Rockwell Automation Annual Report 2005

Plain-text annual report

2005 Annual Report and Form 10-K ROCKWELL AUTOMATION 777 East Wisconsin Avenue / Suite 1400 / Milwaukee / WI 53202 414.212.5200 / www.rockwellautomation.com FINANCIAL HIGHLIGHTS continuing operations (dollars in millions, except per share amounts) 2003 2004 2005 Sales $3,992.3 $4,411.1 $5,003.2 Segment operating earnings Income from continuing operations* Diluted earnings per share from continuing operations* Sales by segment: Control Systems Power Systems 452.2 281.4 595.4 354.1 867.2 518.4 1.48 1.85 2.77 $3,287.4 $3,658.6 $4,123.6 704.9 752.5 879.6 Total $3,992.3 $4,411.1 $5,003.2 * Includes separately reported tax beneﬁ ts of $69.4 million ($0.37 per share), $46.3 million ($0.24 per share) and $19.7 million ($0.10 per share) for the years 2003, 2004, and 2005, respectively. SALES (dollars in millions) OPERATING EARNINGS (dollars in millions) $3,992.3 $4,411.1 $5,003.2 $452.2 $595.4 $867.2 Control Systems Power Systems SALES PER EMPLOYEE (dollars in thousands) $188 $213 $238 FREE CASH FLOW (dollars in millions) $312.3 $498.9 $514.8 2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005 Dear Shareowners, I am pleased to report that ﬁ scal 2005 was another outstanding year for Rockwell Automation – one marked by increasing evidence that we have the people, ﬁ nancial resources and strategic focus to deliver sustained value to our shareowners. Our ﬁ nancial performance tells the story: • Revenues were $5 billion, up 11 percent (excluding the beneﬁ t of currency translation); • Segment operating margin improved 4.0 points at Control Systems and 3.5 points at Power Systems; • Earnings per share from continuing operations was $2.77, up 50 percent; 2 • Free cash ﬂ ow was $514.8 million, or 99 percent of income from continuing operations, reﬂ ecting high-quality earnings and our continued focus on capital spending discipline; and • Return on Invested Capital was 18.5 percent.* These results validate the growth and performance strategy we launched several years ago to transform Rockwell Automation into a global technology leader. Today we are well-positioned to meet customer business needs, to capitalize on the current industrial recovery, and to generate proﬁ table growth throughout the economic cycle. * For a complete deﬁ nition and calculation of ROIC, please see the supplemental page following the Form 10-K. Fiscal 2005 was another outstanding year for Rockwell Automation – one marked by increasing evidence that we have the people, ﬁ nancial resources and strategic focus to deliver sustained value to our shareowners. Keith D. Nosbusch Chairman and Chief Executive Ofﬁ cer There are two fundamental actions driving our transformation. First, we are committed to generating sustainable, above-market revenue growth through disciplined investment in organic growth initiatives. Second, we are funding these investments with our relentless focus on cost productivity. I am happy to report that today, this is a proven business model and way of life for us. Our priority now, quite simply, is continued execution. In 2005, we accelerated our investment in high-return growth opportunities to enhance our technology leadership, expand and diversify our served markets, and deepen our customer relationships. Establishing Our Technology Leadership Our company’s success is anchored in the most innovative, competitive and 4 comprehensive product and service portfolio in the automation industry. It consists principally of the Logix control and information platform, power control and conversion solutions, and value-added services. Our unique integrated architecture is revolutionizing manufacturing. It enables manufacturers to integrate multiple-control disciplines on a single platform. It also allows customers to collect and use plant ﬂ oor data to enhance manufacturing operations and supply chain processes, and to make more effective real-time business decisions. Our company’s success is anchored in the most innovative, competitive and comprehensive product and service portfolio in the automation industry. Working collaboratively with our customers, we continue to invest in new features and capabilities that enhance and extend the functionality of the Logix platform. These investments include simpliﬁ cation of the platform to accommodate the unique needs of smaller manufacturers and machine builders, integrated safety to capture heightened demand for machine safety, and industry-speciﬁ c applications to penetrate the process and plant-wide information markets. The signiﬁ cant investments we have made in Logix over the past decade are delivering outstanding returns. In 2005, Logix sales were up 26 percent to $433 million, and we expect that the Logix installed base will be more than $3 billion by 2008. When it comes to the Logix platform, I’m conﬁ dent that the best is yet to come. Our power control and conversion businesses – drives, industrial components, 5 packaged solutions, systems, mechanical power transmission and motors – are also essential to expanding our customers’ success. These businesses continued to introduce innovative and differentiated products, securing our place as a world-class provider for customers in industries such as oil and gas, mining, metals, and water/wastewater – where the goals are improved performance and energy efﬁ ciency. Finally, our steady investment in a growing portfolio of value-added services and solutions delivery capabilities has strengthened our market presence. It allows us to help our customers optimize manufacturing, improve plant uptime and reduce time to market. We work hard to understand the business needs of our customers, develop solutions that respond to those needs, and deliver meaningful beneﬁ ts and value. Expanding and Diversifying Our Served Markets While our investment in enhancing our technology leadership adds to our capabilities, our vertical industry and globalization initiatives give us access to a larger, more diverse set of potential customers. We are investing in developing in-depth, industry-speciﬁ c application expertise to better anticipate and address our customers’ unique manufacturing problems and business needs. As a result, we are closer to our customers’ core value-added processes and are better able to apply our innovation to differentiate their products and improve their competitiveness. During 2005, we created industry-speciﬁ c domain expertise staffed with dedicated sales resources, and developed targeted applications to solve problems unique to these industries. We are developing this expertise across many industries, 6 with a focus on the food, beverage and brewing, consumer goods, automotive, and life sciences industries. Our investment in global market expansion has also yielded tangible results. Revenues outside the U.S. now exceed 38 percent of our total sales. During 2005, we experienced strong revenue growth in the Asia Paciﬁ c and Latin American regions, with 16 and 27 percent increases, respectively (excluding currency translation). Revenues in Europe were ﬂ at in a difﬁ cult economic environment. We are investing in, and deploying new customer-facing resources throughout Europe to grow market share by emphasizing the beneﬁ ts of our integrated control and information architecture. Our expanding presence in key developing markets, including China, India, Latin America and Central and Eastern Europe, is important to our growth. Our sales in China, which is the second largest market for Logix, grew 25 percent to approximately $145 million. We also experienced rapid growth in Mexico and Brazil, particularly on large projects in resource-based industries. Finally, our investment in infrastructure, sales resources and market access capabilities in Central and Eastern Europe resulted in 37 percent sales growth. Looking forward, we expect to derive 50 percent of our revenues from sales outside the United States by 2009. We are committed to the continued globalization of our business model and diversiﬁ cation of our customer base. Our shareowners should beneﬁ t from the revenue diversiﬁ cation that comes with global business operations. Deepening Our Customer Relationships We are passionate about customer success. Rockwell Automation continues to emphasize its customer-centric focus that increasingly positions us as a trusted partner. To achieve this, we work hard to understand the business needs of our customers, develop solutions that respond to those needs, and deliver meaningful beneﬁ ts and value. We deliver value by helping customers achieve faster time to market, lower total cost of ownership, better asset management, and reduced manufacturing business risks. Our value proposition has remained the same: to help our customers be more productive and globally competitive. 7 Funding Growth with Productivity As we pursue growth opportunities and expand served markets, Rockwell Automation is maintaining its focus on performance improvement. We continually emphasize productivity and cost-management initiatives, with a particular focus on Lean Enterprise, Six Sigma processes, and developing performance-driven skills in employees around the world. We are driving this continuous improvement throughout the company. Our annual cost productivity goal has increased to 3-4 percent, a critical objective for two reasons. First, it is important that we fund growth and redeploy resources without adding expense. Second, we understand the challenges of customer expectations and competitive pressures. Our customers continuously raise the bar, and our competitors are not standing still. We must respond by offering the highest quality products, services and solutions with the best value, 8 and we must never become complacent. Focus on Corporate Best Practices As we work to build and deliver shareowner value, we are equally focused on best practices in the critical areas of corporate governance, ethics and social responsibility. Under the leadership of our Board of Directors, we continue to make sound corporate governance a priority. That commitment is reﬂ ected in the leadership scores we have received from corporate governance rating agencies. Our corporate culture has always been one of integrity and forthrightness, and we have further demonstrated this with the appointment of a compliance leader whose job is to act as a central point of review and supervision for our business conduct. Finally, we continue our vigilance in fostering a diverse and inclusive workforce, maintaining a safe workplace, and respecting the environment. Rockwell Automation’s intellectual assets – represented by our highly skilled, experienced and talented workforce – will continue to be an invaluable competitive advantage. Outlook In conclusion, our growth prospects remain excellent. We continue to enjoy a strong ﬁ nancial position with a very conservatively capitalized balance sheet, signiﬁ cant operating leverage, and outstanding cash ﬂ ow. We will build on our strengths and prudently deploy ﬁ nancial resources to accelerate growth and optimize long-term returns to shareowners. Perhaps most important, Rockwell Automation’s intellectual assets – represented by our highly skilled, experienced and talented workforce – will continue to be an invaluable competitive advan- tage. Our employees drive this organization’s pursuit of excellence at all levels, and that attribute will continue to be a key differentiator. I am pleased to be able to report in this letter – my ﬁ rst as your Chairman and CEO – that Rockwell Automation is executing on its balanced strategy of growth and performance. We have solid momentum entering 2006, and we are carefully deploying and allocating the resources necessary to position us 9 for continued success in an ever-changing global marketplace. To our employees around the world, you continue to be key drivers in this success, and I want to acknowledge and thank you for your hard work and dedication. We have signiﬁ cantly more work to accomplish and will be relentless in doing so. To our investors and business partners, I look forward to updating you on our new initiatives, and would like to express our thanks for your continuing support. Keith D. Nosbusch Chairman and Chief Executive Ofﬁ cer 10 Rockwell Automation Corporate Ofﬁ cers JAMES E. HART Vice President, Finance JOHN P. McDERMOTT Senior Vice President JOHN M. MILLER Vice President and Chief Intellectual Property Counsel TIMOTHY C. OLIVER Vice President and Treasurer RONDI ROHR-DRALLE Vice President, Corporate Development ROBERT A. RUFF Senior Vice President A. LAWRENCE STUEVER Vice President and General Auditor JOSEPH D. SWANN Senior Vice President and President, Power Systems KEITH D. NOSBUSCH Chairman of the Board and Chief Executive Ofﬁ cer JOHN D. COHN Senior Vice President, Strategic Development and Communications KENT G. COPPINS Vice President and General Tax Counsel THEODORE D. CRANDALL Senior Vice President DAVID M. DORGAN Vice President and Controller STEVEN A. EISENBROWN Senior Vice President JAMES V. GELLY Senior Vice President and Chief Financial Ofﬁ cer DOUGLAS M. HAGERMAN Senior Vice President, General Counsel and Secretary MARY JANE HALL Senior Vice President, Human Resources Rockwell Automation Board of Directors KEITH D. NOSBUSCH Chairman of the Board and Chief Executive Ofﬁ cer BETTY C. ALEWINE Retired President and Chief Executive Ofﬁ cer COMSAT Corporation DON H. DAVIS, JR. Retired Chairman and Chief Executive Ofﬁ cer VERNE G. ISTOCK Retired Chairman and President Bank One Corporation BARRY C. JOHNSON, Ph.D. Dean, College of Engineering Villanova University WILLIAM T. MCCORMICK, JR. Retired Chairman and Chief Executive Ofﬁ cer CMS Energy Corporation BRUCE M. ROCKWELL Retired Executive Vice President Fahnestock & Co. Inc. DAVID B. SPEER President and Chief Executive Ofﬁ cer Illinois Tool Works Inc. JOSEPH F. TOOT, JR. Retired President and Chief Executive Ofﬁ cer The Timken Company KENNETH F. YONTZ Chairman of the Board Sybron Dental Specialties, Inc. 11 General Information ROCKWELL AUTOMATION World Headquarters INTERNET Log on to www.melloninvestor.com/isd for 777 E. Wisconsin Avenue, Suite 1400 convenient access 24 hours a day, 7 days a Milwaukee, WI 53202 414.212.5200 week for online services including account information, change of address, transfer of www.rockwellautomation.com shares, lost certiﬁ cates, dividend payment INVESTOR RELATIONS Securities analysts should call: Timothy C. Oliver Vice President and Treasurer 414.212.5210 CORPORATE PUBLIC RELATIONS Members of the news media should call: 12 Matthew P. Gonring Vice President Global Marketing and Communications 414.382.5575 ANNUAL MEETING The company’s annual meeting of shareowners elections and additional administrative services. If you are interested in receiving shareowner information electronically, enroll in MLinksm, a self-service program that provides electronic notiﬁ cation and secure access to shareowner communications. To enroll, follow the MLink enrollment instructions when you access your shareowner account via www.melloninvestor.com/isd TELEPHONE Call Mellon Investor Services at one of the following numbers: Inside the United States: 800.204.7800 Outside the United States: + 1.201.680.6578 will be held near its World Headquarters at IN WRITING The Pﬁ ster Hotel, 424 E. Wisconsin Avenue, Correspondence about share ownership, Milwaukee, Wisconsin, at 10 a.m., Wednesday, dividend payments, transfer requirements, February 1, 2006. A notice of the meeting and change of address, lost certiﬁ cates and proxy materials will be delivered to shareowners account status may be directed to: in December 2005. SHAREOWNER SERVICES Mellon Investor Services, our transfer agent and Mellon Investor Services LLC PO Box 3338 South Hackensack, NJ 07606-1938 registrar, maintains the records for our registered Shareowners wishing to transfer stock should shareowners and can help you with a variety of send their written request, stock certiﬁ cate(s) shareowner related services. You can access and other required documents to: your shareowner account in one of the following three ways: Mellon Investor Services LLC PO Box 3312 South Hackensack, NJ 07606-1915 Registered or overnight mail should be sent to: shares held in their accounts. Participation in the Mellon Investor Services LLC Newport Ofﬁ ce Center VII 480 Washington Boulevard Jersey City, NJ 07310 A copy of our annual report (including Form 10-K) may be obtained without charge through the Internet at http://www.shareholder.com/ rockwellauto/document-request.cfm or by calling 888.765.3228. Other investor information is available in the Investor Relations section of our website at www.rockwellautomation.com Shareowners needing further assistance should contact Rockwell Automation Shareowner Relations by telephone at 414.212.5300 or email at shareownerrelations@ra.rockwell.com INVESTOR SERVICES PROGRAM Under the Mellon Investor Services Program for Shareowners of Rockwell Automation, shareowners of record may select to reinvest all or a part of their dividends, to have cash dividends directly deposited in their bank accounts and to deposit share certiﬁ cates with the agent for safekeeping. These services are all provided without charge to the participating shareowner. In addition, the program allows participating 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 program is voluntary, and shareowners of record may participate or terminate their participation at any time. For full details of the program, 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 www.melloninvestor.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 555 East Wells Street, Suite 1400 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 201.680-6578 STOCK EXCHANGES Common Stock (Symbol: ROK) United States: New York and Paciﬁ c United Kingdom: London 13 Form 10-K Rockwell Automation UNITED STATES 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, 2005. Commission Ñle number 1-12383 Rockwell Automation, Inc. (Exact name of registrant 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 if the registrant is a well-known seasoned issuer, as deÑned in Rule 405 of the Securities Act. Yes ¥ No n Indicate by check mark if the registrant is not required to Ñle reports pursuant to Section 13 or Section 15(d) of the Act. Yes n No ¥ 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 filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the Act). Yes ¥ No n Indicate by check mark whether the registrant is a shell company (as deÑned in Rule 12b-2 of the Act). Yes n No ¥ The aggregate market value of registrant's voting stock held by non-aÇliates of registrant on March 31, 2005 was approximately $10.4 billion. 179,136,454 shares of registrant's Common Stock, par value $1 per share, were outstanding on October 31, 2005. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of registrant to be held on February 1, 2006 is incorporated by reference into Part III hereof. FORWARD-LOOKING STATEMENTS PART I This Annual Report contains statements (including certain projections and business trends) accompanied by such phrases as ""believe'', ""estimate'', ""expect'', ""anticipate'', ""will'', ""intend'' 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, many of which are beyond our control, including but not limited to: ‚ economic and political changes in global markets where we compete, such as currency exchange rates, inÖation rates, interest rates, recession, local laws, regulations and policies of foreign governments and other external factors we cannot control; ‚ successful development of advanced technologies, demand for and market acceptance of new and existing products; ‚ general global and regional economic, business or industry conditions, including levels of capital spending in industrial markets; ‚ the availability, eÅectiveness and security of our information technology systems; ‚ competitive product and pricing pressures; ‚ disruption of our operations due to natural disasters, acts of war, strikes, terrorism, or other causes; ‚ intellectual property infringement claims by others and the ability to protect our intellectual property; ‚ regulatory and legislative changes related to the reporting and funding of pension and health care obligations; ‚ our ability to successfully address claims by taxing authorities in the various jurisdictions where we do business; ‚ our ability to attract and retain qualiÑed personnel; ‚ the uncertainties of litigation; ‚ disruption of our North American distribution channel; ‚ the availability and price of components and materials; and ‚ other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission Ñlings. These forward-looking statements reÖect our beliefs as of the date of Ñling this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1 Risk Factors for additional information. Item 1. Business General Rockwell Automation, Inc. (the Company or Rockwell Automation) is a leading global provider of industrial automation power, control and information products and services. The Company was incorporated in Delaware in 1996 and is the successor to the former Rockwell International Corporation as the 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, we completed the spinoÅ of our automotive component systems business into an independent, separately traded, publicly held company named Meritor Automotive, Inc. (Meritor). On July 7, 2 2000, Meritor and Arvin Industries, Inc. merged to form ArvinMeritor, Inc. (ArvinMeritor). On December 31, 1998, we completed the spinoÅ of our semiconductor systems business (Semiconductor Systems) into an independent, separately traded, publicly held company named Conexant Systems, Inc. (Conexant). On June 29, 2001, we completed the spinoÅ of our Rockwell Collins avionics and communications business into an independent, separately traded, publicly held company named Rockwell Collins, Inc. (Rockwell Collins). In September 2004, we sold our FirstPoint Contact business. Additional information related to this divestiture is contained in Note 13 in the Financial Statements. As used herein, the terms ""we'', ""us'', ""our'', the ""Company'' or ""Rockwell Automation'' include subsidiaries and predecessors unless the context indicates otherwise. Information included in this Annual Report on Form 10-K refers to our continuing businesses unless otherwise indicated. Where 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 (MD&A), or in Item 8. Financial Statements and Supplementary Data (the Financial Statements), or to information in our Proxy Statement for the Annual Meeting of Shareowners of the Company to be held on February 1, 2006 (the 2006 Proxy Statement), such information is incorporated therein by such reference. All date references to years refer to our Ñscal year unless otherwise stated. Operating Segments We have two operating segments: Control Systems and Power Systems. In 2005, our total sales were $5.0 billion. Financial information with respect to our operating segments, including their contributions to sales and operating earnings for each of the three years in the period ended September 30, 2005, is contained under the caption Results of Operations in MD&A, and in Note 18 in the Financial Statements. Control Systems Control Systems is our largest operating segment with 2005 sales of $4.1 billion (82 percent of our total sales) and approximately 17,000 employees at September 30, 2005. Control Systems supplies industrial automation products, systems, software and services focused on helping customers control and improve manufacturing processes. The operating segment includes two main business groups: the Components and Packaged Applications Group (CPAG) and the Automation Control and Information Group (ACIG). CPAG supplies industrial components, power control and motor management products, and packaged and engineered products and systems. CPAG's sales account for approximately 40 percent of Control Systems' sales. ACIG's core products are used primarily to control and monitor industrial plants and processes and typically consist of a processor, software and input/output (I/O) devices. ACIG's integrated architecture and Logix controllers perform multiple types of control applications, including discrete, batch, continuous process, drive system, motion and machine safety across various factory Öoor operations. ACIG's sales account for approximately 45 percent of Control Systems' sales. In addition, Control Systems' oÅering also includes services and solutions, such as multi-vendor customer support, training, automation systems integration, asset management, and manufacturing information solutions for discrete and targeted batch process industries. Control Systems' service and solution oÅerings compete with Emerson Electric Co., General Electric Company, Invensys, Siemens AG and other system integrators. 3 The following is a summary of the major products and services and major competitors of Control Systems' two main business groups: Business Group Major Products/Services Major Competitors CPAG ACIG ABB, Ltd. Schneider Electric SA Siemens AG Emerson Electric Co. Mitsubishi Omron Schneider Electric SA Siemens AG Motor starters Contactors Push buttons Signaling devices Termination and protection devices Relays and timers Condition sensors Adjustable speed drives Motor control centers Drive systems Controllers Control platforms Software Input/output devices High performance rotary and linear motion control systems Electronic operator interface devices Sensors Industrial computers Machine safety components Depending on the product or service involved, Control Systems' competitors range from large diversiÑed businesses that sell products outside of industrial automation, to smaller companies specializing in niche products and services. Factors that inÖuence Control Systems' competitive position are its broad product portfolio and scope of solutions, technology leadership, knowledge of customer applications, large installed base, established distribution network, quality of products and services, price and global presence. Control Systems' products are marketed primarily under the Allen-Bradley and Rockwell Software brand names. Major markets served include consumer products, transportation, oil and gas, mining, metals and forest products. In North America, Control Systems' products are sold primarily through independent distributors that typically do not carry products that compete with Allen-Bradley products. Large systems and service oÅerings are sold principally through a direct sales force, though opportunities are sometimes sourced through distributors or system integrators. Product sales outside the United States occur through a combination of direct sales, sales through distributors and sales through system integrators. In 2005, sales in the United States accounted for 56 percent of Control Systems' sales. Outside the U.S., Control Systems' primary markets were Canada, China, the United Kingdom, Germany, Italy, Mexico, Australia and Korea. Control Systems is headquartered in Milwaukee, Wisconsin and has operations in North America, Europe, Asia-PaciÑc and Latin America. Power Systems Power Systems recorded 2005 sales of $0.9 billion (18 percent of our total sales) and had approximately 4,000 employees at September 30, 2005. Power Systems consists of two business groups: Dodge mechanical (Mechanical) and Reliance electrical (Electrical). 4 The following is a summary of the major products and services and major competitors of the Power Systems operating segment: Business Group Major Products/Services Major Competitors Mechanical Electrical Mounted bearings Gear reducers Mechanical drives Conveyor pulleys Couplings Bushings Clutches Motor brakes Emerson Electric Co. Rexnord Corporation SEW Ì Eurodrive SKF Industrial and engineered motors Adjustable speed drives Repair services Motor and mechanical maintenance solutions Regal-Beloit Corporation Training Consulting services to OEMs, end-users and distributors A.O. Smith Corporation Baldor Electric Company Emerson Electric Co. Siemens AG Depending on the product involved, Power Systems' competitors range from large diversiÑed businesses that sell products outside of industrial automation, to smaller companies specializing in niche products and services. Factors that inÖuence Power Systems' competitive position are product quality, installed base, price and our established distributor network. While Power Systems' competitive position is strong in North America, it is limited somewhat by its small presence outside the United States. Mechanical's products are marketed primarily under the Dodge brand name while Electrical's products are marketed primarily under the Reliance Electric brand name. Major markets served include mining, cement, aggregates, environmental, forest products, food/beverage, oil and gas, metals and material handling. Mechanical's products are sold primarily through distributors while Electrical's products are sold primarily through a direct sales force. In 2005, sales in the United States accounted for 87 percent of Power Systems' sales. Outside the U.S., Power Systems' primary markets were Canada, China and Mexico. Power Systems is headquartered in Greenville, South Carolina and has operations in North America, Europe and Asia-PaciÑc. Geographic Information In 2005, sales in the United States accounted for 62 percent of our total sales. Our principal markets outside the United States are in Canada, China, the United Kingdom, Germany, Italy, Mexico, Australia and Korea. See Risk Factors below for a discussion of risks associated with our operations outside of the United States. Sales and property information by major geographic area for each of the three years in the period ended September 30, 2005 is contained in Note 18 in the Financial Statements. 5 Research and Development Our research and development spending is (in millions): Year Ended September 30, 2004 2003 2005 Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $128.2 10.4 $111.8 9.9 $111.9 9.7 $138.6 $121.7 $121.6 Customer-sponsored research and development was not signiÑcant in 2005, 2004 or 2003. Employees At September 30, 2005, we had approximately 21,000 employees. Approximately 14,000 were employed in the United States, and, of these employees, about 7 percent were represented by various local or national unions. Raw Materials and Supplies We purchase many items of equipment, components and materials used in the production of our products from others. The raw materials essential to the conduct of each of our business segments generally are available at competitive prices. Although we have a broad base of suppliers and subcontractors, we depend upon the ability of our suppliers and subcontractors to meet performance and quality speciÑcations and delivery schedules. See Risk Factors below for a discussion of risks associated with our reliance on third party suppliers. Backlog Our total order backlog was $772.5 million at September 30, 2005 and $500.4 million at September 30, 2004. Backlog is not necessarily indicative of results of operations for future periods due to the short-cycle nature of most of our sales activities. Environmental Protection Requirements Information about the eÅect on the Company and its manufacturing operations of compliance with environmental protection requirements and resolution of environmental claims is contained in Note 17 in the Financial Statements. See also Item 3. Legal Proceedings. Patents, Licenses and Trademarks We own or license numerous patents and patent applications related to our products and operations. Various claims of patent infringement and requests for patent indemniÑcation have been made to us. We believe that none of these claims will have a material adverse eÅect on our Ñnancial condition. See Item 3. Legal Proceedings. While in the aggregate our patents and licenses are important in the operation of our business, we do not believe that loss or termination of any one of them would materially aÅect our business or Ñnancial condition. See Risk Factors below for a discussion of risks associated with our intellectual property. The Company's name and its registered trademark ""Rockwell Automation'' is important to each of our business segments. In addition, we own other important trademarks we use for certain products and services, such as ""Allen-Bradley'' and ""A-B'' for electronic controls and systems for industrial automation, ""Reliance'' and ""Reliance Electric'' for electric motors and drives and ""Dodge'' for mechanical power transmission products. 6 Seasonality Our business segments are not subject to signiÑcant seasonality. Risk Factors We generate a substantial portion of our revenues from international sales and are subject to the risks of doing business outside of the United States. Approximately 38 percent of our revenues in 2005 were outside of the U.S. Future growth rates and success of our business depend in large part on continued growth in our non-U.S. operations. Numerous risks and uncertainties aÅect our non-U.S. operations. These risks and uncertainties include changes in political, economic and social environments, local labor conditions, changes in laws, regulations and policies of foreign governments, as well as U.S. laws aÅecting activities of U.S. companies abroad, including tax laws and enforcement of contract and intellectual property rights. In addition, we are aÅected by changes in foreign currency exchange rates, inÖation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be diÇcult to transfer to the U.S. in a tax-eÇcient manner. An inability to anticipate changes in customer preferences could result in decreased demand for our products. Our success depends in part on our ability to anticipate and oÅer products that appeal to the changing needs and preferences of our customers in the various markets we serve. Developing new products requires high levels of innovation and the development process is often lengthy and costly. If we are not able to anticipate, identify, develop and market products that respond to changes in customer preferences, demand for our products could decline and our operating results would be adversely aÅected. General economic, business or industry conditions may result in a decrease in our revenues and proÑtability. Demand for our products is sensitive to changes in levels of global industrial production. As economic activity slows down, companies tend to reduce their levels of capital spending, resulting in decreased demand for our products. If this occurs, our revenues and proÑtability may be negatively aÅected. Information technology infrastructure failures could signiÑcantly aÅect our business. We depend heavily on our information technology infrastructure in order to achieve our business objectives. If we experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could cause us to lose customers or revenue and could require us to incur signiÑcant expense to eliminate these problems and address related security concerns. We are in the process of introducing a global Enterprise Resource Planning (ERP) system that will redesign and deploy new processes, organization structures, and a common information system over a period of several years. As we implement the ERP system, the new system may not perform as expected. This could have an adverse eÅect on our business. The global industrial automation power, control and information products and services industry is highly competitive. We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase our market share or proÑtability. 7 The growth of our Control Systems solutions oÅerings may create additional risks. Risks inherent in the sale of systems and solutions include assuming greater responsibility for project completion and success, deÑning and controlling contract scope, eÇcient execution of projects, and the eÇciency and quality of our subcontractors. Our inability to control, manage, and mitigate these risks could adversely aÅect our results of operations. Natural disasters, terrorism, acts of war, international conÖicts or other disruptions to our operations could harm our business. Natural disasters, acts or threats of war or terrorism, international conÖicts, and the actions taken by the United States and other governments in response to such events could cause damage or disrupt our business operations, our suppliers, or our customers, and could create political or economic instability, any of which could have an adverse eÅect on our business. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products, could make it diÇcult or impossible for us to deliver products, or could disrupt our supply chain. The inability to secure and maintain rights to intellectual property could harm our business and our customers. We own the rights to many patents, trademarks, brand names and trade names that are important to our business. The loss of patents or licenses used in principal portions of our business may have an adverse eÅect on our results of operations. Expenses related to enforcing our intellectual property rights could be signiÑcant. In addition, others may assert intellectual property infringement claims against us or our customers. We sometimes provide a limited intellectual property indemnity in connection with our terms and conditions of sale to our customers and in other types of contracts with third parties. IndemniÑcation payments and legal costs to defend claims could have an adverse eÅect on our business. Future legislation or regulations intended to reform the funding and reporting of pension beneÑt plans could adversely aÅect our operating results and cash Öows, as could changes in market conditions that impact the assumptions we use to measure our liabilities under these plans. Legislators and agencies of the U.S. government have proposed legislation and regulations to amend, restrict or eliminate various features of, and mandate additional funding of, pension beneÑt plans. If legislation or new regulations are adopted, we may be required to contribute additional cash to these plans, in excess of our current estimates. Market volatility in interest rates, investment returns and other factors could also adversely aÅect the funded status of our pension plans. Moreover, future changes to the accounting and reporting standards related to pension plans could create signiÑcant volatility in our operating results. The inability to successfully defend claims from taxing authorities related to our current and divested businesses could adversely aÅect our operating results and Ñnancial position. We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may diÅer from actual payments or assessments. Claims from taxing authorities related to these diÅerences could have an adverse impact on our operating results and Ñnancial position. In connection with the divestiture of certain businesses in prior years, we retained tax liabilities and the rights to tax refunds for periods before the divestitures. As a result, from time to time, we may be required to make payments related to tax matters associated with those divested businesses. Our failure to attract and retain qualiÑed personnel could lead to a loss of revenue or proÑtability. Our success depends in part on the eÅorts and abilities of our senior management team and key employees. Their skills, experience and industry contacts signiÑcantly beneÑt our operations and 8 administration. The failure to attract and retain members of our senior management team and key employees could have a negative eÅect on our operating results. Potential liabilities and costs from litigation (including asbestos claims) could adversely aÅect our business. Various lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our business, including those pertaining to product liability, safety and health, employment and contract matters. We have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. The uncertainties of litigation (including asbestos claims) and the uncertainties related to the collection of insurance coverage make it diÇcult to accurately predict the ultimate resolution thereof. Potential liabilities and costs relating to environmental remediation could adversely aÅect our business. Our operations, both in the United States and abroad, are subject to regulation by various environmental regulatory authorities concerned with the impact of the environment on human health, the limitation and control of emissions and discharges into the air, ground and waters, the quality of air and bodies of water, and the handling, use and disposal of speciÑed substances. Environmental laws and regulations can be complex and may change. Our Ñnancial responsibility for the cleanup or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by unrelated companies or individuals, as well as properties currently owned and used by us, regardless of whether the contamination is attributable to prior owners. We have been named as a potentially responsible party at cleanup sites and may be in the future as well, and the costs associated with these current and future sites may be signiÑcant. Risks associated with acquisitions could have an adverse eÅect on us. We have acquired, and anticipate continuing to acquire, businesses in an eÅort to enhance shareowner value. Acquisitions involve risks and uncertainties, including: ‚ diÇculties integrating the acquired company, retaining the acquired business' customers, and achieving the expected beneÑts of the acquisition, such as revenue increases, cost savings, and increases in geographic or product presence, in the desired time frames, if at all; ‚ loss of key employees of the acquired business; ‚ implementing and maintaining consistent standards, controls, procedures, policies and information systems; and ‚ diversion of management's attention from other business concerns. Future acquisitions could cause us to incur additional debt, dilution, contingent liabilities, increased interest expense, and amortization expenses related to intangible assets. Impairment losses on goodwill and intangible assets with an indeÑnite life, or restructuring charges, could also occur as a result of acquisitions. A disruption to our distribution channel could have an adverse eÅect on our operating results. In North America, approximately 75 percent of our sales are through a limited number of third party distributors. While we maintain the right to appoint new distributors, any unplanned disruption to the existing channel could adversely aÅect our revenues and proÑtability. A disruption could be caused by the sale of a distributor to a competitor, Ñnancial instability of the distributor, or other unforeseen events. 9 Our reliance on third party suppliers creates certain risks and uncertainties. Our manufacturing processes require that we purchase a high volume of equipment, components and materials from third party suppliers. Our reliance on these suppliers involves certain risks, including: ‚ the cost of these purchases may change due to inÖation, exchange rates and other factors; ‚ poor quality can adversely aÅect the reliability and reputation of our products; and ‚ a shortage of components or materials could adversely aÅect our manufacturing eÇciencies and delivery capabilities, which could reduce sales and proÑtability. Any of these uncertainties could adversely aÅect our proÑtability and ability to compete. We also maintain several single-source supplier relationships, because either alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. Unavailability or delivery delays of single-source components or products could adversely aÅect our ability to ship the related product in desired quantities and in a timely manner. The eÅect of unavailability or delivery delays would be more severe if associated with our higher volume and more proÑtable products. Even where alternative sources of supply are available, qualifying the alternative suppliers and establishing reliable supplies could cost more or could result in delays and a possible loss of revenues. Available Information We maintain an Internet site at http://www.rockwellautomation.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports Ñled or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), as well as our annual report to shareowners and Section 16 reports on Forms 3, 4 and 5, are available free of charge on this site as soon as reasonably practicable after we Ñle or furnish these reports with the Securities and Exchange Commission (SEC). All reports we Ñle with the SEC are also available free of charge via EDGAR through the SEC's website at http://www.sec.gov. Our Guidelines on Corporate Governance and charters for our Board Committees are also available at our Internet site. These Guidelines and charters are also available in print to any shareowner upon request. The information contained on and linked from our Internet site is not incorporated by reference into this Form 10-K. The certiÑcations of our Chief Executive OÇcer and Chief Financial OÇcer required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as Exhibits to this Annual Report on Form 10-K and were included as Exhibits to each of our Quarterly Reports on Form 10-Q Ñled with the SEC during 2005. Our Chief Executive OÇcer certiÑed to the New York Stock Exchange (NYSE) on March 2, 2005, pursuant to Section 303A.12 of the NYSE's listing standards, that he was not aware of any violation by the Company of the NYSE's corporate governance listing standards as of that date. Item 2. Properties At September 30, 2005, we operated 69 plants, principally in North America. We also had 278 sales and administrative oÇces and a total of 37 warehouses, service centers, and other facilities. The aggregate Öoor space of our facilities was approximately 14.1 million square feet. Of this Öoor space, we owned approximately 52 percent and leased approximately 48 percent. Manufacturing space occupied approximately 6.6 million square feet. Our Control Systems segment occupied approximately 3.7 million square feet, and our Power Systems segment occupied the remaining approximately 2.9 million square feet of manufacturing space. At September 30, 2005, approximately 0.7 million square feet of Öoor space was not in use, principally in owned facilities. In November 2005, we sold and leased back 24 properties in North America comprising approximately 3.8 million square feet. See Note 20 in the Financial Statements for additional information. There are no major encumbrances (other than Ñnancing arrangements, which in the aggregate are not signiÑcant) on any of our plants or equipment. In our opinion, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. 10 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 us and another former operator of the Rocky Flats Plant (the Plant), Golden, Colorado, that we operated from 1975 through December 31, l989 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 environmental, 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. Trial began on October 11, 2005. EÅective August 1, 1996, the DOE assumed control of the defense of the contractor defendants, including us, in the action. Beginning on that date, the costs of our defense, which had previously been reimbursed to us by the DOE, have been and are being paid directly by the DOE. We believe that we are entitled under applicable law and our contract with the DOE to be indemniÑed for all costs and any liability associated with this action. On November 13, 1990, we were served with another civil action brought against us 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 our 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 us that it would no longer reimburse costs incurred by us 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 us 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 will also be entitled to an award of attorneys' fees but the court refused to award fees until appeals from the judgment have been exhausted. On September 24, 2001, a panel of the 10th Circuit Court of Appeals aÇrmed the judgment. On November 2, 2001, we Ñled a petition for rehearing with the Court of Appeals seeking reconsideration of that portion of the decision holding that the relator, Mr. Stone, is entitled to an award of attorneys' fees. On March 4, 2002, the Court of Appeals remanded the case to the trial court for the limited purpose of making Ñndings of fact and conclusions of law pertaining to Mr. Stone's relator status and, the trial court having made Ñndings of fact on the issue, on March 15, 2004, a panel of the Court of Appeals again ruled that Mr. Stone is entitled to an award of attorneys' fees. We believe that ruling is in error and have petitioned the 10th Circuit Court of Appeals for en banc review. We believe that we are entitled under applicable law and our contract with the DOE to be indemniÑed for all costs and any liability associated with this action, and intend to Ñle a claim with the DOE seeking reimbursement. We believe that an outcome adverse to us will not have a material eÅect on our business or Ñnancial condition. On January 8, 1991, we Ñled suit in the United States Claims Court against the DOE, seeking recovery of $6.5 million of award fees that we allege are owed to us under the terms of our 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 us alleging violations of the U.S. False Claims Act previously asserted in the civil action described in the preceding paragraph. On May 4, 2005, we Ñled another claim with the DOE, seeking recovery of $11.3 million in unreimbursed costs incurred in defense of the Stone suit described in the preceding paragraph. On September 30, 2005, the DOE denied that claim, a denial we intend to appeal, and simultaneously Ñled a motion in the Court of Claims suit seeking leave to amend its answer and counterclaim to seek repayment of $4 million in previously reimbursed Stone 11 defense costs or an oÅset of that amount against any judgment we might obtain against the DOE on our claim for award fees. Russellville. 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 a plant in Russellville, Kentucky owned and operated by our Measurement & Flow Control Division prior to its divestiture in March 1989, 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 civil 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. We have been proceeding with remediation and characterization eÅorts consistent with the trial court's ruling. Solaia Technology LLC. We are a party in several suits in which Solaia Technology LLC (Solaia) is adverse. Solaia is a single-purpose entity formed to license US Patent No. 5,038,318 (the `318 patent). Solaia acquired the `318 patent from Schneider Automation, Inc., a competitor of ours in the Ñeld of factory automation. Schneider has retained certain interests in the `318 patent, including a share in Solaia's licensing income. Solaia has asserted that the `318 patent covers computer controlled factory automation systems used throughout most modern factories in the United States. Solaia has issued hundreds of demand letters to a wide range of factory owners and operators, and has Ñled a series of lawsuits against over 40 companies alleging patent infringement. A signiÑcant number of the companies sued by Solaia have chosen to settle the claims for amounts that we believe are notably smaller than the likely legal costs of successfully defending Solaia's claims in court. Recently, Solaia has dismissed its lawsuits against several of the companies that chose not to settle. In a suit Ñled by Solaia on July 2, 2002 in Chicago, Solaia Technology LLC v. ArvinMeritor, Inc., et al. (02-C-4704, N.D. Ill.) (Chicago patent suit), Solaia accused sixteen companies of infringing the `318 patent. We made arrangements with ArvinMeritor, which owns and operates our former automotive business, to undertake ArvinMeritor's defense of Solaia's patent claims to seek to assure that Solaia's infringement claim against ArvinMeritor could be Ñnally and actually adjudicated in the Chicago patent suit. In that case, Solaia responded on May 12, 2003 by suing us directly for direct patent infringement, demanding material monetary damages. We believe that Solaia's claim against us in the Chicago patent suit is wholly without merit and baseless. On March 28, 2005, the court granted ArvinMeritor's motion for summary judgment that the accused ArvinMeritor systems did not infringe the `318 patent. On the same date, the court denied Solaia's motion for summary judgment that the accused Rockwell systems infringed the `318 patent. Additional summary judgment motions, in which we seek dismissal of Solaia's claims against us, remain pending. We sought to protect our customers from Solaia's claims by bringing an action in federal court in Milwaukee against Solaia, its law Ñrm Niro, Scavone, Haller & Niro, and Schneider Automation, Rockwell Automation, Inc., et al. v. Schneider Automation, Inc., et al (Case No. 02-C-1195 E.D. Wis.) (the Milwaukee action). Pursuant to our claims of tortious interference, civil conspiracy and violations of federal antitrust and unfair competition laws, we are seeking monetary damages and other relief arising from the infringement claims Solaia has made against our customers. In January 2003, Solaia Ñled a lawsuit in federal court in Chicago against us and several others, Solaia Technology LLC v. Rockwell Automation, Inc., et al., (Case No. 03-C-566 N.D. Ill.), alleging federal antitrust and unfair competition violations, tortious interference, defamation and other claims. We deny any liability under those claims. Solaia's antitrust and tort case has now been transferred to the federal court in Milwaukee (Case No. 03-C-939, E.D. Wis.) and eÅectively consolidated with the Milwaukee action, and all proceedings in Milwaukee have been administratively stayed. In December 2003, Solaia Ñled a state court action in Cook County, Illinois alleging tortious interference claims against us and one of our former oÇcers. This action was removed from state court and, as with 12 Solaia's January 2003 suit, has been transferred to the federal court in Milwaukee (Case No. 04-C-368, E.D. Wis.). All of the Milwaukee cases are in their earliest stages. The federal court in Milwaukee has stayed all three cases in Milwaukee pending developments in the Chicago patent suit. Asbestos. Like thousands of other companies, we (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. Currently there are thousands of claimants in lawsuits that name us as defendants, together with hundreds of other companies. The great bulk of the complaints, however, do not identify any of our products or specify which of these claimants, if any, were exposed to asbestos attributable to our products; and past experience has shown that the vast majority of the claimants will never identify any of our products. In addition, when our products appear to be identiÑed, they are frequently from divested businesses, and we are indemniÑed for most of the costs. For those claimants who do show that they worked with our products, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of our products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants. We have maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insured retentions, for most of these claims. We initiated litigation in the Milwaukee County Circuit Court on February 12, 2004 to enforce the insurance policies against Nationwide Indemnity Company and Kemper Insurance, the insurance carriers that provided liability insurance coverage to our former Allen- Bradley subsidiary. As a result, the insurance carriers have paid some past defense and indemnity costs and have agreed to pay the substantial majority of future defense and indemnity costs for Allen-Bradley asbestos claims, subject to policy limits. If either carrier becomes insolvent or the policy limits of either carrier are exhausted, our share of future defense and indemnity costs may increase. However, coverage under excess policies may be available to pay some or all of these costs. The uncertainties of asbestos claim litigation and the long term solvency of our insurance companies make it diÇcult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation aÅecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material adverse eÅect on our Ñnancial condition. Other. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our 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 us, we believe the disposition of matters that are pending or asserted will not have a material adverse eÅect on our business or Ñnancial condition. 13 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 2005. 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, 2005 are: Name, OÇce and Position, and Principal Occupations and Employment Age Keith D. Nosbusch Ì Chairman of the Board of Rockwell Automation since February 2005, and President and Chief Executive OÇcer of Rockwell Automation since February 2004; Senior Vice President of Rockwell Automation and President, Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ John D. Cohn Ì Senior Vice President, Strategic Development and Communications of Rockwell Automation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kent G. Coppins Ì Vice President and General Tax Counsel of Rockwell Automation since June 2001; Associate General Tax Counsel of Rockwell Automation prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Theodore D. Crandall Ì Senior Vice President of Rockwell Automation since February 2004 and Senior Vice President, Components and Packaged Applications Group of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ David M. Dorgan Ì Vice President and Controller of Rockwell Automation since June 2001; Director, Headquarters Finance of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Steven A. Eisenbrown Ì Senior Vice President of Rockwell Automation since February 2004 and Senior Vice President, Automation Control and Information Group of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ James V. Gelly Ì Senior Vice President and Chief Financial OÇcer of Rockwell Automation since January 2004; Vice President and Treasurer of Honeywell International (diversiÑed technology and manufacturing) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Douglas M. Hagerman Ì Senior Vice President, General Counsel and Secretary of Rockwell Automation since May 2004; Litigation partner at Foley & Lardner LLP (law Ñrm) and Co-Chair of the Securities Litigation, Enforcement and Regulation Practice Group prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏ Mary Jane Hall Ì Senior Vice President, Human Resources of Rockwell Automation since February 2004; Vice President of Rockwell Automation from June 2001 to February 2004; Senior Vice President, Human Resources of Rockwell Automation Control Systems from January 2001 to February 2004; Vice President, Human Resources of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ James E. Hart Ì Vice President, Finance of Rockwell Automation since February 2004; Vice President, Finance and Procurement of Rockwell Automation Control Systems from April 2001 to February 2004; Vice President, Strategic Sourcing and Chief Procurement OÇcer of Rockwell Automation prior theretoÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ John P. McDermott Ì Senior Vice President, Global Sales and Solutions of Rockwell Automation Control Systems since October 2005 and Senior Vice President of Rockwell Automation since February 2004; Senior Vice President, Global Manufacturing Solutions Group of Rockwell Automation Control Systems from November 2002 to October 2005; Senior Vice President, Americas Sales of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ John M. Miller Ì Vice President and Chief Intellectual Property Counsel of Rockwell Automation since October 2004; Associate Intellectual Property Counsel of Rockwell Automation prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Timothy C. Oliver Ì Vice President and Treasurer of Rockwell Automation since May 2004; Vice President, Investor Relations and Financial Planning of Raytheon Company (manufacturer of defense electronics and business aviation aircraft) from March 2001 to May 2004; Director of Finance for Aviation Aftermarket business of Honeywell International (diversiÑed technology and manufacturing) prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 51 52 50 41 52 45 44 62 56 47 38 37 14 Name, OÇce and Position, and Principal Occupations and Employment Ì (Continued) Rondi Rohr-Dralle Ì Vice President, Corporate Development of Rockwell Automation since June 2001; Vice President, Finance of Rockwell Automation Control Systems, Global Manufacturing Solutions Group prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Robert A. RuÅ Ì Senior Vice President of Rockwell Automation since February 2004 and Senior Vice President of Americas Sales of Rockwell Automation Control Systems since November 2002; Regional Vice President-Detroit Region Sales of Rockwell Automation Control Systems from February 2001 to November 2002; Vice President-Eastern U.S. Region Sales of Rockwell Automation Control Systems prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A. Lawrence Stuever Ì Vice President and General Auditor of Rockwell Automation since June 2003; Vice President, Compensation of Rockwell Automation prior thereto ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Joseph D. Swann Ì Senior Vice President of Rockwell Automation since June 2001 and President, Rockwell Automation Power Systems since June 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Age 49 57 53 64 There are no family relationships, as deÑned by applicable SEC rules, between any of the above executive oÇcers and any other executive oÇcer or director of the Company. No oÇcer of the Company was selected pursuant to any arrangement or understanding between the oÇcer and any person other than the Company. All executive oÇcers are elected annually. PART II Item 5. Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The principal market on which our common stock is traded is the New York Stock Exchange. We intend to delist our common stock from the PaciÑc Exchange and the London Stock Exchange in 2006. On October 31, 2005, there were 34,125 shareowners of record of our common stock. The following table sets forth the high and low sales price of our common stock on the New York Stock Exchange Ó Composite Transactions reporting system during each quarter of our Ñscal years ended September 30, 2005 and 2004: Fiscal Quarters 2005 2004 High Low High Low First ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SecondÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49.97 63.30 58.40 55.25 $37.72 45.40 45.49 48.16 $36.10 37.00 37.56 39.72 $26.16 28.45 30.89 35.05 The declaration and payment of dividends by the Company is at the sole discretion of our Board of Directors. During 2005, we declared and paid aggregate cash dividends of $0.78 per common share ($0.165 for each of the Ñrst and second quarters and $0.225 for each of the third and fourth quarters). During each of the previous two years (2004 and 2003), we declared and paid aggregate cash dividends of $0.66 per common share ($0.165 per quarter). 15 The table below sets forth information with respect to purchases made by or on behalf of the Company of shares of Company common stock during the three months ended September 30, 2005: Period July 1-31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 1-31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ September 1-30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Number of Shares Purchased(1) 565,400 1,142,741 392,100 Average Price Paid per Share(2) $52.3622 51.4539 52.9182 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 565,400 1,137,000 392,100 Maximum Number of Shares that may yet be Purchased Under the Plans or Programs(3) 2,237,000 1,100,000 8,776,900 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,100,241 51.9718 2,094,500 (1) All of the shares purchased during the quarter ended September 30, 2005 were acquired pursuant to the repurchase program described in (3) below, except for 5,741 shares that were acquired in August 2005 from an employee. These shares were acquired in connection with a stock swap exercise of employee stock options and the surrender of shares to us to pay the exercise price. (2) Average price paid per share includes brokerage commissions. (3) On September 8, 2005, we initiated a 9 million share repurchase program eÅective through September 30, 2006 that was approved by our Board of Directors, replacing our former 9 million share repurchase program in eÅect since December 2, 2004. At the time of the termination and replacement of our former repurchase program, 931,000 shares remained subject to repurchase under the former program. The new program allows management to repurchase shares at its discretion, except during quarter-end ""quiet periods'', deÑned as the period of time from quarter-end until two days following the Ñling of our quarterly earnings results with the SEC on Form 8-K. During quarter-end quiet periods, shares are repurchased at our broker's discretion pursuant to a share repurchase plan subject to previously established price and volume parameters. Item 6. Selected Financial Data The following table sets forth selected consolidated Ñnancial data of our continuing operations. The data should be read in conjunction with MD&A and the Financial Statements. The consolidated statement of operations data for each of the Ñve years in the period ended September 30, 2005, the related consolidated balance sheet data and other data have been derived from our audited consolidated Ñnancial statements. 2005(a) Year Ended September 30, 2004(b) 2002(d) 2003(c) (in millions, except per share data) 2001(e) Consolidated Statement of Operations Data: Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,003.2 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.8 Income from continuing operations before accounting $4,411.1 41.7 $3,992.3 52.5 $3,775.7 66.1 $4,134.8 83.2 change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 518.4 354.1 281.4 223.7 120.7 Earnings per share from continuing operations before accounting change: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative eÅect of accounting change per diluted 2.83 2.77 Ì 0.78 share(f)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheet Data: (at end of period) Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,525.1 1.2 Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 748.2 Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,649.1 Other Data: Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 124.1 150.8 Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Goodwill and trademark amortization(f) ÏÏÏÏÏÏÏÏÏÏÏÏ 20.4 Other intangible asset amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.91 1.85 Ì 0.66 1.51 1.48 Ì 0.66 1.21 1.19 (0.58) 0.66 0.66 0.65 Ì 0.93 $4,213.3 0.2 757.7 1,861.0 $ 98.0 159.7 Ì 27.0 $4,006.3 8.7 764.0 1,586.8 $ 107.6 168.5 Ì 22.1 $3,955.8 161.6 766.8 1,609.0 $ 99.6 178.4 Ì 19.3 $4,043.7 10.4 909.3 1,600.5 $ 155.7 190.2 55.5 16.3 16 (a) Includes a reduction in the income tax provision of $19.7 million, or $0.10 per diluted share, primarily related to the resolution of claims and other tax matters in connection with the closure of the 1998 through 2002 federal audit. Additionally, includes a beneÑt of $12.3 million ($8.4 million after tax, or $0.04 per diluted share) related to insurance settlements and $21.5 million of costs ($14.2 million after tax, or $0.08 per diluted share) related to special charges as further detailed in Note 19 in the Financial Statements. (b) Includes a reduction in the income tax provision of $46.3 million, or $0.24 per diluted share, related to the resolution of certain tax matters as well as state tax refunds. (c) Includes a reduction in the income tax provision of $69.4 million, or $0.37 per diluted share, related to the settlement of a U.S. federal research and experimentation credit refund claim. (d) Includes a reduction in the income tax provision of $48.2 million, or $0.26 per diluted share, from the resolution of certain tax matters and income of $9.4 million ($7.2 million after tax, or $0.04 per diluted share) from the favorable settlement of intellectual property matters. (e) Includes special items of $73.1 million ($48.0 million after tax, or $0.26 per diluted share) and a reduction in the income tax provision of $21.6 million, or $0.12 per diluted share, from the resolution of certain tax matters. Special items include charges of $91.1 million ($59.9 million after tax, or $0.32 per diluted share) for a comprehensive restructuring program, which were partially oÅset by income of $18.0 million ($11.9 million after tax, or $0.06 per diluted share) resulting from the favorable settlement of an intellectual property matter. (f) EÅective October 1, 2001, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). As a result of adopting SFAS 142, we no longer amortize goodwill and certain trademarks that have been deemed to have an indeÑnite useful life, resulting in a decrease in amortization expense beginning in 2002. In addition, in 2002 we recorded pre-tax impairment charges of $128.7 million ($107.8 million after tax, or $0.58 per diluted share) in connection with the adoption of SFAS 142. These charges have been recorded as the cumulative eÅect of accounting change. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Non-GAAP Measures The following discussion includes sales excluding the eÅect of changes in currency exchange rates and free cash Öow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to sales excluding the eÅect of changes in currency exchange rates in addition to a discussion of why we believe this non-GAAP measure is useful to investors. See Financial Condition for a reconciliation of cash Öows from operating activities to free cash Öow and a discussion of why we believe this non-GAAP measure is useful to investors. Overview Overall demand for our products is driven by: ‚ Investments in capacity, including upgrades, modiÑcations, and expansions of existing manufacturing facilities, and the creation of new manufacturing facilities; ‚ Industry factors that include our customers' new product introductions, trends in the actual and forecasted demand for our customers' products or services, and the regulatory and competitive environments in which our customers operate; ‚ Levels of global industrial production; and ‚ Regional factors that include local political, social, regulatory and economic circumstances. U.S. Industrial Economic Trends In 2005, sales in the U.S. accounted for more than 60 percent of our total sales. The trend of improving conditions experienced in the U.S. manufacturing economy during 2004 continued into 2005, as reÖected in the various indicators we use to gauge the direction and momentum of our served markets. These indicators include: ‚ Industrial equipment spending, which is an economic statistic compiled by the Bureau of Economic Analysis (""BEA''). This statistic provides insight into spending trends in the broad U.S. industrial economy, which includes our primary customer base. This measure, over the longer term, has proven to have reasonable predictive value, and to be a good directional indicator of our growth trend. ‚ Capacity utilization, which is an indication of plant operating activity published by the Federal Reserve. Historically there has been a meaningful correlation between capacity utilization and the level of capital investment made by our customers in their manufacturing base. ‚ The purchasing managers' index (PMI), published by the Institute for Supply Management (ISM), which is an indication of the level of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting. 18 The table below depicts the continued gradual improvement in U.S. industrial equipment spending (expressed in billions of USD), capacity utilization (expressed as a percentage), and the continued expansion in manufacturing activity, as indicated by the PMI (expressed as deÑned above) since December 2002. Industrial Equipment Spending (in billions) Capacity Utilization (percent) Fiscal 2005 September 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ December 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $162.6 154.9 161.3 152.6 Fiscal 2004 September 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ December 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal 2003 September 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ June 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ December 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 149.3 139.5 145.3 137.1 140.8 139.3 139.7 136.9 Note: Economic indicators are subject to revisions by the issuing organizations. 78.6 79.8 79.5 79.2 78.0 77.8 77.4 76.8 75.8 74.9 75.2 75.2 PMI 59.4 53.8 55.2 57.3 59.1 61.2 62.3 62.1 55.1 50.4 46.4 52.5 Non-U.S. Regional Trends Outside the U.S., demand is principally driven by the strength of the industrial economy in each region and by our customers' ability and propensity to invest in their manufacturing assets. These customers may include both multinational companies with expanding global presence and growing indigenous companies. Recent strength in demand has, in part, been driven by investment in infrastructure in developing economies, in basic materials production capacity in response to higher-end product pricing and in expanding consumer markets. The table below presents our actual sales for the year ended September 30, 2005 by geographic region and the change in sales from the year ended September 30, 2004 (in millions, except percentages): Year Ended September 30, 2005 Change vs. Year Ended September 30, 2004 Change Excluding the EÅect of Changes in Currency Exchange Rates vs. Year Ended September 30, 2004(1) United States and Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe, Middle East and Africa ÏÏÏÏÏÏÏÏÏÏÏÏÏ Asia-PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,477.2 823.5 483.1 219.4 $5,003.2 13% 6% 21% 34% 13% 12% 1% 16% 27% 11% (1) See Supplemental Sales Information for information on this non-GAAP measure. Industry Views We serve customers in a wide range of industries including consumer products, transportation, basic materials, and oil and gas. During 2005 we beneÑted from growing demand in most of the industries we serve. 19 Our consumer products customers are engaged in the food and beverage, brewing, consumer packaged goods and life sciences industries. As automation is key to their ability to diÅerentiate their product oÅerings, their investment is generally less cyclical than heavy manufacturing customers. Factors such as customer investment in new model introductions and more Öexible manufacturing technologies aÅect our sales to transportation customers. Our customers in basic materials industries, including mining, aggregates, metals, forest products and cement, all beneÑt from higher commodities prices and higher global demand for basic materials, both of which encourage investment in capacity and productivity in these industries. As energy prices rise, customers in the oil and gas industry increase their investment in production and transmission capacity. In addition, higher energy prices have historically caused customers across all industries to consider new investment in more energy-eÇcient manufacturing processes and technologies, such as intelligent motor controls. Outlook for 2006 The following is a summary of our objectives for 2006: ‚ Sustain the growth of our Logix platform by accelerating the proliferation and adoption of our integrated architecture features and functionality, and by aggressively pursuing growth in an expanded addressable market; ‚ Continue our geographic expansion and growth, particularly in emerging economies; ‚ Demonstrate and expand our industry speciÑc domain expertise and solutions capability; and ‚ Drive continued cost productivity. Our outlook for 2006 assumes that the economic environment will remain favorable and that a continuing industrial recovery will result in growth during 2006. While we expect demand for our products to beneÑt from this trend, we also assume that our growth will vary, and may exceed or lag trend levels in any given quarter. As of the date of Ñling this report, based upon current economic activities and business trends, we expect to grow revenue in 2006 by 7 to 9 percent, excluding the eÅect of changes in currency exchange rates. As of the date hereof, we also expect full year 2006 diluted earnings per share to be in the range of $3.00 to $3.10, and plan to generate free cash Öow of approximately $280 million, after giving eÅect to our $450 million voluntary contribution to our U.S. qualiÑed pension trust in October 2005. 20 Summary of Results of Operations 2005 Year Ended September 30, 2004 (in millions) 2003 Sales: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,123.6 879.6 $3,658.6 752.5 $3,287.4 704.9 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,003.2 $4,411.1 $3,992.3 Segment operating earnings(a): Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 756.9 110.3 $ 527.9 67.5 $ 397.6 54.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase accounting depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General corporateÌnet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on disposition of a business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 867.2 (14.7) (69.7) Ì (45.8) Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 737.0 (218.6) Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from discontinued operations(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 518.4 21.6 595.4 (27.3) (88.3) Ì (41.7) 438.1 (84.0) 354.1 60.8 452.2 (26.9) (66.8) (8.4) (52.5) 297.6 (16.2) 281.4 5.0 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 540.0 $ 414.9 $ 286.4 (a) Information regarding how we deÑne segment operating earnings is included in Note 18 in the Financial Statements. (b) In September 2004, we sold our FirstPoint Contact business for cash and a note convertible into a minority interest in the corporate parent of the buyer of the business resulting in a gain of $33.5 million ($32.1 million after tax, or $0.17 per diluted share). In September 2005, the note was converted to non-voting equity shares accounted for under the cost method. The results of operations of FirstPoint Contact and the gain on sale are included in Income from discontinued operations. Additional information related to Income from discontinued operations is included in Note 13 in the Financial Statements. 2005 Compared to 2004 (in millions, except per share amounts) Sales Income from continuing operations Diluted earnings per share from continuing operations 2005 2004 $5,003.2 518.4 2.77 $4,411.1 354.1 1.85 Increase $592.1 164.3 0.92 Sales increased 13 percent compared to 2004 driven by double digit growth at both Control Systems and Power Systems. Two percentage points of the growth was due to the eÅect of changes in currency exchange rates, primarily resulting from the strength of the major European currencies and the Canadian dollar in relation to the U.S. dollar. Sales rose by double digit percentages in all regions except for EMEA where diÇcult economic conditions dampened growth in the major economies of Western Europe, primarily France, Germany and the U.K. The emerging economies in Asia-PaciÑc, led by China and India, experienced particularly strong growth. Strength of the oil and gas and mining industries in Latin America and oil and gas industry in Canada contributed to particularly strong sales growth in those regions. Sales in the global water/wastewater, oil and gas, aggregate and cement, and mining industries grew at a rate higher than our annual growth rate of 13 percent. Sales in the food and transportation industries grew at rates approximate to our annual growth rate, while sales in life sciences, semiconductor, and beverage grew at a rate less than our annual growth rate. 21 Income from continuing operations beneÑted from higher volume, productivity programs and favorable pricing oÅset slightly by inÖation in comparison to the prior year. Additionally, income from continuing operations in 2005 includes $19.7 million ($0.10 per share) of tax beneÑts related to the resolution of claims and other tax matters in connection with the closure of the 1998 through 2002 federal audit and $8.4 million after-tax ($0.04 per share) of beneÑts related to insurance settlements, oÅset by $14.2 million after-tax ($0.08 per share) related to special charges associated with restructuring activities in Europe and a U.S. plant closing. Income from continuing operations in 2004 includes $46.3 million ($0.24 per share) of tax beneÑts related to the resolution of certain tax matters and state tax refunds, oÅset by $16.3 million after-tax ($0.09 per share) of special facilities related charges. Control Systems (in millions, except percentages) Sales Segment operating earnings Segment operating margin 2005 2004 $4,123.6 756.9 18.4% $3,658.6 527.9 14.4% Increase $465.0 229.0 4.0pts Control Systems sales increased 13 percent compared to 2004. Three percentage points of the sales increase was due to the eÅect of changes in currency exchange rates, primarily resulting from the relative strength of the major European currencies and the Canadian dollar in relation to the U.S. dollar. Sales of our Logix oÅering grew by more than 26 percent compared to 2004, which was somewhat oÅset by a decline in our legacy control platform products that are being replaced by Logix. Growth in sales of our Logix oÅering was driven by our introduction of new functionality and an expanded addressable market. Our intelligent motor control products also delivered signiÑcantly higher revenue driven by strong sales to extraction-based and heavy industrial customers. Higher commodity prices and a renewed investment in energy eÇciency programs led to the strong demand from these customers. Segment operating earnings increased by 43 percent compared to 2004. The increase in segment operating earnings is due to higher volume, cost productivity and favorable pricing that was somewhat oÅset by inÖation. Control Systems 2005 results include $12.3 million (pre-tax) of beneÑts related to insurance settlements oÅset by $16.5 million (pre-tax) of special charges associated with realignment of administrative functions and a reduction in workforce in Europe. Prior year segment operating earnings includes a $26.3 million (pre-tax) charge related to a facilities rationalization program. Power Systems (in millions, except percentages) Sales Segment operating earnings Segment operating margin 2005 2004 $879.6 110.3 12.5% $752.5 67.5 9.0% Increase $127.1 42.8 3.5pts Power Systems sales increased 17 percent compared to 2004 with growth in both our Dodge mechanical and Reliance electrical business groups. Growth was driven by demand from the power-centric customers in heavy, extraction-based industries such as mining and oil and gas. Higher commodity prices are causing the segment's predominantly U.S. based customers to invest in capacity expansion after several years of under- investment and reduced capital spending. Power Systems operating earnings grew 63 percent due to higher volume, favorable pricing and productivity somewhat oÅset by inÖation and signiÑcantly higher material costs. Segment operating earnings in 2005 include a charge of $5.0 million (pre-tax) associated with a facility closure and the corresponding write-down of property to its fair value compared to $4.0 million (pre-tax) of charges related to restructuring activities in 2004. 22 General Corporate Ì Net General corporate expenses were $69.7 million in 2005 compared to $88.3 million in 2004. Expense dropped primarily due to decreased environmental costs, lower contributions to our charitable corporation and increased interest income. Interest Expense Interest expense was $45.8 million in 2005 compared to $41.7 million in 2004, primarily due to higher interest rates associated with our interest rate swap (see Note 6 in the Financial Statements). 2004 Compared to 2003 (in millions, except per share amounts) Sales Income from continuing operations Diluted earnings per share from continuing operations 2004 2003 $4,411.1 354.1 1.85 $3,992.3 281.4 1.48 Increase $418.8 72.7 0.37 Sales increased 10 percent compared to 2003 driven by growth at both Control Systems and Power Systems. Three percentage points of the growth was due to the eÅect of changes in currency exchange rates. Income from continuing operations in 2004 included $46.3 million ($0.24 per share) of tax beneÑts related to the resolution of certain tax matters as well as the beneÑt of state tax refunds. The 2003 results included a tax beneÑt of $69.4 million ($0.37 per share) related to the settlement of a U.S. federal research and experimentation credit refund claim. Control Systems (in millions, except percentages) Sales Segment operating earnings Segment operating margin 2004 2003 $3,658.6 527.9 14.4% $3,287.4 397.6 12.1% Increase $371.2 130.3 2.3pts Control Systems sales increased 11 percent compared to 2003. Four percentage points of the sales increase was due to the eÅect of changes in currency exchange rates, primarily resulting from the relative strength of the euro to the U.S. dollar. Sales outside of the U.S. increased 15 percent (6 percent excluding the eÅect of changes in currency exchange rates) and U.S. sales increased 8 percent. Control Systems experienced sales growth in all regions with exceptional strength in the emerging economies of Asia and Latin America where we continued to increase market penetration. Sales growth was primarily driven by maintenance related and smaller productivity related projects. These projects were the result of pent-up demand after the period of under-investment in productive assets during 2002 and 2003. In addition to these investments, we experienced an increase in activity related to larger scale projects in the second half of Ñscal year 2004. These larger projects were driven by our customers' requirements for incremental productivity improvements and capacity optimization. Our Logix platform business continued its strong growth with an increase of 30 percent over 2003. Industrial components and adjustable speed drives experienced double-digit growth as well. These gains were partially oÅset by moderate declines in drive systems and legacy control platforms. Segment operating margins increased due to higher volume, favorable product mix and productivity improvements. Volume leverage improved during the year due to our continuing productivity eÅorts and ongoing facility rationalization programs. 23 Power Systems (in millions, except percentages) Sales Segment operating earnings Segment operating margin 2004 2003 $752.5 67.5 9.0% $704.9 54.6 7.7% Increase $ 47.6 12.9 1.3pts Power Systems sales increased 7 percent compared to 2003. The Mechanical and Electrical business groups contributed about equally to the growth. The sales increase was mainly the result of volume strength in the second half of 2004. Higher global demand for basic materials and subsequent higher prices for these materials encouraged signiÑcant investment in capacity optimization and productivity and drove our sales. SigniÑcant cost and productivity initiatives launched in the second quarter of 2004, Ñnancial leverage on incremental volume and price increases more than oÅset rising raw material prices, resulting in the improved segment operating margin. General Corporate Ì Net General corporate expenses were $88.3 million in 2004 compared to $66.8 million in 2003. Expense in 2004 includes charges of $16.4 million due to higher estimated costs for environmental remediation at several legacy sites, $7.0 million of contributions to our charitable corporation and $5.0 million of costs associated with corporate staÅ changes. Expense in 2003 included a charge of $4.7 million due to higher estimated future costs for environmental remediation at a legacy site. Loss on Disposition of a Business In the second quarter of 2003, we sold a majority of our ownership interest in Reliance Electric Limited Japan (REJ) resulting in a loss of $8.4 million ($2.5 million after tax, or $0.01 per diluted share). The cash proceeds from the transaction totaled $10.4 million. Interest Expense Interest expense was $41.7 million in 2004 compared to $52.5 million in 2003. The decrease was the result of the retirement at maturity of the $150.0 million principal amount of 6.80% notes in April 2003, the beneÑt of an interest rate swap (see Note 6 in the Financial Statements) and lower average short-term borrowings. Discontinued Operations See Note 13 and Note 16 in the Financial Statements for information regarding discontinued operations. Income Taxes During 2005, we recognized tax beneÑts of $19.7 million ($0.10 per diluted share) related to the resolution of claims and other tax matters in connection with the closure of the federal audit cycle for the years 1998 through 2002. In 2004, we recognized tax beneÑts of $46.3 million ($0.24 per diluted share) related to the following items: ‚ $34.5 million resulting from the resolution of certain tax matters primarily related to former businesses. A majority of the beneÑts recognized related to non-U.S. tax matters in addition to an agreement with a taxing authority related to the treatment of an investment; ‚ $4.3 million related to additional state tax beneÑts associated with the U.S. research and experimentation credit refund claim in 2003 (see discussion below); and ‚ $7.5 million related to a refund from the State of California for the period 1989 to 1991. 24 During 2003, we recognized a net tax beneÑt of $69.4 million ($0.37 per diluted share) related to a U.S. federal research and experimentation credit refund claim and a tax beneÑt of approximately $2.6 million as a result of our ability to utilize certain capital loss carryforwards for which a valuation allowance had been previously provided. The full year eÅective tax rate for 2005 was 29.7 percent as compared to 19.2 percent for 2004. The discrete items described above decreased the eÅective tax rate by 2.6 percent in 2005 and 10.5 percent in 2004. The full year eÅective tax rate for 2003 was 5.4 percent, including the eÅect of the research and experimentation settlement (23.3 percent beneÑt) and the utilization of capital loss carryforwards (0.9 percent beneÑt). See Note 16 in the Financial Statements for a reconciliation of the United States statutory tax rate to the eÅective tax rate. Current and projected growth in income in higher tax jurisdictions has resulted, and may continue to result, in an increasing eÅective tax rate over time. We expect that the eÅective income tax rate in 2006 will be approximately 33.5 percent, excluding the income tax expense or beneÑt related to discrete items, if any, that will be separately reported or reported net of their related tax eÅects. See Note 13 and Note 16 in the Financial Statements for information on tax matters related to discontinued operations. Financial Condition The following is a summary of our cash Öows from operating, investing and Ñnancing activities, as reÖected in the Consolidated Statement of Cash Flows (in millions): Year Ended September 30, 2004 2005 2003 Cash provided by (used for): Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅect of exchange rate changes on cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 638.9 (122.8) (550.6) (3.1) $ 596.9 (65.2) (312.0) 1.8 $ 419.9 (131.4) (335.3) (31.0) Cash (used for) provided by continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (37.6) $ 221.5 $ (77.8) The following table summarizes free cash Öow (in millions): Cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 638.9 $ 596.9 (124.1) (98.0) $ 419.9 (107.6) Free cash Öow ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 514.8 $ 498.9 $ 312.3 Our deÑnition of free cash Öow, which is a non-GAAP Ñnancial measure, takes into consideration capital investment required to maintain the operations of our businesses and execute our strategy. In our opinion, free cash Öow provides useful information to investors regarding our ability to generate cash from business operations that is available for acquisitions and other investments, service of debt principal, dividends and share repurchases. We use free cash Öow as one measure to monitor and evaluate performance. Our deÑnition of free cash Öow may be diÅerent from deÑnitions used by other companies. Free cash Öow was $514.8 million for the year ended September 30, 2005 compared to $498.9 million for the year ended September 30, 2004. Increased pre-tax earnings more than oÅset the increase in voluntary contributions to our U.S. pension plan ($150.0 million in 2005 compared to $125.0 million in 2004), capital spending and working capital needs. The increased capital spending includes investments in information technology and certain long-lived asset replacements. 25 When necessary, we utilize commercial paper as our principal source of short-term Ñnancing. At September 30, 2005 and 2004, we had no commercial paper borrowings outstanding. During 2005 we had no commercial paper borrowings and during 2004 we did not have signiÑcant commercial paper borrowings due to our cash position. In January 2004, we repaid our $8.4 million of industrial development revenue bonds prior to maturity using cash on hand. In April 2003, we repaid our $150.0 million principal amount of 6.80% notes at maturity using a combination of cash on hand and commercial paper borrowings. In 2005, we repurchased approximately 9.8 million shares of our common stock at a cost of $499.2 million, compared to repurchases of approximately 7.5 million shares of our common stock at a cost of $258.4 million in 2004. We anticipate repurchasing stock in 2006, the amount of which will depend ultimately on business conditions, stock price and other cash requirements. At September 30, 2005 we had authorization from our Board of Directors to purchase up to approximately 8.8 million additional shares through September 30, 2006. In October 2005, we contributed $450 million to our U.S. qualiÑed pension trust. The contribution was funded with a combination of cash on hand and $300 million of commercial paper borrowings. In November 2005, we sold 24 owned properties in a sale-leaseback transaction for net cash proceeds of approximately $148 million. The cash proceeds were used to repay commercial paper borrowings. We expect future signiÑcant uses of cash to include capital expenditures, dividends to shareowners, repayments of short-term borrowings, acquisitions of businesses and repurchases of common stock and may include additional contributions to our pension plans. We expect capital expenditures in 2006 to be about $150 million. We expect that each of these future uses of cash will be funded by existing cash balances, cash generated by operating activities, commercial paper borrowings, a new issue of debt or issuance of other securities. In addition to cash generated by operating activities, we have access to existing Ñnancing sources, including the public debt markets and unsecured credit facilities with various banks. Our debt-to-total capital ratio was 31.2 percent at September 30, 2005 and 28.9 percent at September 30, 2004. In October 2004, we entered into a Ñve-year $600.0 million unsecured revolving credit facility that replaced our then existing $675.0 million unsecured credit facilities. Borrowings under our credit facility bear interest based on short-term money market rates in eÅect during the period the borrowings are outstanding. The terms of our credit facility contain a covenant under which we would be in default if our debt-to-total capital ratio were to exceed 60 percent. In addition to our $600.0 million credit facility, short-term unsecured credit facilities of approximately $115 million at September 30, 2005 were available to foreign subsidiaries. The following is a summary of our credit ratings as of September 30, 2005: Credit Rating Agency Short-Term Long-Term Rating Outlook Rating Outlook Standard & Poor's ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1 P-2 Moody's ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F1 Fitch Ratings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stable Stable Stable A A3 A Stable Stable Stable Moody's changed its long-term outlook from negative to stable during the second quarter of 2005 to reÖect our leading position in the global industrial automation market, our healthy balance sheet and solid cash Öow generation. Among other things, we can draw our credit facility as a standby liquidity facility, to repay our outstanding commercial paper as it matures. This access to funds to repay maturing commercial paper is an important factor in maintaining the ratings set forth in the table above that have been given to our commercial paper. Under our current policy with respect to these ratings, we expect to limit our other borrowings under the credit facility, if any, to amounts that would leave enough credit available under the facility so that we could borrow, if needed, to repay all of our then outstanding commercial paper as it matures. 26 If our access to the commercial paper market is adversely aÅected due to a change in market conditions or otherwise, we would expect to rely on a combination of available cash and the unsecured committed credit facilities to provide short-term funding. In such event, the cost of borrowings under the unsecured committed credit facilities could be higher than the cost of commercial paper borrowings. Cash dividends to shareowners were $142.7 million ($0.78 per share) in 2005 and $122.5 million ($0.66 per share) in 2004. Although declaration and payment of dividends are at the sole discretion of our Board of Directors, we expect to continue to pay quarterly dividends in 2006 of $0.225 per outstanding share. Certain of our contractual cash obligations at September 30, 2005 are: Total 2006 2007 2008 2009 2010 Thereafter Payments by Period Long-term debt and interest(a) ÏÏÏÏÏÏÏÏÏ Minimum operating lease payments(b) ÏÏ $2,192.7 206.5 $ 48.7 51.5 $48.7 45.2 $387.9 37.3 $27.1 26.4 $27.1 15.0 $1,653.2 31.1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,399.2 $100.2 $93.9 $425.2 $53.5 $42.1 $1,684.3 (a) The amounts for long-term debt assume that the respective debt instruments will be outstanding until their scheduled maturity dates. The amounts include interest, but exclude the amounts to be received under an interest rate swap, the $(6.3) million fair value adjustment recorded for the interest rate swap as permitted by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and the unamortized discount of $45.5 million. See Note 6 in the Financial Statements for additional information regarding our long-term debt. (b) See Note 20 in the Financial Statements for information regarding our November 2005, sale-leaseback transaction. We sponsor pension and other postretirement beneÑt plans for certain employees. See Note 12 in the Financial Statements for information regarding these plans and expected future cash outÖows related to the plans. At September 30, 2005, we and Rockwell Collins each guarantee one-half of a lease agreement for one of Rockwell ScientiÑc Company LLC's (RSC) facilities. The total future minimum payments under the lease are $4.8 million. The lease agreement has a term that ends in December 2011. In addition, we share equally with Rockwell Collins in providing a $6.0 million line of credit to RSC, which bears interest at the greater of our or Rockwell Collins' commercial paper borrowing rate. At September 30, 2005 and 2004, there were no outstanding borrowings under this line of credit. Supplemental Sales Information We translate sales of subsidiaries operating outside of the United States using exchange rates eÅective during the respective period. Therefore, reported sales are aÅected by changes in currency rates, which are outside of our control. We believe that sales excluding the eÅect of changes in currency exchange rates, which is a non-GAAP Ñnancial measure, provides useful information to investors because it reÖects regional performance from the activities of our businesses without the eÅect of changes in currency rates. We use sales excluding the eÅect of changes in currency exchange rates to monitor and evaluate our regional performance. We determine the eÅect of changes in currency exchange rates by translating the respective period's sales using the same currency exchange rates as were in eÅect in the preceding year. We attribute sales to the geographic regions based on the country of origin. 27 The following is a reconciliation of our reported sales to sales excluding the eÅect of changes in currency exchange rates (in millions): Year Ended September 30, 2005 Sales Excluding the EÅect of Changes in Currency Exchange Rates Currency Translation Sales Year Ended September 30, 2004 Sales Excluding the EÅect of Changes in Currency Exchange Rates Currency Translation Sales US ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CanadaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe, Middle East and AfricaÏÏÏÏ Asia-PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,058.8 418.4 823.5 483.1 219.4 $ Ì $3,058.8 386.0 787.1 462.6 208.3 (32.4) (36.4) (20.5) (11.1) $2,727.0 339.8 779.6 400.4 164.3 $ Ì $2,727.0 308.9 696.5 379.4 166.8 (30.9) (83.1) (21.0) 2.5 Total Company SalesÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,003.2 $(100.4) $4,902.8 $4,411.1 $(132.5) $4,278.6 The following is a reconciliation of reported sales of our Control Systems segment to sales excluding the eÅect of changes in currency exchange rates (in millions): Year Ended September 30, 2005 Sales Excluding the EÅect of Changes in Currency Exchange Rates Currency Translation Sales Year Ended September 30, 2004 Sales Excluding the EÅect of Changes in Currency Exchange Rates Currency Translation Sales US ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CanadaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe, Middle East and AfricaÏÏÏÏ Asia-PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,275.5 370.0 815.4 457.7 205.0 $ Ì (28.7) (36.1) (20.3) (11.0) $2,275.5 341.3 779.3 437.4 194.0 $2,054.2 302.4 766.0 382.9 153.1 $ Ì $2,054.2 275.0 684.4 361.9 154.8 (27.4) (81.6) (21.0) 1.7 Total Control Systems Sales ÏÏÏÏÏÏÏ $4,123.6 $(96.1) $4,027.5 $3,658.6 $(128.3) $3,530.3 Critical Accounting Policies and Estimates We have prepared the consolidated Ñnancial statements in accordance with accounting principles generally accepted in the United States, which require us 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. We believe the following critical accounting policies could have the most signiÑcant eÅect on our reported results or require subjective or complex judgments by management. Retirement BeneÑts Pension BeneÑts Pension costs and obligations are actuarially determined and are inÖuenced by assumptions used to estimate these amounts, including the discount rate, the expected rate of return on plan assets, the assumed annual compensation increase rate, retirement rate, mortality rate and employee turnover rate. Changes in any of the assumptions and the amortization of diÅerences between the assumptions and actual experience will aÅect the amount of pension expense recognized in future periods. Our global pension expense in 2005 was $66.2 million compared to $68.8 million in 2004. Approximately 80 percent of our 2005 global pension expense relates to our U.S. qualiÑed pension plan. The actuarial 28 assumptions used to determine our 2005 U.S. pension expense included the following: discount rate of 6.25 percent (compared to 6.00 percent for 2004); expected rate of return on plan assets of 8.50 percent (compared to 8.50 percent for 2004); and an assumed compensation increase rate of 4.50 percent (compared to 4.50 percent for 2004). In 2005, we made voluntary contributions of $150.0 million to our primary U.S. qualiÑed pension plan trust compared to $125.0 million in 2004. We estimate our pension expense will be approximately $82 million in 2006, an increase of approximately $16 million over 2005. Our estimated 2006 pension expense reÖects the following changes in the U.S. pension plan: ‚ the net cost related to changes in actuarial assumptions; ‚ the beneÑt of a $100 million contribution in September 2005 and a $450 million contribution in October 2005; and ‚ the beneÑt related to a plan amendment that eliminates the early retirement subsidy for certain employees. For 2006, changes in actuarial assumptions include a 100 basis point reduction in our discount rate to 5.25 percent from the 6.25 percent used in 2005. The discount rate is set as of our June 30th measurement date and was determined by modeling a portfolio of bonds that match the expected cash Öow of our beneÑt plans. Our assumed rate of return on plan assets will remain at 8.50 percent, consistent with 2005. We considered actual returns on plan assets over the long term as well as the current and expected mix of plan investments in setting this assumption. We have assumed a compensation increase rate of 4.06 percent in 2006, compared to 4.50 percent used in 2005. We established this rate using an analysis of all elements of employee compensation that are considered pension eligible earnings. Additionally, in establishing our 2006 pension assumptions, we performed an actuarial experience study that changed other assumptions including retirement rate, employee turnover rate, and mortality rate as a result of utilizing the RP2000 table projected forward 10 years. EÅective for 2006, we amended our U.S. pension plan to eliminate the early retirement subsidy for certain employees. The eÅect of the amendment is a reduction of approximately $70 million in our pension beneÑt obligation and a corresponding reduction in annual pension expense recognized over the average remaining service life of plan participants. The following chart illustrates the estimated change in beneÑt obligation and net periodic pension cost assuming a change of 25 basis points in the assumptions for our U.S. pension plans (in millions): Pension BeneÑts Change in Projected BeneÑt Obligation Change in Net Periodic BeneÑt Cost Discount Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate of Return ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $75.5 Ì $8.1 4.1 Additional information regarding pension beneÑts, including our pension obligation and minimum pension liability adjustment, is contained in Note 12 in the Financial Statements. Other Postretirement BeneÑts We estimate, with the assistance of third party actuarial consultants, the costs and obligations for postretirement beneÑts other than pensions using assumptions, including the discount rate and, for plans other than our primary U.S. postretirement healthcare beneÑt program, expected trends in the cost for healthcare services. Changes in these assumptions and diÅerences between the assumptions and actual experience will aÅect the amount of postretirement beneÑt expense recognized in future periods. The discount rate used to calculate our 2005 other postretirement beneÑts expense was 6.25 percent (compared to 6.00 percent in 29 2004). For 2006, the discount rate assumption for other postretirement beneÑt expense will decrease to 5.0 percent. EÅective October 1, 2002, we amended our primary U.S. postretirement healthcare beneÑt program in order to mitigate our share of the increasing cost of postretirement healthcare services. As a result of this amendment to our primary U.S. program, there is no increase in healthcare costs resulting from healthcare inÖationary trends as of January 1, 2005. Net periodic beneÑt cost in 2005 was $24.9 million compared to $23.4 million in 2004. We expect net periodic beneÑt cost in 2006 of approximately $36 million and the estimated postretirement projected beneÑt obligation to approximate $425 million. The expected increases are primarily due to the decrease in discount rate (as of our June 30, 2005 measurement date) by 125 basis points to 5.0 percent. Additional information regarding postretirement beneÑts is contained in Note 12 in the Financial Statements. Revenue Recognition We record sales of products and services, representing approximately 90% of our consolidated sales, when all of the following have occurred: an agreement of sale exists; pricing is Ñxed or determinable; collection is reasonably assured; and product has been delivered and acceptance has occurred, as may be required according to contract terms, or services have been rendered. We recognize substantially all of the remainder of our sales on construction-type contracts using either the percentage-of-completion or completed contract methods of accounting. We record sales relating to these contracts using the percentage-of-completion method when we determine that progress towards completion is reasonably and reliably estimable; we use the completed contract method for all others. Under the percentage-of-completion method, we recognize sales and gross proÑt as work is performed using either (i) the relationship between actual costs incurred and total estimated costs at completion or (ii) units-of- delivery. Under the percentage-of-completion method, we adjust sales and gross proÑt for revisions of estimated total contract costs or revenue in the period the change is identiÑed. We record estimated losses on contracts when they are identiÑed. We use contracts and customer purchase orders to determine the existence of an agreement of sale. We use shipping documents and customer acceptance, when applicable, to verify delivery. We assess whether the fee is Ñxed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based on the creditworthiness of the customer as determined by credit evaluations and analysis, as well as the customer's payment history. Returns, Rebates and Incentives Our primary incentive program provides distributors with cash rebates or account credits based on agreed amounts that vary depending on the end user or original equipment manufacturing (OEM) customer to whom our distributor ultimately sells the product. We also oÅer various other incentive programs that provide distributors and direct sale customers with cash rebates, account credits or additional products and services based on meeting speciÑed program criteria. Certain distributors are oÅered a right to return product, subject to contractual limitations. We record accruals for customer returns, rebates and incentives at the time of revenue recognition based primarily on historical experience. Adjustments to the accrual may be required if actual returns, rebates and incentives diÅer from historical experience or if there are changes to other assumptions used to estimate the accrual. A critical assumption used in estimating the accrual for our primary distributor rebate program is the time period from when revenue is recognized to when the rebate is processed. If the time period were to change by 10 percent, the eÅect would be an adjustment to the accrual of approximately $5.0 million. 30 Returns, rebates and incentives are recognized as a reduction of sales if distributed in cash or customer account credits. Rebates and incentives are recognized in cost of sales for additional products and services to be provided. Accruals are reported as a current liability in our balance sheet or, where a right of set-oÅ exists, as a reduction of accounts receivable. The accrual for customer returns, rebates and incentives was $117.6 million at September 30, 2005 and $86.1 million at September 30, 2004, of which $9.4 million at September 30, 2005 and $7.8 million at September 30, 2004 was included as an oÅset to accounts receivable. Impairment of Long-Lived Assets We evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable through future cash Öows. We evaluate the recoverability of goodwill and other intangible assets with indeÑnite useful lives annually or more frequently if events or circumstances indicate that an asset might be impaired. We use judgment when applying the impairment rules to determine when an impairment test is necessary. Factors we consider that could trigger an impairment review include signiÑcant underperformance relative to historical or forecasted operating results, a signiÑcant decrease in the market value of an asset, a signiÑcant change in the extent or manner in which an asset is used and signiÑcant negative industry or economic trends. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value. To determine fair value, we must make estimates of the future cash Öows related to the asset being reviewed. These estimates require assumptions about demand for our products and services, future market conditions and technological developments. Other assumptions include the discount rate and future growth rates. We perform our annual impairment test on non-amortized intangible assets during the second quarter of our Ñscal year. As of the second quarter of 2005, the estimated fair value of our Reliance trademark exceeded its $72.8 million net book value. We calculated the estimated fair value with the assistance of third party valuation specialists. Either an increase in the discount rate or a decrease in planned future growth or proÑtability of our Electrical (Reliance) business group could result in an impairment charge to write down the book value of the Reliance trademark to the revised estimated fair value. Litigation, Claims and Contingencies We record liabilities for litigation, claims and contingencies when an obligation is probable and when we have a basis to reasonably estimate the value of an obligation. We also record liabilities for environmental matters based on estimates for known environmental remediation exposures utilizing information received from independent environmental consultants. The liabilities include accruals for sites we currently own and third-party sites where we were determined to be a potentially responsible party. At third-party sites where more than one potentially responsible party has been identiÑed, we record a liability for our estimated allocable share of costs related to our 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 where we are the only responsible party, we record a liability for the total estimated costs of remediation. We do not discount future expenditures for environmental remediation obligations to their present value. Environmental liability estimates may be aÅected by changing determinations of what constitutes an environmental exposure or an acceptable level of cleanup. To the extent that remediation procedures change, additional contamination is identiÑed, or the Ñnancial condition of other potentially responsible parties is adversely aÅected, the estimate of our environmental liabilities may change. The reserve for environmental matters, net of related receivables, was $39.3 million at September 30, 2005 and $38.8 million at September 30, 2004. During 2005, we recorded adjustments totaling $8.5 million to increase the environmental reserves related to several legacy sites compared to 2004 adjustments of $16.9 million. Our recorded liability for environmental matters almost entirely relates to businesses formerly owned by us (legacy businesses) for which we retained the responsibility to remediate. The nature of our current business is such that the likelihood of new environmental exposures that could result in a signiÑcant charge to 31 earnings is low. As a result of remediation eÅorts at legacy sites and limited new environmental matters, we expect that gradually, over a long period of time, our environmental obligations will decline. However, changes in remediation procedures at existing legacy sites or discovery of contamination at additional sites could result in increases to our environmental obligations. Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability. As described in Item 3. Legal Proceedings, we have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. See Item 3 for further discussion. Our principal self-insurance programs include product liability where we are self-insured up to a speciÑed dollar amount. Claims exceeding this amount up to speciÑed limits are covered by policies purchased from commercial insurers. We estimate the reserve for product liability claims, excluding asbestos, with the assistance of a third party actuarial consultant using our claims experience for the periods being valued. Adjustments to the product liability reserves may be required to reÖect emerging claims experience and other factors such as inÖationary trends or the outcome of claims. The reserve for product liability claims was $29.5 million at September 30, 2005 and $32.3 million at September 30, 2004. Additional information regarding litigation, claims and contingencies is contained in Note 17 in the Financial Statements. Income Taxes We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S. Federal, state and foreign jurisdictions for various tax periods. Additionally, we have retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses in prior years. Our income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the diÅerences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the Ñnal resolution of complex tax audit matters, our estimates of income tax liabilities may diÅer from actual payments or assessments. While we have support for the positions taken on our tax returns, taxing authorities are increasingly asserting interpretations of laws and facts and challenging cross jurisdictional transactions. Cross jurisdictional transactions between our subsidiaries involving the transfer price for products, services, and/or intellectual property as well as various U.S. state tax matters comprise our more signiÑcant income tax exposures. We regularly assess our position with regard to tax exposures and record liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of SFAS No. 5, Accounting for Contingencies. We have recorded an accrual of $103.1 million at September 30, 2005 that reÖects our estimate of the likely outcome of current and future audits and is recorded in Other liabilities in our Consolidated Balance Sheet. A Ñnal determination of these tax audits or changes in our estimates may result in additional future income tax expense or beneÑt. We have recorded a valuation allowance of $55.5 million at September 30, 2005 for the majority of our deferred tax assets related to net operating loss carryforwards, capital loss carryforwards and state tax credit carryforwards (Carryforwards) based on the projected proÑtability of the entity in the respective tax jurisdiction. The valuation allowance is based on an evaluation of the uncertainty of the amounts of the Carryforwards that are expected to be realized. Our income would increase if we determine we will be able to utilize more Carryforwards than currently expected. At the end of each interim reporting period, we estimate the eÅective tax rate expected to apply to the full Ñscal year. The estimated eÅective tax rate contemplates the expected jurisdiction where income is earned as well as tax planning strategies. Current and projected growth in income in higher tax jurisdictions has resulted, and may continue to result, in an increasing eÅective tax rate over time. If the actual results diÅer from our estimates, we may have to adjust the eÅective tax rate in the interim period such determination is made. 32 Additional information regarding income taxes is contained in Note 16 in the Financial Statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk during the normal course of business from changes in interest rates and foreign currency exchange rates. We manage exposure to these risks 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 existing cash balances and cash provided by normal operating activities, we use a combination of short-term and long-term debt to Ñnance operations. We are exposed to interest rate risk on certain of these debt obligations. Our short-term debt obligations relate to commercial paper borrowings and bank borrowings. At September 30, 2005 and 2004, we had no commercial paper or bank borrowings outstanding. During 2005, we had no commercial paper borrowings. In 2004, the weighted average commercial paper borrowing was $1.8 million. Changes in market interest rates on commercial paper borrowings aÅect our results of operations. If market interest rates would have averaged 10 percent higher than actual levels in either 2005 or 2004, the eÅect on our results of operations would not have been signiÑcant. In October 2005, we issued $300 million of unsecured commercial paper obligations with maturities of 1 to 28 days. We used the proceeds of the commercial paper to partially fund a $450 million voluntary contribution to our U.S. qualiÑed pension plan trust made on October 11, 2005. As these obligations mature, we anticipate issuing additional short-term commercial paper obligations to reÑnance all or part of these borrowings. We had outstanding Ñxed rate long-term debt obligations with carrying values of $748.2 million at September 30, 2005 and $757.7 million at September 30, 2004. The fair value of this debt was $826.2 million at September 30, 2005 and $837.1 million at September 30, 2004. The potential reduction 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. We currently have no plans to repurchase our outstanding Ñxed- rate instruments and, therefore, Öuctuations in market interest rates would not have an eÅect on our results of operations or shareowners' equity. In September 2002, we entered into an interest rate swap contract that eÅectively converted our $350.0 million aggregate principal amount of 6.15% notes, payable in 2008, to Öoating rate debt based on six- month LIBOR. The Öoating rate was 6.23 percent at September 30, 2005. A hypothetical 10 percent change in market interest rates would not be signiÑcant to the overall fair value of the swap or our results of operations. Foreign Currency Risk We are 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. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and foreign currency forward exchange contracts to manage our exposure on transactions denominated in currencies other than the applicable functional currency. In addition, we enter into contracts to hedge certain forecasted intercompany transactions expected to occur within the next four years. Contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. We do not enter into derivative Ñnancial instruments for speculative purposes. We do not hedge our 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 our Ñnancial condition or results of operations. 33 We record all derivatives on the balance sheet at fair value regardless of the purpose for holding them. Derivatives that are not designated as hedges for accounting purposes 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. We recognize the ineÅective portion of a derivative's change in fair value in earnings immediately. At September 30, 2005 and 2004, we had outstanding foreign currency forward exchange contracts primarily consisting of contracts to exchange the euro, Swiss franc, Canadian dollar, British pound sterling, and Australian dollar for U.S. dollars. The use of these contracts allows us 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 signiÑcant to our Ñnancial condition or results of operations. 34 Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEET (in millions) September 30, 2005 2004 Assets Current Assets Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 463.6 799.6 569.9 169.4 184.0 $ 473.8 719.9 574.3 132.7 125.4 Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,186.5 2,026.1 Property, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangible assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid pension ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 774.5 811.9 307.0 66.3 200.5 178.4 804.5 811.1 323.8 12.1 68.8 166.9 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,525.1 $ 4,213.3 Liabilities and Shareowners' Equity Current Liabilities Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and contingent liabilities (Note 17) 1.2 388.5 214.4 5.4 331.3 940.8 748.2 977.5 209.5 $ 0.2 362.2 202.3 8.3 290.6 863.6 757.7 505.6 225.4 Shareowners' Equity Common stock (shares issued: 216.4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unearned restricted stock compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock in treasury, at cost (shares held: 2005, 36.7; 2004, 32.6)ÏÏÏÏÏÏÏÏÏ 216.4 1,122.7 2,493.5 (501.5) (1.7) (1,680.3) 216.4 1,050.6 2,255.7 (226.8) (1.1) (1,433.8) Total shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,649.1 1,861.0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,525.1 $ 4,213.3 See Notes to Consolidated Financial Statements. 35 CONSOLIDATED STATEMENT OF OPERATIONS (in millions, except per share amounts) Year Ended September 30, 2004 2003 2005 Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,003.2 (3,109.1) $ 4,411.1 (2,848.3) $ 3,992.3 (2,681.0) Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income (expense) (Note 15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏ Income tax provision (Note 16) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,894.1 (1,120.8) 9.5 (45.8) 737.0 (218.6) Income from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from discontinued operations (Note 13)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 518.4 21.6 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 540.0 Basic earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Diluted earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.83 0.12 2.95 2.77 0.11 2.88 1,562.8 (1,058.6) (24.4) (41.7) 438.1 (84.0) 354.1 60.8 414.9 1.91 0.33 2.24 1.85 0.32 2.17 $ $ $ $ $ $ $ $ $ $ 1,311.3 (967.7) 6.5 (52.5) 297.6 (16.2) 281.4 5.0 286.4 1.51 0.03 1.54 1.48 0.03 1.51 Weighted average outstanding shares: Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183.1 187.2 185.5 191.1 185.4 190.1 See Notes to Consolidated Financial Statements. 36 CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) Year Ended September 30, 2004 2005 2003 Continuing Operations: Operating Activities: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to arrive at cash provided by operating activities: $ 540.0 (21.6) 518.4 $ 414.9 (60.8) 354.1 $ 286.4 (5.0) 281.4 DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax mattersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension and postretirement beneÑt expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension trust contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss on dispositions of property and business (Note 15) ÏÏÏÏÏÏÏÏ Income tax beneÑt from the exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in assets and liabilities, excluding eÅects of acquisitions, divestitures, and foreign currency adjustments: Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Provided by Operating ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Investing Activities: Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisition of businesses, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from sales of business and property ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Used for Investing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financing Activities: Issuance (repayments) of debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from the exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Used for Financing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅect of exchange rate changes on cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash (Used for) Provided by Continuing Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued Operations: Cash Provided by Discontinued Operating Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Used for Discontinued Investing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash Provided by Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Decrease) Increase in CashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150.8 20.4 (19.7) 91.1 (185.6) 115.8 4.7 72.1 (56.4) 9.0 20.7 12.3 (46.4) (68.3) 638.9 (124.1) (5.4) 7.4 (0.7) (122.8) 1.0 (142.7) (499.2) 91.6 (1.3) (550.6) (3.1) (37.6) 159.7 27.0 (46.3) 92.2 (157.3) 63.6 24.3 40.2 (48.2) (28.5) 37.1 35.2 7.2 36.6 596.9 (98.0) Ì 32.4 0.4 (65.2) (8.4) (122.5) (258.4) 78.5 (1.2) (312.0) 1.8 221.5 168.5 22.1 (69.4) 70.7 (65.9) 26.4 12.2 20.9 (13.0) 20.3 6.9 7.7 (32.8) (36.1) 419.9 (107.6) (25.7) 6.6 (4.7) (131.4) (153.4) (122.4) (128.4) 70.4 (1.5) (335.3) (31.0) (77.8) 27.4 Ì 27.4 (10.2) 473.8 $ 463.6 27.2 (1.3) 25.9 247.4 226.4 $ 473.8 16.2 (1.2) 15.0 (62.8) 289.2 $ 226.4 See Notes to Consolidated Financial Statements. 37 CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY (in millions, except per share amounts) Year Ended September 30, 2004 2003 2005 Common Stock (no shares issued during years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 216.4 $ 216.4 $ 216.4 Additional Paid-In Capital Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,050.6 72.1 Ì 1,007.5 40.2 2.9 986.6 20.9 Ì Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,122.7 1,050.6 1,007.5 Retained Earnings Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends (2005, $0.78 per share; 2004 and 2003, $0.66 per share) Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,255.7 540.0 (142.7) (159.5) 2,143.0 414.9 (122.5) (179.7) 2,165.3 286.4 (122.4) (186.3) Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,493.5 2,255.7 2,143.0 Accumulated Other Comprehensive Loss Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (226.8) (274.7) (343.8) 117.0 (193.8) (150.0) Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (501.5) (226.8) (343.8) Unearned Restricted Stock Compensation Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted stock compensation expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted stock grants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury Stock Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.1) 0.9 (1.5) (1.7) Ì 0.6 (1.7) (1.1) (0.2) 0.5 (0.3) Ì (1,433.8) (499.2) 252.7 (1,436.3) (258.4) 260.9 (1,565.3) (128.4) 257.4 Ending balanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,680.3) (1,433.8) (1,436.3) Total Shareowners' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,649.1 $ 1,861.0 $ 1,586.8 See Notes to Consolidated Financial Statements. 38 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) Year Ended September 30, 2004 2005 2003 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive (loss) income: $ 540.0 $ 414.9 $ 286.4 Minimum pension liability adjustments (net of tax (beneÑt) expense of $(185.0), $42.1 and $(106.9)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Currency translation adjustments (net of tax expense of $0, $0, and $25.0) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net change in unrealized losses on cash Öow hedges (net of tax expense (beneÑt) of $6.9, $8.6 and $(9.0)) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net change in unrealized losses on investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ (293.4) 68.2 (169.9) 7.1 11.4 0.2 34.0 14.2 0.6 34.1 (14.9) 0.7 Other comprehensive (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (274.7) 117.0 (150.0) Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 265.3 $ 531.9 $ 136.4 See Notes to Consolidated Financial Statements. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Accounting Policies Rockwell Automation, Inc. (the Company or Rockwell Automation) is a leading global provider of industrial automation power, control and information products and services. Basis of Presentation Except as indicated, amounts reÖected in the consolidated Ñnancial statements or the notes thereto relate to our continuing operations. Certain prior year amounts have been reclassiÑed to conform to the current year presentation. In September 2004, we sold our FirstPoint Contact business. FirstPoint Contact is classiÑed as a discontinued operation in the consolidated Ñnancial statements for all periods presented. Principles of Consolidation The accompanying consolidated Ñnancial statements include the accounts of the Company and its wholly-owned and controlled majority owned subsidiaries. All signiÑcant intercompany accounts and transactions have been eliminated in consolidation. Investments in aÇliates over which we have the ability to exert signiÑcant inÖuence, but that we do not control and are not the primary beneÑciary of, including Rockwell ScientiÑc Company LLC (RSC), are accounted for using the equity method of accounting. Accordingly, our proportional share of the respective aÇliate's earnings or losses is included in other income (expense) in the Consolidated Statement of Operations. Investments in aÇliates over which we do not have the ability to exert signiÑcant inÖuence are accounted for using the cost method of accounting. These aÇliated companies are not material individually or in the aggregate to our Ñnancial position, results of operations or cash Öows. Use of Estimates The consolidated Ñnancial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us 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. We use estimates in accounting for, among other items, customer returns, rebates and incentives; allowance for doubtful accounts; excess and obsolete inventory; impairment of long-lived assets; product warranty obligations; retirement beneÑts; litigation, claims and contingencies, including environmental matters; and income taxes. We account for changes to estimates and assumptions prospectively when warranted by factually based experience. Revenue Recognition We record sales of products and services, representing approximately 90 percent of our consolidated sales, when all of the following have occurred: an agreement of sale exists; pricing is Ñxed or determinable; collection is reasonably assured; and product has been delivered and acceptance has occurred, as may be required according to contract terms, or services have been rendered. We recognize substantially all of the remainder of our sales on construction-type contracts using either the percentage-of-completion or completed contract method of accounting. We record sales relating to these contracts using the percentage-of-completion method when we determine that progress towards completion is reasonably and reliably estimable; we use the completed contract method for all others. Under the percentage-of-completion method, we recognize sales and gross proÑt as work is performed using either (i) the relationship between actual costs incurred and total estimated costs at completion or (ii) units-of- delivery. Under the percentage-of-completion method, we adjust sales and gross proÑt for revisions of estimated total contract costs or revenue in the period the change is identiÑed. We record estimated losses on contracts when they are identiÑed. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) We use contracts and customer purchase orders to determine the existence of an agreement of sale. We use shipping documents and customer acceptance, when applicable, to verify delivery. We assess whether the fee is Ñxed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based on the creditworthiness of the customer as determined by credit evaluations and analysis, as well as the customer's payment history. Shipping and handling costs billed to customers are included in sales and the related costs are included in cost of sales in the Consolidated Statement of Operations. Returns, Rebates and Incentives Our primary incentive program provides distributors with cash rebates or account credits based on agreed amounts that vary depending on the end user or original equipment manufacturer (OEM) customer to whom our distributor ultimately sells the product. We also oÅer various other incentive programs that provide distributors and direct sale customers with cash rebates, account credits or additional products and services based on meeting speciÑed program criteria. Certain distributors are oÅered a right to return product, subject to contractual limitations. We record accruals for customer returns, rebates and incentives at the time of revenue recognition based primarily on historical experience. Returns, rebates and incentives are recognized as a reduction of sales if distributed in cash or customer account credits. Rebates and incentives are recognized in cost of sales for additional products and services to be provided. Amounts are accrued at the time of recognition of our sale to a distributor or direct sale customer. Accruals are reported as a current liability in our balance sheet or, where a right of set-oÅ exists, as a reduction of accounts receivable. Cash and Cash Equivalents Cash and cash equivalents include time deposits and certiÑcates of deposit with original maturities of three months or less. Receivables We record allowances for doubtful accounts based on customer-speciÑc analysis and general matters such as current assessments of past due balances and economic conditions. Receivables are stated net of allowances for doubtful accounts of $18.4 million at September 30, 2005 and $25.2 million at September 30, 2004. In addition, receivables are stated net of an allowance for certain customer returns, rebates and incentives of $9.4 million at September 30, 2005 and $7.8 million at September 30, 2004. Inventories Inventories are stated at the lower of cost or market using the Ñrst-in, Ñrst-out (FIFO) method. Market is determined on the basis of estimated realizable values. Property Property is stated at cost. We calculate depreciation of property using the straight-line method over 15 to 40 years for buildings and improvements, 3 to 14 years for machinery and equipment and 3 to 10 years for computer hardware and software. We capitalize signiÑcant renewals and enhancements and write oÅ replaced units. We expense maintenance and repairs, as well as renewals of minor amounts. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) Intangible Assets Goodwill and other intangible assets generally result from business acquisitions. We account for business acquisitions by allocating the purchase price to tangible and intangible assets acquired and liabilities assumed at their fair values, the excess of the purchase price over the allocated amount is recorded as goodwill. Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, requires goodwill and other intangible assets with indeÑnite useful lives to be reviewed for impairment annually or more frequently if events or circumstances indicate an impairment may be present, rather than amortized as previous standards required. Any excess in carrying value over the estimated fair value is charged to results of operations. We amortize distributor networks, computer software products, patents and other intangible assets with Ñnite useful lives on a straight-line basis over their estimated useful lives, generally ranging from 3 to 40 years. Impairment of Long-Lived Assets We evaluate the recoverability of the recorded amount of long-lived assets whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash Öows derived from an asset are less than its carrying amount. If we determine that an asset is impaired, we measure the impairment to be recognized as the amount by which the recorded amount of the asset exceeds its fair value. We report assets to be disposed of at the lower of the recorded amount or fair value less cost to sell. We determine fair value using a discounted future cash Öow analysis or other accepted valuation techniques. During 2004, we sold a facility in a sale-leaseback transaction with a third party resulting in a $20.6 million pre-tax loss. The net cash proceeds from the sale were $19.0 million. Derivative Financial Instruments We use 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. We use foreign currency forward exchange contracts to oÅset changes in the amount of future cash Öows associated with intercompany transactions expected to occur within the next four years (cash Öow hedges) and changes in the fair value of certain assets and liabilities resulting from intercompany loans and other transactions with third parties denominated in foreign currencies. We sometimes use interest rate swap contracts to manage the balance of Ñxed and Öoating rate debt. Our accounting method for derivative Ñnancial instruments is based upon the designation of such instruments as hedges under accounting principles generally accepted in the United States. It is our policy 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 We translate assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. dollar into U.S. dollars using exchange rates at the end of the respective period. We translate sales, costs and expenses at average exchange rates eÅective during the respective period. We report foreign currency translation adjustments as a component of other comprehensive income. Currency transaction gains and losses are included in the results of operations in the period incurred. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) Research and Development Expenses We expense research and development (R&D) costs as incurred; these costs were $138.6 million in 2005, $121.7 million in 2004 and $121.6 million in 2003. We include R&D expenses in cost of sales in the Consolidated Statement of Operations. Income Taxes We record a liability for income tax exposures when they are probable and the amount can be reasonably estimated. Tax beneÑts related to claims are also recognized when they become probable and reasonably estimable. The determination of probability and the estimate of the liability or tax beneÑt reÖect the relevant tax law as applied to us taking into account the particular country, state, or other taxing authority. Earnings Per Share We present basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the year. The eÅect of stock options represents the entire diÅerence between basic and diluted EPS. We use the treasury stock method to calculate the eÅect of outstanding stock options. Stock options for which the exercise price exceeds the average market price (out-of-the-money options) over the period have an antidilutive eÅect on EPS, and accordingly, we exclude them from the calculation. Antidilutive options for the years ended September 30, 2005 (20,013 shares), 2004 (51,938 shares) and 2003 (1,073,119 shares) were excluded from the diluted EPS calculation. Stock-Based Compensation We account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We grant stock options at prices equal to the fair market value of our common stock on the grant dates; therefore we do not recognize compensation expense in connection with stock options granted to employees. We recognize compensation expense on grants of restricted stock during the period of the employee's service. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) The following table illustrates the eÅect on net income and earnings per share as if the fair value-based method provided by SFAS No. 123, Accounting for Stock-Based Compensation, had been applied for all outstanding and unvested awards in each year (in millions, except per share amounts): Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add: Stock-based employee compensation expense included in 2005 2004 2003 $540.0 $414.9 $286.4 reported net income, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.6 3.3 0.3 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18.8) (15.2) (5.3) Pro forma net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $521.8 $403.0 $281.4 Earnings per share: Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.95 $ 2.24 $ 1.54 Basic Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.85 $ 2.17 $ 1.52 Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.88 $ 2.17 $ 1.51 Diluted Ì pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.79 $ 2.11 $ 1.48 Pro forma net income for 2005 includes an additional $4.9 million after tax of compensation expense, recognized in the second quarter of 2005, for retirement eligible stock option participants. Previously we reported compensation expense for these participants over the vesting period. Stock options granted to retirement eligible plan participants who retire under our retirement plans on or after the Ñrst anniversary of the grant date continue to vest post-retirement in accordance with plan provisions and agreements related thereto. If the plan participant retires less than twelve months from the grant date, the options under that grant are forfeited. Stock compensation expense on grants to plan participants who are retirement eligible on the grant date or who will be retirement eligible in less than twelve months from the grant date is reported in pro forma net income over the twelve month period from the grant date. We report stock compensation expense on grants to plan participants who become retirement eligible between twelve and thirty-six months after the grant date in pro forma net income over the period from grant date to the retirement eligibility date. Pro forma net income for 2004 includes $3.6 million after tax of expense related to performance-vesting options that vested in the Ñrst quarter of 2004 as a result of the market price of our common stock reaching a speciÑed level for a pre-determined period of time. Net income, as reported and pro forma net income in 2004 include $2.9 million (before and after tax) of compensation expense resulting from modiÑcations made to certain stock options in connection with the sale of our FirstPoint Contact business. See Recent Accounting Pronouncements for further discussion of stock-based compensation. The per share weighted average fair value of options granted was $12.60 in 2005, $7.20 in 2004 and $2.98 in 2003. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) We estimated the fair value of each option on the date of grant using the Black-Scholes pricing model and the following assumptions: Average risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected term (years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 3.59% 1.50% 0.31 5 2004 3.17% 2.34% 0.31 5 2003 2.59% 4.22% 0.30 5 Product and Workers' Compensation Liabilities We record accruals for product and workers' compensation claims in the period in which they are probable and reasonably estimable. Our principal self-insurance programs include product liability and workers' compensation where we self-insure up to a speciÑed dollar amount. Claims exceeding this amount up to speciÑed limits are covered by policies purchased from commercial insurers. We estimate the liability for the majority of the self-insured claims with the assistance of a third party actuarial consultant using our claims experience for the periods being valued. Environmental Matters We record accruals for environmental matters in the period in which our responsibility is probable and the cost can be reasonably estimated. We make changes to the accruals in the periods in which the estimated costs of remediation change. At environmental sites for which more than one potentially responsible party has been identiÑed, we record a liability for our estimated allocable share of costs related to our 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 for which we are the only responsible party, we record a liability for the total estimated costs of remediation. We do not discount to their present value future expenditures for environmental remediation obligations. If we determine that recovery from insurers or other third parties is probable, we record a receivable for the estimated recovery. Recent Accounting Pronouncements In March 2005, the FASB issued Interpretation No. 47 (FIN 47) to clarify the guidance included in SFAS No. 143, Accounting for Asset Retirement Obligations. FIN 47 requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. If amounts cannot be reasonably estimated, certain disclosures will be required about the unrecognized asset retirement obligations. The interpretation must be adopted in the fourth quarter of 2006. We are currently evaluating the interpretation to determine the eÅect on our Ñnancial statements and related disclosures. In December 2004, the FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires compensation cost related to share-based payment transactions, including stock options and restricted stock, to be recognized in the Ñnancial statements. Compensation cost will be measured based on the grant-date fair value of the instruments issued using an option pricing model and will be recognized over the requisite service period. We are required to implement SFAS 123(R) for our 2006 Ñscal year. SFAS 123(R) will apply to all awards granted after the implementation date and to previously-granted awards unvested as of the implementation date. The eÅect of adoption of SFAS 123(R) is currently estimated to be approximately $17 to $20 million ($0.09 to $0.11 per share) after-tax for 2006. However, our actual share-based compensation expense in 2006 depends on a number of factors, including fair value of awards at the time of grant. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 1. Basis of Presentation and Accounting Policies Ì (Continued) In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current- period charges. Further, SFAS 151 requires the allocation of Ñxed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period in which it is incurred. SFAS 151 is eÅective for inventory costs incurred beginning in the Ñrst quarter of 2006. We do not believe the adoption of SFAS 151 will have a material eÅect on our Ñnancial statements and related disclosures. 2. Acquisitions of Businesses 2005 Acquisitions On September 1, 2005, our Power Systems segment acquired the assets of Quality Rewind & Electric, Inc.'s motor repair and management business based in Ft. McMurray, Alberta, Canada. 2003 Acquisitions In March 2003, our Control Systems segment acquired certain assets and assumed certain liabilities of Weidm uller Holding AG's (Weidm uller) North American business. In February 2003, our Control Systems segment acquired substantially all of the assets and assumed certain liabilities of Interwave Technology, Inc., a consulting integrator focusing on manufacturing solutions. The aggregate cash purchase price of these businesses was $25.7 million. Amounts recorded for liabilities assumed were approximately $1.0 million. 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 and allocation of the purchase price for these acquisitions is not presented as the combined eÅect of these acquisitions was not material to our results of operations or Ñnancial position. 3. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the years ended September 30, 2004 and 2005 are (in millions): Balance as of September 30, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Translation and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Control Systems $653.1 12.9 Power Systems $145.1 Ì Total $798.2 12.9 Balance as of September 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 666.0 145.1 811.1 Acquisition of business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Translation and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (3.6) 4.3 0.1 4.3 (3.5) Balance as of September 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $662.4 $149.5 $811.9 We performed our annual evaluation of goodwill and indeÑnite life intangible assets for impairment during the second quarter of 2005 and concluded that no impairments existed. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 3. Goodwill and Other Intangible Assets Ì (Continued) Other intangible assets consist of (in millions): September 30, 2005 Accumulated Amortization Carrying Amount Net Amortized intangible assets: Distributor networks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Computer software products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Patents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total amortized intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets not subject to amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $117.7 123.9 39.3 84.1 365.0 210.8 $ 87.1 69.9 36.3 75.5 268.8 Ì $ 30.6 54.0 3.0 8.6 96.2 210.8 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $575.8 $268.8 $307.0 September 30, 2004 Accumulated Amortization Carrying Amount Net Amortized intangible assets: Distributor networks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Computer software products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Patents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total amortized intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets not subject to amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $117.7 113.4 39.3 93.2 363.6 210.8 $ 84.6 57.6 35.4 73.0 250.6 Ì $ 33.1 55.8 3.9 20.2 113.0 210.8 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $574.4 $250.6 $323.8 Computer software products amortization expense was $14.8 million in 2005, $16.0 million in 2004 and $13.8 million in 2003. The Allen-Bradley, Reliance and Dodge trademarks have been determined to have an indeÑnite life, and therefore are not subject to amortization. Estimated amortization expense is $17.2 million in 2006, $17.1 million in 2007, $16.5 million in 2008, $12.8 million in 2009, and $11.5 million in 2010. 4. Inventories Inventories consist of (in millions): September 30, 2005 2004 Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raw materials, parts, and supplies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $189.6 149.3 231.0 $218.7 135.4 220.2 Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $569.9 $574.3 We report inventories net of the allowance for excess and obsolete inventory of $45.9 million at September 30, 2005 and $46.2 million at September 30, 2004. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 5. Property Property consists of (in millions): September 30, 2005 2004 Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 32.3 464.5 1,645.8 37.0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,179.6 1,405.1 $ 32.4 458.0 1,606.0 43.3 2,139.7 1,335.2 Property, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 774.5 $ 804.5 6. Long-term Debt Long-term debt consists of (in millions): September 30, 2005 2004 6.15% notes, payable in 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.70% debentures, payable in 2028 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.20% debentures, payable in 2098 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 343.7 250.0 200.0 (45.5) $ 353.7 250.0 200.0 (46.0) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 748.2 Ì 757.7 Ì Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 748.2 $ 757.7 In September 2002, we entered into an interest rate swap contract (the Swap) that eÅectively converted our $350.0 million aggregate principal amount of 6.15% notes, payable in 2008, to Öoating rate debt based on six-month LIBOR. The Öoating rate was 6.23 percent at September 30, 2005 and 4.27 percent at September 30, 2004. As permitted by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, we have designated the Swap as a fair value hedge. Accordingly, the fair value of the Swap was recorded in other (liabilities) assets on the Consolidated Balance Sheet with a corresponding adjustment to the carrying value of the underlying debt at September 30, 2005 and 2004. The fair value of the Swap, based upon quoted market prices for contracts with similar maturities, was $(6.3) million at September 30, 2005 and $3.7 million at September 30, 2004. On October 26, 2004, we entered into a Ñve-year $600.0 million unsecured revolving credit facility. Borrowings under our credit facility bear interest based on short-term money market rates in eÅect during the period the borrowings are outstanding. The terms of our credit facility contain a covenant under which we would be in default if our debt-to-total capital ratio were to exceed 60 percent. In addition to our $600.0 million credit facility, short-term unsecured credit facilities of approximately $115 million at September 30, 2005 were available to foreign subsidiaries. There were no signiÑcant commitment fees or compensating balance requirements under any of our credit facilities. Borrowings under our credit facilities during 2005 were not signiÑcant. Interest payments were $45.6 million during 2005, $40.9 million during 2004 and $54.7 million during 2003. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 7. Other Current Liabilities Other current liabilities consist of (in millions): September 30, 2005 2004 Advance payments from customers and deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer returns, rebates and incentives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized losses on foreign exchange contracts (Note 9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Product warranty obligations (Note 8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxes other than income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 78.2 108.2 4.0 36.3 42.8 61.8 $ 63.5 78.3 12.0 28.9 34.8 73.1 Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $331.3 $290.6 8. Product Warranty Obligations We record a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Most of our products are covered under a warranty period that runs for twelve months from either the date of sale or from installation to an end-user or OEM customer. We also record a liability for speciÑc warranty matters when they become known and reasonably estimable. Our product warranty obligations are included in other current liabilities in the Consolidated Balance Sheet. Changes in the product warranty obligations are (in millions): Balance at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Warranties recorded at time of saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to pre-existing warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 28.9 51.0 (0.7) (42.9) $ 29.3 30.8 (1.1) (30.1) Balance at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36.3 $ 28.9 September 30, 2005 2004 9. Financial Instruments Our Ñnancial instruments include long-term debt, foreign currency forward exchange contracts and an interest rate swap. The following is a summary of the carrying value and fair value of our Ñnancial instruments (in millions): September 30, 2005 Fair Value Carrying Value September 30, 2004 Fair Value Carrying Value Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign currency forward exchange contracts ÏÏÏÏÏÏÏÏ Interest rate swapÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(748.2) 18.2 (6.3) $(826.2) 18.2 (6.3) $(757.7) (7.8) 3.7 $(837.1) (7.8) 3.7 We base the fair value of long-term debt upon quoted market prices for the same or similar issues. We base the fair value of foreign currency forward exchange contracts on quoted market prices for contracts with similar maturities. 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, 2005 and 2004, we had outstanding foreign currency forward exchange contracts primarily consisting of contracts for the euro, Swiss franc, 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 9. Financial Instruments Ì (Continued) Canadian dollar, British pound sterling and Australian dollar. The foreign currency forward exchange contracts are recorded in other current assets in the amounts of $22.2 million as of September 30, 2005 and $4.2 million as of September 30, 2004 and other current liabilities in the amounts of $4.0 million as of September 30, 2005 and $12.0 million as of September 30, 2004. We do not anticipate any material adverse eÅect on our results of operations or Ñnancial position relating to these foreign currency forward exchange contracts. We have 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 signiÑcant. 10. Shareowners' Equity Common Stock At September 30, 2005, the authorized stock of the Company consisted of one billion shares of common stock, par value $1.00 per share, and 25 million shares of preferred stock, without par value. At September 30, 2005, 20.3 million shares of common stock were reserved for various incentive plans. Changes in outstanding common shares are summarized as follows (in millions): 2005 2004 2003 Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury stock purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares delivered under incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 183.8 (9.8) 5.7 185.6 (7.5) 5.7 185.8 (5.6) 5.4 Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 179.7 183.8 185.6 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 percent or more of the common stock, although the board of directors is authorized to reduce the 20 percent threshold for triggering the Rights to not less than 10 percent. 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. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 10. Shareowners' Equity Ì (Continued) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consists of (in millions): September 30, 2005 2004 Minimum pension liability adjustments (Note 12) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net unrealized gains (losses) on cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains (losses) on investment securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(424.6) (84.2) 7.2 0.1 $(131.2) (91.3) (4.2) (0.1) Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(501.5) $(226.8) Unrealized losses on cash Öow hedges of $11.2 million ($6.8 million after tax) in 2005 and $36.6 million ($22.1 million after tax) in 2004 were reclassiÑed into earnings and oÅset gains on the hedged items. Approximately $4.6 million ($2.8 million after tax) of the net unrealized gains on cash Öow hedges as of September 30, 2005 will be reclassiÑed into earnings during 2006. We expect that these unrealized gains will be oÅset when the hedged items are recognized in earnings. 11. Stock Options We have granted options to purchase our common stock under various incentive plans and by board action to directors, oÇcers and other key employees at prices equal to the fair market value of the stock on the grant dates. 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 our 2000 Long-Term Incentives Plan, we are authorized to grant up to 24.0 million shares of our 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 approximately 8.0 million at September 30, 2005. None of our employee incentive plans presently permits options to be granted after November 30, 2009. Stock options generally expire ten years from the grant date and vest over three years. Information relative to stock options is as follows (shares in thousands): 2005 2004 2003 Wtd. Avg. Exercise Price Shares Wtd. Avg. Exercise Price Shares Number of shares under option: Outstanding at beginning of year ÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canceled or expiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,082 2,449 (5,703) (126) $18.17 44.11 16.18 22.11 16,860 3,168 (5,676) (270) $14.88 28.24 13.87 21.09 Shares 19,775 2,883 (5,416) (382) Outstanding at end of year ÏÏÏÏÏÏÏÏ 10,702 25.12 14,082 18.17 16,860 Exercisable at end of yearÏÏÏÏÏÏÏÏÏ 5,478 16.96 8,562 15.57 9,980 Wtd. Avg. Exercise Price $14.27 15.69 13.03 15.57 14.88 14.67 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 11. Stock Options Ì (Continued) The following table summarizes information about stock options outstanding at September 30, 2005 (shares in thousands; remaining life in years): Range of Exercise Prices $5.85 to $11.71 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11.72 to $17.56 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17.57 to $23.42 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23.43 to $35.12 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $35.13 to $58.54 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Option Shares Outstanding Wtd. Avg. Wtd. Avg. Exercise Remaining Price Life Option Shares Exercisable Wtd. Avg. Exercise Price 1,244 3,060 1,386 2,586 2,426 10,702 4.6 5.8 3.9 7.7 9.1 $11.47 14.88 20.50 28.27 44.10 $11.47 14.65 20.48 28.38 39.10 1,244 2,238 1,366 628 2 5,478 The closing price of our common stock on September 30, 2005 was $52.90. 12. Retirement BeneÑts We sponsor funded and unfunded pension plans and other postretirement beneÑt plans for our employees. The pension plans cover most of our employees and provide for monthly pension payments to eligible employees after retirement. Pension beneÑts for salaried employees generally are based on years of credited service and average earnings. Pension beneÑts for hourly employees are primarily based on speciÑed beneÑt amounts and years of service. Our policy with respect to funding our pension obligations is to fund the minimum amount required by applicable laws and governmental regulations. We may, however, at our discretion, fund amounts in excess of the minimum amount required by laws and regulations, as we did in 2005 and 2004. Other postretirement beneÑts are primarily in the form of retirement medical plans that cover most of our United States employees and provide for the payment of certain medical costs of eligible employees and dependents after retirement. The components of net periodic beneÑt cost are (in millions): Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏ Amortization: Pension BeneÑts 2004 2005 2003 Other Postretirement BeneÑts 2003 2004 2005 $ 60.8 120.2 (132.9) $ 62.2 110.6 (119.8) $ 50.3 102.0 (115.6) $ 5.1 20.9 Ì $ 5.8 19.9 Ì $ 5.8 23.4 Ì Prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏ Net transition asset ÏÏÏÏÏÏÏÏÏÏÏ Net actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.7 (0.2) 16.6 1.8 (1.8) 15.8 1.4 (2.4) 5.9 (13.3) Ì 12.2 (13.8) Ì 11.5 (12.2) Ì 12.1 Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏ $ 66.2 $ 68.8 $ 41.6 $ 24.9 $ 23.4 $ 29.1 Included in this net periodic beneÑt cost table and Income from discontinued operations in the Consolidated Statement of Operations is pre-tax pension beneÑt cost of $2.8 million and $1.8 million for the years ended September 30, 2004 and 2003, respectively, and pre-tax other postretirement beneÑt cost of $1.1 million and $0.2 million for the years ended September 30, 2004 and 2003, respectively, related to FirstPoint Contact. We retained the pension liability related to the eligible FirstPoint Contact participants and the other postretirement beneÑt liability for eligible retirees through the date of sale, which will result in ongoing net periodic beneÑt cost for us. Also in 2004, we recognized a pension curtailment loss of $0.4 million and an other postretirement beneÑts curtailment gain of $2.3 million related to the sale of our FirstPoint 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 12. Retirement BeneÑts Ì (Continued) Contact business that is reÖected in Income from discontinued operations in the Consolidated Statement of Operations. BeneÑt obligation, plan assets, funded status, and net liability information is summarized as follows (in millions): Pension BeneÑts Other Postretirement BeneÑts 2005 2004 2005 2004 BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discount rate change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medicare subsidy eÅectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DivestitureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan participant contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Currency translation and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,054.9 60.8 120.2 325.5 107.8 (70.0) Ì Ì 4.8 (81.3) (2.0) $1,919.2 62.2 110.6 (73.8) 68.4 0.8 Ì (9.5) 4.9 (75.1) 47.2 BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,520.7 2,054.9 Plan assets at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Company contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan participant contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Currency translation and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,548.8 134.4 75.6 4.8 (81.3) (2.3) 1,248.2 187.5 152.2 4.9 (75.1) 31.1 Plan assets at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,680.0 1,548.8 $ 349.7 5.1 20.9 47.3 50.2 Ì (13.5) Ì 9.1 (43.3) 0.6 426.1 Ì Ì 34.2 9.1 (43.3) Ì Ì $ 345.2 5.8 19.9 (8.6) 34.9 Ì (16.9) (0.3) 6.1 (36.9) 0.5 349.7 Ì Ì 30.8 6.1 (36.9) Ì Ì Funded status of plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Contributions after measurement dateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unamortized amounts: (840.7) 117.5 (506.1) Ì (426.1) Ì (349.7) Ì Prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net transition liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net actuarial losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (60.6) 1.5 894.8 11.2 1.2 481.0 (90.9) Ì 304.6 (104.4) Ì 232.6 Net amount on balance sheetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 112.5 $ (12.7) $(212.4) $(221.5) Net amount on balance sheet consists of: Prepaid pension ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total retirement beneÑt liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 200.5 (780.4) 266.4 1.4 424.6 $ 68.8 (305.1) 81.4 11.0 131.2 $ Ì $ Ì (221.5) (212.4) Ì Ì Ì Ì Ì Ì Net amount on balance sheetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 112.5 $ (12.7) $(212.4) $(221.5) 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 12. Retirement BeneÑts Ì (Continued) During 2005, we recorded an increase to our minimum pension liability of $468.8 million resulting primarily from the discount rate change. Considering the increase of the deferred tax asset of $185.0 million resulting from the increase of our minimum pension liability and the decrease in the intangible pension asset of $9.6 million, the net decrease to shareowners' equity (reÖected as an increase in accumulated other comprehensive loss) was $293.4 million. EÅective for 2006, we amended our U.S. pension plan to eliminate the early retirement subsidy for certain employees. The eÅect of the amendment is a reduction in the pension obligation of approximately $70 million and a corresponding reduction in annual pension expense recognized over the average remaining service life of plan participants. In 2005, we made voluntary contributions of $150.0 million to our U.S. qualiÑed pension plan trust, including $100.0 million contributed in the fourth quarter. We also made contributions of $17.5 million to our non-U.S. pension plan trusts in the fourth quarter of 2005. In 2004, we contributed $125.0 million to our U.S. qualiÑed pension plan trust. The accumulated beneÑt obligation for our pension plans is $2,357.1 million as of the 2005 measurement date and $1,768.1 million as of the 2004 measurement date. We use an actuarial measurement date of June 30 to measure our beneÑt obligations and to calculate our net periodic beneÑt cost for pension and other postretirement beneÑts. Net Periodic BeneÑt Cost Assumptions SigniÑcant assumptions used in determining net periodic beneÑt cost for the period ended September 30 are (in weighted averages): Pension BeneÑts September 30, 2004 2005 2003 Other Postretirement BeneÑts September 30, 2004 2003 2005 U.S. Plans Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏ Compensation increase rate ÏÏÏÏÏÏÏÏÏÏÏÏ Non-U.S. Plans Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏ Compensation increase rate ÏÏÏÏÏÏÏÏÏÏÏÏ 6.25% 8.50% 4.50% 5.03% 6.25% 2.62% 6.00% 8.50% 4.50% 4.89% 6.35% 2.96% 7.00% 8.50% 4.50% 5.12% 6.75% 3.38% 6.25% Ì Ì 6.25% Ì Ì 6.00% Ì Ì 6.25% Ì Ì 6.60%(1) Ì Ì 6.50% Ì Ì 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 12. Retirement BeneÑts Ì (Continued) Net BeneÑt Obligation Assumptions SigniÑcant assumptions used in determining the beneÑt obligations are (in weighted averages): Pension BeneÑts September 30, 2004 2005 Other Postretirement BeneÑts September 30, 2004 2005 U.S. Plans Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation increase rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Healthcare cost trend rate(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Non-U.S. Plans Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation increase rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Healthcare cost trend rate(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5.25% 4.06% 4.19% 2.62% 6.25% 4.50% Ì 5.03% 2.62% Ì 5.00% Ì 11.0% 5.00% Ì 8.75% 6.25% Ì 11.00% 6.25% Ì 9.50% (1) As a result of a plan amendment adopted eÅective October 1, 2002, and in accordance with SFAS No. 106, Employers' Accounting for Postretirement BeneÑts Other Than Pensions, our postretirement healthcare liabilities were recalculated as of the date of the amendment using a 6.5 percent discount rate, the discount rate applicable at the date of the plan amendment. The related net periodic beneÑt cost in 2003 of $29.1 million consists of expense using a 7.0 percent discount rate for the period July 1, 2002 through September 30, 2002 and expense using a 6.5 percent discount rate for the period October 1, 2002 through June 30, 2003. (2) The healthcare cost trend rate reÖects the estimated increase in gross medical claims costs as required to be disclosed by SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement BeneÑts. As a result of the plan amendment adopted eÅective October 1, 2002, our eÅective per person retiree medical cost increase is zero percent beginning in 2005 for the majority of our postretirement beneÑt plans. For our other plans, we assume gross healthcare cost trend rate will decrease to 5.5% in 2011. (3) Decreasing to 4.25% in 2011. EÅective October 1, 2002, we amended our United States postretirement healthcare beneÑt program in to order mitigate the increasing cost of postretirement healthcare services. EÅective January 1, 2004, we began contributing 50 percent of the amount in excess of the 2003 per capita amount. However, our calendar 2004 contribution was limited to a 7.5 percent increase from the 2003 per capita amount. EÅective January 1, 2005, we limit our future per capita maximum contribution to our calendar 2004 per capita contribution. As a result of the Ñnalization during 2005 of the rules for the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), we have included an additional reduction in our accumulated projected beneÑt obligation of $13.5 million as of September 30, 2005 related to certain Other Postretirement BeneÑt plans. A reduction in our accumulated projected beneÑt obligation of $16.9 million was included as of September 30, 2004. Net periodic postretirement beneÑt cost in 2005 decreased by $2.0 million and is expected to decrease in 2006 by an additional $1 million as a result of the Act. There was no adjustment to net periodic postretirement beneÑt cost in 2004. In determining the expected long-term rate of return on assets assumption, we equally consider the historical performance and the future expected performance for returns for each asset category, as well as the target asset allocation of the pension portfolios. We consulted with and considered the opinions of Ñnancial and other professionals in developing appropriate return assumptions. This resulted in the selection of the 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 12. Retirement BeneÑts Ì (Continued) weighted average long-term rate of return on assets assumption. Our weighted-average asset allocations at September 30, by asset category, are: Asset Category Allocation Range Target Allocation September 30, 2004 2005 Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debt Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50% - 80% 20% - 50% 0% - 20% 66% 33% 1% 64% 35% 1% 65% 33% 2% The investment objective for pension funds related to our deÑned beneÑt plans is to meet the plan's beneÑt obligations, while maximizing the long-term growth of assets without undue risk. We strive to achieve this objective by investing plan assets within target allocation ranges and diversiÑcation within asset categories. Target allocation ranges are guidelines that are adjusted periodically based on ongoing monitoring by plan Ñduciaries. Investment risk is controlled by rebalancing to target allocations on a periodic basis and ongoing monitoring of investment manager performance relative to the investment guidelines established for each manager. As of September 30, 2005 and 2004, our pension plans do not own our common stock. In certain non-U.S. countries in which we operate, there are no legal requirements or Ñnancial incentives provided to companies to pre-fund pension obligations. In these instances, we typically make beneÑt payments directly from cash as they become due, rather than by creating a separate pension fund. Estimated Future Payments We contributed $450 million to our U.S. pension plan trust in October 2005. In addition, we expect to contribute approximately $25 million related to our worldwide pension plans and $30.2 million to our postretirement beneÑt plans in 2006. The following beneÑt payments, which include employees' expected future service, as applicable, are expected to be paid (in millions): Pension BeneÑts Other Postretirement BeneÑts 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2011 - 2015ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 92.3 96.9 103.1 109.2 115.8 705.0 $ 30.2 29.6 29.6 29.7 30.1 154.6 Other Postretirement BeneÑts A one-percentage point change in assumed healthcare cost trend rates would have the following eÅect (in millions): One-Percentage Point Increase 2004 2005 One-Percentage Point Decrease 2004 2005 Increase (decrease) to total of service and interest cost components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) to postretirement beneÑt obligationÏÏÏÏÏ $ 1.2 20.2 $ 1.0 12.6 $ (1.0) (19.1) $ (0.9) (10.8) 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 12. Retirement BeneÑts Ì (Continued) Pension BeneÑts Information regarding our pension plans with accumulated beneÑt obligations in excess of the fair value of plan assets (underfunded plans) as of the 2005 and 2004 measurement dates (June 30) are as follows (in millions): 2005 2004 Projected beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,279.5 2,138.4 1,442.3 $1,730.2 1,489.7 1,233.2 DeÑned Contribution Savings Plans We also sponsor certain deÑned contribution savings plans for eligible employees. Expense related to these plans was $24.5 million in 2005, $25.2 million in 2004, and $24.2 million in 2003. 13. Discontinued Operations The following is a summary of the composition of income from discontinued operations included in the Consolidated Statement of Operations (in millions): FirstPoint Contact net income from operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FirstPoint Contact gain on sale (net of tax expense of $1.4) ÏÏÏÏÏÏÏÏÏÏÏ Tax matters (see Note 16) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rocky Flats ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 2004 $ Ì $ 5.7 32.1 18.4 4.6 Ì 21.6 Ì Income from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.6 $60.8 2003 $0.6 Ì Ì 4.4 $5.0 FirstPoint Contact In 2004, we sold our FirstPoint Contact business for cash proceeds and a note convertible into a minority interest in the corporate parent of the buyer. The value assigned to the convertible note on the date of the transaction was approximately $27.0 million. In September 2005, the note was converted to non-voting equity shares, accounted for under the cost method. The historical cost value of $27.0 million was used to value the equity shares at the date of conversion. No fair value was available for this investment as the equity shares are not publicly traded. Accordingly, it is not practicable to estimate that value. The results of operations of FirstPoint Contact for 2003 and 2004, as well as the gain on the sale, are reÖected in Income from Discontinued Operations in the Consolidated Statement of Operations. Summarized results of FirstPoint Contact are as follows (in millions): Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $105.5 9.4 5.7 $111.8 1.1 0.6 2004 2003 Rocky Flats In 2004, we recorded a beneÑt of $7.6 million ($4.6 million after tax) as a result of a Ñnal judgment in a defense claim legal proceeding related to our former operation of the Rocky Flats facility of the Department of 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 13. Discontinued Operations Ì (Continued) Energy. This amount is in addition to income of $7.3 million ($4.4 million after tax) recognized in 2003 related to the Rocky Flats defense claim legal proceeding. 14. Related Party Transactions We own 50 percent of RSC. This ownership interest is accounted for using the equity method. Our investment in RSC of $58.8 million at September 30, 2005 and $57.5 million at September 30, 2004 is included in Other assets in the Consolidated Balance Sheet. We have an agreement with RSC pursuant to which RSC performs research and development services for us. We incurred $2.8 million in 2005, $3.7 million in 2004 and $3.0 million in 2003 for research and development services performed by RSC. At September 30, 2005, the amounts due to or from RSC were not signiÑcant. At September 30, 2004, the amount due to RSC for research and development services was $0.7 million. At September 30, 2004, the amount due from RSC for cost sharing arrangements was not signiÑcant. We share equally with Rockwell Collins, Inc. (Rockwell Collins), which owns 50 percent of RSC, in providing a $6.0 million line of credit to RSC which bears interest at the greater of our or Rockwell Collins' commercial paper borrowing rate. At September 30, 2005 and 2004, there were no outstanding borrowings on the line of credit. In addition, we and Rockwell Collins each guarantee one-half of a lease agreement for one of RSC's facilities. The total future minimum lease payments under the lease are $4.8 million. The lease agreement has a term that ends in December 2011. We own 25 percent of CoLinx, LLC (CoLinx), a company that provides logistics and e-commerce services. This ownership interest is accounted for using the equity method. We paid CoLinx $18.2 million in 2005, $17.1 million in 2004 and $15.2 million in 2003, primarily for logistics services. In addition, CoLinx paid us approximately $2.8 million in 2005, $2.2 million in 2004 and $2.4 million in 2003 for the use of facilities we own and other services. The amounts due to and from CoLinx at September 30, 2005 and 2004 were not signiÑcant. 15. Other Income (Expense) The components of other income (expense) are (in millions): 2005 2004 2003 Net loss on dispositions of property and businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intellectual property settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Royalty income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings on equity method investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4.7) Ì 10.6 2.4 3.8 (2.6) $(24.3) 0.3 5.6 2.6 3.2 (11.8) $(12.2) 1.4 5.8 1.9 3.2 6.4 Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9.5 $(24.4) $ 6.5 During 2004, we sold a facility in a sale-leaseback transaction with a third party resulting in a $20.6 million pre-tax loss. The net cash proceeds from the sale were $19.0 million. During 2003, we sold a majority of our ownership interest in Reliance Electric Limited Japan (REJ) resulting in a loss of $8.4 million ($2.5 million after tax, or $0.01 per diluted share). The loss includes a $9.3 million non-cash charge related to the impairment of the Reliance trademark. The cash proceeds from the transaction totaled $10.4 million. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 16. Income Taxes The components of the income tax provision are as follows (in millions): 2005 2004 2003 Current: United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50.8 56.6 (4.6) $32.3 (5.8) (6.1) $(35.4) 28.7 (3.5) Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred: 102.8 20.4 (10.2) United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112.0 (5.8) 9.6 Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115.8 53.4 6.0 4.2 63.6 23.3 (0.3) 3.4 26.4 Income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $218.6 $84.0 $ 16.2 During 2005, we recognized a net tax beneÑt of $19.7 million in income from continuing operations and $21.6 million in income from discontinued operations related to current and former businesses. The net tax beneÑts included in income from continuing operations are primarily related to the resolution of claims and other tax matters in connection with the closure of the federal audit cycle for the years 1998 through 2002. In addition, these net tax beneÑts include the eÅect of the true-up of estimated tax audit contingency accruals in connection with closure of the 1998 through 2002 audit. The net tax beneÑts included in discontinued operations relate primarily to the closure of the 1998 through 2002 audit ($7.5 million), a prior year state tax refund of a divested business ($11.3 million) and the resolution of various other tax matters of divested businesses ($2.8 million). During 2004, we recognized tax beneÑts of $46.3 million in income from continuing operations and $18.4 million in income from discontinued operations related to the following items: ‚ $34.5 million resulting from the resolution of certain tax matters, in part related to former businesses. A majority of the beneÑts recognized related to non-U.S. tax matters in addition to an agreement with a taxing authority related to the treatment of an investment. Of this amount, $11.5 million is reÖected as a reduction of the United States income tax provision; $21.3 million is reÖected as a reduction of the non-United States income tax provision; and $1.7 million is reÖected as reduction of the state and local income tax provision; ‚ $4.3 million related to additional state tax beneÑts associated with the U.S. research and experimentation credit refund claim in 2003 (see discussion below); and ‚ $25.9 million related to a refund from the State of California for the period 1989 to 1991. Of this amount, $7.5 million is included as a reduction in the income tax provision and $18.4 million is included in Income from discontinued operations. During 2003, we recognized in earnings a tax beneÑt of $69.4 million related to a federal research and experimentation credit refund claim for the years 1997 through 2001. Of this amount, $66.4 million is reÖected as a reduction of the United States income tax provision and $3.0 million is reÖected as a reduction of the state and local income tax provision. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 16. Income Taxes Ì (Continued) Net current deferred income tax assets at September 30, 2005 and 2004 consist of the tax eÅects of temporary diÅerences related to the following (in millions): 2005 2004 Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Product warranty costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State tax credit carryforwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 56.3 12.9 25.7 12.3 3.5 1.3 57.4 $ 20.5 11.3 26.4 11.1 3.5 1.1 58.8 Current deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $169.4 $132.7 Net long-term deferred income tax assets/(liabilities) at September 30, 2005 and 2004 consist of the tax eÅects of temporary diÅerences related to the following (in millions): Retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PropertyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State tax credit carryforwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 2004 $ 152.6 (105.4) (30.2) 31.6 46.5 11.9 14.8 121.8 (55.5) $ 135.0 (125.2) (22.1) 19.4 58.4 9.1 0.5 75.1 (63.0) Long-term deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 66.3 $ 12.1 Total deferred tax assets were $426.8 million at September 30, 2005 and $355.1 million at September 30, 2004. Total deferred tax liabilities were $135.6 million at September 30, 2005 and $147.3 million at September 30, 2004. We reclassiÑed our tax audit accrual as of September 30, 2004 from Deferred income taxes (non-current) to Other liabilities in the Consolidated Balance Sheet. The reclassiÑcation resulted in a remaining net non-current deferred tax asset of $12.1 million at September 30, 2004, which is reported as a non-current asset in the Consolidated Balance Sheet. We believe it is more likely than not that we will realize current and long-term deferred tax assets through the reduction of future taxable income, other than as reÖected below for tax attributes to be carried forward. SigniÑcant factors we considered in determining the probability of the realization of the deferred tax assets include: (a) our historical operating results ($261.0 million of United States taxable income over the past three years), (b) expected future earnings, and (c) the extended period of time over which the retiree medical beneÑts will be paid. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 16. Income Taxes Ì (Continued) Net operating loss, capital loss and tax credit carryforwards, valuation allowances and the related carryforward periods at September 30, 2005 are (in millions): Tax Attribute to be Carried Forward Non-United States net operating lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States net operating lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States capital loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United States net operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United States capital lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local net operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State tax credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax BeneÑt Amount $ 2.2 17.5 29.8 1.7 16.7 13.7 13.2 Valuation Allowance Carryforward Period Ends $ (2.2) (7.3) (29.1) 2008-2012 IndeÑnite IndeÑnite Ì 2019-2025 2007-2009 2006-2025 Ì 2006-2020 (16.7) (0.2) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $94.8 $(55.5) We have a valuation allowance at September 30, 2005 as noted above for carryforwards for which future use is uncertain. During 2005, the valuation allowance decreased by $7.5 million as a result of a basis adjustment in connection with the Ñling of the 2004 income tax return related to the sale of FirstPoint Contact and the recording of a valuation allowance for non-U.S. net operating losses. We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S. Federal, state and foreign jurisdictions for various tax periods. Additionally, we have retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses in prior years. Our income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the diÅerences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the Ñnal resolution of complex tax audit matters, our estimates of income tax liabilities may diÅer from actual payments or assessments. Cross jurisdictional transactions between our subsidiaries involving the transfer price for products, services, and/or intellectual property as well as various U.S. state tax matters comprise our more signiÑcant income tax exposures. We regularly assess our position with regard to tax exposures and record liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of SFAS No. 5, Accounting for Contingencies. We have recorded an accrual of $103.1 million and $111.7 million at September 30, 2005 and 2004, respectively, that reÖects our estimate of the likely outcome of current and future audits and is recorded in Other liabilities in our Consolidated Balance Sheet. The change in the accrual reÖects a reduction of $34.6 million related primarily to settlement of the 1998 Ì 2002 U.S. federal audit, oÅset by an increase of $26.0 million to the accrual for changes in estimates and additional interest related to previously identiÑed income tax exposures. A Ñnal determination of these tax audits or changes in our estimates may result in additional future income tax expense or beneÑt. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 16. Income Taxes Ì (Continued) The eÅective income tax rate diÅered from the United States statutory tax rate for the reasons set forth below: 2005 2004 2003 Statutory tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State and local income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax credit utilizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee stock ownership plan beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax refund claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Utilization of foreign loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Utilization of capital loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Tax beneÑts on export sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and experimentation refund claim ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Resolution of prior period tax matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 2.1 (0.5) (0.9) (0.5) (1.6) (0.1) (4.2) 1.3 (0.9) 35.0% 2.8 (3.0) (0.2) (0.9) (3.7) (0.3) 0.8 (2.1) (2.3) (8.3) 1.4 35.0% 1.3 0.6 (0.8) (1.4) (2.4) (1.0) (1.7) (0.8) (23.3) 0.6 (0.7) EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29.7% 19.2% 5.4% We calculated the income tax provisions based upon the following components of income from continuing operations before income taxes (in millions): 2005 2004 2003 United States income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-United States income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $610.0 127.0 $319.8 118.3 $205.6 92.0 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $737.0 $438.1 $297.6 We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. aÇliates that have been reinvested indeÑnitely. These earnings relate to ongoing operations and at September 30, 2005, were approximately $510.0 million. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. or state income tax liabilities that would be payable if such earnings were not reinvested indeÑnitely. Deferred taxes are provided for non-U.S. aÇliates when we plan to remit those earnings. Income taxes paid were $134.8 million during 2005, $30.0 million during 2004 and $84.5 million during 2003. 17. Commitments and Contingent Liabilities Environmental Matters 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 our manufacturing operations. Thus far, compliance with environmental requirements and resolution of environmental claims have been accomplished without material eÅect on our liquidity and capital resources, competitive position or Ñnancial condition. We have been designated as a potentially responsible party at 12 Superfund sites, excluding sites as to which our records disclose no involvement or as to which our potential liability has been Ñnally determined and assumed by third parties. We estimate the total reasonably possible costs we could incur for the remediation of Superfund sites at September 30, 2005 to be $7.1 million, of which $3.8 million has been accrued. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 17. Commitments and Contingent Liabilities Ì (Continued) Various other lawsuits, claims and proceedings have been asserted against us 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, 2005, we have estimated the total reasonably possible costs we could incur from these matters to be $82.5 million. We have recorded environmental accruals for these matters of $34.3 million. In addition to the above matters, we assumed certain other environmental liabilities in connection with the 1995 acquisition of Reliance. We are indemniÑed by ExxonMobil Corporation (Exxon) for substantially all costs associated with these Reliance matters. At September 30, 2005, we have recorded a liability of $22.6 million and a receivable of $21.4 million for these Reliance matters. We estimate the total reasonably possible costs for these matters to be $35.0 million for which we are substantially indemniÑed by Exxon. Based on our assessment, we believe that our 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 our liquidity and capital resources, competitive position or Ñnancial condition. We cannot assess the possible eÅect of compliance with future requirements. Lease Commitments Rental expense was $88.0 million in 2005; $85.2 million in 2004; and $80.7 million in 2003. Minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year aggregated $206.5 million as of September 30, 2005 and are payable as follows (in millions): 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Beyond 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 51.5 45.2 37.3 26.4 15.0 31.1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $206.5 Commitments from third parties under sublease agreements having noncancelable lease terms in excess of one year aggregated $13.6 million as of September 30, 2005 and are receivable through 2010 at approximately $2.7 million per year. Most leases contain renewal options for varying periods, and certain leases include options to purchase the leased property. Other Matters Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, 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 us, we believe the disposition of matters that are pending or asserted will not have a material adverse eÅect on our business or Ñnancial condition. We (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. Currently there are thousands of claimants in lawsuits that name us as defendants, together with hundreds of other companies. The great bulk of the complaints, however, do not identify any of our products or specify which of these claimants, if any, were exposed to asbestos attributable to our products; and past experience has shown 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 17. Commitments and Contingent Liabilities Ì (Continued) that the vast majority of the claimants will never identify any of our products. In addition, when our products appear to be identiÑed, they are frequently from divested businesses, and we are indemniÑed for most of the costs. For those claimants who do show that they worked with our products, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of our products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants. We have maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insured retentions, for most of these claims. We initiated litigation in the Milwaukee County Circuit Court on February 12, 2004 to enforce the insurance policies against Nationwide Indemnity Company and Kemper Insurance, the insurance carriers that provided liability insurance coverage to our former Allen- Bradley subsidiary. As a result, the insurance carriers have paid some past defense and indemnity costs and have agreed to pay the substantial majority of future defense and indemnity costs for Allen-Bradley asbestos claims, subject to policy limits. If either carrier becomes insolvent or the policy limits of either carrier are exhausted, our share of future defense and indemnity costs may increase. However, coverage under excess policies may be available to pay some or all of these costs. The uncertainties of asbestos claim litigation and the long term solvency of our insurance companies make it diÇcult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation aÅecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material adverse eÅect on our Ñnancial condition. In connection with the divestiture of our former aerospace and defense businesses (the A&D Business) to The Boeing Company (Boeing), we agreed to indemnify Boeing for certain matters related to operations of the A&D Business for periods prior to the divestiture. In connection with the spinoÅs of our former automotive component systems business, semiconductor systems business and Rockwell Collins avionics and communications business, the spun-oÅ companies have agreed to indemnify us for substantially all contingent liabilities related to the respective businesses, including environmental and intellectual property matters. We have, from time to time, divested certain of our businesses. In connection with such divestitures, lawsuits, claims and proceedings may be instituted or asserted against us related to the period that we owned the businesses. In many countries we provide a limited intellectual property indemnity as part of our terms and conditions of sale. We also at times provide limited intellectual property indemnities in other contracts with third parties, such as contracts concerning: the development and manufacture of our products; the divestiture of businesses; and the licensing of intellectual property. Due to the number of agreements containing such provisions, we are unable to estimate the maximum potential future payments. However, we believe that future payments, if any, would not be material to our business or Ñnancial condition. 18. Business Segment Information Rockwell Automation is a provider of industrial automation power, control and information products and services. We are organized based upon products and services and have two operating segments: Control Systems and Power Systems. Control Systems The Control Systems operating segment supplies industrial automation products, systems, software and services focused on helping customers control and improve manufacturing processes. Control Systems 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 18. Business Segment Information Ì (Continued) includes two main business groups: the Components and Packaged Applications Group (CPAG) and the Automation Control and Information Group (ACIG). CPAG supplies industrial components, power control and motor management products, and packaged and engineered products and systems. It supplies motor starters, contactors, push buttons, signaling devices, termination and protection devices, relays and timers, condition sensors, adjustable speed drives, motor control centers and drive systems. CPAG's sales account for approximately 40 percent of Control Systems' sales. ACIG's core products are used primarily to control and monitor industrial plants and processes and typically consist of a processor, software and input/output (I/O) devices. ACIG's integrated architecture and Logix controllers perform multiple types of control applications, including discrete, batch, continuous process, drive system, motion and machine safety across various factory Öoor operations. ACIG's products include controllers, control platforms, I/O devices, high performance rotary and linear motion control systems, electronic operator interface devices, sensors, industrial computers and machine safety components. ACIG's sales account for approximately 45 percent of Control Systems' sales. In addition, Control Systems' oÅering also includes services and solutions, such as multi-vendor customer support, training, automation systems integration, asset management, and manufacturing information solutions for discrete and targeted batch process industries. Power Systems The Power Systems operating segment consists of two business groups: Dodge mechanical (Mechanical) and Reliance electrical (Electrical). Mechanical's products include mounted bearings, gear reducers, mechanical drives, conveyor pulleys, couplings, bushings, clutches and motor brakes. Electrical's products include industrial and engineered motors, adjustable speed drives, product repair, motor and mechanical maintenance solutions, training and consulting services to OEM's, end-users and distributors. The following tables reÖect the sales and operating results of our reportable segments for the years ended September 30 (in millions): Sales: 2005 2004 2003 Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intersegment sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,154.4 899.3 (50.5) $3,692.6 770.0 (51.5) $3,313.9 724.1 (45.7) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,003.2 $4,411.1 $3,992.3 Segment operating earnings: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 756.9 110.3 $ 527.9 67.5 $ 397.6 54.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase accounting depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏ General corporate Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on disposition of a business (Note 15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 867.2 (14.7) (69.7) Ì (45.8) 595.4 (27.3) (88.3) Ì (41.7) 452.2 (26.9) (66.8) (8.4) (52.5) Income from continuing operations before income taxes ÏÏÏÏÏÏ $ 737.0 $ 438.1 $ 297.6 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 18. Business Segment Information Ì (Continued) Among other considerations, we evaluate performance and allocate resources based upon segment operating earnings before income taxes, interest expense, costs related to corporate oÇces, certain non- recurring corporate initiatives, gains and losses from the disposition of businesses, earnings and losses from equity aÇliates that are not considered part of the operations of a particular segment and incremental acquisition related expenses resulting from purchase accounting adjustments such as intangible asset amortization, depreciation, inventory and purchased research and development charges. Depending on the product, intersegment sales are either at a market price or cost plus a mark-up, which does not necessarily represent a market price. In preparing the segment information, we use accounting policies consistent with those described in Note 1. 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): 2005 2004 2003 IdentiÑable assets: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,484.2 867.8 1,173.1 $2,442.1 850.2 921.0 $2,424.0 854.7 727.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,525.1 $4,213.3 $4,006.3 Depreciation and amortization: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 115.1 38.2 3.2 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase accounting depreciation and amortizationÏÏÏÏÏÏÏÏÏ 156.5 14.7 $ 121.4 35.2 2.8 159.4 27.3 $ 122.1 38.2 3.4 163.7 26.9 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 171.2 $ 186.7 $ 190.6 Capital expenditures for property: Control Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Power Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 89.7 21.1 13.3 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 124.1 $ $ 70.7 26.9 0.4 98.0 $ 78.1 28.7 0.8 $ 107.6 IdentiÑable assets at Corporate consist principally of cash, net deferred income tax assets, property and the 50 percent ownership interest in RSC. We conduct a signiÑcant portion of our business activities outside the United States. The following tables present sales and property by geographic region (in millions): United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe, Middle East and Africa ÏÏ Asia-PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $3,058.8 418.4 823.5 483.1 219.4 Sales 2004 $2,727.0 339.8 779.6 400.4 164.3 2003 2005 $2,530.2 303.8 685.4 330.7 142.2 $661.4 23.7 57.6 19.1 12.7 $774.5 Property 2004 $683.2 21.5 70.0 18.6 11.2 $804.5 2003 $793.2 21.5 76.8 16.8 8.8 $917.1 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,003.2 $4,411.1 $3,992.3 We attribute sales to the geographic regions based on the country of origin. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 19. Quarterly Financial Information (Unaudited) 2005 Quarters First Second(a)(b) Third Fourth(c) 2005 SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations ÏÏÏÏÏÏÏÏÏ Income from discontinued operations(d) ÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations(d) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations(d) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,184.9 449.1 179.6 122.1 11.3 133.4 0.66 0.06 0.72 0.65 0.06 0.71 Income from continuing operations for 2005 includes: (in millions, except per share amounts) $1,218.4 455.9 $1,264.7 481.0 $1,335.2 508.1 180.6 142.5 7.5 150.0 0.77 0.04 0.81 0.75 0.04 0.79 191.2 127.3 Ì 127.3 0.70 Ì 0.70 0.68 Ì 0.68 185.6 126.5 2.8 129.3 0.70 0.02 0.72 0.69 0.01 0.70 $5,003.2 1,894.1 737.0 518.4 21.6 540.0 2.83 0.12 2.95 2.77 0.11 2.88 (a) a net tax beneÑt of $19.7 million ($0.10 per diluted share) primarily related to the resolution of claims and other tax matters in connection with the closure of the federal audit cycle for the years 1998 through 2002; (b) an insurance claim of $11.4 million ($7.8 million after tax, or $0.04 per diluted share) related to the recovery of previously incurred legal costs; (c) special charges of $21.5 million ($14.2 million after tax, or $0.08 per diluted share) associated with realignment of administrative functions and a reduction of workforce in Europe in our Control Systems segment and a facility closure in our Power Systems segment. Segment operating earnings of Control Systems and Power Systems include these special charges of $16.5 million and $5.0 million, respectively, for the quarter ended September 30, 2005. The special charges are included in the Consolidated Statement of Operations for the year ended September 30, 2005 in cost of sales and selling, general and administrative expenses in the amounts of $9.4 million and $12.1 million, respectively. We expect that total cash expenditures (after-tax) in connection with these actions will be approximately $11.4 million related to employee severance and separation costs and will be mostly incurred during the Ñrst half of 2006. Non-cash charges of $2.8 million after-tax relate to a write-down of property to its fair value, determined by management using customary valuation techniques. (d) see Note 13 for additional information on discontinued operations. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì(Continued) 19. Quarterly Financial Information (Unaudited) Ì (Continued) 2004 Quarters Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏ Income from discontinued operations(e) ÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations(e)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share: Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Discontinued operations(e)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First(a) $990.3 329.9 75.4 57.1 5.1 62.2 0.30 0.03 0.33 0.29 0.03 0.32 Income from continuing operations for 2004 includes: Third(b) Fourth(c)(d) Second (in millions, except per share amounts) $1,206.2 437.2 $1,135.0 411.9 $1,079.6 383.8 106.2 74.9 3.4 78.3 0.40 0.02 0.42 0.39 0.02 0.41 129.8 125.5 0.9 126.4 0.68 Ì 0.68 0.66 Ì 0.66 126.7 96.6 51.4 148.0 0.52 0.28 0.80 0.51 0.27 0.78 2004 $4,411.1 1,562.8 438.1 354.1 60.8 414.9 1.91 0.33 2.24 1.85 0.32 2.17 (a) a net tax beneÑt of $4.3 million ($0.02 per diluted share) related to additional state tax beneÑts associated with a previously reported U.S. federal research and experimentation credit refund claim; (b) a tax beneÑt of $34.5 million ($0.18 per diluted share) related to the resolution of certain tax matters; (c) a tax beneÑt of $7.5 million ($0.04 per diluted share) related to tax refunds from the State of California; (d) charges of $26.3 million ($16.3 million after tax, or $0.09 per diluted share) associated with an ongoing facilities rationalization program. (e) see Note 13 for additional information on discontinued operations. 20. Subsequent Events In November 2005, the Company completed a sale-leaseback transaction of 24 properties, including the land, buildings and improvements aÇxed to the properties. The lease terms vary from Ñve to Ñfteen years depending on the property and will be classiÑed as operating leases. The net proceeds on sale were approximately $148 million, which were used to repay commercial paper borrowings. Three of the sold properties resulted in a loss of $2.0 million that will be recognized in our Ñrst quarter of 2006, the remaining properties resulted in a gain on sale of $36 million that will be amortized to rent expense over the term of the respective leases. The average operating lease commitment for the Ñrst Ñve years is $12 million per year and $10 million per year thereafter. On October 11, 2005, we issued unsecured commercial paper obligations of $300.0 million with various maturities of between 1 and 28 days. We used the proceeds to partially fund a $450 million voluntary contribution to our U.S. qualiÑed pension trust. 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareowners of Rockwell Automation, Inc. Milwaukee, Wisconsin We have audited the accompanying consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the ""Company'') as of September 30, 2005 and 2004, 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, 2005. Our audits also included the Ñnancial statement schedule listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (United States). 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 the Company at September 30, 2005 and 2004, and the results of its operations and its cash Öows for each of the three years in the period ended September 30, 2005, 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the eÅectiveness of the Company's internal control over Ñnancial reporting as of September 30, 2005, based on the criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 10, 2005 expressed an unqualiÑed opinion on management's assessment of the Company's internal control over Ñnancial reporting. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin November 10, 2005 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive OÇcer and Chief Financial OÇcer, of the eÅectiveness, as of September 30, 2005, of the design and operation of our disclosure controls and procedures, as deÑned in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Chief Executive OÇcer and Chief Financial OÇcer have concluded that our disclosure controls and procedures were eÅective as of September 30, 2005. Management's Report on Internal Control Over Financial Reporting We are responsible for establishing and maintaining adequate internal control over Ñnancial reporting, as deÑned in Rule 13a-15(f) under the Exchange Act. Our internal control over Ñnancial reporting is a process designed to provide reasonable assurance regarding the reliability of our Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including the Chief Executive OÇcer and Chief Financial OÇcer, we conducted an evaluation of the eÅectiveness of our internal control over Ñnancial reporting based on the framework in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, management has concluded that our internal control over Ñnancial reporting was eÅective as of September 30, 2005. Our assessment of the eÅectiveness of our internal control over Ñnancial reporting as of September 30, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting Ñrm, as stated in their report that is included below. Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Changes in Internal Control Over Financial Reporting During 2005, we continued to make improvements to the design and eÅectiveness of our internal controls over Ñnancial reporting, including those related to our information technology systems, as part of a previously existing overall program on internal control and as part of the process of preparing for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Some of these changes, especially to our internal controls related to information technology systems, could be deemed to have materially improved our internal control over Ñnancial reporting. We anticipate that we will continue to make improvements. 70 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareowners of Rockwell Automation, Inc. Milwaukee, Wisconsin We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Rockwell Automation, Inc. and subsidiaries (the ""Company'') maintained eÅective internal control over Ñnancial reporting as of September 30, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅectiveness of internal control over Ñnancial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the eÅectiveness of the Company's internal control over Ñnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on the criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2005 of the Company and our report dated November 10, 2005, expressed an unqualified opinion on those financial statements and financial statement schedule. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin November 10, 2005 71 Item 9B. Other Information None. Item 10. Directors and Executive OÇcers of the Company PART III See the information under the captions Election of Directors, Information as to Nominees for Directors and Continuing Directors, Board of Directors and Committees and Section 16(a) BeneÑcial Ownership Reporting Compliance in the 2006 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. We have adopted a code of ethics that applies to our executive oÇcers, including the principal executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer. A copy of our code of ethics is posted on our Internet site at http://www.rockwellautomation.com. In the event that we amend or grant any waiver from, a provision of the code of ethics that applies to the principal executive oÇcer, principal Ñnancial oÇcer or principal accounting oÇcer and that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefor on our Internet site. Item 11. Executive Compensation See the information under the captions Executive Compensation, Option Grants, Aggregated Option Exercises and Fiscal Year-End Values and Retirement Plans in the 2006 Proxy Statement. Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters See the information under the captions Stock Ownership by Certain BeneÑcial Owners and Ownership by Management of Equity Securities in the 2006 Proxy Statement. The following table provides information as of September 30, 2005 about our common stock that may be issued upon the exercise of options, warrants and rights granted to employees, consultants or directors under all of our existing equity compensation plans, including our 2000 Long-Term Incentives Plan, 1995 Long- Term Incentives Plan, 2003 Directors Stock Plan and 1995 Directors Stock Plan. Plan Category Number of Securities to be issued upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) Equity compensation plans approved by shareownersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,667,127(1) Equity compensation plans not approved by shareowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,000(3) Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,702,127 $25.15 16.45 $25.12 Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding Securities reÖected in Column (a)) (c) 8,026,232(2) Ì 8,026,232 (1) Represents outstanding options under our 1995 Long-Term Incentives Plan, 2000 Long-Term Incentives Plan, 2003 Directors Stock Plan and 1995 Directors Stock Plan. 72 (2) Includes 7,612,490 and 413,742 shares available for future issuance under our 2000 Long-Term Incentives Plan and our 2003 Directors Stock Plan, respectively. (3) On July 31, 2001, each non-employee director received a grant of options to purchase 7,000 shares of our common stock at an exercise price of $16.05 per share pursuant to Board resolutions. On February 6, 2002, a new non-employee director received a grant of options to purchase 7,000 shares of our common stock at an exercise price of $18.05 per share pursuant to Board resolutions. The options became exercisable in substantially equal installments on the Ñrst, second and third anniversaries of the grant date and expire ten years from the grant date. Item 13. Certain Relationships and Related Transactions See the information under the caption Board of Directors and Committees in the 2006 Proxy Statement. Item 14. Principal Accountant Fees and Services See the information under the caption Proposal to Approve the Selection of Auditors in the 2006 Proxy Statement. 73 PART IV Item 15. Exhibits and Financial Statement Schedule (a) Financial Statements, Financial Statement Schedule and Exhibits (1) Financial Statements (all Ñnancial statements listed below are those of the Company and its consolidated subsidiaries). Consolidated Balance Sheet, September 30, 2005 and 2004 Consolidated Statement of Operations, years ended September 30, 2005, 2004 and 2003 Consolidated Statement of Cash Flows, years ended September 30, 2005, 2004 and 2003 Consolidated Statement of Shareowners' Equity, years ended September 30, 2005, 2004 and 2003 Consolidated Statement of Comprehensive Income, years ended September 30, 2005, 2004 and 2003 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (2) Financial Statement Schedule for the years ended September 30, 2005, 2004 and 2003 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-1 4-b-2 4-b-3 Restated CertiÑcate of Incorporation of the Company, Ñled as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, is hereby incorporated by reference. By-Laws of the Company, as amended November 3, 2004, Ñled as Exhibit 3.2 to the Company's Current Report on Form 8-K dated November 4, 2004, 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 December 1, 1996 between the Company and JPMorgan Chase (formerly 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. * Management contract or compensatory plan or arrangement. 74 4-b-4 *l0-a-1 *10-a-2 *10-a-3 *10-a-4 *10-a-5 *10-a-6 *10-a-7 *10-a-8 *10-b-l *10-b-2 *10-b-3 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 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. Form of Stock Option Agreement under the Company's 1995 Long-Term Incentives Plan, 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. Copy of resolutions of the Board of Directors of the Company, adopted December 1, 1999, amending the Company's 1995 Long-Term Incentives Plan, Ñled as Exhibit 10-b-8 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002, 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 spinoÅ of Rockwell Collins, Ñled as Exhibit 10-b-8 to the Company's Annual Report on Form 10-K for the year ended September 30, 2001, is hereby incorporated by reference. Copy of resolutions of the Board of Directors of the Company, adopted November 6, 2002, amending the Company's 1995 Long-Term Incentives Plan, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, is hereby incorporated by reference. Copy of resolutions of the Compensation and Management Development Committee of the Board of Directors of the Company, adopted June 4, 2003, amending the restricted stock agreements of Don H. Davis, Jr., Ñled as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is hereby incorporated by reference. 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. Forms of Restricted Stock Agreements under the Company's Directors Stock Plan between the Company and each of William H. Gray, III, William T. McCormick, Jr., 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, 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. * Management contract or compensatory plan or arrangement. 75 *10-b-4 *10-b-5 *10-b-6 *10-b-7 *10-b-8 *10-b-9 *10-b-10 *10-b-11 *10-b-12 *10-b-13 *10-b-14 *10-c-1 Form of Restricted Stock Agreement under the Directors Stock Plan for restricted stock granted between February 2, 2000 and February 6, 2002, 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. Form of Stock Option Agreement for options granted on July 31, 2001 and February 6, 2002 for service on the Board between the Company and each of the Company's Non-Employee Directors, Ñled as Exhibit 10-c-7 to the Company's Annual Report on Form 10-K for the year ended September 30, 2001, is hereby incorporated by reference. Copy of resolution of the Board of Directors of the Company, adopted on December 4, 2002, amending the Company's Directors Stock Plan, Ñled as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, is hereby incorporated by reference. Copy of the Company's 2003 Directors Stock Plan, Ñled as Exhibit 4-d to the Company's Registration Statement on Form S-8 (No. 333-101780), is hereby incorporated by reference. Form of Restricted Stock Agreement under Section 6 of the 2003 Directors Stock Plan, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, is hereby incorporated by reference. Form of Stock Option Agreement under Sections 7(a)(i) and 7(a)(ii) of the 2003 Directors Stock Plan, Ñled as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, is hereby incorporated by reference. Memorandum of Amendments to the Company's 2003 Directors Stock Plan approved and adopted by the Board of Directors of the Company on April 25, 2003, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is hereby incorporated by reference. Form of Restricted Stock Agreement under Section 8(a)(i) of the 2003 Directors Stock Plan, Ñled as Exhibit 10-c-14 to the Company's Annual Report on Form 10-K for the year ended September 30, 2003, is hereby incorporated by reference. Amendments to Restricted Stock Agreements with William H. Gray, III, William T. McCormick, Jr., Joseph F. Toot, Jr., and Don H. Davis, Jr., Ñled as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, are hereby incorporated by reference. Summary of Non-Employee Director Compensation and BeneÑts, Ñled as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, is hereby incorporated by reference. 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. * Management contract or compensatory plan or arrangement. 76 *10-c-2 *10-c-3 *10-c-4 *10-d-1 *10-d-2 *10-d-3 *10-d-4 *10-d-5 *10-d-6 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 spinoÅ 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. Description of amendments to certain Restricted Stock Agreements between the Company and each of Betty C. Alewine, William T. McCormick, Jr., Bruce M. Rockwell and Joseph F. Toot, Jr., Ñled as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 7, 2005, is hereby incorporated by reference. Copy of the Company's 2000 Long-Term Incentives Plan, as amended through February 4, 2004, Ñled as Exhibit 10-e-1 to the Company's Annual Report on 10-K for the year ended September 30, 2004, 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 spinoÅ of Rockwell Collins, Ñled as Exhibit 10-e-4 to the Company's Annual Report on Form 10-K for the year ended September 30, 2001, is hereby incorporated by reference. Forms of Stock Option Agreements under the Company's 2000 Long-Term Incentives Plan, Ñled as Exhibit 10-e-6 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002, are 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, 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 spinoÅ of Rockwell Collins, Ñled as Exhibit 10-e-6 to the Company's Annual Report on Form 10-K for the year ended September 30, 2001, is hereby incorporated by reference. Copy of resolutions of the Compensation and Management Development Committee of the Board of Directors of the Company adopted December 5, 2001, amending certain outstanding awards under the Company's 1995 Long- Term Incentives Plan and 2000 Long-Term Incentives Plan, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, is hereby incorporated by reference. Memorandum of Amendments to Outstanding Restricted Stock Agreements under the Company's 1995 Long-Term Incentives Plan and 2000 Long-Term Incentives Plan, approved and adopted by the Compensation and Management Development Committee of the Board of Directors of the Company on November 7, 2001, Ñled as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 77 *10-d-7 *10-d-8 *10-e *10-f *10-g-1 *10-g-2 *10-g-3 *l0-h-1 *l0-h-2 *10-h-3 *10-i-1 *10-i-2 Form of Restricted Stock Agreement under the Company's 2000 Long-Term Incentives Plan, Ñled as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, is hereby incorporated by reference. Memorandum of Amendments to the Rockwell Automation, Inc. 2000 Long- Term Incentives Plan, as amended, Ñled as Exhibit 10.2 to the Company's Current Report on Form 8-K dated April 7, 2005, is hereby incorporated by reference. Copy of resolutions of the Compensation and Management Development Committee of the Board of Directors of the Company, adopted February 5, 2003, regarding the Corporate OÇce vacation plan, Ñled as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, is hereby incorporated by reference. Copy of the Company's Deferred Compensation Plan, Ñled as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, is hereby incorporated by reference. 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, as amended December 3, 2003, Ñled as Exhibit 10-i-1 to the Company's Annual Report for the year ended September 30, 2004, is hereby incorporated by reference. Copy of the Company's Incentive Compensation Plan, Ñled as Exhibit 10 to the Company's Current Report on Form 8-K dated September 7, 2005, is hereby incorporated by reference. Description of the Company's incentive compensation program for Ñscal year 2005 and the performance measures and goals therefor and for the Company's Annual Incentive Compensation Plan for Senior Executives for Ñscal year 2005, contained in the Company's Current Report on Form 8-K dated December 7, 2004, 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. Copy of Restricted Stock Agreement dated January 5, 2004, between the Company and James V. Gelly, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, is hereby incorporated by reference. * Management contract or compensatory plan or arrangement. 78 *10-j-1 *10-j-2 *10-j-3 *10-j-4 *10-j-5 *10-j-6 *10-j-7 *10-j-8 *l0-j-9 10-k-1 10-k-2 Form of Change of Control Agreement between the Company and each of Don H. Davis, Jr., John D. Cohn and Joseph 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 Agreement 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. Copy of Restricted Stock Agreement dated February 5, 2004 between the Company and Keith D. Nosbusch, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, is hereby incorporated by reference. Agreement dated as of January 27, 2004, between the Company and Michael A. Bless, Ñled as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, is hereby incorporated by reference. Copy of Restricted Stock Agreement dated May 1, 2004 between the Company and Douglas M. Hagerman, Ñled as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, is hereby incorporated by reference. Form of Change of Control Agreement dated as of May 1, 2004 between the Company and each of James V. Gelly and Douglas M. Hagerman, Ñled as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, is hereby incorporated by reference. Copy of Change of Control Agreement dated as of June 2, 2004 between the Company and Keith D. Nosbusch, Ñled as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, is hereby incorporated by reference. Agreement dated as of May 27, 2004 between the Company and William J. Calise, Jr., Ñled as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, is hereby incorporated by reference. Agreement dated January 26, 2005 by and between the Company and Don H. Davis, Jr., Ñled as Exhibit 10 to the Company's Quarterly Report of Form 10-Q for the quarter ended December 31, 2004, 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. * Management contract or compensatory plan or arrangement. 79 10-k-3 10-l-l 10-l-2 10-l-3 10-m-1 10-m-2 10-m-3 10-n-1 10-n-2 10-n-3 10-o l0-p 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. 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. Five-Year Credit Agreement dated as of October 26, 2004 among the Company, the Banks listed therein and JPMorgan Chase Bank, as Administrative Agent, Ñled as Exhibit 99 to the Company's Current Report on Form 8-K dated October 27, 2004, is hereby incorporated by reference. Purchase and Sale Agreement dated as of August 24, 2005 by and between the Company and First Industrial Acquisitions, Inc., including the form of Lease Agreement attached as Exhibit I thereto, together with the First Amendment to Purchase and Sale Agreement dated as of September 30, 2005 and the Second Amendment to Purchase and Sale Agreement dated as of October 31, 2005. * Management contract or compensatory plan or arrangement. 80 12 21 23 24 31.1 31.2 32.1 32.2 Computation of Ratio of Earnings to Fixed Charges for the Five Years Ended September 30, 2005. List of Subsidiaries of the Company. Consent of Independent Registered Public Accounting Firm. 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. CertiÑcation of Periodic Report by the Chief Executive OÇcer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. CertiÑcation of Periodic Report by the Chief Financial OÇcer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. CertiÑcation of Periodic Report by the Chief Executive OÇcer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. CertiÑcation of Periodic Report by the Chief Financial OÇcer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management contract or compensatory plan or arrangement. 81 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 AUTOMATION, INC. By /s/ JAMES V. GELLY James V. Gelly Senior Vice President and Chief Financial OÇcer (principal Ñnancial oÇcer) By /s/ DAVID M. DORGAN David M. Dorgan Vice President and Controller (principal accounting oÇcer) Dated: November 10, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 10th day of November 2005 by the following persons on behalf of the registrant and in the capacities indicated. KEITH D. NOSBUSCH* Chairman of the Board, President and Chief Executive OÇcer (principal executive oÇcer) and Director BETTY C. ALEWINE* Director DON H. DAVIS, JR.* Director VERNE G. ISTOCK* Director BARRY C. JOHNSON* Director WILLIAM T. MCCORMICK, JR.* Director BRUCE M. ROCKWELL* Director DAVID B. SPEER* Director JOSEPH F. TOOT, JR.* Director KENNETH F. YONTZ* Director *By /s/ DOUGLAS M. HAGERMAN Douglas M. Hagerman, Attorney-in-fact** **By authority of powers of attorney Ñled herewith 82 SCHEDULE II ROCKWELL AUTOMATION, INC. VALUATION AND QUALIFYING ACCOUNTS For the Years Ended September 30, 2005, 2004 and 2003 Description *Year ended September 30, 2005 Allowance for doubtful accounts(a) ÏÏÏÏ Allowance for customer returns, rebates Additions Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts (in millions) Deductions(b) Balance at End of Year $28.0 $ 4.4 $ Ì $ 11.2 $ 21.2 and incentives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86.1 367.1 11.3(c) 346.9 117.6 Allowance for excess and obsolete inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46.2 Valuation allowance for deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63.0 18.0 5.5 0.2 Ì 18.5 13.0 45.9 55.5 *Year ended September 30, 2004 Allowance for doubtful accounts(a) ÏÏÏÏ Allowance for customer returns, rebates $29.5 $ 8.5 $ Ì $ 10.0 $ 28.0 and incentives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.4 237.1 Allowance for excess and obsolete inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53.4 Valuation allowance for deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46.8 14.3 26.1 Ì 0.7 3.7 226.4 22.2 13.6 86.1 46.2 63.0 *Year ended September 30, 2003 Allowance for doubtful accounts(a) ÏÏÏÏ Allowance for customer returns, rebates $43.6 $ 3.5 $1.6 $ 19.2 $ 29.5 and incentives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.1 160.7 Allowance for excess and obsolete inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50.9 Valuation allowance for deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51.7 15.2 3.8 Ì 1.9 Ì 160.4 14.6 8.7 75.4 53.4 46.8 (a) Includes allowances for current and other long-term receivables. (b) Consists of amounts written oÅ for the allowance for doubtful accounts and excess and obsolete inventory, customer account credits for customer returns, rebates and incentives and adjustments resulting from our ability to utilize foreign tax credits, capital losses, or net operating loss carryforwards for which a valuation allowance had previously been recorded. (c) Represents reclassiÑcation of amounts reported in other balance sheet accounts in prior years. * Amounts reported relate to continuing operations in all periods presented. S-1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Keith D. Nosbusch, Chairman, President and Chief Executive OÇcer of Rockwell Automation, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Rockwell Automation, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that occurred during the registrant's most recent Ñscal quarter (the registrant's fourth Ñscal quarter in the case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect, the registrant's internal control over Ñnancial reporting; and 5. The registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of internal control over Ñnancial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial information; and b) Any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal control over Ñnancial reporting. Date: November 10, 2005 /s/ Keith D. Nosbusch Keith D. Nosbusch Chairman, President and Chief Executive OÇcer Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James V. Gelly, Senior Vice President and Chief Financial OÇcer of Rockwell Automation, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Rockwell Automation, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that occurred during the registrant's most recent Ñscal quarter (the registrant's fourth Ñscal quarter in the case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect, the registrant's internal control over Ñnancial reporting; and 5. The registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of internal control over Ñnancial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial information; and b) Any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal control over Ñnancial reporting. Date: November 10, 2005 James V. Gelly /s/ James V. Gelly Senior Vice President and Chief Financial OÇcer Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT I, Keith D. Nosbusch, Chairman, President and Chief Executive OÇcer of Rockwell Automation, Inc. (the ""Company''), hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the year ended September 30, 2005 (the ""Report'') fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the Ñnancial condition and results of operations of the Company. Date: November 10, 2005 /s/ Keith D. Nosbusch Keith D. Nosbusch Chairman, President and Chief Executive OÇcer Exhibit 32.2 CERTIFICATION OF PERIODIC REPORT I, James V. Gelly, Senior Vice President and Chief Financial OÇcer of Rockwell Automation, Inc. (the ""Company''), hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the year ended September 30, 2005 (the ""Report'') fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the Ñnancial condition and results of operations of the Company. Date: November 10, 2005 /s/ James V. Gelly James V. Gelly Senior Vice President and Chief Financial OÇcer Rockwell Automation, Inc. Return On Invested Capital This page does not constitute part of our Annual Report on Form 10-K for the ﬁ scal year ended September 30, 2005. Supplemental Information Rockwell Automation, Inc. Return On Invested Capital This annual report contains information regarding Return On Invested Capital (ROIC), which is a non-GAAP ﬁ nancial measure. Management believes that ROIC is useful to investors as a measure of performance and of the effectiveness of the use of capital in its operations. Management uses ROIC as one measure to monitor and evaluate the performance of the company. Our measure of ROIC is likely to differ from that used by other companies. We deﬁ ne ROIC as the percentage resulting from the following calculation: (a) Income from continuing operations before accounting change, if any, and before interest expense, income tax provision, and purchase accounting depreciation and amortization, divided by; (b) average invested capital for the year, calculated as a ﬁ ve quarter rolling average using the sum of short-term debt, long-term debt, shareowners’ equity, cumulative impairments of goodwill and intangibles required under SFAS No. 142, and accumulated amortization of goodwill and other intangible assets, minus cash and cash equivalents, multiplied by; (c) one minus the adjusted effective tax rate for the period, the adjusted effective tax rate is calculated by excluding the effect of separately reported tax items in continuing operations. ROIC is calculated as follows: (in millions, except percentages) (a) Return Income from continuing operations Interest expense Income tax provision Purchase accounting depreciation and amortization Return (b) Average Invested Capital Short-term debt Long-term debt Shareowners’ equity Impairments of goodwill and intangibles Accumulated amortization of goodwill and intangibles Cash and cash equivalents Average invested capital (c) Adjusted Effective Tax Rate Income tax provision Separately reported tax items in continuing operations Income tax provision before separately reported tax items in continuing operations Year Ended September 30, 2005 2004 $518.4 $354.1 45.8 218.6 14.7 41.7 84.0 27.3 797.5 507.1 0.4 752.2 3.6 760.0 1,870.1 1,689.2 108.0 659.7 (471.7) 108.0 645.4 (339.8) 2,918.7 2,866.4 218.6 19.7 84.0 46.3 238.3 130.3 Income from continuing operations before income taxes $737.0 $438.1 Adjusted effective tax rate 32.3% 29.7% (a) / (b) * (1-c) Return On Invested Capital 18.5% 12.4% This page does not constitute part of our Annual Report on Form 10-K for the ﬁ scal year ended September 30, 2005. FINANCIAL HIGHLIGHTS continuing operations Sales $3,992.3 $4,411.1 $5,003.2 (dollars in millions, except per share amounts) Segment operating earnings Income from continuing operations* Diluted earnings per share from continuing operations* Sales by segment: Control Systems Power Systems 2003 2004 2005 452.2 281.4 595.4 354.1 867.2 518.4 1.48 1.85 2.77 $3,287.4 $3,658.6 $4,123.6 704.9 752.5 879.6 Total $3,992.3 $4,411.1 $5,003.2 * Includes separately reported tax beneﬁ ts of $69.4 million ($0.37 per share), $46.3 million ($0.24 per share) and $19.7 million ($0.10 per share) for the years 2003, 2004, and 2005, respectively. 2005 Annual Report and Form 10-K ROCKWELL AUTOMATION 777 East Wisconsin Avenue / Suite 1400 / Milwaukee / WI 53202 414.212.5200 / www.rockwellautomation.com

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