contracts are periodically used to manage the balance of Ñxed and Öoating rate debt. The Company's accounting method for derivative Ñnancial instruments is based upon the designation of such instruments as hedges under generally accepted accounting principles. It is the policy of the Company to execute such instruments with creditworthy banks and not to enter into derivative Ñnancial instruments for speculative purposes. All foreign currency forward exchange contracts are denominated in currencies of major industrial countries. Foreign Currency Translation Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars using exchange rates at the end of the respective period. Sales, costs and expenses are translated at average exchange rates eÅective during the respective period. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss. Currency transaction gains and losses are included in the results of operations in the period incurred. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Stock options are granted at prices equal to or greater than the fair market value of the Company's common stock on the grant dates, therefore no compensation expense is recognized in connection with stock options granted to employees. Compensation expense resulting from grants of restricted stock is recognized generally during the period the service is performed. Environmental Matters The Company records accruals for environmental matters in the accounting period in which its responsibility is established and the cost can be reasonably estimated. Revisions to the accruals are made in the periods in which the estimated costs of remediation change. At environmental sites in which more than one potentially responsible party has been identiÑed, the Company records a liability for its estimated allocable share of costs related to its involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentiÑed parties. At environmental sites in which the Company is the only responsible party, the Company records a liability for the total estimated costs of remediation. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. If recovery from insurers or other third parties is determined to be probable, the Company records a receivable for the estimated recovery. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 1. Accounting Policies Ì (Continued) Recently Adopted Accounting Standards The Company adopted Emerging Issues Task Force Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs (EITF 00-10), on July 1, 2001. EITF 00-10 requires companies to classify shipping and handling amounts billed to customers as sales. The Company has historically classiÑed shipping and handling amounts billed to customers as a reduction to cost of sales. Shipping and handling amounts billed to customers which have been reclassiÑed to sales from cost of sales were $19 million in 2001, $20 million in 2000 and $17 million in 1999. Shipping and handling costs are included in cost of sales in the Consolidated Statement of Operations. EÅective October 1, 2000, the Company adopted Securities and Exchange Commission StaÅ Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB 101). No accounting changes were required in connection with the adoption of SAB 101 and, accordingly, the adoption had no eÅect on the Company's results of operations or shareowners' equity. EÅective July 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires the Company to record all derivatives on the balance sheet at fair value regardless of the purpose or intent for holding them. Derivatives that are not hedges are adjusted to fair value through earnings. For derivatives that are hedges, depending on the nature of the hedge, changes in fair value are either oÅset by changes in the fair value of the hedged assets, liabilities or Ñrm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineÅective portion of a derivative's change in fair value is immediately recognized in earnings. The eÅect of adopting SFAS 133 was not material to the Company's Ñnancial position, results of operations or shareowners' equity. New Accounting Standards In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 addresses Ñnancial accounting and reporting for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, goodwill and certain other intangible assets will no longer be systematically amortized but instead will be reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair value. SFAS 142 is eÅective for Ñscal years beginning after December 15, 2001, with early adoption permitted for entities with Ñscal years beginning after March 15, 2001. The Company expects to adopt SFAS 142 eÅective October 1, 2001. Management expects that the eÅect of ceasing amortization of goodwill will increase net income by approximately $41 million after tax, or 22 cents per diluted share, in Ñscal 2002. The Company has not completed its assessment of the additional eÅects of adopting SFAS 142. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses Ñnancial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS 144 is eÅective for Ñscal years beginning after December 15, 2001, with early adoption permitted. Management is currently evaluating the provisions of SFAS 144, but believes there will be no eÅect on the Company's Ñnancial position, results of operations or shareowners' equity resulting from the adoption. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 2. Discontinued Operations The Ñnancial statements have been restated for all periods presented to classify Rockwell Collins as a discontinued operation, together with Semiconductor Systems, which had previously been reported as a discontinued operation. At September 30, 2000, the net assets of Rockwell Collins consisted of the following (in millions): Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20 513 656 156 1,345 220 574 794 Net current assets of Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 551 Property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 422 318 Total long-term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 740 399 Net long-term assets of Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 341 Summarized results of discontinued operations are as follows (in millions): Year Ended September 30, 2000 1999 2001 Sales: Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Semiconductor Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,002 Ì $2,515 Ì $2,395 289 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,002 $2,515 $2,684 Income (loss) before income taxes: Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Semiconductor Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 268 Ì $ 436 Ì $ 448 (29) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 268 $ 436 $ 419 Net income (loss): Rockwell Collins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Semiconductor Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 180 Ì $ 292 Ì $ 296 (20) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 180 $ 292 $ 276 The results of operations of Rockwell Collins in 2001 include $21 million of costs directly related to the SpinoÅ. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 3. Special Charges In 2001, the Company recorded special charges of $91 million ($60 million after tax, or 32 cents per diluted share) for costs associated with the consolidation and closing of facilities, the realignment of administrative functions, the reduction of workforce, primarily in North America, by approximately 2,000 employees and asset impairments. The special charges are reÖected in the Consolidated Statement of Operations for the year ended September 30, 2001 in cost of sales and selling, general and administrative expenses in the amounts of $50 million and $41 million, respectively. The Company expects to be substantially complete with these actions in the Ñrst quarter of 2002. Total cash expenditures in connection with these actions are expected to approximate $51 million. The Company spent approximately $17 million through September 30, 2001 for employee severance and separation costs. In connection with the SpinoÅ, Rockwell Collins assumed a liability for employee severance and separation costs resulting from these actions of approximately $7 million. As a result of actions taken through September 30, 2001, the workforce has been reduced by approximately 1,400 employees. The special charges included write-downs to the carrying amount of goodwill, certain facilities and machinery and equipment totaling approximately $26 million resulting from the decision to shut down certain facilities and exit non-strategic operations. The charges represented the diÅerence between the fair values of the assets and their carrying values. Fair value was determined by management on the basis of various customary valuation techniques. Revenues and results of operations of businesses and product lines which are being exited are not material. The charges and their utilization for the year ended September 30, 2001 are summarized as follows (in millions): Charges Amounts Utilized September 30, 2001 Employee severance and separation costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Impairment of property and intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease termination costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52 26 5 8 $91 $25 26 Ì 6 $57 $27 Ì 5 2 $34 The Company evaluates the adequacy of reserves recorded in prior years and makes necessary revisions for changes in estimates in the periods in which they occur. During 2001, the Company recorded an adjustment of $8 million as a reduction of cost of sales and $2 million as a reduction of selling, general and administrative expenses primarily as a result of lower than expected employee separation and lease termination costs associated with actions taken in prior years. The remaining balances at September 30, 2001 related to charges taken in previous years were not signiÑcant. 4. Acquisitions of Businesses In October 2000, the Control Systems segment acquired the batch software and services business of Sequencia Corporation. The purchase price for this acquisition was $6 million which was allocated to intangible assets, including developed technology and assembled workforce, and the excess of the purchase price over the amounts assigned to intangible assets was recorded as goodwill. Goodwill and the intangible assets are being amortized on a straight-line basis over approximately 5 years. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 4. Acquisitions of Businesses Ì (Continued) In March 2000, the Control Systems segment acquired Entek IRD International Corporation (Entek), a provider of machinery condition monitoring solutions. In April 2000, the Control Systems segment acquired substantially all the assets and assumed certain liabilities of Systems Modeling Corporation, a software developer. The aggregate purchase price for these acquisitions was $70 million, of which $61 million was allocated to intangible assets, including developed technology, and the excess of the purchase price over the amounts assigned to tangible and intangible assets was recorded as goodwill. Developed technology is being amortized on a straight-line basis over a period of 5 years. Goodwill related to the acquisitions of Entek and Systems Modeling Corporation is being amortized on a straight-line basis over 15 and 10 years, respectively. During 1999, the Company acquired four businesses for an aggregate purchase price of $185 million, of which $178 million was allocated to intangible assets. Goodwill is being amortized on a straight-line basis over periods ranging from 10 to 30 years, and the intangible assets are being amortized on a straight-line basis over 10 years. Amounts recorded for liabilities assumed in connection with these acquisitions were $1 million, $16 million and $41 million for the years ended September 30, 2001, 2000 and 1999, respectively. These acquisitions were accounted for as purchases and, accordingly, the results of operations of these businesses have been included in the Consolidated Statement of Operations since their respective dates of acquisition. Pro forma Ñnancial information is not presented as the combined eÅect of these acquisitions was not material to the Company's results of operations or Ñnancial position. 5. Inventories Inventories are summarized as follows (in millions): Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raw materials, parts, and supplies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $204 154 242 Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $600 $220 167 223 $610 September 30, 2000 2001 6. Property Property is summarized as follows (in millions): Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 30, 2001 2000 $ 41 506 1,551 70 2,168 1,093 $ 51 513 1,596 94 2,254 1,060 PropertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,075 $1,194 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 7. Intangible Assets Intangible assets are summarized as follows (in millions): Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trademarks, distributor networks, patents, and other intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,130 657 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less accumulated amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,787 595 $1,148 646 1,794 539 Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,192 $1,255 September 30, 2001 2000 8. Short-Term Debt Short-term debt consists of the following (in millions): Short-term bank borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 30, 2000 2001 $ 9 1 $10 $15 1 $16 The weighted average interest rate on short-term bank borrowings was 2.0% at September 30, 2001 and 2.4% at September 30, 2000. At September 30, 2001, the Company had $1 billion of unsecured credit facilities with various banks to support commercial paper borrowings. There were no signiÑcant commitment fees or compensating balance requirements under these facilities. Short-term credit facilities available to foreign subsidiaries amounted to $191 million at September 30, 2001 and consisted of arrangements for which there are no signiÑcant commitment fees. 9. Other Current Liabilities Other current liabilities are summarized as follows (in millions): Advance payments from customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Product warranty costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxes other than income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40 34 33 99 Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $206 $ 37 35 37 106 $215 September 30, 2000 2001 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 10. Long-Term Debt Long-term debt consists of the following (in millions): September 30, 2000 2001 6.8% notes, payable in 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.15% notes, payable in 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.70% debentures, payable in 2028 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.20% debentures, payable in 2098 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $150 350 250 200 24 (51) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 923 1 $150 350 250 200 28 (53) 925 1 Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $922 $924 11. Financial Instruments The Company's Ñnancial instruments include short- and long-term debt and foreign currency forward exchange contracts. The fair value of short-term debt approximates the carrying value due to its short-term nature. At September 30, 2001 and 2000, the carrying value of long-term debt was $923 million and $925 million, respectively. The fair value of long-term debt, based upon quoted market prices for the same or similar issues, was $887 million and $843 million at September 30, 2001 and 2000, respectively. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at speciÑed future dates at speciÑed exchange rates. At September 30, 2001 and 2000, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $738 million and $852 million, respectively, primarily consisting of contracts for the euro, pound sterling, Canadian dollar, Australian dollar, and Swiss franc. Notional amounts are stated in the U.S. dollar equivalents at spot exchange rates at the respective dates. At September 30, 2001, the net carrying value of foreign currency forward exchange contracts of $2 million was equal to its fair value based upon quoted market prices for contracts with similar maturities. As of September 30, 2001 and 2000, the foreign currency forward exchange contracts are recorded in other current assets in the amounts of $11 million and $51 million, respectively, and other current liabilities in the amounts of $9 million and $11 million, respectively. The Company does not anticipate any material adverse eÅect on its results of operations or Ñnancial position relating to these foreign currency forward exchange contracts. The Company has designated certain foreign currency forward exchange contracts related to forecasted intercompany transactions as cash Öow hedges. The amount recognized in earnings as a result of the ineÅectiveness of cash Öow hedges was not material. In February 2000, the Company entered into an interest rate swap contract (the Swap) which eÅectively converted its $350 million aggregate principal amount of 6.15% notes, payable in 2008, to Öoating rate debt based on 90 day LIBOR (5.42% at September 30, 2000). At September 30, 2000, the fair value of the Swap, based upon quoted market prices for contracts with similar maturities, was approximately $13 million. On October 24, 2000, the Swap was terminated at a net gain of $16 million. The gain is being amortized as a reduction of interest expense over the remaining term of the 6.15% notes, payable in 2008. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 12. Shareowners' Equity Common Stock At September 30, 2001, the authorized stock of the Company consisted of one billion shares of common stock, par value $1 per share, and 25 million shares of preferred stock, without par value. At September 30, 2001, 32 million shares of common stock were reserved for various employee incentive plans. Changes in outstanding common shares are summarized as follows (in millions): 2001 2000 1999 Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury stock purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183.5 (1.7) 1.9 190.9 (8.0) 0.6 190.6 (3.5) 3.8 Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183.7 183.5 190.9 For 2001, 2000 and 1999, dilutive stock options resulted in an increase in average outstanding shares of 2.4 million, 2.1 million and 3.1 million, respectively. Preferred Share Purchase Rights Each outstanding share of common stock provides the holder with one Preferred Share Purchase Right (Right). The Rights will become exercisable only if a person or group, without the approval of the board of directors, acquires, or oÅers to acquire, 20% or more of the common stock, although the board of directors is authorized to reduce the 20% threshold for triggering the Rights to not less than 10%. Upon exercise, each Right entitles the holder to 1/100th of a share of Series A Junior Participating Preferred Stock of the Company (Junior Preferred Stock) at a price of $250, subject to adjustment. Upon an acquisition of the Company, each Right (other than Rights held by the acquirer) will generally be exercisable for $500 worth of either common stock of the Company or common stock of the acquirer for $250. In certain circumstances, each Right may be exchanged by the Company for one share of common stock or 1/100th of a share of Junior Preferred Stock. The Rights will expire on December 6, 2006, unless earlier exchanged or redeemed at $0.01 per Right. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss, including amounts related to Rockwell Collins at September 30, 2000, consisted of the following (in millions): September 30, 2000 2001 Unrealized gains on cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5 (166) (1) $ 12 (173) (5) Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(162) $(166) During 2001, unrealized gains on cash Öow hedges of $22 million ($15 million after tax) were reclassiÑed into earnings. Approximately $5 million of the unrealized gains on cash Öow hedges will be reclassiÑed into earnings during 2002. Management expects that these unrealized gains will be oÅset when the hedged items are recognized in earnings. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 13. Stock Options Options to purchase common stock of the Company have been granted under various incentive plans and by board action to directors, oÇcers and other key employees at prices equal to or above the fair market value of such stock on the dates the options were granted. The plans provide that the option price for certain options granted under the plans may be paid in cash, shares of common stock or a combination thereof. Under the 2000 Long-Term Incentives Plan, the Company may grant up to 16 million shares of Company common stock as non-qualiÑed options, incentive stock options, stock appreciation rights and restricted stock. Shares available for future grant or payment under various incentive plans were 12 million at September 30, 2001. None of the incentive plans presently permits options to be granted after November 30, 2009. Stock options generally expire ten years from the date they are granted and vest over three years (time-vesting options) with the exception of performance-vesting options. In 2001, 2000 and 1999, the Company granted performance-vesting options. These options expire ten years from the date they are granted and vest at the earlier of (a) the date the market price of the Company's common stock reaches a speciÑed level for a pre-determined period of time or certain other Ñnancial performance criteria are met or (b) a period of six to nine years from the date they are granted. Information relative to stock options is as follows (shares in thousands): Number of shares under option: Outstanding at beginning of year ÏÏÏÏÏÏÏ Granted: 2001 2000 1999 Wtd. Avg. Exercise Price Shares Wtd. Avg. Exercise Price Shares Wtd. Avg. Exercise Price Shares 13,998 $36.04 11,564 $31.13 13,419 $36.27 Time-vestingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Performance-vesting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,309 941 Adjustments: Collins adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Conversion to Collins options ÏÏÏÏÏÏÏÏ Conexant adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Conversion to Conexant optionsÏÏÏÏÏÏ Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canceled or expiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,379 (2,486) Ì Ì (1,884) (561) Outstanding at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,696 Exercisable at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,863 28.23 29.94 Ì 37.32 Ì Ì 23.17 29.99 14.15 13.48 2,523 880 51.04 52.48 2,169 1,023 Ì Ì Ì Ì (561) (408) Ì Ì 669 Ì Ì Ì Ì (1,621) (3,750) (345) 24.62 40.31 13,998 36.04 11,564 8,584 30.52 7,419 37.05 35.22 Ì Ì Ì 48.97 23.68 39.60 31.13 28.69 In connection with the SpinoÅ, the number and exercise prices of certain options were adjusted in order to preserve the intrinsic value of the options that were outstanding immediately before and after the SpinoÅ. For certain other options, option holders received a combination of Rockwell and Rockwell Collins options with adjustments made to the number and exercise prices of those options to preserve the intrinsic value of the Rockwell and Rockwell Collins options that were outstanding immediately before and after the SpinoÅ. Outstanding Rockwell options held by Rockwell Collins employees generally were converted into Rockwell Collins options. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 13. Stock Options Ì (Continued) In connection with the spinoÅ of Semiconductor Systems, the number and exercise prices of certain options were adjusted in order to preserve the intrinsic value of the options that were outstanding immediately before and after the spinoÅ. For certain other options, option holders received a combination of Rockwell and Conexant options with adjustments made to the number and exercise prices of those options to preserve the intrinsic value of the Rockwell and Conexant options that were outstanding immediately before and after the spinoÅ. Outstanding Rockwell options held by Semiconductor Systems employees were converted into Conexant options. The following table summarizes information about stock options outstanding at September 30, 2001 (shares in thousands; remaining life in years): Range of Exercise Prices $ 4.71 to $10.49ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10.50 to $14.14ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14.15 to $18.86ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18.87 to $23.57ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Options Outstanding Weighted Average Remaining Life Exercise Price 1.9 7.4 6.3 7.9 $ 8.80 11.72 16.51 20.49 Shares 2,231 9,558 3,749 4,158 19,696 Options Exercisable Wtd. Avg. Exercise Price Shares $ 8.80 12.05 16.54 20.68 2,231 3,926 2,568 1,138 9,863 The Company's net income and earnings per share would have been reduced to the following pro forma amounts if the Company accounted for its stock-based plans using the fair value method provided by SFAS No. 123, Accounting for Stock-Based Compensation (in millions, except per share amounts): 2001 As Reported Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 305 $1.67 $1.65 Pro Forma $ 271 $1.48 $1.46 2000 As Reported $ 636 $3.38 $3.35 Pro Forma $ 611 $3.26 $3.22 1999 As Reported $ 559 $2.94 $2.89 Pro Forma $ 478 $2.51 $2.47 The 2001 pro forma net income includes $6 million ($4 million after tax, or two cents per diluted share) of pro forma compensation expense related to the spinoÅ of Rockwell Collins. The 1999 pro forma net income includes $87 million ($57 million after tax, or 29 cents per diluted share) of pro forma compensation expense related to the spinoÅ of Semiconductor Systems. The pro forma eÅect of stock options on net income for 2001 may not be indicative of the pro forma eÅect on net income in future years. The weighted average fair value of options granted was $8.79, $16.30 and $9.55 per share in 2001, 2000 and 1999, respectively. The fair value of each option was estimated on the date of grant or subsequent date of option adjustment using the Black-Scholes pricing model and the following assumptions: Average risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected life (years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 2000 1999 Collins SpinoÅ Adjustment 4.73% 1.77% 0.35 5 Grants 5.76% 2.29% 0.33 5 Grants Grants 6.06% 4.51% 2.29% 2.23% 0.33 5 0.29 5 Conexant SpinoÅ Adjustment 4.66% Ì 0.44 5 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 14. Retirement BeneÑts The Company sponsors pension and other postretirement beneÑt plans for its employees. The pension plans cover most of the Company's employees and provide for monthly pension payments to eligible employees upon retirement. Pension beneÑts for salaried employees generally are based on years of credited service and average earnings. Pension beneÑts for hourly employees generally are based on speciÑed beneÑt amounts and years of service. The Company's policy is to fund its pension obligations in conformity with the funding requirements of applicable laws and governmental regulations. Other postretirement beneÑts are in the form of retirement medical plans and cover most of the Company's United States employees and provide for the payment of certain medical costs of eligible employees and dependents upon retirement. In connection with the SpinoÅ, Rockwell Collins assumed the former Rockwell International Corporation domestic qualiÑed plan (Rockwell Retirement Plan). Pension plan obligations attributable to all of Rockwell's domestic active employees and former employees of the Control Systems, Power Systems and Electronic Commerce businesses were retained by Rockwell and a proportionate share of pension plan assets were transferred from the Rockwell Retirement Plan to a new pension plan established by Rockwell. The Company also retained liabilities for other postretirement beneÑts for active and former employees. The tables below reÖect the continuing Rockwell plans. The components of net periodic beneÑt cost are as follows (in millions): Pension BeneÑts 2000 2001 1999 Other Postretirememt BeneÑts 2000 2001 1999 Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization: $ 44 87 (126) $ 44 79 (110) $ 52 75 $ 7 18 (100) Ì $ 7 18 Ì $ 6 13 Ì Prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 (4) 4 5 (4) 3 6 (6) (13) Ì 3 17 (6) Ì 2 (6) Ì Ì Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10 $ 17 $ 37 $22 $21 $13 The Company recognized a curtailment gain of $9 million and $14 million in 2000 and 1999, respectively, and special termination beneÑt charges of $3 million, $3 million and $11 million in 2001, 2000 and 1999, respectively. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 14. Retirement BeneÑts Ì (Continued) BeneÑt obligation, plan asset, funded status, and net liability information is summarized as follows (in millions): BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discount rate change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial (gains) lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RSC adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other (including currency translation) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension BeneÑts 2000 2001 $1,243 44 87 83 (4) 3 (51) (41) 11 $1,203 44 79 (73) 65 1 (45) Ì (31) BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,375 1,243 Plan assets at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ RSC adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other (including currency translation) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,453 (28) 8 (51) (106) 8 1,376 148 8 (45) Ì (34) Plan assets at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,284 1,453 Other Postretirement BeneÑts 2001 2000 $ 242 7 18 16 43 Ì (30) (6) 4 $ 258 7 18 (12) 5 (4) (30) Ì Ì 294 Ì Ì 30 (30) Ì Ì Ì 242 Ì Ì 30 (30) Ì Ì Ì Funded status of plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized amounts: (91) 210 (294) (242) Prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net actuarial (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 (8) (32) 18 (12) (272) (39) Ì 103 (49) Ì 49 Net liability on balance sheet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (115) $ (56) $(230) $(242) Net liability on balance sheet consists of: Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17 (137) 1 3 1 $ 18 (75) (2) 7 (4) $ Ì $ Ì (242) (230) Ì Ì Ì Ì Ì Ì Net liability on balance sheet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (115) $ (56) $(230) $(242) In connection with the SpinoÅ, pension plan obligations attributable to Rockwell Science Center domestic active and former employees and a proportionate share of pension plan assets were transferred from the Rockwell Retirement Plan to a new pension plan established by RSC. RSC also assumed its obligation for other postretirement beneÑts for such active and former employees. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 14. Retirement BeneÑts Ì (Continued) The Company uses an actuarial measurement date of June 30 to measure its beneÑt obligations. SigniÑcant assumptions used in determining these beneÑt obligations and net periodic beneÑt cost are summarized as follows (in weighted averages): Pension BeneÑts Other Postretirement BeneÑts 2001 2000 2001 2000 Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation increase rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Health care cost trend rate* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 8.0% 7.0% 7.5% 8.0% 7.5% 8.0% 4.5% 4.5% Ì 9.75% 9.5% Ì Ì Ì * Decreasing to 5.5% after 2016. The discount rate, compensation increase rate and health care cost trend rate assumptions are determined as of the measurement date. The expected return on plan assets assumption is determined as of the previous measurement date. Pension BeneÑts The projected beneÑt obligation, accumulated beneÑt obligation and fair value of plan assets for the pension plans with accumulated beneÑt obligations in excess of the fair value of plan assets (underfunded plans) were $93 million, $78 million and $20 million, respectively, as of September 30, 2001 and $63 million, $55 million and $1 million, respectively, as of September 30, 2000. Other Postretirement BeneÑts Assumed health care cost trend rates have a signiÑcant eÅect on amounts reported for the retiree medical plans. A one-percentage point change in assumed health care cost trend rates would have the following eÅect (in millions): One-Percentage Point Increase 2000 2001 One-Percentage Point Decrease 2000 2001 Increase (decrease) to total of service and interest cost components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) to postretirement beneÑt obligation ÏÏÏÏÏÏÏÏ $ 3 23 $ 3 16 $ (3) (19) $ (3) (14) DeÑned Contribution Savings Plans The Company also sponsors certain deÑned contribution savings plans for eligible employees. Expense related to these plans was $22 million, $21 million and $21 million, for 2001, 2000 and 1999, respectively. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 15. Other Income, Net The components of other income, net are as follows (in millions): 2001 2000 1999 Net gain on dispositions of property and businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6 Demutualization incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Loss on investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 18 Intellectual property settlement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Royalty income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44 $15 28 Ì Ì 9 10 4 $66 $ 36 Ì (29) 14 10 9 8 $ 48 During 2000, the Company recorded a $32 million gain on the sale of real estate, which was partially oÅset by a loss of $14 million on the sale of a Power Systems business, and recorded $28 million of income resulting from the demutualization of Metropolitan Life Insurance Company. In 1999, the Company recorded a loss of $29 million associated with the write-oÅ of its investment in Goss Graphic Systems, Inc. preferred stock, which the Company received in connection with the sale of its graphic systems business. In addition, the Company recorded a gain of $32 million on the sale of Control Systems' North American Transformer business. 16. Income Taxes The components of the income tax provision are as follows (in millions): 2001 2000 1999 Current: United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax refund claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13 (22) 44 6 $ (5) Ì 19 7 Total currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred: United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 21 (2) 2 2 2 111 11 20 142 $104 Ì 24 32 160 (18) 11 2 (5) Income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 43 $163 $155 During 2001, the Company reached agreement with various taxing authorities on refund claims related to certain prior years and recorded $22 million as a reduction of its income tax provision. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 16. Income Taxes Ì (Continued) Net current deferred income tax beneÑts at September 30, 2001 and 2000 consist of the tax eÅects of temporary diÅerences related to the following (in millions): 2001 2000 Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Product warranty costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20 13 28 26 65 Current deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $152 $ 22 15 33 24 59 $153 Net long-term deferred income taxes in the balance sheet at September 30, 2001 and 2000 consist of the tax eÅects of temporary diÅerences related to the following (in millions): 2001 2000 Retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PropertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax credit carryforwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(129) 126 75 (4) (49) 100 SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 119 52 $(107) 145 73 (9) (71) 88 119 80 Long-term deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 171 $ 199 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 16. Income Taxes Ì (Continued) Management believes it is more likely than not that current and long-term deferred tax assets will be realized through the reduction of future taxable income. SigniÑcant factors considered by management in its determination of the probability of the realization of the deferred tax assets include: (a) the historical operating results of the Company ($453 million of United States taxable income over the past three years), (b) expectations of future earnings, and (c) the extended period of time over which the retirement medical liability will be paid. A valuation allowance is established for deferred tax assets related to net operating loss carryforwards and foreign tax credit carryforwards for which utilization is uncertain. The carryforward period for $1 million of the net operating losses ends between 2002 and 2005. The carryforward period for the remaining net operating losses is indeÑnite. The carryforward period for all of the foreign tax credits ends in 2002. The eÅective income tax rate diÅered from the United States statutory tax rate for the reasons set forth below: 2001 2000 1999 Statutory tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax credit utilization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-deductible goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee stock ownership plan beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax refund claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Utilization of foreign loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0% 3.4 3.6 1.4 5.3 (4.8) (8.4) 8.3 2.0 (4.2) 5.0 1.8 (4.9) 2.1 (1.2) Ì Ì (0.9) (2.6) (1.8) (1.7) (0.6) (0.3) (13.1) Ì EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.6% 32.3% 35.5% The income tax provisions were calculated based upon the following components of income from continuing operations before income taxes (in millions): 2001 2000 1999 United States income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 87 81 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $168 $410 97 $507 $343 95 $438 No provision has been made for United States, state, or additional non-United States income taxes related to approximately $239 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practical to determine the United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. The Company's United States income tax returns for the years 1995 through 1997 are currently under examination. In connection with the divestiture of the Company's aerospace and defense business (""the A&D Business''), the spinoÅ of the Company's automotive components business (""Automotive''), the Semiconduc- tor Systems spinoÅ, and the Rockwell Collins spinoÅ, the Company has retained all tax liabilities and the right to all tax refunds related to United States and certain non-U.S. operations of the A&D Business, Automotive, Semiconductor Systems and Rockwell Collins for periods prior to the respective divestiture dates. Manage- ment expects the examination of the Company's 1995 through 1997 tax years will be completed during 2002. Management believes adequate provision for income taxes has been made for all years through 2001. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 17. Supplementary Financial Statement Information Statement of cash Öows information (in millions): Income taxes paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Statement of operations information (in millions): Research and development: 2001 2000 1999 $213 79 $129 74 $111 85 Company-initiated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer-funded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rental expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 169 61 86 209 61 94 188 52 89 Income taxes paid and interest payments related to discontinued operations for 2001, 2000 and 1999 were not signiÑcant. Minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year aggregated $200 million as of September 30, 2001 and are payable as follows (in millions): 2002, $44; 2003, $37; 2004, $31; 2005, $23; 2006, $17, and after 2006, $48. Commitments from third parties under sublease agreements having noncancelable lease terms in excess of one year aggregated $44 million as of September 30, 2001 and are receivable through 2008 at approximately $6 million per year. 18. Commitments and Contingent Liabilities Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities aÅecting the environment have and will continue to have an eÅect on the manufacturing operations of the Company. Thus far, compliance with environmental require- ments and resolution of environmental claims has been accomplished without material eÅect on the Company's liquidity and capital resources, competitive position or Ñnancial condition. The Company has been designated as a potentially responsible party at 19 Superfund sites, excluding sites as to which the Company's records disclose no involvement or as to which the Company's potential liability has been Ñnally determined or assumed by third parties. Management estimates the total reasonably possible costs the Company could incur for the remediation of Superfund sites at September 30, 2001 to be about $13 million, of which $9 million has been accrued. Various other lawsuits, claims and proceedings have been asserted against the Company alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously owned properties. As of September 30, 2001, manage- ment has estimated the highest total reasonably possible costs the Company could incur from these matters to be about $55 million. The Company has recorded environmental accruals for these matters of $25 million. In addition to the above matters, the Company assumed certain other environmental liabilities in connection with the 1995 acquisition of Reliance Electric Company (Reliance). The Company is indemniÑed by ExxonMobil Corporation (Exxon) for substantially all costs associated with these Reliance matters. At September 30, 2001, the Company has recorded a liability of approximately $29 million and a receivable of approximately $28 million for these Reliance matters. Management estimates the highest total reasonably possible costs for these matters to be approximately $37 million for which the Company is substantially indemniÑed by Exxon. Based on its assessment, management believes that the Company's expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse eÅect on the Company's liquidity and capital resources, competitive position or Ñnancial condition. Manage- ment cannot assess the possible eÅect of compliance with future requirements. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 18. Commitments and Contingent Liabilities Ì (Continued) Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to the conduct of its business, including those pertaining to product liability, intellectual property, safety and health, employment and contract matters. In connection with the divestiture of the A&D Business to The Boeing Company (Boeing), Rockwell agreed to indemnify Boeing for certain government contract and environmental matters related to operations of the A&D Business for periods prior to the divestiture. In connection with the spinoÅs of Automotive, Semiconductor Systems and Rockwell Collins, the spun-oÅ companies have agreed to indemnify Rockwell for substantially all contingent liabilities related to the respective businesses, including environmental and intellectual property matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, management believes the disposition of matters which are pending or asserted will not have a material adverse eÅect on the Company's business or Ñnancial condition. In the ordinary course of business, the Company has divested certain of its businesses. As a result of such divestitures, there may be lawsuits, claims or proceedings instituted or asserted against the Company related to the period that the businesses were owned by the Company. Management believes that any judgments against the Company related to such matters would not have a material adverse eÅect on the Company's business or Ñnancial condition. 19. Business Segment Information Rockwell is a provider of industrial automation power, control and information products and services. The Company is organized based upon products and services and has three operating segments consisting of Control Systems, Power Systems and Electronic Commerce. Following the spinoÅ of Rockwell Collins, the Company has a 50 percent ownership interest in RSC and accounts for its interest in RSC using the equity method. The Control Systems segment is a supplier of industrial automation products, systems, software and services focused on helping customers control manufacturing processes. Products include controllers, I/O (input/output) systems, drives, sensors, packaged control products, operator interface devices, software products and services and network monitoring products. These products are primarily marketed under the Rockwell Automation, Allen-Bradley, and Rockwell Software brand names. Major markets served include consumer products, food and beverage, transportation, metals, mining, pulp and paper, petroleum, specialty chemicals, pharmaceuticals, electric power, water treatment, electronic assembly and semiconductor fabrication. The Power Systems segment is a supplier of industrial automation mechanical power transmission products and industrial motors and drives. Products include power transmission components, gear reducers, speed drives, shaft mounted reducers, conveyor pulleys, shaft couplings, clutches, motor brakes, mounted bearings and motors. These products are primarily marketed under the Dodge and Reliance Electric brand names. Major markets served include mining, aggregate, food/beverage, forestry, petrochemicals, metals, unit handling, air handling and environmental. The Electronic Commerce segment is a solutions supplier for companies that interact with their customers via the telephone, the internet, or both. Products include automatic call distributors, computer telephony integration software, information collection, reporting, queuing and management systems and call center systems and consulting services. Major markets served include service, transportation, energy, healthcare, retail, telecommunications and Ñnancial. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 19. Business Segment Information Ì (Continued) The following tables reÖect the sales and operating results of the Company's reportable segments for the years ended September 30 (in millions): 2001 2000 1999 Sales: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intersegment salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,364 744 151 73 (53) $3,682 797 169 78 (70) $3,651 822 203 35 (46) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,279 $4,656 $4,665 Segment operating earnings: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 426 38 7 3 $ 640 65 (16) 7 $ 642 53 12 18 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill and purchase accounting items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General corporate Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Loss) gain on disposition of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 474 (79) (53) Ì (83) (91) 696 (82) (20) (14) (73) Ì 725 (72) (163) 32 (84) Ì Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏ $ 168 $ 507 $ 438 Other represents the sales and segment operating earnings of Rockwell Science Center through the third quarter of 2001. Beginning with the fourth quarter of 2001, the Company's 50 percent ownership interest in RSC is accounted for using the equity method, and the Company's proportional share of RSC's earnings or losses are included in general corporate-net. Among other considerations, the Company evaluates performance and allocates resources based upon segment operating earnings before income taxes, interest expense, costs related to corporate oÇces, nonrecurring special charges, gains and losses from the disposition of businesses, earnings and losses from equity aÇliates, and incremental acquisition related expenses resulting from purchase accounting adjustments such as goodwill and other intangible asset amortization, depreciation, inventory and purchased research and development charges. The accounting policies used in preparing the segment information are consistent with those described in Note 1. Special charges are discussed in Note 3. EÅective October 1, 2001, management changed its method of evaluating segment performance to exclude from segment operating earnings all purchase accounting items, including depreciation and intangible asset amortization. Management believes the exclusion of these items provides additional insight into the operating performance of the segments. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 19. Business Segment Information Ì (Continued) The following tables summarize the identiÑable assets at September 30, the provision for depreciation and amortization and the amount of capital expenditures for property for the years ended September 30 for each of the reportable segments and Corporate (in millions): 2001 2000 1999 IdentiÑable assets: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net assets of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,494 1,024 86 Ì 470 Ì $2,604 1,049 101 62 581 892 $2,688 1,132 112 38 657 665 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,074 $5,289 $5,292 Depreciation and amortization: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase accounting depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 132 41 10 4 6 193 79 $ 130 37 10 6 5 188 82 $ 124 34 8 7 6 179 72 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 272 $ 270 $ 251 Capital expenditures for property: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Electronic Commerce ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 99 43 1 13 1 $ 148 54 6 6 3 $ 167 53 9 6 15 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 157 $ 217 $ 250 IdentiÑable assets at Corporate consist principally of cash, net deferred income tax assets, property and the 50 percent ownership interest in RSC. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 19. Business Segment Information Ì (Continued) The Company conducts a signiÑcant portion of its business activities outside the United States. The following tables reÖect geographic sales and property by geographic region (in millions): United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EuropeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Asia-PaciÑcÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 $2,871 655 299 278 176 Sales 2000 $3,205 684 329 268 170 1999 2001 $3,278 700 299 233 155 $ 945 75 20 24 11 Property 2000 $1,052 84 21 25 12 1999 $1,050 102 22 25 12 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,279 $4,656 $4,665 $1,075 $1,194 $1,211 Sales are attributed to the geographic regions based on the country of destination. 20. Quarterly Financial Information (Unaudited) 2001 Quarters SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings (loss) per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings (loss) per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First $1,111 748 69 134 0.38 0.74 0.38 0.73 Fourth Second Third (in millions, except per share amounts) $1,026 796 (27) 34 $1,168 783 71 125 $974 704 12 12 0.39 0.68 0.38 0.67 (0.15) 0.18 (0.15) 0.18 0.07 0.07 0.07 0.07 2001 $4,279 3,031 125 305 0.69 1.67 0.68 1.65 Net income for 2001 includes: (a) charges of $69 million ($45 million after tax, or 25 cents per diluted share) for costs associated with realignment actions in the third quarter; (b) charges of $22 million ($15 million after tax, or eight cents per diluted share) for costs associated with realignment actions in the fourth quarter and (c) a gain of $18 million ($12 million after tax, or six cents per diluted share) resulting from the favorable settlement of an intellectual property matter in the fourth quarter. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 20. Quarterly Financial Information (Unaudited) Ì (Continued) 2000 Quarters Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share: Continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First $1,103 721 87 157 0.46 0.83 0.45 0.81 Fourth Second Third (in millions, except per share amounts) $1,195 813 92 170 $1,184 796 63 145 $1,174 772 102 164 0.54 0.87 0.53 0.85 0.49 0.91 0.49 0.90 0.34 0.79 0.34 0.78 2000 $4,656 3,102 344 636 1.83 3.38 1.81 3.35 Net income for 2000 includes: (a) a net gain of $18 million ($12 million after tax, or six cents per diluted share) resulting from the sale of real estate in the second quarter which was partially oÅset by a loss on sale of a business and (b) a gain of $28 million ($19 million after tax, or 10 cents per diluted share) resulting from the demutualization of Metropolitan Life Insurance Company in the third quarter. 46 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of Rockwell International Corporation: We have audited the accompanying consolidated balance sheet of Rockwell International Corporation and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations, shareowners' equity, cash Öows, and comprehensive income for each of the three years in the period ended September 30, 2001. Our audits also included the Ñnancial statement schedule listed at Item 14(a)(2). These Ñnancial statements and Ñnancial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these Ñnancial statements and Ñnancial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated Ñnancial statements present fairly, in all material respects, the Ñnancial position of Rockwell International Corporation and subsidiaries at September 30, 2001 and 2000, and the results of their operations and their cash Öows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such Ñnancial statement schedule, when considered in relation to the basic consolidated Ñnancial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin November 7, 2001 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 10. Directors and Executive OÇcers of the Company. PART III See the information under the captions Election of Directors and Information as to Nominees for Directors and Continuing Directors in the 2002 Proxy Statement. No nominee for director was selected pursuant to any arrangement or understanding between the nominee and any person other than the Company pursuant to which such person is or was to be selected as a director or nominee. See also the information with respect to executive oÇcers of the Company under Item 4a of Part I hereof. Item 11. Executive Compensation. See the information under the captions Executive Compensation, Option Grants and Aggregated Option Exercises and Fiscal Year-End Values and Retirement Plans in the 2002 Proxy Statement. Item 12. Security Ownership of Certain BeneÑcial Owners and Management. See the information under the captions Voting Securities and Ownership by Management of Equity Securities in the 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions. See the information under the caption Board of Directors and Committees in the 2002 Proxy Statement. 48 Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) Financial Statements, Financial Statement Schedule and Exhibits. PART IV (1) Financial Statements (all Ñnancial statements listed below are those of the Company and its consolidated subsidiaries). Consolidated Balance Sheet, September 30, 2001 and 2000. Consolidated Statement of Operations, years ended September 30, 2001, 2000 and 1999. Consolidated Statement of Cash Flows, years ended September 30, 2001, 2000 and 1999. Consolidated Statement of Shareowners' Equity, years ended September 30, 2001, 2000 and 1999. Consolidated Statement of Comprehensive Income, years ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedule for the years ended September 30, 2001, 2000 and 1999. Schedule II Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page S-1 Schedules not Ñled herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the consolidated Ñnancial statements or notes thereto. (3) Exhibits. 3-a-1 3-b-l 4-a-1 4-b-l 4-b-2 4-b-3 Restated CertiÑcate of Incorporation of the Company, as amended, Ñled as Exhibit 3-a-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. By-Laws of the Company, Ñled as Exhibit 3-b-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, are hereby incorporated by reference. Rights Agreement, dated as of November 30, 1996, between the Company and Mellon Investor Services LLC (formerly named ChaseMellon Shareholder Services, L.L.C.), as rights agent, Ñled as Exhibit 4-c to Registration Statement No. 333-17031, is hereby incorporated by reference. Indenture dated as of April 1, 1993 between Reliance Electric Company and Bankers Trust Company, as Trustee, pursuant to which the 6.8% Notes of Reliance Electric Company due April 15, 2003 have been issued, Ñled as Exhibit 4.7 to Registration Statement No. 33-60066, is hereby incorporated by reference. First Supplemental Indenture dated April 14, 1993 to the Indenture listed as Exhibit 4-b-l above, Ñled as Exhibit 4.1 to Current Report on Form 8-K of Reliance Electric Company dated April 19, 1993 (File No. 1-10404), is hereby incorporated by reference. Form of certiÑcate for the 6.8% Notes of Reliance Electric Company due April 15, 2003, Ñled as Exhibit 4-8 to Registration Statement No. 33-60066, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 49 4-c-1 4-c-2 4-c-3 4-c-4 *10-a-l *10-a-2 *10-a-3 *10-a-4 *10-a-5 *10-a-6 *10-a-7 *10-a-8 *l0-b-1 Indenture dated as of December 1, 1996 between the Company and The Chase Manhattan Bank (successor to Mellon Bank, N.A.), as Trustee, Ñled as Exhibit 4-a to Registration Statement No. 333-43071, is hereby incorporated by reference. Form of certiÑcate for the Company's 6.15% Notes due January 15, 2008, Ñled as Exhibit 4-a to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. Form of certiÑcate for the Company's 6.70% Debentures due January 15, 2028, Ñled as Exhibit 4-b to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. Form of certiÑcate for the Company's 5.20% Debentures due January 15, 2098, Ñled as Exhibit 4-c to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. Copy of the Company's 1988 Long-Term Incentives Plan, as amended through November 30, 1994, Ñled as Exhibit 10-d-l to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996, amending the Company's 1988 Long-Term Incentives Plan, Ñled as Exhibit 4-g-1 to Registration Statement No. 333-17055, is hereby incorporated by reference. Copy of resolution of the Board of Directors of the Company, adopted November 5, 1997, increasing the number of shares authorized for issuance under the Company's 1988 Long-Term Incentives Plan, Ñled as Exhibit 10-b-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. Form of Stock Option Agreement under the Company's 1988 Long-Term Incentives Plan for options granted after May 1, 1992 and prior to March 1, 1993, Ñled as Exhibit 28-a-1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-1035), is hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after March 1, 1993 and prior to November 1, 1993, Ñled as Exhibit 28-a to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No. 1-1035), are hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after November 1, 1993 and prior to December 1, 1994, Ñled as Exhibit 10-d-6 to the Company's Annual Report on Form 10- K for the year ended September 30, 1993 (File No. 1-1035), are hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after December 1, 1994, Ñled as Exhibit 10-d-7 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), are hereby incorporated by reference. Memorandum of Proposed Amendments to the Rockwell International Corporation 1988 Long-Term Incentives Plan approved and adopted by the Board of Directors of the Company on June 6, 2001 in connection with the spin-oÅ of Rockwell Collins. Copy of the Company's 1995 Long-Term Incentives Plan, as amended, Ñled as Exhibit l0-b-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 50 *10-b-2 *10-b-3 *10-b-4 *10-b-5 *10-b-6 *10-b-7 *10-b-8 *10-c-l *10-c-2 *10-c-3 *10-c-4 *10-c-5 *10-c-6 Forms of Stock Option Agreements under the Company's 1995 Long-Term Incentives Plan for options granted prior to December 3, 1997, Ñled as Exhibit 10-e-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), are hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 1995 Long-Term Incentives Plan for options granted between December 3, 1997 and August 31, 1998, Ñled as Exhibit 10-b-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, are hereby incorporated by reference. Form of Stock Option Agreement under the Company's 1995 Long-Term Incentives Plan for options granted on April 23, 1998, Ñled as Exhibit 10-b-4 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. Form of Stock Option Agreement under the Company's 1995 Long-Term Incentives Plan for options granted after August 31, 1998, Ñled as Exhibit 10-b-5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. Form of Restricted Stock Agreement under the Company's 1995 Long-Term Incentives Plan, Ñled as Exhibit 10-e to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. Copy of Restricted Stock Agreement dated December 3, 1997 between the Company and Don H. Davis, Jr., Ñled as Exhibit 10-c-5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. Memorandum of Proposed Amendments to the Rockwell International Corporation 1995 Long-Term Incentives Plan approved and adopted by the Board of Directors of the Company on June 6, 2001 in connection with the spin-oÅ of Rockwell Collins. Copy of the Company's Directors Stock Plan, as amended February 2, 2000, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is hereby incorporated by reference. Form of Stock Option Agreement under the Company's Directors Stock Plan for options granted prior to February 2, 2000, Ñled as Exhibit 10-d to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (File No. 1-1035), is hereby incorporated by reference. Forms of Restricted Stock Agreements under the Company's Directors Stock Plan between the Company and each of George L. Argyros, William H. Gray, III, William T. McCormick, Jr., John D. Nichols and Joseph F. Toot, Jr., Ñled as Exhibit 10-f to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, are hereby incorporated by reference. Form of Stock Option Agreement under the Directors Stock Plan for options granted after February 2, 2000, Ñled as Exhibit 10-c-4 to the Company's Annual Report on Form 10-K for the year ended September 30, 2000, is hereby incorporated by reference. Form of Restricted Stock Agreement under the Directors Stock Plan for restricted stock granted after February 2, 2000, Ñled as Exhibit 10-c-5 to the Company's Annual Report on Form 10-K for the year ended September 30, 2000, is hereby incorporated by reference. Form of Restricted Stock Agreement for payment of portion of annual retainer for Board service by issuance of shares of restricted stock, Ñled as Exhibit 10-c-6 to the Company's Annual Report on Form 10-K for the year ended September 30, 2000, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 51 *10-c-7 *10-d-1 *10-d-2 *10-d-3 *10-e-1 *10-e-2 *10-e-3 *10-e-4 *10-e-5 *10-e-6 *10-f-1 *10-g-1 *10-g-2 Form of Stock Option Agreement for options granted on July 31, 2001 for service on the Board between the Company and each of the Company's Non-Employee Directors. Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996, adjusting outstanding awards under the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan and (iii) Directors Stock Plan, Ñled as Exhibit 4-g-2 to Registration Statement No. 333-17055, is hereby incorporated by reference. Copy of resolution of the Board of Directors of the Company, adopted September 3, 1997, adjusting outstanding awards under the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan and (iii) Directors Stock Plan, Ñled as Exhibit 10-e-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. Memorandum of Adjustments to Outstanding Options Under Rockwell International Corporation's 1988 Long-Term Incentives Plan, 1995 Long-Term Incentives Plan and Directors Stock Plan approved and adopted by the Board of Directors of the Company in connection with the spin-oÅ of Conexant, Ñled as Exhibit 10-d-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999, is hereby incorporated by reference. Copy of the Company's 2000 Long-Term Incentives Plan, Ñled as Exhibit A to the Proxy Statement for the Company's 2000 Annual Meeting, is hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 2000 Long-Term Incentives Plan for options granted prior to July 31, 2001, Ñled as Exhibit 10-e-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2000, are hereby incorporated by reference. Form of Restricted Stock Agreement under the Company's 2000 Long-Term Incentives Plan, Ñled as Exhibit 4-d-3 to Registration Statement No. 333-38444, is hereby incorporated by reference. Memorandum of Proposed Amendments to the Rockwell International Corporation 2000 Long-Term Incentives Plan approved and adopted by the Board of Directors of the Company on June 6, 2001, in connection with the spin-oÅ of Rockwell Collins. Forms of Stock Option Agreements under the Company's 2000 Long-Term Incentives Plan for options granted on October 1, 2001. Memorandum of Adjustments to Outstanding Options under Rockwell International Corporation's 1988 Long-Term Incentives Plan, 1995 Long-Term Incentives Plan, 2000 Long-Term Incentives Plan and Directors Stock Plan approved and adopted by the Board of Directors of the Company on June 6, 2001, in connection with the spin-oÅ of Rockwell Collins. Copy of the Company's Incentive Compensation Plan, amended and restated as of July 1, 1997, Ñled as Exhibit 10-f-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. Copy of the Company's Deferred Compensation Plan, as amended eÅective as of October 1, 1992, Ñled as Exhibit 10-g-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-1035), is hereby incorporated by reference. Copy of the Company's Deferred Compensation Plan, amended and restated as of June 1, 2000, Ñled as Exhibit 4-d to Registration Statement No. 333-34826, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 52 *10-h-1 *10-h-2 *10-h-3 *l0-i-1 *10-j-1 *10-k-1 *10-k-2 10-l-1 10-l-2 10-l-3 Copy of resolutions of the Board of Directors of the Company, adopted November 3, 1993, providing for the Company's Deferred Compensation Policy for Non-Employee Directors, Ñled as Exhibit 10-h-l to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. Copy of resolutions of the Compensation Committee of the Board of Directors of the Company, adopted July 6, 1994, modifying the Company's Deferred Compensation Policy for Non-Employee Directors, Ñled as Exhibit 10-h-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. Copy of resolutions of the Board of Directors of New Rockwell International Corporation, adopted December 4, 1996, providing for its Deferred Compensation Policy for Non-Employee Directors, Ñled as Exhibit 10-i-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. Copy of the Company's Annual Incentive Compensation Plan for Senior Executive OÇcers, Ñled as Exhibit A to the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners (File No. 1-1035), is hereby incorporated by reference. Restricted Stock Agreement dated December 6, 1995 between the Company and Don H. Davis, Jr., Ñled as Exhibit 10-1-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 (File No. 1-1035), is hereby incorporated by reference. Form of Change of Control Agreements between the Company and each of D.H. Davis, Jr., M.A. Bless, W.J. Calise, Jr., J.D. Cohn, K.D. Nosbusch, and J.D. Swann, Ñled as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is hereby incorporated by reference. Form of Change of Control Agreements between the Company and certain other oÇcers of the Company, Ñled as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is hereby incorporated by reference. Agreement and Plan of Distribution dated as of December 6, 1996, among Rockwell International Corporation (renamed Boeing North American, Inc.), the Company (formerly named New Rockwell International Corporation), Allen- Bradley Company, Inc., Rockwell Collins, Inc., Rockwell Semiconductor Systems, Inc., Rockwell Light Vehicle Systems, Inc. and Rockwell Heavy Vehicle Systems, Inc., Ñled as Exhibit l0-b to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. Post-Closing Covenants Agreement dated as of December 6, 1996, among Rockwell International Corporation (renamed Boeing North American, Inc.), The Boeing Company, Boeing NA, Inc. and the Company (formerly named New Rockwell International Corporation), Ñled as Exhibit 10-c to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. Tax Allocation Agreement dated as of December 6, 1996, among Rockwell International Corporation (renamed Boeing North American, Inc.), the Company (formerly named New Rockwell International Corporation) and The Boeing Company, Ñled as Exhibit 10-d to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 53 10-m-l 10-m-2 10-m-3 10-n-1 10-n-2 10-n-3 10-o-1 10-o-2 10-o-3 12 21 23 24 Distribution Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., Ñled as Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. Employee Matters Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., Ñled as Exhibit 2.2 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. Tax Allocation Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., Ñled as Exhibit 2.3 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. Distribution Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., Ñled as Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 12, 1999, is hereby incorporated by reference. Amended and Restated Employee Matters Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., Ñled as Exhibit 2.2 to the Company's Current Report on Form 8-K dated January 12, 1999, is hereby incorporated by reference. Tax Allocation Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., Ñled as Exhibit 2.3 to the Company's Current Report on Form 8-K dated January 12, 1999, is hereby incorporated by reference. Distribution Agreement dated as of June 29, 2001 by and among the Company, Rockwell Collins, Inc. and Rockwell ScientiÑc Company LLC, Ñled as Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 11, 2001, is hereby incorporated by reference. Employee Matters Agreement dated as of June 29, 2001 by and among the Company, Rockwell Collins, Inc. and Rockwell ScientiÑc Company LLC, Ñled as Exhibit 2.2 to the Company's Current Report on Form 8-K dated July 11, 2001, is hereby incorporated by reference. Tax Allocation Agreement dated as of June 29, 2001 by and between the Company and Rockwell Collins, Inc., Ñled as Exhibit 2.3 to the Company's Current Report on Form 8-K dated July 11, 2001, is hereby incorporated by reference. Computation of Ratio of Earnings to Fixed Charges for the Five Years Ended September 30, 2001. List of Subsidiaries of the Company. Independent Auditors' Consent. Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and oÇcers of the Company. (b) Reports on Form 8-K. The Company Ñled a Current Report on Form 8-K dated July 11, 2001 in respect of the completion on June 29, 2001 of the spin-oÅ of its avionics and communications business to holders of shares of Common Stock, par value $1 per share, of the Company by means of the pro rata distribution to such holders of all the outstanding shares of Common Stock, par value $.01 per share, of Rockwell Collins, Inc., then a wholly-owned subsidiary of the Company, including the associated preferred share purchase rights (the ""Distribution''). Rockwell Collins began operations as an independent, separately traded, publicly held company on June 30, 2001. The Form 8-K includes unaudited pro forma condensed consolidated Ñnancial information of the Company reÖecting the Distribution (Items 2 and 7). 54 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES ROCKWELL INTERNATIONAL CORPORATION By /s/ WILLIAM J. CALISE, JR. William J. Calise, Jr. Senior Vice President, General Counsel and Secretary Dated: November 21, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 21st day of November 2001 by the following persons on behalf of the registrant and in the capacities indicated. DON H. DAVIS, JR.* Chairman of the Board and Chief Executive OÇcer (principal executive oÇcer) BETTY C. ALEWINE* Director J. MICHAEL COOK* Director WILLIAM H. GRAY, III* Director WILLIAM T. MCCORMICK, JR.* Director JOHN D. NICHOLS* Director BRUCE M. ROCKWELL* Director JOSEPH F. TOOT, JR.* Director MICHAEL A. BLESS* Senior Vice President and Chief Financial OÇcer (principal Ñnancial oÇcer) DAVID M. DORGAN* Vice President and Controller (principal accounting oÇcer) *By /s/ WILLIAM J. CALISE, JR. William J. Calise, Jr., Attorney-in-fact** **By authority of powers of attorney Ñled herewith 55 SCHEDULE II ROCKWELL INTERNATIONAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS For the Years Ended September 30, 2001, 2000 and 1999 Description Year ended September 30, 2001 Balance at Beginning of Year(a) Net Charge to Costs and Expenses Balance at End of Year(a) Other Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $42 $14 $(10)(b) $46 Year ended September 30, 2000 Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Year ended September 30, 1999 Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 47 12 14 (22)(b) (9)(b) 42 52 (a) Includes allowances for trade and other long-term receivables. (b) Consists principally of uncollectible accounts written oÅ. S-1 73487-ROCKWELL AR01 COVERrv1 12/4/01 01:14 Page 2 73487-ROCKWELL AR01 COVERrv1 12/4/01 01:09 Page 1 / R O C K W E L L A U T O M A T I O N / 2 0 0 1 A N N U A L R E P O R T & F O R M 1 0 - K / / ROCKWELL AUTOMATION / 777 East Wisconsin Avenue / Suite 1400 / Milwaukee, WI 53202 / 414.212.5200 / www.rockwellautomation.com / ROK 2001 / ANNUAL REPORT & FORM 10-K / 

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