item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 1996 1995 statement consolidated income years ended september 30 1996 1995 1994 statement consolidated cash flows years ended september 30 1996 1995 1994 statement consolidated shareowners equity years ended september 30 1996 1995 1994 notes financial statements independent auditors report sales earnings business segment years ended september 30 1992 1996 2 financial statement schedule years ended september 30 1996 1995 1994 schedules filed herewith omitted absence conditions required information called shown financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated december 19 1996 pursuant requirements securities exchange act 1934 report signed 19th day december 1996 following persons behalf registrant capacities indicated william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 1996 1995 1994 includes allowances commercial longterm receivables b collection accounts previously written c uncollectible accounts written consists principally amounts relating businesses acquired businesses sold foreign currency translation adjustments s1item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 1997 1996 statement consolidated income years ended september 30 1997 1996 1995 statement consolidated cash flows years ended september 30 1997 1996 1995 statement consolidated shareowners equity years ended september 30 1997 1996 1995 notes financial statements independent auditors report sales earnings business segment years ended september 30 1993 1997 2 financial statement schedule years ended september 30 1997 1996 1995 schedules filed herewith omitted absence conditions required information called shown financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered report management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated december 5 1997 pursuant requirements securities exchange act 1934 report signed 5th day december 1997 following persons behalf registrant capacities indicated donald r beall chairman board director h davis jr president chief executive officer principal executive officer director lew allen jr director george l argyros director richard bressler director judith l estrin director william h gray iii director james clayburn la force jr director william mccormick jr director john nichols director bruce rockwell director william sneath director joseph f toot jr director w michael barnes senior vice president finance planning chief financial officer principal financial officer william e sanders vice president controller principal accounting officer william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 1997 1996 1995 includes allowances commercial longterm receivables b collection accounts previously written c uncollectible accounts written consists principally amounts relating businesses acquired businesses sold foreign currency translation adjustments s1 securities exchange commission washington dc 20549 exhibits form 10k fiscal year ended september 30 1997 rockwell international corporation exact name registrant specified charter exhibit index management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered reportitem 14 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 1998 1997 consolidated statement operations years ended september 30 1998 1997 1996 consolidated statement cash flows years ended september 30 1998 1997 1996 consolidated statement shareowners equity years ended september 30 1998 1997 1996 notes consolidated financial statements independent auditors report 2 financial statement schedule years ended september 30 1998 1997 1996 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered report management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated december 3 1998 pursuant requirements securities exchange act 1934 report signed 3rd day december 1998 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer george l argyros director donald r beall director richard bressler director william h gray iii director james clayburn la force jr director william mccormick jr director john nichols director bruce rockwell director william sneath director joseph f toot jr director w michael barnes senior vice president finance planning chief financial officer principal financial officer william e sanders vice president controller principal accounting officer william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 1998 1997 1996 includes allowances commercial longterm receivables b uncollectible accounts written c consists principally amounts relating businesses acquired businesses sold foreign currency translation adjustments s1item 14 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 1999 1998 consolidated statement operations years ended september 30 1999 1998 1997 consolidated statement cash flows years ended september 30 1999 1998 1997 consolidated statement shareowners equity years ended september 30 1999 1998 1997 consolidated statement comprehensive income loss years ended september 30 1999 1998 1997 notes consolidated financial statements independent auditors report 2 financial statement schedule years ended september 30 1999 1998 1997 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered report management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated december 1 1999 pursuant requirements securities exchange act 1934 report signed 1st day december 1999 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer george l argyros director donald r beall director william h gray iii director james clayburn la force jr director william mccormick jr director john nichols director bruce rockwell director robert b shapiro director william sneath director joseph f toot jr director w michael barnes senior vice president finance planning chief financial officer principal financial officer william e sanders vice president controller principal accounting officer william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 1999 1998 1997 includes allowances commercial longterm receivables b uncollectible accounts written c consists principally amounts relating businesses acquired businesses sold foreign currency translation adjustments s1item 14 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2000 1999 consolidated statement operations years ended september 30 2000 1999 1998 consolidated statement cash flows years ended september 30 2000 1999 1998 consolidated statement shareowners equity years ended september 30 2000 1999 1998 consolidated statement comprehensive income loss years ended september 30 2000 1999 1998 notes consolidated financial statements independent auditors report 2 financial statement schedule years ended september 30 2000 1999 1998 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k reports form 8k filed last quarter period covered report management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated november 22 2000 pursuant requirements securities exchange act 1934 report signed 22nd day november 2000 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer betty c alewine director george l argyros director donald r beall director j michael cook director william h gray iii director william mccormick jr director john nichols director bruce rockwell director robert b shapiro director joseph f toot jr director w michael barnes senior vice president finance planning chief financial officer principal financial officer william e sanders vice president controller principal accounting officer william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 2000 1999 1998 includes allowances commercial longterm receivables b uncollectible accounts written c consists principally amounts relating businesses acquired businesses sold foreign currency translation adjustments s1item 14 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2001 2000 consolidated statement operations years ended september 30 2001 2000 1999 consolidated statement cash flows years ended september 30 2001 2000 1999 consolidated statement shareowners equity years ended september 30 2001 2000 1999 consolidated statement comprehensive income years ended september 30 2001 2000 1999 notes consolidated financial statements independent auditors report 2 financial statement schedule years ended september 30 2001 2000 1999 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k company filed current report form 8k dated july 11 2001 respect completion june 29 2001 spinoff avionics communications business holders shares common stock par value 1 per share company means pro rata distribution holders outstanding shares common stock par value 01 per share rockwell collins inc whollyowned subsidiary company including associated preferred share purchase rights distribution rockwell collins began operations independent separately traded publicly held company june 30 2001 form 8k includes unaudited pro forma condensed consolidated financial information company reflecting distribution items 2 7 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell international corporation william j calise jr william j calise jr senior vice president general counsel secretary dated november 21 2001 pursuant requirements securities exchange act 1934 report signed 21st day november 2001 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer betty c alewine director j michael cook director william h gray iii director william mccormick jr director john nichols director bruce rockwell director joseph f toot jr director michael bless senior vice president chief financial officer principal financial officer david dorgan vice president controller principal accounting officer william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell international corporation valuation qualifying accounts years ended september 30 2001 2000 1999 includes allowances trade longterm receivables b consists principally uncollectible accounts written s1item 14 controls procedures within 90day period prior date report rockwell automation carried evaluation supervision participation company’s management including chief executive officer chief financial officer effectiveness design operation rockwell automation’s disclosure controls procedures pursuant exchange act rule 13a14 based upon evaluation chief executive officer chief financial officer concluded rockwell automation’s disclosure controls procedures effective timely alert material information relating company including consolidated subsidiaries required included rockwell automation’s exchange act filings significant changes rockwell automation’s internal controls factors could significantly affect controls subsequent date evaluation part iv item 15item 14 principal accountant fees services see information caption proposal approve selection auditors 2004 proxy statement part iv item 15item 14 principal accountant fees services see information caption proposal approve selection auditors 2005 proxy statement part iv item 15item 14 principal accountant fees services see information caption proposal approve selection auditors 2006 proxy statement part iv item 15item 14 principal accountant fees services see information caption proposal approve selection independent registered public accounting firm 2007 proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm 2008 proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm 2010 proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm 2011 proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference section entitled audit matters proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm 2009 proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated reference section entitled proposal approve selection independent registered public accounting firm 2012 proxy statement part iv item 15 item 7 managements discussion analysis financial condition results operations overview sale ad business marks important step transformation rockwell company shifted strategic focus aerospace defense higher growth us commercial international markets rockwell predominantly electronics company 70 percent 1996 sales coming electronics businesses compared 1984 63 percent rockwells sales aerospace defense sales outside united states grown 43 percent total sales 1996 compared 13 percent 1984 past five years financial performance rockwells continuing businesses outstanding sales grown 15 percent average annual rate operating earnings increased 27 percent average annual rate earnings per share continuing operations excluding onetime acquisitionrelated charge 1996 56 cents per share increased 109 per share 1992 311 per share 1996 average annual increase 30 percent cash flow continuing businesses equally impressive cash provided operating activities increasing 200 million 1992 12 billion 1996 rockwells financial condition continues strength provides substantial flexibility businesses grow internal investments acquisitions companys debt total capital ratio low 11 percent september 30 1996 excluding 2165 billion rockwell debt assumed boeing acquisition ad business yearend cash balances totaled 700 million increased 600 million sale graphic systems business october 1996 looking ahead management established longterm financial goals average annual sales growth 8 percent average annual earnings per share growth 15 percent addition company recapitalized reorganization resulting low debt leverage major increase rockwells equity return equity 14 percent range companys plan increase return equity 20 percent next three years results operations 1996 compared 1995 sales rockwells continuing businesses 1996 14 percent 104 billion 91 billion 1995 led significant increases automation semiconductor systems automotives light vehicle systems businesses composition sales follows billions income continuing operations 1996 121 million 56 cents per share special charge 676 million 311 per share 37 percent increase 1995s comparable income 493 million 227 per share including charge income continuing operations 1996 555 million 255 per share increase 12 percent 1995 1996 onetime special charge writeoff purchased research development connection companys acquisition brooktree 1996 company also recorded 77 million aftertax restructuring charge related decision exit several nonstrategic product lines costs associated staff reductions several businesses charge offset favorable settlements prior years income tax insurance claims 76 million tax continuing operations sales earnings business segment companys electronics businesses accounted 70 percent total 1996 sales 83 percent total operating earnings following discussion sales earnings rockwells continuing businesses automation rockwells largest business 40 percent total sales reported 16 percent sales increase 1995 7 percent due stronger worldwide markets 9 percent due inclusion reliance sales full year compared nine months 1995 although growth automations served markets continued 1996 rate growth industry slowed 1995s record levels automations 1996 earnings increased 12 percent 1995 due higher sales improved profit margins automations earnings percentage sales increased quarter 1996 113 percent first quarter 143 percent fourth quarter semiconductor systems rockwells fastest growing business achieved 82 percent increase 1996 sales earnings triple 1995 earnings due strong customer demand high speed personal computer modem chipsets year semiconductor systems achieved excellent 21 percent return sales compared 13 percent 1995 semiconductor systems operates volatile industry characterized rapid technological advances constantly changing customer demand patterns participation industry requires significant investments research development frequent new product introductions enhancements aggressive pricing practices future sales earnings business dependent continued successful development advanced technologies timely introduction new products management see semiconductor systems business sustaining dramatic sales earnings growth rates achieved 1996 expect continued growth 1997 avionics communications 1996 sales slightly 1995 earnings 8 percent record sales earnings business general aviation division offset charge resulting bankruptcy fokker nv higher commercial air transport research development expenditures strengthening commercial air transport market second half fiscal year positions avionics communications achieve strong sales earnings improvements 1997 automotive represents 30 percent companys total sales 1996 automotives sales earnings slightly ahead 1995 return sales 7 percent compared 68 percent 1995 within automotive earnings heavy vehicle systems business 7 percent improved cost performance north america gains property sales offsetting significant sales earnings decline brazilian operations due depressed economic conditions light vehicle systems business higher volume related earnings offset new product launch costs roof seat systems operations sales business increased 11 percent 1996 1995 compared 1994 sales 1995 increased 2 billion 29 percent 1994 sales acquisition reliance january 1995 contributed 1 billion sales increase strong markets new product introductions increased market share led substantial sales increases semiconductor systems automation light heavy vehicle systems businesses avionics communications 1995 sales also 1994 international sales increased 29 percent 1994 income continuing operations 1995 increased 40 percent 1994 automations 1995 earnings 82 percent 1994 45 percent due strong worldwide markets allenbradley products 37 percent inclusion reliance 1995s results excluding reliance automation posted 1995 sales increases 19 percent united states 36 percent canada 38 percent asiapacific 28 percent europe 26 percent latin america semiconductor systems earnings 15 percent higher 1994 due strong customer demand new high speed data modem chipsets reached full production 1995s third quarter fourth quarter semiconductor systems earnings three times higher 1994s fourth quarter earnings avionics communications 1995 earnings approximately 1994 result significant investments products address land transportation electronics market offset strengthening commercial avionics markets second half 1995 substantial completion development work boeing 777 program automotives 1995 earnings 86 percent 1994 due sales increases improved operating performance heavy light vehicle systems businesses lower heavy vehicle systems product warranty costs earnings heavy vehicle systems 1995 doubled 1994s results earnings light vehicle systems 32 percent 1994 automotives return sales increased 68 percent 1995 compared 43 percent 1994 income taxes companys effective income tax rate continuing operations 1996 38 percent compared 392 percent 1995 favorable 65 million settlement prior years research experimentation tax credit refund claim reduced current years effective income tax rate 72 percent reduction partially offset 47 percent increase effective income tax rate due onetime writeoff purchased research development deductible tax purposes september 30 1996 company unrecognized tax benefits foreign net operating loss carryforwards approximately 37 million company also foreign tax credit carryforwards approximately 52 million unrecognized tax benefit capital loss carryforward 45 million resulting sale reliances telecommunications business tax benefits generally expire 1997 2001 available reduce future income taxes company discontinued operations discontinued operations consist ad business sold boeing graphic systems business sold affiliate stonington partners inc well interest expense associated debt assumed boeing corporate expenses related businesses decrease 1996 earnings discontinued operations primarily reflects significant adverse contract adjustment defense electronics business losses commercial printing press business financial condition bolstered excellent 1996 earnings performance continuing businesses cash provided operating activities rose 12 billion compared 700 million 1995 funding working capital needs businesses well record research new product development expenditures 691 million major use cash 1996 866 million capital expenditures fund growth companys businesses substantially capital expenditures facilities equipment support growth initiatives well cost reduction quality improvement programs nearly half capital expenditures spent semiconductor systems business july 1996 semiconductor systems business announced due current forecasted favorable pricing worldwide semiconductor silicon wafer fabrication market delayed production startup new facility currently construction colorado springs colorado facility planned start production 1998 1997 companys capital expenditures planned 900 million twothirds spent semiconductor systems automation businesses major use cash 1995 acquisition reliance 11 billion net 475 million proceeds sale telecommunications business largest acquisition 1996 brooktree 278 million another use companys cash payment dividends 1996 dividend payments totaled record 253 million 35 percent net income retirement benefits companys retirement benefit payments next several years significantly lower result sale ad business medical payments rockwell retirees totaled 206 million 1996 including 122 million retirees ad business payment future responsibility boeing rockwells pension payments retirees low 1997 since boeing assumed pension liabilities substantially rockwells us employees retired prior january 1 1996 well future pension liabilities active employees ad business pension plan assets substantially excess assumed pension liabilities transferred boeing rockwells continuing pension plans remain overfunded even though current benefit payments projected insignificant near future company intends fund plans regular basis environmental issues federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue impact manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial statements company designated potentially responsible party 31 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined management estimates total reasonably possible costs company could incur remediation superfund sites september 30 1996 52 million 35 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously disposed properties matters management estimated total reasonably possible costs company could incur september 30 1996 140 million company recorded environmental accruals matters 112 million 50 million relate reliance major portion 50 million accrual reliances environmental obligations recoverable exxon corporation based agreement exxon reliance whereby exxon agreed pay substantially costs related certain environmental matters offsetting 19 million receivable exxon recorded september 30 1996 company believes reliance entitled indemnification exxon additional 21 million costs receivable recorded since exxon disputing indemnification obligation based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial statements management cannot assess possible effect compliance future requirements cautionary statement annual report form 10k contains statements relating future results company including certain projections business trends forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited changes political economic conditions domestic foreign government spending budgetary trade policies demand market acceptance new existing products successful development advanced technologies competitive product pricing pressures well risks uncertainties including limited described discussion semiconductor systems business results operations 1996 compared 1995 page 13 hereof detailed time filings company securities exchange commission item 8item 7 managements discussion analysis financial condition results operations overview divestiture automotive aerospace defense graphic systems businesses rockwell today global market leader three electronics businesses serving 17 discrete markets deriving 35 percent revenues international business past five years sales businesses grown average annual rate 21 percent operating earnings purchased research development 1996 restructuring charge increased average annual rate 23 percent rockwells largest business automation 58 percent total company sales grown 27 percent average annual rate past five years excluding impact acquisitionrelated charge operating margins 1997 13 percent near alltime high automation number one supplier industrial automation systems north america goal number one worldwide future sales growth driven new products international expansion continued development companys market channel partners nearly 20 percent automations 1998 sales products developed last two years companys avionics communications business generated 22 percent total company sales 1997 first second served markets commercial air transport general aviation government avionics rockwell marketleading products gps data links liquid crystal displays avionics communications expects strong sales growth 1998 driven increased production new commercial aircraft retrofit existing aircraft addition avionics communications continues pursue operating efficiencies gain competitive cost advantages provide worldclass customer service international business expected comprise almost 40 percent avionics communications sales 1998 compared 35 percent 1997 november 1997 company entered agreement acquire division hughes electronics corporation hughesavicom international inc leading supplier airborne interactive inflight entertainment systems acquisition expected completed december 1997 semiconductor systems generated 20 percent total company sales 1997 experienced explosive revenue growth fiscal 1996 semiconductor systems faced significant competition personal computer pc modem chipset business 1997 expects trend continue 1998 strategic acquisitions major investments new product development past two years enabled business lessen dependence pc modems result semiconductor systems capitalizing strong digital signal processing dsp capability nonmodem product lines including wireless communications personal imaging digital infotainment wide local area network access business also leadership position emerging market personalized electronic commerce products services nonmodem businesses planned almost double sales 1998 expected approach half total semiconductor systems sales end 1998 company also expects market growth accelerate leadership pc modem chipset business worldwide standard new 56 kbps modem established 1998 assuming generally favorable economic conditions management expects 1998 earnings per share growth acquisitionrelated special charges high singledigit range 294 per share reported 1997 sales earnings automation avionics communications higher semiconductor systems earnings likely lower due continued uncertainty unit volumes lower pricing modem business 1998 management expects stronger performance second half 1998 ongoing major investments semiconductor systems begin paying company expects return longterm average earnings per share growth goal 15 percent 1999 results operations 1997 compared 1996 sales increased 7 percent 1997 78 billion 72 billion 1996 due strong global demand increased market share penetration automation avionics communications composition sales follows billions earnings per share continuing operations increased 12 percent 1997 294 per share 263 per share 1996 acquisitionrelated special charges years related income continuing operations 1997 increased 628 million comparable income 572 million 1996 special charges 1997 writeoffs purchased research development 23 million aftertax 11 cents per share fourth quarter related completion acquisition automation software business 19 million aftertax nine cents per share third quarter connection semiconductor systems acquisition special charge fourth quarter 1996 consisted writeoff purchased research development 121 million aftertax 56 cents per share related semiconductor systems acquisition including special charges income continuing operations 1997 586 million 274 per share compared 1996 income continuing operations 451 million 207 per share 1996 company also recorded 47 million aftertax restructuring charge related decision exit several nonstrategic product lines costs associated staff reductions several businesses charge offset favorable settlement prior years income tax claims 65 million automation achieved 11 percent increase operating earnings 1997 capitalizing strong worldwide markets continuing cost containment initiatives operating earnings acquisitionrelated special charge 1997 restructuring charge 1996 598 million 1997 compared 537 million 1996 including charges automation earnings totaled 575 million 1997 compared 1996 earnings 526 million avionics communications outstanding results 1997 sales increasing 15 percent 17 billion 15 billion 1996 primarily due improved commercial air transport markets operating earnings 1997 record 253 million 52 percent comparable 1996 operating earnings restructuring charge 166 million due higher sales volume benefits 1996 restructuring actions avionics communications 1996 earnings totaled 116 million including restructuring charge semiconductor systems operating earnings acquisitionrelated charges 1997 1996 30 percent lower sales 16 billion years operating margins declined 15 percent 1997 21 percent 1996 due primarily highly competitive transition business new highspeed k56flex personal computer modem accelerated price reductions particularly older v34 modem semiconductor systems earnings including writeoff purchased research development years totaled 201 million 1997 compared 209 million 1996 semiconductor systems operates volatile industry characterized rapid technological advances constantly changing customer demand patterns participation industry requires significant investments research development frequent new product introductions enhancements aggressive pricing practices future sales earnings business dependent continued successful development advanced technologies timely introduction new products continuing operations sales earnings business segment 1997 purchased research development 30 million 23 million relates acquisitions semiconductor systems business remaining interest automation software business respectively 1996 purchased research development relates acquisition semiconductor systems business restructuring charge 1996 relates business segments follows millions automation 11 avionics communications 50 corporate 15 divested business semiconductor systems local area networking product line 1996 compared 1995 sales 1996 increased nearly 13 billion 22 percent 1995 semiconductor systems achieved 82 percent increase sales due strong customer demand v34 personal computer modem chipsets automation sales also due strong worldwide markets inclusion reliance electric company reliance sales full year compared nine months 1995 income continuing operations 121 million 56 cents per share special charge 572 million 263 per share 55 percent increase 1995s comparable income 368 million 169 per share automation reported 16 percent sales increase 1995 although growth automations served markets continued 1996 rate growth industry slowed 1995s record levels automations 1996 earnings 1996 restructuring charge increased 12 percent 1995 due higher sales improved profit margins including restructuring charge automations 1996 earnings 526 million avionics communications 1996 sales slightly 1995 earnings 1996 restructuring charge 9 percent record sales earnings business general aviation division offset charge resulting bankruptcy fokker nv higher commercial air transport research development expenditures including restructuring charge avionics communications 1996 earnings totaled 116 million semiconductor systems earnings acquisitionrelated special charge increased threefold 1996 due strong demand v34 personal computer modem chipsets year semiconductor systems achieved excellent 21 percent return sales compared 13 percent 1995 semiconductor systems 1996 earnings including acquisitionrelated charge totaled 209 million income taxes companys 1997 effective income tax rate decreased 365 percent 382 percent 1996 due reduced foreign income taxes utilization previously unrecognized tax credit carryforwards management believes effective income tax rate continue benefit ongoing tax planning initiatives discontinued operations discontinued operations consist automotive business ad business graphic systems business income discontinued operations 1997 includes charge 57 million 48 million aftertax transaction separationrelated costs incurred connection spinoff meritor financial condition rockwells financial condition major strength provides substantial flexibility enhancing shareowner value cash provided operating activities totaled 766 million 1997 compared 979 million 1996 virtually debt company well positioned investments new product development acquisitions bolster product geographic positions global businesses company recently completed 1 billion stock repurchase program announced time reorganization board directors approved additional 500 million repurchase program future stock repurchases expected funded cash generated operating activities commercial paper borrowings major use cash 1997 continuing investment research new product development totaled 661 million 28 percent 518 million 1996 new product investments semiconductor systems represented almost half total increased investments new product lines wireless communications digital infotainment wide local area network access company plans continue approximately level investment new products 1998 company also invested 683 million capital expenditures facilities equipment enhance growth opportunities businesses obtain operating efficiencies improve quality 1998 capital investment plan approximately 700 million july 1996 semiconductor systems announced due current forecasted favorable pricing worldwide semiconductor silicon wafer fabrication market delayed production startup facility construction colorado springs colorado based current market demand favorable wafer pricing management uncertain wafer production facility commence another use companys cash payment dividends shareowners dividend payments 1997 116 per share totaled 248 million 39 percent net income upon spinoff meritor annual 116 per share dividend apportioned 102 rockwell 014 meritor november 1997 rockwell board directors declared 0255 per share regular quarterly dividend 102 per share annual rate payable december 1997 environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue impact manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial statements company designated potentially responsible party 29 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined management estimates total reasonably possible costs company could incur remediation superfund sites september 30 1997 18 million 14 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously disposed properties 1997 company recorded 20 million charge additional environmental costs expected incurred previously owned facility september 30 1997 management estimated total reasonably possible costs company could incur matters 125 million company recorded environmental accruals matters 104 million 37 million relate liabilities assumed connection reliance acquisition major portion 37 million accrual reliances environmental obligations recoverable exxon corporation exxon based agreement exxon reliance whereby exxon agreed pay substantially costs related certain environmental matters offsetting 15 million receivable exxon recorded september 30 1997 company believes reliance entitled indemnification exxon additional 19 million costs receivable recorded since exxon disputing indemnification obligation based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial statements management cannot assess possible effect compliance future requirements year 2000 company developed plans address issues related impact computer systems year 2000 financial operational systems assessed plans developed address systems modification requirements financial impact making required systems changes expected material companys consolidated financial position results operations cash flows quantitative qualitative disclosures market risk company enters foreign currency forward exchange contracts protect adverse currency rate fluctuations foreign currency commitments entered ordinary course business commitments generally terms less one year foreign currency forward exchange contracts executed creditworthy banks denominated currencies major industrial countries gains losses relating foreign currency forward exchange contracts deferred included measurement foreign currency transaction subject hedge company believes gain loss incurred foreign currency forward exchange contracts offset effects currency movements respective underlying hedged transactions based companys overall currency rate exposure september 30 1997 10 change currency rates would material effect financial position results operations cash flows company see note 11 notes financial statements financial statements page 27 hereof cautionary statement annual report form 10k contains statements relating future results company including certain projections business trends forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited changes political economic conditions domestic foreign government spending budgetary trade policies demand market acceptance new existing products successful development advanced technologies competitive product pricing pressures well risks uncertainties including limited described discussion semiconductor systems business results operations 1997 compared 1996 pages 1214 hereof detailed time filings company securities exchange commission item 8item 7 managements discussion analysis financial condition results operations overview 1998 company announced several strategic actions intended complete rockwells transformation highly focused electronic controls communications company actions included spinoff companys semiconductor systems business companys management expects complete december 31 1998 implementation comprehensive restructuring program costreduction initiatives across companys continuing businesses companys management confident companys market leadership coupled global growth opportunities successful completion strategic actions enable company deliver increasing value companys shareowners 1999 beyond rockwell automation companys largest business comprised twothirds companys total sales 1998 maintained position leading supplier industrial automation equipment systems services north america addition 1998 rockwell automation registered global market share gains several business segments rockwell automation posted 1998 operating earnings special charges 594 million last year achieved despite softening demand north america lower sales asiapacific performance problems industrial motors business november 1998 company completed acquisition anorad corporation world leader linear motorbased precision positioning equipment anorad acquisition immediately positions rockwell automation global market share leader linear motor technology companys avionics communications segment includes rockwell collins electronic commerce businesses excellent year 1998 rockwell collins achieved 18 percent increase sales commercial air transport business regional aircraft systems businesses capitalized strong markets addition companys government systems business captured 1 billion new orders 1998 companys passenger systems inflight entertainment business new orders totaling 460 million nine months since companys acquisition business december 1997 rockwell electronic commerce posted 13 percent increase sales due increased demand new spectrumtm automatic call distribution systems looking forward 1999 company expects earnings per share continuing operations 290 300 range driven profitable growth rockwell collins government passenger systems businesses delivering companys commitment 100 million pretax savings restructuring program costreduction initiatives company also expects rockwell automation offset effects soft global markets growth generated products software motion control systems activities new valueadded services product offerings return profitability industrial motors business results operations summary results operations continuing operations special charges relate business segments follows millions automation 488 avionics communications 99 corporate 10 1998 automation 11 avionics communications 50 corporate 15 1996 purchased research development relates acquisitions avionics communications business 1998 automation business 1997 1996 provision income taxes includes 65 million credit related settlement research experimentation tax credit refund claims related years prior 1996 1998 compared 1997 sales increased six percent 1998 68 billion 64 billion 1997 due primarily strong markets rockwell collins products composition sales follows billions earnings per share continuing operations special items increased 10 percent 1998 233 per share comparable 1997 earnings per share 212 related income continuing operations 1998 totaled 462 million slightly higher 1997s comparable income 460 million special items 1998 included first quarter pretax charge 103 million 31 cents per share purchased research development connection acquisition passenger systems business third quarter pretax charges 597 million 257 per share costs associated comprehensive restructuring program including worldwide workforce reduction facility closings consolidations exiting nonstrategic businesses writeoffs goodwill assets 1997 special item fourth quarter pretax charge 23 million 11 cents per share purchased research development related acquisition rockwell automation software business including special items 1998 loss continuing operations accounting change 109 million 55 cents per share compared 1997 income continuing operations 437 million 201 per share significant component third quarter charges writedown longlived assets primarily goodwill associated rockwell automations industrial motors business since companys acquisition reliance electric company january 1995 industrial motors business performed expectations marginally profitable fiscal 1996 operating performance industrial motors deteriorated second half fiscal 1997 first nine months fiscal 1998 operating losses incurred result continuing operating losses included costs associated facility reorganization consolidation activities losses longterm customer commitments manufacturing product quality issues forecasts future operating losses management concluded longlived assets industrial motors business impaired result charge recorded write carrying value assets estimated fair value approximately 266 million 132 per share connection comprehensive restructuring program industrial motors management team reorganized addition actions taken improve product quality delivery lower manufacturing costs ensure new customer orders priced appropriately rockwell automation demonstrated ability 1998 perform weak global markets offsetting flat sales united states lower sales asiapacific region canada meaningful gains europe latin america sales 1998 45 billion 1997 automation companys continuing business significant foreign currency exposures automations sales 1998 adversely affected approximately 80 million due currency rate fluctuations primarily asiapacific region canada earnings impact foreign currency fluctuations mitigated 1998 use forward contracts hedge foreign currency commitments excluding special items operating earnings 1998 594 million compared 598 million 1997 earnings percent sales 131 percent 1998 compared 133 percent 1997 operating efficiencies costreduction actions begun june 1998 substantially offset impacts performance issues industrial motors business sluggish north american markets operating results 1998 included 16 million gain related favorable resolution certain environmental matters exxon corporation including special items rockwell automations operating earnings totaled 106 million 1998 compared 575 million 1997 avionics communications achieved 18 percent increase sales 1998 22 billion 19 billion 1997 significant sales increases occurred companys commercial air transport business regional aircraft systems businesses 1998 approximately onethird sales increase 1998 due inclusion passenger systems business acquired december 1997 avionics communications operating earnings 1998 special items third quarter charge 35 million estimated losses incurred government systems contract 20 percent 320 million 1998 266 million 1997 operating earnings percent sales 1998 special items contract reserve 145 percent compared 142 percent 1997 including charge purchased research development 103 million special charges 99 million 35 million government contract reserve avionics communications operating earnings 83 million 1998 compared 266 million 1997 effective october 1 1997 company changed method accounting certain general administrative costs related government contracts rockwell collins business expense costs incurred company previously included costs inventory cumulative effect accounting change increase 1998s net loss 17 million nine cents per share including 1998 accounting change results discontinued operations net loss 1998 427 million 216 per share compared 1997 net income 644 million 297 per share 1997 compared 1996 sales continuing operations 1997 increased nearly 600 million 64 billion 58 billion 1996 due strong global demand increased market share automation avionics communications income continuing operations 1997 acquisitionrelated charge 460 million 212 per share compared 364 million 165 per share 1996 including acquisitionrelated charge income continuing operations 1997 437 million 201 per share rockwell automation achieved 11 percent increase operating earnings 1997 capitalizing strong worldwide markets continuing costcontainment initiatives operating earnings acquisitionrelated special charge 1997 restructuring charge 1996 598 million 1997 compared 537 million 1996 including charges rockwell automation earnings totaled 575 million 1997 compared 1996 earnings 526 million avionics communications increased sales 1997 16 percent 19 billion 16 billion 1996 primarily due improved commercial air transport markets operating earnings 1997 record 266 million 50 percent comparable 1996 operating earnings restructuring charge 177 million due higher sales volume benefits 1996 restructuring actions avionics communications 1996 earnings totaled 127 million including restructuring charge income taxes companys effective income tax rate excluding tax effects special items declined 363 percent 1998 393 percent 1997 lower tax rate 1998 attributable 16 million tax benefit associated companys donation september 1998 trisonic wind tunnel public university management believes effective income tax rate continue benefit 1999 beyond ongoing tax planning initiatives medical plan changes 1998 company announced part costreduction initiatives consolidate various employee retiree medical plans single highquality costeffective program company expects plan design changes reduce companys medical costs active employees retirees 35 million 1999 approximately 50 million annually thereafter discontinued operations november 4 1998 board directors company approved spinoff semiconductor systems independent separately traded public company named conexant systems inc spinoff expected occur december 31 1998 rate one share conexant common stock every two shares company common stock held close business december 11 1998 company received favorable ruling internal revenue service taxfree status spinoff semiconductor systems reported discontinued operation periods presented loss discontinued operations 1998 301 million includes aftertax charges 90 million principally related closure writedown wafer fabrication facilities colorado springs colorado costs associated 10 percent workforce reduction semiconductor systems loss 1998 also includes aftertax charges 40 million modem inventory writeoffs 26 million intellectual property matters 35 million estimated operating losses expected incurred semiconductor systems october 1 1998 december 31 1998 expected spinoff date net loss also includes operating losses related significant decline modem prices coupled companys commitment fund research development new products discontinued operations periods prior 1998 include semiconductor systems automotive aerospace defense graphic systems businesses acquisition passenger systems december 1997 company acquired inflight entertainment ife business hughesavicom international inc called rockwell collins passenger systems 157 million cash excess purchase price fair value tangible net assets 133 million allocated intangible assets including 103 million 63 million tax purchased research development 23 million developed technology 5 million patents 5 million assembled workforce 37 million goodwill intangible assets purchased research development amortized straightline basis 10 years purchased research development represents value assigned projects process date acquisition passenger systems yet reached technological feasibility alternative future use charged immediately expense research development projects principally related two products total entertainment systemtm tes personal inseat entertainment system incorporating videoondemand ife system includes direct broadcast satellite dbs capability date acquisition expected effort complete tes dbs projects next three years included software hardware design systems testing efforts financial condition rockwells financial condition strengthened 1998 implementation working capital management initiatives businesses initiatives reduced working capital levels generated approximately 450 million operating cash flow last six months 1998 full 1998 year cash provided operating activities totaled 723 million increase 78 percent 1997s cash operations 407 million 1998 investment continuing businesses research new product development totaled 402 million seven percent 377 million 1997 new product investments rockwell collins 12 percent 1998 represented nearly half companys total research development investment increase primarily due accelerated product development companys passenger systems business new product development investments also higher 1998 automation electronic commerce company expects level new product development continue 1999 company also invested 408 million capital expenditures increase 72 million 21 percent 1997 higher investments 1998 primarily due design installation integrated enterprisewide information systems companys businesses 1999 capital spending plan 400 million company also spent approximately 980 million 1998 connection stock repurchase program september 30 1998 company 1906 million shares outstanding compared 2068 million september 30 1997 september 30 1998 company approximately 165 million remaining current 500 million stock repurchase program company expects complete program 1999 decision made regarding continuation stock repurchases beyond program january 1998 company issued 800 million aggregate principal amount longterm notes debentures public offering proceeds debt offering approximately 750 million used repay 380 million outstanding shortterm commercial paper borrowings balance used general corporate purposes including companys ongoing common stock repurchase program september 30 1998 companys debt total capital ratio 25 percent assuming spinoff conexant occurred september 30 1998 companys debt total capital ratio would approximately 32 percent another use companys cash payment dividends shareowners rockwells dividends totaled 202 million 102 per share 1998 compared 248 million 116 per share 1997 upon spinoff meritor september 30 1997 companys annual 116 per share dividend set 102 rockwell 014 meritor rockwell board directors declared regular 0255 per share quarterly dividend payable december 1998 year 2000 readiness disclosure year 2000 issue result computer programs written using two digits rather four digits define applicable year computer equipment software devices embedded technology timesensitive may recognize date using 00 year 1900 rather year 2000 could result system failures miscalculations causing disruptions operations including among things temporary inability manufacture products acquire ship inventory process transactions send invoices engage normal business activities inability business processes function correctly 2000 could serious adverse effects companies entities throughout world company developed plans address issues related impact year 2000 five major areas products business systems computer systems handle business processes infrastructure servers desktop computers networks telecommunication systems software manufacturing systems computer systems used manufacturing process suppliers five areas undergoing following process ensure readiness year 2000 first inventory phase resources inventoried identify type software hardware year 2000 issues second assessment phase inventoried items assessed confirm year 2000related issue present extent remediation required third strategy phase remediation strategy created ensure substantial completion upgrades critical systems middle calendar 1999 fourth conversionupgrade phase upgrades performed items identified inventory assessment phases finally testing phase upgraded items tested verify year 2000 readiness company completed inventory phase five areas substantially completed assessment strategy phases five areas september 30 1998 company approximately 60 percent complete conversionupgrade phase five areas substantially complete final testing situations company completed conversionupgrade phase company utilizing internal external resources address year 2000 issue expects substantially complete project middle calendar 1999 current estimate total project costs approximately 48 million includes cost purchasing certain hardware software purchased hardware software capitalized accordance normal policy approximately twothirds total cost relates use internal resources primarily salary costs 50 percent total project cost spent september 30 1998 substantially remainder spent 1999 company enlisted services industry consultants outside contractors assist year 2000 identification assessment remediation testing efforts costs companys year 2000 identification assessment remediation testing efforts dates company believes complete efforts based upon managements estimates derived using numerous assumptions regarding future events including continued availability certain resources thirdparty remediation plans factors notwithstanding comprehensive program make smooth transition assurance estimates prove accurate actual results could differ materially currently anticipated specific factors could cause material differences include limited availability cost personnel trained year 2000 issues ability identify assess remediate test relevant computer codes embedded technology moreover company could adversely impacted year 2000 issues faced major distributors customers vendors governments financial service organizations company interacts company believes greatest uncertainties manufacturing supplier areas due number equipment materials suppliers involved various stages readiness year 2000 particular company dependent equipment manufacturers supply upgrades required remediate year 2000 issues manufacturing systems area suppliers upgrade systems ensure uninterrupted supply materials year 2000 failure significant equipment materials supplier could result temporary slowdown production company duration company cannot reasonably estimate result companys contingency planning centers heavily supplier manufacturing systems areas top five 10 percent critical materials manufacturing suppliers company conduct onsite reviews intends monitor specific year 2000 milestones ensure compliance company process identifying specific year 2000 compliance target dates critical materials suppliers event supplier meet established compliance milestones begin early april 1999 company implement contingency plans include alternate sourcing stockpiling materials part companys initial assessment phase included detailed year 2000 questionnaire sent critical materials manufacturing suppliers questionnaire included questions products services internal operating systems suppliers supply chain september 30 1998 company received responses approximately 50 percent questioned company following questionnaires necessary ensure year 2000 compliance varying definitions compliance year 2000 array products services sold company today past may lead claims whose impact company currently estimable company product general liability insurance policies provide coverage event certain product failures company however purchased year 2000 specific insurance managements view cost prohibitive likely little value course many cases company contractually limits disclaims consequential damages companys sales contracts assurance given aggregate cost defending resolving claims materially adversely affect companys results operations although companys agreements manufacturers others purchases products contain provisions requiring parties indemnify company certain circumstances assurance indemnification arrangements cover companys liabilities costs related claims third parties related year 2000 issue business operations also dependent year 2000 readiness infrastructure suppliers areas utilities communications transportation services environment likely instances failure could cause disruptions business processes likelihood effects failures infrastructure systems supply chain cannot estimated however respect operations direct control management expect view year 2000 readiness efforts diversity suppliers customers occurrences year 2000 failures material adverse effect financial position results operations company quantitative qualitative disclosures market risk policy company enter derivative financial instruments speculative purposes company enter foreign currency forward exchange contracts ordinary course business protect adverse currency rate fluctuations firm anticipated foreign currency transactions contracts generally terms less one year gains losses relating hedging firm commitments deferred included measurement foreign currency transaction subject hedge gains losses relating anticipated transactions recognized currently companys foreign currency forward exchange contracts executed creditworthy banks denominated currencies major industrial countries notional amount companys outstanding foreign currency forward exchange contracts country including contracts relating discontinued operations follows millions company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts based companys overall currency rate exposure september 30 1998 10 percent change currency rates would material effect financial position results operations cash flows company see note 10 notes consolidated financial statements financial statements pages 3031 hereof cautionary statement annual report form 10k contains statements relating future results company including certain projections business trends forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited timely completion semiconductor systems spinoff ultimate resolution lawsuits claims proceedings may asserted company implementation restructuring actions accordance managements plans economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control domestic foreign government spending budgetary trade policies demand market acceptance new existing products successful development advanced technologies timely completion year 2000 modifications company governments companys key suppliers customers competitive product pricing pressures well risks uncertainties including limited detailed time companys securities exchange commission filings item 8item 7 managements discussion analysis financial condition results operations results operations summary results operations 1999 compared 1998 sales increased four percent 1999 7 billion 68 billion 1998 due strong growth rockwell collins composition sales follows billions earnings per share continuing operations 1999 301 29 percent comparable 1998 earnings special items 233 related income increased 120 million 582 million 462 million 1998 effective september 30 1999 rockwell revised presentation business segments avionics communications segment comprised solely rockwell collins rockwell electronic commerce rockwell science center combined businesses segment prior period amounts reclassified conform current year presentation automations sales 44 billion 1999 three percent 1998 due 130 million sales decline motors business despite sluggish markets automation achieved record operating earnings 633 million 1999 excluding 28 million gain resulting sale north american transformer business automations higher operating performance driven significant improvements manufacturing processes material cost reductions offset investments new product development launch costs operating earnings 1999 also include 9 million charge related consolidation power systems businesses operating results 1998 include 16 million gain related favorable resolution certain environmental matters exxon corporation operating earnings percent sales 144 percent 1999 excluding 28 million gain compared 131 percent 1998 avionics communications achieved 21 percent increase sales 1999 24 billion 2 billion 1998 rockwell collins businesses passenger systems government systems air transport business regional systems posted sales increases 1999 rockwell collins also generated 34 percent increase customer service support revenue 1999 rockwell collins operating earnings 1999 416 million excluding 32 million gain associated sale railroad electronics business 36 percent 1998 operating earnings 307 million excluding 35 million charge 1998 estimated loss government systems contract higher operating earnings 1999 driven outstanding performance air transport business regional systems businesses operating earnings percent sales 1999 excluding 32 million gain 174 percent compared 155 percent 1998 excluding 35 million contract charge sales businesses increased five percent 1999 237 million operating earnings 1999 30 million include approximately 14 million resulting favorable resolution intellectual property matter increase general corporate expenses 1999 due charges approximately 37 million costs incurred connection companys relocation corporate office 29 million loss associated writeoff investment goss graphics systems inc preferred stock 1998 compared 1997 sales increased six percent 1998 68 billion 64 billion 1997 due primarily strong markets rockwell collins products income continuing operations special items 1998 totaled 462 million 233 per share compared 460 million 212 per share 1997 automation demonstrated ability 1998 perform uncertain global markets offsetting lower sales north america asiapacific region gains europe latin america sales 1998 45 billion 1997 operating earnings 1998 594 million compared 598 million 1997 operating earnings percent sales 131 percent 1998 compared 133 percent 1997 operating efficiencies costreduction actions implemented june 1998 substantially offset effects performance issues motors business avionics communications achieved 18 percent increase sales 1998 2 billion 17 billion 1997 significant sales increases occurred companys commercial air transport business regional aircraft systems businesses 1998 approximately onethird sales increase 1998 due inclusion passenger systems business acquired december 1997 avionics communications operating earnings 1998 excluding third quarter government contract reserve 35 million 21 percent 1997 operating earnings percent sales 1998 special items contract reserve 155 percent compared 151 percent 1997 sales businesses increased 226 million 1998 202 million 1997 operating earnings 13 million 1998 consistent operating earnings 1997 special items 1998 consisted pretax charge 103 million 31 cents per share purchased research development connection acquisition passenger systems business pretax charge 597 million 257 per share asset impairments comprehensive restructuring program significant component asset impairment charge related writedown longlived assets primarily goodwill associated rockwell automations motors business special charges related business segments follows automation 488 million avionics communications 88 million businesses 11 million corporate 10 million including special items 1998 loss continuing operations accounting change 109 million 55 cents per share compared 1997 income continuing operations 437 million 201 per share addition company recorded aftertax charge 17 million nine cents per share related change accounting method avionics communications business certain general administrative costs related government contracts including effect accounting change results discontinued operations net loss 1998 427 million 216 per share compared 1997 net income 644 million 297 per share special item 1997 pretax charge 23 million 11 cents per share purchased research development related acquisition rockwell automation software business discontinued operations december 31 1998 company completed spinoff semiconductor systems independent separately traded publicly held company distributing outstanding shares conexant systems inc companys shareowners prorata basis connection spinoff company retained ownership wafer fabrication facilities colorado springs colorado currently held sale company accrued semiconductor systems estimated first quarter 1999 operating loss costs related spinoff 1998 additional 20 million loss recorded first quarter 1999 relates principally companys decision record writedown wafer fabrication facilities colorado springs related costs disposal discontinued operations periods prior 1999 include semiconductor systems automotive aerospace defense graphic systems businesses acquisitions company completed six acquisitions 1999 complement companys product offerings strengthen technologies expand global reach total cost acquisitions 241 million 214 million allocated intangible assets including developed technology patents assembled workforce goodwill intangible assets amortized straightline basis periods ranging six thirty years rockwell automation acquired anorad corporation anorad eja engineering ltd eja substantially assets enterprise technology group inc etg software business certain assets principally intellectual property vancouverbased dynapro anorad leading supplier linear motor equipment acquisition positions rockwell address motion control opportunities semiconductor fabrication market eja based united kingdom marketleading manufacturer integrated control safety systems 2 billion industrial safety market etg acquisition enhances technological capabilities growing rockwell software business dynapro acquisition expands rockwell automations humanmachine interface software hardware capabilities avionics communications business acquired intertrade limited intertrade remaining 50 percent interest flight dynamics intertrade avionics parts supplier complement growing customer service support business flight dynamics market leader headup guidance systems increases rockwell collins aviation electronics content across multiple platforms income taxes companys effective income tax rate declined 346 percent 1999 363 percent excluding tax effects special items 1998 lower tax rate 1999 primarily attributable higher utilization foreign tax credits 1999 management believes companys effective income tax rate continue benefit 2000 beyond ongoing tax planning initiatives benefit plans companys pension plan surplus increased 270 million september 30 1999 95 million 1998 due higher discount rate continued strong investment returns assets pension plans amounted approximately 3 billion september 30 1999 company track full implementation single simplified medical plan active employees retirees january 1 2000 outlook 2000 assuming continuation present global economic conditions expect earnings per share growth approximately 10 percent expect higher sales earnings rockwell automation rockwell electronic commerce rockwell collins results 1999 higher sales earnings business regional systems government systems customer service support offsetting expected decline new aircraft production commercial air transport market financial condition rockwells strong financial position provides substantial flexibility acquisitions investments new product development technology cash generated operations 940 million 1999 30 percent 723 million 1998 free cash flow 1999 594 million increase 256 million 338 million free cash flow 1998 higher cash generation 1999 driven improvements working capital management supplier management cost reductions company defines free cash flow internal performance measurement cash provided operating activities including proceeds dispositions property reduced capital expenditures companys definition free cash flow may different definitions used companies cash used investing activities 420 million 1999 compared 465 million 1998 capital expenditures 1999 377 million consisted primarily investments facilities machinery equipment integrated enterprisewide information systems facilitate growth increase operating efficiencies addition company used 241 million acquisition six new businesses 1999 cash used acquisitions partially offset 198 million proceeds received sale property businesses including companys railroad electronics business north american transformer business capital expenditures 2000 expected approximate 400 million company continues invest heavily research new product development investment totaled 422 million 1999 five percent 402 million 1998 new product development rockwell collins 15 percent 1998 due higher investment passenger systems business company expects level product development continue 2000 addition internally generated cash company access existing financing sources including public debt markets approximately 13 billion unsecured credit facilities various banks companys debttototalcapital ratio september 30 1999 29 percent compared 25 percent september 30 1998 1999 company completed 500 million stock repurchase program initiated 1997 board directors approved additional 250 million stock repurchase program company spent approximately 172 million 1999 connection programs september 30 1999 approximately 242 million remaining current 250 million stock repurchase program cash dividends shareowners 194 million 102 per share 1999 compared 202 million 102 per share 1998 year 2000 readiness disclosure company substantially completed comprehensive fivephased year 2000 remediation project inventory assessment strategy phases completed early 1999 conversionupgrade testing phases essentially complete september 30 1999 companys recent efforts focused upon development year 2000 contingency plans deal unanticipated year 2000 situations items remediated order minimize risk disruption customers businesses management believes companys products mission critical components business systems infrastructure supporting systems ready transition year 2000 beyond despite companys internal state readiness year 2000 business operations still negatively affected external year 2000 failures especially supply chain relates critical manufacturing suppliers material suppliers infrastructure utilities communications transportation services suppliers year 2000 failure critical supplier could result temporary slowdown cessation production company duration cannot reasonably estimated possible company attempted reduce risk various means assessing year 2000 readiness critical suppliers including reviewing responses standard year 2000 questionnaire reviewing public year 2000 readiness statements engaging followup actions necessary evaluate year 2000 readiness top five percent critical manufacturing material suppliers company conducted onsite reviews monitored specific year 2000 milestones review suppliers readiness compliance products services current estimate year 2000 total project costs approximately 42 million includes cost purchasing certain hardware software purchased hardware software capitalized accordance normal policy september 30 1999 approximately 95 percent total project cost spent varying definitions compliance year 2000 array products services sold company today past may lead claims whose effect company currently estimable company product general liability insurance policies provide coverage event certain product failures company however purchased year 2000 specific insurance managements view cost prohibitive likely little value many cases company contractually limits disclaims consequential damages companys sales contracts assurance given aggregate cost defending resolving claims materially adversely affect companys results operations although companys agreements manufacturers others purchases products contain provisions requiring parties indemnify company certain circumstances assurance indemnification arrangements would cover companys potential liabilities costs related claims third parties related year 2000 issue company developing contingency plans address potential year 2000 events september 30 1999 approximately 85 percent companys year 2000 contingency plans developed process includes identification key business processes assessment exposure year 2000related incidents outlining actions taken actions include identifying alternate suppliers prestocking critical inventory items forming rapid response teams ensure normal business operations continue unaffected respect operations direct control management currently expect view year 2000 readiness efforts diversity suppliers customers occurrences year 2000 failures material adverse effect financial position results operations company however evaluation ongoing expect new different information become available us consequently guarantee material elements year 2000 ready time environment likely instances failure could cause disruptions business processes likelihood effects failures cannot estimated quantitative qualitative disclosures market risk company exposed market risk normal course business changes interest rates foreign currency exchange rates exposure risks managed combination normal operating financing activities respect foreign currency transactions derivative financial instruments form foreign currency forward exchange contracts interest rate risk addition using cash provided normal operating activities company utilizes combination shortterm longterm debt finance operations company exposed interest rate risk debt obligations company shortterm debt obligations consisting commercial paper foreign bank borrowings carrying values 187 million 154 million september 30 1999 1998 respectively companys results operations affected changes market interest rates shortterm obligations market interest rates would averaged 10 percent higher actual levels either 1999 1998 effect companys results operations would material fair values obligations approximated carrying values september 30 1999 1998 would materially affected changes market interest rates september 30 1999 1998 company outstanding fixed rate longterm debt obligations carrying values 913 million 910 million respectively fair value debt 836 million 962 million september 30 1999 1998 respectively potential loss fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt company currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect companys results operations shareowners equity foreign currency risk company global electronic controls communications company conducts significant portion business activities outside united states currencies united states dollar company enters foreign currency forward exchange contracts ordinary course business protect adverse currency rate fluctuations firm foreign currency transactions addition company enters contracts conservatively hedge certain forecasted foreign currency transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes substantial majority contracts entered order hedge firm commitments remainder entered hedge forecasted transactions generally accepted accounting principles gains losses contracts firm commitments deferred accumulated comprehensive income loss included measurement underlying foreign currency transaction hedged gains losses contracts relating forecasted transactions recognized current results operations september 30 1999 1998 company outstanding foreign currency forward exchange contracts notional amounts 708 million 578 million respectively primarily consisting contracts exchange euro british pound sterling canadian dollar swiss franc notional amounts stated us dollar equivalents exchange rates effect time contract initiation hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material results operations financial position company cautionary statement annual report contains statements including certain projections business trends accompanied phrases believes estimates expects high expectations could likely anticipates similar expressions forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control domestic foreign government spending budgetary trade policies demand market acceptance new existing products successful development advanced technologies competitive product pricing pressures timely completion year 2000 software modifications company key suppliers customers governments implementation restructuring actions accordance managements plans uncertainties litigation well risks uncertainties including limited detailed time companys securities exchange commission filings forwardlooking statements made date hereof company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise item 8item 7 managements discussion analysis financial condition results operations results operations summary results operations information respect composition segment operating earnings contained note 17 notes consolidated financial statements financial statements b 2000 company changed method determining cost certain automation inventories lifo method fifo method additional information regarding change see item 6 selected financial data page 11 hereof note 1 notes consolidated financial statements financial statements 2000 compared 1999 sales increased 72 billion 2000 70 billion 1999 primarily due continued growth rockwell collins composition sales follows billions earnings per share 2000 335 12 percent comparable 1999 earnings 300 related income increased 57 million 636 million 579 million earnings per share 2000 reflect benefits companys stock repurchase program lower effective income tax rate automations sales 44 billion 2000 slightly higher 1999 despite continued sluggish north american markets particularly automotive related spending projects weaker euro lower volume motors business increase sales attributable businesses acquired 2000 offset absence sales north american transformer business disposed fourth quarter 1999 automation achieved record operating earnings 667 million 2000 driven benefits manufacturing process improvements material cost reductions offset investments new product development material cost increases resulting certain part shortages operating earnings 2000 included approximately 15 million charges associated ongoing process improvement productivity initiatives operating earnings percent sales 151 percent 2000 compared 150 percent 1999 avionics communications achieved record sales operating earnings 2000 sales increased 120 million 2000 25 billion 24 billion 1999 business regional systems passenger systems government systems aviation services businesses posted sales increases 2000 including approximately 20 million sales attributable sony trans com acquisition sales increases businesses offset expected decline air transport systems business resulted decrease new aircraft production commercial air transport market avionics communications sales increased nearly 30 percent since 1998 avionics communications also achieved record operating earnings 447 million 2000 increase 33 million 1999s operating earnings 414 million increased operating earnings primarily attributable higher sales business regional systems business operating earnings percent sales 178 percent 2000 compared 173 percent 1999 sales rockwell electronic commerce science center combined businesses 20 million 217 million 2000 237 million 1999 due lower sales rockwell electronic commerce rockwell electronic commerce science center experienced operating loss 9 million 2000 compared operating earnings 30 million 1999 results 2000 include approximately 10 million charges associated realignment rockwell electronic commerce aimed sharpening market focus responding better customer needs optimizing operating performance operating earnings 1999 included 14 million gain resulting resolution intellectual property matter general corporatenet 2000 included gain 32 million sale real estate colorado springs colorado 28 million gain resulting demutualization metropolitan life insurance company corporate expenses 2000 included 11 million related strategic investments sourcealliancecom inflight network joint venture news corporation general corporatenet 1999 included charges approximately 37 million costs incurred connection companys relocation corporate office 29 million loss associated writeoff investment goss graphics systems inc preferred stock 1999 compared 1998 sales increased four percent 1999 70 billion 68 billion 1998 due strong growth rockwell collins composition sales follows billions earnings per share continuing operations 1999 300 29 percent comparable 1998 earnings special items 234 related income increased 116 million 579 million 463 million 1998 automations sales 44 billion 1999 three percent 1998 due 130 million sales decline motors business despite sluggish markets automation posted operating earnings 660 million 1999 automations higher operating performance driven significant improvements manufacturing processes material cost reductions offset investments new product development launch costs operating earnings 1999 also included 9 million charge related consolidation power systems businesses operating results 1998 included 16 million gain related favorable resolution certain environmental matters exxon corporation operating earnings percent sales 150 percent 1999 compared 141 percent 1998 avionics communications achieved 21 percent increase sales 1999 24 billion 20 billion 1998 rockwell collins businesses passenger systems government systems air transport business regional systems posted sales increases 1999 rockwell collins also generated 34 percent increase customer service support revenue 1999 rockwell collins operating earnings 1999 414 million 36 percent 1998 operating earnings 305 million excluding 35 million charge 1998 estimated loss government systems contract higher operating earnings 1999 driven outstanding performance air transport business regional systems businesses operating earnings percent sales 1999 173 percent compared 154 percent 1998 excluding 35 million contract charge sales rockwell electronic commerce science center increased five percent 1999 237 million operating earnings 1999 30 million included approximately 14 million resulting favorable resolution intellectual property matter increase general corporate expenses 1999 due charges approximately 37 million costs incurred connection companys relocation corporate office 29 million loss associated writeoff investment goss graphics systems inc preferred stock special charges 1998 related business segments follows automation 488 million avionics communications 88 million businesses 11 million corporate 10 million december 31 1998 company completed spinoff semiconductor systems independent separately traded publicly held company distributing outstanding shares conexant companys shareowners prorata basis acquisitions company completed three acquisitions 2000 complement companys product offerings strengthen technologies total cost acquisitions 193 million 97 million allocated intangible assets including developed technology patents assembled workforce goodwill intangible assets amortized straightline basis periods ranging five fifteen years rockwell automation acquired entek ird international corporation entek acquired substantially assets assumed certain liabilities systems modeling corporation smc entek provider machinery condition monitoring solutions acquisition increase rockwells ability provide valueadded services reduce customers downtime maintenance costs manufacturing facilities smc developer shop floor scheduling simulation modeling software acquisition smc help rockwell automation round manufacturing businessware strategy adding additional capabilities rockwell collins acquired substantially assets assumed substantially liabilities sony trans com inc stci producer inflight entertainment ife systems commercial aircraft acquisition stci part rockwell collins passenger systems allow rockwell collins tailor ife systems airlines widebody narrowbody fleets combined businesses expected generate revenues excess 500 million 2001 october 2000 rockwell collins entered agreement acquire ksystems inc parent kaiser aerospace electronics corp kaec leading supplier cockpit display solutions tactical aircraft optical technologies instrumentation communication specialized aircraft products defense aerospace industry purchase price 300 million acquisition significantly strengthen core capabilities rockwell collins transaction expected close first quarter 2001 company intends finance acquisition shortterm borrowings income taxes companys effective income tax rate declined 326 percent 2000 346 percent 1999 improvement reflects benefits development implementation strategies achieve meaningful sustainable tax rate reductions strategies include utilization next years foreign tax credit carryforwards lower state income tax rates lower taxes associated companys growing international business due rationalization european distribution warehousing customer support operations addition effective income tax rate 2000 future years benefit conversion rockwell salaried retirement savings plan taxadvantaged employee stock ownership plan management believes companys effective income tax rate continue benefit 2001 beyond ongoing tax planning initiatives benefit plans excess pension assets pension liabilities increased 427 million september 30 2000 270 million 1999 due higher discount rate continued strong investment returns assets pension plans amounted approximately 32 billion september 30 2000 outlook 2001 management continues expect earnings per share 2001 range 310 320 management seen improvement automation markets expects first quarter 2001 results somewhat better previous guidance 65 cents per share expectations 2001 include 20 cents dilution related investments joint ventures acquisitions 7 cents dilution related foreign currency exchange rates financial condition rockwells strong cash flow excellent financial condition provides substantial flexibility acquisitions investments new product development technologies cash generated operations 926 million 2000 1999 free cash flow 2000 659 million increase 65 million 594 million free cash flow 1999 higher cash generation 2000 primarily driven higher earnings lower capital expenditures company defines free cash flow internal performance measurement cash provided operating activities including proceeds dispositions property reduced capital expenditures companys definition free cash flow may different definitions used companies management expects free cash flow 2001 approximate 500 million cash used investing activities 449 million 2000 compared 420 million 1999 capital expenditures 2000 315 million consisted primarily investments facilities machinery equipment integrated enterprisewide information systems facilitate growth increase operating efficiencies addition company used 193 million acquisition three new businesses 2000 capital expenditures 2001 expected somewhat higher 2000 company continues invest heavily research new product development investments totaled 474 million 2000 12 percent 422 million 1999 new product development rockwell collins 15 percent 1999 primarily due higher investment business regional systems business company expects level product development continue 2001 addition internallygenerated cash company access existing financing sources including public debt markets approximately 12 billion unsecured credit facilities various banks companys debttototalcapital ratio september 30 2000 26 percent compared 30 percent september 30 1999 2000 company completed 250 million stock repurchase program initiated 1999 board directors approved additional 250 million stock repurchase program company spent approximately 325 million purchase approximately eight million shares 2000 connection programs september 30 2000 approximately 167 million remaining current 250 million stock repurchase program cash dividends shareowners 192 million 102 per share 2000 compared 194 million 102 per share 1999 quantitative qualitative disclosures market risk company exposed market risk normal course business changes interest rates foreign currency exchange rates exposure risks managed combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition using cash provided normal operating activities company utilizes combination shortterm longterm debt finance operations company exposed interest rate risk certain debt obligations company shortterm debt obligations consisting commercial paper bank borrowings carrying values 15 million 187 million september 30 2000 1999 respectively companys results operations affected changes market interest rates shortterm obligations market interest rates would averaged 10 percent higher actual levels either 2000 1999 effect companys results operations would material fair values obligations approximated carrying values september 30 2000 1999 would materially affected changes market interest rates september 30 2000 1999 company outstanding fixed rate longterm debt obligations carrying values 925 million 913 million respectively fair value debt 843 million 836 million september 30 2000 1999 respectively potential loss fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt company currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect companys results operations shareowners equity february 2000 company entered interest rate swap contract swap effectively converted certain fixed rate debt floating rate debt october 24 2000 swap terminated net gain 16 million gain amortized reduction interest expense remaining term companys 615 notes payable 2008 foreign currency risk company global electronic controls communications company conducts significant portion business activities outside united states currencies united states dollar company enters foreign currency forward exchange contracts ordinary course business protect adverse currency rate fluctuations firm foreign currency transactions addition company enters contracts conservatively hedge certain forecasted foreign currency transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes effective july 1 2000 company accounts derivatives statement financial accounting standards 133 accounting derivative instruments hedging activities requires company record derivatives balance sheet fair value regardless purpose intent holding derivatives hedges adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivatives change fair value immediately recognized earnings september 30 2000 1999 company outstanding foreign currency forward exchange contracts notional amounts 992 million 708 million respectively primarily consisting contracts exchange euro pound sterling canadian dollar australian dollar swiss franc notional amounts stated us dollar equivalents spot exchange rates respective dates hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material financial condition results operations shareowners equity company cautionary statement annual report contains statements including certain projections business trends accompanied phrases believes estimates expects could likely anticipates intends similar expressions forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control domestic foreign government spending budgetary trade policies demand market acceptance new existing products successful development advanced technologies competitive product pricing pressures uncertainties litigation well risks uncertainties including limited detailed time companys securities exchange commission filings forwardlooking statements made date hereof company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise item 8item 7 managements discussion analysis financial condition results operations results operations summary results operations represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 companys 50 percent ownership interest rsc accounted using equity method companys proportional share rscs earnings losses included general corporatenet b information respect composition segment operating earnings contained note 19 notes consolidated financial statements financial statements 2001 compared 2000 sales 4279 million 2001 compared 4656 million 2000 income continuing operations 2001 125 million 68 cents per diluted share compared 344 million 181 per diluted share 2000 2001 results continuing operations include special charges 91 million 60 million tax 32 cents per share costs associated realignment actions partially offset 18 million gain 12 million tax six cents per share resulting favorable settlement intellectual property matter control systems control systems sales 2001 3359 million compared 3677 million 2000 reflecting principally depressed market conditions automation products united states 2001 shipments outside united states effect currency rate fluctuations higher included increases six percent europe 13 percent asia pacific 13 percent latin america sales 2001 reduced approximately 96 million due stronger dollar 2001 particularly euro relative foreign currency exchange rates period year ago segment operating earnings 426 million 2001 compared 640 million 2000 decrease due lower volume costs resulting planned lower capacity utilization control systems return sales 2001 127 percent compared 174 percent 2000 power systems power systems sales 2001 710 million compared 762 million 2000 increase motors business offset lower volume mechanical products distributors continue pare inventories segment operating earnings 2001 38 million compared 65 million period year ago primarily due lower volume unfavorable product mix power systems return sales 54 percent 2001 compared 85 percent 2000 electronic commerce sales electronic commerce 150 million 2001 compared 168 million 2000 decrease due depressed market conditions segment operating earnings 7 million 2001 compared operating loss 16 million 2000 increase due successful implementation cost saving initiatives absence approximately 10 million charges related initiatives reflected results 2000 effective june 29 2001 rockwell collins company 50 percent ownership interest rsc formerly whollyowned subsidiary rockwell known rockwell science center results rockwell science center included continuing operations third quarter 2001 sales rockwell science center first nine months 2001 60 million compared 49 million full year 2000 increase primarily due higher sales united states government segment operating earnings decreased 3 million first nine months 2001 compared 7 million full year 2000 due lower royalty income general corporate net general corporatenet 2001 included gain 18 million resulting favorable settlement intellectual property matter general corporatenet 2000 included 32 million gain sale real estate 28 million income resulting metropolitan life insurance company demutualization special charges company recorded charges 91 million 60 million tax 32 cents per diluted share costs associated realignment business operations reduce costs response continued decline demand industrial automation markets total cash expenditures related realignment actions expected approximately 51 million substantially spending completed end first quarter fiscal 2002 management expects annual pretax savings resulting actions approximately 150 million portion expected reinvested growth initiatives special charges related business segments follows control systems 76 million power systems 5 million corporate 10 million see note 3 special charges notes consolidated financial statements financial statements 2000 compared 1999 sales 4656 million 2000 compared 4665 million 1999 earnings per diluted share continuing operations 2000 181 23 percent comparable 1999 earnings 147 related income continuing operations increased 61 million 344 million 283 million earnings per share 2000 reflect benefits companys stock repurchase program lower effective income tax rate control systems control systems sales 3677 million 2000 slightly higher 1999 despite continued sluggish north american markets particularly automotive related spending projects weaker euro increase sales attributable businesses acquired 2000 offset absence sales north american transformer business disposed fourth quarter 1999 operating earnings 640 million 2000 compared 642 million 1999 2000 control systems made investments new product development experienced material cost increases resulting certain parts shortages operating earnings 2000 include approximately 15 million charges associated ongoing process improvement productivity initiatives operating earnings percent sales 174 percent 2000 compared 176 percent 1999 power systems power systems sales decreased 20 million 1999 2000 primarily result lower volume motors business segment operating earnings increased 65 million 2000 53 million 1999 due benefits manufacturing process improvements material cost reductions operating earnings percentage sales 85 percent 2000 compared 68 percent 1999 electronic commerce sales electronic commerce 34 million 168 million 2000 202 million 1999 electronic commerce experienced operating loss 16 million 2000 compared operating earnings 12 million 1999 results 2000 include approximately 10 million charges associated realignment aimed sharpening market focus better responding customer needs optimizing operating performance sales rockwell science center increased 14 million 1999 2000 segment operating earnings decreased 7 million 2000 18 million 1999 operating earnings 1999 included 14 million gain resulting favorable settlement intellectual property matter general corporate net general corporatenet 2000 included gain 32 million sale real estate colorado springs colorado 28 million income resulting demutualization metropolitan life insurance company corporate expenses 2000 included 5 million related strategic investments sourcealliancecom general corporatenet 1999 included charges approximately 37 million costs incurred connection companys relocation corporate office 29 million loss associated writeoff investment goss graphic systems inc preferred stock disposition businesses 2000 company recognized 14 million loss sale power systems business 1999 company recognized 32 million gain sale control systems north american transformer business discontinued operations june 29 2001 company completed spinoff rockwell collins avionics communications business independent separately traded publicly held company connection spinoff outstanding shares rockwell collins inc distributed rockwell shareowners basis one rockwell collins share outstanding rockwell share commensurate spinoff rockwell collins made special payment company 300 million company recorded decrease shareowners equity net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company included 2001 income discontinued operations 21 million costs related spinoff december 31 1998 company completed spinoff semiconductor systems independent separately traded publicly held company distributing outstanding shares conexant companys shareowners prorata basis acquisitions 2001 control systems acquired batch software services business sequencia corporation total cost acquisition 6 million allocated intangible assets including developed technology assembled workforce excess purchase price amounts assigned intangible assets recorded goodwill acquisition expand control systems portfolio manufacturing businessware solutions batch application space 2000 control systems acquired entek ird international corporation entek acquired substantially assets assumed certain liabilities systems modeling corporation smc entek provider machinery condition monitoring solutions acquisition increased rockwells ability provide valueadded services reduce customers downtime maintenance costs manufacturing facilities smc developer shop floor scheduling simulation modeling software acquisition smc complements control systems manufacturing businessware strategy providing additional capabilities total cost acquisitions 70 million 61 million allocated intangible assets including developed technology excess purchase price amounts assigned tangible intangible assets recorded goodwill income taxes companys effective income tax rate declined 280 percent excluding tax effect special items 2001 323 percent 2000 improvement reflects benefits development implementation strategies achieve meaningful sustainable tax rate reductions well certain tax refund claims 2001 strategies include utilization foreign tax credits lower state income tax rates lower taxes associated tax effective structuring international business addition effective income tax rate continues benefit conversion rockwell salaried retirement savings plan taxadvantaged employee stock ownership plan management believes companys effective income tax rate continue benefit 2002 beyond ongoing tax planning initiatives outlook 2002 due continuing weak manufacturing environment company assuming sequential three percent sales decline first quarter 2002 event earnings per share expected modestly higher fourth quarter earnings due continued implementation cost reduction actions longer term results continue difficult project given uncertain market conditions financial condition cash generated operations 335 million 2001 compared 645 million 2000 free cash flow 2001 178 million compared 428 million 2000 lower cash generation 2001 driven primarily lower earnings partially offset reduced capital expenditures company defines free cash flow internal performance measurement cash provided operating activities reduced capital expenditures companys definition free cash flow may different definitions used companies cash provided investing activities 153 million 2001 compared cash used investing activities 228 million 2000 investing activities 2001 include special payment 300 million received rockwell collins connection spinoff june 29 2001 capital expenditures 2001 157 million 60 million less 2000 consisted primarily investments facilities machinery equipment integrated information systems facilitate growth increase operating efficiencies capital expenditures 2002 expected approximate 2001 levels addition internallygenerated cash company access existing financing sources including public debt markets companys approximately 1 billion unsecured credit facilities various banks companys debttototalcapital ratio september 30 2001 37 percent compared 26 percent september 30 2000 board directors approved 250 million stock repurchase program company spent approximately 63 million purchase approximately 17 million shares 2001 connection program september 30 2001 approximately 104 million remaining companys current 250 million stock repurchase program cash dividends shareowners 170 million 093 per share 2001 compared 192 million 102 per share 2000 effective spinoff rockwell collins company anticipates pay quarterly cash dividends annual basis equal 066 per share however declaration payment dividends company sole discretion companys board directors quantitative qualitative disclosures market risk company exposed market risk normal course business changes interest rates foreign currency exchange rates exposure risks managed combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition using cash provided normal operating activities company utilizes combination shortterm longterm debt finance operations company exposed interest rate risk debt obligations company shortterm debt obligations consisting bank borrowings carrying value 9 million 15 million september 30 2001 2000 respectively companys results operations affected changes market interest rates shortterm obligations market interest rates would averaged 10 percent higher actual levels either 2001 2000 effect companys results operations would material fair values obligations approximated carrying values september 30 2001 2000 would materially affected changes market interest rates september 30 2001 2000 company outstanding fixed rate longterm debt obligations carrying values 923 million 925 million respectively fair value debt 887 million 843 million september 30 2001 2000 respectively potential loss fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt company currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect companys results operations shareowners equity foreign currency risk company exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies companys objective minimize exposure risks combination normal operating activities utilization foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition company enters contracts hedge certain forecasted intercompany transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes company hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant companys financial condition results operations company records derivatives balance sheet fair value regardless purpose intent holding derivatives hedges adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivatives change fair value immediately recognized earnings september 30 2001 2000 company outstanding foreign currency forward exchange contracts notional amounts 738 million 852 million respectively primarily consisting contracts exchange euro pound sterling canadian dollar australian dollar swiss franc notional amounts stated united states dollar equivalents spot exchange rates respective dates use contracts allows company manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material financial condition results operations shareowners equity company new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards sfas 141 business combinations sfas 141 statement financial accounting standards 142 goodwill intangible assets sfas 142 sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations carrying amount exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company expects adopt sfas 142 effective october 1 2001 management expects effect ceasing amortization goodwill increase net income approximately 41 million tax 22 cents per diluted share fiscal 2002 company completed assessment additional effects adopting sfas 142 august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment longlived assets longlived assets disposed sfas 144 effective fiscal years beginning december 15 2001 early adoption permitted management currently evaluating provisions sfas 144 believes effect companys financial position results operations shareowners equity resulting adoption cautionary statement annual report contains statements including certain projections business trends accompanied phrases believes estimates expects anticipates intends assumes similar expressions forwardlooking statements defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control demand market acceptance new existing products including levels capital spending industrial markets successful development advanced technologies competitive product pricing pressures terrorist attacks new york city washington dc september 11 2001 aftermath uncertainties litigation well risks uncertainties including limited detailed time companys securities exchange commission filings forwardlooking statements made date hereof company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise item 7aitem 7 management’s discussion analysis financial condition results operations critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require company make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates company believes following critical accounting policies could significant effect company’s reported results require subjective complex judgments management revenue recognition sales generally recorded following occurred agreement sale exists product delivery acceptance occurred services rendered pricing fixed determinable collection reasonably assured management required make judgments whether pricing fixed determinable whether collectibility reasonably assured company records accruals sales rebates distributors time shipment based upon historical experience liability recorded company’s primary distributor rebate program 36 million september 30 2002 35 million september 30 2001 addition company liability rebates sales incentives commercial customers distributors 32 million september 30 2002 28 million september 30 2001 allowance doubtful accounts company records allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions additional allowances doubtful accounts may required deterioration past due balances economic conditions less favorable company anticipated customerspecific circumstances financial difficulty 2002 company recorded allowance approximately 9 million fully reserve receivable due deterioration financial condition one independent distributors allowance doubtful accounts 45 million september 30 2002 43 million september 30 2001 excess obsolete inventory company records allowances excess obsolete inventory based historical estimated future demand market conditions additional inventory allowances may required future demand market conditions less favorable company estimated allowance excess obsolete inventory 53 million september 30 2002 50 million september 30 2001 impairment longlived assets company evaluates recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable company evaluates recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired company uses judgment applying impairment rules determine impairment test necessary factors company considers could trigger impairment review include significant underperformance relative historical forecasted operating results significant decrease market value asset significant change extent manner asset used significant negative industry economic trends impairment losses measured amount carrying value asset exceeds estimated fair value company required make estimates future cash flows related asset subject review estimates require assumptions demand company’s products services future market conditions technological developments assumptions include determining discount rate future growth rates 2002 company recorded pretax impairment charges 129 million 108 million aftertax connection adoption sfas 142 additional information regarding impairment charges contained note 3 notes consolidated financial statements financial statements product warranty obligations company records liability product warranty obligations time sale customer based upon historical warranty experience company also records liability specific warranty matters become known reasonably estimable additional provision product warranty obligations may required actual product performance less favorable anticipated liability product warranty obligations 31 million september 30 2002 34 million september 30 2001 retirement benefits pension benefits pension costs obligations actuarially determined affected assumptions including discount rate expected rate return plan assets assumed annual rate compensation increase plan employees among factors changes discount rate differences actual results assumption affect amount pension expense recognized future periods fiscal 2002 based annual review actuarial assumptions company reduced longterm expected rate return plan assets 975 percent 90 percent discount rate 80 percent 75 percent pension plan covering employees factors equal changes resulted incremental pension expense 2002 approximately 12 million fiscal year 2003 company assuming expected rate return plan assets 85 percent discount rate 70 percent factors equal assuming actual experience consistent actuarial assumptions company expects fiscal year 2003 pension expense increase approximately 15 million compared fiscal 2002 including recognition actuarial losses related primarily accumulated difference actual expected returns pension plan assets addition required contribute amount company’s primary qualified pension plan trust covering majority employees company may choose contribute maximum allowable tax deductible contribution approximately 50 million fiscal 2003 additional information regarding pension benefits available note 12 notes consolidated financial statement financial statements postretirement benefits costs obligation postretirement benefits pension also actuarially determined affected assumptions including discount rate expected future increase per capita costs covered postretirement health care benefits changes discount rate differences actual assumed per capita health care costs may affect recorded amount expense future periods effective october 1 2002 company amended us postretirement health care benefit program order mitigate increasing cost postretirement health care services effect change reduce benefit obligation 62 million net periodic benefit cost 2003 approximately 32 million approximately 20 percent lower cost would without implementing change additional information regarding postretirement benefits available note 12 notes consolidated financial statements financial statements selfinsurance liabilities company’s selfinsurance programs include primarily product liability workers’ compensation product liability workers’ compensation company selfinsures first dollar loss specified retention levels eligible losses excess selfinsurance retention levels stated limits liability covered policies purchased thirdparty insurers aggregate selfinsurance liability estimated using company’s claim experience risk exposure levels periods valued adjustments selfinsured liabilities may required reflect emerging claims experience factors inflationary trends jury awards liability selfinsurance programs 48 million september 30 2002 46 million september 30 2001 litigation claims contingencies company records environmental liabilities based estimates known environmental remediation exposures utilizing information received independent environmental consultants liabilities include accruals sites owned company thirdparty sites company determined potentially responsible party thirdparty sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party liability recorded total estimated costs remediation future expenditures environmental remediation obligations discounted present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change financial condition potentially responsible parties adversely affected estimate company’s environmental liabilities may change liability environmental matters net related receivables 28 million september 30 2002 additional information regarding litigation claims contingencies included note 19 notes consolidated financial statements financial statements income taxes company records liability potential tax assessments based estimate potential exposure liability potential tax assessments may affected new laws new interpretations laws rulings tax authorities among reasons due subjectivity complex nature underlying issues actual payments assessments may differ estimates extent company’s estimates differ actual payments assessments income tax expense adjusted 2002 company resolved certain matters previous years resulting 48 million reduction income tax provision 2001 company reached agreement various taxing authorities refund claims related certain prior years recorded 22 million reduction income tax provision additional information regarding income taxes included note 17 notes consolidated financial statements financial statements company recorded valuation allowance 23 million september 30 2002 majority deferred tax assets related net operating loss carryforwards capital loss carryforwards state tax credit carryforwards valuation allowance based evaluation uncertainty amounts net operating loss carryforwards capital loss carryforwards state tax credit carryforwards expected realized increase income would result company determines could utilize net operating loss carryforwards capital loss carryforwards state tax credit carryforwards originally expected end interim reporting period company estimates effective tax rate expected applicable full fiscal year estimated effective tax rate contemplates expected jurisdiction income earned eg united states compared nonunited states well tax planning strategies actual results different company’s estimates adjustments effective tax rate may required period determination made results operations summary results operations represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporate net b information respect composition segment operating earnings contained note 20 notes consolidated financial statements financial statements c certain amounts prior periods reclassified reflect transfer management responsibility business control systems power systems effective january 1 2002 addition certain amounts reclassified cost sales result adoption eitf 0114 effective october 1 2001 company adopted statement financial accounting standards 142 goodwill intangible assets sfas 142 result adopting sfas 142 company longer amortizes goodwill certain intangible assets deemed indefinite useful life amortization related goodwill indefinite useful life intangible assets 56 million 2001 53 million 2000 addition company recorded charge 56 million 35 million tax 19 cents per diluted share related trademark impairment 73 million tax 39 cents per diluted share related goodwill impairment connection adoption sfas 142 amount included goodwill purchase accounting items 2002 includes amortization expense acquired intangible assets indefinite life depreciation expense purchase accounting adjustments demand company’s products largely driven trends industrial spending sales affected level industrial production activity customers’ new product introductions upgrades expansions existing manufacturing facilities creation new manufacturing facilities due recent weak business conditions especially manufacturing economy manufacturers operating historically low levels plant capacity utilization condition results tendency defer significant amounts capital investment environment improves capacity utilization united states published federal reserve decreased 802 percent december 2000 759 percent september 2002 result demand company’s products deteriorated results reflected operating results 2002 2001 2002 compared 2001 sales 3909 million 2002 compared 4285 million 2001 income continuing operations accounting change 2002 226 million 120 per diluted share compared 125 million 68 cents per diluted share 2001 2002 results continuing operations include reduction income tax provision 48 million 26 cents per diluted share favorable resolution certain tax matters income 9 million 7 million tax four cents per diluted share favorable settlement intellectual property matters 2001 income continuing operations accounting change would 198 million 107 per diluted share excluding amortization goodwill certain intangible assets 56 million 47 million tax 25 cents per diluted share well special charges 91 million 60 million tax 32 cents per diluted share costs associated realignment actions income 18 million 12 million tax six cents per diluted share resulting favorable settlement intellectual property matter reduction income tax provision 22 million 12 cents per diluted share favorable resolution certain tax matters control systems control systems’ sales 2002 3060 million compared 3327 million 2001 decrease primarily result continued depressed market conditions automation products sales declined 9 percent united states 2002 compared 2001 nonunited states shipments exclude effect foreign currency translation declined 4 percent compared 2001 primarily result 9 percent decline europe excluding effect acquisitions nonunited states shipments declined 6 percent compared 2001 including 11 percent decrease europe despite overall sales decline sales logix™ integrated architecture products increased 31 percent sales global manufacturing solutions business increased 6 percent 2001 driven increases process engineering solutions sales acquisition propack segment operating earnings 324 million 2002 compared 425 million 2001 decrease primarily due lower volume especially higher margin cpag acig products addition control systems continued invest growth global manufacturing solutions business control systems’ return sales 2002 106 percent compared 128 percent 2001 power systems power systems’ sales 2002 716 million compared 748 million 2001 decline result lower demand due depressed market conditions segment operating earnings increased 53 million 2002 39 million 2001 improvement result cost savings actions taken fourth quarter 2001 ongoing initiatives improve productivity power systems’ return sales 74 percent 2002 compared 52 percent 2001 firstpoint contact firstpoint contact’s sales 2002 133 million compared 150 million 2001 decline primarily due decreased customer capital spending telecommunications products segment operating earnings 4 million 2002 compared 7 million 2001 included 2002 results charges 4 million related severance asset impairment general corporate net general corporate expenses 57 million 2002 compared 53 million 2001 general corporate expenses included income settlement intellectual property matters 9 million 2002 18 million 2001 gain sale real estate 5 million 2001 also 2001 general corporate expenses included 3 million costs associated spinoff rockwell collins excluding items general corporate expenses decreased 73 million 2001 66 million 2002 primarily result lower corporate spending interest expense interest expense decreased 66 million 2002 83 million 2001 decrease due lower weightedaverage borrowings lower commercial paper borrowing rates 2002 company used commercial paper second quarter 2001 fund acquisition rockwell collins third quarter 2001 company received special payment 300 million rockwell collins used repay commercial paper borrowings 2001 compared 2000 sales 4285 million 2001 compared 4661 million 2000 income continuing operations 2001 125 million 68 cents per diluted share compared 344 million 181 per diluted share 2000 2001 results continuing operations included special charges 91 million 60 million tax 32 cents per diluted share costs associated realignment actions partially offset 18 million gain 12 million tax six cents per diluted share resulting favorable settlement intellectual property matter control systems control systems’ sales 2001 3327 million compared 3641 million 2000 reflecting principally depressed market conditions automation products united states 2001 nonunited states shipments exclude effect foreign currency translation higher included increases six percent europe 13 percent asia pacific 13 percent latin america sales 2001 reduced approximately 96 million due stronger dollar 2001 particularly euro relative foreign currency exchange rates 2000 segment operating earnings 425 million 2001 compared 636 million 2000 decrease due lower volume costs resulting planned lower capacity utilization control systems’ return sales 2001 128 percent compared 175 percent 2000 power systems power systems’ sales 2001 748 million compared 803 million 2000 increase electrical business offset lower volume mechanical products distributors continued pare inventories segment operating earnings 2001 39 million compared 69 million 2000 primarily due lower volume unfavorable product mix power systems’ return sales 52 percent 2001 compared 86 percent 2000 firstpoint contact sales firstpoint contact 150 million 2001 compared 168 million 2000 decrease due depressed market conditions telecommunications sector segment operating earnings 7 million 2001 compared operating loss 16 million 2000 increase due successful implementation cost saving initiatives absence approximately 10 million charges related initiatives reflected results 2000 general corporate net general corporate expenses 2001 included income 18 million resulting favorable settlement intellectual property matter 3 million costs associated spinoff rockwell collins 5 million gain sale real estate general corporate expenses 2000 included 32 million gain sale real estate 28 million income resulting metropolitan life insurance company demutualization special charges 2001 company recorded charges 91 million 60 million tax 32 cents per diluted share costs associated realignment business operations reduce costs response continued decline demand industrial automation markets total cash expenditures related realignment actions approximately 50 million 43 million spent september 30 2002 special charges related business segments follows control systems 76 million power systems 5 million corporate 10 million see note 13 special charges notes consolidated financial statements financial statements accounting change effective october 1 2001 company adopted sfas 142 standard requires companies longer amortize goodwill indefinite life intangible assets trademarks standard also requires companies evaluate goodwill indefinite life intangible assets impairment 2002 result analysis company recorded charges 56 million 35 million aftertax 19 cents per diluted share related trademark impairment 73 million aftertax 39 cents per diluted share related goodwill impairment power systems reporting unit discontinued operations discontinued operations 2002 relate net benefit 3 million resolution certain obligations related two discontinued businesses june 29 2001 company completed spinoff rockwell collins avionics communications business independent separately traded publicly held company connection spinoff outstanding shares rockwell collins distributed rockwell automation shareowners basis one rockwell collins share outstanding rockwell automation share time spinoff rockwell collins made special payment company 300 million company recorded decrease shareowner’s equity net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company included 2001 income discontinued operations 21 million costs related spinoff rockwell scientific company llc since june 29 2001 company rockwell collins owned 50 percent rockwell scientific company llc rsc formerly known rockwell science center results rockwell science center included continuing operations third quarter 2001 sales rockwell science center first nine months 2001 60 million compared 49 million full year 2000 increase primarily due higher sales united states government segment operating earnings decreased 3 million first nine months 2001 compared 7 million full year 2000 due lower royalty income beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporatenet acquisitions september 2002 company’s control systems segment acquired engineering services system integration assets spel spol sro acquisition expected accelerate establishment company complete solution provider central europe acquisition also strategically locates company region future growth opportunities may 2002 company’s control systems segment acquired assets controller division samsung electronics company limited’s mechatronics business controller division company combined existing korean business controller division form new business operates name rockwell samsung automation creates technologies design development automation products acquisition expected expand company’s existing operations korea company’s design product development capabilities support future commercial operational expansion asia pacific region march 2002 company’s control systems segment acquired stock propack data gmbh propack provider manufacturing information systems pharmaceutical regulated industries acquisition expected broaden company’s position pharmaceuticals market enhance company’s process solutions business enable company expand reach manufacturing information markets january 2002 company’s control systems segment acquired stock tesch gmbh electronic products safety relay manufacturer expanding company’s machine safety product research development capabilities aggregate cash purchase price businesses acquired 2002 majority related acquisition propack approximately 71 million assets acquired liabilities assumed recorded fair values excess purchase price estimated fair value acquired tangible intangible assets recorded goodwill 2001 company’s control systems segment acquired batch software services business sequencia corporation total cost acquisition 6 million allocated intangible assets including developed technology assembled workforce excess purchase price amounts assigned intangible assets recorded goodwill acquisition expanded control systems’ portfolio manufacturing businessware solutions batch application market 2000 company’s control systems segment acquired entek ird international corporation entek acquired substantially assets assumed certain liabilities systems modeling corporation smc entek provider machinery condition monitoring solutions acquisition increased rockwell automation’s ability provide valueadded services reduce customers’ downtime maintenance costs manufacturing facilities smc developer shop floor scheduling simulation modeling software acquisition smc complements control systems’ manufacturing businessware strategy providing additional capabilities total cost acquisitions 2000 70 million 61 million allocated intangible assets including developed technology excess purchase price amounts assigned tangible intangible assets recorded goodwill income taxes 2002 company resolved certain tax matters period 19951999 resulting 48 million reduction income tax provision excluding effect reduction effective income tax rate 2002 237 percent see note 17 notes consolidated financial statements financial statements reconciliation united states statutory rate effective income tax rate management believes effective income tax rate 2003 approximately 30 percent company anticipates filing 2003 federal research experimentation tax credit refund claim approximately 100 million years 1997 2001 claim subject audit internal revenue service ultimate potential tax benefit claim currently known therefore benefit recognized financial reporting purposes outlook indicators future direction global manufacturing economy mixed though company’s end markets generally stabilized company expect deterioration markets serves company managing cost structure tightly first quarter results include expenses targeted cost reduction actions combined normal quarterly revenue trends expected result first quarter earnings per share range 16 18 cents full year company deliver earnings growth least 15 percent 105 per share even current soft business conditions persist business conditions improve modestly company expects achieve earnings growth 25 percent 115 per share financial condition company’s cash flows operating investing financing activities reflected consolidated statement cash flows summarized following tables millions following table summarizes free cash flow company’s definition free cash flow internal performance measurement may different definitions used companies cash provided operating activities 476 million 2002 compared 335 million 2001 free cash flow 2002 372 million 24 million contribution made company’s qualified pension plan trust related spinoff rockwell collins 12 million contributions nonunited states pension trusts compared free cash flow 178 million 2001 higher cash generation 2002 driven primarily working capital improvements decrease capital expenditures cash used investing activities 175 million 2002 compared cash provided investing activities 153 million 2001 investing activities 2001 included special payment 300 million received rockwell collins connection spinoff june 29 2001 capital expenditures 2002 104 million compared 157 million 2001 capital expenditures 2003 expected 125 150 million ultimately depend business conditions addition internallygenerated cash company access existing financing sources including public debt markets unsecured credit facilities various banks company’s debttototalcapital ratio 366 percent september 30 2002 365 percent september 30 2001 2000 board directors approved 250 million stock repurchase program company spent approximately 63 million purchase approximately 17 million shares 2001 connection program purchased shares 2002 september 30 2002 approximately 104 million remaining company’s current 250 million stock repurchase program company anticipates repurchasing stock 2003 amount ultimately depend business conditions future significant uses cash expected include capital expenditures dividends shareowners acquisitions repurchases common stock connection company’s stock repurchase program may include contributions qualified pension plan trust additional information regarding pension contributions contained mda page 15 hereof addition company’s 150 million 68 notes mature april 2003 expected future uses cash funded existing cash balances cash generated operating activities commercial paper borrowings although funding may include new issue debt securities company elects utilize commercial paper markets principal source shortterm financing september 30 2002 company commercial paper borrowings outstanding year ended september 30 2002 company weighted average borrowings 68 million commercial paper program interest rates ranging 18 percent 27 percent september 30 2002 company 1 billion unsecured committed credit facilities available support commercial paper borrowings october 29 2002 company terminated credit facilities entered new credit facilities various banks 3375 million expiring october 2003 3375 million expiring october 2005 prior october 2003 company expects enter new credit facility similar credit facility expiring time amount deemed sufficient support operations pursuant terms new credit facilities company’s debt capital ratio shall exceed 60 percent outstanding commercial paper balances reduce amount available borrowings unsecured committed credit facilities company’s current commercial paper credit ratings follows moody’s p2 standard poor’s a1 fitch f1 company’s access commercial paper market adversely affected due change market conditions otherwise company would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities would likely higher cost commercial paper borrowings cash dividends shareowners 122 million 066 per share 2002 compared 170 million 093 per share 2001 prior spinoff rockwell collins company paid quarterly cash dividends annual basis equaled 102 per share since spinoff rockwell collins company paid quarterly cash dividends annual basis equal 066 per share although declaration payment dividends company sole discretion company’s board directors company expects pay quarterly dividends 2003 annual basis equal 066 per share certain company’s contractual cash obligations september 30 2002 summarized follows connection sale power systems business 2000 company entered supply agreement buyer business agreement requires minimum purchases company approximately 21 million per year december 31 2005 event purchases less 21 million given year company may incur penalties percentage amount actual purchases less contractual minimum period based upon current estimates future purchases management believe penalties payable terms agreement would material company’s business financial condition september 30 2002 company guaranteed performance conexant related 60 million lease obligation lease obligation secured real property subject lease within range estimated fair values real property management expects released guarantee december 31 2003 september 30 2002 company sole guarantor performance rsc lease agreement one rsc’s facilities total future minimum payments lease approximately 7 million lease agreement term ends 2011 effective october 2002 company rockwell collins guarantees onehalf lease obligation rsc quantitative qualitative disclosures market risk company exposed market risk normal course business changes interest rates foreign currency exchange rates exposure risks managed combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition using cash provided normal operating activities company utilizes combination shortterm longterm debt finance operations company exposed interest rate risk debt obligations company’s shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2002 2001 company commercial paper borrowings outstanding 2002 weighted average commercial paper borrowings 68 million compared 293 million 2001 september 30 2002 carrying value bank borrowings 10 million compared 9 million september 30 2001 company’s results operations affected changes market interest rates shortterm obligations market interest rates would averaged 10 percent higher actual levels either 2002 2001 effect company’s results operations would material fair values obligations approximated carrying values september 30 2002 2001 would materially affected changes market interest rates company outstanding fixed rate longterm debt obligations carrying values 919 million september 30 2002 910 million september 30 2001 fair value debt 976 million september 30 2002 898 million september 30 2001 potential loss fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt company currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect company’s results operations shareowners’ equity september 2002 company entered interest rate swap contract swap effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 421 percent september 30 2002 hypothetical 10 percent change market interest rates would material overall fair value swap company’s results operations foreign currency risk company exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies company’s objective minimize exposure risks combination normal operating activities utilization foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition company enters contracts hedge certain forecasted intercompany transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes company hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant company’s financial condition results operations company records derivatives balance sheet fair value regardless purpose intent holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivative’s change fair value immediately recognized earnings september 30 2002 2001 company outstanding foreign currency forward exchange contracts primarily consisting contracts exchange euro pound sterling canadian dollar swiss franc use contracts allows company manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material financial condition results operations shareowners’ equity company new accounting standards june 2001 financial accounting standards board issued statement financial accounting standards sfas 143 accounting asset retirement obligations sfas 143 requires entities recognize fair value liability legal obligations associated retirement tangible longlived assets period incurred reasonable estimate fair value made august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment longlived assets held used longlived assets disposed sale sfas 144 presentation discontinued operations broadened include component entity rather limited segment business also accrual future operating losses discontinued businesses longer permitted july 2002 financial accounting standards board issued sfas 146 accounting costs associated exit disposal activities sfas 146 addresses financial accounting reporting associated exit disposal activities sfas 146 company measure costs associated exit disposal activity fair value recognize costs period liability incurred rather date commitment exit disposal plan company required adopt sfas 143 sfas 144 beginning fiscal year 2003 management currently evaluating provisions sfas 143 sfas 144 believes material effect company’s financial position results operations shareowners’ equity time adoption company required adopt sfas 146 exit disposal activities initiated december 31 2002 cautionary statement annual report contains statements including certain projections business trends accompanied phrases “believes” “estimates” “expects” “anticipates” “will” similar expressions “forwardlooking statements” defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control demand market acceptance new existing products including levels capital spending industrial markets successful development advanced technologies competitive product pricing pressures future terrorist attacks uncertainties litigation well risks uncertainties including limited detailed time company’s securities exchange commission filings forwardlooking statements made date hereof company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise item 7aitem 7 management’s discussion analysis financial condition results operations critical accounting policies estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require company make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates company believes following critical accounting policies could significant effect company’s reported results require subjective complex judgments management revenue recognition sales generally recorded following occurred agreement sale exists product delivery acceptance occurred services rendered pricing fixed determinable collection reasonably assured contracts customer purchase orders generally used determine existence arrangement shipping documents customer acceptance applicable used verify delivery company assesses whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment company assesses collectibility based primarily creditworthiness customer determined credit checks analysis well customer’s payment history company records accruals customer returns rebates incentives time sale customer based upon historical experience additional accruals may required actual returns rebates incentives differ historical experience accrual rebates incentives customers 75 million september 30 2003 74 million september 30 2002 5 million september 30 2003 6 million september 30 2002 included offset accounts receivable allowance doubtful accounts company records allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions additional allowances doubtful accounts may required deterioration past due balances economic conditions less favorable company anticipated customerspecific circumstances financial difficulty 2002 company recorded allowance approximately 9 million fully reserve receivable due deterioration financial condition one independent distributors allowance doubtful accounts 28 million september 30 2003 45 million september 30 2002 decrease allowance balance primarily relates writeoff 9 million distributor receivable 3 million account collections allowance previously provided remainder decrease resulted company’s regular review allowance considering factors historical experience credit quality age accounts receivable balances excess obsolete inventory company records allowances excess obsolete inventory based historical estimated future demand market conditions additional inventory allowances may required future demand market conditions less favorable company estimated allowance excess obsolete inventory 56 million september 30 2003 53 million september 30 2002 impairment longlived assets company evaluates recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable company evaluates recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired company uses judgment applying impairment rules determine impairment test necessary factors company considers could trigger impairment review include significant underperformance relative historical forecasted operating results significant decrease market value asset significant change extent manner asset used significant negative industry economic trends impairment losses measured amount carrying value asset exceeds estimated fair value determine fair value company required make estimates future cash flows related asset subject review estimates require assumptions demand company’s products services future market conditions technological developments assumptions include determining discount rate future growth rates 2002 company recorded pretax impairment charges 129 million 108 million tax connection adoption sfas 142 additional information regarding impairment charges contained note 3 notes consolidated financial statements financial statements product warranty obligations company records liability product warranty obligations time sale customer based upon historical warranty experience company also records liability specific warranty matters become known reasonably estimable additional provision product warranty obligations may required actual product performance less favorable anticipated liability product warranty obligations 29 million september 30 2003 31 million september 30 2002 retirement benefits pension benefits pension costs obligations actuarially determined affected annually reviewed assumptions including discount rate expected rate return plan assets assumed annual rate compensation increase plan employees among factors changes discount rate differences assumptions made actual experience affect amount pension expense recognized future periods pension expense fiscal 2003 42 million compared 25 million fiscal 2002 fiscal 2003 pension expense determined using following actuarial assumptions discount rate 70 percent compared 75 percent fiscal 2002 expected rate return plan assets 85 percent compared 90 percent fiscal 2002 assumed rate compensation increase 45 percent compared 45 percent fiscal 2002 factors equal changes primary cause incremental pension expense 2003 2002 approximately 17 million fiscal year 2004 company assuming expected rate return plan assets 85 percent discount rate 60 percent determining net periodic benefit cost factors equal assuming actual experience consistent actuarial assumptions company expects fiscal year 2004 pension expense increase approximately 24 million compared fiscal 2003 increase primarily attributable change discount rate includes recognition actuarial losses related primarily accumulated difference actual expected returns pension plan assets june 2003 company made 50 million voluntary contribution company’s primary us qualified pension plan trust compared 2002 contribution 24 million related spinoff rockwell collins addition required contribute amount company’s primary us qualified pension plan trust fiscal 2004 company may choose contribute maximum allowable tax deductible contribution approximately 200 million company currently anticipates making contribution fiscal 2004 primary us qualified pension plan trust amount approximates 2003 contribution additional information regarding pension benefits including company’s pension obligation minimum pension liability adjustment contained note 13 notes consolidated financial statements financial statements postretirement benefits costs obligations postretirement benefits pension also actuarially determined affected assumptions including discount rate changes discount rate may affect recorded amount expense future periods effective october 1 2002 company amended primary us postretirement health care benefit program order mitigate company’s share increasing cost postretirement health care services change reduced benefit obligation 86 million net periodic benefit cost 2003 approximately 29 million compared 28 million 2002 net periodic benefit cost 2004 expected 23 million reflects full year effect expense october 1 2002 plan amendment additional information regarding postretirement benefits contained note 13 notes consolidated financial statements financial statements selfinsurance liabilities company’s selfinsurance programs include primarily product liability workers’ compensation product liability workers’ compensation company selfinsures first dollar loss specified retention levels eligible losses excess selfinsurance retention levels stated limits liability covered policies purchased thirdparty insurers aggregate selfinsurance liability estimated using company’s claims experience risk exposure levels periods valued adjustments selfinsured liabilities may required reflect emerging claims experience factors inflationary trends jury awards liability selfinsurance programs 51 million september 30 2003 48 million september 30 2002 litigation claims contingencies company records liabilities litigation claims contingencies obligation probable company basis reasonably estimate value obligation company also records environmental liabilities based estimates known environmental remediation exposures utilizing information received independent environmental consultants liabilities include accruals sites owned company thirdparty sites company determined potentially responsible party thirdparty sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party liability recorded total estimated costs remediation future expenditures environmental remediation obligations discounted present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate company’s environmental liabilities may change liability environmental matters net related receivables 29 million september 30 2003 28 million september 30 2002 includes adjustment made fourth quarter 2003 increase environmental reserve approximately 5 million due higher estimated future costs environmental remediation near russellville kentucky facility company’s former measurement flow control business also fourth quarter 2003 company recognized income reflected discontinued operations approximately 7 million 4 million tax favorable determination legal proceeding related company’s former operation rocky flats facility department energy additional information regarding litigation claims contingencies contained note 19 notes consolidated financial statements financial statements see also item 3 legal proceedings page 6 hereof income taxes company records liability potential tax assessments based estimate potential exposure liability potential tax assessments may affected new laws new interpretations laws rulings tax authorities among reasons due subjectivity complex nature underlying issues actual payments assessments may differ estimates extent company’s estimates differ actual payments assessments income tax expense adjusted 2002 company resolved certain matters previous years resulting 48 million reduction income tax provision additional information regarding income taxes contained note 18 notes consolidated financial statements financial statements company recorded valuation allowance 47 million september 30 2003 majority deferred tax assets related net operating loss carryforwards capital loss carryforwards state tax credit carryforwards valuation allowance based evaluation uncertainty amounts carryforwards expected realized increase income would result company determines could utilize carryforwards originally expected end interim reporting period company estimates effective tax rate expected applicable full fiscal year estimated effective tax rate contemplates expected jurisdiction income earned eg united states compared nonunited states well tax planning strategies actual results different company’s estimates adjustments effective tax rate may required period determination made results operations summary results operations represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporatenet b information respect composition segment operating earnings contained note 20 notes consolidated financial statements financial statements c effective october 1 2001 company adopted sfas 142 result adopting sfas 142 company longer amortizes goodwill certain trademarks deemed indefinite useful life resulting decrease amortization expense 2002 2001 amortization goodwill indefinite life trademarks 56 million addition 2002 company recorded pretax charges 56 million related trademark impairment 73 million related goodwill impairment connection adoption sfas 142 charges recorded cumulative effect accounting change amount 129 million 108 million tax 58 cents per diluted share amount included goodwill purchase accounting items 2003 2002 includes amortization expense acquired intangible assets finite life depreciation expense purchase accounting adjustments demand company’s products largely driven trends industrial spending sales affected level industrial production activity customers’ new product introductions upgrades expansions existing manufacturing facilities creation new manufacturing facilities due weak business conditions recent years especially manufacturing economy manufacturers operating historically low levels plant capacity utilization condition results tendency defer significant amounts capital investment environment improves table depicts trend since december 2000 capacity utilization united states published federal reserve manufacturing activity united states reflected purchasing managers’ index pmi published institute supply management ism according ism pmi measure 50 indicates manufacturing economy generally expanding measure 50 indicates generally contracting 2003 compared 2002 sales 4104 million 2003 increase 5 percent compared 3909 million 2002 three percentage points growth due effect currency translation segment operating earnings 2003 453 million increase 19 percent compared 381 million 2002 income continuing operations accounting change 2003 282 million 149 per diluted share compared 226 million 120 per diluted share 2002 net income 2003 286 million 151 per diluted share compared 121 million 64 cents per diluted share 2002 2003 results included tax benefit 69 million 37 cents per diluted share related settlement us federal research experimentation credit refund claim 2002 results included tax benefit 48 million 26 cents per diluted share resolution certain tax matters period 19951999 charge 129 million 108 million tax 58 cents per diluted share related adoption sfas 142 control systems control systems’ sales 2003 3287 million increase 7 percent compared 3060 million 2002 3 percentage points sales increase due favorable impact currency translation primarily resulting relative strength euro us dollar sales outside us increased 18 percent 9 percent excluding currency translation see supplemental sales information page 27 us sales increased 1 percent company’s logix process solutions businesses grew approximately 30 percent 2002 company’s global manufacturing solutions business grew approximately 5 percent 2002 segment operating earnings 398 million 2003 increase 23 percent compared 324 million 2002 increase due higher volume continuing benefits cost reduction actions control systems’ return sales 2003 121 percent compared 106 percent 2002 power systems power systems’ sales 2003 705 million compared 716 million 2002 mechanical sales increased 3 percent electrical sales decreased 5 percent segment operating earnings 54 million 2003 compared 53 million 2002 segment operating earnings remained relatively stable despite decrease sales due savings cost reduction efforts power systems’ return sales 77 percent 2003 compared 74 percent 2002 firstpoint contact firstpoint contact’s sales 2003 112 million compared 133 million 2002 decrease primarily due lower customer capital spending telecommunications products segment operating earnings 1 million 2003 compared 4 million 2002 included 2003 results charge 2 million related workforce reduction included 2002 results charges 4 million related severance asset impairment general corporate net general corporate expenses 67 million 2003 compared 57 million 2002 expense 2003 included charge 5 million due higher estimated future costs environmental remediation near russellville kentucky facility company’s former measurement flow control business 2002 included 9 million income related settlement intellectual property matters excluding amounts corporate expenses decreased 2003 result lower corporate staff costs increase approximately 2 million earnings company’s investment rsc loss disposition business second quarter 2003 company sold majority ownership interest rej resulting loss approximately 8 million 3 million tax 1 cent per diluted share aftertax loss sale included 2 million benefit resulting company’s ability utilize capital loss carryforwards valuation allowance previously provided cash proceeds transaction totaled approximately 10 million interest expense interest expense 52 million 2003 compared 66 million 2002 decrease result retirement maturity 150 million principal amount 680 notes april 2003 benefit interest rate swap see note 9 notes consolidated financial statements lower average shortterm borrowings 2002 compared 2001 sales 3909 million 2002 compared 4285 million 2001 income continuing operations accounting change 2002 226 million 120 per diluted share compared 125 million 68 cents per diluted share 2001 2002 results continuing operations include reduction income tax provision 48 million 26 cents per diluted share favorable resolution certain tax matters 2001 income continuing operations accounting change included amortization goodwill certain intangible assets 56 million 47 million tax 25 cents per diluted share well special charges 91 million 60 million tax 32 cents per diluted share costs associated realignment actions income 18 million 12 million tax 6 cents per diluted share resulting favorable settlement intellectual property matter reduction income tax provision 22 million 12 cents per diluted share favorable resolution certain tax matters goodwill certain trademarks deemed indefinite life longer amortized sfas 142 control systems control systems’ sales 2002 3060 million compared 3327 million 2001 decrease primarily result continued depressed market conditions automation products sales us declined 9 percent 2002 sales outside us declined 6 percent 4 percent excluding currency translation primarily result 7 percent decline europe 9 percent excluding currency translation despite overall sales decline sales logix integrated architecture products increased 31 percent sales global manufacturing solutions business increased 6 percent 2001 driven increases process engineering solutions sales acquisition propack segment operating earnings 324 million 2002 compared 425 million 2001 decrease primarily due lower volume especially higher margin cpag acig products addition control systems continued invest growth global manufacturing solutions business control systems’ return sales 2002 106 percent compared 128 percent 2001 power systems power systems’ sales 2002 716 million compared 748 million 2001 decline result lower demand due depressed market conditions segment operating earnings increased 53 million 2002 39 million 2001 improvement result cost savings actions taken fourth quarter 2001 ongoing initiatives improve productivity power systems’ return sales 74 percent 2002 compared 52 percent 2001 firstpoint contact firstpoint contact’s sales 2002 133 million compared 150 million 2001 decline primarily due decreased customer capital spending telecommunications products segment operating earnings 4 million 2002 compared 7 million 2001 included 2002 results charges 4 million related severance asset impairment general corporate net general corporate expenses 57 million 2002 compared 53 million 2001 general corporate expenses included income settlement intellectual property matters 9 million 2002 18 million 2001 gain sale real estate 5 million 2001 also 2001 general corporate expenses included 3 million costs associated spinoff rockwell collins excluding items general corporate expenses decreased 73 million 2001 66 million 2002 primarily result lower corporate spending interest expense interest expense decreased 66 million 2002 83 million 2001 decrease due lower weightedaverage shortterm borrowings lower commercial paper borrowing rates 2002 company used commercial paper second quarter 2001 fund acquisition rockwell collins third quarter 2001 company received special payment 300 million rockwell collins used repay commercial paper borrowings special charges 2001 company recorded charges 91 million 60 million tax 32 cents per diluted share costs associated realignment operations reduce costs response continued decline demand industrial markets total cash expenditures related realignment actions approximate 50 million substantially spent september 30 2003 special charges related business segments follows control systems 76 million power systems 5 million corporate 10 million see note 14 notes consolidated financial statements financial statements discontinued operations discontinued operations 2003 benefit 7 million 4 million tax 2 cents per diluted share favorable determination legal proceeding related company’s former operation rocky flats facility department energy discontinued operations 2002 related net benefit 3 million resolution certain obligations related two discontinued businesses june 29 2001 company completed spinoff rockwell collins avionics communications business independent separately traded publicly held company connection spinoff outstanding shares common stock rockwell collins distributed rockwell automation shareowners basis one rockwell collins share outstanding rockwell automation share time spinoff rockwell collins made special payment company 300 million company recorded decrease shareowner’s equity net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company included 2001 income discontinued operations 21 million costs related spinoff rockwell scientific company llc since june 29 2001 company rockwell collins owned 50 percent rsc results rockwell science center included continuing operations third quarter 2001 sales rockwell science center first nine months 2001 60 million segment operating earnings 3 million first nine months 2001 beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporatenet acquisitions see note 2 notes consolidated financial statements information regarding acquisitions income taxes 2003 company recognized earnings net tax benefit 69 million related us federal research experimentation credit refund claim tax benefit approximately 2 million result company’s ability utilize certain capital loss carryforwards valuation allowance previously provided ability utilize capital loss carryforwards result sale majority company’s ownership rej took place 2003 full year effective tax rate 2003 approximately 6 percent including effect research experimentation settlement 23 percent benefit rej transaction 1 percent benefit see note 18 notes consolidated financial statements financial statements management believes effective income tax rate 2004 approximately 30 percent excluding income tax expense benefit related discrete items separately reported net related tax effects 2002 company resolved certain tax matters period 19951999 resulting 48 million reduction income tax provision including effect reduction effective income tax rate 2002 3 percent outlook customer demand strengthened since early september 2003 management begun see broad improvement across company’s markets management confident early signs indicative emerging upward trend optimistic trend sustainable evidence emerges management planning revenue growth 2004 midsingle digits expects diluted earnings per share 2004 range 135 145 financial condition company’s cash flows operating investing financing activities reflected consolidated statement cash flows summarized following table millions following table summarizes free cash flow millions company’s definition free cash flow takes consideration capital investment required maintain operations company execute strategy management believes free cash flow provides useful information investors regarding company’s ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases management uses free cash flow one measure monitor evaluate performance company’s definition free cash flow may different definitions used companies free cash flow 327 million year ended september 30 2003 compared 372 million year ended september 30 2002 decrease free cash flow part result 50 million voluntary contribution made company’s primary us qualified pension plan trust june 2003 compared 24 million contribution made 2002 related spinoff rockwell collins capital expenditures 2003 109 million compared 104 million 2002 capital expenditures 2004 expected 125 million 135 million depend ultimately business conditions company acquired weidmüller holding ag’s north american business interwave technology inc 2003 approximately 26 million see note 2 notes consolidated financial statements discussion businesses 2002 company acquired four businesses approximately 71 million company elects utilize commercial paper principal source shortterm financing september 30 2003 2002 company commercial paper borrowings outstanding year ended september 30 2003 company weighted average borrowings 27 million commercial paper program interest rates ranging 11 percent 14 percent year ended september 30 2002 company weighted average borrowings 68 million commercial paper program interest rates ranging 18 percent 27 percent april 2003 company’s 150 million principal amount 680 notes retired maturity using combination cash hand commercial paper borrowings company repurchased approximately 56 million shares common stock cost approximately 128 million 2003 included repurchases approximately 70000 shares cost approximately 16 million voluntary program provided shareowners owning fewer 100 shares common stock opportunity sell shares common stock company without paying commission september 30 2003 company approximately 177 million remaining stock repurchases existing board authorizations company repurchase shares 2002 company anticipates repurchasing stock 2004 amount depend ultimately business conditions cash requirements future significant uses cash expected include capital expenditures dividends shareowners acquisitions repurchases common stock connection company’s stock repurchase program may include contributions company’s pension plans additional information regarding pension contributions contained mda page 15 hereof expected future uses cash funded cash generated operating activities commercial paper borrowings new issue debt issuance securities addition cash generated operating activities company access existing financing sources including public debt markets unsecured credit facilities various banks company’s debttototalcapital ratio 327 percent september 30 2003 366 percent september 30 2002 september 30 2003 company 675 million unsecured committed credit facilities available support commercial paper borrowings 3375 million expiring october 2003 3375 million expiring october 2005 october 2003 company entered new 3375 million credit facility expiring october 2004 outstanding commercial paper balances reduce amount available borrowings unsecured committed credit facilities terms credit facilities contain covenant company would default company’s debt capital ratio exceed 60 percent addition 675 million credit facilities shortterm unsecured credit facilities available foreign subsidiaries amounted 121 million september 30 2003 following summary company’s credit ratings september 30 2003 standard poor’s changed outlook “negative” april 2003 due concerns company’s exposure unfunded postretirement benefit liabilities including defined benefit pension retiree medical liabilities company’s access commercial paper market adversely affected due change market conditions otherwise company would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities could higher cost commercial paper borrowings cash dividends shareowners 122 million 066 per share 2003 2002 prior spinoff rockwell collins company paid quarterly cash dividends annual basis equaled 102 per share since spinoff rockwell collins company paid quarterly cash dividends annual basis equal 066 per share although declaration payment dividends company sole discretion company’s board directors company expects pay quarterly dividends 2004 annual basis expected equal 066 per share certain company’s contractual cash obligations september 30 2003 summarized follows shortterm debt includes 8 million industrial development revenue bonds company expects repay january 2004 prior maturity b longterm debt excludes unamortized discount 46 million 10 million fair value adjustment recorded interest rate swap permitted sfas 133 accounting derivative instruments hedging activities c connection sale power systems business 2000 company entered supply agreement buyer business agreement requires minimum purchases company approximately 21 million per year december 31 2005 event purchases less 21 million given year company may incur penalties 25 percent amount actual purchases less contractual minimum period based upon current estimates future purchases management believe penalties payable terms agreement would material company’s business financial condition additional information supply agreement see note 19 notes consolidated financial statements financial statements september 30 2003 company guaranteed performance conexant related 60 million lease obligation lease obligation secured real property subject lease within range estimated fair values real property consideration guarantee company receives 250000 per quarter conexant december 31 2003 guarantee expires 2005 september 30 2003 company rockwell collins guarantee onehalf lease agreement one rsc’s facilities total future minimum payments lease approximately 6 million lease agreement term ends december 2011 addition company shares equally rockwell collins providing 4 million line credit rsc bears interest greater company’s rockwell collins’ commercial paper borrowing rate september 30 2003 2002 outstanding borrowings line credit quantitative qualitative disclosures market risk company exposed market risk normal course business changes interest rates foreign currency exchange rates exposure risks managed combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition cash provided normal operating activities company utilizes combination shortterm longterm debt finance operations company exposed interest rate risk certain debt obligations company’s shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2003 2002 company commercial paper borrowings outstanding 2003 weighted average commercial paper borrowings 27 million compared 68 million 2002 bank borrowings outstanding september 30 2003 september 30 2002 carrying value bank borrowings 10 million company’s results operations affected changes market interest rates commercial paper borrowings market interest rates would averaged 10 percent higher actual levels either 2003 2002 effect company’s results operations would material fair values obligations approximated carrying values september 30 2002 would materially affected changes market interest rates company outstanding fixed rate longterm debt obligations carrying values 773 million september 30 2003 919 million september 30 2002 fair value debt 844 million september 30 2003 976 million september 30 2002 potential loss fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt company currently plans repurchase outstanding fixedrate instruments 8 million industrial development revenue bonds company expects repay january 2004 prior maturity therefore fluctuations market interest rates would effect company’s results operations shareowners’ equity september 2002 company entered interest rate swap contract effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 352 percent september 30 2003 hypothetical 10 percent change market interest rates would material overall fair value swap company’s results operations foreign currency risk company exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies company’s objective minimize exposure risks combination normal operating activities utilization foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition company enters contracts hedge certain forecasted intercompany transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes company hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant company’s financial condition results operations company records derivatives balance sheet fair value regardless purpose intent holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivative’s change fair value immediately recognized earnings september 30 2003 2002 company outstanding foreign currency forward exchange contracts primarily consisting contracts exchange euro pound sterling canadian dollar swiss franc use contracts allows company manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material financial condition results operations shareowners’ equity company recently adopted accounting standards see note 1 notes consolidated financial statements regarding recently adopted accounting standards supplemental sales information following reconciliation control systems segment reported sales excluding currency translation nongaap measure following reconciliation company reported sales excluding currency translation nongaap measure effect currency translation determined translating respective period sales data using exchange rates preceding year management believes sales excluding currency translation provides useful information investors since reflects regional performance company’s activities without effect changes currency rates outside control management uses sales excluding currency translation monitor evaluate company’s regional performance cautionary statement annual report contains statements including certain projections business trends accompanied phrases “believes” “estimates” “expects” “anticipates” “will” “intends” similar expressions “forwardlooking statements” defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited economic political changes international markets company competes currency exchange rates inflation rates recession foreign ownership restrictions external factors company control demand market acceptance new existing products including levels capital spending industrial markets successful development advanced technologies competitive product pricing pressures future terrorist attacks epidemics uncertainties litigation well risks uncertainties including limited detailed time company’s securities exchange commission filings forwardlooking statements made date hereof company undertakes obligation update revise forwardlooking statements whether result new information future events otherwise item 7aitem 7 management’s discussion analysis financial condition results operations results operations cautionary statement annual report contains statements including certain projections business trends accompanied phrases “believe” “estimate” “expect” “anticipate” “will” “intend” similar expressions “forwardlooking statements” defined private securities litigation reform act 1995 actual results may differ materially projected result certain risks uncertainties including limited following • economic political changes international markets compete currency exchange rates inflation rates recession foreign ownership restrictions external factors cannot control • demand market acceptance new existing products • levels capital spending industrial markets • availability price components materials • successful development advanced technologies • availability effectiveness information technology systems • competitive product pricing pressures • future terrorist attacks • intellectual property infringement claims others ability protect intellectual property • uncertainties litigation • risks uncertainties including limited detailed time sec filings forwardlooking statements made date hereof undertake obligation update revise forwardlooking statements whether result new information future events otherwise nongaap measures following discussion includes sales excluding effect changes currency exchange rates free cash flow nongaap measures see supplemental sales information page 23 hereof reconciliation reported sales excluding effect changes currency exchange rates addition discussion believe nongaap measure useful investors see financial condition page 21 hereof reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview overall demand products driven • levels global industrial production • investments capacity including upgrades modifications expansions existing manufacturing facilities creation new manufacturing facilities • regional factors include local political social regulatory economic circumstances • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate us industrial economic trends 2004 sales us accounted 60 percent total sales due weaker business conditions 2002 2003 especially us manufacturing economy manufacturers operated historically low levels plant capacity utilization 2004 manufacturing economy experienced improving fundamentals higher levels output us reflected various indicators use gauge direction momentum markets indicators include • industrial equipment spending economic statistic compiled bureau economic analysis “bea” statistic provides insight spending trends broad us industrial economy includes primary customer base measure longer term proven reasonable predictive value good directional indicator growth trend • capacity utilization indication plant operating activity published federal reserve historically meaningful correlation capacity utilization level capital investment made customers manufacturing base • purchasing managers’ index pmi published institute supply management ism indication level manufacturing activity us according ism pmi measure 50 indicates manufacturing economy generally expanding measure 50 indicates generally contracting table depicts trend indicated months since december 2001 us industrial equipment spending capacity utilization pmi nonus regional trends outside us growth demand part driven investments made infrastructure emerging economies found asiapacific latin america regions demand products china moderating somewhat rapid expansion experienced first half 2004 result rising local interest rates economic political factors commercial activity korea india strong latin america demand products driven investment mining oil gas industries resulting increased sales 2004 industry views serve wide range industries including consumer products transportation basic materials oil gas 2004 benefited growing demand nearly industries serve consumer products segment serves broad array customers food beverage brewing consumer packaged goods life sciences industries group generally less cyclical heavy manufacturing segments sales automotive segment affected factors customer investment new model introductions flexible manufacturing technologies basic materials segments including mining aggregates cement benefit higher commodities prices higher global demand basic materials encourage significant investment capacity productivity industries energy prices rise customers oil gas industry increase investment production transmission capacity latter half 2004 addition higher energy prices historically caused customers across industries consider new investment energyefficient manufacturing processes technologies outlook 2005 following summary objectives 2005 • expand integrated architecture platform accelerating penetration batchhybrid market demonstrating value realtime information • continue geographic expansion growth particularly emerging economies • build additional domain expertise industries serve • drive continued cost productivity outlook 2005 assumes current economic recovery continue experience favorable industrial environment gradual growth 2005 expect demand products benefit trend also assume growth vary may exceed lag trend levels given quarter date hereof expect grow revenue 2005 6 8 percent excluding effect changes currency exchange rates raise operating margins approximately 15 percent date hereof expect full year 2005 diluted earnings per share range 215 225 plan generate free cash flow excess net income part disciplined capital deployment summary results operations information regarding define segment operating earnings contained note 18 financial statements b cumulative effect accounting change recorded 2002 represents impairment charges recorded connection adoption sfas 142 additional information regarding impairment charges contained note 3 financial statements september 2004 sold firstpoint contact business cash note convertible minority interest corporate parent buyer business resulting gain 335 million 321 million tax 017 per diluted share results operations firstpoint contact gain sale included income discontinued operations annual report 2004 compared 2003 sales increased 10 percent compared 2003 driven growth control systems power systems three percentage points growth due effect changes currency exchange rates income continuing operations 2004 includes 463 million 024 per diluted share tax benefits related resolution certain tax matters well benefit state tax refunds 2003 result included tax benefit 694 million 037 per diluted share related settlement us federal research experimentation credit refund claim control systems control systems sales increased 11 percent compared 2003 four percentage points sales increase due effect changes currency exchange rates primarily resulting relative strength euro us dollar sales outside us increased 15 percent 6 percent excluding effect changes currency exchange rates us sales increased 8 percent control systems experienced sales growth regions exceptional strength emerging economies asia latin america continued increase market penetration sales growth primarily driven maintenance related smaller productivity related projects result pentup demand period underinvestment productive assets 2002 2003 addition ongoing required investments experienced increase activity related larger scale projects second half fiscal year 2004 larger projects driven customers’ requirements incremental productivity improvements capacity optimization logix platform business continued strong growth increase 30 percent 2003 industrial components adjustable speed drives experienced doubledigit growth well gains partially offset moderate declines drive systems legacy control platforms segment operating margins increased due higher volume favorable product mix productivity improvements volume leverage improved year due continuing productivity efforts ongoing facility rationalization programs power systems power systems sales increased 7 percent compared 2003 mechanical electrical businesses contributed equally growth sales increase mainly result volume strength second half 2004 higher global demand basic materials subsequent higher prices materials encouraged significant investment capacity optimization productivity drove sales significant cost productivity initiatives launched second quarter financial leverage incremental volume price increases offset rising raw material prices resulting improved segment operating margin general corporate net general corporate expenses 883 million 2004 compared 668 million 2003 expense 2004 includes charges 164 million due higher estimated costs environmental remediation several legacy sites 70 million contributions charitable corporation 50 million costs associated corporate staff changes expense 2003 included charge 47 million due higher estimated future costs environmental remediation legacy site loss disposition business second quarter 2003 sold majority ownership interest reliance electric limited japan rej resulting loss 84 million 25 million tax 001 per diluted share cash proceeds transaction totaled 104 million interest expense interest expense 417 million 2004 compared 525 million 2003 decrease result retirement maturity 1500 million principal amount 680 notes april 2003 benefit interest rate swap see note 6 financial statements lower average shortterm borrowings 2003 compared 2002 sales increased 6 percent compared 2002 three percentage points growth due effect changes currency exchange rates growth driven 7 percent increase control systems offset 2 percent decrease power systems income continuing operations accounting change 2003 included tax benefit 694 million 037 per diluted share related settlement us federal research experimentation credit refund claim 2002 results included tax benefit 482 million 026 per diluted share resolution certain tax matters period 1995 1999 control systems control systems sales increased 7 percent compared 2002 3 percentage points increase due favorable impact currency translation primarily resulting relative strength euro us dollar sales outside us increased 18 percent 9 percent excluding effect changes currency exchange rates us sales increased 1 percent logix platform business grew approximately 30 percent 2002 improvement segment operating margin due higher volume continuing benefits cost reduction actions power systems power systems sales decreased 2 percent compared 2002 mechanical sales increased 3 percent electrical sales decreased 5 percent segment operating earnings remained relatively stable despite decrease sales due savings cost reduction efforts general corporate net general corporate expenses 668 million 2003 compared 574 million 2002 expense 2003 included charge 47 million due higher estimated future costs environmental remediation legacy site 2002 amount included 94 million income related settlement intellectual property matters excluding amounts corporate expenses decreased 2003 result lower corporate staff costs increase approximately 14 million earnings investment rsc loss disposition business second quarter 2003 sold majority ownership interest rej resulting loss 84 million 25 million tax 001 per diluted share cash proceeds transaction totaled 104 million interest expense interest expense 525 million 2003 compared 661 million 2002 decrease result retirement maturity 1500 million principal amount 680 notes april 2003 benefit interest rate swap see note 6 financial statements lower average shortterm borrowings discontinued operations see note 13 financial statements information regarding composition discontinued operations income taxes 2004 recognized tax benefits 463 million income continuing operations 184 million income discontinued operations related following items • 345 million resulting resolution certain tax matters part related former businesses majority benefits recognized related nonus tax matters addition agreement taxing authority related treatment investment • 43 million related additional state tax benefits associated us research experimentation credit refund claim 2003 see discussion • 259 million related refund state california period 1989 1991 amount 75 million included reduction income tax provision 184 million included income discontinued operations including items full year effective tax rate 2004 approximately 19 percent aggregate items decreased effective tax rate approximately 11 percent 2003 recognized earnings net tax benefit 694 million related us federal research experimentation credit refund claim tax benefit approximately 26 million result ability utilize certain capital loss carryforwards valuation allowance previously provided ability utilize capital loss carryforwards result sale majority ownership rej took place 2003 full year effective tax rate 2003 approximately 5 percent including effect research experimentation settlement 23 percent benefit rej transaction 1 percent benefit see note 16 financial statements reconciliation united states statutory tax rate effective tax rate expect effective income tax rate 2005 approximately 31 percent excluding income tax expense benefit related discrete items separately reported net related tax effects subsequent september 30 2004 president signed law american jobs creation act 2004 working families tax relief act 2004 legislation contains numerous corporate tax changes including eliminating tax benefit relating us product exports new deduction relating us manufacturing lower us tax rate nonus dividends extension research experimentation credit new legislation anticipated materially affect results operations financial condition financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow takes consideration capital investment required maintain operations businesses execute strategy opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may different definitions used companies free cash flow 4989 million year ended september 30 2004 compared 3123 million year ended september 30 2003 following factors contributed significant increase free cash flow • income taxes 2004 1405 million higher 2003 • us federal tax payments lower 2004 result tax benefits related voluntary pension contributions increased benefits exercise stock options us federal tax payments 100 million 2004 compared 430 million 2003 • received net tax refunds 306 million various tax authorities related prior years factors offset higher voluntary contributions us qualified pension trust totaled 1250 million 2004 compared 500 million 2003 anticipate cash payments income taxes approach income tax expense near future necessary utilize commercial paper principal source shortterm financing september 30 2004 2003 commercial paper borrowings outstanding 2004 2003 significant commercial paper borrowings due cash position january 2004 repaid 84 million industrial development revenue bonds prior maturity using cash hand april 2003 repaid 1500 million principal amount 680 notes maturity using combination cash hand commercial paper borrowings repurchased approximately 75 million shares common stock cost 2584 million 2004 september 30 2004 approximately 1685 million remaining stock repurchases existing board authorizations repurchased approximately 56 million shares common stock cost 1284 million 2003 anticipate repurchasing stock 2005 amount depend ultimately business conditions stock price cash requirements future significant uses cash expected include capital expenditures dividends shareowners acquisitions businesses repurchases common stock may include contributions pension plans expect capital expenditures 2005 120 million additional information regarding pension contributions contained mda page 14 hereof expect future uses cash funded existing cash balances cash generated operating activities commercial paper borrowings new issue debt issuance securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 289 percent september 30 2004 327 percent september 30 2003 september 30 2004 6750 million unsecured committed credit facilities 3375 million expiring october 2004 3375 million expiring october 2005 facilities available general corporate purposes including support commercial paper borrowings october 26 2004 entered new fiveyear 6000 million unsecured revolving credit facility replaced facility expiring date facility expiring october 2005 cancelled date borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenant would default debt capital ratio exceed 60 percent addition 6000 million credit facility shortterm unsecured credit facilities available foreign subsidiaries amounted 1304 million september 30 2004 following summary credit ratings september 30 2004 among things credit facility standby liquidity facility drawn needed repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining ratings set forth table given commercial paper required current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities could higher cost commercial paper borrowings cash dividends shareowners 1225 million 066 per share 2004 1224 million 066 per share 2003 although declaration payment dividends sole discretion board directors expect pay quarterly dividends 2005 least equal quarterly per share amount paid 2004 certain contractual cash obligations september 30 2004 summarized follows amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts received interest rate swap unamortized discount 460 million 37 million fair value adjustment recorded interest rate swap permitted sfas 133 accounting derivative instruments hedging activities see note 6 financial statements additional information regarding longterm debt b connection sale power systems business 2000 entered supply agreement buyer business agreement requires us purchase minimum 210 million per year december 31 2005 event purchases less 210 million given year may incur penalties 25 percent amount actual purchases less contractual minimum period based upon current estimates future purchases believe penalties payable terms agreement would material business financial condition additional information supply agreement see note 17 financial statements sponsor pension postretirement benefit plans certain employees see note 12 financial statements information regarding plans expected future cash outflows related plans september 30 2004 guaranteed performance conexant related lease obligation approximately 600 million lease obligation secured real property subject lease within range estimated fair values real property consideration guarantee received 250000 per quarter conexant december 31 2003 receive 500000 per quarter conexant december 31 2004 unless released guarantee prior thereto expect released guarantee 2005 september 30 2004 rockwell collins guarantee onehalf lease agreement one rockwell scientific company llc’s rsc facilities total future minimum payments lease 55 million lease agreement term ends december 2011 addition share equally rockwell collins providing 40 million line credit rsc bears interest greater rockwell collins’ commercial paper borrowing rate september 30 2004 2003 outstanding borrowings line credit october 2004 line credit increased 60 million us rockwell collins still sharing equally supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore reported sales affected changes currency rates outside control believe sales excluding effect changes currency exchange rates nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates use sales excluding effect changes currency exchange rates monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect preceding year following reconciliation reported sales excluding effect changes currency exchange rates millions following reconciliation reported sales control systems segment sales excluding effect changes currency exchange rates millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management revenue recognition sales generally recorded following occurred agreement sale exists product delivered according contract terms acceptance may required contract terms occurred services rendered pricing fixed determinable collection reasonably assured generally use contracts customer purchase orders determine existence arrangement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based primarily creditworthiness customer determined credit evaluations analysis well customer’s payment history record accruals customer returns rebates incentives time revenue recognition based upon historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 40 million accrual rebates incentives customers 791 million september 30 2004 708 million september 30 2003 78 million september 30 2004 54 million september 30 2003 included offset accounts receivable impairment longlived assets evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable future cash flows evaluate recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired use judgment applying impairment rules determine impairment test necessary factors consider could trigger impairment review include significant underperformance relative historical forecasted operating results significant decrease market value asset significant change extent manner asset used significant negative industry economic trends impairment losses measured amount carrying value asset exceeds estimated fair value determine fair value required make estimates future cash flows related asset reviewed estimates require assumptions demand products services future market conditions technological developments assumptions include discount rate future growth rates 2002 recorded pretax impairment charges 1287 million 1078 million tax connection adoption sfas 142 perform annual impairment test nonamortized intangible assets second quarter fiscal year second quarter fiscal 2004 728 million net book value reliance trademark approximated estimated fair value computed assistance independent valuation specialists either increase discount rate decrease planned future growth profitability rates could result material impairment charge writedown book value reliance trademark revised estimated fair value additional information regarding impairment charges contained note 3 financial statements retirement benefits pension benefits pension costs obligations actuarially determined affected annually reviewing assumptions including discount rate expected rate return plan assets assumed annual rate compensation increase plan employees among factors changes discount rate differences assumptions actual experience affect amount pension expense recognized future periods worldwide pension expense 2004 688 million compared 416 million 2003 approximately 80 percent cost relates us qualified pension plan used following actuarial assumptions determine 2004 us pension expense discount rate 60 percent compared 70 percent 2003 expected rate return plan assets 85 percent compared 85 percent 2003 assumed rate compensation increase 45 percent compared 45 percent 2003 decrease discount rate well amortization actuarial losses primary causes 272 million increase pension expense 2004 2003 2005 assuming expected rate return plan assets rate compensation increase remain consistent 2004 assumptions discount rate increase 60 625 assuming discount rate increase actual experience consistent actuarial assumptions expect 2005 pension expense remain approximately 2004 following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points assumptions us pension plans millions 2004 made voluntary contributions 1250 million primary us qualified pension plan trust compared 500 million voluntary contribution 2003 currently anticipate making contributions 2005 qualified pension plans amount approximates 2005 net periodic pension cost additional information regarding pension benefits including pension obligation minimum pension liability adjustment contained note 12 financial statements postretirement benefits estimate assistance independent actuarial consultants costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment increase healthcare costs resulting healthcare inflationary trends beginning january 1 2005 amendment reduced postretirement benefit obligation 865 million net periodic benefit cost 2004 approximately 234 million compared 291 million 2003 decrease primarily due effect amending primary us postretirement healthcare benefit program expect net periodic benefit cost 2005 approximately 25 million expected increase due amortization actuarial losses offset increase discount rate june 30 2004 measurement date 25 basis points 625 additional information regarding postretirement benefits contained note 12 financial statements selfinsurance liabilities principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims assistance independent actuarial consultant using claims experience periods valued adjustments selfinsured liabilities may required reflect emerging claims experience factors inflationary trends outcome liability claims liability selfinsurance programs 534 million september 30 2004 511 million september 30 2003 described item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see item 3 page 6 hereof discussion litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures utilizing information received independent environmental consultants liabilities include accruals sites currently thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change liability environmental matters net related receivables 388 million september 30 2004 289 million september 30 2003 2004 recorded adjustments totaling 169 million increase environmental reserves related several legacy sites adjustments addition adjustment made fourth quarter 2003 increase environmental reserve 47 million due higher estimated future costs environmental remediation legacy sites recorded liability environmental matters almost entirely relates businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result material charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations 2004 recorded income 76 million 46 million tax result final judgment defense claim legal proceeding related former operation rocky flats facility department energy amount addition income 73 million 44 million tax recognized 2003 related rocky flats defense claim legal proceeding march 2004 received 151 million related matter amount displayed net related tax consolidated statement cash flows cash provided discontinued operations additional information regarding litigation claims contingencies contained note 17 financial statements see also item 3 legal proceedings page 6 hereof income taxes record liability probable income tax assessments based estimate potential exposure extent estimates differ actual payments assessments income tax expense adjusted income tax positions based diligent research applicable income tax laws claimed knowledge vigorously defended conduct business many countries requires interpretation income tax laws rulings taxing jurisdictions due subjectivity interpretations laws rulings jurisdiction business differences interplay tax laws jurisdictions well subjectivity factual interpretations estimates income tax liabilities may differ actual payments assessments 2004 resolved certain tax matters resulting recognizing 345 million tax benefits majority matters related nonus jurisdictions 2002 resolved certain matters previous years resulting 482 million reduction income tax provision tax positions claimed knowledge taxing authorities increasingly asserting interpretations laws facts effort increase tax revenue especially instances transactions involve two countries cross border transactions affiliates involving transfer price products services andor intellectual property one primary issues face due presence canadian markets canadian transfer pricing matters significant countries business transfer pricing matters well legal structures relating current previouslydivested businesses represent nearly 57 million tax liabilities income tax assessments recorded valuation allowance 630 million september 30 2004 majority deferred tax assets related net operating loss carryforwards capital loss carryforwards state tax credit carryforwards valuation allowance based evaluation uncertainty amounts carryforwards expected realized increase income would result determine able utilize carryforwards currently expected end interim reporting period estimate effective tax rate expected applicable full fiscal year estimated effective tax rate contemplates expected jurisdiction income earned eg united states compared nonunited states well tax planning strategies actual results different estimates adjustments effective tax rate may required period determination made additional information regarding income taxes contained note 16 financial statements recently adopted accounting standards see note 1 financial statements regarding recently adopted accounting standards item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes sales excluding effect changes currency exchange rates free cash flow nongaap measures see supplemental sales information reconciliation reported sales excluding effect changes currency exchange rates addition discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview overall demand products driven • investments capacity including upgrades modifications expansions existing manufacturing facilities creation new manufacturing facilities • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate • levels global industrial production • regional factors include local political social regulatory economic circumstances us industrial economic trends 2005 sales us accounted 60 percent total sales trend improving conditions experienced us manufacturing economy 2004 continued 2005 reflected various indicators use gauge direction momentum served markets indicators include • industrial equipment spending economic statistic compiled bureau economic analysis “bea” statistic provides insight spending trends broad us industrial economy includes primary customer base measure longer term proven reasonable predictive value good directional indicator growth trend • capacity utilization indication plant operating activity published federal reserve historically meaningful correlation capacity utilization level capital investment made customers manufacturing base • purchasing managers’ index pmi published institute supply management ism indication level manufacturing activity us according ism pmi measure 50 indicates manufacturing economy generally expanding measure 50 indicates generally contracting table depicts continued gradual improvement us industrial equipment spending expressed billions usd capacity utilization expressed percentage continued expansion manufacturing activity indicated pmi expressed defined since december 2002 note economic indicators subject revisions issuing organizations nonus regional trends outside us demand principally driven strength industrial economy region customers’ ability propensity invest manufacturing assets customers may include multinational companies expanding global presence growing indigenous companies recent strength demand part driven investment infrastructure developing economies basic materials production capacity response higherend product pricing expanding consumer markets table presents actual sales year ended september 30 2005 geographic region change sales year ended september 30 2004 millions except percentages 1 see supplemental sales information nongaap measure industry views serve customers wide range industries including consumer products transportation basic materials oil gas 2005 benefited growing demand industries serve consumer products customers engaged food beverage brewing consumer packaged goods life sciences industries automation key ability differentiate product offerings investment generally less cyclical heavy manufacturing customers factors customer investment new model introductions flexible manufacturing technologies affect sales transportation customers basic materials industries including mining aggregates metals forest products cement benefit higher commodities prices higher global demand basic materials encourage investment capacity productivity industries energy prices rise customers oil gas industry increase investment production transmission capacity addition higher energy prices historically caused customers across industries consider new investment energyefficient manufacturing processes technologies intelligent motor controls outlook 2006 following summary objectives 2006 • sustain growth logix platform accelerating proliferation adoption integrated architecture features functionality aggressively pursuing growth expanded addressable market • continue geographic expansion growth particularly emerging economies • demonstrate expand industry specific domain expertise solutions capability • drive continued cost productivity outlook 2006 assumes economic environment remain favorable continuing industrial recovery result growth 2006 expect demand products benefit trend also assume growth vary may exceed lag trend levels given quarter date filing report based upon current economic activities business trends expect grow revenue 2006 7 9 percent excluding effect changes currency exchange rates date hereof also expect full year 2006 diluted earnings per share range 300 310 plan generate free cash flow approximately 280 million giving effect 450 million voluntary contribution us qualified pension trust october 2005 summary results operations information regarding define segment operating earnings included note 18 financial statements b september 2004 sold firstpoint contact business cash note convertible minority interest corporate parent buyer business resulting gain 335 million 321 million tax 017 per diluted share september 2005 note converted nonvoting equity shares accounted cost method results operations firstpoint contact gain sale included income discontinued operations additional information related income discontinued operations included note 13 financial statements 2005 compared 2004 sales increased 13 percent compared 2004 driven double digit growth control systems power systems two percentage points growth due effect changes currency exchange rates primarily resulting strength major european currencies canadian dollar relation us dollar sales rose double digit percentages regions except emea difficult economic conditions dampened growth major economies western europe primarily france germany uk emerging economies asiapacific led china india experienced particularly strong growth strength oil gas mining industries latin america oil gas industry canada contributed particularly strong sales growth regions sales global water wastewater oil gas aggregate cement mining industries grew rate higher annual growth rate 13 percent sales food transportation industries grew rates approximate annual growth rate sales life sciences semiconductor beverage grew rate less annual growth rate income continuing operations benefited higher volume productivity programs favorable pricing offset slightly inflation comparison prior year additionally income continuing operations 2005 includes 197 million 010 per share tax benefits related resolution claims tax matters connection closure 1998 2002 federal audit 84 million aftertax 004 per share benefits related insurance settlements offset 142 million aftertax 008 per share related special charges associated restructuring activities europe us plant closing income continuing operations 2004 includes 463 million 024 per share tax benefits related resolution certain tax matters state tax refunds offset 163 million aftertax 009 per share special facilities related charges control systems control systems sales increased 13 percent compared 2004 three percentage points sales increase due effect changes currency exchange rates primarily resulting relative strength major european currencies canadian dollar relation us dollar sales logix offering grew 26 percent compared 2004 somewhat offset decline legacy control platform products replaced logix growth sales logix offering driven introduction new functionality expanded addressable market intelligent motor control products also delivered significantly higher revenue driven strong sales extractionbased heavy industrial customers higher commodity prices renewed investment energy efficiency programs led strong demand customers segment operating earnings increased 43 percent compared 2004 increase segment operating earnings due higher volume cost productivity favorable pricing somewhat offset inflation control systems 2005 results include 123 million pretax benefits related insurance settlements offset 165 million pretax special charges associated realignment administrative functions reduction workforce europe prior year segment operating earnings includes 263 million pretax charge related facilities rationalization program power systems power systems sales increased 17 percent compared 2004 growth dodge mechanical reliance electrical business groups growth driven demand powercentric customers heavy extractionbased industries mining oil gas higher commodity prices causing segment’s predominantly us based customers invest capacity expansion several years underinvestment reduced capital spending power systems operating earnings grew 63 percent due higher volume favorable pricing productivity somewhat offset inflation significantly higher material costs segment operating earnings 2005 include charge 50 million pretax associated facility closure corresponding writedown property fair value compared 40 million pretax charges related restructuring activities 2004 general corporate net general corporate expenses 697 million 2005 compared 883 million 2004 expense dropped primarily due decreased environmental costs lower contributions charitable corporation increased interest income interest expense interest expense 458 million 2005 compared 417 million 2004 primarily due higher interest rates associated interest rate swap see note 6 financial statements 2004 compared 2003 sales increased 10 percent compared 2003 driven growth control systems power systems three percentage points growth due effect changes currency exchange rates income continuing operations 2004 included 463 million 024 per share tax benefits related resolution certain tax matters well benefit state tax refunds 2003 results included tax benefit 694 million 037 per share related settlement us federal research experimentation credit refund claim control systems control systems sales increased 11 percent compared 2003 four percentage points sales increase due effect changes currency exchange rates primarily resulting relative strength euro us dollar sales outside us increased 15 percent 6 percent excluding effect changes currency exchange rates us sales increased 8 percent control systems experienced sales growth regions exceptional strength emerging economies asia latin america continued increase market penetration sales growth primarily driven maintenance related smaller productivity related projects result pentup demand period underinvestment productive assets 2002 2003 addition investments experienced increase activity related larger scale projects second half fiscal year 2004 larger projects driven customers’ requirements incremental productivity improvements capacity optimization logix platform business continued strong growth increase 30 percent 2003 industrial components adjustable speed drives experienced doubledigit growth well gains partially offset moderate declines drive systems legacy control platforms segment operating margins increased due higher volume favorable product mix productivity improvements volume leverage improved year due continuing productivity efforts ongoing facility rationalization programs power systems power systems sales increased 7 percent compared 2003 mechanical electrical business groups contributed equally growth sales increase mainly result volume strength second half 2004 higher global demand basic materials subsequent higher prices materials encouraged significant investment capacity optimization productivity drove sales significant cost productivity initiatives launched second quarter 2004 financial leverage incremental volume price increases offset rising raw material prices resulting improved segment operating margin general corporate net general corporate expenses 883 million 2004 compared 668 million 2003 expense 2004 includes charges 164 million due higher estimated costs environmental remediation several legacy sites 70 million contributions charitable corporation 50 million costs associated corporate staff changes expense 2003 included charge 47 million due higher estimated future costs environmental remediation legacy site loss disposition business second quarter 2003 sold majority ownership interest reliance electric limited japan rej resulting loss 84 million 25 million tax 001 per diluted share cash proceeds transaction totaled 104 million interest expense interest expense 417 million 2004 compared 525 million 2003 decrease result retirement maturity 1500 million principal amount 680 notes april 2003 benefit interest rate swap see note 6 financial statements lower average shortterm borrowings discontinued operations see note 13 note 16 financial statements information regarding discontinued operations income taxes 2005 recognized tax benefits 197 million 010 per diluted share related resolution claims tax matters connection closure federal audit cycle years 1998 2002 2004 recognized tax benefits 463 million 024 per diluted share related following items • 345 million resulting resolution certain tax matters primarily related former businesses majority benefits recognized related nonus tax matters addition agreement taxing authority related treatment investment • 43 million related additional state tax benefits associated us research experimentation credit refund claim 2003 see discussion • 75 million related refund state california period 1989 1991 2003 recognized net tax benefit 694 million 037 per diluted share related us federal research experimentation credit refund claim tax benefit approximately 26 million result ability utilize certain capital loss carryforwards valuation allowance previously provided full year effective tax rate 2005 297 percent compared 192 percent 2004 discrete items described decreased effective tax rate 26 percent 2005 105 percent 2004 full year effective tax rate 2003 54 percent including effect research experimentation settlement 233 percent benefit utilization capital loss carryforwards 09 percent benefit see note 16 financial statements reconciliation united states statutory tax rate effective tax rate current projected growth income higher tax jurisdictions resulted may continue result increasing effective tax rate time expect effective income tax rate 2006 approximately 335 percent excluding income tax expense benefit related discrete items separately reported net related tax effects see note 13 note 16 financial statements information tax matters related discontinued operations financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investment required maintain operations businesses execute strategy opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may different definitions used companies free cash flow 5148 million year ended september 30 2005 compared 4989 million year ended september 30 2004 increased pretax earnings offset increase voluntary contributions us pension plan 1500 million 2005 compared 1250 million 2004 capital spending working capital needs increased capital spending includes investments information technology certain longlived asset replacements necessary utilize commercial paper principal source shortterm financing september 30 2005 2004 commercial paper borrowings outstanding 2005 commercial paper borrowings 2004 significant commercial paper borrowings due cash position january 2004 repaid 84 million industrial development revenue bonds prior maturity using cash hand april 2003 repaid 1500 million principal amount 680 notes maturity using combination cash hand commercial paper borrowings 2005 repurchased approximately 98 million shares common stock cost 4992 million compared repurchases approximately 75 million shares common stock cost 2584 million 2004 anticipate repurchasing stock 2006 amount depend ultimately business conditions stock price cash requirements september 30 2005 authorization board directors purchase approximately 88 million additional shares september 30 2006 october 2005 contributed 450 million us qualified pension trust contribution funded combination cash hand 300 million commercial paper borrowings november 2005 sold 24 owned properties saleleaseback transaction net cash proceeds approximately 148 million cash proceeds used repay commercial paper borrowings expect future significant uses cash include capital expenditures dividends shareowners repayments shortterm borrowings acquisitions businesses repurchases common stock may include additional contributions pension plans expect capital expenditures 2006 150 million expect future uses cash funded existing cash balances cash generated operating activities commercial paper borrowings new issue debt issuance securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototal capital ratio 312 percent september 30 2005 289 percent september 30 2004 october 2004 entered fiveyear 6000 million unsecured revolving credit facility replaced existing 6750 million unsecured credit facilities borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenant would default debttototal capital ratio exceed 60 percent addition 6000 million credit facility shortterm unsecured credit facilities approximately 115 million september 30 2005 available foreign subsidiaries following summary credit ratings september 30 2005 moody’s changed longterm outlook negative stable second quarter 2005 reflect leading position global industrial automation market healthy balance sheet solid cash flow generation among things draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining ratings set forth table given commercial paper current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities could higher cost commercial paper borrowings cash dividends shareowners 1427 million 078 per share 2005 1225 million 066 per share 2004 although declaration payment dividends sole discretion board directors expect continue pay quarterly dividends 2006 0225 per outstanding share certain contractual cash obligations september 30 2005 amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts received interest rate swap 63 million fair value adjustment recorded interest rate swap permitted sfas 133 accounting derivative instruments hedging activities unamortized discount 455 million see note 6 financial statements additional information regarding longterm debt b see note 20 financial statements information regarding november 2005 saleleaseback transaction sponsor pension postretirement benefit plans certain employees see note 12 financial statements information regarding plans expected future cash outflows related plans september 30 2005 rockwell collins guarantee onehalf lease agreement one rockwell scientific company llc’s rsc facilities total future minimum payments lease 48 million lease agreement term ends december 2011 addition share equally rockwell collins providing 60 million line credit rsc bears interest greater rockwell collins’ commercial paper borrowing rate september 30 2005 2004 outstanding borrowings line credit supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore reported sales affected changes currency rates outside control believe sales excluding effect changes currency exchange rates nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates use sales excluding effect changes currency exchange rates monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect preceding year attribute sales geographic regions based country origin following reconciliation reported sales excluding effect changes currency exchange rates millions following reconciliation reported sales control systems segment sales excluding effect changes currency exchange rates millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense recognized future periods global pension expense 2005 662 million compared 688 million 2004 approximately 80 percent 2005 global pension expense relates us qualified pension plan actuarial assumptions used determine 2005 us pension expense included following discount rate 625 percent compared 600 percent 2004 expected rate return plan assets 850 percent compared 850 percent 2004 assumed compensation increase rate 450 percent compared 450 percent 2004 2005 made voluntary contributions 1500 million primary us qualified pension plan trust compared 1250 million 2004 estimate pension expense approximately 82 million 2006 increase approximately 16 million 2005 estimated 2006 pension expense reflects following changes us pension plan • net cost related changes actuarial assumptions • benefit 100 million contribution september 2005 450 million contribution october 2005 • benefit related plan amendment eliminates early retirement subsidy certain employees 2006 changes actuarial assumptions include 100 basis point reduction discount rate 525 percent 625 percent used 2005 discount rate set june 30th measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed rate return plan assets remain 850 percent consistent 2005 considered actual returns plan assets long term well current expected mix plan investments setting assumption assumed compensation increase rate 406 percent 2006 compared 450 percent used 2005 established rate using analysis elements employee compensation considered pension eligible earnings additionally establishing 2006 pension assumptions performed actuarial experience study changed assumptions including retirement rate employee turnover rate mortality rate result utilizing rp2000 table projected forward 10 years effective 2006 amended us pension plan eliminate early retirement subsidy certain employees effect amendment reduction approximately 70 million pension benefit obligation corresponding reduction annual pension expense recognized average remaining service life plan participants following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points assumptions us pension plans millions additional information regarding pension benefits including pension obligation minimum pension liability adjustment contained note 12 financial statements postretirement benefits estimate assistance third party actuarial consultants costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2005 postretirement benefits expense 625 percent compared 600 percent 2004 2006 discount rate assumption postretirement benefit expense decrease 50 percent effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment primary us program increase healthcare costs resulting healthcare inflationary trends january 1 2005 net periodic benefit cost 2005 249 million compared 234 million 2004 expect net periodic benefit cost 2006 approximately 36 million estimated postretirement projected benefit obligation approximate 425 million expected increases primarily due decrease discount rate june 30 2005 measurement date 125 basis points 50 percent additional information regarding postretirement benefits contained note 12 financial statements revenue recognition record sales products services representing approximately 90 consolidated sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress towards completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturing oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 50 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1176 million september 30 2005 861 million september 30 2004 94 million september 30 2005 78 million september 30 2004 included offset accounts receivable impairment longlived assets evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable future cash flows evaluate recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired use judgment applying impairment rules determine impairment test necessary factors consider could trigger impairment review include significant underperformance relative historical forecasted operating results significant decrease market value asset significant change extent manner asset used significant negative industry economic trends impairment losses measured amount carrying value asset exceeds estimated fair value determine fair value must make estimates future cash flows related asset reviewed estimates require assumptions demand products services future market conditions technological developments assumptions include discount rate future growth rates perform annual impairment test nonamortized intangible assets second quarter fiscal year second quarter 2005 estimated fair value reliance trademark exceeded 728 million net book value calculated estimated fair value assistance third party valuation specialists either increase discount rate decrease planned future growth profitability electrical reliance business group could result impairment charge write book value reliance trademark revised estimated fair value litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures utilizing information received independent environmental consultants liabilities include accruals sites currently thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters net related receivables 393 million september 30 2005 388 million september 30 2004 2005 recorded adjustments totaling 85 million increase environmental reserves related several legacy sites compared 2004 adjustments 169 million recorded liability environmental matters almost entirely relates businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability described item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see item 3 discussion principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate reserve product liability claims excluding asbestos assistance third party actuarial consultant using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 295 million september 30 2005 323 million september 30 2004 additional information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions taken tax returns taxing authorities increasingly asserting interpretations laws facts challenging cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies recorded accrual 1031 million september 30 2005 reflects estimate likely outcome current future audits recorded liabilities consolidated balance sheet final determination tax audits changes estimates may result additional future income tax expense benefit recorded valuation allowance 555 million september 30 2005 majority deferred tax assets related net operating loss carryforwards capital loss carryforwards state tax credit carryforwards based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty amounts carryforwards expected realized income would increase determine able utilize carryforwards currently expected end interim reporting period estimate effective tax rate expected apply full fiscal year estimated effective tax rate contemplates expected jurisdiction income earned well tax planning strategies current projected growth income higher tax jurisdictions resulted may continue result increasing effective tax rate time actual results differ estimates may adjust effective tax rate interim period determination made additional information regarding income taxes contained note 16 financial statements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes sales excluding effect changes currency exchange rates free cash flow nongaap measures see supplemental sales information reconciliation reported sales excluding effect changes currency exchange rates addition discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview overall demand products services driven • investments manufacturing capacity including upgrades modifications expansions existing manufacturing facilities creation new manufacturing facilities • customers’ needs greater productivity cost reduction quality overall global competitiveness • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate • levels global industrial production • regional factors include local political social regulatory economic circumstances • seasonal capital spending patterns customers due annual capital budgeting processes working schedules u industrial economic trends 2006 sales us accounted 62 percent total sales trend improving conditions us manufacturing economy 2004 2005 continued first half 2006 moderated somewhat second half various indicators use gauge direction momentum served markets include • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy includes primary customer base measure longer term proven reasonable predictive value good directional indicator growth trend • capacity utilization indication plant operating activity published federal reserve historically meaningful correlation capacity utilization level capital investment made customers manufacturing base • purchasing managers’ index pmi published institute supply management ism indication level manufacturing activity us according ism pmi measure 50 indicates manufacturing economy generally expanding measure 50 indicates generally contracting table depicts continued gradual improvement us industrial equipment spending capacity utilization sustained strength pmi since december 2003 still expect moderate growth 2007 planning deceleration sustainable level growth us economy 2007 note economic indicators subject revisions issuing organizations nonus regional trends outside us demand principally driven strength industrial economy region customers’ ability propensity invest manufacturing assets customers may include multinational companies expanding global presence growing indigenous companies recent strength demand part driven investment infrastructure developing economies basic materials production capacity response higherend product pricing expanding consumer markets continue see strong demand china india latin america also saw considerable growth europe second half 2006 following nearly two years little growth 2006 european operations benefited targeted growth investments customerfacing resources well improving macroeconomic conditions expect strong growth latin america europe emerging economies asia pacific continue 2007 revenue geographic region table presents actual sales year ended september 30 2006 geographic region change sales year ended september 30 2005 millions except percentages 1 attribute sales geographic regions based upon country destination 2 see supplemental sales information nongaap measure industry views serve customers wide range industries including consumer products transportation basic materials oil gas 2006 benefited growing demand industries serve consumer products customers engaged food beverage home health beauty life sciences industries customers’ needs include global expansion incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance addition customers operate environment product innovation time market critical factors result consumer products customers’ capital investments generally less cyclical heavy manufacturing customers transportation factors plant closings customer investment new model introductions flexible manufacturing technologies affect sales global automotive revenue flat 2006 traditional north american automotive installed base experienced significant slowdown second half year negative impact sales operating earnings control systems business primarily sales logix plc products plan 2007 anticipate recovery customers basic materials industries including mining aggregates metals forest products cement benefit higher commodity prices higher global demand basic materials encourage investment capacity productivity industries energy prices rise customers oil gas industry increase investment production transmission capacity 2006 high energy prices contributed strong growth resource energy based industries addition higher energy prices historically caused customers across industries consider investing energyefficient manufacturing processes technologies intelligent motor controls outlook 2007 following summary key objectives 2007 • successfully complete divestiture principal businesses power systems operating segment • execute cost productivity initiatives • continue globalization efforts particular focus emerging markets • sustain growth integrated control information architecture accelerating proliferation adoption rate enhancing features functionality aggressively pursuing growth expanded addressable market key objectives assume certain amount cost productivity 2007 cost productivity initiatives likely include workforce reductions facility rationalization actions consistent planned divestiture power systems operating segment globalization cost productivity efforts costs associated actions recorded relevant recognition criteria met outlook 2007 based expected demand assumes sustained momentum outside north america slower rates growth us canada previous three years outlook also assumes sustained momentum across industrial end markets actual growth reported particular quarter may perform lag trend oscillation performance around trend attributed inherent variability business short lead times minimal backlog nonproject businesses extrapolation growth rates levels profitability one quarter lead incorrect conclusions future performance date filing report based upon current economic conditions business trends expect grow revenue 2007 7 8 percent consistent longterm growth trend date hereof also expect full year 2007 diluted earnings per share range 370 390 includes expected effective income tax rate average 32 percent full year excluding effect acquisitions divestitures items separately reported net related tax effects tax rate assumes continued execution globalization strategy also plan generate free cash flow approximately equal net income guidance incorporate impact future acquisitions divestures including planned divestiture dodge mechanical reliance electric motors motor repair services businesses summary results operations compared 2005 sales increased 11 percent 2006 compared 2005 double digit growth control systems power systems total sales significantly affected year changes currency exchange rates sales us canada increased 11 percent 2006 compared 2005 sales us canada benefited strength powercentric businesses however negatively impacted weakness north american automotive market second half year sales asiapacific region grew 11 percent 2006 compared 2005 particularly strong growth emerging economies including china india latin america sales grew 19 percent 2006 compared 2005 excluding effect currency translation led strength oil gas mining industries sales europe grew 7 percent 2006 compared 2005 excluding effects currency translation europe experienced considerable growth second half 2006 operations europe benefited investment customer facing resources improving macroeconomic conditions segment operating earnings segment operating earnings increased 1685 million 2005 10357 million 2006 segment operating earnings benefited higher volume productivity programs favorable pricing partially offset inflation higher growth initiative spending comparison prior year segment operating earnings 2006 include 198 million stock compensation expense due adoption new accounting standard sfas 123r sharebased payment sfas 123r additionally 2006 results include 273 million increased pension retiree medical expense compared 2005 segment operating earnings 2005 include benefit 123 million related insurance settlement charge 215 million related special charges associated restructuring activities europe us plant closing general corporate net general corporate expenses 925 million 2006 compared 697 million 2005 increase includes 97 million stock compensation expense lower interest income higher contributions rockwell automation charitable corporation interest expense interest expense 584 million 2006 compared 458 million 2005 increase due commercial paper borrowings 2006 well higher interest rates associated interest rate swap see note 6 financial statements income taxes effective tax rate 2006 295 percent compared 297 percent 2005 2006 effective tax rate differed federal statutory rate 35 percent due reversal 272 million 015 per diluted share valuation allowances capital loss carryforwards settlement audit matters us internal revenue service years 2003 2004 lower nonus tax rates foreign sales corporation fsc extra territorial income eti tax benefits provision adjustments effective tax rate 2005 lower federal statutory tax rate 35 percent due benefit 197 million 010 per diluted share related settlement audit matters us internal revenue service years 1998 2002 utilization foreign tax credits fsc eti tax benefits provision adjustments see note 16 financial statements additional information tax events 2006 2005 affecting respective tax rates discontinued operations see note 13 note 16 financial statements regarding discontinued operations control systems sales increased 10 percent 2006 compared 2005 significantly affected year changes currency exchange rates sales us canada increased 11 percent 2006 compared 2005 excluding effects changes foreign currency exchange rates sales us canada benefited strength powercentric businesses however negatively impacted weakness north american automotive market second half year sales asiapacific region grew 9 percent 2006 compared 2005 particularly strong growth emerging economies including china india latin america sales grew 19 percent 2006 compared 2005 excluding effect currency translation led strength oil gas mining industries european sales grew 7 percent 2006 compared 2005 excluding effects currency translation europe experienced considerable growth second half 2006 operations europe benefited investment customer facing resources improving macroeconomic conditions operating earnings segment operating earnings grew 15 due higher volume productivity programs lower restructuring costs favorable pricing partially offset inflation higher growth initiative spending comparison prior year segment operating earnings 2006 include 158 million stock compensation expense due adoption new accounting standard sfas 123r additionally 2006 results include 215 million increased pension retiree medical expense compared 2005 segment operating earnings 2005 include benefit 123 million related insurance settlement charge 165 million related special charges associated restructuring activities europe power systems sales power systems sales increased 15 percent compared 2005 growth dodge mechanical reliance electrical business groups sales power systems benefited continued strong momentum resulting high energy commodity prices higher prices resulted segment’s predominantly us based customers investing capacity expansion several years underinvestment reduced capital spending operating earnings power systems operating earnings grew 47 percent due higher volume productivity initiatives balanced dynamic price cost lower restructuring costs somewhat offset inflation segment operating earnings 2006 include stock compensation expense 40 million increased pension retiree medical expense 58 million compared 2005 segment operating earnings 2005 include charge 50 million associated facility closure corresponding writedown property fair value compared 2004 sales increased 13 percent compared 2004 driven double digit growth control systems power systems two percentage points growth due effect changes currency exchange rates primarily resulting strength major european currencies canadian dollar relation us dollar sales rose double digit percentages regions except emea difficult economic conditions dampened growth major economies western europe primarily france germany uk emerging economies asiapacific led china india experienced particularly strong growth strength oil gas mining industries latin america oil gas industry canada contributed particularly strong sales growth regions sales global waterwastewater oil gas aggregate cement mining industries grew rate higher annual growth rate 13 percent sales food transportation industries grew rates approximate annual growth rate sales life sciences semiconductor beverage grew rate less annual growth rate segment operating earnings segment operating earnings benefited higher volume productivity programs favorable pricing offset slightly inflation comparison prior year additionally segment operating earnings 2005 include 215 million related special charges associated restructuring activities europe us plant closing offset 123 million benefits received related insurance settlements segment operating earnings 2004 include 263 million special facilities related charges general corporate net general corporate expenses 697 million 2005 compared 883 million 2004 expense decreased primarily due reduced environmental costs lower contributions charitable corporation increased interest income interest expense interest expense 458 million 2005 compared 417 million 2004 primarily due higher interest rates associated interest rate swap see note 6 financial statements income taxes effective tax rate 297 percent 2005 192 percent 2004 effective tax rate 2005 lower federal statutory tax rate 35 percent due benefit 197 million 010 per diluted share related settlement audit matters us internal revenue service years 1998 2002 utilization foreign tax credits fsc eti tax benefits provision adjustments effective tax rate 2004 lower federal statutory tax rate 35 percent due benefits totaling 463 million 024 per diluted share resolution various tax matters nonus jurisdictions state tax benefits involving refund claims lower nonus tax rates fsc eti tax benefits provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate additional information tax events 2005 2004 affecting respective tax rates discontinued operations see note 13 note 16 financial statements regarding discontinued operations control systems sales control systems sales increased 13 percent compared 2004 three percentage points sales increase due effect changes currency exchange rates primarily resulting relative strength major european currencies canadian dollar relation us dollar sales logix offering grew 26 percent compared 2004 somewhat offset decline legacy control platform products replaced logix growth sales logix offering driven introduction new functionality expanded addressable market intelligent motor control products also delivered significantly higher revenue driven strong sales extractionbased heavy industrial customers higher commodity prices renewed investment energy efficiency programs led strong demand customers operating earnings segment operating earnings increased 43 percent compared 2004 increase segment operating earnings due higher volume cost productivity favorable pricing somewhat offset inflation control systems 2005 results include 123 million benefits related insurance settlements offset 165 million special charges associated realignment administrative functions reduction workforce europe prior year segment operating earnings include 263 million charge related facilities rationalization program power systems sales power systems sales increased 17 percent compared 2004 growth dodge mechanical reliance electrical business groups growth driven demand powercentric customers heavy extractionbased industries mining oil gas higher commodity prices causing segment’s predominantly us based customers invest capacity expansion several years underinvestment reduced capital spending operating earnings power systems operating earnings grew 63 percent due higher volume favorable pricing productivity somewhat offset inflation significantly higher material costs segment operating earnings 2005 include charge 50 million associated facility closure corresponding writedown property fair value compared 40 million charges related restructuring activities 2004 financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investment required maintain operations businesses execute strategy first quarter 2006 adopted sfas 123r see note 1 financial statements requires report excess tax benefits related sharebased compensation financing cash flow rather operating cash flow added benefit back operating cash flow present free cash flow basis consistent historical presentation opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies free cash flow 3235 million year ended september 30 2006 compared 5148 million year ended september 30 2005 free cash flow 2006 includes voluntary contributions us pension plan 4500 million compared 1500 million contributions 2005 addition increased capital spending working capital 2006 resulted operating growth investments occurred year commercial paper principal source shortterm financing commercial paper borrowings outstanding september 30 2006 2190 million weighted average interest rate borrowings 54 percent september 30 2005 throughout 2005 commercial paper borrowings outstanding due cash position october 2005 contributed 450 million us qualified pension trust funded contribution combination cash hand 300 million commercial paper borrowings november 2005 sold 24 owned properties saleleaseback transaction net cash proceeds approximately 1475 million used cash proceeds repay commercial paper borrowings september 2006 received 834 million cash sale investment rsc 2006 repurchased approximately 122 million shares common stock 04 million shares settle october 2006 total cost shares 7431 million 206 million recorded accounts payable september 30 2006 repurchased 98 million shares common stock cost 4992 million 2005 anticipate repurchasing stock 2007 amount depend ultimately business conditions stock price cash requirements september 30 2006 authorization board directors purchase approximately 56 million additional shares september 30 2007 november 7 2006 announced entered definitive agreement divest principal businesses included power systems operating segment 18 billion comprised 175 billion cash 50 million common stock acquirer divestiture subject customary closing conditions regulatory approval expected close second fiscal quarter expect use significant portion aftertax cash proceeds repurchase common stock pay outstanding commercial paper balances pursue growth opportunities expect future significant uses cash include repurchases common stock repayments shortterm borrowings dividends shareowners capital expenditures acquisitions businesses may include additional contributions pension plans expect capital expenditures 2007 175 million expect fund future uses cash existing cash balances cash generated operating activities commercial paper borrowings divestures businesses new issue debt issuance securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 335 percent september 30 2006 312 percent september 30 2005 october 2004 entered fiveyear 6000 million unsecured revolving credit facility replaced existing 6750 million unsecured credit facilities september 2006 entered 364day 2500 million unsecured revolving credit facility credit facilities remain effect drawn either september 30 2006 2005 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2006 2005 addition 6000 million 2500 million credit facilities shortterm unsecured credit facilities approximately 1252 million september 30 2006 available foreign subsidiaries following summary credit ratings september 30 2006 among uses draw credit facilities standby liquidity facilities repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining ratings set forth table given commercial paper current policy respect ratings expect limit borrowings credit facilities amounts would leave enough credit available facilities could borrow needed repay outstanding commercial paper matures access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities could higher cost commercial paper borrowings cash dividends shareowners 1593 million 090 per share 2006 1427 million 078 per share 2005 although declaration payment dividends sole discretion board directors expect pay quarterly dividends 2007 029 per outstanding share certain contractual cash obligations september 30 2006 amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts received interest rate swap 68 million fair value adjustment recorded interest rate swap permitted sfas 133 accounting derivative instruments hedging activities unamortized discount 450 million see note 6 financial statements additional information regarding longterm debt b see note 17 financial statements information regarding november 2005 saleleaseback transaction c item includes longterm obligations agreements various service providers sponsor pension postretirement benefit plans certain employees see note 12 financial statements information regarding plans expected future cash outflows related plans supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales believe sales excluding effect changes currency exchange rates nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates use sales excluding effect changes currency exchange rates monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect preceding year attribute sales geographic regions based country destination following reconciliation reported sales excluding effect changes currency exchange rates millions following reconciliation reported sales control systems segment sales excluding effect changes currency exchange rates millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense recognized future periods global pension expense 2006 836 million compared 662 million 2005 approximately 70 percent 2006 global pension expense relates us qualified pension plan actuarial assumptions used determine 2006 us pension expense included following discount rate 525 percent compared 625 percent 2005 expected rate return plan assets 850 percent compared 850 percent 2005 assumed compensation increase rate 406 percent compared 450 percent 2005 2006 made voluntary contributions 4500 million primary us qualified pension plan trust compared 1500 million 2005 pension protection act 2006 signed law august 2006 currently evaluating legislation effect future pension contributions estimate pension expense approximately 46 million 2007 decrease approximately 37 million 2006 estimated 2007 pension expense reflects net cost related changes actuarial assumptions us pension plan benefit 4500 million contribution october 2005 2007 changes actuarial assumptions include increase discount rate 650 percent 525 percent rate used 2006 discount rate set june 30th measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed rate return plan assets reduced 800 percent compared 850 percent assumed rate return used 2006 considered actual returns plan assets long term well current expected mix plan investments setting assumption intend time change us plan’s mix investments increasing weighting debt securities assumed compensation increase rate 419 percent 2007 compared 406 percent used 2006 established rate using analysis elements employee compensation considered pension eligible earnings following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points assumptions us pension plans millions additional information regarding pension benefits including pension obligation minimum pension liability adjustment contained note 12 financial statements postretirement benefits estimate costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2006 postretirement benefits expense 500 percent compared 625 percent 2005 2007 discount rate assumption postretirement benefit expense increase 650 percent discount rate set june 30th measurement date determined modeling portfolio bonds match expected cash flow benefit plans effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment primary us program increase healthcare costs resulting healthcare inflationary trends january 1 2005 net periodic benefit cost 2006 354 million compared 249 million 2005 expect net periodic benefit cost 2007 approximately 13 million estimated postretirement projected benefit obligation approximate 255 million decreases due primarily increase discount rate 150 basis points 650 percent transition eligible retirees efficient medicare advantage plan additional information regarding postretirement benefits contained note 12 financial statements revenue recognition record sales products services representing approximately 90 percent consolidated sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturing oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 60 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1218 million september 30 2006 1176 million september 30 2005 85 million september 30 2006 94 million september 30 2005 included offset accounts receivable impairment longlived assets evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable future cash flows evaluate recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired use judgment applying impairment rules determine impairment test necessary factors consider could trigger impairment review include significant underperformance relative historical forecasted operating results significant decrease market value asset significant change extent manner asset used significant negative industry economic trends impairment losses measured amount carrying value asset exceeds estimated fair value determine fair value must make estimates future cash flows related asset reviewed estimates require assumptions demand products services future market conditions technological developments assumptions include discount rate future growth rates perform annual impairment test nonamortized intangible assets second quarter fiscal year second quarter 2006 estimated fair value reliance trademark exceeded 728 million net book value either increase discount rate decrease planned future growth profitability electrical business group could result impairment charge write book value reliance trademark revised estimated fair value litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change effective september 30 2006 adopted fin 47 clarifies guidance included sfas 143 accounting asset retirement obligations sfas 143 fin 47 companies must accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise application fin 47 resulted charge net tax 181 million included consolidated statement operations year ended september 30 2006 cumulative effect change accounting principle reserve environmental matters net related receivables 666 million september 30 2006 393 million september 30 2005 reserve 2006 includes 293 million recorded liabilities consolidated balance sheet september 30 2006 resulting adoption fin 47 see note 17 financial statements additional information 2006 recorded adjustments totaling 52 million excluding adoption fin 47 increase environmental reserves related several legacy sites compared 2005 adjustments 85 million recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability described item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see item 3 discussion principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate reserve product liability claims excluding asbestos using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 297 million september 30 2006 295 million september 30 2005 additional information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions taken tax returns taxing authorities increasingly asserting interpretations laws facts challenging cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies recorded accrual 851 million september 30 2006 1031 million september 30 2005 reflects estimate likely outcome current future audits included liabilities consolidated balance sheet final determination tax audits changes estimates may result additional future income tax expense benefit recorded valuation allowance majority deferred tax assets amount 368 million september 30 2006 555 million september 30 2005 related nonus net operating loss capital loss carryforwards based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforward amount realized income would increase determine able utilize carryforwards currently expected end interim reporting period estimate base effective tax rate effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects recognize tax effect significant unusual extraordinary items period realizable additional information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales addition discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information products services overall demand products services driven • investments manufacturing capacity including upgrades modifications expansions existing manufacturing facilities creation new manufacturing facilities • customers’ needs greater productivity cost reduction quality safety overall global competitiveness • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate • levels global industrial production • regional factors include local political social regulatory economic circumstances • seasonal capital spending patterns customers due annual capital budgeting processes working schedules u industrial economic trends 2007 sales us customers accounted 54 percent total sales various indicators use gauge direction momentum served us markets include • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy global insights uses statistic along economic indicators forecast industrial equipment spending measures longer term proven reasonable predictive value directional indicator domestic growth • capacity utilization indication plant operating activity published federal reserve historically meaningful correlation capacity utilization level capital investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting table depicts continued general gradual improvement us industrial equipment spending since december 2004 capacity utilization remained 80 percent since december 2005 pmi sustained rate 50 since december 2004 although seen consistent strength past years manufacturing indicators follow seeing deceleration rate manufacturing growth north american market note economic indicators subject revisions issuing organizations nonus regional trends 2007 sales nonus customers accounted 46 percent total sales outside us demand products services principally driven strength industrial economy region customers’ ability propensity invest manufacturing assets customers may include multinational companies expanding global presence growing number local companies recent strength demand products services part driven investments infrastructure developing economies investments basic materials production capacity response higher commodity pricing expanding consumer markets continued see strong demand china india latin america 2007 also saw considerable growth europe 2007 benefited targeted growth investments customerfacing resources improving macroeconomic conditions expect strong growth latin america europe emerging economies asiapacific continue 2008 revenue geographic region table presents actual sales year ended september 30 2007 geographic region change sales year ended september 30 2006 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure industry views serve customers wide range industries including consumer resourcebased transportation consumer industry customers engaged food beverage home personal care life sciences industries customers’ needs include global expansion incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance addition customers operate environment product innovation time market critical factors consumer products customers’ capital investments generally less cyclical resourcebased customers resourcebased industries including oil gas mining aggregates metals waterwastewater forest products cement benefit higher commodity prices higher global demand basic materials encourage investment capacity productivity industries higher energy prices historically caused customers across industries consider investing energyefficient manufacturing processes technologies intelligent motor controls transportation factors excess capacity geographic expansion investment new model introductions flexible manufacturing technologies affect sales outlook 2008 following summary key objectives 2008 • continue grow profitably diversify business aggressively pursuing growth expanded addressable market enhancing market access organically synergistic acquisitions • execute cost productivity initiatives • expand global business footprint focus production efficiencies enhanced customer experience • remain focused erp system implementation across globe minimal disruption business clients • sustain growth integrated control information architecture accelerating proliferation adoption rate enhancing features functionality outlook 2008 based anticipated strength customer demand europe emerging markets believe investments technology leadership expanded served markets stronger global presence creating worldwide opportunities growth ever despite deceleration rate manufacturing growth north american market ongoing diversification revenue base combined recent acquisitions cause us optimistic 2008 another good year remain intensely focused executing growth productivity initiatives continue evolve global footprint manufacturing engineering back office customer support infrastructure date filing report based upon current economic conditions business trends expect revenue grow 10 12 percent 2008 anticipate acquisitions contribute approximately 3 percentage points growth rate services solutions business continue become larger portion revenue also believe continue benefit strong momentum growth initiatives particularly process applications safety expect continued growth commercial investments made emea latin america continued strength emerging markets improved performance asiapacific region especially china offset somewhat slower rates growth developed economies date hereof also expect 2008 diluted earnings per share range 425 445 includes expected effective income tax rate average 28 29 percent full year subject quarterly variability anticipate earnings benefit volume leverage productivity initiatives decrease year average share count items partially offset investments new products services technologies expertise serve new applications markets combined inflation material employee costs globalization business model also expect acquisitions put downward pressure operating margin combined purchase accounting expense negative impact diluted earnings per share also plan generate free cash flow approximately 95 percent net income 2008 summary results operations information regarding define segment operating earnings included note 18 financial statements b amount 2007 represents costs 277 million tax 017 per diluted share related various restructuring activities designed execute cost productivity initiatives advance globalization strategy see note 14 financial statements information c amount 2006 represents gain sale 120 million tax 007 per diluted share related sale 50 percent interest rsc see note 2 financial statements information see note 13 financial statements description items reported discontinued operations e effective september 30 2006 adopted fin 47 resulting charge 286 million 177 million tax 010 per diluted share see note 17 financial statements information 2007 compared 2006 sales increased 10 percent 2007 compared 2006 organic sales increased 6 percent foreign currency translation acquisitions added 3 1 percentage points growth rate respectively sales united states increased 3 percent 2007 compared 2006 full year sales strong europe latin america organic growth rates 14 percent 19 percent respectively asia pacific sales grew organically 7 percent 2006 canada reported 1 percent decline organic growth continued see growth investments emea latin america life sciences industry deliver incremental revenue increases partially offset sales decline north american automotive industry due weakness important detroit customer base general corporate net general corporate expenses 728 million 2007 compared 907 million 2006 decrease due primarily interest income proceeds power systems sale expenses 2007 also include charges 139 million related environmental remediation costs legacy sites partially offset 121 million dividend related equity interest acquired result divestiture firstpoint contact business special charges special charges 435 million include costs related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions included workforce reductions realignment administrative functions rationalization consolidation global operations expect total cash expenditures approximate 390 million connection actions paid 53 million september 30 2007 noncash special charges include writedowns certain inventory machinery equipment totaling 45 million interest expense interest expense 634 million 2007 compared 566 million 2006 increase due higher average commercial paper borrowings 2007 well higher interest rates associated interest rate swap see note 6 financial statements income taxes effective tax rate 2007 278 percent compared 281 percent 2006 2007 effective tax rate differed federal statutory rate 35 percent benefited lower nonus tax rates resolved certain tax matters claims related closure 2005 us federal audit cycle various state tax audits made provision adjustments 2006 effective tax rate lower federal statutory rate 35 percent reversed 272 million 015 per diluted share valuation allowances capital loss carryforwards settled audit matters us internal revenue service years 2003 2004 benefited lower tax rates outside us received foreign sales corporation fsc extra territorial income eti tax benefits made provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2007 2006 affecting respective tax rates income continuing operations accounting change income continuing operations 2007 increased 8 percent 2006 increase due primarily increased sales lower retirement benefits expense improved operating margins increased dividend interest income partially offset special charges additional environmental charges higher interest expense discontinued operations amounts reported discontinued operations primarily relate operating results principal businesses former power systems operating segment periods divestiture gain sale principal businesses former power systems operating segment net income operating activities power systems 423 million 2007 1001 million 2006 reported aftertax gain sale power systems 8682 million 539 per share 2007 also reported aftertax income 80 million 2007 related discontinued operations activities compared 47 million loss discontinued operations activities 2006 see also note 13 financial statements information discontinued operations architecture software sales architecture software sales increased 8 percent compared 2006 organic growth accounted 5 percent increase foreign currency translation added 3 percentage points growth rate continued see growth process applications safety compactlogix™ product offering operating margin segment operating margin increased 06 points 2007 compared 2006 due successful execution productivity initiatives price increases lower retirement benefits expense partially offset inflation spending support growth control products solutions sales control products solutions sales increased 11 percent compared 2006 organic growth contributed 7 percent increase foreign currency translation acquisitions added 4 percentage points growth rate year results benefited strong growth powercentric solutions businesses operating margin segment operating margin increased 07 points 2007 compared 2006 due productivity efforts price increases lower retirement benefits expense partially offset inflation spending support growth 2006 compared 2005 sales increased 11 percent 2006 compared 2005 growth architecture software control products solutions segments total sales significantly affected year changes currency exchange rates organic sales us canada increased 11 percent 2006 compared 2005 despite negatively impacted weakness north american automotive market second half year organic sales asiapacific region grew 9 percent 2006 compared 2005 particularly strong growth emerging economies including china india latin america organic sales grew 19 percent 2006 compared 2005 led strength oil gas mining industries organic sales europe grew 7 percent 2006 compared 2005 europe experienced considerable growth second half 2006 operations europe benefited investment customer facing resources improving macroeconomic conditions general corporate net general corporate expenses 907 million 2006 compared 685 million 2005 increase includes 97 million stock compensation expense lower interest income higher contributions rockwell automation charitable corporation interest expense interest expense 566 million 2006 compared 458 million 2005 increase due commercial paper borrowings 2006 well higher interest rates associated interest rate swap see note 6 financial statements income taxes effective tax rate 2006 281 percent compared 289 percent 2005 2006 effective tax rate differed federal statutory rate 35 percent due reversal 272 million 015 per diluted share valuation allowances capital loss carryforwards settlement audit matters us internal revenue service years 2003 2004 lower nonus tax rates fsc eti tax benefits provision adjustments effective tax rate 2005 lower federal statutory tax rate 35 percent due benefit 193 million 010 per diluted share related settlement audit matters us internal revenue service years 1998 2002 utilization foreign tax credits fsc eti tax benefits provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2006 2005 affecting respective tax rates income continuing operations accounting change income continuing operations accounting change increased 18 percent 5293 million compared 2005 increase due higher volume productivity programs favorable pricing slightly lower effective tax rate partially offset inflation higher growth initiative spending comparison prior year income continuing operations accounting change includes 167 million tax sharebased compensation expense due adoption new accounting standard sfas 123r sharebased payment sfas 123r additionally 2006 results include 134 million tax increased pension retiree medical expense lower interest income higher charitable contributions higher interest expense compared 2005 income continuing operations accounting change 2005 includes aftertax benefit 84 million related insurance settlement aftertax charge 111 million related restructuring activities europe discontinued operations amounts reported discontinued operations primarily relate results former power systems operating segment power systems sales 2006 9892 million increase 15 percent compared 8607 million 2005 due growth dodge mechanical reliance electrical business groups sales power systems benefited continued strong momentum resulting high energy commodity prices higher prices resulted businesses’ predominantly us based customers continuing invest capacity expansion several years underinvestment reduced capital spending power systems net income 1001 million increase 41 percent compared 708 million 2005 due higher volume productivity initiatives balanced dynamic price cost lower restructuring costs somewhat offset inflation net income 2006 includes sharebased compensation expense 25 million increased pension retiree medical expense 35 million compared 2005 net income 2005 includes charge 31 million associated facility closure corresponding writedown property fair value discontinued operations 2006 also includes charges related former aerospace defense businesses’ operation rocky flats facility loss sale electrocraft business electrocraft’s loss operations discontinued operations 2005 includes tax matters electrocraft’s loss operations see note 13 financial statements information regarding discontinued operations architecture software sales architecture software sales increased 7 percent 2006 compared 2005 logix platform business grew 20 percent despite slowdown sales traditional north american automotive market second half year operating margin segment operating margin fell 11 points due higher employee expenses inflation higher growth initiative spending comparison prior year partially offset higher volume productivity programs favorable pricing lower restructuring costs segment operating earnings 2006 include 70 million stock compensation expense due adoption sfas 123r additionally 2006 results include 78 million increased pension retiree medical expense compared 2005 segment operating earnings 2005 include benefit 56 million related insurance settlement charge 63 million related restructuring activities europe control products solutions sales control products solutions sales increased 14 percent due growth control products solutions businesses growth benefited strength powercentric businesses operating margin segment operating margin increased 28 points due higher volume productivity programs favorable pricing lower restructuring costs partially offset higher employee expenses inflation higher growth initiative spending comparison prior year segment operating earnings 2006 include 88 million stock compensation expense due adoption sfas 123r additionally 2006 results include 137 million increased pension retiree medical expense compared 2005 segment operating earnings 2005 include benefit 67 million related insurance settlement charge 102 million related restructuring activities europe financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy first quarter 2006 adopted sfas 123r see note 11 financial statements requires report excess income tax benefit exercise stock options financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance definition free cash flow may different definitions used companies definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows cash flows operating activities discontinued operations reported statement cash flows net separately calculated income tax effects us federal state income taxes paid result gain sale principal businesses former power systems operating segment classified within continuing operations consistent cash proceeds taxes paid 2007 excluded free cash flow present free cash flow representative performance continuing businesses free cash flow 5310 million year ended september 30 2007 compared 2384 million year ended september 30 2006 increase free cash flow largely result 4500 million voluntary contribution us qualified pension plan trust 2006 compared 80 million voluntary contributions 2007 increase partially offset increased working capital requirements 2007 january 2007 received 175 billion cash proceeds sale dodge mechanical reliance electric motors motor repair services businesses used cash proceeds repurchase shares common stock offset dilutive effect divestiture pay taxes gain sale acquire industrial control services group limited ics triplex 2007 repurchased approximately 238 million shares common stock 01 million shares settle october 2007 total cost shares 15061 million 75 million recorded accounts payable september 30 2007 compared purchases approximately 122 million shares common stock cost 7431 million 2006 purchases 04 million shares amounting 206 million settle october 2006 recorded accounts payable september 30 2006 anticipate repurchasing stock 2008 amount depend ultimately business conditions stock price cash requirements september 30 2007 approximately 263 million remaining stock repurchases existing board authorization november 7 2007 board directors authorized us repurchase additional 10 billion shares common stock expect future significant uses cash include repayments shortterm borrowings 3500 million notes due second quarter fiscal 2008 repurchases common stock dividends shareowners capital expenditures acquisitions businesses may include additional contributions pension plans expect capital expenditures 2008 145 million expect fund future uses cash combination existing cash balances cash generated operating activities longterm borrowings commercial paper borrowings proceeds sale securities capital markets november 7 2007 board directors authorized us issue 500 million longterm debt proceeds debt issued primarily would used reduce outstanding debt including retiring 350 million notes due second quarter fiscal 2008 addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 347 percent september 30 2007 335 percent september 30 2006 debttototalcapital ratio september 30 2007 influenced adoption sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r occurred 2007 commercial paper principal source shortterm financing commercial paper borrowings outstanding september 30 2007 1730 million weighted average interest rate borrowings 51 percent september 30 2006 commercial paper borrowings outstanding 2190 million weighted average interest rate 54 percent october 2004 entered fiveyear 6000 million unsecured revolving credit facility credit facility remains effect drawn september 30 2007 2006 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2007 2006 addition 6000 million credit facility shortterm unsecured credit facilities approximately 1723 million september 30 2007 available foreign subsidiaries september 2006 entered 364day 2500 million unsecured revolving credit facility terminated 2500 million credit facility effective march 30 2007 longer considered liquidity provided facility necessary following summary credit ratings september 30 2007 credit rating agency short term rating long term rating outlook standard poor’s a1 stable moody’s p1 a2 stable fitch ratings stable among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining ratings set forth table given commercial paper current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facilities provide shortterm funding event cost borrowings unsecured committed credit facilities could higher cost commercial paper borrowings cash dividends shareowners 1847 million 116 per share 2007 1593 million 090 per share 2006 1427 million 078 per share 2005 although declare pay dividends sole discretion board directors expect pay quarterly dividends 2008 least 029 per outstanding share summary contractual cash obligations september 30 2007 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid interest rate swap 18 million fair value adjustment recorded interest rate swap permitted sfas 133 accounting derivative instruments hedging activities unamortized discount 445 million see note 6 financial statements information regarding longterm debt b see note 17 financial statements information regarding november 2005 saleleaseback transaction c postretirement plans unfunded amounts reported estimates future benefit payments extent estimable amounts reported pension funding contributions reflect current estimates known commitments amounts subsequent 2008 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa zero may make additional contributions plan discretion management e item includes longterm obligations agreements various service providers supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates acquisitions made period use organic sales one measure monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year adjustments made 2006 sales acquisitions effect significant attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions comprised 1166 million related effect changes currency exchange rates 496 million related acquisitions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management prior years listed impairment longlived assets critical accounting policy estimate subjective portion balance reliance trademark relating principal businesses former power systems operating segment sale businesses including related trademark impairment longlived assets longer considered critical accounting policy estimate retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2007 463 million compared 716 million 2006 approximately 57 percent 2007 global pension expense relates us pension plan actuarial assumptions used determine 2007 us pension expense included following discount rate 650 percent compared 525 percent 2006 expected rate return plan assets 800 percent compared 850 percent 2006 assumed compensation increase rate 419 percent compared 406 percent 2006 increase us discount rate partially offset decrease expected rate return us plan assets accounts majority decline global pension expense 2007 made voluntary contributions 80 million primary us qualified pension plan trust compared 4500 million 2006 pension protection act 2006 signed law august 2006 interpretive guidance still evolving currently evaluating legislation effect future pension contributions estimate pension expense approximately 296 million 2008 decrease approximately 167 million 2007 2008 us discount rate remain 650 percent discount rate set june 30th measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed rate return us plan assets remain 800 percent considered actual returns plan assets long term well current expected mix plan investments setting assumption intend time change us plan’s mix investments increasing weighting debt securities assumed us compensation increase rate 415 percent 2008 compared 419 percent used 2007 established rate analyzing elements compensation pension eligible earnings following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points key assumption us pension plans millions pension benefits change projected benefit obligation change net periodic benefit cost discount rate 749 88 information regarding pension benefits contained note 12 financial statements postretirement benefits estimate costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2007 postretirement benefits expense 650 percent compared 500 percent 2006 2008 discount rate assumption postretirement benefit expense decrease 625 percent discount rate set june 30th measurement date determined modeling portfolio bonds match expected cash flow benefit plans effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment obligation less sensitive increasing healthcare costs resulting inflationary trends since january 1 2005 net periodic benefit cost recorded continuing operations 2007 130 million compared 187 million 2006 expect net periodic benefit cost 2008 approximately 155 million estimated postretirement projected benefit obligation approximate 2274 million increase net periodic benefit cost due primarily decrease discount rate 25 basis points 625 percent information regarding postretirement benefits contained note 12 financial statements revenue recognition approximately 90 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize revenue software products related services accordance statement position sop 972 software revenue recognition issued american institute certified public accountants recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 60 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1286 million september 30 2007 1112 million september 30 2006 81 million september 30 2007 85 million september 30 2006 included offset accounts receivable fair value measurements increased use fair value measurements financial statements due recent accounting pronouncements obligations retained connection sale principal businesses former power systems operating segment sharebased compensation account sharebased compensation sfas 123r compensation costs based grantdate fair value instruments using valuation model generally recognized straight line basis vesting term estimate average riskfree interest rate expected dividend yield expected volatility expected term compensation instrument outstanding order determine fair value valuation model sensitive expected volatility term assumptions sharebased compensation expense net related income tax benefit amounted 188 million 2007 167 million 2006 asset retirement obligations account conditional asset retirement obligations financial accounting standards board fasb interpretation 47 accounting conditional asset retirement obligations fin 47 accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates application fin 47 resulted charge net tax 177 million included consolidated statement operations year ended september 30 2006 cumulative effect change accounting principle recorded liabilities consolidated balance sheet totaled 53 million current liabilities 218 million liabilities september 30 2007 287 million liabilities september 30 2006 indemnifications conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped purchase price recorded liability fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34 fin 45 related indemnification obligations offset gain sale significant change costs timing could significant effect estimates estimate potential future payments could incur indemnifications may approximate 325 million 96 million accrued current liabilities 161 million accrued liabilities september 30 2007 derivatives accounting method derivative instruments based sfas 133 accounting derivative instruments hedging activities sfas 133 fair value derivative financial instruments recorded balance sheet based quoted market prices contracts similar maturities use foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks use foreign currency forward exchange contracts offset changes amount future cash flows associated intercompany transactions expected occur within next three years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contracts manage balance fixed floating rate debt unrealized gains derivative instruments recorded current assets total 52 million 19 million september 30 2007 2006 respectively unrealized losses derivative instruments recorded current liabilities total 382 million 85 million september 30 2007 2006 respectively purchase accounting acquire business account assets liabilities acquired fair value date acquisition accordance sfas 141 business combinations sfas 142 goodwill intangible assets valuation acquired identifiable intangible assets determination amortizable lives requires use management judgment assumptions see note 2 financial statements discussion acquisitions 2007 2006 litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters net related receivables 298 million september 30 2007 370 million september 30 2006 change primarily due legal settlement changes estimated remediation costs three sites result new information recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability described item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see item 3 discussion principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 240 million september 30 2007 258 million september 30 2006 information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state foreign jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities increasingly asserting interpretations laws facts challenging cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies sfas 5 recorded accrual 1045 million september 30 2007 851 million september 30 2006 reflects estimate likely outcome current future audits included liabilities consolidated balance sheet final determination tax audits changes estimates may result additional future income tax expense benefit first quarter 2008 adopt fasb interpretation 48 accounting uncertainty income taxes fin 48 upon adoption standard assess position regard tax exposures uncertain tax positions requirements rather sfas 5 adoption fin 48 october 1 2007 result decrease shareowners’ equity 10 million recorded valuation allowance majority deferred tax assets related net operating loss capital loss carryforwards certain temporary differences amount 426 million september 30 2007 368 million september 30 2006 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforward amount realized income would increase determine able use carryforwards currently expected end interim reporting period estimate base effective tax rate effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects recognize tax effect significant unusual extraordinary items period realizable information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products services driven • investments manufacturing including upgrades modifications expansions existing facilities creation new facilities • customers’ needs greater cost reduction sustainable production cleaner safer energy efficient productivity quality assurance overall global competitiveness • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • seasonal spending patterns customers due annual budgeting processes working schedules longterm strategy strategic framework incorporates vision valued global provider innovative industrial automation information products services solutions growth performance strategy seeks • deploy human financial resources strengthen technology leadership allow us capture larger share customers’ spending continue transform business model one based less tangible assets intellectual capital • expand served market increasing capabilities new applications including process control safety information software • enhance market access increasing solutions service capabilities advancing global presence delivering products solutions wider range industries • build channel capability partnerships increase penetration oems • look potential acquisitions serve catalysts organic growth add complementary technology expand served market increase domain expertise continue geographic diversification • drive continuous improvement driving quality improving customer experience satisfaction driving aggressive productivity optimizing endtoend business processes technological advancement domain expertise seek technology leadership position facets plantwide control believe core technologies foundation longterm sustainable growth multiple global gross domestic product gdp growth customers face increasingly complex volatile customer demand patterns driving need flexible manufacturing investments new technology domain expertise expanded served market beyond discrete control process safety information value proposition help customers gain benefits faster time market lower total cost ownership better asset utilization reduced business risks believe process automation largest growth opportunity company logix architecture enables us compete effectively traditional distributed control systems dcs solutions many process applications logix architecture integrate information across plant floor enterprise systems external supply chain logix architecture continues important differentiator anchor comprehensive automation offerings one comprehensive safety offerings industry including machine process safety products solutions see significant potential growing safety market successfully integrated safety logix platform launch guardlogix® safety controllers safety products designed bring dual benefit customers safe environment employees productivity operations internal investment acquisitions expanded capability area plantwide information opportunity involves optimizing processes assets integrating plant floor enterprise business system supply chain broad power motor control offering one core competencies many motor control products intelligent configurable products enhance availability efficiency safe operation customers’ critical plant assets augment product portfolio solutions service offerings expanded portfolio repeatable solutions enables us gain efficiency drive innovation improve global deployment solutions customers combination leading technologies industryspecific domain expertise people enables us solve many customers’ manufacturing challenges global expansion enhanced market access manufacturing world continues globalize must able meet customers’ needs emerging markets expect continue add delivery resources expand sales force emerging markets long term currently half employees outside us achieved goal 50 percent revenues outside us 2008 expand markets considerable growth potential shift global footprint expect continue broaden portfolio products services solutions provide customers regions made significant investments globalize manufacturing customer facing resources order closer customers throughout world emerging markets asia pacific including china india latin america middle eastern europe potential exceed global gdp rates due higher levels infrastructure investment growing role consumer spending markets believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future oems represent another growth opportunity oem market large opportunity increase market share within particularly outside north america remain competitive oems need continually improve costs machine performance reduce time market modular scaleable logix offering particularly combined motion safety assist oems addressing business needs industry views apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer resourcebased transportation consumer industry customers engaged food beverage home personal care life sciences industries customers’ needs include global expansion incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance addition customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals waterwastewater forest products companies industries typically invest commodity prices relatively high global demand basic materials increasing transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ purchasing decisions regarding products services solutions demand products services solutions across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor controls energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions march 2009 bought majority assets assumed certain liabilities automation business rutter hinz inc expected accelerate business growth canada oil gas resourcebased industries january 2009 bought assets assumed certain liabilities xi’an hengsheng science technology limited acquisition advances globalization strategy strengthens ability deliver project management engineering solutions primarily customers china 2008 acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion acquisition cedes expanded comprehensive machine safety component portfolio cedes supplier safety measuring light curtains leading product offering machine safety market incuity positions us continued success information solutions market incuity’s enterprise manufacturing intelligence offerings named factorytalk® vantagepoint enable us accelerate specific aspects plantwide information strategy extend capabilities integrated architecture believe pavilion’s expertise advanced process control production optimization environmental compliance solutions paired logix architecture positions us help customers create agile efficient productive environment also benefits particular process growth initiative believe acquired companies help us expand market share deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide information system intended improve profitability used fund investment growth technology offset inflation ongoing productivity initiatives target cost improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2009 sales us customers accounted 51 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2002 historically meaningful correlation industrial production index level capital investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2007 2009 recent trends metrics show signs possible stabilization however continue operate period uncertainty respect us economy note economic indicators subject revisions issuing organizations nonus regional trends 2009 sales nonus customers accounted 49 percent total sales outside us demand products services principally driven strength industrial economy region customers’ ability propensity invest manufacturing assets customers include multinational companies expanding global presence indigenous companies demand historically driven part • investments infrastructure developing economies • investments basic materials production capacity partly response higher endproduct pricing • expanding consumer markets use changes gdp one indicator growth opportunities region business gdp either declined grew slowly regions fiscal 2009 contributing reduced customer demand observed significant effects gdp deceleration developed economies canada western europe asia pacific experienced yearoveryear gdp declines also saw gdp declines latin america beginning second fiscal quarter 2009 gdp growth rates certain asia pacific emerging economies exceeded global average growth economies began accelerate second half fiscal 2009 signs indicating potential stabilization global economic conditions began appear fourth fiscal quarter 2009 market outlook regions continues remain uncertain revenue geographic region table presents actual sales year ended september 30 2009 geographic region change sales year ended september 30 2008 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure summary results operations 2009 results reflect severity global economic recession market conditions quickly deteriorated across industries regions turmoil financial markets intensified economic decline contributing factor industrial companies’ decisions slow production reduce spending conserve cash factors contributed 2009 one challenging years history economic environment experienced full year organic revenue decline 19 percent however saw demand levels products business start stabilize latter part year revenue grew sequentially fourth quarter 2009 macroeconomic conditions appear stabilizing outlook manufacturing investment remains uncertain 2009 acted decisively throughout year rightsize cost structure allowing us achieve cost savings 2009 expected incremental cost savings 2010 actions required us record restructuring charges 604 million 418 million tax 029 per diluted share carefully balanced actions preserving investments core technologies global domain expertise also generated significant cash flow year quickly aligning inventory levels lower demand effectively managing receivables difficult credit environment appropriately constraining capital spending balance sheet liquidity position remain strong continue operating discipline focus cost control cash management 2010 believe ongoing commitment innovation technology differentiation domain expertise thought leadership enable us continue meet customers’ global productivity sustainability needs following tables reflect sales operating results years ended september 30 2009 2008 2007 millions except per share amounts information regarding define segment operating earnings included note 18 financial statements b segment operating earnings 2009 includes restructuring charges 604 million see note 14 financial statements information restructuring charges special items c see note 13 financial statements description items reported discontinued operations 2009 compared 2008 sales decreased 24 percent 2009 compared 2008 effects currency translation contributed 5 percentage points decrease experienced significant decline customer demand 2009 due deteriorating economic financial credit market conditions regions industries sales customers united states declined 22 percent organically compared 2008 plant shutdowns occurred production slowed across many industries canadian organic sales decline 28 percent compared 2008 driven weakness industrial sectors including transportation general manufacturing sales customers emea declined 19 percent organically compared 2008 emea weakness occurred industries well sales oems due large number plant shutdowns production cutbacks organic sales asiapacific declined 11 percent compared 2008 korea japan contributed decline region organic sales latin america declined 6 percent compared 2008 latin america region benefited demand resourcebased industries first two quarters year experienced yearoveryear organic sales declines second half year 2009 experienced significant yearoveryear declines end markets including transportation metals lesser extent consumer products industries however decline process sales lower average rate decline purchase accounting depreciation amortization purchase accounting depreciation amortization 186 million 2009 compared 242 million 2008 decrease primarily due completed amortization certain intangible assets currency translation general corporate net general corporate expenses 803 million 2009 compared 772 million 2008 increase primarily due increased charitable contributions gain recognized first nine months 2008 connection divestiture power systems partially offset cost reductions interest expense interest expense 609 million 2009 compared 682 million 2008 decrease due lower interest rates lower shortterm debt balances income taxes effective tax rate 2009 204 percent compared 286 percent 2008 2009 2008 effective tax rates lower us statutory tax rate 35 percent benefited lower tax rates income outside united states 2008 benefited use foreign tax credits 2009 rate lower 2008 benefited lower proportionate share income higher tax rate jurisdictions compared 2008 2009 also recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2009 2008 affecting respective tax rates income continuing operations income continuing operations decreased 62 percent 2009 2179 million compared 2008 decrease primarily due significant decline sales volume inflation unfavorable impact currency exchange rates restructuring charges also contributed decrease items partially offset cost reductions lower interest expense lower effective tax rate 2009 recorded restructuring charges 604 million 418 million tax 029 per diluted share related actions designed better align cost structure current economic conditions recorded 352 million restructuring charges reduction architecture software operating earnings 252 million reduction control products solutions operating earnings special items 40 million 2009 include reversal portion restructuring accruals established prior years 2008 recorded restructuring charges 507 million 340 million tax 023 per diluted share related actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million net tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates recorded net charges special items 2008 see note 14 financial statements information restructuring charges special items architecture software sales architecture software sales decreased 29 percent 2009 compared 2008 plant shutdowns occurred production slowed across many industries organic sales decreased 24 percent effects currency translation contributed approximately 5 percentage points decline experienced yearoveryear declines sales segment result global recession shortcycle nature segment’s sales activities logix sales declined 17 percent 2009 compared 2008 decline sales legacy processor products greater segment’s average rate decline operating margin architecture software segment operating margin decreased 113 points 129 percent 2009 compared 2008 decrease primarily due significant declines sales volume unfavorable impact currency exchange rates restructuring charges also contributed decrease partially offset cost reductions control products solutions sales control products solutions sales decreased 20 percent 2009 compared 2008 organic sales decreased 15 percent effects currency translation contributed 5 percentage points decrease experienced significant yearoveryear declines sales products businesses segment result global recession shortcycle nature businesses’ sales activities sales solutions services businesses declined lower rate segment’s average rate decline delivered solutions backlog operating margin control products solutions segment operating margin decreased 55 points 79 percent 2009 compared 2008 decrease resulted primarily significant declines sales volume inflation unfavorable impact currency exchange rates restructuring charges also contributed decrease partially offset cost reductions 2008 compared 2007 sales increased 14 percent 2008 compared 2007 organic sales increased 6 percent effects currency translation acquisitions adding 5 3 percentage points growth rate respectively 2008 continued execution ongoing globalization strategy focus emerging markets approximately 50 percent sales 2008 nonus customers sales emerging markets grew average growth rate demonstrated improved performance asiapacific region particular strength china india growth rate asiapacific accelerated every quarter 2008 resulting full year organic growth rate 15 percent compared 2007 continued see strong organic growth latin america 14 percent benefiting strength resourcebased industries sales customers united states canada emea grew 45 percent organically 2008 experienced considerable growth key process oem growth initiatives demonstrating ongoing diversification revenue base achieved average growth resourcebased industries primarily due higher commodity prices infrastructure spending continued demand oil gas resources particularly emerging markets sales global automotive customers grew average growth rate us automotive growth average growth rate sales customers life sciences industries significantly average growth rate sales growth food beverage home personal care industries also average growth rate however industries tend provide consistent rates growth time purchase accounting depreciation amortization purchase accounting depreciation amortization 242 million 2008 compared 164 million 2007 increase due amortization intangibles recent acquisitions particularly cedes incuity pavilion industrial control services group limited business ics triplex general corporate net general corporate expenses 772 million 2008 compared 728 million 2007 increase primarily due lower interest dividend income 2008 compared 2007 partially offset reduced charitable contributions 2008 lower environmental remediation charges legacy sites compared 2007 interest expense interest expense 682 million 2008 compared 634 million 2007 increase due higher average outstanding borrowings partially offset lower interest rates prior year special items 2008 incurred special charges 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million net tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions include workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units special items 435 million 2007 include costs related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions included workforce reductions realignment administrative functions rationalization consolidation global operations see note 14 financial statements information restructuring charges special items income taxes effective tax rate 2008 286 percent compared 278 percent 2007 effective tax rate 2008 lower statutory tax rate 35 percent lower tax rates income outside united states used foreign tax credits tax rate 2008 higher 2007 favorably resolved various federal state matters prior year 2007 effective tax rate differed federal statutory rate 35 percent benefited lower nonus tax rates resolved certain tax matters claims related closure 2005 us federal audit cycle various state tax audits made provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2008 2007 affecting respective tax rates income continuing operations income continuing operations 2008 increased 83 million compared 2007 increase primarily due productivity performance higher volume partially offset increased investment spending support globalization growth technology increased purchase accounting depreciation amortization inflation higher effective income tax rate discontinued operations amounts reported discontinued operations 2007 primarily relate operating results principal businesses former power systems operating segment periods divestiture gain sale principal businesses operating segment net income operating activities power systems 423 million 2007 reported aftertax gain sale power systems 8682 million 539 per share 2007 also reported aftertax income 80 million 2007 related discontinued operations activities see note 13 financial statements information discontinued operations architecture software sales architecture software sales increased 9 percent compared 2007 organic growth accounted 3 percentage points increase foreign currency translation acquisitions added 5 1 percentage points growth rate respectively logix sales grew 12 percent 2008 compared 2007 partially offset decline legacy processor sales operating margin segment operating margin decreased 23 points 2008 compared 2007 negatively impacted increased investment spending support technology growth yearoveryear impact acquisitions impact foreign currency partially offset volume leverage productivity control products solutions sales control products solutions sales increased 18 percent compared 2007 organic sales growth 9 percent foreign currency translation acquisitions added 5 4 percentage points growth rate respectively yearoveryear results benefited growth initiatives strong results solutions businesses especially resourcebased end markets operating margin segment operating margin decreased 09 points 2008 compared 2007 decrease primarily due mix product solutions businesses impact foreign currency increased investment spending negative impact acquisitions partially offset strong productivity performance volume leverage price financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy accounting sharebased compensation requires us report excess income tax benefit exercise stock options financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows cash flows operating activities discontinued operations reported statement cash flows net separately calculated income tax effects us federal state income taxes paid result gain sale principal businesses former power systems operating segment classified within continuing operations consistent cash proceeds taxes paid 2008 2007 excluded free cash flow present free cash flow representative performance continuing businesses free cash flow source 4308 million year ended september 30 2009 compared source 4583 million year ended september 30 2008 decrease free cash flow primarily due decrease current year earnings increase payments related restructuring actions partially offset improvements working capital resulting lower sales volume refunds related contractual tax matter lower capital expenditures december 2007 issued aggregate 500 million principal amount 565 notes due 2017 625 debentures due 2037 debt offering yielded approximately 4935 million proceeds used repay maturity 615 notes due january 15 2008 general corporate purposes january 2007 received 175 billion cash proceeds sale dodge mechanical reliance electric motors motor repair services businesses used cash proceeds repurchase shares common stock offset dilutive effect divestiture pay taxes gain sale acquire ics triplex commercial paper principal source shortterm financing september 30 2009 commercial paper borrowings outstanding september 30 2008 commercial paper borrowings outstanding 1000 million weighted average interest rate 22 percent 2009 repurchased approximately 17 million shares common stock occurred october 2008 total cost shares 500 million compared purchases approximately 67 million shares common stock cost 3551 million 2008 purchases 01 million shares amounting 35 million settle october 2008 recorded accounts payable september 30 2008 decision repurchase stock 2010 depend business conditions free cash flow generation cash requirements stock price september 30 2009 approximately 6212 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include dividends shareowners capital expenditures additional contributions pension plans acquisitions businesses repurchases common stock repayments debt expect capital expenditures 2010 110 million expect fund future uses cash combination existing cash balances cash generated operating activities commercial paper borrowings new issuance debt securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 407 percent september 30 2009 373 percent september 30 2008 increase primarily due 3603 million reduction shareowners’ equity net tax related funded status pension plans decreased result lower discount rates decrease pension plan assets march 16 2009 replaced former fiveyear 6000 million unsecured revolving credit facility two new unsecured revolving credit facilities totaling 5350 million new facilities borrowing limits 2675 million one facility threeyear term facility 364day term 364day credit facility includes termout option allows us borrow march 15 2010 2675 million term loan one year drawn credit facilities september 30 2009 2008 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2009 2008 addition two 2675 million credit facilities shortterm unsecured credit facilities approximately 1697 million september 30 2009 available nonus subsidiaries following summary credit ratings september 30 2009 among uses draw credit facilities standby liquidity facilities repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining commercial paper ratings set forth table current policy respect ratings expect limit borrowings credit facilities amounts would leave enough credit available facilities could borrow needed repay outstanding commercial paper matures ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities enter contracts hedge certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years offset transaction gains losses associated assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies foreign currency forward exchange contracts denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 1645 million 2009 1702 million 2008 1847 million 2007 116 per share year current quarterly dividend rate 029 per outstanding share determined sole discretion board directors summary projected contractual cash obligations september 30 2009 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 453 million see note 6 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2010 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2010 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers e longterm liabilities include environmental liabilities net related receivables asset retirement obligations indemnifications amounts subsequent 2010 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates acquisitions use organic sales one measure monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2009 327 million compared 286 million 2008 approximately 51 percent 2009 global pension expense relates us pension plan actuarial assumptions used determine 2009 us pension expense included following discount rate 675 percent compared 650 percent 2008 expected rate return plan assets 800 percent compared 800 percent 2008 assumed longterm compensation increase rate 420 percent compared 415 percent 2008 changed measurement date 2009 june 30 september 30 required us gaap recorded reduction retained earnings 82 million 53 million net tax fourth quarter 2009 related change pension protection act 2006 signed law august 2006 internal revenue service irs issued final guidance respect certain aspects law 2009 pension plan valuation completed based final guidance valuation resulted minimum contributions required 2009 estimate pension expense approximately 712 million 2010 increase approximately 385 million 2009 2010 us discount rate decrease 620 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed rate return us plan assets remain 800 percent considered actual returns plan assets long term well current expected mix plan investments setting assumption assumed us longterm compensation increase rate 430 percent 2010 established rate analyzing elements compensation pension eligible earnings changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points key assumption us pension plans millions information regarding pension benefits contained note 12 financial statements postretirement benefits estimate costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2009 postretirement benefits expense 650 percent compared 625 percent 2008 2010 discount rate assumption postretirement benefit expense decrease 600 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment obligation less sensitive increasing healthcare costs resulting inflationary trends since january 1 2005 changed measurement date 2009 june 30 september 30 required us gaap recorded reduction retained earnings 40 million 25 million net tax fourth quarter 2009 related change net periodic benefit cost 2009 158 million compared 154 million 2008 expect net periodic benefit cost 2010 approximately 140 million estimated postretirement projected benefit obligation approximate 2158 million information regarding postretirement benefits contained note 12 financial statements revenue recognition approximately 80 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 61 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable accrual customer returns rebates incentives 1161 million september 30 2009 1378 million september 30 2008 88 million september 30 2009 132 million september 30 2008 included offset accounts receivable fair value measurements sharebased compensation sharebased compensation expense net related income tax benefit amounted 187 million 2009 215 million 2008 188 million 2007 compensation costs based grantdate fair value instruments using valuation model recognized straight line basis vesting term estimate average riskfree interest rate expected dividend yield expected volatility expected term compensation instrument outstanding order determine fair value stock options granted valuation model sensitive expected volatility term assumptions stock options granted 2009 weighted average fair value 775 per share chart illustrates weighted average fair value assuming 10 percent change expected volatility term assumptions asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 29 million current liabilities 239 million liabilities september 30 2009 51 million current liabilities 228 million liabilities september 30 2008 indemnifications conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale recorded liability reduction gain sale relevant us gaap guarantor accounting rules related indemnification obligations significant change costs timing could significant effect estimates estimate potential future payments could incur indemnifications may approximate 259 million 111 million 105 million accrued current liabilities 113 million 129 million accrued liabilities september 30 2009 2008 respectively derivatives use foreign currency forward exchange contracts manage foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions expected occur within next two years cash flow hedges also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies fair value derivative financial instruments recorded balance sheet based quoted market prices contracts similar maturities unrealized gains derivative instruments recorded current assets amounts 250 million 61 million assets amounts 114 million 51 million september 30 2009 2008 respectively unrealized losses derivative instruments recorded current liabilities amounts 191 million 162 million liabilities amounts 94 million 84 million september 30 2009 2008 respectively purchase accounting goodwill indefinite lived intangible assets acquire business account assets liabilities acquired fair value date acquisition order value acquired identifiable intangible assets determine amortizable lives management must use judgment selecting relevant assumptions see note 2 financial statements discussion acquisitions 2009 2008 2007 years subsequent year acquisition perform annual impairment test goodwill balance perform goodwill impairment test reporting unit level determined reporting units two operating segments control products solutions architecture software concluded components one level segments constitute reporting units use discounted cash flow valuation model estimate fair value reporting units also compare sum computed fair values reporting units market capitalization verify reasonableness fair value reporting unit determined 2009 impairment test significantly exceeded net asset book value reporting unit valuation model sensitive discount rate perpetuity growth rate tax rate assumptions ten percent change one assumptions would change outcome goodwill impairment test fair value reporting unit would continue significantly exceed net asset book value changed goodwill impairment testing valuation techniques current year also perform annual impairment test allenbradley® ics triplextm trademarks indefinite life subject amortization use relieffromroyalty method determine fair value trademarks compare book value determine whether impairment warranted inputs model requiring judgment revenue growth discount factor ten percent change either one assumptions would result impairment either indefinite lived intangible assets litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters 334 million net related receivables 248 million september 30 2009 332 million net related receivables 228 million september 30 2008 recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 168 million september 30 2009 230 million september 30 2008 various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state foreign jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures recognized 67 million decrease shareowners’ equity october 1 2008 related change accounting uncertain tax positions accordance changes us gaap gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 1167 million september 30 2009 1258 million september 30 2008 amount net unrecognized tax benefits would reduce effective tax rate continuing operations recognized 409 million september 30 2009 432 million september 30 2008 addition amount net unrecognized tax benefits would reported discontinued operations recognized 267 million september 30 2009 334 million september 30 2008 recognize interest penalties related unrecognized tax benefits tax expense total accrued interest penalties 276 million september 30 2009 260 million september 30 2008 believe reasonably possible amount net unrecognized tax benefits could reduced 268 million next 12 months result resolution worldwide tax matters lapses statutes limitations recorded valuation allowance majority deferred tax assets related net operating loss capital loss carryforwards certain temporary differences amount 438 million september 30 2009 451 million september 30 2008 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforward amount realized income would increase determine able use carryforwards currently expected end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines creation new facilities production lines • customers’ needs productivity cost reduction sustainable production cleaner safer energy efficient quality assurance overall global competitiveness • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • seasonal spending patterns customers due annual budgeting processes working schedule • investments basic materials production capacity partly response higher endproduct pricing longterm strategy strategic framework incorporates vision valued global provider innovative industrial automation information products services solutions growth performance strategy seeks • achieve growth rates excess automation market expanding served market strengthening technology customerfacing differentiation • diversify revenue streams increasing capabilities new applications including process control safety information software broadening solutions service capabilities advancing global presence serving wider range industries • grow market share gaining new customers capturing larger share original equipment manufacturer machine builders oems end user customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market increasing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership allow us continue transform business model one based less tangible assets intellectual capital • continuously improve quality customer experience drive 34 percent annual cost productivity optimize endtoend business processes implementing strategy seek achieve longterm financial goals include revenue growth 68 percent doubledigit eps growth 60 percent revenue outside us customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives addition increasingly complex volatile customer demand patterns drive need flexible manufacturing value proposition help customers gain benefits faster time market lower total cost ownership increase asset utilization reduce business risks differentiation technology domain expertise seek technology leadership position facets control believe core technologies foundation longterm sustainable growth excess global gross domestic product gdp growth integrated control information architecture logix core capable safely efficiently controlling industrial processes connecting plant floor enterprise systems external supply chain architecture important differentiator anchor comprehensive automation offering complement scalable logix platform componentlevel control solutions suited less complex machine applications investments technologies expanded served market beyond discrete control process safety plantwide information believe process automation largest growth opportunity company logix architecture enables us compete effectively traditional distributed control systems dcs providers many process applications one comprehensive safety offerings industry including machine process safety products solutions see significant potential growing safety market successfully integrated safety logix platform launch guardlogix® safety controllers safety products designed bring dual benefit customers safe environment employees productivity operations internal investment acquisitions expanded software communication capabilities critical components integrated architecture key optimizing processes assets integrating plant floor enterprise business system supply chain broad power motor control offering one core competencies many motor control products intelligent configurable integrated seamlessly logix architecture products enhance availability efficiency safe operation customers’ critical energyintensive plant assets augment product portfolio solutions service offerings expanded portfolio repeatable solutions enables us gain efficiency drive innovation improve global deployment solutions customers combination leading technologies industryspecific domain expertise people enables us solve many customers’ manufacturing challenges global expansion manufacturing world continues globalize must able meet customers’ needs emerging markets expect continue add delivery resources expand sales force emerging markets long term currently approximately 60 percent employees outside us 49 percent revenues outside us expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world growth emerging markets asiapacific including china india latin america central eastern europe africa potential exceed global gdp growth rates due higher levels infrastructure investment growing impact consumer spending markets believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access oems represent another growth opportunity oem market large opportunity increase market share within particularly outside north america remain competitive oems need continually improve costs machine performance reduce time market modular scalable logix offering particularly combined motion safety assist oems addressing business needs also continue build improved portfolio less complex oem machines helps expand addressed market especially emerging economies developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals pulp paper waterwastewater companies industries typically invest commodity prices relatively high global demand basic materials increasing transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation purchasing decisions sales transportation primarily automotive tire manufacturers outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings march 2009 bought majority assets assumed certain liabilities automation business rutter hinz inc expected accelerate business growth canada oil gas resourcebased industries january 2009 bought assets assumed certain liabilities xi’an hengsheng science technology limited acquisition advances globalization strategy strengthens ability deliver project management engineering solutions primarily customers china 2008 acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion acquisition cedes expanded comprehensive machine safety component portfolio cedes supplier safety measuring light curtains leading product offering machine safety market incuity positions us continued success information solutions market incuity’s enterprise manufacturing intelligence offerings named factorytalk® vantagepoint enable us accelerate specific aspects plantwide information strategy extend capabilities integrated architecture believe pavilion’s expertise advanced process control production optimization environmental compliance solutions paired logix architecture positions us help customers create agile efficient productive environment also benefits particular process growth initiative believe acquired companies help us expand market share deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide information system intended improve profitability used fund investment growth technology offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2010 sales us customers accounted 51 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2007 historically meaningful correlation industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2008 2010 early part industrial recovery stronger expected however high unemployment relatively low levels capacity utilization continue create uncertainty pace recovery note economic indicators subject revisions issuing organizations nonus regional trends 2010 sales nonus customers accounted 49 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes gdp one indicator growth opportunities region business gdp either declined grew slowly regions fiscal 2009 contributing reduced customer demand signs indicating economic growth regions began appear fourth fiscal quarter 2009 continued fiscal 2010 gdp growth asiapacific particularly emerging countries including china india continued exceed global average growth european region continues average gdp growth latin america accelerated 2010 continued improvement global economy seems indicate recovery taking hold revenue geographic region table presents actual sales year ended september 30 2010 geographic region change sales year ended september 30 2009 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure summary results operations sales 2010 increased 12 percent compared 2009 organic sales increase 10 percent enhanced benefits currency translation 2 percentage points product sales grew 22 percent year reflecting improved maintenance repair operations mro smaller capital projects oem demand sales growth solutions services business lagged recovery product sales first half 2010 solutions services sales declined year consequence declining order rates second half fiscal 2009 order rates began improve first half fiscal 2010 resulting yearoveryear growth solutions services sales second half 2010 full year sales solutions services business declined 4 percent asiapacific best performing region organic sales increased 17 percent compared 2009 latin america united states also performed well organic sales increased 11 percent regions year total sales emerging markets increased 18 percent organic sales increase 14 percent plus 4 percentage points currency translation acquisitions emerging markets represent 20 percent total company sales consequence rapid large declines sales fiscal 2009 due severe global recession took aggressive actions adjust cost structure including restructuring actions implemented throughout 2009 temporary employee pay benefit reductions general reductions discretionary spending 2010 actions contributed approximately 120 million benefit current year results consistent expectations favorable results improved outlook full year caused us reverse temporary employee pay cuts restore 401k company match effective january 1 2010 also implemented wage salary increases employees result employee costs also include performancebased compensation sales incentives increased approximately 200 million pension postretirement expense increased 41 million 2010 compared 2009 addition spent approximately 50 million related customerfacing resources particularly emerging markets innovation products services solutions offerings 2010 following tables reflect sales operating results years ended september 30 2010 2009 2008 millions except per share amounts information regarding define segment operating earnings included note 18 financial statements b segment operating earnings 2009 includes restructuring charges 604 million see note 14 financial statements information restructuring charges special items c see note 13 financial statements description items reported discontinued operations 2010 compared 2009 sales increased 5245 million 12 percent 43325 million 2009 48570 million 2010 organic sales increase 10 percent enhanced benefits currency translation 2 percentage points positive performance product businesses across regions resulting recovery worldwide macroeconomic conditions industrial production 2010 pricing contributed less 1 percentage point growth period organic sales customers asiapacific region increased 17 percent led strength emerging markets including china india organic sales increased 11 7 percent united states canada respectively organic sales increased latin america 11 percent recent growth offset declines earlier fiscal year organic sales increased 2 percent emea declines solutions services businesses slower recover offset growth product businesses sales growth solutions services business lagged recovery product sales first half 2010 solutions services sales declined year consequence declining order rates second half fiscal 2009 order rates began improve first half fiscal 2010 resulting yearoveryear growth solutions services sales second half 2010 full year sales solutions services business declined 4 percent 2010 sales end markets improved year progressed fullyear 2010 largest sales increases customers transportation industry income continuing operations income taxes income continuing operations income taxes increased 102 percent 2179 million 2009 4404 million 2010 strong performance reflects continuing economic recovery gross profit margin increased 37 points 399 percent 2010 increased volume restructuring savings favorable mix contributed significant yearoveryear margin improvement partially offset cost increases related employee compensation pension postretirement expense incremental spending support growth saved approximately 120 million 2010 compared 2009 related benefits realized restructuring actions taken fiscal 2009 line expectations recorded 60 million less restructuring charges 2010 compared 2009 also contributed yearoveryear income improvement benefits offset increases approximately 200 million employee compensation 41 million increase pension postretirement expense 50 million incremental spending support growth 2010 compared 2009 architecture software segment contributed 44 percent total sales 2010 compared 40 percent 2009 2010 architecture software segment’s operating margin 225 percent increase percentage sales highermargin architecture software segment caused positive mix effect operating margin general corporate expenses 936 million 2010 compared 803 million 2009 increase primarily due higher employee costs resulting wage salary increases well performancebased compensation selling general administrative expense percentage sales decreased 09 points 272 percent volume increases outpaced spending increases income taxes effective tax rate 2010 191 percent compared 204 percent 2009 2010 2009 effective tax rates lower us statutory rate 35 percent benefited lower nonus tax rates 2010 rate lower 2009 benefited higher proportionate share income lower tax rate jurisdictions compared 2009 also recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits 2010 2009 also recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2010 2009 affecting respective tax rates discontinued operations income discontinued operations increased 211 million 2010 compared 2009 primarily due 213 million tax benefit resulting resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors repair services businesses architecture software sales architecture software sales increased 23 percent 21150 million 2010 compared 17235 million 2009 organic sales increased 20 percent effects currency translation contributed 3 percentage points total increase substantially organic sales increase result increase volume due improving macroeconomic conditions regions industries pricing minor impact revenue period canada latin america yearoveryear sales increases greater segment average rate increase yearoveryear sales increases customers united states asiapacific consistent segment average rate increase yearoveryear sales increases customers emea slightly segment average rate increase logix sales increased 25 percent 2010 compared 2009 operating margin architecture software segment operating earnings 4754 million 2010 113 percent 2230 million 2009 operating margin increased 96 points 225 percent 2010 compared 2009 increase predominantly due volume increases result higher worldwide levels industrial production capital spending customers approximately half restructuring cost savings additional employee compensation additional pension postretirement expenses incremental spending support growth described applied architecture software segment control products solutions sales control products solutions sales increased 5 percent 27420 million 2010 compared 26090 million 2009 organic sales increased 2 percent effects currency translation acquisitions contributed 2 percentage points 1 percentage point respectively segment’s modest organic sales growth primarily attributable robust growth products businesses 2010 offset declines solutions services sales reflecting decline order rates experienced second half 2009 decline order rates led significant sales declines first half 2010 order rates recovered normal lag associated solution services sales began see revenue increases businesses second half 2010 asiapacific canada reported doubledigit yearoveryear overall segment growth benefiting 27 million 122 million respectively recent acquisitions emea reported yearoveryear overall segment sales declines 2010 sales united states latin america increased consistent segment average impact pricing segment’s sales increase insignificant operating margin control products solutions segment operating earnings 2418 million 2010 17 percent 2067 million period 2009 operating margin increased 09 points 88 percent 2010 compared 2009 approximately half restructuring cost savings additional employee compensation additional pension postretirement expenses incremental spending support growth described applied control products solutions segment positive mix attributable shift toward product sales solutions services sales contributed margin improvement 2009 compared 2008 sales decreased 24 percent 2009 compared 2008 effects currency translation contributed 5 percentage points decrease experienced significant decline customer demand 2009 due deteriorating economic financial credit market conditions regions industries sales customers united states declined 22 percent organically compared 2008 plant shutdowns occurred production slowed across many industries canadian organic sales decline 28 percent compared 2008 driven weakness industrial sectors including transportation general manufacturing sales customers emea declined 19 percent organically compared 2008 emea weakness occurred industries well sales oems due large number plant shutdowns production cutbacks organic sales asiapacific declined 11 percent compared 2008 korea japan contributed decline region organic sales latin america declined 6 percent compared 2008 latin america region benefited demand resourcebased industries first two quarters year experienced yearoveryear organic sales declines second half year 2009 experienced significant yearoveryear declines end markets including transportation metals lesser extent consumer products industries however decline process sales lower average rate decline purchase accounting depreciation amortization purchase accounting depreciation amortization 186 million 2009 compared 242 million 2008 decrease primarily due completed amortization certain intangible assets currency translation general corporate net general corporate expenses 803 million 2009 compared 772 million 2008 increase primarily due increased charitable contributions gain recognized first nine months 2008 connection divestiture power systems partially offset cost reductions interest expense interest expense 609 million 2009 compared 682 million 2008 decrease due lower interest rates lower shortterm debt balances income taxes effective tax rate 2009 204 percent compared 286 percent 2008 2009 2008 effective tax rates lower us statutory tax rate 35 percent benefited lower tax rates income outside united states 2008 benefited use foreign tax credits 2009 rate lower 2008 benefited lower proportionate share income higher tax rate jurisdictions compared 2008 2009 also recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2009 2008 affecting respective tax rates income continuing operations income continuing operations decreased 62 percent 2009 2179 million compared 2008 decrease primarily due significant decline sales volume inflation unfavorable impact currency exchange rates restructuring charges also contributed decrease items partially offset cost reductions lower interest expense lower effective tax rate 2009 recorded restructuring charges 604 million 418 million tax 029 per diluted share related actions designed better align cost structure current economic conditions recorded 352 million restructuring charges reduction architecture software operating earnings 252 million reduction control products solutions operating earnings special items 40 million 2009 include reversal portion restructuring accruals established prior years 2008 recorded restructuring charges 507 million 340 million tax 023 per diluted share related actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million net tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates recorded net charges special items 2008 see note 14 financial statements information restructuring charges special items architecture software sales architecture software sales decreased 29 percent 2009 compared 2008 plant shutdowns occurred production slowed across many industries organic sales decreased 24 percent effects currency translation contributed approximately 5 percentage points decline experienced yearoveryear declines sales segment result global recession shortcycle nature segment’s sales activities logix sales declined 17 percent 2009 compared 2008 decline sales legacy processor products greater segment’s average rate decline operating margin architecture software segment operating margin decreased 113 points 129 percent 2009 compared 2008 decrease primarily due significant declines sales volume unfavorable impact currency exchange rates restructuring charges also contributed decrease partially offset cost reductions control products solutions sales control products solutions sales decreased 20 percent 2009 compared 2008 organic sales decreased 15 percent effects currency translation contributed 5 percentage points decrease experienced significant yearoveryear declines sales products businesses segment result global recession shortcycle nature businesses’ sales activities sales solutions services businesses declined lower rate segment’s average rate decline delivered solutions backlog operating margin control products solutions segment operating margin decreased 55 points 79 percent 2009 compared 2008 decrease resulted primarily significant declines sales volume inflation unfavorable impact currency exchange rates restructuring charges also contributed decrease partially offset cost reductions financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy accounting sharebased compensation requires us report related excess income tax benefit financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows cash flows operating activities discontinued operations reported statement cash flows net separately calculated income tax effects us federal state income taxes paid result gain sale principal businesses former power systems operating segment classified within continuing operations consistent cash proceeds taxes paid 2008 excluded free cash flow present free cash flow representative performance continuing businesses free cash flow source 4107 million year ended september 30 2010 compared source 4308 million year ended september 30 2009 decrease free cash flow primarily due discretionary pretax contribution 150 million us pension trust increased working capital partially offset improvements current year earnings reduced incentive compensation payments working capital increase largely attributable significant increases inventory accounts receivable partially offset increase accounts payable levels changes restored working capital levels reflective current demand reduced incentive compensation payments function timing varying levels earned incentives 2009 compared 2008 incentive compensation payments generally occur first quarter year following year incentive earned incentive compensation payments lower normal 2010 difficult economic conditions resulted reduced zero earned incentives 2009 employee incentive compensation plans pay substantially incentive compensation earned 2010 performance first quarter 2011 december 2007 issued aggregate 500 million principal amount 565 notes due 2017 625 debentures due 2037 debt offering yielded approximately 4935 million proceeds used repay maturity 615 notes due january 15 2008 general corporate purposes commercial paper principal source shortterm financing september 30 2010 2009 commercial paper borrowings outstanding 2010 commercial paper borrowings outstanding repurchased approximately 22 million shares common stock 2010 total cost shares 1200 million 12 million recorded accounts payable september 30 2010 related 19700 shares settle october 2010 2009 repurchased approximately 17 million shares common stock occurred october 2008 total cost shares 500 million decision repurchase stock 2011 depend business conditions free cash flow generation cash requirements stock price september 30 2010 approximately 5012 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions pension plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2011 120 million expect fund future uses cash combination existing cash balances cash generated operating activities commercial paper borrowings new issuance debt securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 383 percent september 30 2010 407 percent september 30 2009 decrease primarily due net increase shareowners’ equity march 16 2009 replaced former fiveyear 6000 million unsecured revolving credit facility two new unsecured revolving credit facilities totaling 5350 million individual borrowing limit 2675 million one facility threeyear term facility 364day term march 15 2010 replaced former 364day 2675 million unsecured revolving credit facility new 364day 3000 million unsecured revolving credit facility increasing current borrowing capacity two facilities 5675 million new credit facility includes termout option allows us borrow march 14 2011 3000 million term loan one year drawn credit facilities september 30 2010 2009 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2010 2009 separate shortterm unsecured credit facilities approximately 1353 million september 30 2010 available nonus subsidiaries following summary credit ratings september 30 2010 among uses draw credit facilities standby liquidity facilities repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining commercial paper ratings set forth table current policy respect ratings expect limit borrowings credit facilities amounts would leave enough credit available facilities could borrow needed repay outstanding commercial paper matures ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities enter contracts offset changes amount future cash flows associated certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years offset transaction gains losses associated assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies foreign currency forward exchange contracts denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 1736 million 2010 122 per common share cash dividends shareowners 1645 million 2009 1702 million 2008 116 per common share year current quarterly dividend rate 035 per common share 140 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2010 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 452 million see note 6 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2011 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2011 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers e longterm liabilities include environmental liabilities net related receivables asset retirement obligations indemnifications amounts subsequent 2011 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates acquisitions use organic sales one measure monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2010 750 million compared 327 million 2009 approximately 67 percent 2010 global pension expense relates us pension plan actuarial assumptions used determine 2010 us pension expense included following discount rate 620 percent compared 675 percent 2009 expected rate return plan assets 800 percent compared 800 percent 2009 assumed longterm compensation increase rate 430 percent compared 420 percent 2009 changed measurement date 2009 june 30 september 30 required us gaap recorded reduction retained earnings 82 million 53 million net tax fourth quarter 2009 related change pension protection act 2006 signed law august 2006 internal revenue service irs issued final guidance respect certain aspects law 2010 pension plan valuation completed based final guidance based valuation minimum contributions required 2010 estimate pension expense approximately 909 million 2011 increase approximately 159 million 2010 2011 us discount rate decrease 560 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed us longterm compensation increase rate 400 percent 2011 established rate analyzing elements compensation pensioneligible earnings expected rate return us plan assets remain 800 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plans’ invested assets also considered current expected mix plan assets setting assumption target allocations ranges expected return major categories us plan assets follows financial markets rallied significantly 2010 recovering losses incurred financial crisis 2008 2009 plan’s equity securities return exceeded expected return range 2010 largely due strong us equity returns plan’s debt securities return also exceeded expected return range 2010 lower market interest rates resulted higher bond values financial markets continue experience volatility changed expectation longterm returns asset categories plan assets invested actual return portfolio us plan assets approximated 800 percent annualized 15 years ended september 30 2010 exceeded 900 percent annualized 20 years ended september 30 2010 changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change benefit obligation annual net periodic pension cost assuming change 25 basis points key assumptions us pension plans millions information regarding pension benefits contained note 12 financial statements postretirement benefits estimate costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2010 postretirement benefits expense 600 percent compared 650 percent 2009 2011 discount rate assumption postretirement benefit expense decrease 510 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment obligation less sensitive increasing healthcare costs resulting inflationary trends since january 1 2005 changed measurement date 2009 june 30 september 30 required us gaap recorded reduction retained earnings 40 million 25 million net tax fourth quarter 2009 related change net periodic benefit cost 2010 141 million compared 158 million 2009 estimate net periodic benefit cost approximately 95 million 2011 information regarding postretirement benefits contained note 12 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 79 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable accrual customer returns rebates incentives 1359 million september 30 2010 1161 million september 30 2009 164 million september 30 2010 88 million september 30 2009 included offset accounts receivable reserves litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters 371 million net related receivables 250 million september 30 2010 334 million net related receivables 248 million september 30 2009 recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 176 million september 30 2010 168 million september 30 2009 various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 79 million current liabilities 227 million liabilities september 30 2010 29 million current liabilities 239 million liabilities september 30 2009 conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 206 million 64 million 111 million accrued current liabilities 111 million 113 million accrued liabilities september 30 2010 2009 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state foreign jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures recognized 67 million decrease shareowners’ equity october 1 2008 related change accounting uncertain tax positions accordance changes us gaap gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 663 million september 30 2010 1167 million september 30 2009 amount net unrecognized tax benefits would reduce effective tax rate continuing operations recognized 95 million september 30 2010 409 million september 30 2009 addition amount net unrecognized tax benefits would reported discontinued operations recognized 57 million september 30 2010 267 million september 30 2009 recognize interest penalties related unrecognized tax benefits tax expense total accrued interest penalties 266 million september 30 2010 276 million september 30 2009 believe reasonably possible amount net unrecognized tax benefits could reduced 297 million next 12 months result resolution worldwide tax matters lapses statutes limitations recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 267 million september 30 2010 438 million september 30 2009 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy vision valued global provider innovative industrial automation information products solutions services supported growth performance strategy seeks • achieve growth rates excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals include sales growth 68 percent doubledigit eps growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world continue expand footprint emerging markets currently approximately 60 percent employees outside us 50 percent sales outside us expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world growth emerging markets asia pacific including china india latin america central eastern europe africa projected exceed global gross domestic product gdp growth rates due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market approximately 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader batch process applications compete effectively traditional distributed control systems dcs providers continuous process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion strong growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals energy pulp paper waterwastewater companies industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd leading manufacturer medium voltage drives direct current power supplies switch gear wind inverters headquartered harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products march 2012 acquired certain assets assumed certain liabilities softswitching technologies corporation industrial power quality detection protection systems provider united states may 2011 acquired lektronix limited affiliate independent industrial automation repair service provider primarily europe asia april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates process control automation systems integrator mining mineral processing industry south africa believe acquired companies help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide business system intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2013 sales us customers accounted 50 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2007 historically meaningful correlation changes industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2011 2013 pmi increase fourth quarter fiscal 2013 indicates expansion us manufacturing sector industrial equipment spending industrial production index gradually improving capacity utilization remained flat stability recently reported forecasted macroeconomic indicators supports expectation market conditions us remain stable next year expect us growth fiscal 2014 fiscal 2013 note economic indicators subject revisions issuing organizations nonus regional trends 2013 sales nonus customers accounted 50 percent total sales customers include indigenous companies multinational companies expanding global presence international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes gross domestic product gdp industrial production index indicators growth opportunities region business outside us expect stable underlying market conditions europes macroeconomic conditions improving pace recovery uncertain given unemployment levels impact austerity programs asia pacific expected return growth next year primarily due market stabilization china expect growth latin america moderate fiscal 2014 coming strong year despite weakness past year continue expect emerging markets fastest growing automation markets long term summary results operations despite sluggish market conditions 2013 achieved record sales 63519 million sales growth 15 percent year regions except asia pacific experienced sales growth year led latin america organic sales growth 12 percent end market strongest sales growth year oil gas results key initiatives mixed • sales related process initiative flat 2013 compared 2012 • logix sales increased 4 percent 2013 compared 2012 • sales emerging markets decreased 1 percent 2013 compared 2012 primarily due weakness emerging asia low growth environment able expand segment operating margin almost point continuing invest growth effective tax rate 2013 229 percent compared 237 percent 2012 adjusted effective tax rate 2013 239 percent compared 241 percent 2012 recognized net discrete tax benefits 227 million 2013 primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit recognized net discrete tax benefits 21 million 2012 primarily related favorable resolution tax matters various global jurisdictions following tables reflect sales operating results years ended september 30 2013 2012 2011 millions except per share amounts 1 see note 17 condensed consolidated financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures believe measures useful investors measures operating performance use measures monitor evaluate profitability company measure total segment operating earnings total segment operating margin may different used companies 3 beginning fiscal 2013 redefined segment operating earnings exclude nonoperating pension costs nonoperating pension costs reclassified separate line item within table periods presented costs previously included segment operating earnings general corporatenet continue include service cost amortization prior service cost business segment incurred expense costs represent operating cost providing pension benefits employees 4 see note 13 condensed consolidated financial statements description items reported discontinued operations purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions increases nonoperating pension costs segments fiscal 2013 primarily due decrease us discount rate 520 percent 2012 415 percent 2013 adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related income tax effects define nonoperating pension costs defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate following reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate years ended september 30 2013 2012 2011 millions except per share amounts 2013 compared 2012 sales fiscal 2013 increased 15 percent compared 2012 organic sales increased 17 percent sales solutions services businesses grew 1 percent year fiscal 2013 yearend backlog businesses 9 percent higher end last year product sales grew 2 percent year pricing contributed 1 percentage point growth table presents sales year ended september 30 2013 geographic region percentage change sales year ended september 30 2012 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • united states canada solid sales growth oil gas best performing end markets • emeas sales growth flat year continued outperform market especially oems • asia pacific challenging year sales declines countries except japan • latin america highest growth region led strong growth brazil mexico general corporate net general corporate net expenses 972 million fiscal 2013 compared 829 million fiscal 2012 largest contributor yearoveryear increase higher legacy environmental charges income continuing operations income taxes income continuing operations income taxes increased 2 percent 9659 million 2012 9809 million 2013 increase primarily due increase segment operating earnings partially offset higher nonoperating pension costs total segment operating earnings increased 6 percent year primarily due higher sales strong productivity income taxes effective tax rate 2013 229 percent compared 237 percent 2012 2013 2012 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates adjusted effective tax rate 2013 239 percent compared 241 percent 2012 recognized net discrete tax benefits 227 million 2013 primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit recognized net discrete tax benefits 21 million 2012 primarily related favorable resolution tax matters various global jurisdictions see note 15 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2013 2012 affecting respective tax rates architecture software sales architecture software sales increased 1 percent 2013 compared 2012 organic sales increased 2 percent effects currency translation reduced sales 1 percentage point pricing contributed 1 percentage point growth year strong yearoveryear sales growth united states emea offset significant declines asia pacific logix sales increased 4 percent 2013 compared 2012 operating margin architecture software segment operating earnings increased 6 percent operating margin expanded 13 points 283 percent 2013 compared 2012 primarily due higher sales strong productivity control products solutions sales control products solutions sales increased 2 percent 2013 compared 2012 organic sales increased 2 percent pricing contributed less 1 percentage point growth year latin america strongest performing region segment doubledigit yearoveryear sales growth year united states canada experienced solid sales growth 2013 asia pacific reported significant sales declines operating margin control products solutions segment operating earnings increased 6 percent operating margin expanded 05 point 130 percent 2013 compared 2012 primarily due higher sales strong productivity favorable mix 2012 compared 2011 sales fiscal 2012 increased 4 percent compared 2011 organic sales increased 6 percent acquisitions contributed 1 percentage point growth rate currency translation reduced sales 3 percentage points organic sales solutions services businesses grew 12 percent year acquisitions contributed 2 percentage points increase currency translation reduced sales 4 percentage points yearend backlog businesses 7 percent lower year ago due increase order delays product organic sales grew 4 percent year currency translation reduced sales 3 percentage points volume accounted substantially organic sales growth year pricing contributed less 1 percentage point growth table presents sales year ended september 30 2012 geographic region percentage change sales year ended september 30 2011 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • organic sales growth united states driven transportation oil gas industries consumer industries lagged region growth rate • strong organic sales growth canada reflected continued strength resourcebased industries • emeas organic sales growth driven strong double digit growth emerging markets particularly central eastern europe • asia pacific organic sales growth mixed across countries region mature markets generally outperforming emerging markets australia experiencing significant sales declines • organic sales growth latin america driven strong growth transportation oil gas industries mexico partially offset yearoveryear declines brazil experiencing economic slowdown income continuing operations income continuing operations income taxes increased 11 percent 8676 million 2011 9659 million 2012 increase predominantly due increased volume lower incentive compensation expense partially offset increased spending support growth income taxes effective tax rate 2012 237 percent compared 197 percent 2011 2012 2011 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates 2012 recognized net discrete tax benefits 21 million primarily related favorable resolution worldwide tax matters 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit see note 15 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2012 2011 affecting respective tax rates architecture software sales architecture software sales increased 2 percent 2012 organic sales increased 5 percent effects currency translation reduced sales 3 percentage points pricing contributed less 1 percentage point growth year yearoveryear organic sales growth regions canada emea slightly segment average logix organic sales increased 8 percent 2012 compared 2011 currency translation reduced sales 3 percentage points operating margin architecture software segment operating earnings increased 7 percent operating margin expanded 11 points 265 percent 2012 compared 2011 increase predominantly due volume increases lower incentive compensation expense partially offset increased spending support growth control products solutions sales control products solutions sales increased 6 percent organic sales increased 8 percent acquisitions contributed 1 percentage point growth rate currency translation reduced sales 3 percentage points pricing contributed less 1 percentage point growth year canada strongest performing region segment double digit yearoveryear organic sales growth year yearoveryear organic sales growth latin america emea slightly segment average yearoveryear organic sales growth united states asia pacific less segment average growth rate operating margin control products solutions segment operating earnings increased 16 percent operating margin expanded 11 points 119 percent 2012 compared 2011 increase predominantly due volume increases lower incentive compensation expense partially offset increased spending support growth financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings thus reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting sharebased compensation requires us report related excess income tax benefit financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies cash provided operating activities 10148 million year ended september 30 2013 compared 7187 million year ended september 30 2012 free cash flow source 9005 million year ended september 30 2013 compared source 5976 million year ended september 30 2012 increase cash flow provided operating activities increase free cash flow primarily due 300 million discretionary pretax contribution us qualified pension trust partially offset related tax benefit made 2012 lower incentive compensation payments 2013 repurchased approximately 47 million shares common stock share repurchase program 2013 total cost shares 4015 million 64 million recorded accounts payable september 30 2013 related 60000 shares settle october 2013 2012 repurchased approximately 37 million shares common stock share repurchase program total cost shares 2653 million 76 million recorded accounts payable september 30 2012 related 110000 shares settle october 2012 decision repurchase stock 2014 depend business conditions free cash flow generation cash requirements stock price september 30 2013 approximately 5351 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2014 170 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive operations outside us significant amount cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings permanently reinvested generally funds would subject us tax repatriated percentage nonus funds vary quarter average approximately 90 percent past eight quarters september 30 2013 approximately 90 percent funds held nonus subsidiaries encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks commercial paper principal source shortterm financing september 30 2013 commercial paper borrowings outstanding 1790 million weighted average interest rate 017 percent september 30 2012 commercial paper borrowings outstanding 1570 million weighted average interest rate 027 percent debttototalcapital ratio 295 percent september 30 2013 364 percent september 30 2012 decrease debttototalcapital ratio primarily due higher shareowners equity resulting yearend pension adjustments actuarial gains due increase discount rate may 22 2013 replaced former fouryear 7500 million unsecured revolving credit facility expiring march 2015 new fiveyear 7500 million unsecured revolving credit facility expiring may 2018 increase aggregate amount credit facility 2500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrowed credit facilities years ended september 30 2013 2012 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1216 million september 30 2013 available nonus subsidiaries borrowings nonus credit facilities fiscal 2013 2012 significant compliance covenants credit facilities years ended september 30 2013 2012 significant commitment fees compensating balance requirements credit facilities among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2013 ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents shortterm investments among counterparties minimize exposure one entities enter contracts offset changes amount future cash flows associated certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years offset transaction gains losses associated assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 2763 million 2013 198 per common share 2474 million 2012 1745 per common share 2110 million 2011 1475 per common share quarterly dividend rate september 30 2013 052 per common share 208 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2013 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 449 million see note 6 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2014 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2014 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers contractual commitments capital expenditures e longterm liabilities include environmental liabilities asset retirement obligations indemnifications net related receivables amounts subsequent 2014 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2013 1681 million compared 1047 million 2012 approximately 77 percent 2013 global pension expense relates us pension plan actuarial assumptions used determine 2013 us pension expense included following discount rate 415 percent compared 520 percent 2012 expected rate return plan assets 800 percent compared 800 percent 2012 assumed longterm compensation increase rate 400 percent compared 400 percent 2012 2013 2012 2011 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 3000 million 1500 million us pension plans 2012 2011 respectively table presents estimate net periodic benefit cost 2014 compared net periodic benefit cost 2013 millions 2014 us discount rate increase 505 percent 415 percent 2013 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans us longterm compensation increase rate decrease 375 percent 2014 400 percent 2013 established rate analyzing elements compensation pensioneligible earnings 2014 expected rate return us plan assets decrease 750 percent 800 percent 2013 reflecting lower future expected market returns estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plans’ invested assets also considered current expected mix plan assets setting assumption financial markets produced strong results 2013 plan’s debt securities return exceeded expected return range 2013 lower market interest rates resulted higher bond values plan’s equity securities return exceeded expected return range 2013 largely due higher us equity returns actual return portfolio us plan assets approximately 730 percent annualized 15 years ended september 30 2013 approximately 890 percent annualized 20 years ended september 30 2013 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions information regarding pension benefits contained note 12 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence vsoe based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 108 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1840 million september 30 2013 1766 million september 30 2012 89 million september 30 2013 79 million september 30 2012 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include expenses sites currently operate formerly owned operated third party sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent required remediation procedures timing procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change accrual environmental matters 475 million net 351 million related receivables 452 million net 321 million related receivables september 30 2013 2012 respectively recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes required remediation procedures timing procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered insurance policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 210 million 223 million september 30 2013 2012 respectively various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 23 million 34 million current liabilities september 30 2013 2012 respectively 220 million 224 million liabilities september 30 2013 2012 respectively conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 114 million 03 million 16 million accrued current liabilities september 30 2013 2012 respectively 92 million 88 million accrued liabilities september 30 2013 2012 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 16 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state nonus taxing authorities additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 408 million 703 million september 30 2013 2012 respectively entire amount would reduce effective tax rate recognized accrued interest penalties related unrecognized tax benefits 124 million 201 million september 30 2013 2012 respectively recognize interest penalties related unrecognized tax benefits income tax provision unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 271 million september 30 2013 believe reasonably possible amount gross unrecognized tax benefits could reduced 164 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 283 million september 30 2013 318 million september 30 2012 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected conversely income would decrease determine unable realize deferred tax assets future consolidated financial statements provide tax liability undistributed earnings subsidiaries repatriated us september 30 2013 provided us deferred taxes 24270 million earnings since earnings current plans continue permanently reinvested outside us end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 15 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses overall demand products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy vision valued global provider innovative industrial automation information products solutions services supported growth performance strategy seeks • achieve growth rates excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals include sales growth 68 percent doubledigit eps growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world continue expand footprint emerging markets currently approximately 60 percent employees outside us 48 percent sales outside us expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world growth emerging markets asia pacific including china india latin america central eastern europe africa projected exceed global gross domestic product gdp growth rates due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader batch process applications compete effectively traditional distributed control systems dcs providers continuous process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals energy pulp paper waterwastewater companies industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings january 2014 acquired jacobs automation leader intelligent track motion control technology improves performance across wide range packaging material handling applications global machine builder market november 2013 acquired vmonitor llc affiliates global technology leader wireless solutions oil gas industry acquisition expected strengthen ability deliver endtoend projects oil gas sector accelerate development similar process solutions remote monitoring services water wastewater mining industries globally october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd leading manufacturer medium voltage drives direct current power supplies switch gear wind inverters headquartered harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products march 2012 acquired certain assets assumed certain liabilities softswitching technologies corporation industrial power quality detection protection systems provider united states believe acquired companies help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide business system intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2014 sales us customers accounted 52 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index ip published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2007 historically meaningful correlation changes industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicator current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2012 2014 pmi increase fourth quarter fiscal 2014 indicates expansion us manufacturing sector industrial equipment spending industrial production index improving capacity utilization remained flat strength recently reported macroeconomic indicators supports expectation market conditions us remain healthy next year though ip growth expected somewhat lower expect us growth fiscal 2015 slightly lower fiscal 2014 note economic indicators subject revisions issuing organizations nonus regional trends 2014 sales nonus customers accounted 48 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned overview section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries gross domestic product gdp industrial production indicators growth opportunities region business overall economic projections call higher rates industrial production growth regions outside us 2015 compared 2014 however market conditions expected mixed across within regions europe economic forecasts call little growth western europe moderate growth emerging countries asia pacific china’s economic picture mixed overcapacity lack liquidity threats exports production expected improve latin america brazil recession mexicos economy remains strong canada expected continued low levels economic growth weak commodity prices weigh investment resourcebased industries despite current headwinds inherently greater volatility economic conditions continue expect emerging markets fastest growing automation markets long term summary results operations 2014 achieved record sales 66235 million sales growth 43 percent year organic sales increased 51 percent regions except canada experienced organic sales growth year led united states organic sales growth 68 percent end market strongest sales growth year oil gas following summary results related key growth initiatives • sales related process initiative increased approximately 4 percent 2014 compared 2013 • logix sales exceeded 1 billion 2014 grew 6 percent compared 2013 logix organic sales increased 7 percent year • sales emerging markets increased 3 percent 2014 compared 2013 organic sales emerging markets increased 6 percent year higher company average second year row expanded segment operating margin almost point continuing invest growth following tables reflect sales operating results years ended september 30 2014 2013 2012 millions except per share amounts 1 see note 15 consolidated financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures believe measures useful investors measures operating performance use measures monitor evaluate profitability company measure total segment operating earnings total segment operating margin may different used companies 3 beginning fiscal 2013 redefined segment operating earnings exclude nonoperating pension costs nonoperating pension costs reclassified separate line item within table periods presented costs previously included segment operating earnings general corporatenet continue include service cost amortization prior service cost business segment incurred expense costs represent operating cost providing pension benefits employees 4 adjusted eps nongaap earnings measure excludes nonoperating pension costs related income tax effect see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions decreases nonoperating pension costs segments fiscal 2014 primarily due increase discount rate used measure net periodic pension cost us pension plans rate increased 415 percent 2013 505 percent 2014 adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related income tax effects define nonoperating pension costs defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate following components operating nonoperating pension costs years ended september 30 2014 2013 2012 millions following reconciliations income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate years ended september 30 2014 2013 2012 millions except per share amounts 2014 compared 2013 sales fiscal 2014 increased 43 percent compared 2013 organic sales increased 51 percent currency translation reduced sales 10 percent sales solutions services businesses grew 2 percent year product sales grew 5 percent year pricing contributed 1 percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2014 change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales growth united states realized broadly across industries highest growth oil gas home personal care industries • sales canada declined due unfavorable impact foreign currency translation organic sales declined slightly due continued weakness solutions services resourcebased industries partially offset growth product businesses • emea sales grew result favorable impact currency translation organic sales growth small contribution acquisitions organic sales driven growth products businesses • asia pacific organic sales growth driven strong sales oem customers china return growth india • latin america sales declined due unfavorable impact currency translation organic sales growth region driven strong sales brazil mexico offset sales declines rest region general corporate net general corporate net expenses 810 million fiscal 2014 compared 972 million fiscal 2013 yearoveryear decrease primarily due fiscal 2013 charges related legacy environmental matters income taxes income taxes increased 16 percent 9809 million 2013 11342 million 2014 primarily due increase segment operating earnings lower nonoperating pension costs reduced general corporate net expenses total segment operating earnings increased 9 percent year primarily due higher sales favorable mix partially offset increased spending income taxes effective tax rate 2014 271 percent compared 229 percent 2013 2014 2013 effective tax rates lower us statutory rate 35 percent primarily benefited lower nonus tax rates adjusted effective tax rate 2014 275 percent compared 239 percent 2013 increases effective tax rate adjusted effective tax rate primarily due significant net favorable prior period tax matters recognized fiscal 2013 smaller amount net unfavorable similar items recognized fiscal 2014 also recognized significant benefit retroactive extension us federal research development tax credit us research tax credit fiscal 2013 us research tax credit expired december 31 2013 see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2014 2013 affecting respective tax rates architecture software sales architecture software sales increased 61 percent 2014 compared 2013 organic sales increased 68 percent effects currency translation reduced sales 07 percent pricing contributed approximately 1 percentage point growth year regions experienced sales growth year except latin america grew organically declined total due currency translation excluding impact currency translation canada best performing region segment 2014 logix sales increased 6 percent 2014 compared 2013 logix organic sales increased 7 percent year operating margin architecture software segment operating earnings increased 11 percent operating margin expanded 12 points 295 percent 2014 compared 283 percent 2013 primarily due higher sales partially offset increased spending control products solutions sales control products solutions sales increased 30 percent 2014 compared 2013 organic sales increased 38 percent currency translation reduced sales 11 percent pricing contributed less 1 percentage point growth year united states best performing region segment 2014 excluding impact currency translation regions experienced sales growth except canada solutions business adversely impacted resourcebased industries operating margin control products solutions segment operating earnings increased 7 percent year segment operating margin 136 percent 2014 compared 130 percent year ago primarily due higher sales partially offset increased spending 2013 compared 2012 sales fiscal 2013 increased 15 percent compared 2012 organic sales increased 17 percent sales solutions services businesses grew 1 percent year fiscal 2013 yearend backlog businesses 9 percent higher end last year product sales grew 2 percent year pricing contributed 1 percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2013 change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • united states canada solid sales growth oil gas best performing end markets • emeas sales growth flat year continued outperform market especially oems • asia pacific challenging year sales declines countries except japan • latin america highest growth region led strong growth brazil mexico general corporate net general corporate net expenses 972 million fiscal 2013 compared 829 million fiscal 2012 largest contributor yearoveryear increase higher legacy environmental charges income taxes income taxes increased 2 percent 9659 million 2012 9809 million 2013 increase primarily due increase segment operating earnings partially offset higher nonoperating pension costs total segment operating earnings increased 6 percent year primarily due higher sales strong productivity income taxes effective tax rate 2013 229 percent compared 237 percent 2012 2013 2012 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates adjusted effective tax rate 2013 239 percent compared 241 percent 2012 recognized net discrete tax benefits 227 million 2013 primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2013 2012 affecting respective tax rates architecture software sales architecture software sales increased 1 percent 2013 compared 2012 organic sales increased 2 percent effects currency translation reduced sales 1 percentage point pricing contributed 1 percentage point growth year strong yearoveryear sales growth united states emea offset significant declines asia pacific logix sales increased 4 percent 2013 compared 2012 operating margin architecture software segment operating earnings increased 6 percent operating margin expanded 13 points 283 percent 2013 compared 2012 primarily due higher sales strong productivity control products solutions sales control products solutions sales increased 2 percent 2013 compared 2012 organic sales increased 2 percent pricing contributed less 1 percentage point growth year latin america strongest performing region segment doubledigit yearoveryear sales growth year united states canada experienced solid sales growth 2013 asia pacific reported significant sales declines operating margin control products solutions segment operating earnings increased 6 percent operating margin expanded 05 point 130 percent 2013 compared 2012 primarily due higher sales strong productivity favorable mix financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow millions nongaap financial measure definition free cash flow takes consideration capital investments required maintain operations businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting principles generally accepted united states us gaap require excess income tax benefit reported financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies cash provided operating activities 10333 million year ended september 30 2014 compared 10148 million year ended september 30 2013 free cash flow source 9222 million year ended september 30 2014 compared source 9005 million year ended september 30 2013 increase cash flow provided operating activities increase free cash flow primarily due higher earnings largely offset higher tax payments repurchased approximately 41 million shares common stock share repurchase program 2014 total cost shares 4838 million 45 million recorded accounts payable september 30 2014 related 40757 shares settle october 2014 2013 repurchased approximately 47 million shares common stock share repurchase program total cost shares 4015 million 64 million recorded accounts payable september 30 2013 related 60000 shares settle october 2013 decision repurchase stock 2015 depend business conditions free cash flow generation cash requirements stock price september 30 2014 approximately 10514 million remaining stock repurchases existing board authorizations see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2015 150 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive operations outside us significant amount cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings permanently reinvested generally funds would subject us tax repatriated percentage nonus funds vary quarter average approximately 90 percent past eight quarters september 30 2014 approximately 90 percent funds held nonus subsidiaries encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks commercial paper principal source shortterm financing september 30 2014 commercial paper borrowings outstanding 3250 million weighted average interest rate 017 percent weighted average maturity period seven days september 30 2013 commercial paper borrowings outstanding 1790 million weighted average interest rate 017 percent weighted average maturity period five days debttototalcapital ratio 316 percent september 30 2014 295 percent september 30 2013 increase debttototalcapital ratio primarily due higher commercial paper balances september 30 2014 2013 total borrowing capacity fiveyear unsecured revolving credit facility expiring may 2018 7500 million increase aggregate amount credit facility 2500 million subject consent banks credit facility borrowed credit facility years ended september 30 2014 2013 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1266 million september 30 2014 available nonus subsidiaries borrowings nonus credit facilities fiscal 2014 2013 significant compliance covenants credit facilities years ended september 30 2014 2013 significant commitment fees compensating balance requirements credit facilities among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2014 ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents shortterm investments among counterparties minimize exposure one entities use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years also enter contracts offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 3205 million 2014 232 per common share 2763 million 2013 198 per common share 2474 million 2012 1745 per common share quarterly dividend rate september 30 2014 058 per common share 232 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2014 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 448 million see note 5 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2015 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2015 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers contractual commitments capital expenditures e longterm liabilities include environmental liabilities asset retirement obligations indemnifications net related receivables amounts subsequent 2015 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2014 1317 million compared 1681 million 2013 approximately 72 percent 2014 global pension expense relates us pension plan actuarial assumptions used determine 2014 us pension expense included following discount rate 505 percent compared 415 percent 2013 expected rate return plan assets 750 percent compared 800 percent 2013 assumed longterm compensation increase rate 375 percent compared 400 percent 2013 2014 2013 2012 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 3000 million us pension plans 2012 table presents estimate net periodic benefit cost 2015 compared net periodic benefit cost 2014 millions 2015 us discount rate decrease 450 percent 505 percent 2014 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans 2015 us longterm compensation increase rate remain 375 percent established rate analyzing elements compensation pensioneligible earnings 2015 expected rate return us plan assets remain 750 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plans’ invested assets also considered current expected mix plan assets setting assumption financial markets produced strong results 2014 plan’s debt securities return exceeded expected return range 2014 lower market interest rates resulted higher bond values plan’s equity securities return exceeded expected return range 2014 largely due higher us equity returns actual return portfolio us plan assets approximately 720 percent annualized 15 years ended september 30 2014 approximately 950 percent annualized 20 years ended september 30 2014 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated approximate change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 11 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 108 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1956 million september 30 2014 1840 million september 30 2013 116 million september 30 2014 89 million september 30 2013 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include expenses sites currently operate formerly owned operated third party sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent required remediation procedures timing procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change accrual environmental matters 482 million net 397 million related receivables 475 million net 351 million related receivables september 30 2014 2013 respectively recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes required remediation procedures timing procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered insurance policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 223 million 210 million september 30 2014 2013 respectively various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 03 million 23 million current liabilities september 30 2014 2013 respectively 219 million 220 million liabilities september 30 2014 2013 respectively conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 92 million 08 million 03 million accrued current liabilities september 30 2014 2013 respectively 70 million 92 million accrued liabilities september 30 2014 2013 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 14 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state nonus taxing authorities additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due ambiguity laws rulings jurisdiction differences interplay tax laws jurisdictions uncertainty underlying facts may construed inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge crossjurisdictional transactions crossjurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax reserves gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 389 million 408 million september 30 2014 2013 respectively entire amount would reduce effective tax rate recognized accrued interest penalties related unrecognized tax benefits 81 million 124 million september 30 2014 2013 respectively recognize interest penalties related unrecognized tax benefits income tax provision unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 229 million september 30 2014 believe reasonably possible amount gross unrecognized tax benefits could reduced 238 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 91 million recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 278 million september 30 2014 283 million september 30 2013 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected conversely income would decrease determine unable realize deferred tax assets future consolidated financial statements provide tax liability undistributed earnings subsidiaries repatriated us september 30 2014 provided us deferred taxes 27810 million earnings since earnings current plans continue permanently reinvested outside us end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 13 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses overall demand products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy vision valued global provider innovative industrial automation information products solutions services supported growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals include abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world currently approximately 60 percent employees outside us 45 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals energy pulp paper waterwastewater companies industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers industries also generate maintenance repair order ongoing services revenue related installed base outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings october 2014 acquired assets esc services inc global provider lockouttagout services solutions acquisition enables customers increase asset utilization strengthen enterprise risk management january 2014 acquired jacobs automation leader intelligent track motion control technology improves performance across wide range packaging material handling applications global machine builders november 2013 acquired vmonitor llc affiliates global technology leader wireless solutions oil gas industry acquisition strengthens ability deliver endtoend projects oil gas sector accelerates development similar process solutions remote monitoring services industries globally october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd leading manufacturer medium voltage drives direct current power supplies switch gear wind inverters headquartered harbin china acquisition strengthens presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products believe acquired companies help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity implementation common global processes enterprisewide business system nearly complete intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2015 sales us customers accounted 55 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index ip published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2012 historically meaningful correlation changes industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending compiled bureau economic analysis provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry published federal reserve measures plant operating activity historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2013 2015 changes indicators recent quarter mixed yearoveryear growth ip fourth quarter ip growth decelerated throughout quarter forecasted negative first quarter fiscal 2016 industrial equipment spending grew year sequentially fourth quarter capacity utilization flat prior quarter prior year pmi declined sharply ended september slightly 50 note economic indicators subject revisions issuing organizations nonus regional trends 2015 sales nonus customers accounted 45 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned overview section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries gross domestic product gdp industrial production indicators growth opportunities region business overall economic projections call higher rate industrial production growth regions outside us 2016 compared 2015 europe middle east africa emea economic forecasts call moderate growth western europe emerging countries asia pacific china’s economic growth impacted slowing investment declining exports industrial overcapacity whereas economy india slowly improving latin america much region including brazil remains recession mexicos economy continues strong canada continue experience low level economic growth due exposure resourcebased industries despite mixed outlook emerging markets 2016 continue expect fastest growing automation markets long term summary results operations 2015 sales 63079 million decrease 48 percent year organic sales increased 11 percent currency translation reduced sales 60 percent modest organic growth led consumer automotive industries offset significant headwinds heavy industries particularly oil gas industry following summary results related key growth initiatives • sales related process initiative decreased approximately 5 percent 2015 compared 2014 excluding impact currency translation process initiative sales flat year • logix sales exceeded 1 billion 2015 decreased 25 percent compared 2014 logix organic sales increased 42 percent year highest growth rate latin america • sales emerging markets decreased 65 percent 2015 compared 2014 organic sales emerging countries increased 40 percent year currency translation reduced sales emerging countries 106 percent 2015 able expand segment operating margin one percentage point favorable impact strong productivity organic growth partially offset higher spending unfavorable currency effects following tables reflect sales operating results years ended september 30 2015 2014 2013 millions except per share amounts 1 see note 15 consolidated financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension costs interest expense income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 adjusted eps nongaap earnings measure excludes nonoperating pension costs related income tax effect see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions increases nonoperating pension costs segments fiscal 2015 primarily due decrease discount rate used measure net periodic pension cost us pension plans rate decreased 505 percent 2014 450 percent 2015 adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related income tax effects define nonoperating pension costs defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate following components operating nonoperating pension costs years ended september 30 2015 2014 2013 millions following reconciliations income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively years ended september 30 2015 2014 2013 millions except per share amounts 2015 compared 2014 sales fiscal 2015 decreased 48 percent compared 2014 organic sales increased 11 percent currency translation reduced sales 60 percent product sales decreased 3 percent year product organic sales increased 3 percent year 2015 currency translation reduced sales 6 percent pricing contributed approximately one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2015 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states increased modestly strength consumer automotive industries offset weakness heavy industries especially oil gas industry • sales canada declined due unfavorable impact currency translation well declines resourcebased industries particularly oil gas industry • emea sales decreased due unfavorable impact currency translation organic sales growth led emerging countries modest growth mature europe • asia pacific sales declined due unfavorable impact currency translation well decrease organic sales china partially offset growth india • latin america sales decreased due unfavorable impact currency translation organic sales growth region primarily driven strong sales growth mexico general corporate net general corporate net expenses 856 million fiscal 2015 compared 810 million fiscal 2014 income taxes income taxes decreased 1 percent 11342 million 2014 11275 million 2015 primarily due increases nonoperating pension costs general corporate net expenses interest expense partially offset increase segment operating earnings total segment operating earnings increased 1 percent year primarily due strong productivity higher organic sales partially offset unfavorable currency effects higher spending income taxes effective tax rate 2015 266 percent compared 271 percent 2014 2015 2014 effective tax rates lower us statutory rate 35 percent primarily benefited lower nonus tax rates adjusted effective tax rate 2015 270 percent compared 275 percent 2014 decreases effective tax rate adjusted effective tax rate primarily due tax effect foreign dividends retroactive extension us federal research development tax credit us research tax credit calendar year 2014 first quarter fiscal 2015 partially offset difference mix pretax income across regions see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2015 2014 affecting years respective tax rates architecture software sales architecture software sales decreased 34 percent 2015 compared 2014 organic sales increased 31 percent effects currency translation reduced sales 66 percent pricing contributed approximately one half percentage points growth year regions experienced decline sales year except united states excluding impact currency translation latin america segments best performing region 2015 regions experiencing sales growth except asia pacific logix sales decreased 25 percent 2015 compared 2014 logix organic sales increased 42 percent year operating margin architecture software segment operating earnings decreased 4 percent operating margin 294 percent 2015 compared 295 percent 2014 favorable impact organic sales growth productivity offset higher spending unfavorable currency effects control products solutions sales control products solutions sales decreased 58 percent 2015 compared 2014 organic sales decreased 04 percent currency translation reduced sales 56 percent pricing contributed slightly less one percentage point growth year regions experienced decline sales except united states flat year excluding impact currency translation growth latin america offset declines canada regions flat 2015 sales solutions services businesses decreased 8 percent year organic sales solutions services businesses decreased 2 percent 2015 net effect currency translation acquisitions reduced sales 6 percentage points operating margin control products solutions segment operating earnings increased 8 percent year segment operating margin 155 percent 2015 compared 136 percent year ago primarily due strong productivity 2014 compared 2013 sales fiscal 2014 increased 43 percent compared 2013 organic sales increased 51 percent currency translation reduced sales 10 percent product sales grew 5 percent year pricing contributed one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2014 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales growth united states realized broadly across industries highest growth oil gas home personal care industries • sales canada declined due unfavorable impact currency translation organic sales declined slightly due continued weakness solutions services resourcebased industries partially offset growth product businesses • emea sales grew result favorable impact currency translation organic sales growth small contribution acquisitions organic sales driven growth products businesses • asia pacific organic sales growth driven strong sales oem customers china return growth india • latin america sales declined due unfavorable impact currency translation organic sales growth region driven strong sales brazil mexico offset sales declines rest region general corporate net general corporate net expenses 810 million fiscal 2014 compared 972 million fiscal 2013 yearoveryear decrease primarily due fiscal 2013 charges related legacy environmental matters income taxes income taxes increased 16 percent 9809 million 2013 11342 million 2014 primarily due increase segment operating earnings lower nonoperating pension costs reduced general corporate net expenses total segment operating earnings increased 9 percent year primarily due higher sales favorable mix partially offset increased spending income taxes effective tax rate 2014 271 percent compared 229 percent 2013 2014 2013 effective tax rates lower us statutory rate 35 percent primarily benefited lower nonus tax rates adjusted effective tax rate 2014 275 percent compared 239 percent 2013 increases effective tax rate adjusted effective tax rate primarily due significant net favorable prior period tax matters recognized fiscal 2013 smaller amount net unfavorable similar items recognized fiscal 2014 also recognized significant benefit retroactive extension us research tax credit fiscal 2013 us research tax credit expired december 31 2013 see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2014 2013 affecting respective tax rates architecture software sales architecture software sales increased 61 percent 2014 compared 2013 organic sales increased 68 percent effects currency translation reduced sales 07 percent pricing contributed approximately one percentage point growth year regions experienced sales growth year except latin america grew organically declined total due currency translation excluding impact currency translation canada segments best performing region 2014 logix sales increased 6 percent 2014 compared 2013 logix organic sales increased 7 percent year operating margin architecture software segment operating earnings increased 11 percent operating margin expanded 12 points 295 percent 2014 compared 283 percent 2013 primarily due higher sales partially offset increased spending control products solutions sales control products solutions sales increased 30 percent 2014 compared 2013 organic sales increased 38 percent currency translation reduced sales 11 percent sales solutions services businesses grew 2 percent year pricing contributed less one percentage point growth year united states segments best performing region 2014 excluding impact currency translation regions experienced sales growth except canada solutions business adversely impacted resourcebased industries operating margin control products solutions segment operating earnings increased 7 percent year segment operating margin 136 percent 2014 compared 130 percent year ago primarily due higher sales partially offset increased spending financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow millions nongaap financial measure definition free cash flow takes consideration capital investments required maintain operations businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting principles generally accepted united states us gaap require excess income tax benefit reported financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies cash provided operating activities 11877 million year ended september 30 2015 compared 10333 million year ended september 30 2014 free cash flow 10772 million year ended september 30 2015 compared 9222 million year ended september 30 2014 increase cash flow provided operating activities increase free cash flow primarily due strong working capital performance repurchased approximately 54 million shares common stock share repurchase program 2015 total cost shares 6062 million 125 million recorded accounts payable september 30 2015 related 124400 shares settle october 2015 2014 repurchased approximately 41 million shares common stock share repurchase program total cost shares 4838 million 45 million recorded accounts payable september 30 2014 related 40757 shares settle october 2014 decision repurchase stock 2016 depend business conditions free cash flow generation cash requirements stock price september 30 2015 approximately 4452 million remaining stock repurchases 10 billion share repurchase authorization approved board directors 2014 see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2016 150 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive operations outside us significant amount cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings indefinitely reinvested generally funds would subject us tax repatriated september 30 2015 approximately 90 percent funds held nonus subsidiaries percentage nonus funds vary quarter average approximately 90 percent past eight quarters encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks february 2015 issued 6000 million aggregate principal amount longterm notes public offering debt offering yielded 5943 million net proceeds used net proceeds offering primarily repay outstanding commercial paper remaining proceeds used general corporate purposes upon issuance notes entered fixedtofloating interest rate swap contracts multiple banks effectively converted notes floating rate debt series rate based threemonth libor plus fixed spread additional information related longterm debt interest rate swap contracts included note 5 note 8 financial statements respectively shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2015 september 30 2014 commercial paper borrowings outstanding 3250 million weighted average interest rate 017 percent weighted average maturity period seven days debttototalcapital ratio 399 percent september 30 2015 316 percent september 30 2014 increase debttototalcapital ratio primarily due increase debt decrease equity decrease equity primarily due pension postretirement benefit plan adjustments currency translation adjustments year march 24 2015 replaced former fiveyear 7500 million unsecured revolving credit facility new fiveyear 10 billion unsecured revolving credit facility expiring march 2020 borrowed either credit facility periods ended september 30 2015 september 30 2014 separate shortterm unsecured credit facilities approximately 1212 million september 30 2015 available nonus subsidiaries borrowings nonus credit facilities september 30 2015 september 30 2014 significant compliance covenants credit facilities september 30 2015 september 30 2014 additional information related credit facilities included note 5 financial statements among uses draw 10 billion credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2015 ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents shortterm investments among counterparties minimize exposure one entities use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 3501 million 2015 260 per common share 3205 million 2014 232 per common share 2763 million 2013 198 per common share quarterly dividend rate september 30 2015 065 per common share 260 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2015 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid received interest rate swap contracts including 54 million fair value adjustment recorded interest rate swap contracts september 30 2015 unamortized discount 454 million september 30 2015 see note 5 financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2016 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2016 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers contractual commitments capital expenditures e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities net related receivables amounts subsequent 2016 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2015 1457 million compared 1317 million 2014 approximately 69 percent 2015 global pension expense relates us pension plan actuarial assumptions used determine 2015 us pension expense included following discount rate 450 percent compared 505 percent 2014 expected rate return plan assets 750 percent compared 750 percent 2014 assumed longterm compensation increase rate 375 percent compared 375 percent 2014 2015 2014 2013 required make contributions satisfy minimum statutory funding requirements us pension plans table presents estimate net periodic benefit cost 2016 compared net periodic benefit cost 2015 millions 2016 us discount rate increase 455 percent 450 percent 2015 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans 2016 us longterm compensation increase rate remain 375 percent established rate analyzing elements compensation pensioneligible earnings 2016 expected rate return us plan assets remain 750 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption financial markets produced mixed results 2015 plan’s debt securities return positive expected return range 2015 lower market interest rates resulted low single digit bond returns plan’s equity securities return expected return range 2015 us international equity returns negative year actual return portfolio us plan assets approximately 590 percent annualized 15 years ended september 30 2015 approximately 840 percent annualized 20 years ended september 30 2015 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated approximate change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 11 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 112 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1814 million september 30 2015 1956 million september 30 2014 92 million september 30 2015 116 million september 30 2014 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include expenses sites currently operate formerly owned operated third party sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent required remediation procedures timing procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change accrual environmental matters including certain environmental indemnification liabilities substantially indemnified exxonmobil corporation 545 million net 329 million related receivables 482 million net 397 million related receivables september 30 2015 2014 respectively recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes required remediation procedures timing procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations one principal selfinsurance programs covers product liability selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims including asbestos costs 178 million net 104 million related receivables 148 million net 75 million related receivables september 30 2015 2014 respectively various lawsuits claims proceedings may instituted asserted us relating conduct business described note 14 financial statements within section entitled matters named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see note 14 financial statements discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 04 million 03 million current liabilities september 30 2015 2014 respectively 198 million 219 million liabilities september 30 2015 2014 respectively conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 66 million 10 million 08 million accrued current liabilities september 30 2015 2014 respectively 56 million 70 million accrued liabilities september 30 2015 2014 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 14 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state nonus taxing authorities additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due ambiguity laws rulings jurisdiction differences interplay tax laws jurisdictions uncertainty underlying facts may construed inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge crossjurisdictional transactions crossjurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax reserves gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 439 million 389 million september 30 2015 2014 respectively entire amount would reduce effective tax rate recognized accrued interest penalties related unrecognized tax benefits 51 million 81 million september 30 2015 2014 respectively recognize interest penalties related unrecognized tax benefits income tax provision unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 265 million september 30 2015 believe reasonably possible amount gross unrecognized tax benefits could reduced 310 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 145 million recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 222 million september 30 2015 278 million september 30 2014 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected conversely income would decrease determine unable realize deferred tax assets future consolidated financial statements provide tax liability undistributed earnings subsidiaries repatriated us september 30 2015 provided us deferred taxes 30590 million earnings since earnings current plans continue indefinitely reinvested outside us end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 13 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview rockwell automation inc leader industrial automation information makes customers productive world sustainable overall demand products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • customers’ needs faster time market lower total cost ownership improved asset utilization optimization enterprise risk management • customers’ needs continuously improve quality safety sustainability • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy vision valued global provider innovative industrial automation information products solutions services supported growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • acquire companies serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise market access • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals including abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world approximately 60 percent employees 45 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customerfacing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals energy pulp paper waterwastewater companies industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers industries also generate maintenance repair order mro ongoing services revenue related installed base outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings september 2016 acquired maverick technologies leading systems integrator acquisition significantly enhances expertise key process batch applications help customers realize greater productivity improved global competitiveness process control information management solutions september 2016 acquired automation control products premier provider centralized thin client remote desktop server management software acquisition strengthens ability provide customers visual display software solutions manage information streamline workflows connected manufacturing environment march 2016 acquired magnemotion inc leading manufacturer intelligent conveying systems acquisition continues strategy build portfolio smart manufacturing technologies expanding existing capabilities independent cart technology october 2014 acquired assets esc services inc global provider lockouttagout services solutions acquisition enables customers increase asset utilization strengthen enterprise risk management january 2014 acquired jacobs automation pioneer intelligent track motion control technology improves performance across wide range packaging material handling applications global machine builders november 2013 acquired vmonitor llc affiliates global technology leader wireless solutions oil gas industry acquisition strengthens ability deliver endtoend projects oil gas sector accelerates development similar process solutions remote monitoring services industries globally believe acquisitions help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity implementation common global processes enterprisewide business system nearly complete intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2016 sales us accounted 55 percent total sales various indicators use gauge direction momentum served us markets include • industrial production ip index published federal reserve measures real output manufacturing mining electric gas utilities ip index expressed percentage real output base year currently 2012 historically meaningful correlation changes ip index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending compiled bureau economic analysis provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry published federal reserve measures plant operating activity historically meaningful correlation capacity utilization levels us ip table depicts trends indicators fiscal 2014 2016 macroeconomic indicators improved recent quarter except pmi indicating recovery industrial economy although pmi declined september reading 515 indicates manufacturing sector continuing expand note economic indicators subject revisions issuing organizations nonus economic trends 2016 sales outside us accounted 45 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned overview section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries gross domestic product ip indicators growth opportunities region business economic projections call higher rate industrial production growth regions 2017 except europe middle east africa emea current economic projections indicate stable conditions europe proceed 2017 uncertainty associated ultimate resolution united kingdom’s decision exit european union asia pacific china’s economic growth continues impacted elevated debt levels although industrial output new orders growth shown recent improvement indian economy remains one fastest growing globally latin america brazil remains recession improved outlook mexico’s economy continues stable canada’s outlook also improved investment resourcebased industries may reached bottom summary results operations 2016 sales 58795 million decrease 68 percent year organic sales decreased 39 percent currency translation reduced sales 30 percentage points growth consumer automotive industries offset declines heavy industries particularly oil gas mining following summary results related key growth initiatives • sales related process initiative decreased 19 percent 2016 compared 2015 excluding impact currency translation process initiative sales decreased 16 percent year • logix sales decreased 7 percent year compared 2015 logix organic sales decreased 4 percent • sales emerging markets decreased 84 percent 2016 compared 2015 organic sales emerging countries increased 12 percent year currency translation reduced sales emerging countries 97 percentage points 2016 able hold pretax margin 16 percent segment operating margin 20 percent despite difficult market conditions lower reported sales following table reflects sales operating results years ended september 30 2016 2015 2014 millions except per share amounts 1 see note 15 financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension costs interest expense income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 adjusted eps nongaap earnings measure excludes nonoperating pension costs related income tax effects see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions increases nonoperating pension costs segments fiscal 2016 primarily due adoption new mortality table rp2014 mortality improvement scale mp2014 used measure net periodic pension cost us pension plans adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related income tax effects nonoperating pension costs include defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic pension cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period adjusted eps also used financial measure performance annual incentive compensation measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate following components operating nonoperating pension costs years ended september 30 2016 2015 2014 millions following reconciliations income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively years ended september 30 2016 2015 2014 millions except per share amounts percentages 2016 compared 2015 sales fiscal 2016 decreased 68 percent compared 2015 organic sales decreased 39 percent currency translation reduced sales 30 percentage points pricing contributed less one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2016 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states declined year mainly due weakness heavy industries particularly oil gas • sales canada decreased due unfavorable impact currency translation well declines heavy industries particularly oil gas • emea sales decreased due unfavorable impact currency translation organic sales increased mature europe emerging countries • asia pacific sales declined due unfavorable impact currency translation well decrease organic sales china • latin america sales decreased due unfavorable impact currency translation organic sales growth region led mexico general corporate net general corporate net expenses 797 million fiscal 2016 compared 856 million fiscal 2015 income taxes income taxes decreased 16 percent 11275 million 2015 9431 million 2016 primarily due decrease segment operating earnings total segment operating earnings decreased 13 percent year 13605 million 2015 11887 million 2016 primarily due lower organic sales unfavorable currency effects income taxes effective tax rate 2016 226 percent compared 266 percent 2015 adjusted effective tax rate 2016 236 percent compared 270 percent 2015 decreases effective tax rate adjusted effective tax rate primarily due incremental benefit retroactive permanent extension us federal research development tax credit us research tax credit first quarter 2016 favorable geographic mix pretax income discrete tax items see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2016 2015 affecting years respective tax rates architecture software sales architecture software sales decreased 42 percent 2016 compared 2015 organic sales decreased 15 percent effects currency translation reduced sales 30 percentage points acquisitions contributed 03 percentage points sales growth pricing contributed approximately one percentage point growth year regions experienced decline sales year except emea excluding impact currency translation growth latin america emea offset decreases remaining regions logix sales decreased 7 percent 2016 compared 2015 logix organic sales decreased 4 percent year currency translation reduced sales 3 percentage points operating margin architecture software segment operating earnings decreased 14 percent operating margin 264 percent 2016 compared 294 percent 2015 primarily due unfavorable mix currency effects well lower organic sales control products solutions sales control products solutions sales decreased 88 percent 2016 compared 2015 organic sales decreased 58 percent currency translation reduced sales 30 percentage points pricing contributed less one percentage point growth year regions experienced yearoveryear decrease sales excluding impact currency translation growth latin america offset declines remaining regions sales solutions services businesses decreased 11 percent year organic sales solutions services businesses decreased 8 percent 2016 currency translation reduced sales 3 percentage points product sales decreased 5 percent year product organic sales decreased 2 percent year 2016 currency translation reduced sales 3 percentage points operating margin control products solutions segment operating earnings decreased 11 percent year segment operating margin 152 percent 2016 compared 155 percent year ago primarily due lower organic sales partially offset productivity 2015 compared 2014 sales fiscal 2015 decreased 48 percent compared 2014 organic sales increased 11 percent currency translation reduced sales 60 percent product sales decreased 3 percent year product organic sales increased 3 percent year 2015 currency translation reduced sales 6 percent pricing contributed approximately one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2015 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states increased modestly strength consumer automotive industries offset weakness heavy industries especially oil gas industry • sales canada declined due unfavorable impact currency translation well declines resourcebased industries particularly oil gas industry • emea sales decreased due unfavorable impact currency translation organic sales growth led emerging countries modest growth mature europe • asia pacific sales declined due unfavorable impact currency translation well decrease organic sales china partially offset growth india • latin america sales decreased due unfavorable impact currency translation organic sales growth region primarily driven strong sales growth mexico general corporate net general corporate net expenses 856 million fiscal 2015 compared 810 million fiscal 2014 income taxes income taxes decreased 1 percent 11342 million 2014 11275 million 2015 primarily due increases nonoperating pension costs general corporate net expenses interest expense partially offset increase segment operating earnings total segment operating earnings increased 1 percent year primarily due strong productivity higher organic sales partially offset unfavorable currency effects higher spending income taxes effective tax rate 2015 266 percent compared 271 percent 2014 adjusted effective tax rate 2015 270 percent compared 275 percent 2014 decreases effective tax rate adjusted effective tax rate primarily due tax effect foreign dividends retroactive extension us research tax credit calendar year 2014 first quarter fiscal 2015 partially offset difference mix pretax income across regions see note 13 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2015 2014 affecting years respective tax rates architecture software sales architecture software sales decreased 34 percent 2015 compared 2014 organic sales increased 31 percent effects currency translation reduced sales 66 percent pricing contributed approximately one half percentage points growth year regions experienced decline sales year except united states excluding impact currency translation latin america segments best performing region 2015 regions experiencing sales growth except asia pacific logix sales decreased 25 percent 2015 compared 2014 logix organic sales increased 42 percent year operating margin architecture software segment operating earnings decreased 4 percent operating margin 294 percent 2015 compared 295 percent 2014 favorable impact organic sales growth productivity offset higher spending unfavorable currency effects control products solutions sales control products solutions sales decreased 58 percent 2015 compared 2014 organic sales decreased 04 percent currency translation reduced sales 56 percent pricing contributed slightly less one percentage point growth year regions experienced decline sales except united states flat year excluding impact currency translation growth latin america offset declines canada regions flat 2015 sales solutions services businesses decreased 8 percent year organic sales solutions services businesses decreased 2 percent 2015 net effect currency translation acquisitions reduced sales 6 percentage points operating margin control products solutions segment operating earnings increased 8 percent year segment operating margin 155 percent 2015 compared 136 percent year ago primarily due strong productivity financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow millions nongaap financial measure definition free cash flow takes consideration capital investments required maintain businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting principles generally accepted united states us gaap require excess income tax benefit sharebased compensation reported financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance including financial measure annual incentive compensation definition free cash flow may differ definitions used companies cash provided operating activities 9473 million year ended september 30 2016 compared 11877 million year ended september 30 2015 free cash flow 8337 million year ended september 30 2016 compared 10772 million year ended september 30 2015 yearoveryear decrease cash flow provided operating activities free cash flow primarily due lower pretax income less favorable working capital performance 2016 compared 2015 repurchased approximately 46 million shares common stock share repurchase program 2016 total cost 5002 million 2015 repurchased approximately 54 million shares common stock share repurchase program total cost 6062 million september 30 2016 2015 53 million 125 million respectively outstanding common stock share repurchases recorded accounts payable settle next fiscal year decision repurchase shares 2017 depend business conditions free cash flow generation cash requirements stock price april 6 2016 board directors authorized us expend additional 10 billion repurchase shares common stock september 30 2016 approximately 9450 million remaining share repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2017 150 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive international operations significant amounts cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings indefinitely reinvested generally funds would subject us tax repatriated september 30 2016 approximately 95 percent funds held nonus subsidiaries percentage funds held nonus subsidiaries vary quarter average approximately 90 percent past eight quarters encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 4486 million september 30 2016 weighted average interest rate 057 percent weighted average maturity period 35 days commercial paper borrowings outstanding september 30 2015 debttototalcapital ratio 497 percent september 30 2016 399 percent september 30 2015 september 30 2016 2015 total current borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed credit facility years ended september 30 2016 2015 separate shortterm unsecured credit facilities approximately 1212 million september 30 2016 available nonus subsidiaries borrowings nonus credit facilities september 30 2016 september 30 2015 significant compliance covenants credit facilities september 30 2016 september 30 2015 additional information related credit facilities included note 5 financial statements among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2016 ability access commercial paper market related costs borrowings affected strength credit ratings market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments diversify cash equivalents shortterm investments among counterparties minimize exposure one entities emphasis primarily safety liquidity principal secondarily maximizing yield funds use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities 1975 1989 rockwell international corporation ric operated rocky flats facility colorado us department energy doe 1990 class landowners near rocky flats sued ric dow chemical another former operator facility may 2016 parties agreed settle case doe authorized settlement agreement subject court approval dow chemical pay 3750 million aggregate resolve claims expect fully reimbursed doe obligation 24375 million settlement either pay amounts due expect pay 2425 million within next 12 months promptly pursue reimbursement doe however uncertain whether government indemnification reimbursement process completed time payment due given cash credit resources believe matter material adverse effect financial condition refer note 17 financial statements discussion rocky flats settlement cash dividends shareowners 3782 million 2016 290 per common share 3501 million 2015 260 per common share 3205 million 2014 232 per common share quarterly dividend rate september 30 2016 0725 per common share 290 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2016 follows millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid received interest rate swap contracts including 195 million fair value adjustment recorded interest rate swap contracts september 30 2016 unamortized discount 451 million september 30 2016 see note 5 financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2017 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2017 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes contractual commitments capital expenditures certain materials purchases longterm obligations agreements various service providers e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities net related receivables amounts subsequent 2017 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid g refer note 17 financial statements discussion rocky flats settlement supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales acquired businesses also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2016 1613 million compared 1457 million 2015 approximately 77 percent 2016 global pension expense relates us pension plan actuarial assumptions used determine 2016 us pension expense included following discount rate 455 percent compared 450 percent 2015 expected rate return plan assets 750 percent compared 750 percent 2015 assumed longterm compensation increase rate 375 percent compared 375 percent 2015 2016 2015 2014 required make contributions satisfy minimum statutory funding requirements us pension plans table presents estimate net periodic benefit cost 2017 compared net periodic benefit cost 2016 millions 2017 us discount rate decrease 375 percent 455 percent 2016 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans 2017 us longterm compensation increase rate decrease 350 percent 375 percent 2016 established rate analyzing elements compensation pensioneligible earnings 2017 expected rate return us plan assets remain 750 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption financial markets produced positive returns 2016 plan’s debt securities return positive expected return range 2016 lower market interest rates resulted strong performance bonds plan’s equity securities return expected return range 2016 us international equity returns positive year actual return portfolio us plan assets approximately 760 percent annualized 15 years ended september 30 2016 approximately 830 percent annualized 20 years ended september 30 2016 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 11 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured products delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others information regarding revenue recognition policies contained note 1 financial statements returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 79 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products solutions services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1844 million september 30 2016 1814 million september 30 2015 79 million september 30 2016 92 million september 30 2015 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include expenses sites currently operate formerly owned operated third party sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent required remediation procedures timing procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change accrual environmental matters including environmental indemnification liabilities 687 million net 222 million related receivables 611 million net 329 million related receivables september 30 2016 2015 respectively recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes required remediation procedures timing procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations one principal selfinsurance programs covers product liability selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims including asbestos costs 201 million net 111 million related receivables 178 million net 104 million related receivables september 30 2016 2015 respectively various lawsuits claims proceedings may instituted asserted us relating conduct business described note 14 financial statements within section entitled matters named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see note 14 financial statements discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 07 million 04 million current liabilities september 30 2016 2015 respectively 199 million 198 million liabilities september 30 2016 2015 respectively information regarding litigation claims contingencies contained note 14 financial statements income taxes significant judgment required determination income tax expense deferred tax assets liabilities unrecognized tax benefits deferred income taxes recorded temporary differences tax basis assets liabilities reported amounts financial statements evaluating ability recover deferred tax assets consider jurisdiction available positive negative evidence including recent historical operating results expected future taxable income scheduled reversals deferred tax liabilities taxplanning strategies assumptions taxable income consistent plans estimates underlying businesses record valuation allowance determine likely deferred tax assets realized conduct business globally routinely audited various tax jurisdictions operate income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments taxes record unrecognized tax liabilities likely position sustained upon examination including resolution appeals litigation processes adjust liabilities judgment changes result evaluation new information previously available provided us deferred taxes 32740 million undistributed earnings certain nonus subsidiaries since earnings determined indefinitely reinvested outside us thus subject us income taxes foreign withholding taxes practicable estimate amount additional taxes may payable upon distribution earnings information regarding income taxes contained note 13 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview rockwell automation inc leader industrial automation information makes customers productive world sustainable overall demand products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • customers’ needs faster time market lower total cost ownership improved asset utilization optimization enterprise risk management • customers’ needs continuously improve quality safety sustainability • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy bring connected enterprise life integrate control information across enterprise help industrial companies people productive vision valued global provider innovative industrial automation information products solutions services supported growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • acquire companies serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise market access • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals including abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income expect acquisitions add percentage point per year longterm sales growth customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world approximately 60 percent employees 45 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customerfacing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products heavy industries transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers heavy industries including oil gas mining aggregates cement metals energy semiconductor pulp paper waterwastewater companies resourcebased industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers industries also generate maintenance repair order mro ongoing services revenue related installed base outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings september 2016 acquired maverick technologies leading systems integrator acquisition significantly enhances expertise key process batch applications help customers realize greater productivity improved global competitiveness process control information management solutions september 2016 acquired automation control products premier provider centralized thin client remote desktop server management software acquisition strengthens ability provide customers visual display software solutions manage information streamline workflows connected manufacturing environment march 2016 acquired magnemotion inc leading manufacturer intelligent conveying systems acquisition continues strategy build portfolio smart manufacturing technologies expanding existing capabilities independent cart technology october 2014 acquired assets esc services inc global provider lockouttagout services solutions acquisition enables customers increase asset utilization strengthen enterprise risk management believe acquisitions help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity implementation common global processes enterprisewide business system nearly complete intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2017 sales us accounted 55 percent total sales various indicators use gauge direction momentum served us markets include • industrial production ip index published federal reserve measures real output manufacturing mining electric gas utilities ip index expressed percentage real output base year currently 2012 historically meaningful correlation changes ip index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending compiled bureau economic analysis provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry published federal reserve measures plant operating activity historically meaningful correlation capacity utilization levels us ip table depicts trends indicators fiscal 2015 2017 fourth quarter fiscal 2017 four indicators improved compared quarter prior year pmi industrial equipment spending also improving sequentially note economic indicators subject revisions issuing organizations nonus economic trends 2017 sales outside us accounted 45 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned “overview” section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries gross domestic product ip indicators growth opportunities region business seen return industrial production growth regions fiscal year 2017 growth forecast fiscal year 2018 europe business sentiment remains high levels asia macroeconomic environment stable latin america business confidence investment levels brazil improving although growth expected slow mexico industrial production gdp growth canada expected continue fiscal year 2018 summary results operations 2017 sales 63113 million increase 73 percent year organic sales increased 61 percent currency translation reduced sales 03 percentage points acquisitions contributed 15 percentage points sales growth broadbased across regions led strength automotive semiconductor food beverage industries following summary results related key growth initiatives • logix reported organic sales increased 10 percent year compared 2016 • process initiative sales increased 13 percent 2017 compared 2016 process initiative organic sales increased 4 percent currency translation reduced process sales one percentage point acquisitions contributed 10 percentage points process sales growth • sales emerging countries increased 87 percent 2017 compared 2016 organic sales emerging countries increased 101 percent year currency translation reduced sales emerging countries 15 percentage points acquisitions contributed 01 percentage points sales growth following table reflects sales operating results years ended september 30 2017 2016 2015 millions except per share amounts 1 see note 16 financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension costs interest expense income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 adjusted eps nongaap earnings measure excludes nonoperating pension costs related income tax effects see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure 4 fourth quarter fiscal 2017 sold product distribution business within control products solutions segment business held intellectual property included products sold outside core channel different brands sold business approximately 94 million recorded pretax gain 608 million included within income expense consolidated statement operations purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions increases nonoperating pension costs segments fiscal 2017 primarily due decrease us discount rate 455 percent fiscal 2016 375 percent fiscal 2017 adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related income tax effects nonoperating pension costs include defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic pension cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period adjusted eps also used financial measure performance annual incentive compensation measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate following components operating nonoperating pension costs years ended september 30 2017 2016 2015 millions following reconciliations income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively years ended september 30 2017 2016 2015 millions except per share amounts percentages 2017 compared 2016 sales fiscal 2017 increased 73 percent compared 2016 organic sales increased 61 percent currency translation reduced sales 03 percentage points acquisitions contributed 15 percentage points sales growth pricing contributed less one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2017 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states increased year led strength automotive consumer industries • sales canada grew growth led pulp paper consumer automotive industries • emea sales increased compared prior year growth emerging developed countries • asia pacific sales increased year strong growth across region particularly within semiconductor industry • sales growth latin america mixed growth led mexico partially offset declines across rest region general corporate net general corporate net expenses 763 million fiscal 2017 compared 797 million fiscal 2016 income taxes income taxes increased 10 percent 9431 million 2016 10374 million 2017 primarily due gain sale business fourth quarter increase segment operating earnings total segment operating earnings increased 4 percent year 11887 million 2016 12331 million 2017 primarily due higher sales partially offset higher incentive compensation restructuring charges fiscal 2016 incur expenses related primary annual incentive compensation plans based companys performance fiscal 2017 recorded approximately 115 million related plans income taxes effective tax rate 2017 204 percent compared 226 percent 2016 adjusted effective tax rate 2017 215 percent compared 236 percent 2016 decreases effective tax rate adjusted effective tax rate primarily due larger favorable discrete tax items current year see note 14 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2017 2016 affecting years respective tax rates architecture software sales architecture software sales increased 100 percent 2017 compared 2016 organic sales increased 94 percent effects currency translation reduced sales 03 percentage points acquisitions contributed 09 percentage points sales growth pricing contributed approximately one percentage point growth year regions experienced reported organic sales growth united states strongest performing region logix reported organic sales increased 10 percent 2017 compared 2016 operating margin architecture software segment operating earnings increased 12 percent operating margin 270 percent 2017 compared 264 percent 2016 primarily due higher sales partially offset higher incentive compensation restructuring charges control products solutions sales control products solutions sales increased 52 percent 2017 compared 2016 organic sales increased 34 percent effects currency translation reduced sales 02 percentage points acquisitions contributed 20 percentage points sales growth pricing significant impact growth year regions experienced reported organic sales growth united states asia pacific strongest performing regions sales solutions services businesses increased 4 percent year organic sales solutions services businesses increased 1 percent 2017 acquisitions contributed 3 percentage points growth product sales increased 6 percent year product organic sales increased 7 percent year 2017 currency translation reduced sales approximately 1 percentage point operating margin control products solutions segment operating earnings decreased 9 percent year segment operating margin 132 percent 2017 compared 152 percent year ago primarily due higher incentive compensation restructuring charges partially offset higher sales 2016 compared 2015 sales fiscal 2016 decreased 68 percent compared 2015 organic sales decreased 39 percent currency translation reduced sales 30 percentage points pricing contributed less one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2016 percentage change period year ago millions except percentages 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states declined year mainly due weakness heavy industries particularly oil gas • sales canada decreased due unfavorable impact currency translation well declines heavy industries particularly oil gas • emea sales decreased due unfavorable impact currency translation organic sales increased mature europe emerging countries • asia pacific sales declined due unfavorable impact currency translation well decrease organic sales china • latin america sales decreased due unfavorable impact currency translation organic sales growth region led mexico general corporate net general corporate net expenses 797 million fiscal 2016 compared 856 million fiscal 2015 income taxes income taxes decreased 16 percent 11275 million 2015 9431 million 2016 primarily due decrease segment operating earnings total segment operating earnings decreased 13 percent year 13605 million 2015 11887 million 2016 primarily due lower organic sales unfavorable currency effects income taxes effective tax rate 2016 226 percent compared 266 percent 2015 adjusted effective tax rate 2016 236 percent compared 270 percent 2015 decreases effective tax rate adjusted effective tax rate primarily due incremental benefit retroactive permanent extension us federal research development tax credit us research tax credit first quarter 2016 favorable geographic mix pretax income discrete tax items see note 14 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2016 2015 affecting years respective tax rates architecture software sales architecture software sales decreased 42 percent 2016 compared 2015 organic sales decreased 15 percent effects currency translation reduced sales 30 percentage points acquisitions contributed 03 percentage points sales growth pricing contributed approximately one percentage point growth year regions experienced decline sales year except emea excluding impact currency translation growth latin america emea offset decreases remaining regions logix sales decreased 7 percent 2016 compared 2015 logix organic sales decreased 4 percent year currency translation reduced sales 3 percentage points operating margin architecture software segment operating earnings decreased 14 percent operating margin 264 percent 2016 compared 294 percent 2015 primarily due unfavorable mix currency effects well lower organic sales control products solutions sales control products solutions sales decreased 88 percent 2016 compared 2015 organic sales decreased 58 percent currency translation reduced sales 30 percentage points pricing contributed less one percentage point growth year regions experienced yearoveryear decrease sales excluding impact currency translation growth latin america offset declines remaining regions sales solutions services businesses decreased 11 percent year organic sales solutions services businesses decreased 8 percent 2016 currency translation reduced sales 3 percentage points product sales decreased 5 percent year product organic sales decreased 2 percent year 2016 currency translation reduced sales 3 percentage points operating margin control products solutions segment operating earnings decreased 11 percent year segment operating margin 152 percent 2016 compared 155 percent year ago primarily due lower organic sales partially offset productivity financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow millions nongaap financial measure definition free cash flow takes consideration capital investments required maintain businesses operations execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows first quarter fiscal year 2017 adopted new sharebased compensation accounting standard requires excess income tax benefit sharebased compensation classified operating rather financing cash flow previous periods added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows beginning first quarter fiscal year 2017 adjustment necessary benefit already included operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance including financial measure annual incentive compensation definition free cash flow may differ definitions used companies cash provided operating activities 10340 million year ended september 30 2017 compared 9473 million year ended september 30 2016 free cash flow 8923 million year ended september 30 2017 compared 8337 million year ended september 30 2016 yearoveryear increases cash provided operating activities free cash flow primarily due lower incentive compensation income tax payments partially offset voluntary contribution 2000 million us qualified pension plan 2017 repurchased approximately 23 million shares common stock share repurchase program 2017 total cost 3366 million 2016 repurchased approximately 46 million shares common stock share repurchase program total cost 5002 million september 30 2017 outstanding common stock share repurchases recorded accounts payable september 30 2016 53 million outstanding common stock share repurchases recorded accounts payable settle 2017 decision repurchase shares 2018 depend business conditions free cash flow generation cash requirements stock price april 6 2016 board directors authorized us expend additional 10 billion repurchase shares common stock september 30 2017 approximately 6084 million remaining share repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt including current portion longterm debt expect capital expenditures 2018 160 million expect fund 2500 million current portion long term debt due december 2017 issuance commercial paper expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive international operations significant amounts cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings indefinitely reinvested generally funds would subject us tax repatriated september 30 2017 substantially funds held nonus subsidiaries percentage funds held nonus subsidiaries vary quarter although substantially funds held nonus subsidiaries average past eight quarters encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 3500 million september 30 2017 weighted average interest rate 126 percent weighted average maturity period 10 days commercial paper borrowings outstanding 4486 million september 30 2016 weighted average interest rate 057 percent weighted average maturity period 35 days september 30 2017 2016 total current borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed credit facility years ended september 30 2017 2016 december 2016 amended financial covenant credit facility previous financial covenant limited debttototalcapital ratio 60 percent replaced minimum ebitdatointerest ratio 30 10 ebitdatointerest ratio defined amendment ratio consolidated ebitda defined amendment preceding four quarters consolidated interest expense period believe new covenant provides us greater financial flexibility separate shortterm unsecured credit facilities approximately 1284 million september 30 2017 available nonus subsidiaries borrowings nonus credit facilities september 30 2017 september 30 2016 significant compliance covenants credit facilities september 30 2017 september 30 2016 additional information related credit facilities included note 5 financial statements among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2017 ability access commercial paper market related costs borrowings affected strength credit ratings market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments diversify cash equivalents shortterm investments among counterparties minimize exposure one entities emphasis primarily safety liquidity principal secondarily maximizing yield funds use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 3907 million 2017 304 per common share 3782 million 2016 290 per common share 3501 million 2015 260 per common share quarterly dividend rate september 30 2017 076 per common share 304 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2017 follows millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid received interest rate swap contracts including 46 million fair value adjustment recorded interest rate swap contracts september 30 2017 unamortized discount 448 million september 30 2017 2018 amount includes 2500 million 565 notes due december 2017 see note 5 financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2018 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2018 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes contractual commitments capital expenditures certain materials purchases longterm obligations agreements various service providers e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities net related receivables amounts subsequent 2018 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales acquired businesses also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period divest business exclude sales prior period comparable sales current period organic sales growth calculated comparing organic sales reported sales prior year excluding divestitures attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting estimates believe following accounting estimates critical understanding financial statements could significant effect reported results require subjective complex judgments management accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported estimates based best judgment current future conditions actual results could differ estimates refer note 1 financial statements information regarding significant accounting policies retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2017 1759 million compared 1613 million 2016 approximately 77 percent 2017 global pension expense relates us pension plan actuarial assumptions used determine 2017 us pension expense included following discount rate 375 percent compared 455 percent 2016 expected rate return plan assets 750 percent compared 750 percent 2016 2018 us discount rate increase 390 percent 375 percent 2017 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans 2018 expected rate return us plan assets remain 750 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption financial markets produced positive returns 2017 plan’s debt securities return positive plan’s equity securities return expected return range 2017 us international equity returns positive year actual return portfolio us plan assets approximately 895 percent annualized 15 years ended september 30 2017 approximately 745 percent annualized 20 years ended september 30 2017 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 12 financial statements revenue recognition customer incentives offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products solutions services based meeting specified program criteria customer incentives recognized reduction sales distributed cash customer account credits customer incentives recognized cost sales additional products solutions services provided record accruals time revenue recognition current liability within customer returns rebates incentives consolidated balance sheet right setoff exists reduction receivables primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product critical assumption used estimating accrual program time period revenue recognized rebate processed estimate based primarily historical experience time period change 10 percent effect would adjustment accrual approximately 97 million information regarding revenue recognition returns rebates incentives policies contained note 1 financial statements income taxes undistributed earnings annual tax rate depends extent earnings indefinitely reinvested outside us indefinite reinvestment determined managements judgment intentions concerning future operations company provided us deferred taxes 35260 million undistributed earnings certain nonus subsidiaries since earnings determined indefinitely reinvested outside us thus subject us income taxes foreign withholding taxes practicable estimate amount additional taxes may payable upon distribution earnings information regarding income taxes contained note 14 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview rockwell automation inc leader industrial automation information makes customers productive world sustainable overall demand hardware software products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • customers’ needs faster time market lower total cost ownership improved asset utilization optimization enterprise risk management • customers’ needs continuously improve quality safety sustainability • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy bring connected enterprise life integrate control information across enterprise help industrial companies people productive vision valued global provider innovative industrial automation information hardware software products solutions services supported growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • diversify sales streams broadening portfolio hardware software products solutions services expanding global presence serving wider range industries applications • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • acquire companies serve catalysts organic growth adding complementary technology expanding served market enhancing domain expertise market access • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals including abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income expect acquisitions add percentage point per year longterm sales growth customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable competitive advantage integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively software portfolio combined software made available result strategic alliance ptc comprehensive flexible information platform industry combination technology domain expertise help customers achieve additional productivity benefits reduced unplanned downtime improved energy efficiency higher quality increased throughput yield intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world approximately 60 percent employees 45 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio hardware software products solutions services provide customers regions made significant investments globalize manufacturing product development customerfacing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader process applications complement growing global network engineers partners provide solutions process customers original equipment manufacturers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products heavy industries transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities flexible manufacturing regulatory compliance customers operate environment product innovation time market critical factors serve customers heavy industries including oil gas mining aggregates cement metals energy semiconductor chemicals pulp paper waterwastewater companies resourcebased industries typically invest capacity expansion commodity prices relatively high global demand basic materials increasing addition ongoing investment upgrades aging automation systems productivity transportation industry factors geographic expansion investment new model introductions including electric vehicles flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers industries also generate maintenance repair order mro ongoing services revenue related installed base outsourcing sustainability trends demand hardware software products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energyefficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions investments acquisition investment strategy focuses hardware software products solutions services catalytic organic growth core offerings 2018 made several investments including ptc leader industrial internet things augmented reality investment alliance ptc accelerate growth companies enable us partner choice customers around world want transform physical operations digital technology result unmatched integrated information solution enable customers achieve increased productivity heightened plant efficiency reduced operational risk better system interoperability november 2017 acquired odos imaging limited scottish technology company provides threedimensional timeofflight sensing systems industrial imaging applications acquisition enables us expand existing capabilities bringing 3d timeofflight sensor technology industrial applications september 2016 acquired maverick technologies leading systems integrator acquisition significantly enhances expertise key process batch applications help customers realize greater productivity improved global competitiveness process control information management solutions september 2016 acquired automation control products premier provider centralized thin client remote desktop server management software acquisition strengthens ability provide customers visual display software solutions manage information streamline workflows connected manufacturing environment march 2016 acquired magnemotion inc leading manufacturer intelligent conveying systems acquisition continues strategy build portfolio smart manufacturing technologies expanding existing capabilities independent cart technology believe acquisitions investments help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity implementation common global processes enterprisewide business system nearly complete intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2018 sales us accounted approximately 55 percent total sales various indicators use gauge direction momentum served us markets include • industrial production ip index published federal reserve measures real output manufacturing mining electric gas utilities ip index expressed percentage real output base year currently 2012 historically meaningful correlation changes ip index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending compiled bureau economic analysis provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry published federal reserve measures plant operating activity historically meaningful correlation capacity utilization levels us ip table depicts trends indicators fiscal 2016 2018 fourth quarter fiscal 2018 indicators except pmi improved compared prior quarter prior year pmi decreased slightly compared prior quarter prior year continues significantly 50 note economic indicators subject revisions issuing organizations nonus economic trends 2018 sales outside us accounted approximately 45 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned “overview” section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries gross domestic product ip indicators growth opportunities region business macroeconomic indicators remain favorable geographies although ip gross domestic product growth rates projected slow 2019 china impact trade tensions expected partially offset government stimulus solid domestic foreign demand india expected help support continued manufacturing growth europe economy affected slowing export growth driven strong euro emerging market currencies increasing oil prices latin america expected continue benefit strong us economy growth rates canada expected lower 2019 summary results operations 2018 sales 66660 million increase 56 percent year organic sales increased 55 percent currency translation increased sales 14 percentage points prior year divestiture reduced sales growth 13 percentage points growth broadbased across industries led food beverage mining life sciences semiconductor following summary results related key growth initiatives • logix reported sales increased 8 percent year 2018 compared 2017 organic sales increased 7 percent year currency translation increased sales 1 percentage point • process initiative reported sales organic sales increased 10 percent year 2018 compared 2017 • sales emerging countries increased 8 percent 2018 compared 2017 organic sales emerging countries increased 9 percent year prior year divestiture reduced sales emerging countries 1 percent following table reflects sales operating results millions except per share amounts 1 see note 16 financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustment pending registration ptc shares gains losses disposition businesses interest expense income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 fourth quarter fiscal 2017 sold product distribution business within control products solutions segment business held intellectual property included products sold outside core channel different brands sold business approximately 94 million recorded pretax gain 608 million included within income expense consolidated statement operations 4 fiscal 2018 recorded charges 5383 million associated enactment tax act refer note 14 financial statements information 5 adjusted eps nongaap earnings measure excludes nonoperating pension costs related income tax effects see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure purchase accounting depreciation amortization nonoperating pension costs allocated operating segments costs excluded measurement segments operating performance internal purposes allocate costs would attribute segments follows millions decreases nonoperating pension costs segments fiscal 2018 primarily due 200 million voluntary contribution fiscal 2017 actuarial adjustments increases nonoperating pension costs segments fiscal 2017 primarily due decrease us discount rate 455 percent fiscal 2016 375 percent fiscal 2017 adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustments pending registration ptc shares including respective tax effects provisional effects tax act believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period adjusted eps also used financial measure performance annual incentive compensation measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate nonoperating pension costs include defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impact plan curtailments settlements components net periodic pension cost primarily relate changes pension assets liabilities result market performance consider excluded costs unrelated operating performance business following components operating nonoperating pension costs millions following reconciliations income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively millions except per share amounts percentages 1includes gain investments valuation adjustment pending registration ptc shares related tax effects 2the tax act may require adjustments additional guidance us department treasury provided company’s assumptions change information interpretations become available refer note 14 financial statements information 2018 compared 2017 sales fiscal 2018 increased 56 percent compared 2017 organic sales increased 55 percent currency translation increased sales 14 percentage points prior year divestiture reduced sales growth 13 percentage points pricing contributed half one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2018 percentage change period year ago 1 organic sales excluding effect changes currency exchange rates acquisitions divestitures see supplemental sales information nongaap measure • sales united states increased year led strength heavy industries • sales canada increased year growth led pulp paper consumer industries • emea sales increased year led consumer industries • asia pacific sales increased year led heavy industries • sales latin america increased year led food beverage mining industries general corporate net general corporate net expenses 756 million fiscal 2018 compared 763 million fiscal 2017 income taxes income taxes increased 28 percent 10374 million 2017 13308 million 2018 primarily due ptc adjustments higher sales lower restructuring charges partially offset absence gain 2017 divestiture total segment operating earnings increased 17 percent year 12331 million 2017 14426 million 2018 primarily due higher sales income taxes december 22 2017 tax act enacted tax act significantly changes us tax law among things lowering statutory corporate income tax rate implementing modified territorial tax system imposing onetime transition tax accumulated earnings foreign subsidiaries previously deferred us tax transition tax fiscal year taxpayer certain provisions tax act impact us fiscal year 2018 including change federal statutory rate transition tax provisions effective fiscal year 2019 including tax global intangible lowtax income gilti foreign subsidiaries deduction foreign derived intangible income fdii elimination domestic manufacturing deduction effective tax rate 2018 598 percent compared 204 percent 2017 increase effective tax rate due provisional expense related transition tax deemed repatriation foreign earnings 3958 million 298 percent withholding taxes previously taxed foreign earnings 381 million 28 percent revaluation net deferred tax assets 1044 million 79 percent adjusted effective tax rate 2018 193 percent compared 215 percent 2017 decrease adjusted effective tax rate primarily due lower us statutory tax rate tax act partially offset lower discrete tax items current year see note 14 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2018 2017 affecting years respective tax rates architecture software sales architecture software sales increased 69 percent 2018 compared 2017 organic sales increased 52 percent effects currency translation increased sales 17 percentage points regions experienced reported organic sales growth united states strongest performing region organically logix reported sales increased 8 percent 2018 compared 2017 logix organic sales increased 7 percent effects currency translation increased sales 1 percentage point operating margin architecture software segment operating earnings increased 15 percent operating margin 291 percent 2018 compared 270 percent 2017 primarily due higher sales control products solutions sales control products solutions sales increased 46 percent 2018 compared 2017 organic sales increased 57 percent effects currency translation increased sales 13 percentage points prior year divestiture reduced sales 24 percentage points regions experienced reported organic sales growth except emea united states strongest performing region product sales decreased 2 percent year product organic sales increased 2 percent currency translation increased sales approximately 1 percentage point prior year divestitures reduced sales approximately 5 percentage points sales solutions services businesses increased approximately 10 percent year organic sales solutions services businesses increased 9 percent 2018 currency translation contributed 1 percentage point sales growth operating margin control products solutions segment operating earnings increased 20 percent year segment operating margin 152 percent 2018 compared 132 percent year ago primarily due higher sales 2017 compared 2016 sales fiscal 2017 increased 73 percent compared 2016 organic sales increased 61 percent currency translation reduced sales 03 percentage points acquisitions contributed 15 percentage points sales growth pricing contributed less one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2017 percentage change period prior year 1 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • sales united states increased year led strength automotive consumer industries • sales canada increased year led pulp paper consumer automotive industries • emea sales increased year growth emerging developed countries • asia pacific sales increased year strong growth across region particularly within semiconductor industry • sales growth latin america mixed growth led mexico partially offset declines across rest region general corporate net general corporate net expenses 763 million fiscal 2017 compared 797 million fiscal 2016 income taxes income taxes increased 10 percent 9431 million 2016 10374 million 2017 primarily due gain sale business fourth quarter increase segment operating earnings total segment operating earnings increased 4 percent year 11887 million 2016 12331 million 2017 primarily due higher sales partially offset higher incentive compensation restructuring charges fiscal 2016 incur expenses related primary annual incentive compensation plans based companys performance fiscal 2017 recorded approximately 115 million related plans income taxes effective tax rate 2017 204 percent compared 226 percent 2016 adjusted effective tax rate 2017 215 percent compared 236 percent 2016 decreases effective tax rate adjusted effective tax rate primarily due larger favorable discrete tax items 2017 see note 14 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2017 2016 affecting years respective tax rates architecture software sales architecture software sales increased 100 percent 2017 compared 2016 organic sales increased 94 percent effects currency translation reduced sales 03 percentage points acquisitions contributed 09 percentage points sales growth pricing contributed approximately one percentage point sales growth year regions experienced reported organic sales growth united states strongest performing region logix reported organic sales increased 10 percent 2017 compared 2016 operating margin architecture software segment operating earnings increased 12 percent operating margin 270 percent 2017 compared 264 percent 2016 primarily due higher sales partially offset higher incentive compensation restructuring charges control products solutions sales control products solutions sales increased 52 percent 2017 compared 2016 organic sales increased 34 percent effect currency translation reduced sales 02 percentage points acquisitions contributed 20 percentage points sales growth pricing significant impact sales growth year regions experienced reported organic sales growth united states asia pacific strongest performing regions sales solutions services businesses increased 4 percent year organic sales solutions services businesses increased 1 percent 2017 acquisitions contributed 3 percentage points sales growth product sales increased 6 percent year product organic sales increased 7 percent year 2017 currency translation reduced sales approximately 1 percentage point operating margin control products solutions segment operating earnings decreased 9 percent year segment operating margin 132 percent 2017 compared 152 percent year ago primarily due higher incentive compensation restructuring charges partially offset higher sales financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow nongaap financial measure millions definition free cash flow takes consideration capital investments required maintain businesses operations execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows first quarter fiscal year 2017 adopted new sharebased compensation accounting standard requires excess income tax benefit sharebased compensation classified operating rather financing cash flow previous periods added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows beginning first quarter fiscal year 2017 adjustment necessary benefit already included operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance including financial measure annual incentive compensation definition free cash flow may differ definitions used companies cash provided operating activities 13000 million year ended september 30 2018 compared 10340 million year ended september 30 2017 free cash flow 11745 million year ended september 30 2018 compared 8923 million year ended september 30 2017 yearoveryear increases cash provided operating activities free cash flow primarily due voluntary contribution 2000 million us qualified pension plan 2017 repurchased approximately 83 million shares common stock share repurchase program 2018 total cost 15 billion 2017 repurchased approximately 23 million shares common stock share repurchase program total cost 3366 million september 30 2018 183 million outstanding common stock share repurchases recorded accounts payable settle 2019 september 30 2017 outstanding common stock share repurchases recorded accounts payable settle 2018 decision repurchase shares 2019 depend business conditions free cash flow generation cash requirements stock price january 15 2018 september 6 2018 board directors authorized us expend additional 10 billion repurchase shares common stock september 30 2018 approximately 11084 million remaining share repurchases existing board authorizations see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases fiscal 2018 repatriated approximately 23 billion us foreign subsidiaries repatriated funds primarily used repurchase shares common stock fund investment ptc source funds cash equivalents liquidation short longterm investments september 30 2018 substantially cash equivalents investments funds held nonus subsidiaries due enactment tax act first quarter fiscal 2018 previously undistributed foreign earnings subject transition tax approximately 3894 million accordingly funds subject us tax repatriated refer note 14 financial statements information regarding effect enactment tax act financial condition results operations expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2019 150 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 5500 million september 30 2018 weighted average interest rate 227 percent weighted average maturity period 26 days commercial paper borrowings outstanding 3500 million september 30 2017 weighted average interest rate 126 percent weighted average maturity period 10 days september 30 2018 2017 total current borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed credit facility years ended september 30 2018 2017 december 2016 amended financial covenant credit facility previous financial covenant limited debttototalcapital ratio 60 percent replaced minimum ebitdatointerest ratio 30 10 ebitdatointerest ratio defined amendment ratio consolidated ebitda defined amendment preceding four quarters consolidated interest expense period believe new covenant provides us greater financial flexibility separate shortterm unsecured credit facilities approximately 1560 million september 30 2018 available nonus subsidiaries borrowings nonus credit facilities september 30 2018 september 30 2017 significant compliance covenants credit facilities september 30 2018 september 30 2017 additional information related credit facilities included note 5 financial statements among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2018 ability access commercial paper market related costs borrowings affected strength credit ratings market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments diversify cash equivalents shortterm investments among counterparties minimize exposure one entities emphasis primarily safety liquidity principal secondarily maximizing yield funds use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 4408 million 2018 351 per common share 3907 million 2017 304 per common share 3782 million 2016 290 per common share quarterly dividend rate september 30 2018 092 per common share 368 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2018 follows millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid received interest rate swap contracts including 240 million fair value adjustment recorded interest rate swap contracts september 30 2018 unamortized discount 446 million september 30 2018 see note 5 financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2019 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2019 excluded summary unable make reasonably reliable estimate amounts minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes contractual commitments capital expenditures certain materials purchases longterm obligations agreements various service providers e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities amounts subsequent 2019 excluded summary unable make reasonably reliable estimate liabilities paid f tax act company may elect pay transition tax interestfree eight years 8 due first five years 15 year six 20 year seven 25 year eight see note 14 financial statements discussion transition tax g amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales acquired businesses also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period divest business exclude sales prior period comparable sales current period organic sales growth calculated comparing organic sales reported sales prior year excluding divestitures attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting estimates believe following accounting estimates critical understanding financial statements could significant effect reported results require subjective complex judgments management accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported estimates based best judgment current future conditions actual results could differ estimates refer note 1 financial statements information regarding significant accounting policies retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2018 1141 million compared 1759 million 2017 approximately 79 percent 2018 global pension expense relates us pension plan actuarial assumptions used determine 2018 us pension expense included following discount rate 390 percent compared 375 percent 2017 expected rate return plan assets 750 percent consistent 2017 2019 us discount rate increase 435 percent 390 percent 2018 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans 2019 expected rate return us plan assets remain 750 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption financial markets produced positive returns 2018 plan’s debt securities return positive plan’s equity securities return expected return range 2018 us international equity returns positive year actual return portfolio us plan assets approximately 788 percent annualized 15 years ended september 30 2018 approximately 746 percent annualized 20 years ended september 30 2018 target allocations ranges longterm expected return major categories us plan assets follows changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points key assumptions us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 12 financial statements revenue recognition customer incentives offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria customer incentives recognized reduction sales distributed cash customer account credits customer incentives recognized cost sales additional hardware software products solutions services provided record accruals time revenue recognition current liability within customer returns rebates incentives consolidated balance sheet right setoff exists reduction receivables primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product critical assumption used estimating accrual program time period revenue recognized rebate processed estimate based primarily historical experience time period change 10 percent effect would adjustment accrual approximately 120 million information regarding revenue recognition returns rebates incentives policies contained note 1 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview rockwell automation inc global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable overall demand hardware software products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • customers’ needs faster time market operational productivity asset management reliability enterprise risk management • customers’ needs continuously improve quality safety sustainability • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy bring connected enterprise life integrating control information across enterprise deliver customer outcomes combining advanced industrial automation latest information technology growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • grow market share core platforms • drive double digit growth information solutions connected services • acquire companies serve catalysts organic growth increasing information solutions highvalue services offerings capabilities expanding global presence enhancing process expertise • enhance market access building channel capability partner network • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals including abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income expect acquisitions add percentage point per year longterm sales growth customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively information software portfolio combined software made available result strategic alliance ptc comprehensive flexible information platform industry combination technology domain expertise help customers achieve additional productivity benefits reduced unplanned downtime improved energy efficiency higher quality increased throughput yield intelligent motor control one core competencies important aspect automation system hardware software products solutions enhance availability efficiency safe operation customers’ critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world approximately 60 percent employees 46 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio hardware software products solutions services provide customers regions made significant investments globalize manufacturing product development customerfacing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity original equipment manufacturers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries group three broad categories discrete hybrid process outsourcing sustainability trends demand hardware software products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energyefficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions investments acquisition investment strategy focuses hardware software products solutions services catalytic organic growth core offerings january 2019 acquired emulate3d innovative engineering software developer whose products digitally simulate emulate industrial automation systems acquisition enables customers virtually test machine system designs incurring manufacturing automation costs committing final design 2018 made several investments including shares ptc common stock “ptc shares” ptc leader industrial internet things augmented reality investment alliance ptc accelerating growth companies enabling us partner choice customers around world want transform physical operations digital technology result unmatched integrated information solution enable customers achieve increased productivity heightened plant efficiency reduced operational risk better system interoperability november 2017 acquired odos imaging limited scottish technology company provides threedimensional timeofflight sensing systems industrial imaging applications acquisition enables us expand existing capabilities bringing 3d timeofflight sensor technology industrial applications believe acquisitions investments help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2019 sales us accounted approximately 54 percent total sales various indicators use gauge direction momentum served us markets include • industrial production ip index published federal reserve measures real output manufacturing mining electric gas utilities ip index expressed percentage real output base year currently 2012 historically meaningful correlation changes ip index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting table depicts trends indicators fiscal 2017 2019 fourth quarter fiscal 2019 ip index improved slightly compared prior quarter prior year pmi 50 decreased compared prior quarter prior year note economic indicators subject revisions issuing organizations nonus economic trends 2019 sales outside us accounted approximately 46 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned “overview” section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes respective countries’ gross domestic product ip indicators growth opportunities region business macroeconomic indicators slowed 2019 projected slow 2020 particularly ip gross domestic product growth rates economic outlook europe china softened amid slowing global growth trade tension us continued brexit uncertainty overall latin america ip expected increase summary results operations 2019 sales 66948 million increase 04 percent year organic sales increased 28 percent currency translation decreased sales 24 percentage points organic sales growth broadbased across regions led strength process end markets following summary results related key growth initiatives • logix reported sales decreased 2 percent year 2019 compared 2018 organic sales increased 1 percent currency translation decreased sales 3 percentage points • process control initiative reported sales increased 1 percent year 2019 compared 2018 organic sales increased 4 percent currency translation decreased sales 3 percentage points • sales emerging countries increased 1 percent year 2019 compared 2018 organic sales emerging countries increased 6 percent currency translation decreased sales emerging countries 5 percentage points following table reflects sales operating results millions except per share amounts 1 see note 17 consolidated financial statements definition segment operating earnings effective october 1 2018 realigned reportable segments transfer business activities segments also reclassified interest income general corporate net interest expense income net result prior period presentation reportable segments restated conform current segment reporting structure 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension postretirement benefit credit cost costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustments related registration ptc shares gains losses disposition businesses interest expense income net income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 fourth quarter fiscal 2017 sold product distribution business within control products solutions segment business held intellectual property included products sold outside core channel different brands sold business approximately 94 million recorded pretax gain 608 million included within income expense consolidated statement operations 4 fiscal 2018 recorded charges 5383 million associated enactment tax cuts jobs act 2017 “tax act” refer note 15 consolidated financial statements information 5 adjusted eps nongaap earnings measure excludes nonoperating pension postretirement benefit cost credit costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustments related registration ptc shares including respective tax effects charges associated enactment tax act fiscal 2018 see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure purchase accounting depreciation amortization nonoperating pension postretirement benefit credit cost allocated operating segments costs excluded measurement segment’s operating performance internal purposes allocate costs would attribute segments follows millions adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension postretirement benefit credit cost costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustments related registration ptc shares including respective tax effects adjustments related tax act fiscal 2018 believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period adjusted eps also used financial measure performance annual incentive compensation measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute income continuing operations diluted eps effective tax rate adopted asu 201707 defines operating nonoperating pension postretirement benefit cost new standard service cost component pension postretirement benefit cost operating cost components pension postretirement benefit cost considered nonoperating costs components net periodic pension postretirement benefit cost primarily relate changes pension assets liabilities result market performance consider excluded costs unrelated operating performance business following components operating nonoperating pension postretirement benefit cost millions following reconciliations net income diluted eps net income effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively millions except per share amounts percentages 1includes loss gain investments valuation adjustments related registration ptc shares 2during fiscal year 2019 company completed analysis impact tax act change provisional amounts recorded fiscal year 2018 see note 15 consolidated financial statements information 2019 compared 2018 sales fiscal 2019 increased 04 percent compared 2018 organic sales increased 28 percent currency translation decreased sales 24 percentage points including price increases relating tariffs pricing contributed less two percentage points growth table presents sales attributed geographic regions based upon country destination year ended september 30 2019 percentage change period year ago 1 organic sales excluding effect changes currency exchange rates acquisitions divestitures see supplemental sales information nongaap measure • sales north america increased year led strength process end markets specifically oil gas pulp paper • emea sales decreased year primarily result currency translation organic sales increased led strength hybrid process end markets specifically life sciences tire • asia pacific sales decreased year primarily result currency translation organic sales increased led strength process end markets specifically oil gas mass transit water wastewater partially offset weakness semiconductor • sales latin america increased year led process end markets including mining oil gas general corporate net general corporate net expenses 1088 million fiscal 2019 compared 1000 million fiscal 2018 income taxes income taxes decreased 32 percent 13308 million 2018 9010 million 2019 primarily due gains losses investments valuation adjustments related registration ptc shares “ptc adjustments” total segment operating earnings increased 2 percent year 14418 million 2018 14736 million 2019 income taxes effective tax rate 2019 228 percent compared 598 percent 2018 decrease effective tax rate primarily due prior year impact tax expense related transition tax deemed repatriation foreign earnings 3958 million 298 percent withholding taxes previously taxed foreign earnings 381 million 28 percent revaluation net deferred tax assets resulting tax act 1044 million 79 percent impact lower us statutory tax rate tax act adjusted effective tax rate 2019 179 percent compared 193 percent 2018 decrease adjusted effective tax rate primarily due lower us statutory tax rate tax act see note 15 consolidated financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2019 2018 affecting year’s respective tax rates architecture software architecture software operating segment contains comprehensive portfolio automation information platforms including hardware software integrated portfolio capable controlling customers’ industrial processes manufacturing well providing connections enterprise business systems automation platform multidiscipline scalable ability handle applications discrete batchhybrid continuous process drives control motion control machine safety process safety products include programmable automation controllers design visualization simulation software human machine interface products networking products industrial computers sensing devices machine safety devices motion control products independent cart technology products information platform includes manufacturing execution system software analytics software enables customers improve operational productivity meet regulatory requirements platform enables enterprise visibility reduction unplanned downtime optimization processes sales architecture software sales decreased 09 percent 2019 compared 2018 organic sales increased 15 percent effects currency translation decreased sales 25 percentage points current year acquisition increased sales 01 percentage points regions experienced reported sales declines except asia pacific organic sales growth led asia pacific emea logix reported sales decreased 2 percent 2019 compared 2018 logix organic sales increased 1 percent effects currency translation decreased sales 3 percentage points operating margin architecture software segment operating earnings decreased 3 percent operating margin 289 percent 2019 compared 294 percent 2018 control products solutions control products solutions operating segment combines comprehensive portfolio intelligent motor control industrial control products valueadded solutions complete portfolio professionally delivered lifecycle services comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters acdc variable frequency drives motor control circuit protection devices operator devices signaling devices termination protection devices relays timers electrical control accessories • valueadded solutions ranging preconfigured line load power solutions packaged drives motor control centers intelligent packaged power engineered order automation equipment solutions • professional lifecycle services combine technology domain expertise help maximize customers’ automation investment provide total lifecycle support design build sustain optimize automation investments broad portfolio includes safety security digital transformation consulting global automation information project delivery capabilities plant network cloud cybersecurity services asset management predictive analytics remote onsite managed support services sales control products solutions sales increased 16 percent 2019 compared 2018 organic sales increased 38 percent effects currency translation decreased sales 22 percentage points control products solutions experienced reported organic sales growth led north america latin america product sales decreased 1 percent year product organic sales increased 1 percent currency translation decreased sales approximately 2 percentage points sales solutions services businesses increased approximately 3 percent year organic sales solutions services businesses increased 6 percent 2019 currency translation decreased sales approximately 3 percentage points operating margin control products solutions segment operating earnings increased 10 percent year segment operating margin 163 percent 2019 compared 150 percent year ago primarily due higher sales 2018 compared 2017 sales fiscal 2018 increased 56 percent compared 2017 organic sales increased 55 percent currency translation increased sales 14 percentage points 2017 divestiture reduced sales 13 percentage points pricing contributed half one percentage point growth table presents sales attributed geographic regions based upon country destination year ended september 30 2018 percentage change period year ago 1 organic sales excluding effect changes currency exchange rates acquisitions divestitures see supplemental sales information nongaap measure • sales north america increased year led strength heavy industries • emea sales increased year led consumer industries • asia pacific sales increased year led heavy industries • sales latin america increased year led food beverage mining industries general corporate net general corporate net expenses 1000 million fiscal 2018 compared 959 million fiscal 2017 income taxes income taxes increased 28 percent 10374 million 2017 13308 million 2018 primarily due ptc adjustments higher sales lower restructuring charges partially offset absence gain 2017 divestiture total segment operating earnings increased 17 percent year 12281 million 2017 14418 million 2018 primarily due higher sales income taxes december 22 2017 tax act enacted tax act significantly changed us tax law among things lowering statutory corporate income tax rate implementing modified territorial tax system imposing onetime transition tax accumulated earnings foreign subsidiaries previously deferred us tax “transition tax” fiscal year taxpayer certain provisions tax act impacted us fiscal year 2018 including change federal statutory rate transition tax provisions effective fiscal year 2019 including tax global intangible lowtax income “gilti” foreign subsidiaries deduction foreign derived intangible income “fdii” elimination domestic manufacturing deduction effective tax rate 2018 598 percent compared 204 percent 2017 increase effective tax rate due provisional expense related transition tax deemed repatriation foreign earnings 3958 million 298 percent withholding taxes previously taxed foreign earnings 381 million 28 percent revaluation net deferred tax assets 1044 million 79 percent adjusted effective tax rate 2018 193 percent compared 215 percent 2017 decrease adjusted effective tax rate primarily due lower us statutory tax rate tax act partially offset lower discrete tax items 2018 see note 15 consolidated financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2018 2017 affecting year’s respective tax rates architecture software sales architecture software sales increased 67 percent 2018 compared 2017 organic sales increased 51 percent effects currency translation increased sales 16 percentage points regions experienced reported organic sales growth united states strongest performing region logix reported sales increased 8 percent 2018 compared 2017 logix organic sales increased 7 percent effects currency translation increased sales 1 percentage point operating margin architecture software segment operating earnings increased 15 percent operating margin 294 percent 2018 compared 273 percent 2017 primarily due higher sales control products solutions sales control products solutions sales increased 47 percent 2018 compared 2017 organic sales increased 58 percent effect currency translation increased sales 13 percentage points 2017 divestiture reduced sales 24 percentage points regions experienced reported organic sales growth except emea united states strongest performing region product sales decreased 2 percent year product organic sales increased 2 percent currency translation increased sales approximately 1 percentage point 2017 divestiture reduced sales approximately 5 percentage points sales solutions services businesses increased approximately 10 percent year organic sales solutions services businesses increased 9 percent 2018 currency translation contributed 1 percentage point sales growth operating margin control products solutions segment operating earnings increased 21 percent year segment operating margin 150 percent 2018 compared 130 percent 2017 primarily due higher sales financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow nongaap financial measure millions definition free cash flow takes consideration capital investments required maintain businesses’ operations execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance including financial measure annual incentive compensation definition free cash flow may differ definitions used companies cash provided operating activities 11820 million year ended september 30 2019 compared 13000 million year ended september 30 2018 free cash flow 10492 million year ended september 30 2019 compared 11745 million year ended september 30 2018 yearoveryear decreases cash provided operating activities free cash flow primarily due increase working capital payment due settlement treasury locks higher tax payments including payment taxes tax act related deemed repatriation foreign earnings repurchased approximately 61 million shares common stock share repurchase program 2019 total cost 10 billion 2018 repurchased approximately 83 million shares common stock share repurchase program total cost 15 billion september 30 2019 93 million outstanding common stock share repurchases recorded accounts payable settle 2020 september 30 2018 183 million outstanding common stock share repurchases recorded accounts payable settle 2019 decision repurchase shares 2020 depend business conditions free cash flow generation cash requirements stock price september 6 2018 july 24 2019 board directors authorized us expend additional 10 billion repurchase shares common stock september 30 2019 approximately 11084 million remaining share repurchases existing board authorizations see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses inorganic investments dividends shareowners repurchases common stock repayments debt expect capital expenditures 2020 160 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities september 30 2019 approximately half cash equivalents held nonus subsidiaries result broad changes us international tax system tax act fiscal year 2018 company began account substantially nonus subsidiaries immediately subject tax still concluding earnings indefinitely reinvested limited number subsidiaries fiscal 2019 repatriated approximately 7673 million us foreign subsidiaries source funds cash equivalents liquidation short longterm investments addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks march 2019 issued 1 billion aggregate principal amount longterm notes registered public offering consisted 4250 million 3500 notes due march 2029 “2029 notes” 5750 million 4200 notes due march 2049 “2049 notes” issued discount net proceeds company debt offering 9876 million used net proceeds primarily repay outstanding commercial paper remaining proceeds used general corporate purposes shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2019 commercial paper borrowings 5500 million september 30 2018 weighted average interest rate commercial paper outstanding 227 percent september 30 2018 november 13 2018 replaced former fiveyear 10 billion unsecured revolving credit facility new fiveyear 125 billion unsecured revolving credit facility expiring november 2023 increase aggregate amount credit facility 7500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrow either facility periods ended september 30 2019 2018 borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding credit facility contains covenants agree maintain ebitdatointerest ratio least 30 10 ebitdatointerest ratio defined credit facility ratio consolidated ebitda defined facility preceding four quarters consolidated interest expense period libor basis determining interest payments borrowings 125 billion credit facility addition outstanding interest rate swaps contain variable element based libor banks currently reporting information used set libor stop 2021 various parties including government agencies seeking identify alternative rate replace libor monitoring efforts likely amend contracts accommodate replacement rate already provided separate shortterm unsecured credit facilities approximately 2171 million september 30 2019 available nonus subsidiaries borrowings nonus credit facilities september 30 2019 2018 significant compliance covenants credit facilities september 30 2019 2018 significant commitment fees compensating balance requirements credit facilities among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2019 ability access commercial paper market related costs borrowings affected strength credit ratings market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments diversify cash equivalents shortterm investments among counterparties minimize exposure one entities february 2017 began investing investmentgrade fixed income securities including corporate debt government obligations provide diversification refer note 9 consolidated financial statements discussion investments emphasis primarily safety liquidity principal secondarily maximizing yield funds use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities’ functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 4598 million 2019 388 per common share 4408 million 2018 351 per common share 3907 million 2017 304 per common share quarterly dividend rate september 30 2019 097 per common share 388 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2019 follows millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude amounts paid received interest rate swap contracts including 70 million fair value adjustment recorded interest rate swap contracts september 30 2019 unamortized discount 466 million september 30 2019 see note 6 consolidated financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2020 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2020 excluded summary unable make reasonably reliable estimate amounts minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes contractual commitments capital expenditures certain materials purchases longterm obligations agreements various service providers included amount 250 million paid schlumberger connection formation sensia october 1 2019 e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities amounts subsequent 2020 excluded summary unable make reasonably reliable estimate liabilities paid f tax act company may elect pay transition tax interestfree eight years 8 due first five years 15 year six 20 year seven 25 year eight g amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales acquired businesses also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency exchange rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year acquire businesses exclude sales current period comparable sales prior period divest business exclude sales prior period comparable sales current period organic sales growth calculated comparing organic sales reported sales prior year excluding divestitures attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting estimates believe following accounting estimates critical understanding financial statements could significant effect reported results require subjective complex judgments management accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported estimates based best judgment current future conditions actual results could differ estimates refer note 1 consolidated financial statements information regarding significant accounting policies retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2019 720 million compared 1141 million 2018 approximately 76 percent 2019 global pension expense global projected benefit obligation relates us pension plan discount rate used determine 2019 us pension expense 435 percent compared 390 percent 2018 2020 us discount rate decrease 330 percent 435 percent 2019 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans changes discount rate inverse relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points discount rate us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 13 consolidated financial statements revenue recognition customer incentives offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria customer incentives recognized reduction sales distributed cash customer account credits customer incentives recognized cost sales additional hardware software products solutions services provided record accruals time revenue recognition current liability within customer returns rebates incentives consolidated balance sheet right setoff exists reduction receivables primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product critical assumption used estimating accrual program time period revenue recognized rebate processed estimate based primarily historical experience time period change 10 percent effect would adjustment accrual approximately 120 million information regarding revenue recognition returns rebates incentives policies contained note 1 consolidated financial statements recent accounting pronouncements see note 1 consolidated financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales total segment operating earnings margin adjusted income adjusted eps adjusted effective tax rate free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see results operations reconciliation income taxes total segment operating earnings margin discussion believe nongaap measures useful investors see results operations reconciliation income continuing operations diluted eps continuing operations effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively discussion believe nongaap measures useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview rockwell automation inc global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable overall demand hardware software products solutions services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines new facilities production lines • investments basic materials production capacity may related commodity pricing levels • customers’ needs faster time market operational productivity asset management reliability enterprise risk management • customers’ needs continuously improve quality safety sustainability • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • spending patterns customers due annual budgeting processes working schedules longterm strategy bring connected enterprise life integrating control information across enterprise deliver customer outcomes combining advanced industrial automation latest information technology growth performance strategy seeks • achieve organic sales growth excess automation market expanding served market strengthening competitive differentiation • grow market share core platforms • drive double digit growth information solutions connected services • acquire companies serve catalysts organic growth increasing information solutions highvalue services offerings capabilities expanding global presence enhancing process expertise • enhance market access building channel capability partner network • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience • drive annual cost productivity implementing strategy seek achieve longterm financial goals including abovemarket organic sales growth eps growth sales growth return invested capital excess 20 percent free cash flow equal 100 percent adjusted income expect acquisitions add percentage point per year longterm sales growth customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology innovation domain expertise integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion power control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively information software portfolio combined software made available result strategic alliance ptc comprehensive flexible information platform industry combination technology domain expertise help customers achieve additional productivity benefits reduced unplanned downtime improved energy efficiency higher quality increased throughput yield intelligent motor control one core competencies important aspect automation system hardware software products solutions enhance availability efficiency safe operation customers’ critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers industry application knowledge required deliver solutions services support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs around world approximately 65 percent employees 46 percent sales outside us continue expand footprint emerging markets expand markets considerable growth potential shift global footprint expect continue broaden portfolio hardware software products solutions services provide customers regions made significant investments globalize manufacturing product development customerfacing resources order closer customers throughout world emerging markets asia pacific including china india latin america central eastern europe africa projected fastest growing long term due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market 90 billion process initiative important contributor expansion remains largest growth opportunity original equipment manufacturers oems represent another area addressed market expansion important growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries group three broad categories discrete hybrid process outsourcing sustainability trends demand hardware software products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals customers across industries investing energyefficient manufacturing processes technologies intelligent motor control energyefficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions investments acquisition investment strategy focuses hardware software products solutions services catalytic organic growth core offerings april 2020 acquired asem spa asem leading provider digital automation technologies asem’s products allow us provide customers high degree configurability industrial computing needs allow achieve faster time market lower cost ownership improve asset utilization better manage enterprise risk april 2020 also acquired kalypso lp kalypso privatelyheld usbased software delivery consulting firm specializing digital transformation industrial companies strong client base life sciences consumer products industrial hightech acquisition enhances ability implement deploy technology deliver even greater value customers january 2020 acquired avnet data security ltd avnet israelbased cybersecurity provider 20 years experience providing cybersecurity services avnet’s combination service delivery training research managed services enable us service much larger set customers globally also continuing accelerate portfolio development market october 1 2019 completed formation joint venture sensia fully integrated digital oilfield automation solutions provider joint venture leverages schlumberger’s oil gas domain knowledge automation information expertise rockwell automation owns 53 sensia schlumberger owns 47 sensia october 2019 also acquired mestech services mestech global provider manufacturing execution systems manufacturing operations management digital solutions consulting systems integration services acquisition mestech expands capabilities profitably grow information solutions connected services globally accelerate ability help customers execute digital transformation initiatives january 2019 acquired emulate3d innovative engineering software developer whose products digitally simulate emulate industrial automation systems acquisition enables customers virtually test machine system designs incurring manufacturing automation costs committing final design 2018 made several investments including shares ptc common stock “ptc shares” ptc leader industrial internet things augmented reality investment alliance ptc accelerating growth companies enabling us partner choice customers around world want transform physical operations digital technology order achieve increased productivity heightened plant efficiency reduced operational risk better system interoperability believe acquisitions investments help us expand served market deliver value customers attracting developing retaining highly qualified talent successful execution strategy dependent attracting developing retaining key employees members management team skills experience industry knowledge employees significantly benefit operations performance continuously evaluate modify enhance internal processes technologies increase employee engagement productivity efficiency september 30 2020 employees including employed consolidated subsidiaries region approximately september 30 2020 following global gender demographics september 30 2020 us employees following race ethnicity demographics several ways attract develop retain highly qualified talent including • safety health employees top priority strive zero workplace injuries illnesses operate manner recognizes safety fundamental rockwell automation great place work 2020 achieved 023 recordable cases per 100 employees • fundamental core values people culture integrity employee training used reinforce values across employees globally annual participation trainings related ethics environment health safety emergency responses near 100 • one way capture employee feedback biannual employee engagement survey measures several engagement indicators provides overall employee engagement index eei latest survey conducted february 2020 showed eei 76 compared global norm 72 index continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2020 sales us accounted half total sales various indicators use gauge direction momentum served us markets include • industrial production ip index published federal reserve measures real output manufacturing mining electric gas utilities ip index expressed percentage real output base year currently 2012 historically meaningful correlation changes ip index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indicates current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting table depicts trends indicators fiscal 2018 2020 figures november 10 2020 subject revision issuing organizations fourth quarter fiscal 2020 pmi ip index improved compared prior quarter however industrial output us end fourth quarter still prepandemic level sequential growth projected ip index first quarter fiscal 2021 note economic indicators subject revisions issuing organizations nonus economic trends 2020 sales customers outside us accounted less half total sales customers include indigenous companies multinational companies global presence addition global factors previously mentioned “overview” section international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes key countries gross domestic product ip indicators growth opportunities region business significant decline third quarter fiscal 2020 industrial output outside us saw sequential growth fourth quarter fiscal 2020 similar us industrial output remains prepandemic levels regions however sequential growth projected regions first quarter fiscal 2021 covid19 pandemic actively monitoring impacts covid19 pandemic aspects business geographies duration severity impacts highly uncertain could continue adverse effect business financial condition results operations company essential business support critical infrastructure customers cannot build products scale without automation global supply chain including network suppliers distribution manufacturing facilities supply chain team closely managing endtoend supply chain sourcing production customer delivery particular focus critical atrisk suppliers supplier locations globally implemented safety hygiene processes manufacturing distribution locations keep employees safe including separation shifts workstations temperature monitoring recommended practices also taken actions help keep nonmanufacturing employees safe including directing employees work home wherever possible limiting screening visitors facilities implementing travel restrictions canceling events involve large groups people encouraging social distancing best practices enhancing cleaning facilities major locations changes implemented resulted could continue result operational inefficiencies solutions services businesses include engineers employees design implement solutions combination domain expertise technology physical access customer facilities often important deliver solutions result covid19 access customer facilities instances difficult led project delays well inefficiencies due lower labor utilization april 8 2020 announced several actions address thencurrent anticipated economic conditions result global covid19 pandemic taken additional cost actions payout earned incentive plans fiscal 2020 adjusted cost structure help balance financial strength flexibility protecting important investments drive longterm differentiation actions included elimination discretionary spending delays noncritical investments adjustment levels contract labor deferral nonessential capital expenditures implemented following temporary cost actions effective may 2020 november 2020 salary reductions nonmanufacturing employees globally temporary suspension 401k match us employees also reduced cash fees board directors effective december 2020 taken several cost reduction actions maintained cases selectively increased investments highest priority areas order increase differentiation create longterm value customers shareowners oil gas industry covid19 pandemic cascading effect oil gas industry business closures restrictions people’s mobility decreased demand oil gas year global production levels exceeded lower demand resulted global oversupply volatility oil prices factors could continue negative impact oil gas customers’ business operations financial condition resulting reductions industrial spending outlook beginning fiscal 2021 changing definition adjusted income adjusted eps exclude impact purchase accounting depreciation amortization expense attributable rockwell automation including related tax effects definition adjusted effective tax rate also changing correspond purchase accounting items excluded adjusted income believe new definitions provide useful information operating performance allow management investors better compare operating performance period compared prior definitions measures given increased inorganic investments see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measures adjusted eps guidance table presented using new definition covid19 pandemic global efforts respond continue evolve projections assume gradual recovery continues increase pandemicrelated facility closures disruptions supply chain based information available us time release following table provides guidance relates sales growth earnings per share fiscal 2021 1organic sales growth adjusted eps nongaap measures see supplemental sales information adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measures 2estimate incremental sales resulting businesses acquired fiscal year 2020 2021 summary results operations 2020 sales 63298 million decrease 55 percent year organic sales decreased 78 percent currency translation decreased sales 12 percentage points acquisitions increased sales 35 percentage points results quarter included • logix reported sales decreased 7 percent year 2020 compared 2019 organic sales decreased 6 percent currency translation decreased sales 1 percentage point • reported sales emerging countries decreased 47 percent year 2020 compared 2019 organic sales emerging countries decreased 76 percent currency translation decreased sales emerging countries 42 percentage points acquisitions increased sales 71 percentage points following table reflects sales operating results millions except per share amounts 1 see note 19 consolidated financial statements definition segment operating earnings effective october 1 2018 realigned reportable segments transfer business activities segments also reclassified interest income general corporate net interest expense income net result prior period presentation reportable segments restated conform current segment reporting structure 2 total segment operating earnings total segment operating margin nongaap financial measures exclude purchase accounting depreciation amortization general corporate net nonoperating pension postretirement benefit credit cost costs related unsolicited emerson proposals first quarter fiscal 2018 gains losses investments valuation adjustments related registration ptc shares gains losses disposition businesses interest expense income net income tax provision consider costs directly related operating performance segments believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies 3 fiscal 2018 recorded charges 5383 million associated enactment tax cuts jobs act 2017 “tax act” refer note 16 consolidated financial statements information 4 adjusted eps nongaap earnings measure see adjusted income adjusted eps adjusted effective tax rate reconciliation information nongaap measure 2020 compared 2019 sales fiscal 2020 decreased 55 percent compared 2019 organic sales decreased 78 percent currency translation decreased sales 12 percentage points acquisitions increased sales 35 percentage points pricing increased sales approximately 1 percentage point table presents sales attributed geographic regions based upon country destination year ended september 30 2020 percentage change period year ago 1 organic sales organic sales growth exclude effect acquisitions changes currency exchange rates divestitures see supplemental sales information nongaap measures • sales north america decreased year led weakness oil gas metals pulp paper • emea sales remained flat year organic sales decreased driven weak process industries tire • asia pacific sales decreased year due weakness oil gas food beverage • sales latin america decreased year primarily due oil gas automotive mining general corporate net general corporate net expenses 989 million fiscal 2020 compared 1088 million fiscal 2019 income taxes income taxes increased 26 percent 9010 million 2019 11361 million 2020 primarily due fairvalue adjustments recognized 2019 2020 connection investment ptc “ptc adjustments” partially offset lower sales total segment operating earnings decreased 15 percent year 14736 million 2019 12579 million 2020 primarily due lower sales partially offset combination temporary structural cost actions income taxes effective tax rate 2020 99 percent compared 228 percent 2019 decrease effective tax rate primarily due ptc adjustments tax benefits recognizable upon formation sensia joint venture discrete items adjusted effective tax rate 2020 120 percent compared 179 percent 2019 decrease adjusted effective tax rate primarily due benefit nonus tax rates tax benefits recognizable upon formation sensia joint venture discrete items see note 16 consolidated financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2020 2019 affecting year’s respective tax rates 2020 compared 2019 diluted eps adjusted eps fiscal 2020 net income attributable rockwell automation 10234 million 877 per share compared 6958 million 583 per share fiscal 2019 increase net income attributable rockwell automation diluted eps primarily due ptc adjustments partially offset lower sales fiscal 2020 adjusted eps 768 fiscal 2020 11 percent compared 867 fiscal 2019 primarily due lower sales partially offset combination temporary structural cost actions architecture software architecture software operating segment contains comprehensive portfolio automation information platforms including hardware software integrated portfolio capable controlling customers’ industrial processes manufacturing well providing connections enterprise business systems automation platform multidiscipline scalable ability handle applications discrete batchhybrid continuous process drives control motion control machine safety process safety products include programmable automation controllers design visualization simulation software human machine interface products networking products industrial computers sensing devices machine safety devices motion control products independent cart technology products information platform includes manufacturing execution system software analytics software enables customers improve operational productivity meet regulatory requirements platform enables enterprise visibility reduction unplanned downtime optimization processes sales architecture software sales decreased 63 percent 2020 compared 2019 organic sales decreased 57 percent effects currency translation decreased sales 12 percentage points acquisitions increased sales 06 percentage points regions experienced sales declines logix reported sales decreased 7 percent 2020 compared 2019 logix organic sales decreased 6 percent effects currency translation decreased sales 1 percentage point segment operating margin architecture software segment operating earnings decreased 9 percent segment operating margin decreased 281 2020 289 2019 primarily due lower sales partially offset combination temporary structural cost actions 2020 compared 2019 control products solutions control products solutions operating segment combines comprehensive portfolio intelligent motor control industrial control products valueadded solutions complete portfolio professionally delivered lifecycle services comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters acdc variable frequency drives motor control circuit protection devices operator devices signaling devices termination protection devices relays timers electrical control accessories • valueadded solutions ranging preconfigured line load power solutions packaged drives motor control centers intelligent packaged power engineered order automation equipment solutions • professional lifecycle services combine technology domain expertise help maximize customers’ automation investment provide total lifecycle support design build sustain optimize automation investments broad portfolio includes safety security digital transformation consulting global automation information project delivery capabilities plant network cloud cybersecurity services asset management predictive analytics remote onsite managed support services sales control products solutions sales decreased 48 percent 2020 compared 2019 organic sales decreased 95 percent effects currency translation decreased sales 12 percentage points acquisitions increased sales 59 percentage points regions experienced reported sales declines except emea regions experienced organic sales declines product sales decreased 10 percent year product organic sales decreased 9 percent currency translation decreased sales approximately 1 percentage point sales solutions services businesses decreased approximately 1 percent year organic sales solutions services businesses decreased 10 percent 2020 currency translation decreased sales approximately 1 percentage point acquisitions increased sales 10 percentage points segment operating margin control products solutions segment operating earnings decreased 23 percent year segment operating margin decreased 132 2020 163 percent year ago primarily due lower sales impact acquisitions partially offset combination temporary structural cost actions 2019 compared 2018 sales fiscal 2019 increased 04 percent compared 2018 organic sales increased 28 percent currency translation decreased sales 24 percentage points including price increases relating tariffs pricing contributed less two percentage points growth table presents sales attributed geographic regions based upon country destination year ended september 30 2019 percentage change period year ago 1 organic sales organic sales growth exclude effect acquisitions changes currency exchange rates divestitures see supplemental sales information nongaap measures • sales north america increased year led strength process end markets specifically oil gas pulp paper • emea sales decreased year primarily result currency translation organic sales increased led strength hybrid process end markets specifically life sciences tire • asia pacific sales decreased year primarily result currency translation organic sales increased led strength process end markets specifically oil gas mass transit water wastewater partially offset weakness semiconductor • sales latin america increased year led process end markets including mining oil gas general corporate net general corporate net expenses 1088 million fiscal 2019 compared 1000 million fiscal 2018 income taxes income taxes decreased 32 percent 13308 million 2018 9010 million 2019 primarily due gains losses investments valuation adjustments related registration ptc shares total segment operating earnings increased 2 percent year 14418 million 2018 14736 million 2019 income taxes effective tax rate 2019 228 percent compared 598 percent 2018 decrease effective tax rate primarily due prior year impact tax expense related transition tax deemed repatriation foreign earnings 3958 million 298 percent withholding taxes previously taxed foreign earnings 381 million 28 percent revaluation net deferred tax assets resulting tax act 1044 million 79 percent impact lower us statutory tax rate tax act adjusted effective tax rate 2019 179 percent compared 193 percent 2018 decrease adjusted effective tax rate primarily due lower us statutory tax rate tax act see note 16 consolidated financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2019 2018 affecting year’s respective tax rates 2019 compared 2018 architecture software sales architecture software sales decreased 09 percent 2019 compared 2018 organic sales increased 15 percent effects currency translation decreased sales 25 percentage points current year acquisition increased sales 01 percentage points regions experienced reported sales declines except asia pacific organic sales growth led asia pacific emea logix reported sales decreased 2 percent 2019 compared 2018 logix organic sales increased 1 percent effects currency translation decreased sales 3 percentage points segment operating margin architecture software segment operating earnings decreased 3 percent operating margin 289 percent 2019 compared 294 percent 2018 control products solutions sales control products solutions sales increased 16 percent 2019 compared 2018 organic sales increased 38 percent effect currency translation decreased sales 22 percentage points control products solutions experienced reported organic sales growth led north america latin america product sales decreased 1 percent year product organic sales increased 1 percent currency translation decreased sales approximately 2 percentage points sales solutions services businesses increased approximately 3 percent year organic sales solutions services businesses increased 6 percent 2019 currency translation decreased sales approximately 3 percentage points segment operating margin control products solutions segment operating earnings increased 10 percent year segment operating margin 163 percent 2019 compared 150 percent year ago primarily due higher sales supplemental segment information purchase accounting depreciation amortization nonoperating pension postretirement benefit cost credit allocated operating segments costs excluded measurement segment’s operating performance internal purposes allocate costs would attribute segments follows millions adjusted income adjusted eps adjusted effective tax rate reconciliation adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude nonoperating pension postretirement benefit cost credit net income loss attributable noncontrolling interests gains losses investments valuation adjustments related registration ptc shares fiscal 2019 2018 costs related unsolicited emerson proposals first quarter fiscal 2018 including respective tax effects adjustments related tax act fiscal 2018 nonoperating pension postretirement benefit cost credit defined components net periodic pension postretirement benefit cost except service cost see note 14 consolidated financial statements information net periodic pension postretirement benefit cost believe adjusted income adjusted eps adjusted effective tax rate provide useful information investors operating performance allow management investors compare operating performance period adjusted eps also used financial measure performance annual incentive compensation measures adjusted income adjusted eps adjusted effective tax rate may different measures used companies nongaap measures considered substitute net income attributable rockwell automation diluted eps effective tax rate following reconciliations net income attributable rockwell automation diluted eps effective tax rate adjusted income adjusted eps adjusted effective tax rate respectively millions except per share amounts percentages 1includes gain loss investments valuation adjustments related registration ptc shares beginning fiscal 2021 changing definition adjusted income adjusted eps also exclude impact purchase accounting depreciation amortization expense attributable rockwell automation related tax effects exclusion definition adjusted effective tax rate also changing correspond purchase accounting items excluded adjusted income new definition adjusted income adjusted eps adjusted effective tax rate nongaap earnings measures exclude net income loss attributable noncontrolling interests purchase accounting depreciation amortization expense attributable rockwell automation nonoperating pension postretirement benefit cost credit gains losses investments valuation adjustments related registration ptc shares fiscal 2019 2018 costs related unsolicited emerson proposals first quarter fiscal 2018 including respective tax effects adjustments related tax act fiscal 2018 adjusted eps adjusted effective tax rate guidance comparable prior periods table presented using new definitions nongaap measures reconciled corresponding gaap measures 1the year ended september 30 2020 included gain investment 1539 million due change value investment ptc fiscal 2021 guidance excludes estimates adjustments forwardlooking basis due variability complexity limited visibility items 2fiscal 2021 guidance based adjusted income attributable rockwell includes adjustment schlumbergers noncontrolling interest sensia financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions following table summarizes free cash flow nongaap financial measure millions definition free cash flow takes consideration capital investments required maintain businesses’ operations execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately consolidated statement cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance including financial measure annual incentive compensation definition free cash flow may differ definitions used companies cash provided operating activities 11205 million year ended september 30 2020 compared 11820 million year ended september 30 2019 free cash flow 10066 million year ended september 30 2020 compared 10492 million year ended september 30 2019 yearoveryear decreases cash provided operating activities free cash flow primarily due lower pretax income excluding noncash adjustments voluntary 500 million contribution us qualified pension plan fiscal 2020 partially offset lower income tax incentive compensation payments fiscal 2020 compared fiscal 2019 repurchased approximately 14 million shares common stock share repurchase program 2020 total cost 2547 million average cost 18218 per share 2019 repurchased approximately 61 million shares common stock share repurchase program total cost 10 billion average cost 16468 per share september 30 2020 outstanding common stock share repurchases recorded accounts payable september 30 2019 93 million outstanding common stock share repurchases recorded accounts payable settle 2020 decision repurchase shares 2021 depend business conditions free cash flow generation cash requirements stock price september 6 2018 july 24 2019 board directors authorized us expend 10 billion repurchase shares common stock september 30 2020 approximately 8537 million remaining share repurchases existing board authorizations see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses inorganic investments dividends shareowners repurchases common stock repayments debt expect capital expenditures 2021 150 million expect fund future uses cash combination existing cash balances cash generated operating activities commercial paper borrowings new issuance debt securities september 30 2020 majority cash equivalents held nonus subsidiaries result broad changes us international tax system tax act fiscal year 2018 began account substantially nonus subsidiaries immediately subject tax still concluding earnings indefinitely reinvested limited number subsidiaries fiscal 2020 repatriated approximately 5136 million us foreign subsidiaries source funds cash equivalents liquidation short longterm investments addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks shortterm debt september 30 2020 primarily consisted 235 million interestbearing loans schlumberger sensia originally due september 30 2020 due september 30 2021 shortterm loans schlumberger entered following formation sensia see note 4 consolidated financial statements additional information sensia commercial paper borrowings outstanding september 30 2020 2019 april 2020 entered 4000 million senior unsecured 364day term loan credit agreement advanced full loan amount agreement addition existing 125 billion unsecured revolving credit facility expiring november 2023 remains available undrawn interest borrowings based shortterm money market rates effect period borrowings outstanding repaid 4000 million term loan september 2020 march 2019 issued 1 billion aggregate principal amount longterm notes registered public offering consisted 4250 million 3500 notes due march 2029 “2029 notes” 5750 million 4200 notes due march 2049 “2049 notes” issued discount net proceeds company debt offering 9876 million used net proceeds primarily repay outstanding commercial paper remaining proceeds used general corporate purposes november 13 2018 replaced former fiveyear 10 billion unsecured revolving credit facility new fiveyear 125 billion unsecured revolving credit facility expiring november 2023 increase aggregate amount credit facility 7500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrow either facility periods ended september 30 2020 2019 borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding credit facility contains covenants agree maintain ebitdatointerest ratio least 30 10 ebitdatointerest ratio defined credit facility ratio consolidated ebitda defined facility preceding four quarters consolidated interest expense period libor primary basis determining interest payments borrowings 125 billion credit facility banks currently reporting information used set libor stop 2021 various parties including government agencies seeking identify alternative rate replace libor monitoring efforts likely amend contracts accommodate replacement rate already provided separate shortterm unsecured credit facilities approximately 2296 million september 30 2020 available nonus subsidiaries borrowings nonus credit facilities september 30 2020 2019 significant compliance covenants credit facilities september 30 2020 2019 significant commitment fees compensating balance requirements credit facilities among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2020 ability access commercial paper market related costs borrowings affected strength credit ratings market conditions commercial paper market improved since covid19 pandemic negatively affected market march april 2020 although commercial paper outstanding since midapril 2020 believe would difficulty issuing commercial paper need arose currently access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents shortterm investments diversify cash equivalents shortterm investments among counterparties minimize exposure one entities use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar addition use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities’ functional currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 4728 million 2020 408 per common share 4598 million 2019 388 per common share 4408 million 2018 351 per common share quarterly dividend rate september 30 2020 102 per common share 408 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2020 follows millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount gain settlement interest rate swap 403 million september 30 2020 see note 7 consolidated financial statements information regarding longterm debt b postretirement benefit plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates contributions pension plans beyond 2021 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2021 excluded summary unable make reasonably reliable estimate amounts minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes contractual commitments capital expenditures certain materials purchases longterm obligations agreements various service providers e longterm liabilities include environmental remediation costs conditional asset retirement obligations indemnification liabilities amounts subsequent 2021 excluded summary unable make reasonably reliable estimate liabilities paid f tax act company may elect pay transition tax interestfree eight years 8 due first five years 15 year six 20 year seven 25 year eight g amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency exchange rates affect reported sales acquired businesses also affect reported sales believe organic sales defined sales excluding effects acquisitions changes currency exchange rates nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect acquisitions changes currency exchange rates use organic sales one measure monitor evaluate regional operating segment performance acquire businesses exclude sales current period comparable sales prior period determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year divest business exclude sales prior period comparable sales current period organic sales growth calculated comparing organic sales reported sales prior year excluding divestitures attribute sales geographic regions based country destination following reconciliation reported sales geographic region organic sales millions 1 includes incremental sales resulting formation sensia joint venture sales acquired businesses fiscal year 2020 following reconciliation reported sales operating segment organic sales millions 1 includes incremental sales resulting formation sensia joint venture sales acquired businesses fiscal year 2020 critical accounting estimates believe following accounting estimates critical understanding financial statements could significant effect reported results require subjective complex judgments management accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported estimates based best judgment current future conditions actual results could differ estimates refer note 1 consolidated financial statements information regarding significant accounting policies retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2020 1309 million compared 720 million 2019 approximately 83 percent 2020 global pension expense 76 percent global projected benefit obligation relate us pension plan discount rate used determine 2020 us pension expense 330 percent compared 435 percent 2019 2021 us discount rate decrease 290 percent 330 percent 2020 discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans changes discount rate inverse relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change projected benefit obligation annual net periodic benefit cost assuming change 25 basis points discount rate us pension plans millions 1 change includes operating nonoperating pension costs information regarding pension benefits contained note 14 consolidated financial statements revenue recognition customer incentives offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria customer incentives recognized reduction sales distributed cash customer account credits record accruals time revenue recognition current liability within customer returns rebates incentives consolidated balance sheet right setoff exists reduction receivables customer incentives additional hardware software products solutions services provided considered distinct performance obligations allocate revenue based relative standalone selling price incentive redeemed revenue recorded contract liability primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product critical assumption used estimating accrual program time period revenue recognized rebate processed estimate based primarily historical experience time period change 10 percent effect would adjustment accrual approximately 118 million information regarding revenue recognition returns rebates incentives policies contained note 1 note 2 consolidated financial statements acquisitions consolidation sensia joint venture determining whether consolidate sensia us gaap requires evaluate ability control significant financial operating decisions joint venture determining nature extent noncontrolling interest holders rights involves management judgment evaluated noncontrolling interest holders rights determined control consolidate sensia financial results acquisitions sensia joint venture intangibles valuation accounting business combination requires excess purchase price acquisition net book value assets acquired allocated identifiable assets acquired entity unallocated portion recognized goodwill engaged independent thirdparty valuation specialist fair value allocation purchase price paid connection formation sensia joint venture intangible assets required use several assumptions estimates although believe assumptions estimates made reasonable appropriate estimates based historical experience information obtained sensia management key assumption requiring use judgment customer attrition rates ranging 75 25 change customer attrition rate 250 basis points would result change 404 million intangible assets information regarding business combination contained note 4 consolidated financial statements goodwill sensia reporting unit quantitative test goodwill impairment requires us estimate fair value reporting units second quarter 2020 performed quantitative impairment test sensia reporting unit determined fair value reporting unit combination income approach derived discounted cash flows market multiples approach using selected comparable public companies critical assumptions used approach included management’s estimated future revenue growth rates estimated future margins discount rate estimated future revenue growth margins based management’s best estimate current future conditions although believe assumptions estimates made reasonable appropriate estimates based number factors including historical experience information obtained reporting unit management actual results could differ estimates especially given uncertainty duration severity impacts related covid19 pandemic impact oil gas customers could continue impacted recent volatility oil prices determined discount rate using weighted average cost capital adjusted risk factors specific reporting unit comparison market industry data hypothetical 10 percent decrease fair value reporting unit would impact conclusion goodwill impaired information regarding goodwill contained note 3 consolidated financial statements recent accounting pronouncements see note 1 consolidated financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines creation new facilities production lines • customers’ needs productivity cost reduction sustainable production cleaner safer energy efficient quality assurance overall global competitiveness • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • seasonal spending patterns customers due annual budgeting processes working schedule • investments basic materials production capacity partly response higher commodity pricing longterm strategy vision valued global provider innovative industrial automation information products services solutions supported growth performance strategy seeks • achieve growth rates excess automation market expanding served market strengthening competitive differentiation • diversify revenue streams increasing capabilities new applications broadening solutions service capabilities advancing global presence serving wider range industries • grow market share gaining new customers capturing larger share existing customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market increasing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience drive annual cost productivity implementing strategy seek achieve longterm financial goals include revenue growth 68 percent doubledigit eps growth return invested capital excess 20 percent free cash flow 100 percent net income 60 percent revenue outside us including 30 percent revenue emerging markets customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives value proposition help customers reduce time market lower total cost ownership improve asset utilization manage enterprise risks differentiation technology domain expertise seek technology leadership position industrial automation believe three platforms integrated architecture intelligent motor control solutions services provide foundation longterm sustainable growth integrated control information architecture logix core important differentiator automation provider support discrete process batch safety motion motor control hardware platform software programming environment integrated architecture scalable standard open communications protocols making easier customers implement cost effectively intelligent motor control one core competencies important aspect automation system products solutions enhance availability efficiency safe operation customers critical energyintensive plant assets intelligent motor control offering integrated seamlessly logix architecture domain expertise refers solutions services provide support customers entire life cycle automation investment combination industryspecific domain expertise people innovative technologies enables us help customers solve manufacturing business challenges global expansion manufacturing world continues expand must able meet customers’ needs emerging markets continue expand footprint emerging markets currently approximately 60 percent employees outside us 51 percent revenues outside us expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world growth emerging markets asiapacific including china india latin america central eastern europe africa projected exceed global gross domestic product gdp growth rates due higher levels infrastructure investment growing middleclass population believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access past decade investments technology globalization enabled us expand addressed market approximately 80 billion process initiative important contributor expansion remains largest growth opportunity logix technology foundation enabled us become industry leader batch process applications compete effectively traditional distributed control systems dcs providers continuous process applications complement growing global network engineers partners provide solutions process customers oems represent another area addressed market expansion strong growth opportunity remain competitive oems need find optimal balance machine cost performance reducing time market scalable integrated architecture intelligent motor control offerings along design productivity tools motion safety products assist oems addressing business needs developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals energy pulp paper waterwastewater companies industries typically invest commodity prices relatively high global demand basic materials increasing transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd leading manufacturer medium voltage drives direct current power supplies switch gear wind inverters headquartered harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products march 2012 acquired certain assets assumed certain liabilities softswitching technologies corporation industrial power quality detection protection systems provider united states may 2011 purchased majority stake equity lektronix limited affiliate independent industrial automation repair service provider primarily europe asia april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates process control automation systems integrator mining mineral processing industry south africa believe acquired companies help us expand served market deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide business system intended improve profitability used fund investments growth offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2012 sales us customers accounted 49 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2007 historically meaningful correlation changes industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2010 2012 point moderating growth manufacturing activity fiscal 2012 indicators among factors lead us anticipate period slower industrial growth continue believe pause recovery inflection point expect see improved market conditions fiscal 2013 latter part year note economic indicators subject revisions issuing organizations nonus regional trends 2012 sales nonus customers accounted 51 percent total sales customers include indigenous companies multinational companies expanding global presence international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes gross domestic product gdp one indicator growth opportunities region business 2012 worldwide gdp growth slowed regions gdp declined indicating global economic slowdown europe sovereign debt concerns put downward pressure industrial growth western europe continues operate recessionary environment potential improved outlook economies later next year emerging markets europe middle east africa emea experienced strong growth expected continue next year asia china experienced slowest gdp growth since early 2009 economy shows signs improvement india flat 2012 compared 2011 indication near term improvement latin america mexico strongest performing country projected continued growth brazil experienced economic slowdown 2012 outlook improvement 2013 still expect emerging markets fastest growing automation markets long term summary results operations despite difficult economic environment 2012 delivered sales growth 4 percent 6 percent organically ended year record sales 62594 million regions experienced organic sales growth year led canada organic sales growth 20 percent emea strong organic growth 6 percent face recession western europe end markets strongest sales growth year transportation oil gas continued execute key initiatives contributed positive performance • sales related process initiative grew approximately 20 percent year 2012 • logix organic sales increased 8 percent compared 2011 • sales emerging markets increased 4 percent 8 percent organically compared 2011 particular strength central eastern europe acquisitions contributed 2 percentage points increase currency translation reduced sales 6 percentage points emerging markets represented 22 percent total company sales 2012 expect proportion continue grow total segment operating margin expanded one full percentage point continued invest growth effective tax rate 2012 237 percent compared 197 percent 2011 primarily due larger discrete tax benefits year ago following tables reflect sales operating results years ended september 30 2012 2011 2010 millions except per share amounts 1 see note 17 condensed consolidated financial statements definition segment operating earnings 2 total segment operating earnings total segment operating margin nongaap financial measures believe measures useful investors measures operating performance use measures monitor evaluate profitability company measure total segment operating earnings total segment operating margin may different used companies 3 see note 13 condensed consolidated financial statements description items reported discontinued operations 2012 compared 2011 sales fiscal 2012 increased 4 percent compared 2011 organic sales increased 6 percent acquisitions contributed 1 percentage point growth rate currency translation reduced sales 3 percentage points organic sales solutions services businesses grew 12 percent year acquisitions contributed 2 percentage points increase currency translation reduced sales 4 percentage points yearend backlog businesses 7 percent lower year ago due increase order delays product organic sales grew 4 percent year currency translation reduced sales 3 percentage points volume accounted substantially organic sales growth year pricing contributed less 1 percentage point growth table presents sales year ended september 30 2012 geographic region percentage change sales year ended september 30 2011 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • organic sales growth united states driven transportation oil gas industries consumer industries lagged region growth rate • strong organic sales growth canada reflected continued strength resourcebased industries • emeas organic sales growth driven strong double digit growth emerging markets particularly central eastern europe • asiapacific organic sales growth mixed across countries region mature markets generally outperforming emerging markets australia experiencing significant sales declines • organic sales growth latin america driven strong growth transportation oil gas industries mexico partially offset yearoveryear declines brazil experiencing economic slowdown income continuing operations income taxes income continuing operations income taxes increased 11 percent 8676 million 2011 9659 million 2012 increase predominantly due increased volume lower incentive compensation expense partially offset increased spending support growth income taxes effective tax rate 2012 237 percent compared 197 percent 2011 2012 2011 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates 2012 recognized net discrete tax benefits 21 million primarily related favorable resolution worldwide tax matters 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit see note 15 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2012 2011 affecting respective tax rates architecture software sales architecture software sales increased 2 percent 2012 organic sales increased 5 percent effects currency translation reduced sales 3 percentage points pricing contributed less 1 percentage point growth year yearoveryear organic sales growth regions canada emea slightly segment average logix organic sales increased 8 percent 2012 compared 2011 currency translation reduced sales 3 percentage points operating margin architecture software segment operating earnings increased 7 percent operating margin expanded 11 points 265 percent 2012 compared 2011 increase predominantly due volume increases lower incentive compensation expense partially offset increased spending support growth control products solutions sales control products solutions sales increased 6 percent organic sales increased 8 percent acquisitions contributed 1 percentage point growth rate currency translation reduced sales 3 percentage points pricing contributed less 1 percentage point growth year canada strongest performing region segment double digit yearoveryear organic sales growth year yearoveryear organic sales growth latin america emea slightly segment average yearoveryear organic sales growth united states asiapacific less segment average growth rate operating margin control products solutions segment operating earnings increased 16 percent operating margin expanded 11 points 119 percent 2012 compared 2011 increase predominantly due volume increases lower incentive compensation expense partially offset increased spending support growth 2011 compared 2010 sales increased 11434 million 24 percent 48570 million 2010 60004 million 2011 sales solutions services businesses increased 24 percent year yearend backlog businesses 12 percent higher year ago product sales also grew 24 percent year reflecting continued improvement customers’ spending increased oem demand volume accounted substantially organic sales growth period pricing contributed less 1 percentage point growth period table presents sales year ended september 30 2011 geographic region percentage change sales year ended september 30 2010 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • organic sales growth united states driven heavy transportation industries consumer industries lagged region growth rate • organic sales growth canada driven primarily heavy industries • europe’s strong organic sales growth driven primarily transportation consumer industries strong oem demand • asiapacific organic sales growth driven strength emerging markets including china india 23 26 percent growth respectively1 • latin america growth driven mining oil gas industries 1 organic sales growth china india exclude 4 3 percentage points effect changes currency respectively income continuing operations income continuing operations increased 58 percent 4404 million 2010 6971 million 2011 increase predominantly due increased volume partially offset increased spending support growth selling general administrative expenses increased 1379 million 13233 14612 decreased percentage sales 28 points 244 percent volume increases outpaced spending increases general corporate expenses net 38 million gain 2011 resulting sale investment income taxes effective tax rate 2011 197 percent compared 191 percent 2010 2011 2010 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit 2010 recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits see note 15 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2011 2010 affecting respective tax rates discontinued operations income discontinued operations 07 million 2011 compared 239 million 2010 income discontinued operations prior year included 213 million tax benefit resulting resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors motor repair services businesses architecture software sales architecture software sales increased 23 percent 25943 million 2011 compared 21150 million 2010 organic sales increased 20 percent effects currency translation contributed 3 percentage points total increase substantially organic sales increase resulted increased volume due positive macroeconomic conditions regions industries pricing immaterial effect revenue period yearoveryear sales increases regions united states greater segment average rate increase logix sales increased 29 percent 2011 compared 2010 operating margin architecture software segment operating earnings 6591 million 2011 39 percent 4754 million 2010 operating margin increased 29 points 254 percent 2011 compared 2010 increase operating margin predominantly due volume increases result higher worldwide levels industrial production capital spending customers partially offset sales mix increased spending support growth control products solutions sales control products solutions sales increased 24 percent 34061 million 2011 compared 27420 million 2010 organic sales increased 20 percent effects currency translation acquisitions contributed 3 percentage points 1 percentage point respectively total increase segment’s organic sales increase resulted growth products solutions services businesses grew rates similar segment average latin america asiapacific emea reported yearoveryear growth segment average yearoveryear sales increases united states canada less segment average growth rate pricing immaterial effect revenue period operating margin control products solutions segment operating earnings 3685 million 2011 52 percent 2418 million period 2010 operating margin increased 20 points 108 percent 2011 compared 2010 increase predominantly due volume increases partially offset sales mix increased spending support growth introduction new nongaap measures changes definition segment operating earnings fiscal 2013 order provide transparency operational results business beginning fiscal 2013 provide nongaap earnings measures adjusted income adjusted eps exclude nonoperating pension costs related tax effects income continuing operations define nonoperating pension costs defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impacts plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operational performance business addition redefine segment operating earnings exclude nonoperating pension costs service cost amortization prior service cost continue included segment operating earnings components net periodic benefit cost represent operating cost providing pension benefits employees adjusted income adjusted earnings per share eps adjusted eps adjusted income nongaap measures exclude effects nonoperating pension costs related tax effects believe nongaap measures provide useful information investors operating performance allow management investors compare operating performance period measures adjusted income adjusted eps may different measures used companies nongaap measures considered substitute income continuing operations diluted eps operating nonoperating pension costs segment operating earnings nongaap table reflects operating results years ended september 30 2012 2011 2010 nonoperating pension costs reclassified line item periods presented costs previously included operating earnings segment general corporatenet fiscal 2012 2011 2010 nonoperating pension costs excluded architecture software segment operating earnings 116 million 113 million 34 million respectively fiscal 2012 2011 2010 nonoperating pension costs excluded control products solutions segment operating earnings 209 million 99 million 62 million respectively fiscal 2012 2011 2010 nonoperating pension costs excluded general corporatenet 27 million 23 million 05 million respectively 1total segment operating earnings total segment operating margin nongaap financial measures believe measures useful investors measures operating performance use measures monitor evaluate profitability operating segments measures total segment operating earnings total segment operating margin may different measures used companies financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings thus reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting sharebased compensation requires us report related excess income tax benefit financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies free cash flow source 5976 million year ended september 30 2012 compared source 5617 million year ended september 30 2011 free cash flow 2012 2011 include discretionary pretax contributions us qualified pension trust 300 million 150 million respectively increase free cash flow primarily due higher income continuing operations smaller increase working capital partially offset higher discretionary pretax contribution us qualified pension trust 2012 purchased 4875 million shortterm investments year ended september 30 2012 1375 million matured period repurchased approximately 37 million shares common stock share repurchase program 2012 total cost shares 2653 million 76 million recorded accounts payable september 30 2012 related 110000 shares settle october 2012 2011 repurchased approximately 40 million shares common stock total cost shares 2992 million 17 million recorded accounts payable september 30 2011 related 30000 shares settle october 2011 decision repurchase stock 2013 depend business conditions free cash flow generation cash requirements stock price september 30 2012 approximately 9367 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions retirement plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2013 150 million expect fund future uses cash combination existing cash balances shortterm investments cash generated operating activities commercial paper borrowings new issuance debt securities given extensive international operations significant amount cash equivalents shortterm investments funds held nonus subsidiaries undistributed earnings permanently reinvested generally funds would subject us tax repatriated percentage nonus funds vary quarter range approximately 70 percent 90 percent past eight quarters september 30 2012 approximately 90 percent funds held nonus subsidiaries encountered expect encounter difficulty meeting liquidity requirements domestic international operations addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks commercial paper principal source shortterm financing september 30 2012 commercial paper borrowings outstanding 1570 million weighted average interest rate 027 percent commercial paper borrowings outstanding year ended september 30 2011 debttototalcapital ratio 364 percent september 30 2012 341 percent september 30 2011 september 30 2012 2011 total current borrowing capacity unsecured revolving credit facility expires march 2015 7500 million borrowed credit facility september 30 2012 2011 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2012 2011 separate shortterm unsecured credit facilities approximately 1206 million september 30 2012 available nonus subsidiaries among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining shortterm credit ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures following summary credit ratings september 30 2012 ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities enter contracts offset changes amount future cash flows associated certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years offset transaction gains losses associated assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 2474 million 2012 1745 per common share 2110 million 2011 1475 per common share 1736 million 2010 122 per common share current quarterly dividend rate 047 per common share 188 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2012 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 450 million see note 6 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2013 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2013 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers contractual commitments capital expenditures contractually required cash payments acquisitions amounts payable 2013 include 844 million acquisition medium voltage drives business harbin jiuzhou electric co ltd october 2012 see note 19 financial statements information regarding acquisition e longterm liabilities include environmental liabilities net related receivables asset retirement obligations indemnifications amounts subsequent 2013 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional operating segment performance activities businesses without effect changes currency rates acquisitions use organic sales one measure monitor evaluate regional operating segment performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2012 1047 million compared 914 million 2011 approximately 72 percent 2012 global pension expense relates us pension plan actuarial assumptions used determine 2012 us pension expense included following discount rate 520 percent compared 560 percent 2011 expected rate return plan assets 800 percent compared 800 percent 2011 assumed longterm compensation increase rate 400 percent compared 400 percent 2011 2012 2011 2010 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 3000 million 1500 million 1500 million us pension plans 2012 2011 2010 respectively estimate pension expense approximately 1688 million 2013 increase approximately 641 million 2012 206 million 435 million relate operating nonoperating pension costs respectively information operating nonoperating pension costs provided introduction new nongaap measures changes definition segment operating earnings fiscal 2013 section part ii item 7 managements discussion analysis 2013 us discount rate decrease 415 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed us longterm compensation increase rate 400 percent 2013 established rate analyzing elements compensation pensioneligible earnings expected rate return us plan assets remain 800 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plans’ invested assets also considered current expected mix plan assets setting assumption target allocations ranges expected return major categories us plan assets follows financial markets produced strong results 2012 plan’s debt securities return exceeded expected return range 2012 lower market interest rates resulted higher bond values plan’s equity securities return exceeded expected return range 2012 largely due higher us equity returns financial markets continue experience volatility changed expectation longterm returns asset categories plan assets invested actual return portfolio us plan assets approximately 660 percent annualized 15 years ended september 30 2012 approximately 900 percent annualized 20 years ended september 30 2012 changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change benefit obligation annual net periodic pension cost assuming change 25 basis points key assumptions us pension plans millions information regarding pension benefits contained note 12 financial statements revenue recognition approximately 80 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence vsoe based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 107 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable accrual customer returns rebates incentives 1766 million september 30 2012 1620 million september 30 2011 79 million september 30 2012 80 million september 30 2011 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change accrual environmental matters 452 million net related receivables 321 million september 30 2012 411 million net related receivables 325 million september 30 2011 recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 223 million september 30 2012 201 million september 30 2011 various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 34 million current liabilities 224 million liabilities september 30 2012 47 million current liabilities 239 million liabilities september 30 2011 conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 135 million 16 million accrued current liabilities september 30 2012 2011 88 million 101 million accrued liabilities september 30 2012 2011 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 16 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state nonus jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 703 million september 30 2012 751 million september 30 2011 amount net unrecognized tax benefits would reduce effective tax rate continuing operations recognized 233 million september 30 2012 302 million september 30 2011 recognize interest penalties related income taxes income tax expense total accrued interest penalties 201 million september 30 2012 169 million september 30 2011 believe reasonably possible amount unrecognized tax benefits could reduced 12 million next 12 months result resolution worldwide tax matters lapses statutes limitations recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 318 million september 30 2012 328 million september 30 2011 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected consolidated financial statements provide tax liability undistributed earnings subsidiaries repatriated us september 30 2012 provided us deferred taxes 20810 million earnings since earnings current plans continue permanently reinvested outside us end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 15 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales addition discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products services driven • investments manufacturing capacity including upgrades modifications expansions existing manufacturing facilities creation new manufacturing facilities • customers’ needs greater productivity sustainable production cleaner safer energy efficient cost reduction quality assurance improvement overall global competitiveness • industry factors include customers’ new product introductions trends actual forecasted demand customers’ products services regulatory competitive environments customers operate • levels global industrial production • regional factors include local political social regulatory economic circumstances • seasonal spending patterns customers due annual budgeting processes working schedules longterm strategy longterm growth performance strategy characterized careful balance sustained organic growth profitability strategy seeks • deploy human financial resources order strengthen technology leadership allow us capture larger share customers’ spending continue transform business model one based less tangible assets intellectual capital • enhance market access increasing solutions service capabilities advancing global presence delivering products solutions wider range targeted industries • expand served market increasing ability meet customers’ needs areas process control safety control information software • look potential acquisitions serve catalysts organic growth add complementary technology expand served market increase domain expertise andor continue geographic diversification • foster robust productivity culture execute longterm growth performance strategy expect provide value shareowners revenue earnings growth free cash flow generation superior returns technological advancement domain expertise seek technology leadership position facets plantwide control believe core technologies foundation longterm sustainable growth multiple global gross domestic product gdp growth customers face increasingly complex volatile customer demand patterns driving need flexible manufacturing investments new technology domain expertise expanded served market beyond discrete control process safety information value proposition help customers gain benefits faster time market lower total cost ownership better asset utilization reduced business risks believe process automation largest growth opportunity company logix architecture enables us compete effectively traditional distributed control systems dcs control solutions many process applications one comprehensive safety offerings industry see significant potential growing safety market successfully integrated safety logix platform launch guardlogix® safety controllers safety products designed bring dual benefit customers safe environment employees productivity operations internal investment acquisitions expanded capability area plantwide information opportunity involves software solutions link plant floor enterprise business systems augment product portfolio solutions service offerings achieve greater customer intimacy combination leading technologies integrated architecture industryspecific domain expertise people enables us deliver effective solutions customers’ manufacturing challenges global expansion enhanced market access manufacturing world continues globalize must capable meeting customers’ needs emerging markets continue add delivery resources expand sales force emerging markets currently greater 50 percent employees outside us achieved goal 50 percent revenues outside us 2008 enter markets considerable growth potential expand global footprint seek continue broaden portfolio products services solutions provide customers regions made significant investments globalize manufacturing customer facing resources order closer customers throughout world emerging markets asia pacific including china india latin america eastern europe potential grow rates excess global gdp due higher levels infrastructure investment growing role consumer spending markets believe increased demand consumer products markets drive manufacturing investment provide us additional growth opportunities future original equipment manufacturers oems represent another growth opportunity us oem market large opportunity increase market share oems particularly outside north america remain competitive oems need continually improve costs machine performance reduce time market modular scaleable logix offering combined motion safety assist oems addressing business needs industry views apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer resourcebased transportation consumer industry customers engaged food beverage home personal care life sciences industries customers’ needs include global expansion incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance addition customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals waterwastewater forest products higher commodity prices higher global demand basic materials encourage companies industries invest capacity productivity transportation factors capacity utilization geographic expansion investment new model introductions flexible manufacturing technologies drivers demand products services solutions demand products services solutions across industries benefit outsourcing sustainability needs customers increasingly desire outsource engineering services order improve flexibility cost base manufacturing application knowledge enables us serve customers globally sustainability needs customers include energy efficiency environmental safety compliance higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor controls energy efficient solutions services addition environmental safety regulations may cause customers make investments ensure compliance implement acceptable business practices productivity continuous improvements important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global process standards enterprisewide information system designed result improved profitability used fund investment growth technology offset inflation dilution acquisitions ongoing productivity initiatives target cost improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs acquisitions 2008 acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion believe acquired companies help us expand market share deliver value customers acquisition cedes expanded comprehensive machine safety component portfolio customers worldwide cedes supplier safety measuring light curtains leading product offering machine safety market acquisition incuity positions us continued growth information solutions market incuity’s enterprise manufacturing intelligence offerings enable us accelerate specific aspects plantwide information strategy extend capabilities integrated architecture believe pavilion’s expertise advanced process control production optimization environmental compliance solutions paired logix architecture help customers create agile efficient productive environment also benefit particular process growth initiative u industrial economic trends 2008 sales us customers accounted 50 percent total sales various indicators use gauge direction momentum served us markets include • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization level capital investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2002 table depicts trends indicators fiscal 2006 2008 us industrial equipment spending declined slightly 2008 yet remained higher levels 2006 first half 2007 capacity utilization moderated reaching peak 2007 pmi remained near 50 fiscal 2008 declined significantly september 2008 indicating expected weakness us manufacturing sector industrial production index gradually increased 2006 march 2008 followed decline last two quarters expect 2009 challenging year based recent deterioration indices note economic indicators subject revisions issuing organizations nonus regional trends 2008 sales nonus customers accounted 50 percent total sales outside us demand products services principally driven strength industrial economy region customers’ ability propensity invest manufacturing assets customers include multinational companies expanding global presence indigenous companies recent strength demand part driven investments infrastructure developing economies investments basic materials production capacity response higher endproduct pricing expanding consumer markets use gdp growth rates one indication growth opportunities region business first half fiscal 2008 gdp growth rates remained fairly robust regions especially china india russia brazil slowed recently consensus forecasts project lower gdp growth regions next year revenue geographic region table presents actual sales year ended september 30 2008 geographic region change sales year ended september 30 2007 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure summary results operations information regarding define segment operating earnings included note 18 financial statements b amount 2008 represents net costs 304 million tax 021 per diluted share related primarily restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions amount 2007 represents costs 277 million tax 017 per diluted share related various restructuring activities designed execute cost productivity initiatives advance globalization strategy see note 14 financial statements information c amount 2006 represents gain sale 120 million tax 007 per diluted share related sale 50 percent interest rsc see note 2 financial statements information see note 13 financial statements description items reported discontinued operations e effective september 30 2006 adopted fin 47 resulting charge 286 million 177 million tax 010 per diluted share see note 17 financial statements information 2008 compared 2007 sales increased 14 percent 2008 compared 2007 organic sales increased 6 percent effects currency translation acquisitions adding 5 3 percentage points growth rate respectively 2008 continued execution ongoing globalization strategy focus emerging markets approximately 50 percent sales 2008 nonus customers sales emerging markets grew average growth rate demonstrated improved performance asiapacific region particular strength china india growth rate asiapacific accelerated every quarter 2008 resulting full year organic growth rate 15 percent compared 2007 continued see strong organic growth latin america 14 percent benefiting strength resourcebased industries sales customers united states canada emea grew 45 percent organically 2008 experienced considerable growth key process oem growth initiatives demonstrating ongoing diversification revenue base achieved average growth resourcebased industries primarily due higher commodity prices infrastructure spending continued demand oil gas resources particularly emerging markets sales global automotive customers grew average growth rate us automotive growth average growth rate sales customers life sciences industries significantly average growth rate sales growth food beverage home personal care industries also average growth rate however industries tend provide consistent rates growth time purchase accounting depreciation amortization purchase accounting depreciation amortization 242 million 2008 compared 164 million 2007 increase due amortization intangibles recent acquisitions particularly cedes incuity pavilion industrial control services group limited business ics triplex general corporate net general corporate expenses 772 million 2008 compared 728 million 2007 increase primarily due lower interest dividend income 2008 compared 2007 partially offset reduced charitable contributions 2008 lower environmental remediation charges legacy sites compared 2007 interest expense interest expense 682 million 2008 compared 634 million 2007 increase due higher average outstanding borrowings partially offset lower interest rates prior year special charges 2008 incurred special charges 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions current year charge partially offset reversal 40 million 36 million net tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions include workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units expect total cash expenditures associated 2008 actions approximately 507 million expect pay majority costs associated actions first half 2009 special charges 435 million 2007 include costs related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions included workforce reductions realignment administrative functions rationalization consolidation global operations paid 166 million related charges year ended september 30 2008 53 million year ended september 30 2007 income taxes effective tax rate 2008 286 percent compared 278 percent 2007 effective tax rate 2008 lower statutory tax rate 35 percent lower tax rates income outside united states used foreign tax credits tax rate 2008 higher 2007 favorably resolved various federal state matters prior year 2007 effective tax rate differed federal statutory rate 35 percent benefited lower nonus tax rates resolved certain tax matters claims related closure 2005 us federal audit cycle various state tax audits made provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2008 2007 affecting respective tax rates income continuing operations income continuing operations 2008 increased 83 million compared 2007 increase primarily due productivity performance higher volume partially offset increased investment spending support globalization growth technology increased purchase accounting depreciation amortization inflation higher effective income tax rate discontinued operations amounts reported discontinued operations 2007 primarily relate operating results principal businesses former power systems operating segment periods divestiture gain sale principal businesses operating segment net income operating activities power systems 423 million 2007 reported aftertax gain sale power systems 8682 million 539 per share 2007 also reported aftertax income 80 million 2007 related discontinued operations activities see note 13 financial statements information discontinued operations architecture software sales architecture software sales increased 9 percent compared 2007 organic growth accounted 3 percentage points increase foreign currency translation acquisitions added 5 1 percentage points growth rate respectively logix sales grew 12 percent 2008 compared 2007 partially offset decline legacy processor sales operating margin segment operating margin decreased 23 points 2008 compared 2007 negatively impacted increased investment spending support technology growth year impact acquisitions impact foreign currency partially offset volume leverage productivity control products solutions sales control products solutions sales increased 18 percent compared 2007 organic sales growth 9 percent foreign currency translation acquisitions added 5 4 percentage points growth rate respectively year results benefited growth initiatives strong results solutions businesses especially resourcebased end markets operating margin segment operating margin decreased 09 points 2008 compared 2007 decrease primarily due mix product solutions businesses impact foreign currency increased investment spending negative impact acquisitions partially offset strong productivity performance volume leverage price 2007 compared 2006 sales increased 10 percent 2007 compared 2006 organic sales increased 6 percent foreign currency translation acquisitions added 3 1 percentage points growth rate respectively sales united states increased 3 percent 2007 compared 2006 full year sales strong europe latin america organic growth rates 14 percent 19 percent respectively asia pacific sales grew organically 7 percent 2006 canada reported 1 percent decline organic growth continued see growth investments emea latin america life sciences industry deliver incremental revenue increases partially offset sales decline north american automotive industry due weakness important detroit customer base purchase accounting depreciation amortization purchase accounting depreciation amortization 164 million 2007 compared 106 million 2006 increase due amortization intangibles 2007 acquisitions particularly ics triplex proscon holdings ltd general corporate net general corporate expenses 728 million 2007 compared 907 million 2006 decrease primarily due interest income proceeds power systems sale expenses 2007 also include charges 139 million related environmental remediation costs legacy sites partially offset 121 million dividend related equity interest acquired result divestiture previously owned business interest expense interest expense 634 million 2007 compared 566 million 2006 increase due higher average commercial paper borrowings 2007 well higher interest rates associated interest rate swap see note 6 financial statements special charges special charges 435 million 2007 include costs related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions included workforce reductions realignment administrative functions rationalization consolidation global operations income taxes effective tax rate 2007 278 percent compared 281 percent 2006 2007 effective tax rate differed federal statutory rate 35 percent benefited lower nonus tax rates resolved certain tax matters claims related closure 2005 us federal audit cycle various state tax audits made provision adjustments 2006 effective tax rate lower federal statutory rate 35 percent reversed 272 million 015 per diluted share valuation allowances capital loss carryforwards settled audit matters us internal revenue service years 2003 2004 benefited lower tax rates outside us received foreign sales corporation fsc extra territorial income eti tax benefits made provision adjustments see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2007 2006 affecting respective tax rates income continuing operations accounting change income continuing operations 2007 increased 8 percent 2006 increase primarily due increased sales lower retirement benefits expense improved operating margins increased dividend interest income partially offset special charges additional environmental charges higher interest expense discontinued operations amounts reported discontinued operations primarily relate operating results principal businesses former power systems operating segment periods divestiture gain sale principal businesses operating segment net income operating activities power systems 423 million 2007 1001 million 2006 reported aftertax gain sale power systems 8682 million 539 per share 2007 also reported aftertax income 80 million 2007 related discontinued operations activities compared 47 million loss discontinued operations activities 2006 see also note 13 financial statements information discontinued operations architecture software sales architecture software sales increased 8 percent compared 2006 organic growth accounted 5 percent increase foreign currency translation added 3 percentage points growth rate continued see growth process applications safety compactlogix™ product offering operating margin segment operating margin increased 06 points 2007 compared 2006 due successful execution productivity initiatives price increases lower retirement benefits expense partially offset inflation spending support growth control products solutions sales control products solutions sales increased 11 percent compared 2006 organic growth contributed 7 percent increase foreign currency translation acquisitions added 4 percentage points growth rate year results benefited strong growth powercentric solutions businesses operating margin segment operating margin increased 07 points 2007 compared 2006 due productivity efforts price increases lower retirement benefits expense partially offset inflation spending support growth financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy account sharebased compensation sfas 123r sharebased payment requires us report excess income tax benefit exercise stock options financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow defined one measure monitor evaluate performance definition free cash flow may different definitions used companies definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows cash flows operating activities discontinued operations reported statement cash flows net separately calculated income tax effects us federal state income taxes paid result gain sale principal businesses former power systems operating segment classified within continuing operations consistent cash proceeds taxes paid 2008 2007 excluded free cash flow present free cash flow representative performance continuing businesses free cash flow source 4583 million year ended september 30 2008 compared 5310 million year ended september 30 2007 decrease free cash flow primarily due increased working capital needs higher capital expenditures december 2007 issued aggregate 500 million principal amount 565 notes due 2017 625 debentures due 2037 debt offering yielded approximately 4935 million proceeds used repay maturity 615 notes due january 15 2008 general corporate purposes january 2007 received 175 billion cash proceeds sale dodge mechanical reliance electric motors motor repair services businesses used cash proceeds repurchase shares common stock offset dilutive effect divestiture pay taxes gain sale acquire ics triplex commercial paper principal source shortterm financing commercial paper borrowings outstanding september 30 2008 1000 million weighted average interest rate borrowings 225 percent september 30 2007 commercial paper borrowings outstanding 1730 million weighted average interest rate 51 percent 2008 repurchased approximately 67 million shares common stock 01 million shares settle october 2008 total cost shares 3551 million 35 million recorded accounts payable september 30 2008 compared purchases approximately 238 million shares common stock cost 15061 million 2007 purchases 01 million shares amounting 75 million settle october 2007 recorded accounts payable september 30 2007 anticipate repurchasing stock 2009 amount depend ultimately business conditions stock price cash requirements september 30 2008 approximately 6712 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include repayments shortterm borrowings repurchases common stock dividends shareowners capital expenditures acquisitions businesses may include additional contributions pension plans recent declines value pension plan assets may impact amount timing future contributions pension plans expect capital expenditures 2009 130 million expect fund future uses cash combination existing cash balances cash generated operating activities commercial paper borrowings new issuance debt securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 373 percent september 30 2008 347 percent september 30 2007 october 2004 entered fiveyear 6000 million unsecured revolving credit facility credit facility remains effect drawn september 30 2008 2007 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2008 2007 credit facility expires october 2009 active discussions bank group renew facility anticipate problems associated renewal addition 6000 million credit facility shortterm unsecured credit facilities approximately 1677 million september 30 2008 available foreign subsidiaries following summary credit ratings september 30 2008 among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining commercial paper ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities cash dividends shareowners 1702 million 116 per share 2008 1847 million 116 per share 2007 1593 million 090 per share 2006 although declare pay dividends sole discretion board directors 2009 expect maintain quarterly dividend 029 per outstanding share summary projected contractual cash obligations september 30 2008 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 458 million see note 6 financial statements information regarding longterm debt b see note 17 financial statements information regarding november 2005 saleleaseback transaction c postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable amounts reported pension funding contributions reflect current estimates known commitments amounts subsequent 2009 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa zero may make additional contributions plan discretion management e item includes longterm obligations agreements various service providers f longterm liabilities include environmental liabilities net related receivables asset retirement obligations indemnifications amounts subsequent 2009 excluded summary unable make reasonably reliable estimate liabilities paid g amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates acquisitions use organic sales one measure monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2008 286 million compared 463 million 2007 approximately 48 percent 2008 global pension expense relates us pension plan actuarial assumptions used determine 2008 us pension expense included following discount rate 650 percent compared 650 percent 2007 expected rate return plan assets 800 percent compared 800 percent 2007 assumed compensation increase rate 415 percent compared 419 percent 2007 made voluntary contributions 80 million primary us qualified pension plan trust made voluntary contributions 2008 pension protection act 2006 signed law august 2006 irs yet issue final guidance respect certain aspects law however 2008 pension plan valuation completed based current understanding law valuation resulted minimum contributions required 2008 estimate pension expense approximately 340 million 2009 increase approximately 54 million 2008 addition change measurement date 2009 june 30 september 30 required sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r sfas 158 result reduction retained earnings approximately 85 million fourth quarter 2009 us discount rate increase 675 percent discount rate set june 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed rate return us plan assets remain 800 percent considered actual returns plan assets long term well current expected mix plan investments setting assumption assumed us compensation increase rate 420 percent 2009 compared 415 percent used 2008 established rate analyzing elements compensation pension eligible earnings changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation following chart illustrates estimated change benefit obligation net periodic pension cost assuming change 25 basis points key assumption us pension plans millions consistent declines global equity markets volatility fixed income markets experienced decline pension assets june 30 2008 measurement date also observed fluctuations variables affecting discount rate would significantly increased discount rate since june 30 2008 measurement date measure us pension plans september 30 2008 using approach used june 30 2008 actual measurement date 2009 us pension expense would decreased approximately 15 million 1 million information regarding pension benefits contained note 12 financial statements postretirement benefits estimate costs obligations postretirement benefits pensions using assumptions including discount rate plans primary us postretirement healthcare benefit program expected trends cost healthcare services changes assumptions differences assumptions actual experience affect amount postretirement benefit expense recognized future periods discount rate used calculate 2008 postretirement benefits expense 625 percent compared 650 percent 2007 2009 discount rate assumption postretirement benefit expense increase 650 percent discount rate set june 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans effective october 1 2002 amended primary us postretirement healthcare benefit program order mitigate share increasing cost postretirement healthcare services result amendment obligation less sensitive increasing healthcare costs resulting inflationary trends since january 1 2005 net periodic benefit cost recorded continuing operations 2008 154 million compared 130 million 2007 expect net periodic benefit cost 2009 approximately 159 million estimated postretirement projected benefit obligation approximate 212 million addition change measurement date 2009 june 30 september 30 required sfas 158 result reduction retained earnings approximately 39 million fourth quarter 2009 information regarding postretirement benefits contained note 12 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize revenue software products related services accordance statement position sop 972 software revenue recognition issued american institute certified public accountants recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 71 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable accrual customer returns rebates incentives 1378 million september 30 2008 1286 million september 30 2007 132 million september 30 2008 81 million september 30 2007 included offset accounts receivable fair value measurements increased use fair value measurements financial statements due recent accounting pronouncements obligations retained connection sale principal businesses former power systems operating segment sharebased compensation account sharebased compensation sfas 123r compensation costs based grantdate fair value instruments using valuation model generally recognized straight line basis vesting term estimate average riskfree interest rate expected dividend yield expected volatility expected term compensation instrument outstanding order determine fair value valuation model sensitive expected volatility term assumptions sharebased compensation expense net related income tax benefit amounted 215 million 2008 188 million 2007 asset retirement obligations account conditional asset retirement obligations financial accounting standards board fasb interpretation 47 accounting conditional asset retirement obligations fin 47 accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 51 million current liabilities 228 million liabilities september 30 2008 53 million current liabilities 218 million liabilities september 30 2007 indemnifications conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale recorded liability fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34 fin 45 related indemnification obligations reduction gain sale significant change costs timing could significant effect estimates estimate potential future payments could incur indemnifications may approximate 276 million 105 million 96 million accrued current liabilities 129 million 161 million accrued liabilities september 30 2008 2007 respectively derivatives accounting method derivative instruments based sfas 133 accounting derivative instruments hedging activities sfas 133 fair value derivative financial instruments recorded balance sheet based quoted market prices contracts similar maturities use foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contacts manage balance fixed floating rate debt unrealized gains derivative instruments recorded current assets amounts 61 million 52 million september 30 2008 2007 respectively assets amount 51 million september 30 2008 unrealized losses derivative instruments recorded current liabilities amounts 162 million 382 million september 30 2008 2007 respectively liabilities amount 84 million september 30 2008 purchase accounting acquire business account assets liabilities acquired fair value date acquisition accordance sfas 141 business combinations sfas 142 goodwill intangible assets order value acquired identifiable intangible assets determine amortizable lives management must use judgment selecting relevant assumptions see note 2 financial statements discussion acquisitions 2008 2007 litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters net related receivables 228 million 332 million september 30 2008 298 million september 30 2007 recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 230 million september 30 2008 240 million september 30 2007 various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state foreign jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures adopted provisions fasb interpretation 48 accounting uncertainty income taxes fin 48 october 1 2007 result recognized 67 million decrease shareowners’ equity gross liability unrecognized tax benefits excluding interest penalties recorded accordance fin 48 reported liabilities consolidated balance sheet 1258 million september 30 2008 1165 million october 1 2007 upon fin 48 adoption majority increase due tax positions related current year amount unrecognized tax benefits would reduce effective tax rate continuing operations recognized 432 million september 30 2008 376 million october 1 2007 addition amount unrecognized tax benefits would reported discontinued operations recognized 334 million september 30 2008 338 million october 1 2007 recognize interest penalties related unrecognized tax benefits tax expense total accrued interest penalties 260 million september 30 2008 188 million september 30 2007 believe reasonably possible amount unrecognized tax benefits could reduced 10 million next 12 months result resolution worldwide tax matters lapses statutes limitations recorded valuation allowance majority deferred tax assets related net operating loss capital loss carryforwards certain temporary differences amount 451 million september 30 2008 426 million september 30 2007 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforward amount realized income would increase determine able use carryforwards currently expected end interim reporting period estimate base effective tax rate effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects recognize tax effect significant unusual extraordinary items period realizable information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations results operations nongaap measures following discussion includes organic sales free cash flow nongaap measures see supplemental sales information reconciliation reported sales organic sales discussion believe nongaap measure useful investors see financial condition reconciliation cash flows operating activities free cash flow discussion believe nongaap measure useful investors overview leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses overall demand products services driven • investments manufacturing including upgrades modifications expansions existing facilities production lines creation new facilities production lines • customers’ needs productivity cost reduction sustainable production cleaner safer energy efficient quality assurance overall global competitiveness • industry factors include customers’ new product introductions demand customers’ products services regulatory competitive environments customers operate • levels global industrial production capacity utilization • regional factors include local political social regulatory economic circumstances • seasonal spending patterns customers due annual budgeting processes working schedule • investments basic materials production capacity partly response higher commodity pricing longterm strategy vision valued global provider innovative industrial automation information products services solutions supported growth performance strategy seeks • achieve growth rates excess automation market expanding served market strengthening technology customerfacing differentiation • diversify revenue streams increasing capabilities new applications broadening solutions service capabilities advancing global presence serving wider range industries • grow market share gaining new customers capturing larger share original equipment manufacturer machine builders oems end user customers’ spending • enhance market access building channel capability partner network • make acquisitions serve catalysts organic growth adding complementary technology expanding served market increasing domain expertise continuing geographic diversification • deploy human financial resources strengthen technology leadership intellectual capital business model • continuously improve quality customer experience drive 34 percent annual cost productivity optimize endtoend business processes implementing strategy seek achieve longterm financial goals include revenue growth 68 percent doubledigit eps growth 60 percent revenue outside us customers face challenge remaining globally cost competitive automation help achieve productivity sustainability objectives addition increasingly complex volatile customer demand patterns drive need flexible manufacturing value proposition help customers reduce time market lower total cost ownership increase asset utilization reduce business risks differentiation technology domain expertise seek technology leadership position facets industrial automation believe core technologies foundation longterm sustainable growth integrated control information architecture logix core capable safely efficiently controlling industrial processes connecting plant floor enterprise systems external supply chain architecture important differentiator anchor comprehensive automation offering complement scalable logix platform additional control solutions suited less complex machine applications investments technologies expanded served market beyond discrete control process safety plantwide information believe process automation largest growth opportunity company logix architecture enables us compete effectively traditional distributed control systems dcs providers many process applications one comprehensive safety offerings industry including machine process safety products solutions see significant potential growing safety market successfully integrated safety logix platform launch guardlogix® safety controllers safety products designed bring dual benefit customers safe environment employees productivity operations internal investment acquisitions expanded software communication capabilities critical components integrated architecture key optimizing processes assets integrating plant floor enterprise business system supply chain broad power motor control offering one core competencies many motor control products intelligent configurable integrated seamlessly logix architecture products enhance availability efficiency safe operation customers’ critical energyintensive plant assets augment product portfolio solutions service offerings expanded portfolio repeatable solutions enables us gain efficiency drive innovation improve global deployment solutions customers combination leading technologies industryspecific domain expertise people enables us solve many customers’ manufacturing challenges global expansion manufacturing world continues expand must able meet customers’ needs emerging markets expect continue add solutions services personnel expand sales force emerging markets long term currently approximately 60 percent employees outside us 51 percent revenues outside us expand markets considerable growth potential shift global footprint expect continue broaden portfolio products solutions services provide customers regions made significant investments globalize manufacturing product development customer facing resources order closer customers throughout world growth emerging markets asiapacific including china india latin america central eastern europe africa projected exceed global gross domestic product gdp growth rates due higher levels infrastructure investment growing impact consumer spending markets believe increased demand consumer products markets lead manufacturing investment provide us additional growth opportunities future enhanced market access oems represent another growth opportunity oem market large opportunity increase market share particularly outside north america remain competitive oems need continually improve costs machine performance reduce time market modular scalable logix offering particularly combined motion safety assist oems addressing business needs also continue expand portfolio less complex oem machines helps expand addressed market especially emerging economies developed powerful network channel partners technology partners commercial partners act amplifiers internal capabilities enable us serve customers’ needs around world broad range industries served apply knowledge manufacturing applications help customers solve business challenges serve customers wide range industries including consumer products resourcebased transportation consumer products customers engaged food beverage home personal care life sciences industries customers’ needs include new capacity incremental capacity existing facilities increasingly flexible manufacturing environment regulatory compliance customers operate environment product innovation time market critical factors serve customers resourcebased industries including oil gas mining aggregates cement metals pulp paper waterwastewater companies industries typically invest commodity prices relatively high global demand basic materials increasing transportation industry factors geographic expansion investment new model introductions flexible manufacturing technologies influence customers’ automation investment decisions sales transportation primarily automotive tire manufacturers outsourcing sustainability trends demand products solutions services across industries benefits outsourcing sustainability needs customers increasingly desire outsource engineering services achieve flexible cost base manufacturing application knowledge enables us serve customers globally help customers meet sustainability needs pertaining energy efficiency environmental safety goals higher energy prices historically caused customers across industries invest energyefficient manufacturing processes technologies intelligent motor control energy efficient solutions services addition environmental safety objectives often spur customers invest ensure compliance implement sustainable business practices acquisitions acquisition strategy focuses products solutions services catalytic organic growth core offerings may 2011 purchased majority stake equity lektronix limited affiliate lektronix independent industrial automation repairs service provider europe asia april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates hiprom process control automation systems integrator mining mineral processing industry south africa march 2009 bought majority assets assumed certain liabilities automation business rutter hinz inc expanded business canada oil gas resourcebased industries january 2009 bought assets assumed certain liabilities xi’an hengsheng science technology limited acquisition advanced globalization strategy strengthened ability deliver project management engineering solutions primarily customers china believe acquired companies help us expand market share deliver value customers continuous improvement productivity continuous improvement important components culture programs place drive ongoing process improvement functional streamlining material cost savings manufacturing productivity process developing implementing common global processes enterprisewide information system intended improve profitability used fund investment growth technology offset inflation ongoing productivity initiatives target cost reduction improved asset utilization charges workforce reductions facility rationalization may required order effectively execute productivity programs u industrial economic trends 2011 sales us customers accounted 49 percent total sales various indicators use gauge direction momentum us served markets include • industrial production index total index published federal reserve measures real output manufacturing mining electric gas utilities industrial production index expressed percentage real output base year currently 2007 historically meaningful correlation industrial production index level automation investment made us customers manufacturing base • manufacturing purchasing managers’ index pmi published institute supply management ism indication current nearterm state manufacturing activity us according ism pmi measure 50 indicates us manufacturing economy generally expanding measure 50 indicates generally contracting • industrial equipment spending economic statistic compiled bureau economic analysis bea statistic provides insight spending trends broad us industrial economy measure longer term proven demonstrate reasonable correlation domestic growth • capacity utilization total industry indication plant operating activity published federal reserve historically meaningful correlation capacity utilization levels us industrial production table depicts trends indicators fiscal 2009 2011 industrial production capacity utilization continued increase pmi lower preceding quarter continued indicate expansion manufacturing activity indicators among factors lead us cautiously optimistic continued recovery slower potentially uneven growth note economic indicators subject revisions issuing organizations nonus regional trends 2011 sales nonus customers accounted 51 percent total sales customers include indigenous companies multinational companies expanding global presence addition global factors previously mentioned international demand particularly emerging markets historically driven strength industrial economy region investments infrastructure expanding consumer markets use changes gdp one indicator growth opportunities region business growth emerging markets continues exceed global gdp growth rates moderated fiscal 2011 europe sovereign debt concerns put downward pressure industrial growth trends indicate slower growth recently experienced overall macroeconomic trends forecasts make us cautiously optimistic global recovery continue fiscal 2012 summary results operations sales fiscal 2011 increased 24 percent compared 2010 continued execute key initiatives well contributed positive performance • sales emerging markets increased 31 percent compared 2010 organic sales emerging markets increased 24 percent year effects currency translation acquisitions contributed 7 percentage points total increase emerging markets represented 22 percent total company sales fiscal 2011 expect proportion continue grow • sales oem customers including sales safety components safety systems grew rate company average improvement operating margin primarily due volume leverage partially offset sales mix increased spending support growth general corporate expenses net 38 million gain 2011 resulting sale investment following tables reflect sales operating results years ended september 30 2011 2010 2009 millions except per share amounts information regarding define segment operating earnings included note 18 financial statements b segment operating earnings 2009 includes restructuring charges 604 million see note 14 financial statements information restructuring charges special items c see note 13 financial statements description items reported discontinued operations 2011 compared 2010 sales increased 11434 million 24 percent 48570 million 2010 60004 million 2011 sales solutions services businesses increased 24 percent year yearend backlog businesses 12 percent higher year ago product sales also grew 24 percent year reflecting continued improvement customers’ spending increased oem demand volume accounted substantially organic sales growth period pricing contributed less 1 percentage point growth period table presents sales year ended september 30 2011 geographic region percentage change sales year ended september 30 2010 millions except percentages 1 attribute sales geographic regions based upon country destination 2 organic sales excluding effect changes currency exchange rates acquisitions see supplemental sales information nongaap measure • organic sales growth united states driven heavy transportation industries consumer industries lagged region growth rate • organic sales growth canada driven primarily heavy industries • europe’s strong organic sales growth driven primarily transportation consumer industries strong oem demand • asiapacific organic sales growth driven strength emerging markets including china india 23 26 percent growth respectively1 • latin america growth driven mining oil gas industries income continuing operations income taxes income continuing operations income taxes increased 58 percent 4404 million 2010 6971 million 2011 increase predominantly due increased volume partially offset increased spending support growth selling general administrative expenses increased 1379 million 13233 14612 decreased percentage sales 28 points 244 percent volume increases outpaced spending increases general corporate expenses net 38 million gain 2011 resulting sale investment organic sales growth china india exclude 4 3 percentage points effect changes currency respectively income taxes effective tax rate 2011 197 percent compared 191 percent 2010 2011 2010 effective tax rates lower us statutory rate 35 percent sales outside us benefited lower tax rates 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit 2010 recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2011 2010 affecting respective tax rates discontinued operations income discontinued operations 07 million 2011 compared 239 million 2010 income discontinued operations prior year included 213 million tax benefit resulting resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors motor repair services businesses architecture software sales architecture software sales increased 23 percent 25943 million 2011 compared 21150 million 2010 organic sales increased 20 percent effects currency translation contributed 3 percentage points total increase substantially organic sales increase resulted increased volume due positive macroeconomic conditions regions industries pricing immaterial effect revenue period yearoveryear sales increases regions united states greater segment average rate increase logix sales increased 29 percent 2011 compared 2010 operating margin architecture software segment operating earnings 6591 million 2011 39 percent 4754 million 2010 operating margin increased 29 points 254 percent 2011 compared 2010 increase operating margin predominantly due volume increases result higher worldwide levels industrial production capital spending customers partially offset sales mix increased spending support growth control products solutions sales control products solutions sales increased 24 percent 34061 million 2011 compared 27420 million 2010 organic sales increased 20 percent effects currency translation acquisitions contributed 3 percentage points 1 percentage point respectively total increase segment’s organic sales increase resulted growth products solutions services businesses grew rates similar segment average latin america asiapacific emea reported yearoveryear growth segment average yearoveryear sales increases united states canada less segment average growth rate pricing immaterial effect revenue period operating margin control products solutions segment operating earnings 3685 million 2011 52 percent 2418 million period 2010 operating margin increased 20 points 108 percent 2011 compared 2010 increase predominantly due volume increases partially offset sales mix increased spending support growth 2010 compared 2009 sales increased 5245 million 12 percent 43325 million 2009 48570 million 2010 organic sales increase 10 percent enhanced benefits currency translation 2 percentage points positive performance product businesses across regions resulting recovery worldwide macroeconomic conditions industrial production 2010 pricing contributed less 1 percentage point growth period organic sales customers asiapacific region increased 17 percent led strength emerging markets including china india organic sales increased 11 7 percent united states canada respectively organic sales increased latin america 11 percent recent growth offset declines earlier fiscal year organic sales increased 2 percent emea declines solutions services businesses slower recover offset growth product businesses sales growth solutions services business lagged recovery product sales first half 2010 solutions services sales declined year consequence declining order rates second half fiscal 2009 order rates began improve first half fiscal 2010 resulting yearoveryear growth solutions services sales second half 2010 full year sales solutions services business declined 4 percent 2010 sales end markets improved year progressed fullyear 2010 largest sales increases customers transportation industry income continuing operations income taxes income continuing operations income taxes increased 102 percent 2179 million 2009 4404 million 2010 strong performance reflects continuing economic recovery gross profit margin increased 37 points 399 percent 2010 increased volume restructuring savings favorable mix contributed significant yearoveryear margin improvement partially offset cost increases related employee compensation pension postretirement expense incremental spending support growth saved approximately 120 million 2010 compared 2009 related benefits realized restructuring actions taken fiscal 2009 line expectations recorded 60 million less restructuring charges 2010 compared 2009 also contributed yearoveryear income improvement benefits offset increases approximately 200 million employee compensation 41 million increase pension postretirement expense 50 million incremental spending support growth 2010 compared 2009 architecture software segment contributed 44 percent total sales 2010 compared 40 percent 2009 2010 architecture software segment’s operating margin 225 percent increase percentage sales highermargin architecture software segment caused positive mix effect operating margin general corporate expenses 936 million 2010 compared 803 million 2009 increase primarily due higher employee costs resulting wage salary increases well performancebased compensation selling general administrative expense percentage sales decreased 09 points 272 percent volume increases outpaced spending increases income taxes effective tax rate 2010 191 percent compared 204 percent 2009 2010 2009 effective tax rates lower us statutory rate 35 percent benefited lower nonus tax rates 2010 rate lower 2009 benefited higher proportionate share income lower tax rate jurisdictions compared 2009 also recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits 2010 2009 also recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary see note 16 financial statements complete reconciliation united states statutory tax rate effective tax rate information tax events 2010 2009 affecting respective tax rates discontinued operations income discontinued operations increased 211 million 2010 compared 2009 primarily due 213 million tax benefit resulting resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors repair services businesses architecture software sales architecture software sales increased 23 percent 21150 million 2010 compared 17235 million 2009 organic sales increased 20 percent effects currency translation contributed 3 percentage points total increase substantially organic sales increase result increase volume due improving macroeconomic conditions regions industries pricing minor impact revenue period canada latin america yearoveryear sales increases greater segment average rate increase yearoveryear sales increases customers united states asiapacific consistent segment average rate increase yearoveryear sales increases customers emea slightly segment average rate increase logix sales increased 25 percent 2010 compared 2009 operating margin architecture software segment operating earnings 4754 million 2010 113 percent 2230 million 2009 operating margin increased 96 points 225 percent 2010 compared 2009 increase predominantly due volume increases result higher worldwide levels industrial production capital spending customers approximately half restructuring cost savings additional employee compensation additional pension postretirement expenses incremental spending support growth described applied architecture software segment control products solutions sales control products solutions sales increased 5 percent 27420 million 2010 compared 26090 million 2009 organic sales increased 2 percent effects currency translation acquisitions contributed 2 percentage points 1 percentage point respectively segment’s modest organic sales growth primarily attributable robust growth products businesses 2010 offset declines solutions services sales reflecting decline order rates experienced second half 2009 decline order rates led significant sales declines first half 2010 order rates recovered normal lag associated solution services sales began see revenue increases businesses second half 2010 asiapacific canada reported doubledigit yearoveryear overall segment growth benefiting 27 million 122 million respectively recent acquisitions emea reported yearoveryear overall segment sales declines 2010 sales united states latin america increased consistent segment average impact pricing segment’s sales increase insignificant operating margin control products solutions segment operating earnings 2418 million 2010 17 percent 2067 million period 2009 operating margin increased 09 points 88 percent 2010 compared 2009 approximately half restructuring cost savings additional employee compensation additional pension postretirement expenses incremental spending support growth described applied control products solutions segment positive mix attributable shift toward product sales solutions services sales contributed margin improvement financial condition following summary cash flows operating investing financing activities reflected consolidated statement cash flows millions definition free cash flow nongaap financial measure takes consideration capital investments required maintain operations businesses execute strategy cash provided continuing operating activities adds back noncash depreciation expense earnings thus reflect charge necessary capital expenditures definition free cash flow excludes operating cash flows capital expenditures related discontinued operations operating investing financing cash flows discontinued operations presented separately statement cash flows accounting sharebased compensation requires us report related excess income tax benefit financing cash flow rather operating cash flow added benefit back calculation free cash flow order generally classify cash flows arising income taxes operating cash flows opinion free cash flow provides useful information investors regarding ability generate cash business operations available acquisitions investments service debt principal dividends share repurchases use free cash flow one measure monitor evaluate performance definition free cash flow may differ definitions used companies free cash flow source 5617 million year ended september 30 2011 compared source 4107 million year ended september 30 2010 free cash flow 2011 2010 include discretionary pretax contributions 150 million company’s us pension trust increase free cash flow primarily due improvements current year earnings partially offset higher compensation payments 2011 compared 2010 incentive compensation payments lower normal 2010 difficult economic conditions resulted reduced zero earned incentives 2009 employee incentive compensation plans incentive compensation payments generally occur first quarter year following year incentive earned paid substantially incentive compensation earned 2010 performance first quarter 2011 pay substantially incentive compensation earned 2011 first quarter 2012 commercial paper principal source shortterm financing september 30 2011 2010 commercial paper borrowings outstanding borrowings outstanding either year october 11 2011 contributed 300 million us qualified pension trust contribution funded combination cash hand 275 million commercial paper borrowings repurchased approximately 40 million shares common stock 2011 total cost shares 2992 million 17 million recorded accounts payable september 30 2011 related 30000 shares settle october 2011 2010 repurchased approximately 22 million shares common stock total cost shares 1200 million 12 million recorded accounts payable september 30 2010 related 19700 shares settle october 2010 decision repurchase stock 2012 depend business conditions free cash flow generation cash requirements stock price september 30 2011 approximately 2020 million remaining stock repurchases existing board authorization see part ii item 5 market company’s common equity related stockholder matters issuer purchases equity securities additional information regarding share repurchases expect future uses cash include working capital requirements capital expenditures additional contributions pension plans acquisitions businesses dividends shareowners repurchases common stock repayments debt expect capital expenditures 2012 140 million expect fund future uses cash combination existing cash balances cash generated operating activities commercial paper borrowings new issuance debt securities addition cash generated operating activities access existing financing sources including public debt markets unsecured credit facilities various banks debttototalcapital ratio 341 percent september 30 2011 383 percent september 30 2010 decrease primarily due net increase shareowners’ equity march 14 2011 replaced former threeyear 2675 million unsecured revolving credit facility expiring march 2012 former 364day 3000 million unsecured revolving credit facility expiring march 2011 new fouryear 7500 million unsecured revolving credit facility incur early termination penalties connection termination former credit facilities drawn credit facilities september 30 2011 2010 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2011 2010 separate shortterm unsecured credit facilities approximately 1278 million september 30 2011 available nonus subsidiaries following summary credit ratings september 30 2011 among uses draw credit facility standby liquidity facility repay outstanding commercial paper matures access funds repay maturing commercial paper important factor maintaining commercial paper ratings set forth table current policy respect ratings expect limit borrowings credit facility amounts would leave enough credit available facility could borrow needed repay outstanding commercial paper matures ability access commercial paper market related costs borrowings affected strength credit rating market conditions experienced difficulty accessing commercial paper market date access commercial paper market adversely affected due change market conditions otherwise would expect rely combination available cash unsecured committed credit facility provide shortterm funding event cost borrowings unsecured committed credit facility could higher cost commercial paper borrowings regularly monitor thirdparty depository institutions hold cash equivalents emphasis primarily safety liquidity principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities enter contracts offset changes amount future cash flows associated certain thirdparty sales intercompany transactions denominated foreign currencies forecasted occur within next two years offset transaction gains losses associated assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies foreign currency forward exchange contracts usually denominated currencies major industrial countries diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities cash dividends shareowners 2110 million 2011 1475 per common share cash dividends shareowners 1736 million 2010 122 per common share cash dividends shareowners 1645 million 2009 116 per common share current quarterly dividend rate 0425 per common share 170 per common share annually determined sole discretion board directors summary projected contractual cash obligations september 30 2011 millions amounts longterm debt assume respective debt instruments outstanding scheduled maturity dates amounts include interest exclude unamortized discount 451 million see note 6 financial statements information regarding longterm debt b postretirement plans unfunded subject change amounts reported estimates future benefit payments extent estimable c amounts reported pension funding contributions reflect current estimates known commitments contributions pension plans beyond 2012 depend future investment performance pension plan assets changes discount rate assumptions governmental regulations effect time amounts subsequent 2012 excluded summary amounts cannot estimated certainty minimum contribution us pension plan required employee retirement income security act erisa currently zero may make additional contributions plan discretion management item includes longterm obligations agreements various service providers e longterm liabilities include environmental liabilities net related receivables asset retirement obligations indemnifications amounts subsequent 2012 excluded summary unable make reasonably reliable estimate liabilities paid f amount unrecognized tax benefits includes accrued interest penalties unable make reasonably reliable estimate liabilities unrecognized tax benefits settled paid supplemental sales information translate sales subsidiaries operating outside united states using exchange rates effective respective period therefore changes currency rates affect reported sales businesses acquired also affect reported sales believe organic sales defined sales excluding effects changes currency exchange rates acquisitions nongaap financial measure provides useful information investors reflects regional performance activities businesses without effect changes currency rates acquisitions use organic sales one measure monitor evaluate regional performance determine effect changes currency exchange rates translating respective period’s sales using currency exchange rates effect prior year determine effect acquisitions excluding sales current period sales comparable prior period organic sales growth calculated comparing organic sales reported sales prior year attribute sales geographic regions based country destination following reconciliation reported sales organic sales millions following reconciliation reported sales operating segment organic sales millions critical accounting policies estimates prepared consolidated financial statements accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates believe following critical accounting policies could significant effect reported results require subjective complex judgments management retirement benefits pension costs obligations actuarially determined influenced assumptions used estimate amounts including discount rate expected rate return plan assets assumed annual compensation increase rate retirement rate mortality rate employee turnover rate changes assumptions amortization differences assumptions actual experience affect amount pension expense future periods global pension expense 2011 914 million compared 750 million 2010 approximately 77 percent 2011 global pension expense relates us pension plan actuarial assumptions used determine 2011 us pension expense included following discount rate 560 percent compared 620 percent 2010 expected rate return plan assets 800 percent compared 800 percent 2010 assumed longterm compensation increase rate 400 percent compared 430 percent 2010 changed measurement date 2009 june 30 september 30 required us gaap recorded reduction retained earnings 82 million 53 million net tax fourth quarter 2009 related change pension protection act 2006 signed law august 2006 internal revenue service irs issued final guidance respect certain aspects law 2011 pension plan valuation completed based final guidance based valuation minimum contributions required 2011 estimate pension expense approximately 1039 million 2012 increase approximately 125 million 2011 2012 us discount rate decrease 520 percent discount rate set september 30 measurement date determined modeling portfolio bonds match expected cash flow benefit plans assumed us longterm compensation increase rate 400 percent 2012 established rate analyzing elements compensation pensioneligible earnings expected rate return us plan assets remain 800 percent estimating expected return plan assets considered actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plans’ invested assets also considered current expected mix plan assets setting assumption target allocations ranges expected return major categories us plan assets follows financial markets mixed 2011 plan’s debt securities return exceeded expected return range 2011 lower market interest rates resulted higher bond values plan’s equity securities return trailed expected return range 2011 largely due lower us equity returns negative international equity returns financial markets continue experience volatility changed expectation longterm returns asset categories plan assets invested actual return portfolio us plan assets approximated 750 percent annualized 15 years ended september 30 2011 exceeded 850 percent annualized 20 years ended september 30 2011 changes discount rate return plan assets inverse relationship net periodic benefit cost change discount rate also inverse relationship projected benefit obligation change compensation increase rate direct relationship net periodic benefit cost projected benefit obligation following chart illustrates estimated change benefit obligation annual net periodic pension cost assuming change 25 basis points key assumptions us pension plans millions information regarding pension benefits contained note 12 financial statements revenue recognition approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered although majority sales agreements contain standard terms conditions control product solutions business also sells certain products solutions services require separate delivery divide arrangements separate deliverables revenue allocated deliverable based relative selling price element provided delivered elements value customers standalone basis delivery performance undelivered items probable substantially control recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual critical assumption used estimating accrual primary distributor rebate program time period revenue recognized rebate processed time period change 10 percent effect would adjustment accrual approximately 85 million returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable accrual customer returns rebates incentives 1620 million september 30 2011 1359 million september 30 2010 80 million september 30 2011 164 million september 30 2010 included offset accounts receivable litigation claims contingencies record liabilities litigation claims contingencies obligation probable basis reasonably estimate value obligation also record liabilities environmental matters based estimates known environmental remediation exposures liabilities include accruals sites currently operate formerly owned operated thirdparty sites determined potentially responsible party thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount future expenditures environmental remediation obligations present value environmental liability estimates may affected changing determinations constitutes environmental exposure acceptable level cleanup extent remediation procedures change additional contamination identified financial condition potentially responsible parties adversely affected estimate environmental liabilities may change reserve environmental matters 411 million net related receivables 325 million september 30 2011 371 million net related receivables 250 million september 30 2010 recorded liability environmental matters relates almost entirely businesses formerly owned us legacy businesses retained responsibility remediate nature current business likelihood new environmental exposures could result significant charge earnings low result remediation efforts legacy sites limited new environmental matters expect gradually long period time environmental obligations decline however changes remediation procedures existing legacy sites discovery contamination additional sites could result increases environmental obligations principal selfinsurance programs include product liability selfinsured specified dollar amount claims exceeding amount specified limits covered policies issued commercial insurers estimate reserve product liability claims using claims experience periods valued adjustments product liability reserves may required reflect emerging claims experience factors inflationary trends outcome claims reserve product liability claims 201 million september 30 2011 176 million september 30 2010 various lawsuits claims proceedings may instituted asserted us relating conduct business described part item 3 legal proceedings named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago see part item 3 discussion accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant change costs timing could significant effect estimates recorded liabilities consolidated balance sheet totaled 47 million current liabilities 239 million liabilities september 30 2011 79 million current liabilities 227 million liabilities september 30 2010 conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legacy legal environmental asbestos matters businesses arising january 31 2007 maximum exposure capped amount received sale estimate potential future payments could incur indemnifications may approximate 162 million 16 million 64 million accrued current liabilities 101 million 111 million accrued liabilities september 30 2011 2010 respectively significant change costs timing could significant effect estimates information regarding litigation claims contingencies contained note 17 financial statements income taxes operate numerous taxing jurisdictions subject regular examinations us federal state foreign jurisdictions additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments support positions take tax returns taxing authorities may assert interpretations laws facts may challenge cross jurisdictional transactions cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures gross liability unrecognized tax benefits excluding interest penalties recorded liabilities consolidated balance sheet amount 751 million september 30 2011 663 million september 30 2010 amount net unrecognized tax benefits would reduce effective tax rate continuing operations recognized 302 million september 30 2011 95 million september 30 2010 recognize interest penalties related unrecognized tax benefits tax expense total accrued interest penalties 169 million september 30 2011 266 million september 30 2010 believe reasonably possible amount unrecognized tax benefits could reduced 54 million next 12 months result resolution worldwide tax matters lapses statutes limitations recorded valuation allowance portion deferred tax assets related net operating loss tax credit capital loss carryforwards certain temporary differences amount 328 million september 30 2011 267 million september 30 2010 based projected profitability entity respective tax jurisdiction valuation allowance based evaluation uncertainty carryforwards certain temporary differences realized income would increase determine able use carryforwards certain temporary differences currently expected end interim reporting period estimate base effective tax rate expect full fiscal year based recent forecast pretax income permanent book tax differences global tax planning strategies use base rate provide income taxes yeartodate basis excluding effect significant unusual extraordinary items reported net related tax effects record tax effect significant unusual extraordinary items reported net tax effects period occur information regarding income taxes contained note 16 financial statements recent accounting pronouncements see note 1 financial statements regarding recent accounting pronouncements item 7a nannannannannanitem 7a quantitative qualitative disclosures market risk information respect companys market risk contained caption quantitative qualitative disclosures market risk mda pages 1516 hereof item 8item 7a quantitative qualitative disclosures market risk information respect company’s market risk contained caption quantitative qualitative disclosures market risk mda pages 2425 hereof item 8item 7a quantitative qualitative disclosures market risk information respect company’s market risk contained caption quantitative qualitative disclosures market risk mda page 25 hereof item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes interest rates foreign currency exchange rates manage exposure risks combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition existing cash balances cash provided normal operating activities utilize combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2004 2003 commercial paper borrowings outstanding 2004 weighted average commercial paper borrowings 18 million compared 265 million 2003 bank borrowings outstanding september 30 2004 2003 results operations affected changes market interest rates commercial paper borrowings market interest rates would averaged 10 percent higher actual levels either 2004 2003 effect results operations would material outstanding fixed rate longterm debt obligations carrying values 7577 million september 30 2004 7724 million september 30 2003 fair value debt 8371 million september 30 2004 8434 million september 30 2003 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect results operations shareowners’ equity september 2002 entered interest rate swap contract effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 427 percent september 30 2004 hypothetical 10 percent change market interest rates would material overall fair value swap results operations foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies objective minimize exposure risks combination normal operating activities utilization foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition enter contracts hedge certain forecasted intercompany transactions contracts executed creditworthy banks denominated currencies major industrial countries policy enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant financial condition results operations record derivatives balance sheet fair value regardless purpose holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately september 30 2004 2003 outstanding foreign currency forward exchange contracts primarily consisting contracts exchange euro pound sterling swiss franc australian dollar canadian dollar use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would material financial condition results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes interest rates foreign currency exchange rates manage exposure risks combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2005 2004 commercial paper bank borrowings outstanding 2005 commercial paper borrowings 2004 weighted average commercial paper borrowing 18 million changes market interest rates commercial paper borrowings affect results operations market interest rates would averaged 10 percent higher actual levels either 2005 2004 effect results operations would significant october 2005 issued 300 million unsecured commercial paper obligations maturities 1 28 days used proceeds commercial paper partially fund 450 million voluntary contribution us qualified pension plan trust made october 11 2005 obligations mature anticipate issuing additional shortterm commercial paper obligations refinance part borrowings outstanding fixed rate longterm debt obligations carrying values 7482 million september 30 2005 7577 million september 30 2004 fair value debt 8262 million september 30 2005 8371 million september 30 2004 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect results operations shareowners’ equity september 2002 entered interest rate swap contract effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 623 percent september 30 2005 hypothetical 10 percent change market interest rates would significant overall fair value swap results operations foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies objective minimize exposure risks combination normal operating activities foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition enter contracts hedge certain forecasted intercompany transactions expected occur within next four years contracts executed creditworthy banks denominated currencies major industrial countries enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant financial condition results operations record derivatives balance sheet fair value regardless purpose holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately september 30 2005 2004 outstanding foreign currency forward exchange contracts primarily consisting contracts exchange euro swiss franc canadian dollar british pound sterling australian dollar us dollars use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes interest rates foreign currency exchange rates manage exposure risks combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2006 outstanding commercial paper borrowings 2190 million weighted average interest rate 54 percent commercial paper significant bank borrowings outstanding september 30 2005 weighted average interest rate 2006 commercial paper borrowings 48 percent changes market interest rates commercial paper borrowings affect results operations 2006 2005 10 percent increase average market interest rates would significant effect results operations september 30 2006 2190 million unsecured commercial paper obligations outstanding maturities three days obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings outstanding fixed rate longterm debt obligations carrying values 7482 million september 30 2006 7482 million september 30 2005 fair value debt 8042 million september 30 2006 8262 million september 30 2005 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments therefore fluctuations market interest rates would effect results operations shareowners’ equity september 2002 entered interest rate swap contract effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 802 percent september 30 2006 hypothetical 10 percent change market interest rates would significant overall fair value swap results operations foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies objective minimize exposure risks combination normal operating activities foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition enter contracts hedge certain forecasted intercompany transactions expected occur within next three years contracts executed creditworthy banks denominated currencies major industrial countries enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency united states dollars 10 percent adverse change underlying foreign currency exchange rates would significant financial condition results operations record derivatives balance sheet fair value regardless purpose holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately september 30 2006 2005 outstanding foreign currency forward exchange contracts primarily consisting contracts relating euro british pound sterling south korean swiss franc use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations following table indicates total us dollar equivalents net transactional foreign exchange exposure related short long contracts outstanding currency contracts included table offsetting effects actual transactions occurred occur future designated certain contracts related intercompany transactions forecasted occur november 2009 cash flow hedges sfas 133 accounting derivative instruments hedging activities remaining foreign exchange contracts offset actual underlying receivables payables consolidated balance sheet item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes interest rates foreign currency exchange rates manage exposure risks combination normal operating financing activities derivative financial instruments form interest rate swap contracts foreign currency forward exchange contracts interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2007 outstanding commercial paper borrowings 1730 million original maturities three days weighted average interest rate 51 percent september 30 2006 outstanding commercial paper borrowings 2190 million original maturities three days weighted average interest rate 54 percent weighted average interest rate commercial paper borrowings 53 percent 2007 48 percent 2006 obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2007 2006 10 percent increase average market interest rates would significant effect results operations outstanding fixed rate longterm debt obligations carrying values 7539 million september 30 2007 7482 million september 30 2006 fair value debt 7773 million september 30 2007 8037 million september 30 2006 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity september 2002 entered interest rate swap contract effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 780 percent september 30 2007 hypothetical 10 percent change market interest rates would significant overall fair value swap results operations foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies objective minimize exposure risks combination normal operating activities foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition enter contracts hedge certain intercompany transactions forecasted occur within next three years contracts executed creditworthy banks denominated currencies major industrial countries enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency us dollars 10 percent adverse change underlying foreign currency exchange rates would significant financial condition results operations record derivatives balance sheet fair value regardless purpose holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately september 30 2007 2006 outstanding foreign currency forward exchange contracts primarily consisting contracts relating euro british pound sterling swiss franc singapore dollar south korean use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations following table indicates total us dollar equivalents millions net transactional foreign exchange exposure related short long contracts outstanding currency contracts included table offsetting effects actual transactions occurred occur future designated certain contracts related intercompany transactions forecasted occur october 2010 cash flow hedges sfas 133 accounting derivative instruments hedging activities remaining foreign exchange contracts offset actual underlying receivables payables consolidated balance sheet item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 364 million liability 285 million september 30 2009 enter contracts global financial institutions believe creditworthy enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency us dollars 2009 relative strengthening us dollar versus foreign currencies unfavorable impact revenues results operations 2008 relative weakening us dollar favorable impact future changes foreign currency exchange rates difficult predict revenues profitability may adversely affected us dollar strengthens relative 2009 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 15 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2009 2008 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations following table indicates us dollar equivalent notional amounts contractual maturity dates related weighted average contract exchange rates foreign currency forward exchange contracts outstanding september 30 2009 millions except rates contracts included table offsetting effects actual transactions occurred occur future designated certain contracts related thirdparty sales intercompany transactions forecasted occur june 2011 cash flow hedges us gaap remaining foreign exchange contracts offset actual underlying receivables payables consolidated balance sheet interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings outstanding commercial paper borrowings september 30 2009 september 30 2008 outstanding commercial paper borrowings 1000 million remaining maturities six days weighted average interest rate 22 percent weighted average interest rate commercial paper borrowings 06 percent 2009 29 percent 2008 obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2009 2008 100 percent increase average market interest rates would increased interest expense 06 million 79 million respectively use 100 percent hypothetical fluctuation actual commercial paper interest rates fluctuated near amount 2008 2009 outstanding fixed rate longterm debt obligations carrying values 9047 million september 30 2009 9044 million september 30 2008 fair value debt 9920 million september 30 2009 8830 million september 30 2008 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 282 million liability 204 million september 30 2010 enter contracts global financial institutions believe creditworthy enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency us dollars 2010 relative weakening us dollar versus foreign currencies favorable impact revenues results operations 2009 relative strengthening us dollar unfavorable impact future changes foreign currency exchange rates difficult predict revenues profitability may adversely affected us dollar strengthens relative 2010 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 15 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2010 2009 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings outstanding commercial paper bank borrowings september 30 2010 2009 weighted average interest rate commercial paper borrowings 06 percent 2009 due low level variablerate borrowings 2010 2009 interest rate changes would material impact interest expense outstanding fixed rate longterm debt obligations carrying values 9049 million september 30 2010 9047 million september 30 2009 fair value debt 10738 million september 30 2010 9920 million september 30 2009 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 106 million liability 117 million september 30 2013 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2013 2012 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2013 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 15 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2013 2012 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings commercial paper borrowings outstanding september 30 2013 1790 million remaining maturities five days weighted average interest rate 017 percent commercial paper borrowings september 30 2012 1570 million remaining maturities six days weighted average interest rate 027 percent obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2013 2012 100 basis point increase average market interest rates would increased interest expense 21 million 27 million respectively outstanding fixed rate longterm debt obligations carrying value 9051 million september 30 2013 9050 million september 30 2012 fair value debt 10722 million september 30 2013 11879 million september 30 2012 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 216 million liability 62 million september 30 2014 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2014 2013 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2014 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 297 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2014 2013 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings commercial paper borrowings outstanding september 30 2014 3250 million remaining maturities seven days weighted average interest rate 017 percent commercial paper borrowings september 30 2013 1790 million remaining maturities five days weighted average interest rate 017 percent obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2014 2013 100 basis point increase average market interest rates would increased interest expense 28 million 21 million respectively outstanding fixed rate longterm debt obligations carrying value 9056 million september 30 2014 9051 million september 30 2013 fair value debt 11194 million september 30 2014 10722 million september 30 2013 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 546 million liability 185 million september 30 2015 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2015 2014 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2015 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 136 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2015 2014 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2015 september 30 2014 commercial paper borrowings outstanding 3250 million weighted average interest rate 017 percent weighted average maturity period seven days issued anticipate continuing issue additional shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations hypothetical 50 basis point increase average market interest rates related shortterm debt would significant results operations financial condition outstanding fixed rate longterm debt obligations carrying value 15009 million september 30 2015 9004 million september 30 2014 fair value debt 16826 million september 30 2015 11194 million september 30 2014 potential reduction fair value fixedrate debt obligations hypothetical 50 basis point increase market interest rates would significant overall fair value longterm debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity february 2015 entered interest rate swap contracts designated fair value hedges interest rate swaps effectively converted 6000 million aggregate principal amount 2050 notes payable march 2020 notes 2875 notes payable march 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 0763 percent 2020 notes 1173 percent 2025 notes september 30 2015 fair value interest rate swap contracts september 30 2015 net unrealized gain 54 million hypothetical 50 basis point increase average market interest rates related interest rate swaps would significant results operations financial condition item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 102 million liability 174 million september 30 2016 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2016 2015 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2016 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 209 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2016 2015 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 4486 million september 30 2016 weighted average interest rate 057 percent weighted average maturity period 35 days commercial paper borrowings outstanding september 30 2015 issued anticipate continuing issue additional shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations hypothetical 50 basis point increase average market interest rates related shortterm debt would significant results operations financial condition outstanding fixed rate longterm debt obligations carrying value 15163 million september 30 2016 15009 million september 30 2015 fair value debt 17805 million september 30 2016 16826 million september 30 2015 potential reduction fair value fixedrate debt obligations hypothetical 50 basis point increase market interest rates would significant overall fair value longterm debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity february 2015 entered interest rate swap contracts designated fair value hedges interest rate swaps effectively converted 6000 million aggregate principal amount 2050 percent notes payable march 2020 notes 2875 percent notes payable march 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 1281 percent 2020 notes 1691 percent 2025 notes september 30 2016 fair value interest rate swap contracts september 30 2016 net unrealized gain 195 million hypothetical 50 basis point increase average market interest rates related interest rate swaps would significant results operations financial condition item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 135 million liability 364 million september 30 2017 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2017 2016 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2017 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 214 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2017 2016 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 3500 million september 30 2017 weighted average interest rate 126 percent weighted average maturity period 10 days commercial paper borrowings outstanding 4486 million september 30 2016 weighted average interest rate 057 percent weighted average maturity period 35 days issued anticipate continuing issue additional shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations hypothetical 50 basis point increase average market interest rates related shortterm debt would significant results operations financial condition outstanding fixed rate longterm debt obligations carrying value 12434 million september 30 2017 15163 million september 30 2016 fair value debt 14526 million september 30 2017 17805 million september 30 2016 potential reduction fair value fixedrate debt obligations hypothetical 50 basis point increase market interest rates would significant overall fair value longterm debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity february 2015 entered interest rate swap contracts designated fair value hedges interest rate swaps effectively converted 6000 million aggregate principal amount 2050 percent notes payable march 2020 notes 2875 percent notes payable march 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 1755 percent 2020 notes 2165 percent 2025 notes september 30 2017 fair value interest rate swap contracts september 30 2017 net unrealized loss 46 million hypothetical 50 basis point increase average market interest rates related interest rate swaps would significant results operations financial condition item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 220 million liability 72 million september 30 2018 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2018 relative weakening us dollar foreign currencies favorable impact sales results operations 2017 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2018 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 210 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2018 2017 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 5500 million september 30 2018 weighted average interest rate 227 percent weighted average maturity period 26 days commercial paper borrowings outstanding 3500 million september 30 2017 weighted average interest rate 126 percent weighted average maturity period 10 days issued anticipate continuing issue additional shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations hypothetical 50 basis point increase average market interest rates related shortterm debt would significant results operations financial condition outstanding fixed rate longterm debt obligations carrying value 12252 million september 30 2018 12434 million september 30 2017 fair value debt 13913 million september 30 2018 14526 million september 30 2017 potential reduction fair value fixedrate debt obligations hypothetical 50 basis point increase market interest rates would significant results operations financial condition currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity february 2015 entered interest rate swap contracts designated fair value hedges interest rate swaps effectively converted 6000 million aggregate principal amount 2050 percent notes payable march 2020 notes 2875 percent notes payable march 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 2759 percent 2020 notes 3169 percent 2025 notes september 30 2018 fair value interest rate swap contracts september 30 2018 net unrealized loss 240 million hypothetical 50 basis point increase average market interest rates related interest rate swaps would significant results operations financial condition item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 281 million liability 56 million september 30 2019 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2019 relative strengthening us dollar foreign currencies unfavorable impact sales results operations 2018 relative weakening us dollar foreign currencies favorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2019 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 23 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2019 2018 2017 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2019 commercial paper borrowings 5500 million september 30 2018 weighted average interest rate 227 percent weighted average maturity period 26 days issued anticipate continuing issue additional shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations outstanding fixed rate longterm current portion longterm debt obligations carrying value 22569 million september 30 2019 12252 million september 30 2018 fair value debt approximately 26809 million september 30 2019 13913 million september 30 2018 potential increase fair value fixedrate debt obligations hypothetical 50 basis point decrease market interest rates would significant results operations financial condition currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity february 2015 entered interest rate swap contracts designated fair value hedges interest rate swaps effectively converted 6000 million aggregate principal amount 2050 percent notes payable march 2020 “2020 notes” 2875 percent notes payable march 2025 “2025 notes” floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 2576 percent 2020 notes 2986 percent 2025 notes september 30 2019 fair value interest rate swap contracts september 30 2019 net unrealized gain 70 million hypothetical 50 basis point increase average market interest rates related interest rate swaps would significant results operations financial condition item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities well derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 140 million liability 275 million september 30 2020 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2020 2019 relative strengthening us dollar foreign currencies unfavorable impact sales results operations future changes foreign currency exchange rates difficult predict sales profitability may adversely affected us dollar strengthens relative 2020 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 101 million record derivatives balance sheet fair value regardless purpose holding use foreign currency forward exchange contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately impact earnings due ineffective hedges 2020 2019 2018 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated hedged exposures related contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt september 30 2020 primarily consisted 235 million interestbearing loans schlumberger sensia due september 30 2021 potential increase fair value fixedrate debt obligations hypothetical 50 basis point decrease market interest rates would significant results operations financial condition commercial paper borrowings outstanding september 30 2020 2019 issued anticipate continuing issue shortterm commercial paper obligations needed changes market interest rates commercial paper borrowings affect results operations outstanding fixed rate longterm current portion longterm debt obligations carrying value 19747 million september 30 2020 22569 million september 30 2019 fair value debt approximately 24977 million september 30 2020 26809 million september 30 2019 potential increase fair value fixedrate debt obligations hypothetical 50 basis point decrease market interest rates would significant results operations financial condition currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 124 million liability 230 million september 30 2012 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes 2012 relative strengthening us dollar foreign currencies unfavorable impact revenues results operations 2011 relative weakening us dollar favorable impact future changes foreign currency exchange rates difficult predict revenues profitability may adversely affected us dollar strengthens relative 2012 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 10 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2012 2011 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings commercial paper borrowings outstanding september 30 2012 1570 million remaining maturities 6 days weighted average interest rate 027 percent outstanding commercial paper bank borrowings september 30 2011 obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2012 100 basis point increase average market interest rates would increased interest expense 27 million due low level variablerate borrowings 2011 interest rate changes would material impact interest expense outstanding fixed rate longterm debt obligations carrying value 9050 million september 30 2012 2011 fair value debt 11879 million september 30 2012 11254 million september 30 2011 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries intercompany loans foreign subsidiaries transactions denominated foreign currencies objective minimize exposure risks combination normal operating activities foreign currency forward exchange contracts manage exposure transactions denominated currencies applicable functional currency addition enter contracts hedge certain thirdparty sales intercompany transactions forecasted occur within next two years contracts denominated currencies major industrial countries fair value foreign currency forward exchange contracts liability 246 million asset 112 million september 30 2008 enter contracts global financial institutions believe creditworthy enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency us dollars 2008 relative weakening us dollar versus foreign currencies favorable impact revenues results operations future changes foreign currency exchange rates difficult predict revenues profitability may adversely affected us dollar strengthens certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting forward foreign exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 10 million record derivatives balance sheet fair value regardless purpose holding derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2008 2007 september 30 2008 2007 outstanding foreign currency forward exchange contracts primarily consisting contracts relating swiss franc euro british pound sterling canadian dollar singapore dollar use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations following table indicates total us dollar equivalents millions net transactional foreign exchange exposure related short long contracts outstanding currency contracts included table offsetting effects actual transactions occurred occur future designated certain contracts related thirdparty sales intercompany transactions forecasted occur october 2010 cash flow hedges sfas 133 accounting derivative instruments hedging activities remaining foreign exchange contracts offset actual underlying receivables payables consolidated balance sheet interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings september 30 2008 outstanding commercial paper borrowings 1000 million remaining maturities six days weighted average interest rate 225 percent september 30 2007 outstanding commercial paper borrowings 1730 million remaining maturities three days weighted average interest rate 51 percent weighted average interest rate commercial paper borrowings 29 percent 2008 53 percent 2007 obligations mature issued anticipate continuing issue additional shortterm commercial paper obligations refinance part borrowings changes market interest rates commercial paper borrowings affect results operations 2008 2007 10 percent increase average interest rates would significant effect results operations 2008 100 percent increase average market interest rates would increased interest expense 79 million use 100 percent hypothetical fluctuation actual commercial paper interest rates fluctuated near amount 2008 outstanding fixed rate longterm debt obligations carrying values 9044 million september 30 2008 7539 million september 30 2007 fair value debt 8830 million september 30 2008 7773 million september 30 2007 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8item 7a quantitative qualitative disclosures market risk exposed market risk normal course business changes foreign currency exchange rates interest rates manage exposure risks combination normal operating financing activities derivative financial instruments form foreign currency forward exchange contracts sometimes use interest rate swap contracts manage balance fixed floating rate debt foreign currency risk exposed foreign currency risks arise normal business operations risks include translation local currency balances foreign subsidiaries transaction gains losses associated intercompany loans foreign subsidiaries transactions denominated currencies location’s functional currency objective minimize exposure risks combination normal operating activities use foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value foreign currency forward exchange contracts asset 296 million liability 77 million september 30 2011 enter contracts major financial institutions believe creditworthy enter derivative financial instruments speculative purposes hedge exposure translation reported results foreign subsidiaries local currency us dollars 2011 2010 relative weakening us dollar versus foreign currencies favorable impact revenues results operations future changes foreign currency exchange rates difficult predict revenues profitability may adversely affected us dollar strengthens relative 2011 levels certain locations assets liabilities denominated currencies functional currencies enter foreign currency forward exchange contracts offset transaction gains losses associated assets liabilities assets liabilities without offsetting foreign currency forward exchange contracts 10 percent adverse change underlying foreign currency exchange rates would reduce pretax income approximately 15 million record derivatives balance sheet fair value regardless purpose holding use contracts allows us manage transactional exposure exchange rate fluctuations gains losses incurred foreign currency forward exchange contracts offset whole part losses gains underlying foreign currency exposure derivatives designated hedges accounting purposes adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive loss hedged item recognized earnings recognize ineffective portion derivative’s change fair value earnings immediately ineffective portion significant 2011 2010 hypothetical 10 percent adverse change underlying foreign currency exchange rates associated contracts would significant financial condition results operations interest rate risk addition existing cash balances cash provided normal operating activities use combination shortterm longterm debt finance operations exposed interest rate risk certain debt obligations shortterm debt obligations relate commercial paper borrowings bank borrowings outstanding commercial paper bank borrowings september 30 2011 2010 october 2011 borrowed 275 million commercial paper order partially fund 300 million discretionary contribution us qualified pension trust due low level variablerate borrowings 2011 2010 interest rate changes would material impact interest expense outstanding fixed rate longterm debt obligations carrying values 9050 million september 30 2011 9049 million september 30 2011 fair value debt 11254 million september 30 2011 10738 million september 30 2010 potential reduction fair value fixedrate debt obligations hypothetical 10 percent increase market interest rates would material overall fair value debt currently plans repurchase outstanding fixedrate instruments maturity therefore fluctuations market interest rates would effect results operations shareowners’ equity item 8 item 8 financial statements supplementary data consolidated balance sheet millions see notes financial statements consolidated balance sheet millions see notes financial statements statement consolidated income millions except per share amounts see notes financial statements statement consolidated cash flows millions see notes financial statements statement consolidated shareowners equity millions except per share amounts see notes financial statements notes financial statements 1 financial statement presentation fiscal 1996 company entered definitive agreements sell graphic systems business affiliate stonington partners inc merge ad business subsidiary boeing graphic systems business sold october 1996 approximately 600 million merger companys ad business boeing completed december 1996 graphic systems business ad business reflected financial statements discontinued operations periods presented see note 3 ad business merged subsidiary boeing taxfree transaction valued approximately 32 billion including assumption boeing approximately 23 billion liabilities principally debt boeing issued approximately 860 million stock exchange companys shareowners interest ad business immediately prior merger company transferred automation avionics communications semiconductor systems automotive businesses new company new rockwell retained rockwell name reflected financial statements continuing operations rockwell periods presented shares new rockwell distributed companys shareowners effective date transaction oneforone share basis financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect amounts reported financial statements actual results could differ estimates significant intercompany accounts transactions eliminated certain prior year amounts reclassified conform current presentation except indicated amounts reflected financial statements disclosed notes financial statements relate companys continuing operations 2 accounting policies inventories stated lower cost using lifo fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided based estimated useful lives generally using accelerated straightline methods significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amount charged expense intangible assets goodwill represents excess cost purchased businesses fair value net assets date acquisition amortized straightline method periods ranging 10 40 years trademarks patents product technology intangibles amortized straightline basis estimated useful lives ranging 5 40 years management reviews periodically realizability goodwill intangible assets based evaluation remaining useful lives cash flows profitability projections determined impairment september 30 1996 environmental matters company records accruals environmental issues accounting period responsibility established cost reasonably estimated environmental sites one potentially responsible party identified company records liability allocable share costs related involvement site well allocable share costs related insolvent parties unidentified shares environmental sites company responsible party company records liability total estimated costs remediation consideration recovery insurers third parties recovery third party determined probable company records receivable estimated recovery earnings per share earnings per common share based weighted average number common shares outstanding year computation include negligible dilutive effect stock options new accounting standards company adopted statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed adoption standard material effect financial statements october 1995 financial accounting standards board issued sfas 123 accounting stock based compensation effective fiscal year 1997 sfas 123 companies elect required recognize compensation expense stockbased awards using fair value methodology company expects implement fiscal year 1997 disclosure provisions permitted sfas 123 october 1996 american institute certified public accountants issued statement position 961 environmental remediation liabilities effective fiscal year 1998 company expect adoption statement material effect financial statements 3 discontinued operations discontinued operations includes graphic systems business ad business see note 1 assets liabilities ad business classified balance sheet net liabilities ad business consist following millions pursuant merger agreement addition ad business boeing acquired certain rockwell corporate property united states pension plan assets assumed pension obligations related certain former employees continuing businesses see note 15 boeing also assumed 2165 million short longterm domestic borrowings company see notes 8 10 accordingly amounts presented balance sheet net liabilities ad business net liabilities ad business date transaction recorded increase additional paidin capital fiscal year 1997 assets liabilities graphic systems business classified balance sheet net assets graphic systems consist following millions net income loss operations ad business graphic systems business reflected statement income discontinued operations summarized results discontinued operations follows millions net loss graphic systems year ended september 30 1996 includes net income operations 3 million offset provision loss sale 10 million graphic systems business ad business utilized certain services provided companys businesses centralized basis including payroll administration data processing telecommunications services businesses also allocated costs centrally administered programs including employee medical claims property casualty insurance costs charged businesses based actual usage services programs 107 million 150 million 180 million 1996 1995 1994 respectively businesses also received services provided company including financial legal tax corporate communications human resources costs services allowable overhead costs government contracts accordingly included results operations ad business costs allocated ad business using variety factors including sales assets inventory payroll 35 million 32 million 40 million 1996 1995 1994 respectively management believes methods allocating costs businesses reasonable interest expense 159 million 142 million 75 million 1996 1995 1994 respectively allocated ad business based actual interest expense associated borrowings assumed boeing 4 restructuring 1996 company recorded restructuring charges 122 million tax 77 million tax 35 cents per share restructuring charges relate decision exit nonstrategic product lines involving certain truck communications intelligent transportation products well costs associated staff reductions several businesses provision includes asset impairments 71 million severance employee costs 35 million contractual commitments costs 16 million september 30 1996 company expended 11 million related actions expected completed end 1997 5 acquisition businesses september 1996 company acquired brooktree designer manufacturer digital mixedsignal integrated circuits computer graphics multimedia imaging communications applications 278 million acquisition accounted purchase september 30 1996 price allocation included writeoff 121 million purchased research development company also acquired several businesses 1996 net cost 68 million pro forma information presented results operations brooktree acquisitions material relation companys income continuing operations january 1995 company completed acquisition reliance major manufacturer industrial products telecommunications equipment 1066 million net proceeds sale reliances telecommunications business acquisition reliance accounted purchase december 31 1994 results operations exclusive divested telecommunications business included statement income since date following unaudited pro forma information prepared assuming reliance acquired beginning years presented pro forma information presented informational purposes necessarily indicative would occurred acquisition made dates pro forma information intended projection future results 6 inventories summarized follows millions 7 intangible assets intangible assets summarized follows millions 8 shortterm debt shortterm debt consisted following millions shortterm debt 565 million 539 million september 30 1996 1995 respectively included net liabilities ad business boeing assumed 565 million shortterm borrowings connection reorganization see note 1 weighted average interest rates remaining shortterm borrowings september 30 1996 company 15 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 505 million september 30 1996 consisted arrangements significant commitment fees 9 current liabilities current liabilities summarized follows millions 10 longterm debt longterm debt consisted following millions longterm debt obligations 1597 million september 30 1996 1995 included net liabilities ad business boeing assumed responsibility obligations connection reorganization see note 1 september 30 1996 aggregate maturities longterm debt five years ending september 30 2001 follows millions 1997 17 1998 4 1999 3 2000 3 2001 1 11 financial instruments companys financial instruments include cash short longterm debt foreign currency forward exchange contracts september 30 1996 carrying values companys financial instruments approximated fair values based current market prices rates policy company enter derivative financial instruments speculative purposes company enter foreign currency forward exchange contracts protect adverse currency rate fluctuations foreign currency commitments entered ordinary course business commitments generally terms less one year foreign currency forward exchange contracts executed creditworthy banks denominated currencies major industrial countries notional amount companys outstanding foreign currency forward exchange contracts aggregated 919 million 681 million september 30 1996 1995 respectively company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts 12 capital stock september 30 1996 authorized stock company consisted 600 million shares common stock 200 million shares class common stock 1 par value 12 million shares preferred stock without par value class common stock substantially identical common stock except share class common stock entitled holder ten votes matters holders common stock entitled vote transferable except certain limited circumstances convertible time common stock shareforshare basis september 30 1996 26 million shares common stock reserved various employee incentive plans 1996 117821 shares series b preferred stock converted common stock remaining 9892 shares redeemed company prices 10000 per share series stock 3600 per share series b stock changes outstanding common shares summarized follows millions outstanding common stock september 30 1996 consisted 1906 million shares common stock 279 million shares class common stock result reorganization company authorized issue 1000000000 shares common stock 100000000 shares class common stock 1 par value 25000000 shares preferred stock without par value shareowners company received one share new rockwell common stock class common stock share held rockwell common stock class common stock respectively connection reorganization terms new rockwell common stock class common stock substantially rockwell common stock class common stock associated share new rockwell common stock class common stock preferred share purchase right pursuant holder share common stock class common stock may certain takeoverrelated circumstances become entitled purchase company 1100 share series junior participating preferred stock price 250 terms conditions rights set forth rights agreement dated november 30 1996 company chasemellon shareholder services llc rights agent new rockwell class common stock automatically converted new rockwell common stock february 23 1997 13 employee stock options purchase common stock company granted various incentive plans directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash companys common stock combination thereof options vesting periods range 1 3 years information relative employee stock options follows shares thousands options outstanding exercisable september 30 1996 included 175890 related class common stock shares available future grant payment various incentive plans 147 million september 30 1996 outstanding options expire various dates december 2 1997 july 10 2006 none incentive plans presently permits options granted july 10 2006 connection reorganization stock options rockwell converted stock options new rockwell number options exercise price option adjusted preserve aggregate intrinsic value options 14 retirement medical plans company retirement medical plans cover united states employees provide payment medical costs eligible employees dependents upon retirement medical expense continuing operations consisted following millions companys retirement medical obligation september 30 1996 1995 consisted following millions decreasing 55 2015 retirement medical liabilities related current former employees ad business 1453 million 1516 million included net liabilities ad business september 30 1996 1995 respectively boeing assumed liabilities connection reorganization changing health care cost trend rates one percentage point would change accumulated retirement medical obligation september 30 1996 approximately 79 million would change retirement medical expense approximately 8 million 15 retirement pension plans company pension plans cover employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service net pension expense continuing operations consisted following millions pension plan assets primarily equity securities united states government obligations fixed income investments whose values subject fluctuations securities market actual return plan assets allocated continuing operations 627 million 511 million 52 million 1996 1995 1994 respectively differences actual returns related assumed returns plan assets deferred considered determination net pension income expense future periods pension plan obligations attributable united states active employees continuing businesses january 1 1996 proportionate share pension plan assets transferred prior reorganization companys united states pension plan newlyestablished new rockwell pension plan pension plan assets obligations related employees ad business retirees companys united states pension plan prior january 1 1996 classified net liabilities ad business remainder companys united states pension plan retained ad business pursuant merger agreement boeing following table reconciles funded status assets liabilities attributable new rockwell pension plan companys overfunded pension plans amounts recorded balance sheet millions company also sponsors certain defined contribution savings plans eligible employees expense related plans 44 million 35 million 34 million 1996 1995 1994 respectively 16 income taxes components provision income taxes follows millions july 1996 company reached agreement internal revenue service concerning research experimentation tax credit refund claim years 1981 though 1991 settlement pursuant company receive approximately 65 million subject approval joint congressional committee taxation net deferred income tax benefits included balance sheet september 30 1996 1995 consist tax effects temporary differences related following millions net deferred income taxes included liabilities balance sheet september 30 1996 1995 consist tax effects temporary differences related following millions management believes likely current longterm tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets included historical operating results company 15 billion united states income continuing operations income taxes past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance represents amount tax benefits related net operating loss capital loss foreign tax credit carryforwards yet recognized carryforward period net operating losses expires 1997 2004 carryforward period foreign tax credits expires 1997 2001 tax benefit capital loss carryforward resulting sale reliances telecommunications business recorded 1996 substantially offset valuation allowance consolidated effective tax rate different united states statutory rate reasons set forth income tax provisions calculated based upon following components income continuing operations income taxes millions provision made united states state additional foreign income taxes related approximately 532 million undistributed earnings foreign subsidiaries intended permanently reinvested companys united states income tax returns years 1989 1991 currently examination pursuant merger agreement boeing company retained tax liabilities right tax refunds related operations ad business periods prior merger management believes adequate provision income taxes made years 1996 17 supplementary financial statement information minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 235 million september 30 1996 payable follows millions 1997 65 1998 51 1999 38 2000 23 2001 15 2001 43 18 contingent liabilities claims asserted company utilizing intellectual property rights others certain companys products resolution matters may result negotiation license agreement settlement legal resolution claims company accrues estimated cost disposition matters management believes resolution matters material adverse effect companys financial statements various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability safety health environmental employment matters company agreed indemnify boeing ad business certain government contract environmental matters related operations ad business periods prior merger although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys financial statements 19 business segment information companys business segments engaged research development manufacture diversified products follows electronics automationindustrial automation equipment systems including control logic sensors humanmachine interface devices motors power mechanical devices software products avionics communicationsavionics products systems related communications technologies primarily used commercial military aircraft defense electronic systems command control communications intelligence semiconductor systemssystemlevel semiconductor chipset solutions personal communication electronics markets including chipsets facsimile personal computer data modems wireless communications products global positioning systems packet data cordless cellular chipsets automated call distribution equipment automotivecomponents systems heavy mediumduty trucks buses trailers heavyduty offhighway vehicles heavy vehicle systems components systems light trucks passenger cars light vehicle systems divested businesses include sales operating results gains losses disposition significant businesses product lines divested businesses include semiconductor systems local area networking product line 1995 automotive plastics business 1994 following tables summarize segment information millions sales earnings business segment restructuring charge relates business segments follows millions automation 11 avionics communications 60 automotive 36 general corporatenet 15 purchased research development relates acquisition brooktree semiconductor systems business asset information business segment automations assets include 1184 million 1234 million intangible assets goodwill related acquisition reliance september 30 1996 1995 respectively automations provision depreciation amortization includes 36 million 27 million years ended september 30 1996 1995 respectively related amortization reliance intangible assets goodwill corporate identifiable assets include cash net deferred income tax assets sales earnings assets geographic area united states sales include export sales customers international subsidiaries 1947 million 1996 1513 million 1995 1152 million 1994 1996 export sales following geographic areas canada 426 million europe 557 million asiapacific 870 million latin america 94 million 20 quarterly financial information unaudited fourth quarter full year income continuing operations includes 121 million 56 cents per share writeoff purchased research development connection acquisition brooktree independent auditors report directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 1996 1995 related consolidated statements income shareowners equity cash flows three years period ended september 30 1996 audit also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 1996 1995 results operations cash flows three years period ended september 30 1996 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp pittsburgh pennsylvania november 6 1996 december 6 1996 sale aerospace defense business boeing company described note 1 see also table caption continuing operations sales earnings business segment mda pages 1213 hereof item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes financial statements consolidated balance sheet millions see notes financial statements consolidated statement income millions except per share amounts see notes financial statements consolidated statement cash flows millions see notes financial statements consolidated statement shareowners equity millions except per share amounts see notes financial statements notes financial statements 1 financial statement presentation rockwell international corporation company rockwell engaged research development manufacture electronics products global leadership positions automation avionics communications semiconductor systems markets company incorporated 1996 successor former rockwell international corporation result taxfree reorganization completed december 6 1996 reorganization pursuant reorganization company merged former aerospace defense businesses ad business subsidiary boeing company boeing transaction valued approximately 32 billion including assumption boeing 23 billion liabilities rockwell principally debt issuance 09 billion boeing stock rockwell shareowners exchange interest ad business september 30 1997 company completed spinoff automotive component systems businesses independent separately traded publicly held company distributing issued outstanding shares meritor automotive inc meritor companys shareowners basis one share meritor common stock every three shares company common stock owned connection spinoff meritor made special payment 445 million company except indicated amounts reflected financial statements disclosed notes financial statements relate companys continuing operations prior year amounts reclassified conform current presentation see note 3 discussion companys discontinued operations 2 accounting policies consolidation consolidated financial statements include accounts company majorityowned subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect amounts reported financial statements actual results could differ estimates inventories stated lower cost using lifo fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided based estimated useful lives generally using accelerated straightline methods significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amount charged expense purchased intangibles goodwill intangible assets generally result business acquisitions company accounts business acquisitions assigning purchase price tangible intangible assets liabilities including research development projects yet reached technological feasibility alternative future use purchased research development assets acquired liabilities assumed recorded fair values appraised value purchased research development immediately charged expense excess purchase price amounts assigned recorded goodwill amortized straightline method periods generally ranging 10 40 years trademarks patents product technology intangibles amortized straightline basis estimated useful lives ranging 5 40 years impairment longlived assets longlived assets reviewed impairment assessing net realizable values based undiscounted cash flows remaining useful lives impairment indicated carrying amount asset reduced fair value revenue recognition sales generally recorded products shipped services rendered except sales certain contracts requiring performance several periods accounted percentageofcompletion method accounting environmental matters company records accruals environmental matters accounting period responsibility established cost reasonably estimated environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related insolvent parties unidentified shares environmental sites company responsible party company records liability total estimated costs remediation consideration recovery insurers third parties recovery third party determined probable company records receivable estimated recovery earnings per share earnings per share based weighted average number common shares outstanding year computation include negligible dilutive effect stock options new accounting standards october 1996 american institute certified public accountants issued statement position 961 environmental remediation liabilities effective 1998 company expect adoption standard material effect financial statements february 1997 financial accounting standards board issued statement financial accounting standards sfas 128 earnings per share effective 1998 adoption standard material effect financial statements 3 discontinued operations financial statements restated classify companys automotive business includes meritor discontinued product line discontinued operation together ad business graphic systems business previously reported discontinued operations periods presented assets liabilities businesses september 30 1996 consisted following millions net assets meritor september 30 1997 spinoff date 151 million including 445 million debt incurred make special payment rockwell recorded decrease equity pursuant reorganization addition ad business boeing acquired certain rockwell corporate property pension plan assets liabilities relating former employees nonad businesses boeing also assumed 22 billion short longterm domestic borrowings company accordingly amounts presented balance sheet net liabilities ad business september 30 1996 connection reorganization shares common stock held treasury canceled net liabilities ad business date reorganization approximately 12 billion recorded increase additional paidin capital october 1996 graphic systems business sold affiliate stonington partners inc approximately 600 million summarized results discontinued operations follows millions earnings ad business first two months 1997 entirely offset expenses related transaction 1997 1996 income automotive business includes restructuring charges 21 million 15 million aftertax 46 million 30 million aftertax respectively income automotive business 1997 also includes charge 57 million 48 million aftertax transaction separationrelated costs incurred connection spinoff meritor 1996 net loss graphic systems includes net income operations 3 million offset provision loss sale 10 million automotive ad graphic systems businesses utilized certain services provided companys businesses centralized basis including payroll administration data processing telecommunications services businesses also allocated costs centrally administered programs including employee medical claims property casualty insurance costs charged businesses based actual usage services programs 58 million 132 million 177 million 1997 1996 1995 respectively businesses also received services provided company including financial legal tax corporate communications human resources ad business costs services allowable overhead costs government contracts accordingly included results operations business costs allocated ad business using variety factors including sales assets inventory payroll 3 million 35 million 32 million 1997 1996 1995 respectively management believes methods allocating costs businesses reasonable interest expense 40 million 169 million 155 million 1997 1996 1995 respectively allocated automotive ad businesses based actual interest expense associated borrowings assumed meritor boeing respectively 4 restructuring 1996 company recorded restructuring charges 76 million 47 million aftertax 22 cents per share restructuring charges relate decision exit nonstrategic product lines continuing operations well costs associated staff reductions automation avionics communications businesses provision includes asset impairments 51 million severance employee costs 9 million contractual commitments costs 16 million actions substantially completed end 1997 5 acquisitions businesses company acquired several businesses 1997 net cost 115 million including 53 million 42 million aftertax related purchased research development september 1996 company acquired brooktree corporation brooktree designer manufacturer digital mixedsignal integrated circuits computer graphics multimedia imaging communications applications 278 million including 121 million purchased research development pro forma information acquisitions 1997 1996 presented results operations businesses material relation companys income continuing operations periods january 1995 company completed acquisition reliance electric company reliance major manufacturer industrial products telecommunications equipment 1066 million net proceeds sale reliances telecommunications business reliance acquired beginning 1995 pro forma revenues net income earnings per share year would 6314 million 742 million 342 respectively acquisitions accounted purchases accordingly results operations businesses included statement income since dates acquisition 6 inventories summarized follows millions 7 intangible assets intangible assets summarized follows millions 8 shortterm debt shortterm debt consisted following millions weighted average interest rates shortterm borrowings september 30 1997 company 2 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 315 million september 30 1997 consisted arrangements significant commitment fees 9 current liabilities current liabilities summarized follows millions 10 longterm debt longterm debt consisted following millions 11 financial instruments companys financial instruments include cash equity securities shortand longterm debt foreign currency forward exchange contracts september 30 1997 carrying values companys financial instruments approximated fair values based current market prices rates policy company enter derivative financial instruments speculative purposes company enter foreign currency forward exchange contracts protect adverse currency rate fluctuations foreign currency commitments entered ordinary course business commitments generally terms less one year gains losses relating foreign currency forward exchange contracts deferred included measurement foreign currency transaction subject hedge amount deferred gain loss contracts immaterial foreign currency forward exchange contracts executed creditworthy banks denominated currencies major industrial countries notional amount companys outstanding foreign currency forward exchange contracts aggregated 239 million 919 million september 30 1997 1996 respectively contracts outstanding september 30 1996 included contracts relating companys discontinued operations company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts 12 capital stock september 30 1997 authorized stock company consisted one billion shares common stock 1 par value 25 million shares preferred stock without par value september 30 1997 25 million shares common stock reserved various employee incentive plans february 23 1997 outstanding shares class common stock converted common stock changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group acquires offers acquire 20 common stock although company authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquiror generally exercisable 500 worth common stock common stock acquiror 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right 13 stock options purchase common stock company granted various incentive plans directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash companys common stock combination thereof 1995 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans 13 million september 30 1997 stock options expire ten years date granted vesting periods range one three years none incentive plans presently permits options granted september 30 2005 information relative stock options follows shares thousands connection divestiture ad business spinoff meritor number options outstanding exercise prices options adjusted order preserve value options existed date divestiture additionally connection meritor spinoff rockwell options granted meritor employees 1997 converted meritor options following table summarizes information stock options outstanding september 30 1997 shares thousands remaining life years 1997 company adopted disclosureonly provisions sfas 123 accounting stockbased compensation accordingly compensation expense recorded relative companys stockbased compensation plans company accounted stockbased plans using fair value method provided sfas 123 companys net income earnings per share would reduced following pro forma amounts millions except per share amounts pro forma effect net income 1997 may indicative pro forma effect net income future years weighted average fair value options granted 1538 1283 per share 1997 1996 respectively fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions 14 retirement medical plans company retirement medical plans cover united states employees provide payment medical costs eligible employees dependents upon retirement medical expense continuing operations consisted following millions companys retirement medical obligation september 30 1997 1996 consisted following millions decreasing 55 2015 increasing health care cost trend rates one percentage point would increase accumulated retirement medical obligation september 30 1997 approximately 57 million would increase retirement medical expense approximately 6 million 15 retirement pension plans company pension plans cover employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service companys policy fund pension obligations conformity funding requirements applicable laws governmental regulations net pension expense continuing operations consisted following millions pension plan assets primarily equity securities united states government obligations fixed income investments whose values subject fluctuations securities market actual return plan assets allocated continuing operations 373 million 514 million 421 million 1997 1996 1995 respectively differences actual returns related assumed returns plan assets deferred considered determination net pension income expense future periods prior reorganization pension plan obligations attributable united states active employees continuing businesses automotive graphic systems businesses january 1 1996 proportionate share pension plan assets transferred companys united states pension plan newlyestablished pension plan pension plan assets obligations related employees ad business retirees companys united states pension plan prior january 1 1996 transferred part ad business pursuant merger agreement boeing following table reconciles funded status companys overfunded pension plans amounts included assets balance sheet millions company also sponsors certain defined contribution savings plans eligible employees expense related plans 50 million 47 million 35 million 1997 1996 1995 respectively 16 income taxes components provision income taxes follows millions 1996 company reached agreement internal revenue service research experimentation tax credit refund claim related certain prior years recorded 65 million reduction provision income taxes net deferred income tax benefits included balance sheet september 30 1997 1996 consist tax effects temporary differences related following millions net deferred income taxes included liabilities balance sheet september 30 1997 1996 consist tax effects temporary differences related following millions management believes likely current longterm tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets included historical operating results company 17 billion united states income continuing operations income taxes past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance represents amount tax benefits related net operating loss capital loss foreign tax credit carryforwards yet recognized carryforward period net operating capital losses expires 1998 2004 carryforward period foreign tax credits expires 1998 2002 consolidated effective tax rate different united states statutory rate reasons set forth income tax provisions calculated based upon following components income continuing operations income taxes millions provision made united states state additional foreign income taxes related approximately 130 million undistributed earnings foreign subsidiaries intended permanently reinvested audit companys united states income tax returns years 1989 1991 completed companys united states income tax returns years 1992 1994 currently examination connection divestiture ad business meritor spinoff company retained tax liabilities right tax refunds related united states certain nonus operations ad automotive businesses periods prior respective divestiture dates management believes adequate provision income taxes made years 1997 17 supplementary financial statement information income taxes paid interest payments related discontinued operations millions 15 56 1997 7 175 1996 6 146 1995 respectively included determination cash flows discontinued operations minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 236 million september 30 1997 payable follows millions 1998 62 1999 50 2000 34 2001 24 2002 18 2002 48 18 contingent liabilities claims asserted company utilizing intellectual property rights others certain companys products resolution matters may result negotiation license agreement settlement resolution claims arbitration litigation company accrues estimated cost ultimate resolution matters management believes resolution matters material adverse effect companys financial statements various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability safety health environmental employment matters pursuant reorganization rockwell agreed indemnify boeing certain government contract environmental matters related operations ad business periods prior merger connection spinoff meritor agreed indemnify company substantially contingent liabilities related automotive business although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys financial statements 19 business segment information companys business segments engaged research development manufacture electronics products follows automationindustrial automation equipment systems including control logic sensors humanmachine interface devices motors power mechanical devices software products avionics communicationsavionics products systems related communications technologies primarily used commercial military aircraft defense electronic systems command control communications intelligence semiconductor systemssystemlevel semiconductor chipset solutions personal communications electronics markets personal computers personal imaging devices wireless communications products network access devices digital information entertainment products well electronic commerce products call center systems personalized electronic commerce applications divested business semiconductor systems local area networking product line following tables summarize segment information millions sales earnings business segment 1997 purchased research development 30 million 23 million relates acquisitions semiconductor systems business remaining interest automation software business respectively 1996 purchased research development relates acquisition brooktree semiconductor systems business restructuring charge relates business segments follows millions automation 11 avionics communications 50 corporate 15 asset information segment corporate identifiable assets include cash net deferred income tax assets sales earnings assets geographic area united states sales include export sales customers international subsidiaries 1850 million 1997 1706 million 1996 1258 million 1995 1997 export sales following geographic areas europe 573 million asia pacific 919 million canada 273 million latin america 85 million 20 quarterly financial information unaudited full year income continuing operations includes writeoffs purchased research development 23 million 11 cents per share related acquisition automation software business fourth quarter 19 million nine cents per share connection acquisition semiconductor systems business third quarter fourth quarter loss full year income discontinued operations includes effects restructuring charges incurred meritor 15 million seven cents per share transaction separationrelated costs 48 million 23 cents per share related spinoff meritor fourth quarter full year income continuing operations includes 121 million 56 cents per share writeoff purchased research development connection acquisition brooktree independent auditors report directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 1997 1996 related consolidated statements income shareowners equity cash flows three years period ended september 30 1997 audit also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 1997 1996 results operations cash flows three years period ended september 30 1997 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp pittsburgh pennsylvania november 5 1997 see also table caption continuing operations sales earnings business segment mda page 13 hereof item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell international corporation rockwell company restated present semiconductor systems business semiconductor systems discontinued operation see note 2 prior year amounts reclassified conform current presentation consolidation consolidated financial statements company include accounts company majorityowned subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect amounts reported consolidated financial statements actual results could differ estimates revenue recognition sales generally recorded products shipped services rendered except sales certain contracts requiring performance several periods accounted percentageofcompletion method accounting inventories stated lower cost using lifo fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided based estimated useful lives generally using accelerated straightline methods significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amount charged expense purchased intangibles goodwill intangible assets generally result business acquisitions company accounts business acquisitions purchase method assigning purchase price tangible intangible assets liabilities including research development projects yet reached technological feasibility alternative future use purchased research development assets acquired liabilities assumed recorded fair values appraised value purchased research development immediately charged expense excess purchase price amounts assigned recorded goodwill amortized using straightline method periods generally ranging 10 40 years trademarks patents product technology intangibles amortized straightline basis estimated useful lives ranging 5 40 years impairment longlived assets longlived assets reviewed impairment events circumstances indicate carrying amount longlived asset may recoverable assets disposed longlived assets held use reviewed impairment assessing net realizable values based estimated undiscounted cash flows remaining useful lives impairment indicated carrying amount asset reduced fair value environmental matters company records accruals environmental matters accounting period responsibility established cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation costs future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery 1998 company adopted american institute certified public accountants aicpa statement position sop 961 environmental remediation liabilities adoption standard material effect financial statements new accounting standards 1998 company adopted statement financial accounting standards sfas 128 earnings per share 1998 results companys continuing operations loss making stock options antidilutive therefore 1998 diluted per share amounts exclude 29 million shares potentially dilutive stock options equal basic per share amounts 1997 1996 dilutive stock options resulted increase outstanding shares 33 million 35 million respectively 1998 company adopted aicpa sop 981 accounting costs computer software developed obtained internal use sop 981 sop 981 requires cost purchased software certain costs incurred developing computer software internal use capitalized amortized future periods year ended september 30 1998 companys continuing businesses capitalized 46 million costs would charged expense previous accounting policy june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities sfas 133 effective 2000 sfas 133 require company record derivatives balance sheet fair value derivatives hedges changes fair value derivatives offset changes fair value hedged assets liabilities firm commitments company believes impact adopting standard material results operations equity accounting change effective october 1 1997 rockwell changed method accounting certain general administrative costs related government contracts expense costs incurred previous accounting method costs included inventory amount general administrative costs included inventory october 1 1997 27 million 17 million tax nine cents per share presented cumulative effect accounting change consolidated statement operations year ended september 30 1998 effect accounting change income continuing operations 1997 would material 2 discontinued operations november 4 1998 board directors company approved spinoff semiconductor systems independent separately traded public company named conexant systems inc conexant spinoff expected occur december 31 1998 rate one share conexant common stock every two shares company common stock owned close business december 11 1998 company received ruling internal revenue service spinoff taxfree company shareowners september 30 1997 company completed spinoff automotive component systems businesses automotive independent company distributing issued outstanding shares meritor automotive inc meritor companys shareowners prorata basis connection transaction meritor made special payment 445 million company net assets meritor september 30 1997 151 million recorded decrease equity december 1996 company divested former aerospace defense businesses ad business merging subsidiary boeing company boeing taxfree reorganization connection reorganization shares common stock held treasury canceled net liabilities ad business date reorganization approximately 12 billion recorded increase additional paidin capital october 1996 companys graphic systems business graphic systems sold approximately 600 million net assets semiconductor systems consisted following millions prior spinoff semiconductor systems distribute wafer fabrication facilities colorado springs colorado related tax benefit company september 30 1998 facilities net book value 42 million related deferred tax benefit 36 million facilities classified company assets held disposal upon distribution summarized results discontinued operations follows millions 1998 net loss semiconductor systems includes 66 million charge 40 million tax inventory writeoffs 43 million charge 26 million tax intellectual property matters special charges 147 million 90 million tax recorded fourth quarter special charges include asset impairment 103 million related closure planned disposal wafer fabrication facilities colorado springs colorado 15 million employee severance voluntary early retirement program costs associated approximate 10 percent worldwide workforce reduction 11 million related intangible asset writeoffs 18 million actions including lease termination costs contractual liabilities asset writeoffs actions expected substantially completed end fiscal 1999 1998 net loss net assets semiconductor systems also include accruals 57 million 35 million tax estimate semiconductor systems operating losses expected incurred october 1 1998 december 31 1998 expected date spinoff 18 million 16 million tax related transaction costs semiconductor systems net income 1997 includes third quarter 30 million charge 19 million tax writeoff purchased research development connection acquisition himedia broadband communication chipset business comstream corporation semiconductor systems 1996 net income includes charge 121 million tax writeoff purchased research development connection acquisition brooktree corporation 1997 1996 income automotive includes fourth quarter restructuring charges 21 million 15 million tax 46 million 30 million tax respectively net income automotive fiscal 1997 also includes fourth quarter charge 57 million 48 million tax transaction separationrelated costs incurred connection spinoff meritor earnings ad business first two months 1997 entirely offset expenses related reorganization discontinued businesses utilized certain management services provided company including financial legal tax corporate communications human resources ad business costs services allowable overhead costs government contracts accordingly included results operations business costs allocated ad business using variety factors including sales assets inventory payroll 3 million 35 million 1997 1996 respectively management believes method allocating costs ad business reasonable interest expense 40 million 169 million 1997 1996 respectively allocated automotive ad businesses based actual interest expense associated borrowings assumed meritor boeing 3 special charges third quarter 1998 company recorded special charges 597 million 508 million tax 257 per share charges including effects fourth quarter adjustments follows goodwill asset impairments 415 million severance employee separation costs associated worldwide workforce reduction approximately 3000 employees 110 million costs related facility closures consolidations exiting nonstrategic businesses product lines 72 million actions expected substantially completed end 1999 total cash expenditures expected approximate 176 million company spent approximately 20 million september 30 1998 16 million related severance employee separation costs expects spend approximately 92 million 1999 related actions result actions taken fourth quarter workforce reduced approximately 800 employees september 30 1998 approximately 156 million included consolidated balance sheet remaining activities associated third quarter special charges amount approximately 83 million 11 million included compensation benefits liabilities respectively severance employee separation costs approximately 28 million 8 million 26 million included accounts payable current liabilities respectively costs facility closures consolidations exiting nonstrategic businesses product lines special charges also include impairment longlived assets automations industrial motors business motors impairment charge 266 million resulted significant longterm decline operating performance represents excess carrying value longlived assets including goodwill motors estimated fair value determined management assistance outside experts utilizing accepted valuation techniques company also recorded impairment charges 53 million related longlived assets businesses sold 1998 held disposition 1996 company recorded special charges 76 million 47 million tax 22 cents per share special charges related decision discontinue dispose certain product lines continuing operations well costs associated staff reductions automation avionics communications businesses provision included asset impairments 51 million severance employee separation costs 9 million contractual commitments costs 16 million actions substantially completed end 1997 special charges reflected consolidated statement operations follows millions revenues businesses product lines exited 197 million 211 million 199 million 1998 1997 1996 respectively net operating loss related businesses product lines material 4 acquisitions businesses first quarter 1998 company acquired inflight entertainment business hughesavicom international inc passenger systems connection acquisition company recorded charge 103 million 63 million tax purchased research development recorded 70 million intangible assets including developed technology patents assembled workforce goodwill amortized straightline basis 10 years remaining assets acquired liabilities assumed recorded estimated fair values determined companys management based information currently available company acquired several businesses fiscal 1997 net cost 51 million acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since dates acquisition 5 inventories summarized follows millions 6 intangible assets intangible assets summarized follows millions reduction goodwill 1997 1998 results principally impairment charge related motors see note 3 7 shortterm debt shortterm debt consisted following millions weighted average interest rates shortterm borrowings september 30 1998 company 15 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 285 million september 30 1998 consisted arrangements significant commitment fees 8 current liabilities current liabilities summarized follows millions 9 longterm debt longterm debt consisted following millions january 1998 company issued 800 million aggregate principal amount longterm notes debentures public offering consisting 615 10year notes issued par 670 30year debentures issued par 520 100year debentures issued discount debt offering yielded approximately 750 million proceeds 10 financial instruments companys financial instruments include cash equity securities short longterm debt foreign currency forward exchange contracts september 30 1998 carrying values companys financial instruments approximated fair values based current market prices rates policy company enter derivative financial instruments speculative purposes company enter foreign currency forward exchange contracts ordinary course business protect adverse currency rate fluctuations firm anticipated foreign currency transactions contracts generally terms less one year gains losses relating hedging firm commitments deferred included measurement foreign currency transaction subject hedge gains losses relating anticipated transactions recognized currently companys foreign currency forward exchange contracts executed creditworthy banks denominated currencies major industrial countries notional amount companys outstanding foreign currency forward exchange contracts aggregated 578 million 239 million september 30 1998 1997 respectively including contracts relating discontinued operations company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts 11 capital stock september 30 1998 authorized stock company consisted one billion shares common stock 1 par value 25 million shares preferred stock without par value september 30 1998 22 million shares common stock reserved various employee incentive plans fiscal 1997 outstanding shares class common stock converted common stock changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group acquires offers acquire 20 common stock although company authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquiror generally exercisable 500 worth common stock common stock acquiror 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right 12 stock options purchase common stock company granted various incentive plans directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash companys common stock combination thereof 1995 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans 9 million september 30 1998 stock options generally expire ten years date granted vest three years none incentive plans presently permits options granted september 30 2005 information relative stock options follows shares thousands connection divestiture ad business spinoff automotive number options outstanding exercise prices options adjusted order preserve value options outstanding date divestiture additionally connection automotive spinoff rockwell options granted automotive employees 1997 converted meritor options connection semiconductor systems spinoff outstanding rockwell options adjusted preserve value options date spinoff including conversion certain options shares conexant following table summarizes information stock options outstanding september 30 1998 shares thousands remaining life years 1997 company adopted disclosureonly provisions sfas 123 accounting stockbased compensation sfas 123 accordingly compensation expense recorded relative companys stockbased compensation plans company accounted stockbased plans using fair value method provided sfas 123 companys net income earnings per share would reduced net loss per share increased following pro forma amounts millions except per share amounts pro forma effect net loss 1998 may indicative pro forma effect net income future years weighted average fair value options granted 1368 1538 1283 per share 1998 1997 1996 respectively fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions 13 retirement medical plans company retirement medical plans cover united states employees provide payment medical costs eligible employees dependents upon retirement medical expense continuing operations consisted following millions companys retirement medical obligation september 30 1998 1997 consisted following millions decreasing 55 2015 1998 company announced current former united states employees consolidating employee retiree medical plans one comprehensive medical benefits program changes announced include offering one common plan design rockwell active employees retirees consolidating number medical benefit providers utilized company increasing amount employee retiree cost sharing unamortized amounts related plan amendments september 30 1998 reflect accumulated cost reduction retirement benefit obligation reduce future retirement medical expense increasing health care cost trend rates one percentage point would increase accumulated retirement medical obligation september 30 1998 approximately 35 million would increased 1998 retirement medical expense approximately 6 million 14 retirement pension plans company pension plans cover employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service companys policy fund pension obligations conformity funding requirements applicable laws governmental regulations net pension expense continuing operations consisted following millions pension plan assets primarily equity securities united states government obligations fixed income investments whose values subject fluctuations securities market actual return plan assets allocated continuing operations 398 million 368 million 503 million 1998 1997 1996 respectively differences actual returns related assumed returns plan assets deferred considered determination net pension expense future periods reduction amount interest projected benefit obligation return plan assets 1996 1997 result assumption boeing pension plan assets liabilities relating substantially former united states employees rockwells continuing businesses december 31 1995 connection reorganization following table reconciles funded status companys pension plans amounts included balance sheet millions company also sponsors certain defined contribution savings plans eligible employees expense related plans 42 million 46 million 43 million 1998 1997 1996 respectively 15 income taxes components income tax provision follows millions 1996 company reached agreement internal revenue service research experimentation tax credit refund claim related certain prior years recorded 65 million reduction provision income taxes net current deferred income tax benefits september 30 1998 1997 consist tax effects temporary differences related following millions net longterm deferred income taxes included liabilities balance sheet september 30 1998 1997 consist tax effects temporary differences related following millions management believes likely current longterm tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 29 billion united states taxable income past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance represents amount tax benefits related net operating loss capital loss foreign tax credit carryforwards yet recognized carryforward period net operating capital losses expires 1999 2006 carryforward period foreign tax credits expires 1999 2002 consolidated income tax provision differed income tax united states statutory tax rate reasons set forth millions september 1998 company donated trisonic wind tunnel valued 49 million university income tax provisions calculated based upon following components loss income continuing operations income taxes millions provision made united states state additional foreign income taxes related approximately 161 million undistributed earnings foreign subsidiaries intended permanently reinvested companys united states income tax returns years 1989 1994 currently examination connection divestiture ad business automotive spinoff expected semiconductor systems spinoff company retained expects retain tax liabilities right tax refunds related united states certain nonus operations ad business automotive semiconductor systems periods prior respective divestiture dates management believes adequate provision income taxes made years 1998 16 supplementary financial statement information income taxes paid interest payments related discontinued operations millions 3 1 1998 25 56 1997 13 175 1996 respectively included determination cash flows discontinued operations minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 232 million september 30 1998 payable follows millions 1999 51 2000 43 2001 33 2002 25 2003 19 2003 61 17 contingent liabilities federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue impact manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial statements company designated potentially responsible party 23 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined management estimates total reasonably possible costs company could incur remediation superfund sites september 30 1998 16 million substantially accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 1998 management estimated total reasonably possible costs company could incur matters 132 million company recorded environmental accruals matters 97 million 97 million accrual environmental matters 35 million relates liabilities assumed connection fiscal 1995 acquisition reliance electric company 1998 company reached agreement exxon corporation exxon whereby exxon continue indemnify company substantially costs related certain environmental matters also reimburse company substantially costs related environmental matter exxon previously disputed obligation accordingly 1998 company recorded 16 million receivable exxon related previously disputed matter total receivables exxon related matters 32 million september 30 1998 based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial statements management cannot assess possible effect compliance future requirements various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment matters pursuant reorganization rockwell agreed indemnify boeing certain government contract environmental matters related operations ad business periods prior reorganization connection automotive spinoff meritor agreed indemnify company substantially contingent liabilities related automotive although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys financial statements connection semiconductor systems spinoff conexant assume contingent liabilities related business including environmental intellectual property matters september 1995 celeritas technologies ltd filed suit company patent infringement misappropriation trade secrets breach contract relating cellular telephone data transmission technology utilized certain modem products produced semiconductor systems july 1997 court entered judgment awarding damages 57 million plus interest july 20 1998 us court appeals federal circuit affirmed trial courts judgment based breach contract company continues believe judgment error filed petition certiorari united states supreme court september 30 1998 company accrued liability approximately 65 million included net assets semiconductor systems ultimate resolution matter prior date spinoff company transfer 65 million cash semiconductor systems placed escrow account used satisfy semiconductor systems obligation respect celeritas matter 18 business segment information companys business segments engaged research development manufacture service electronic controls communications products follows automationindustrial automation equipment systems including control logic sensors humanmachine interface devices motors power mechanical devices software products avionics communicationsavionics products systems related communications technologies primarily used commercial military aircraft defense electronic systems command control communications intelligence inflight entertainment systems commercial aircraft electronic commerce products call center systems personalized electronic commerce applications following tables summarize segment information continuing operations millions sales results operations business segment 1998 special charges relate business segments follows millions automation 488 avionics communications 99 corporate 10 addition 1998 purchased research development 103 million relates acquisition passenger systems avionics communications business 1997 purchased research development 23 million relates acquisition remaining interest automation software business 1996 special charges relate business segments follows millions automation 11 avionics communications 50 corporate 15 asset information business segment corporate identifiable assets include cash net deferred income tax assets sales results operations assets geographic area 1998 special charges relate geographic areas follows millions united states 538 europe 44 asiapacific 12 canada 2 latin america 1 1998 1997 purchased research development charges 103 million 23 million respectively relate united states united states sales include export sales unaffiliated customers 660 million 1998 581 million 1997 591 million 1996 1998 export sales following geographic areas canada 128 million europe 293 million asiapacific 182 million latin america 57 million 19 quarterly financial information unaudited per share information calculated quarterly annual period using average outstanding shares period therefore sum quarterly per share amounts necessarily equal annual per share amounts presented first quarter full year net income loss includes 27 million charge 17 million tax nine cents per share related cumulative effect change accounting principle income loss continuing operations accounting change includes writeoff purchased research development 63 million tax 31 cents per share related acquisition passenger systems business first quarter b effects special charges recorded third quarter 508 million tax 257 per share related asset impairments work force reductions facility closures consolidations exiting nonstrategic businesses product lines fourth quarter full year income continuing operations includes writeoff purchased research development 23 million tax 11 cents per share related acquisition remaining interest automation software business independent auditors report directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 1998 1997 related consolidated statements operations shareowners equity cash flows three years period ended september 30 1998 audit also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 1998 1997 results operations cash flows three years period ended september 30 1998 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 1998 company changed method accounting certain inventoriable general administrative costs related government contracts deloitte touche llp costa mesa california november 4 1998 see also table caption summary results operations continuing operations mda page 12 hereof item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income loss millions see notes consolidated financial statements notes consolidated financial statements 1 accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell international corporation rockwell company certain prior year amounts reclassified conform current year presentation consolidation consolidated financial statements company include accounts company majorityowned subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect amounts reported consolidated financial statements actual results could differ estimates revenue recognition sales generally recorded products shipped services rendered except sales certain contracts requiring performance several periods accounted percentageofcompletion method accounting anticipated losses contracts accounted percentageofcompletion method recognized full period losses become evident cash includes time deposits certificates deposit original maturities three months less inventories stated lower cost market using lifo fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided based estimated useful lives generally using accelerated straightline methods significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amounts charged expense purchased intangibles goodwill intangible assets generally result business acquisitions company accounts business acquisitions purchase method assigning purchase price tangible intangible assets liabilities including research development projects yet reached technological feasibility alternative future use purchased research development assets acquired liabilities assumed recorded fair values appraised value purchased research development immediately charged expense excess purchase price amounts assigned recorded goodwill amortized using straightline method periods generally ranging 10 40 years trademarks patents product technology intangibles amortized straightline basis estimated useful lives ranging 5 40 years impairment longlived assets longlived assets reviewed impairment events circumstances indicate carrying amount longlived asset may recoverable assets disposed longlived assets held use reviewed impairment assessing net realizable values based estimated undiscounted cash flows remaining useful lives impairment indicated carrying amount asset reduced fair value derivative financial instruments company enters foreign currency forward exchange contracts ordinary course business protect adverse currency rate fluctuations firm forecasted foreign currency transactions contracts executed creditworthy banks denominated currencies major industrial countries policy company enter derivative financial instruments speculative purposes accounting policies instruments based upon companys designation instruments hedging transactions generally accepted accounting principles criteria used designation instrument hedge include effectiveness instrument reducing associated risk underlying position gains losses relating hedging firm commitments deferred accumulated comprehensive income loss included measurement underlying foreign currency transaction hedged gains losses relating forecasted transactions recognized current period income net stock options company accounts stock options accordance accounting principles board opinion 25 accounting stock issued employees environmental matters company records accruals environmental matters accounting period responsibility established cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation costs future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery new accounting standards effective october 1 1998 company adopted statement financial accounting standards sfas 130 reporting comprehensive income sfas 130 sfas 130 establishes standards reporting presentation comprehensive income loss components financial statements sfas 130 requires certain equity adjustments reported components comprehensive income adoption statement effect companys results operations shareowners equity effective september 30 1999 company adopted sfas 131 disclosures segments enterprise related information sfas 131 adoption sfas 131 changed composition companys reportable operating segments accordingly certain segment information reported prior year financial statements reclassified conform current year presentation adoption sfas 131 effect companys results operations shareowners equity effective september 30 1999 company adopted sfas 132 employers disclosures pensions postretirement benefits sfas 132 sfas 132 establishes new disclosure requirements pension postretirement benefit information notes consolidated financial statements adoption sfas 132 effect companys results operations shareowners equity june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 require company record derivatives balance sheet fair value derivatives hedges changes fair value offset changes fair value hedged assets liabilities firm commitments june 1999 financial accounting standards board delayed effective date sfas 133 fiscal year 2001 early adoption continues permitted company believes effect adopting standard material results operations shareowners equity 1998 company adopted american institute certified public accountants statement position 981 accounting costs computer software developed obtained internal use sop 981 sop 981 requires cost purchased software certain costs incurred developing computer software internal use capitalized amortized future periods year ended september 30 1998 companys continuing businesses capitalized 46 million costs would charged expense previous accounting policy accounting change effective october 1 1997 rockwell changed method accounting certain general administrative costs related government contracts expense costs incurred previous accounting method costs included inventory amount general administrative costs included inventory october 1 1997 27 million 17 million aftertax nine cents per share presented cumulative effect accounting change consolidated statement operations year ended september 30 1998 effect accounting change income continuing operations 1997 would material 2 discontinued operations december 31 1998 company completed spinoff former semiconductor systems business semiconductor systems independent separately traded publiclyheld company distributing outstanding shares conexant systems inc conexant companys shareowners prorata basis prior spinoff conexant distributed rockwell wafer fabrication facilities colorado springs colorado net book value 21 million related deferred tax asset 48 million also prior spinoff rockwell paid 64 million escrow account satisfy conexants obligation respect litigation matter net assets conexant december 31 1998 913 million recorded decrease shareowners equity september 30 1998 net assets semiconductor systems consisted following millions september 30 1997 company completed spinoff automotive component systems businesses automotive independent company distributing issued outstanding shares meritor automotive inc meritor companys shareowners prorata basis connection transaction meritor made special payment 445 million company net assets meritor september 30 1997 151 million recorded decrease shareowners equity december 1996 company divested former aerospace defense businesses ad business merging subsidiary boeing company boeing taxfree reorganization connection reorganization shares common stock held treasury canceled net liabilities ad business date reorganization approximately 12 billion recorded increase additional paidin capital october 1996 companys graphic systems business graphic systems sold approximately 600 million summarized results discontinued operations follows millions company accrued semiconductor systems estimated first quarter 1999 operating loss costs related spinoff 1998 additional loss recorded first quarter 1999 relates principally companys decision record writedown wafer fabrication facilities colorado springs related costs disposal 3 special charges third quarter 1998 company recorded special charges 597 million 508 million tax 257 per share connection asset impairments implementation comprehensive restructuring program charges including effects adjustments september 30 1999 included 103 million severance employee separation costs associated worldwide workforce reduction approximately 3200 employees 83 million related facility closures consolidations exiting nonstrategic businesses product lines actions expected substantially complete end calendar 1999 remaining cash expenditures related actions made end calendar 2000 total cash expenditures connection actions expected approximate 166 million company spent approximately 73 million september 30 1999 46 million related severance employee separation costs expects spend additional 49 million end 2000 result actions taken september 30 1999 workforce reduced approximately 2300 employees september 30 1999 1998 approximately 93 million 156 million respectively included consolidated balance sheet remaining activities associated third quarter 1998 special charges amount september 30 1999 48 million included compensation benefits 20 million included liabilities remaining 25 million included accounts payable current liabilities amount september 30 1998 83 million included compensation benefits 37 million included liabilities remaining 36 million included accounts payable current liabilities included special charges 266 million related impairment longlived assets automation segments industrial motors business motors impairment resulted significant decline operating performance represents excess carrying value longlived assets including goodwill motors estimated fair value determined management assistance outside experts utilizing accepted valuation techniques company also recorded impairment charges 53 million related longlived assets businesses sold held disposition special charges reflected consolidated statement operations year ended september 30 1998 cost sales selling general administrative expenses amount 455 million 142 million respectively revenues businesses product lines exited 88 million 197 million 211 million 1999 1998 1997 respectively net operating income 1999 net operating losses 1998 1997 related businesses product lines material 4 acquisitions businesses may 1999 automation segment acquired certain intellectual property assets dynapro expanding humanmachine interface software hardware capabilities substantially assets enterprise technology group inc software business january 1999 automation segment acquired eja engineering ltd marketleading manufacturer safety products november 1998 automation segment acquired anorad corporation manufacturer linear motor equipment august 1999 avionics communications segment acquired intertrade limited avionics parts supplier march 1999 avionics communications segment acquired remaining 50 percent interest flight dynamics market leader headup guidance systems aircraft operations assets acquired liabilities assumed recorded estimated fair values determined companys management based information currently available aggregate purchase price acquisitions 1999 241 million 214 million allocated intangible assets including developed technology patents assembled workforce goodwill intangible assets amortized straightline basis periods ranging six thirty years december 1997 avionics communications segment acquired inflight entertainment business hughesavicom international inc passenger systems connection acquisition company recorded charge 103 million 63 million tax purchased research development recorded 70 million intangible assets including developed technology patents assembled workforce goodwill amortized straightline basis 10 years acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information presented combined effect acquisitions material companys results operations financial position 5 inventories net inventories net summarized follows millions 6 property net property net summarized follows millions 7 intangible assets net intangible assets net summarized follows millions 8 shortterm debt shortterm debt consists following millions weighted average interest rates shortterm borrowings september 30 1999 company 1 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 285 million september 30 1999 consisted arrangements significant commitment fees 9 current liabilities current liabilities summarized follows millions 10 longterm debt longterm debt consists following millions 11 financial instruments companys financial instruments include cash short longterm debt foreign currency forward exchange contracts fair values cash shortterm debt approximate carrying values due shortterm nature instruments september 30 1999 1998 carrying value long term debt 913 million 910 million respectively fair value longterm debt based upon quoted market prices similar issues 836 million 962 million september 30 1999 1998 respectively foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 1999 1998 company outstanding foreign currency forward exchange contracts notional amounts 708 million 578 million respectively primarily consisting contracts euro british pound sterling canadian dollar swiss franc notional amounts stated us dollar equivalents exchange rates effect time contract initiation september 30 1999 1998 carrying value foreign currency forward exchange contracts approximated fair value based upon quoted market prices contracts similar maturities company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts 12 shareowners equity common stock september 30 1999 authorized stock company consisted one billion shares common stock 1 par value 25 million shares preferred stock without par value september 30 1999 19 million shares common stock reserved various employee incentive plans 1997 outstanding shares class common stock converted common stock changes outstanding common shares summarized follows millions 1998 loss continuing operations stock options antidilutive therefore 1998 diluted basic earnings per share amounts identical 1999 1997 dilutive stock options resulted increase average outstanding shares 31 million 33 million respectively preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group acquires offers acquire 20 common stock although company authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquiror generally exercisable 500 worth common stock common stock acquiror 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right accumulated comprehensive loss accumulated comprehensive loss consisted following millions 13 stock options purchase common stock company granted various incentive plans directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 1995 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans seven million september 30 1999 none incentive plans presently permits options granted september 30 2005 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options 1999 company granted approximately one million performancevesting options expire ten years date granted vest earlier date market price companys common stock reaches specified level predetermined period time certain financial performance criteria met b period six nine years date granted 1999 approximately 09 million performance options vested information relative stock options follows shares thousands connection spinoff semiconductor systems certain outstanding options number options exercise prices options adjusted order preserve intrinsic value options outstanding date spinoff certain options option holders received combination rockwell conexant options adjustments made number options outstanding exercise prices options intrinsic value rockwell conexant options outstanding date spinoff preserved additionally rockwell options granted semiconductor systems employees converted conexant options connection spinoff automotive divestiture ad business number options outstanding exercise prices options adjusted order preserve intrinsic value options outstanding date divestiture connection automotive spinoff rockwell options granted automotive employees 1997 converted meritor options following table summarizes information stock options outstanding september 30 1999 shares thousands remaining life years companys net income earnings per share would reduced net loss per share increased following pro forma amounts company accounted stockbased plans using fair value method provided sfas 123 accounting stockbased compensation millions except per share amounts 1999 pro forma net income includes 87 million 57 million tax 29 cents per diluted share pro forma compensation expense related spinoff semiconductor systems pro forma effect stock options net income 1999 may indicative pro forma effect net income future years weighted average fair value options granted 955 1368 1538 per share 1999 1998 1997 respectively fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions 14 retirement benefits company sponsors pension postretirement benefit plans employees pension plans cover companys employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service companys policy fund pension obligations conformity funding requirements applicable laws governmental regulations postretirement benefits form retirement medical plans cover companys united states employees provide payment medical costs eligible employees dependents upon retirement components net periodic benefit cost follows millions 1999 company recognized curtailment gain 16 million special termination benefit charges 11 million benefit obligation plan asset funded status net asset liability information summarized follows millions company uses actuarial measurement date june 30 measure benefit obligations significant assumptions used determining benefit obligations summarized follows weighted averages decreasing 55 2015 pension benefits projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 145 million 130 million 7 million respectively september 30 1999 151 million 122 million 7 million respectively september 30 1998 postretirement benefits assumed health care cost trend rates significant effect amounts reported retiree medical plans one percentage point change assumed health care cost trend rates would following effect millions defined contribution savings plans company also sponsors certain defined contribution savings plans eligible employees expense related plans 43 million 42 million 43 million 1999 1998 1997 respectively 15 income net components income net follows millions included 57 million gain dispositions businesses 1999 32 million gain related sale avionics communications segments railroad electronics business october 1998 28 million gain related sale automation segments north american transformer business september 1999 september 1999 company recorded loss 29 million associated writeoff investment goss graphic systems inc goss preferred stock company received connection sale graphic systems october 1996 goss filed bankruptcy fourth quarter 1999 16 income taxes components income tax provision follows millions net current deferred income tax benefits september 30 1999 1998 consist tax effects temporary differences related following millions net longterm deferred income taxes included liabilities balance sheet september 30 1999 1998 consist tax effects temporary differences related following millions management believes likely current longterm tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 18 billion united states taxable income past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance represents amount tax benefits related net operating loss capital loss foreign tax credit carryforwards yet recognized carryforward period net operating capital losses expires 2000 2006 carryforward period foreign tax credits expires 2000 2002 consolidated income tax provision differed income tax united states statutory tax rate reasons set forth millions september 1998 company donated trisonic wind tunnel valued 49 million university income tax provisions calculated based upon following components income loss continuing operations income taxes millions provision made united states state additional foreign income taxes related approximately 172 million undistributed earnings foreign subsidiaries intended permanently reinvested companys united states income tax returns years 1989 1997 currently examination connection divestiture ad business automotive spinoff semiconductor systems spinoff company retained tax liabilities right tax refunds related united states certain nonus operations ad business automotive semiconductor systems periods prior respective divestiture dates management believes adequate provision income taxes made years 1999 17 supplementary financial statement information income taxes paid interest payments related discontinued operations millions 25 56 1997 respectively included determination cash flows discontinued operations amounts 1999 1998 significant minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 223 million september 30 1999 payable follows millions 2000 52 2001 43 2002 33 2003 22 2004 19 2005 54 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 41 million september 30 1999 receivable 2008 approximately 5 million per year 18 contingent liabilities federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial condition company designated potentially responsible party 19 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined management estimates total reasonably possible costs company could incur remediation superfund sites september 30 1999 19 million 16 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 1999 management estimated total reasonably possible costs company could incur matters 90 million company recorded environmental accruals matters 61 million addition matters company assumed certain environmental liabilities connection 1995 acquisition reliance electric company reliance company indemnified exxon corporation exxon substantially costs associated reliance matters september 30 1999 company recorded 29 million liability 28 million receivable reliance matters management estimates total reasonably possible costs matters approximately 43 million company substantially indemnified exxon based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial condition management cannot assess possible effect compliance future requirements various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment matters pursuant reorganization rockwell agreed indemnify boeing certain government contract environmental matters related operations ad business periods prior reorganization connection automotive spinoff meritor agreed indemnify company substantially contingent liabilities related automotive connection semiconductor systems spinoff conexant assumed contingent liabilities related business including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys financial statements ordinary course business company divested certain businesses result divestitures may lawsuits claims proceedings instituted asserted company related period businesses owned company management believes judgments company related matters would material adverse effect companys financial statements 19 business segment information rockwell electronics communications company global leadership positions industrial automation avionics communications automated call distribution systems company organized based upon products services three operating segments consisting automation avionics communications electronic commerce automation segment supplier industrial automation products systems software services focused helping customers control power manufacturing processes products include controllers io inputoutput systems drives sensors power devices packaged control products operator interface devices software products services gear reducers mounted bearings power transmission components network monitoring products motors products primarily marketed rockwell automation allenbradley rockwell software dodge reliance electric brand names major markets served include consumer products food beverage transportation metals mining cement pulp paper petroleum specialty chemicals pharmaceutical electric power water treatment infrastructure semiconductor fabrication avionics communications segment supplier electronic products systems service support solutions commercial aerospace defense industries products include electronic equipment flight control cockpit display navigation voice data communication cockpit management inflight cabin management communications passenger entertainment radar global positioning command control communications devices marketed primarily rockwell collins brand name major customers include airframe manufacturers united states government worlds airlines electronic commerce segment engaged research development manufacture technologies used telephony internet applications combined science center research development facility businesses following tables reflect sales operating results companys reportable segments years ended september 30 millions intersegment sales material eliminated among considerations company evaluates performance allocates resources based upon segment operating earnings income taxes interest expense costs related corporate offices foreign currency translation gains losses nonrecurring special charges purchased research development charges accounting policies used preparing segment information consistent described note 1 special charges discussed note 3 purchased research development charge discussed note 4 following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property company global electronic controls communications company conducts significant portion business activities outside united states following tables reflect geographic sales longlived assets geographic region millions sales attributed geographic regions based location origin united states sales include export sales unaffiliated customers 762 million 1999 660 million 1998 581 million 1997 20 quarterly financial information unaudited net income 1999 includes gain 36 million 24 million tax 12 cents per diluted share sale companys railroad electronics business first quarter b gain 28 million 18 million tax nine cents per diluted share sale companys north american transformer business fourth quarter c loss 29 million 19 million tax 10 cents per diluted share associated writeoff investment goss preferred stock company received connection sale graphic systems october 1996 goss filed bankruptcy fourth quarter 1999 per share information calculated quarterly annual period using average outstanding shares period therefore sum quarterly per share amounts necessarily equal annual per share amounts presented first quarter full year net income loss 1998 includes 27 million charge 17 million tax nine cents per diluted share related cumulative effect change accounting principle income loss continuing operations accounting change 1998 includes writeoff purchased research development 63 million tax 31 cents per diluted share related acquisition passenger systems first quarter b effects special charges recorded third quarter 508 million tax 257 per diluted share independent auditors report board directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 1999 1998 related consolidated statements operations shareowners equity cash flows comprehensive income loss three years period ended september 30 1999 audits also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 1999 1998 results operations cash flows three years period ended september 30 1999 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements company changed method accounting certain inventoriable general administrative costs related government contracts 1998 deloitte touche llp milwaukee wisconsin november 3 1999 see also table caption summary results operations mda page 12 hereof item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income loss millions see notes consolidated financial statements notes consolidated financial statements 1 accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell international corporation rockwell company certain prior year amounts reclassified conform current year presentation consolidation consolidated financial statements company include accounts company majorityowned subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect amounts reported consolidated financial statements actual results could differ estimates revenue recognition sales generally recorded products shipped services rendered except sales certain contracts requiring performance several periods accounted percentageofcompletion method accounting anticipated losses contracts accounted percentageofcompletion method recognized full period losses become evident cash includes time deposits certificates deposit original maturities three months less inventories stated lower cost market using firstin firstout fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided based estimated useful lives generally using accelerated straightline methods significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amounts charged expense purchased intangibles goodwill intangible assets generally result business acquisitions company accounts business acquisitions purchase method assigning purchase price tangible intangible assets liabilities including research development projects yet reached technological feasibility alternative future use purchased research development assets acquired liabilities assumed recorded fair values appraised value purchased research development immediately charged expense excess purchase price amounts assigned recorded goodwill amortized using straightline method periods generally ranging ten forty years trademarks patents product technology intangibles amortized straightline basis estimated useful lives generally ranging five forty years notes consolidated financial statements continued 1 accounting policies continued impairment longlived assets longlived assets reviewed impairment events circumstances indicate carrying amount longlived asset may recoverable assets disposed longlived assets held use reviewed impairment assessing net realizable values based estimated undiscounted cash flows remaining useful lives impairment indicated carrying amount asset reduced fair value derivative financial instruments company uses derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks foreign currency forward exchange contracts used hedge changes amount future cash flows associated intercompany transactions generally forecasted occur within one year cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies interest rate swap contracts used manage balance fixed floating rate debt policy company execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries effective july 1 2000 company accounts derivative financial instruments accordance statement financial accounting standards sfas 133 accounting derivative instruments hedging activities sfas 133 stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees compensation expense resulting grants restricted stock recognized generally period service performed environmental matters company records accruals environmental matters accounting period responsibility established cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation costs future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery new accounting standards effective july 1 2000 company adopted sfas 133 sfas 133 requires company record derivatives balance sheet fair value regardless purpose intent holding derivatives hedges adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivatives change fair value immediately recognized earnings effect adopting sfas 133 material companys financial position results operations shareowners equity notes consolidated financial statements continued 1 accounting policies continued december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 company adopt sab 101 effective october 1 2000 believes effect adoption material results operations shareowners equity accounting changes 2000 company changed method determining cost certain inventories lastin firstout lifo method fifo method result operating efficiencies cost reductions company believes fifo method better measures current cost inventories provides appropriate matching revenues expenses change fifo method retroactively applied restating accompanying consolidated financial statements effect change consolidated balance sheet september 30 consolidated statement operations years ended september 30 summarized follows millions except per share data change resulted decrease 95 million beginning year balance retained earnings 1998 effective october 1 1997 rockwell changed method accounting certain general administrative costs related government contracts expense costs incurred previous accounting method costs included inventory amount general administrative costs included inventory october 1 1997 27 million 17 million aftertax nine cents per share presented cumulative effect accounting change consolidated statement operations year ended september 30 1998 2 acquisitions businesses march 2000 automation segment acquired entek ird international corporation provider machinery condition monitoring solutions april 2000 automation segment acquired substantially assets assumed certain liabilities systems modeling corporation software developer july 2000 avionics communications segment acquired substantially assets assumed substantially liabilities sony trans com inc producer inflight entertainment systems commercial aircraft assets acquired liabilities assumed recorded estimated fair values based information currently available aggregate purchase price acquisitions 2000 193 million 97 million allocated intangible assets including developed technology patents assembled workforce goodwill intangible assets amortized straightline basis periods ranging five fifteen years notes consolidated financial statements continued 2 acquisitions businesses continued 1999 company acquired six businesses aggregate purchase price 241 million 214 million allocated intangible assets intangible assets amortized straightline basis periods ranging six thirty years december 1997 avionics communications segment acquired inflight entertainment business hughesavicom international inc connection acquisition company recorded charge 103 million 63 million tax purchased research development acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information presented combined effect acquisitions material companys results operations financial position 3 inventories summarized follows millions 4 property net property net summarized follows millions notes consolidated financial statements continued 5 intangible assets net intangible assets net summarized follows millions 6 shortterm debt shortterm debt consists following millions weighted average interest rates shortterm borrowings september 30 2000 company 1 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 190 million september 30 2000 consisted arrangements significant commitment fees 7 current liabilities current liabilities summarized follows millions notes consolidated financial statements continued 8 longterm debt longterm debt consists following millions 615 notes payable 2008 effectively converted floating rate debt see note 9 financial instruments companys financial instruments include cash short longterm debt foreign currency forward exchange contracts interest rate swap contract fair values cash shortterm debt approximate carrying values due shortterm nature instruments september 30 2000 1999 carrying value longterm debt 925 million 913 million respectively fair value longterm debt based upon quoted market prices similar issues 843 million 836 million september 30 2000 1999 respectively foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2000 1999 company outstanding foreign currency forward exchange contracts notional amounts 992 million 708 million respectively primarily consisting contracts euro pound sterling canadian dollar australian dollar swiss franc notional amounts stated us dollar equivalents spot exchange rates respective dates september 30 2000 net carrying value foreign currency forward exchange contracts 39 million equal fair value based upon quoted market prices contracts similar maturities september 30 2000 foreign currency forward exchange contracts recorded current assets current liabilities amounts 55 million 16 million respectively company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts upon adoption sfas 133 company designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges material february 2000 company entered interest rate swap contract swap effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based 90 day libor 542 september 30 2000 september 30 2000 fair value swap based upon quoted market prices contracts similar maturities approximately 13 million upon adoption sfas 133 company designated swap fair value hedge accordingly fair value swap recorded asset carrying value underlying debt adjusted equal amount accordance sfas 133 october 24 2000 swap terminated net gain 16 million gain amortized reduction interest expense remaining term 615 notes payable 2008 notes consolidated financial statements continued 10 shareowners equity common stock september 30 2000 authorized stock company consisted one billion shares common stock par value 1 per share 25 million shares preferred stock without par value september 30 2000 34 million shares common stock reserved various employee incentive plans changes outstanding common shares summarized follows millions 2000 1999 dilutive stock options resulted increase average outstanding shares 21 million 31 million respectively 1998 dilutive basic per share amounts identical loss continuing operations resulted stock options antidilutive preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group acquires offers acquire 20 common stock although company authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquiror generally exercisable 500 worth either common stock company common stock acquiror 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right accumulated comprehensive loss accumulated comprehensive loss consisted following millions approximately 11 million unrealized gains cash flow hedges reclassified earnings fiscal 2001 management expects unrealized gains offset hedged items recognized earnings notes consolidated financial statements continued 11 stock options purchase common stock company granted various incentive plans directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans 16 million september 30 2000 none incentive plans presently permits options granted november 30 2009 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options 2000 1999 company granted performancevesting options expire ten years date granted vest earlier date market price companys common stock reaches specified level predetermined period time certain financial performance criteria met b period six nine years date granted performancevesting options vested 2000 1999 approximately 09 million performancevesting options vested information relative stock options follows shares thousands connection spinoff companys former semiconductor systems business semiconductor systems certain outstanding options number options exercise prices options adjusted order preserve intrinsic value options outstanding date spinoff certain options option holders received combination rockwell conexant systems inc conexant options adjustments made number options outstanding exercise prices options preserve intrinsic value rockwell conexant options outstanding date spinoff additionally rockwell options granted semiconductor systems employees converted conexant options notes consolidated financial statements continued 11 stock options continued following table summarizes information stock options outstanding september 30 2000 shares thousands remaining life years companys net income earnings per share would reduced net loss per share increased following pro forma amounts company accounted stockbased plans using fair value method provided sfas 123 accounting stockbased compensation millions except per share amounts 1999 pro forma net income includes 87 million 57 million tax 29 cents per diluted share pro forma compensation expense related spinoff semiconductor systems pro forma effect stock options net income 2000 may indicative pro forma effect net income future years weighted average fair value options granted 1630 955 1368 per share 2000 1999 1998 respectively fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions notes consolidated financial statements continued 12 retirement benefits company sponsors pension postretirement benefit plans employees pension plans cover companys employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service companys policy fund pension obligations conformity funding requirements applicable laws governmental regulations postretirement benefits form retirement medical plans cover companys united states employees provide payment certain medical costs eligible employees dependents upon retirement components net periodic benefit cost follows millions company recognized curtailment gain 10 million 16 million special termination benefit charges 3 million 11 million 2000 1999 respectively notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan asset funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued company uses actuarial measurement date june 30 measure benefit obligations significant assumptions used determining benefit obligations summarized follows weighted averages decreasing 55 2015 pension benefits projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 139 million 120 million 1 million respectively september 30 2000 145 million 130 million 7 million respectively september 30 1999 postretirement benefits assumed health care cost trend rates significant effect amounts reported retiree medical plans onepercentage point change assumed health care cost trend rates would following effect millions defined contribution savings plans company also sponsors certain defined contribution savings plans eligible employees expense related plans 45 million 43 million 42 million 2000 1999 1998 respectively notes consolidated financial statements continued 13 income net components income net follows millions 2000 company recorded 32 million gain sale real estate recorded 28 million income resulting demutualization metropolitan life insurance company 1999 company recorded loss 29 million associated writeoff investment goss graphic systems inc goss preferred stock company received connection sale graphic systems business 14 income taxes components income tax provision follows millions net current deferred income tax benefits september 30 2000 1999 consist tax effects temporary differences related following millions notes consolidated financial statements continued 14 income taxes continued net longterm deferred income taxes included liabilities balance sheet september 30 2000 1999 consist tax effects temporary differences related following millions management believes likely current longterm deferred tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 11 billion united states taxable income past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance represents amount tax benefits related net operating loss foreign tax credit carryforwards yet recognized carryforward period net operating losses ends 2001 2006 carryforward period foreign tax credits ends 2002 consolidated income tax provision differed income tax united states statutory tax rate reasons set forth millions income tax provisions calculated based upon following components income loss continuing operations income taxes millions notes consolidated financial statements continued 14 income taxes continued provision made united states state additional foreign income taxes related approximately 255 million undistributed earnings foreign subsidiaries intended permanently reinvested companys united states income tax returns years 1989 1997 currently examination connection divestiture companys aerospace defense business ad business spinoff companys automotive components business automotive semiconductor systems spinoff company retained tax liabilities right tax refunds related united states certain nonus operations ad business automotive semiconductor systems periods prior respective divestiture dates management expects examination companys 1989 1994 tax years completed 2001 management believes adequate provision income taxes made years 2000 15 supplementary financial statement information income taxes paid interest payments related discontinued operations 1999 1998 significant minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 255 million september 30 2000 payable follows millions 2001 55 2002 45 2003 37 2004 33 2005 28 2006 57 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 47 million september 30 2000 receivable 2008 approximately 6 million per year 16 contingent liabilities federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial condition company designated potentially responsible party 21 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined assumed third parties management estimates total reasonably possible costs company could incur remediation superfund sites september 30 2000 14 million 10 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2000 management estimated total reasonably possible costs company could incur matters notes consolidated financial statements continued 16 contingent liabilities continued 63 million company recorded environmental accruals matters 37 million addition matters company assumed certain environmental liabilities connection 1995 acquisition reliance electric company reliance company indemnified exxon corporation exxon substantially costs associated reliance matters september 30 2000 company recorded liability approximately 29 million receivable approximately 28 million reliance matters management estimates total reasonably possible costs matters approximately 37 million company substantially indemnified exxon based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial condition management cannot assess possible effect compliance future requirements various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment matters connection divestiture ad business boeing company boeing rockwell agreed indemnify boeing certain government contract environmental matters related operations ad business periods prior divestiture connection spinoffs automotive semiconductor systems spunoff companies agreed indemnify rockwell substantially contingent liabilities related respective businesses including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys financial condition ordinary course business company divested certain businesses result divestitures may lawsuits claims proceedings instituted asserted company related period businesses owned company management believes judgments company related matters would material adverse effect companys financial condition 17 business segment information rockwell electronics communications company global leadership positions industrial automation avionics communications automated call distribution systems company organized based upon products services four operating segments consisting automation avionics communications electronic commerce science center automation segment supplier industrial automation products systems software services focused helping customers control power manufacturing processes products include controllers io inputoutput systems drives sensors power devices packaged control products operator interface devices software products services gear reducers mounted bearings power transmission components network monitoring products motors products primarily marketed rockwell automation allenbradley rockwell software dodge reliance electric brand names major markets served include consumer products food beverage transportation metals mining cement pulp paper petroleum specialty chemicals pharmaceutical electric power water treatment infrastructure semiconductor fabrication avionics communications segment supplier electronic products systems service support solutions commercial aerospace defense industries products include electronic equipment flight control cockpit display navigation voice data communication cockpit management inflight notes consolidated financial statements continued 17 business segment information continued cabin management communications passenger entertainment radar global positioning command control communications devices marketed primarily rockwell collins brand name major customers include airframe manufacturers united states government worlds airlines electronic commerce segment engaged research development manufacture technologies used telephony internet applications science center segment engaged research development manufacture technologies electronics imaging optics material computational sciences information technology broad range initiatives includes contract research delivery highvalue products services well licensing selected technologies electronic commerce segment combined science center segment businesses following tables reflect sales operating results companys reportable segments years ended september 30 millions intersegment sales material eliminated among considerations company evaluates performance allocates resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonrecurring special charges gains losses disposition businesses earnings losses equity affiliates amortization goodwill purchased research development charges accounting policies used preparing segment information consistent described note 1 special charges discussed note 19 purchased research development charge discussed note 2 2000 management changed method evaluating segment performance excluding gains losses disposition businesses earnings losses equity affiliates amortization goodwill segment operating earnings management believes exclusion items provides additional insight operating performance segments earnings losses equity affiliates included general corporatenet notes consolidated financial statements continued 17 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments businesses corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property company global electronic controls communications company conducts significant portion business activities outside united states following tables reflect geographic sales property net geographic region millions sales attributed geographic regions based location origin united states sales include export sales unaffiliated customers 888 million 2000 754 million l999 660 million l998 notes consolidated financial statements continued 18 discontinued operations december 31 1998 company spunoff semiconductor systems independent separately traded publiclyheld company distributing outstanding shares conexant companys shareowners prorata basis summarized results semiconductor systems follows millions 19 special charges company recorded charges 597 million 508 million tax 257 per share 1998 connection asset impairments implementation comprehensive restructuring program charges included 100 million severance employee separation costs associated worldwide workforce reduction approximately 3100 employees 84 million related facility closures consolidations exiting nonstrategic businesses product lines actions substantially completed december 31 1999 total cash expenditures connection actions approximate 120 million company spent approximately 97 million september 30 2000 60 million related severance employee separation costs company expects spend additional 19 million end 2001 principally related severance workforce reductions lease obligations exited facilities result actions taken september 30 2000 workforce reduced approximately 2700 employees special charges reflected consolidated statement operations year ended september 30 1998 cost sales selling general administrative expenses amounts 455 million 142 million respectively revenues results operations businesses product lines exited material notes consolidated financial statements continued 20 quarterly financial information unaudited net income 2000 includes net gain 18 million 12 million tax six cents per diluted share resulting sale real estate second quarter partially offset loss sale business b gain 28 million 19 million tax 10 cents per diluted share resulting demutualization metropolitan life insurance company third quarter net income 1999 includes gain 36 million 24 million tax 12 cents per diluted share sale companys railroad electronics business first quarter b gain 28 million 18 million tax nine cents per diluted share sale companys north american transformer business fourth quarter c loss 29 million 19 million tax 10 cents per diluted share associated writeoff fourth quarter companys investment goss preferred stock company received connection sale graphic systems business october 1996 2000 company changed method determining cost certain inventories lifo method fifo method change fifo method applied retroactively restating consolidated financial statements effect change increase cost sales 8 million fourth quarter full year 1999 decrease net income 3 million two cents per diluted share fourth quarter 3 million one cent per diluted share full year per share information calculated quarterly annual period using average outstanding shares period therefore sum quarterly per share amounts necessarily equal annual per share amounts presented independent auditors report board directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 2000 1999 related consolidated statements operations shareowners equity cash flows comprehensive income loss three years period ended september 30 2000 audits also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 2000 1999 results operations cash flows three years period ended september 30 2000 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2000 company changed method determining cost certain inventories lastin firstout method firstin firstout method retroactively restated 1999 1998 financial statements change 1998 company changed method accounting certain inventoriable general administrative costs related government contracts deloitte touche llp milwaukee wisconsin november 1 2000 see also table caption summary results operations mda page 12 hereof item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell international corporation business name rockwell automation rockwell company certain prior year amounts reclassified conform current year presentation june 29 2001 company completed spinoff rockwell collins avionics communications business certain assets liabilities independent separately traded publicly held company spinoff connection spinoff outstanding shares rockwell collins inc rockwell collins distributed rockwell shareowners basis one rockwell collins share outstanding rockwell share commensurate spinoff rockwell collins made special payment company 300 million net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company recorded decrease shareowners equity following spinoff rockwell collins company 50 percent ownership interest rockwell scientific company llc rscformerly known rockwell science center december 31 1998 company completed spinoff former semiconductor systems business semiconductor systems independent separately traded publicly held company distributing outstanding shares conexant systems inc conexant companys shareowners prorata basis consolidation consolidated financial statements company include accounts company majorityowned subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance generally accepted accounting principles require management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates used accounting among items allowances doubtful accounts excess obsolete inventory product warranty costs workers compensation product selfinsurance liabilities employee benefits reserves contingencies revenue recognition sales generally recorded following occurred agreement sale exists product delivery acceptance occurred services rendered pricing fixed determinable collection reasonably assured notes consolidated financial statements continued 1 accounting policies continued cash equivalents cash equivalents includes time deposits certificates deposit original maturities three months less inventories stated lower cost market using firstin firstout fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided generally using accelerated straightline methods 15 40 years buildings improvements 3 14 years machinery equipment significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amounts charged expense intangible assets goodwill intangible assets generally result business acquisitions company accounts business acquisitions purchase method assigning purchase price tangible intangible assets liabilities assets acquired liabilities assumed recorded fair values excess purchase price amounts assigned recorded goodwill amortized using straightline method periods ranging 5 40 years trademarks distributor networks patents intangibles amortized straightline basis estimated useful lives generally ranging 5 40 years impairment longlived assets longlived assets including goodwill reviewed impairment events circumstances indicate carrying amount longlived asset may recoverable assets disposed longlived assets held use reviewed impairment comparing carrying amount asset undiscounted future cash flows expected generated asset remaining useful life asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair value assets disposed reported lower carrying amount fair value less cost sell management determines fair value using discounted future cash flow analysis accepted valuation techniques investments affiliates company ability exert significant influence control including rsc accounted using equity method accounting accordingly companys proportional share respective affiliates earnings losses included income consolidated statement operations notes consolidated financial statements continued 1 accounting policies continued derivative financial instruments company uses derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks foreign currency forward exchange contracts used hedge changes amount future cash flows associated intercompany transactions generally forecasted occur within one year cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies interest rate swap contracts periodically used manage balance fixed floating rate debt companys accounting method derivative financial instruments based upon designation instruments hedges generally accepted accounting principles policy company execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollar translated us dollars using exchange rates end respective period sales costs expenses translated average exchange rates effective respective period foreign currency translation gains losses included component accumulated comprehensive loss currency transaction gains losses included results operations period incurred stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees stock options granted prices equal greater fair market value companys common stock grant dates therefore compensation expense recognized connection stock options granted employees compensation expense resulting grants restricted stock recognized generally period service performed environmental matters company records accruals environmental matters accounting period responsibility established cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation costs future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery notes consolidated financial statements continued 1 accounting policies continued recently adopted accounting standards company adopted emerging issues task force issue 0010 accounting shipping handling fees costs eitf 0010 july 1 2001 eitf 0010 requires companies classify shipping handling amounts billed customers sales company historically classified shipping handling amounts billed customers reduction cost sales shipping handling amounts billed customers reclassified sales cost sales 19 million 2001 20 million 2000 17 million 1999 shipping handling costs included cost sales consolidated statement operations effective october 1 2000 company adopted securities exchange commission staff accounting bulletin 101 revenue recognition financial statements sab 101 accounting changes required connection adoption sab 101 accordingly adoption effect companys results operations shareowners equity effective july 1 2000 company adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 133 requires company record derivatives balance sheet fair value regardless purpose intent holding derivatives hedges adjusted fair value earnings derivatives hedges depending nature hedge changes fair value either offset changes fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings ineffective portion derivatives change fair value immediately recognized earnings effect adopting sfas 133 material companys financial position results operations shareowners equity new accounting standards june 2001 financial accounting standards board issued sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment written charged results operations carrying amount exceeds estimated fair value sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 company expects adopt sfas 142 effective october 1 2001 management expects effect ceasing amortization goodwill increase net income approximately 41 million tax 22 cents per diluted share fiscal 2002 company completed assessment additional effects adopting sfas 142 august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment longlived assets longlived assets disposed sfas 144 effective fiscal years beginning december 15 2001 early adoption permitted management currently evaluating provisions sfas 144 believes effect companys financial position results operations shareowners equity resulting adoption notes consolidated financial statements continued 2 discontinued operations financial statements restated periods presented classify rockwell collins discontinued operation together semiconductor systems previously reported discontinued operation september 30 2000 net assets rockwell collins consisted following millions summarized results discontinued operations follows millions results operations rockwell collins 2001 include 21 million costs directly related spinoff notes consolidated financial statements continued 3 special charges 2001 company recorded special charges 91 million 60 million tax 32 cents per diluted share costs associated consolidation closing facilities realignment administrative functions reduction workforce primarily north america approximately 2000 employees asset impairments special charges reflected consolidated statement operations year ended september 30 2001 cost sales selling general administrative expenses amounts 50 million 41 million respectively company expects substantially complete actions first quarter 2002 total cash expenditures connection actions expected approximate 51 million company spent approximately 17 million september 30 2001 employee severance separation costs connection spinoff rockwell collins assumed liability employee severance separation costs resulting actions approximately 7 million result actions taken september 30 2001 workforce reduced approximately 1400 employees special charges included writedowns carrying amount goodwill certain facilities machinery equipment totaling approximately 26 million resulting decision shut certain facilities exit nonstrategic operations charges represented difference fair values assets carrying values fair value determined management basis various customary valuation techniques revenues results operations businesses product lines exited material charges utilization year ended september 30 2001 summarized follows millions company evaluates adequacy reserves recorded prior years makes necessary revisions changes estimates periods occur 2001 company recorded adjustment 8 million reduction cost sales 2 million reduction selling general administrative expenses primarily result lower expected employee separation lease termination costs associated actions taken prior years remaining balances september 30 2001 related charges taken previous years significant 4 acquisitions businesses october 2000 control systems segment acquired batch software services business sequencia corporation purchase price acquisition 6 million allocated intangible assets including developed technology assembled workforce excess purchase price amounts assigned intangible assets recorded goodwill intangible assets amortized straightline basis approximately 5 years notes consolidated financial statements continued 4 acquisitions businesses continued march 2000 control systems segment acquired entek ird international corporation entek provider machinery condition monitoring solutions april 2000 control systems segment acquired substantially assets assumed certain liabilities systems modeling corporation software developer aggregate purchase price acquisitions 70 million 61 million allocated intangible assets including developed technology excess purchase price amounts assigned tangible intangible assets recorded goodwill developed technology amortized straightline basis period 5 years goodwill related acquisitions entek systems modeling corporation amortized straightline basis 15 10 years respectively 1999 company acquired four businesses aggregate purchase price 185 million 178 million allocated intangible assets goodwill amortized straightline basis periods ranging 10 30 years intangible assets amortized straightline basis 10 years amounts recorded liabilities assumed connection acquisitions 1 million 16 million 41 million years ended september 30 2001 2000 1999 respectively acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information presented combined effect acquisitions material companys results operations financial position 5 inventories summarized follows millions 6 property summarized follows millions notes consolidated financial statements continued 7 intangible assets intangible assets summarized follows millions 8 shortterm debt shortterm debt consists following millions weighted average interest rate shortterm bank borrowings 20 september 30 2001 24 september 30 2000 september 30 2001 company 1 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities shortterm credit facilities available foreign subsidiaries amounted 191 million september 30 2001 consisted arrangements significant commitment fees 9 current liabilities current liabilities summarized follows millions notes consolidated financial statements continued 10 longterm debt longterm debt consists following millions 11 financial instruments companys financial instruments include short longterm debt foreign currency forward exchange contracts fair value shortterm debt approximates carrying value due shortterm nature september 30 2001 2000 carrying value longterm debt 923 million 925 million respectively fair value longterm debt based upon quoted market prices similar issues 887 million 843 million september 30 2001 2000 respectively foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2001 2000 company outstanding foreign currency forward exchange contracts notional amounts 738 million 852 million respectively primarily consisting contracts euro pound sterling canadian dollar australian dollar swiss franc notional amounts stated us dollar equivalents spot exchange rates respective dates september 30 2001 net carrying value foreign currency forward exchange contracts 2 million equal fair value based upon quoted market prices contracts similar maturities september 30 2001 2000 foreign currency forward exchange contracts recorded current assets amounts 11 million 51 million respectively current liabilities amounts 9 million 11 million respectively company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts company designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges material february 2000 company entered interest rate swap contract swap effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based 90 day libor 542 september 30 2000 september 30 2000 fair value swap based upon quoted market prices contracts similar maturities approximately 13 million october 24 2000 swap terminated net gain 16 million gain amortized reduction interest expense remaining term 615 notes payable 2008 notes consolidated financial statements continued 12 shareowners equity common stock september 30 2001 authorized stock company consisted one billion shares common stock par value 1 per share 25 million shares preferred stock without par value september 30 2001 32 million shares common stock reserved various employee incentive plans changes outstanding common shares summarized follows millions 2001 2000 1999 dilutive stock options resulted increase average outstanding shares 24 million 21 million 31 million respectively preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 common stock although board directors authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right accumulated comprehensive loss accumulated comprehensive loss including amounts related rockwell collins september 30 2000 consisted following millions 2001 unrealized gains cash flow hedges 22 million 15 million tax reclassified earnings approximately 5 million unrealized gains cash flow hedges reclassified earnings 2002 management expects unrealized gains offset hedged items recognized earnings notes consolidated financial statements continued 13 stock options purchase common stock company granted various incentive plans board action directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans 12 million september 30 2001 none incentive plans presently permits options granted november 30 2009 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options 2001 2000 1999 company granted performancevesting options expire ten years date granted vest earlier date market price companys common stock reaches specified level predetermined period time certain financial performance criteria met b period six nine years date granted information relative stock options follows shares thousands connection spinoff number exercise prices certain options adjusted order preserve intrinsic value options outstanding immediately spinoff certain options option holders received combination rockwell collins options adjustments made number exercise prices options preserve intrinsic value rockwell collins options outstanding immediately spinoff outstanding rockwell options held rockwell collins employees generally converted rockwell collins options notes consolidated financial statements continued 13 stock options continued connection spinoff semiconductor systems number exercise prices certain options adjusted order preserve intrinsic value options outstanding immediately spinoff certain options option holders received combination rockwell conexant options adjustments made number exercise prices options preserve intrinsic value rockwell conexant options outstanding immediately spinoff outstanding rockwell options held semiconductor systems employees converted conexant options following table summarizes information stock options outstanding september 30 2001 shares thousands remaining life years companys net income earnings per share would reduced following pro forma amounts company accounted stockbased plans using fair value method provided sfas 123 accounting stockbased compensation millions except per share amounts 2001 pro forma net income includes 6 million 4 million tax two cents per diluted share pro forma compensation expense related spinoff rockwell collins 1999 pro forma net income includes 87 million 57 million tax 29 cents per diluted share pro forma compensation expense related spinoff semiconductor systems pro forma effect stock options net income 2001 may indicative pro forma effect net income future years weighted average fair value options granted 879 1630 955 per share 2001 2000 1999 respectively fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions notes consolidated financial statements continued 14 retirement benefits company sponsors pension postretirement benefit plans employees pension plans cover companys employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service companys policy fund pension obligations conformity funding requirements applicable laws governmental regulations postretirement benefits form retirement medical plans cover companys united states employees provide payment certain medical costs eligible employees dependents upon retirement connection spinoff rockwell collins assumed former rockwell international corporation domestic qualified plan rockwell retirement plan pension plan obligations attributable rockwells domestic active employees former employees control systems power systems electronic commerce businesses retained rockwell proportionate share pension plan assets transferred rockwell retirement plan new pension plan established rockwell company also retained liabilities postretirement benefits active former employees tables reflect continuing rockwell plans components net periodic benefit cost follows millions company recognized curtailment gain 9 million 14 million 2000 1999 respectively special termination benefit charges 3 million 3 million 11 million 2001 2000 1999 respectively notes consolidated financial statements continued 14 retirement benefits continued benefit obligation plan asset funded status net liability information summarized follows millions connection spinoff pension plan obligations attributable rockwell science center domestic active former employees proportionate share pension plan assets transferred rockwell retirement plan new pension plan established rsc also assumed obligation postretirement benefits active former employees notes consolidated financial statements continued 14 retirement benefits continued company uses actuarial measurement date june 30 measure benefit obligations significant assumptions used determining benefit obligations net periodic benefit cost summarized follows weighted averages decreasing 55 2016 discount rate compensation increase rate health care cost trend rate assumptions determined measurement date expected return plan assets assumption determined previous measurement date pension benefits projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 93 million 78 million 20 million respectively september 30 2001 63 million 55 million 1 million respectively september 30 2000 postretirement benefits assumed health care cost trend rates significant effect amounts reported retiree medical plans onepercentage point change assumed health care cost trend rates would following effect millions defined contribution savings plans company also sponsors certain defined contribution savings plans eligible employees expense related plans 22 million 21 million 21 million 2001 2000 1999 respectively notes consolidated financial statements continued 15 income net components income net follows millions 2000 company recorded 32 million gain sale real estate partially offset loss 14 million sale power systems business recorded 28 million income resulting demutualization metropolitan life insurance company 1999 company recorded loss 29 million associated writeoff investment goss graphic systems inc preferred stock company received connection sale graphic systems business addition company recorded gain 32 million sale control systems north american transformer business 16 income taxes components income tax provision follows millions 2001 company reached agreement various taxing authorities refund claims related certain prior years recorded 22 million reduction income tax provision notes consolidated financial statements continued 16 income taxes continued net current deferred income tax benefits september 30 2001 2000 consist tax effects temporary differences related following millions net longterm deferred income taxes balance sheet september 30 2001 2000 consist tax effects temporary differences related following millions notes consolidated financial statements continued 16 income taxes continued management believes likely current longterm deferred tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 453 million united states taxable income past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance established deferred tax assets related net operating loss carryforwards foreign tax credit carryforwards utilization uncertain carryforward period 1 million net operating losses ends 2002 2005 carryforward period remaining net operating losses indefinite carryforward period foreign tax credits ends 2002 effective income tax rate differed united states statutory tax rate reasons set forth income tax provisions calculated based upon following components income continuing operations income taxes millions provision made united states state additional nonunited states income taxes related approximately 239 million undistributed earnings foreign subsidiaries intended permanently reinvested practical determine united states federal income tax liability would payable earnings permanently reinvested companys united states income tax returns years 1995 1997 currently examination connection divestiture companys aerospace defense business ad business spinoff companys automotive components business automotive semiconductor systems spinoff rockwell collins spinoff company retained tax liabilities right tax refunds related united states certain nonus operations ad business automotive semiconductor systems rockwell collins periods prior respective divestiture dates management expects examination companys 1995 1997 tax years completed 2002 management believes adequate provision income taxes made years 2001 notes consolidated financial statements continued 17 supplementary financial statement information income taxes paid interest payments related discontinued operations 2001 2000 1999 significant minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 200 million september 30 2001 payable follows millions 2002 44 2003 37 2004 31 2005 23 2006 17 2006 48 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 44 million september 30 2001 receivable 2008 approximately 6 million per year 18 commitments contingent liabilities federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect companys liquidity capital resources competitive position financial condition company designated potentially responsible party 19 superfund sites excluding sites companys records disclose involvement companys potential liability finally determined assumed third parties management estimates total reasonably possible costs company could incur remediation superfund sites september 30 2001 13 million 9 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2001 management estimated highest total reasonably possible costs company could incur matters 55 million company recorded environmental accruals matters 25 million addition matters company assumed certain environmental liabilities connection 1995 acquisition reliance electric company reliance company indemnified exxonmobil corporation exxon substantially costs associated reliance matters september 30 2001 company recorded liability approximately 29 million receivable approximately 28 million reliance matters management estimates highest total reasonably possible costs matters approximately 37 million company substantially indemnified exxon based assessment management believes companys expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect companys liquidity capital resources competitive position financial condition management cannot assess possible effect compliance future requirements notes consolidated financial statements continued 18 commitments contingent liabilities continued various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment contract matters connection divestiture ad business boeing company boeing rockwell agreed indemnify boeing certain government contract environmental matters related operations ad business periods prior divestiture connection spinoffs automotive semiconductor systems rockwell collins spunoff companies agreed indemnify rockwell substantially contingent liabilities related respective businesses including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect companys business financial condition ordinary course business company divested certain businesses result divestitures may lawsuits claims proceedings instituted asserted company related period businesses owned company management believes judgments company related matters would material adverse effect companys business financial condition 19 business segment information rockwell provider industrial automation power control information products services company organized based upon products services three operating segments consisting control systems power systems electronic commerce following spinoff rockwell collins company 50 percent ownership interest rsc accounts interest rsc using equity method control systems segment supplier industrial automation products systems software services focused helping customers control manufacturing processes products include controllers io inputoutput systems drives sensors packaged control products operator interface devices software products services network monitoring products primarily marketed rockwell automation allenbradley rockwell software brand names major markets served include consumer products food beverage transportation metals mining pulp paper petroleum specialty chemicals pharmaceuticals electric power water treatment electronic assembly semiconductor fabrication power systems segment supplier industrial automation mechanical power transmission products industrial motors drives products include power transmission components gear reducers speed drives shaft mounted reducers conveyor pulleys shaft couplings clutches motor brakes mounted bearings motors products primarily marketed dodge reliance electric brand names major markets served include mining aggregate foodbeverage forestry petrochemicals metals unit handling air handling environmental electronic commerce segment solutions supplier companies interact customers via telephone internet products include automatic call distributors computer telephony integration software information collection reporting queuing management systems call center systems consulting services major markets served include service transportation energy healthcare retail telecommunications financial notes consolidated financial statements continued 19 business segment information continued following tables reflect sales operating results companys reportable segments years ended september 30 millions represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 companys 50 percent ownership interest rsc accounted using equity method companys proportional share rscs earnings losses included general corporatenet among considerations company evaluates performance allocates resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonrecurring special charges gains losses disposition businesses earnings losses equity affiliates incremental acquisition related expenses resulting purchase accounting adjustments goodwill intangible asset amortization depreciation inventory purchased research development charges accounting policies used preparing segment information consistent described note 1 special charges discussed note 3 effective october 1 2001 management changed method evaluating segment performance exclude segment operating earnings purchase accounting items including depreciation intangible asset amortization management believes exclusion items provides additional insight operating performance segments notes consolidated financial statements continued 19 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property 50 percent ownership interest rsc notes consolidated financial statements continued 19 business segment information continued company conducts significant portion business activities outside united states following tables reflect geographic sales property geographic region millions sales attributed geographic regions based country destination 20 quarterly financial information unaudited net income 2001 includes charges 69 million 45 million tax 25 cents per diluted share costs associated realignment actions third quarter b charges 22 million 15 million tax eight cents per diluted share costs associated realignment actions fourth quarter c gain 18 million 12 million tax six cents per diluted share resulting favorable settlement intellectual property matter fourth quarter notes consolidated financial statements continued 20 quarterly financial information unaudited continued net income 2000 includes net gain 18 million 12 million tax six cents per diluted share resulting sale real estate second quarter partially offset loss sale business b gain 28 million 19 million tax 10 cents per diluted share resulting demutualization metropolitan life insurance company third quarter independent auditors report board directors shareowners rockwell international corporation audited accompanying consolidated balance sheet rockwell international corporation subsidiaries september 30 2001 2000 related consolidated statements operations shareowners equity cash flows comprehensive income three years period ended september 30 2001 audits also included financial statement schedule listed item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell international corporation subsidiaries september 30 2001 2000 results operations cash flows three years period ended september 30 2001 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp milwaukee wisconsin november 7 2001 item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell automation inc company rockwell automation formerly named rockwell international corporation certain prior year amounts reclassified conform current year presentation june 29 2001 company completed spinoff rockwell collins avionics communications business certain assets liabilities independent separately traded publicly held company spinoff connection spinoff outstanding shares rockwell collins inc rockwell collins distributed rockwell automation shareowners basis one rockwell collins share outstanding rockwell automation share time spinoff rockwell collins made special payment company 300 million net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company recorded decrease shareowners’ equity consolidation consolidated financial statements company include accounts company subsidiaries company control significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates used accounting among items sales rebates incentives distributors commercial customers allowance doubtful accounts excess obsolete inventory impairment longlived assets product warranty obligations retirement benefits selfinsurance liabilities litigation claims contingencies including environmental matters income taxes revenue recognition sales generally recorded following occurred agreement sale exists product delivery acceptance occurred services rendered pricing fixed determinable collection reasonably assured management required make judgments whether pricing fixed determinable whether collectibility reasonably assured securities exchange commission’s sec staff accounting bulletin sab 101 revenue recognition financial statements provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues company’s revenue recognition policy accordance generally accepted accounting principles sab 101 company records accruals sales rebates distributors time shipment based upon historical experience changes allowances may required future rebates differ historical experience accordance emerging issues task force eitf issue 0010 accounting shipping handling fees costs shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued cash equivalents cash equivalents includes time deposits certificates deposit original maturities three months less receivables stated net allowances doubtful accounts 45 september 30 2002 43 million september 30 2001 inventories stated lower cost market using firstin firstout fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided generally using straightline accelerated methods 15 40 years buildings improvements 3 14 years machinery equipment significant renewals betterments capitalized replaced units written maintenance repairs well renewals minor amounts charged expense intangible assets goodwill intangible assets generally result business acquisitions company accounts business acquisitions assigning purchase price tangible intangible assets liabilities assets acquired liabilities assumed recorded fair values excess purchase price amounts assigned recorded goodwill since october 1 2001 upon adoption statement financial accounting standard sfas 142 goodwill intangible assets sfas 142 goodwill intangible assets indefinite useful lives longer systematically amortized instead reviewed impairment excess carrying value estimated fair value charged results operations distributor networks developed technology patents intangibles finite useful lives amortized straightline basis estimated useful lives generally ranging 3 40 years impairment longlived assets company evaluates recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable company evaluates recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair value assets disposed reported lower carrying amount fair value less cost sell management determines fair value using discounted future cash flow analysis accepted valuation techniques investments affiliates company ability exert significant influence control primarily including rockwell scientific company llc rsc accounted using equity method accounting accordingly company’s proportional share respective affiliate’s earnings losses included income expense consolidated statement operations affiliated notes consolidated financial statements continued 1 basis presentation accounting policies continued companies material individually aggregate rockwell automation’s financial position results operations cash flows derivative financial instruments company uses derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks foreign currency forward exchange contracts used hedge changes amount future cash flows associated intercompany transactions generally forecasted occur within one year cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies interest rate swap contracts periodically used manage balance fixed floating rate debt company’s accounting method derivative financial instruments based upon designation instruments hedges generally accepted accounting principles policy company execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollar translated us dollars using exchange rates end respective period sales costs expenses translated average exchange rates effective respective period foreign currency translation gains losses included component accumulated comprehensive loss currency transaction gains losses included results operations period incurred earnings per share company presents two earnings per share eps amounts basic diluted basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year common equivalent shares excluded computation periods antidilutive effect difference basic diluted eps solely attributable stock options company uses treasury stock method calculate effect outstanding stock options stock options exercise price exceeds average market price period antidilutive effect eps accordingly excluded calculation years ended september 30 2002 2001 2000 options 40 million 59 million 48 million respectively excluded diluted eps calculation antidilutive stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees stock options granted prices equal fair market value company’s common stock grant dates therefore compensation expense recognized connection stock options granted employees compensation expense resulting grants restricted stock recognized period service performed environmental matters company records accruals environmental matters accounting period responsibility probable cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one notes consolidated financial statements continued 1 basis presentation accounting policies continued potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery recently adopted accounting standards effective october 1 2001 company adopted sfas 142 sfas 142 goodwill certain intangible assets longer systematically amortized instead reviewed impairment excess carrying value estimated fair value charged results operations see note 3 company adopted eitf issue 0114 income statement characterization reimbursements received ‘out pocket’ expenses incurred eitf 0114 january 1 2002 eitf 0114 requires companies classify sales certain amounts billed customers historically classified reduction cost sales pocket expenses reclassified cost sales 6 million 2001 5 million 2000 june 2001 financial accounting standards board issued sfas 141 business combinations sfas 141 addresses financial accounting reporting business combinations requires purchase method accounting used business combinations initiated june 30 2001 new accounting standards june 2001 financial accounting standards board issued sfas 143 accounting asset retirement obligations sfas 143 requires entities recognize fair value liability legal obligations associated retirement tangible longlived assets period incurred reasonable estimate fair value made august 2001 financial accounting standards board issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment longlived assets held used longlived assets disposed sale sfas 144 presentation discontinued operations broadened include component entity rather limited segment business also accrual future operating losses discontinued businesses longer permitted july 2002 financial accounting standards board issued sfas 146 accounting costs associated exit disposal activities sfas 146 addresses financial accounting reporting associated exit disposal activities sfas 146 company measure costs associated exit disposal activity fair value recognize costs period liability incurred rather date commitment exit disposal plan company required adopt sfas 143 sfas 144 beginning fiscal year 2003 management currently evaluating provisions sfas 143 sfas 144 believes material effect company’s financial position results operations shareowners’ equity time adoption company required adopt sfas 146 exit disposal activities initiated december 31 2002 notes consolidated financial statements continued 2 acquisitions businesses september 2002 company’s control systems segment acquired engineering services system integration assets spel spol sro acquisition expected accelerate establishment company complete solution provider central europe also strategically locates company region future growth opportunities may 2002 company’s control systems segment acquired assets controller division samsung electronics company limited’s mechatronics business controller division company combined existing korean business controller division form new business operates name rockwell samsung automation creates technologies design development automation products acquisition expected expand company’s existing operations korea company’s design product development capabilities support future commercial operational expansion asia pacific region march 2002 company’s control systems segment acquired stock propack data gmbh propack provider manufacturing information systems pharmaceutical regulated industries acquisition expected broaden company’s position pharmaceuticals market enhance company’s process solutions business enable company expand reach manufacturing information markets january 2002 company’s control systems segment acquired stock tesch gmbh electronic products safety relay manufacturer expanding company’s machine safety product research development capabilities aggregate cash purchase price businesses acquired 2002 majority related acquisition propack approximately 71 million assets acquired liabilities assumed recorded fair values excess purchase price estimated fair value acquired tangible intangible assets recorded goodwill october 2000 control systems segment acquired batch software services business sequencia corporation purchase price acquisition 6 million allocated intangible assets including developed technology assembled workforce excess purchase price amounts assigned intangible assets recorded goodwill march 2000 control systems segment acquired entek ird international corporation provider machinery condition monitoring solutions april 2000 control systems segment acquired substantially assets assumed certain liabilities systems modeling corporation software developer aggregate cash purchase price acquisitions 2000 70 million 61 million allocated intangible assets including developed technology excess purchase price amounts assigned tangible intangible assets recorded goodwill developed technology amortized straightline basis period 5 years amounts recorded liabilities assumed connection acquisitions 6 million 2002 1 million 2001 16 million 2000 acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information allocation purchase price presented combined effect acquisitions material company’s results operations financial position notes consolidated financial statements continued 3 goodwill intangible assets connection adoption sfas 142 management determined company’s allenbradley reliance dodge trademarks indefinite useful lives accordingly management performed transitional intangible asset impairment test resulted impairment charge 56 million 35 million tax 19 cents per diluted share related reliance trademark used primarily power systems impairment charge represents excess carrying amount trademark estimated fair value determined management assistance independent valuation experts utilizing relief royalty valuation method estimates benefit company resulting owning rather licensing trademark also connection adoption sfas 142 company completed transitional goodwill impairment test 2002 result impairment charge 73 million tax 39 cents per diluted share recorded related goodwill power systems reporting unit fair value reporting unit estimated using combination valuation techniques including present value expected future cash flows historical valuations comparable businesses previous method determining impairment prescribed sfas 121 accounting impairment longlived assets longlived assets disposed utilized undiscounted cash flow approach initial impairment assessment sfas 142 utilizes fair value approach trademark impairment charge goodwill impairment charge discussed result change accounting method determining impairment goodwill certain intangible assets charges recorded cumulative effect accounting change amount 129 million 108 million tax 58 cents per diluted share october 1 2001 accompanying condensed consolidated statement operations changes carrying amount goodwill year ended september 30 2002 follows millions includes adjustment goodwill resolution tax matters relating tax returns filed reliance electric company prior acquisition rockwell automation 1995 change carrying amount goodwill year ended september 30 2001 resulted primarily amortization notes consolidated financial statements continued 3 goodwill intangible assets continued results periods prior adoption sfas 142 restated following table reconciles reported income continuing operations accounting change net income earnings per share would resulted 2001 2000 sfas 142 adopted effective october 1 1999 millions except per share amounts notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets september 30 2002 september 30 2001 consisted following millions unamortized intangible assets consists trademarks determined indefinite life estimated amortization expense fiscal years ended september 30 follows millions connection business acquisitions 2002 company acquired 12 million intangible assets 9 million assigned developed technology weightedaverage amortization period intangible assets acquired 2002 5 years amortization period developed technology acquired 2002 6 years notes consolidated financial statements continued 4 inventories summarized follows millions inventories reported net allowance excess obsolete inventory 53 million september 30 2002 50 million september 30 2001 5 property summarized follows millions 6 shortterm debt shortterm debt consists following millions included current portion longterm debt 150 million 680 notes mature april 2003 weighted average interest rate shortterm bank borrowings 28 percent september 30 2002 20 percent september 30 2001 september 30 2002 company 1 billion unsecured credit facilities various banks support commercial paper borrowings significant commitment fees compensating balance requirements facilities october 29 2002 company terminated credit facilities entered new credit facilities various banks 3375 million expiring october 2003 3375 million expiring october 2005 pursuant terms new credit facilities company’s debt capital ratio shall exceed 60 percent shortterm credit facilities available foreign subsidiaries amounted 108 million september 30 2002 consisted arrangements significant commitment fees notes consolidated financial statements continued 7 current liabilities current liabilities summarized follows millions 8 longterm debt longterm debt consists following millions september 2002 company entered interest rate swap contract swap effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 421 percent september 30 2002 september 30 2002 fair value swap based upon quoted market prices contracts similar maturities approximately 6 million permitted sfas 133 company designated swap fair value hedge accordingly fair value swap recorded assets consolidated balance sheet carrying value underlying debt adjusted equal amount accordance sfas 133 9 financial instruments company’s financial instruments include short longterm debt foreign currency forward exchange contracts fair value shortterm debt approximates carrying value due shortterm nature carrying value longterm debt 919 million september 30 2002 910 million september 30 2001 fair value longterm debt based upon quoted market prices similar issues 976 million september 30 2002 898 million september 30 2001 foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2002 2001 company outstanding foreign currency forward exchange contracts primarily consisting contracts euro pound sterling canadian dollar swiss franc net carrying value foreign currency forward exchange notes consolidated financial statements continued 9 financial instruments continued contracts 15 million september 30 2002 2 million september 30 2001 equal fair value based upon quoted market prices contracts similar maturities foreign currency forward exchange contracts recorded current assets amounts 6 million september 30 2002 11 million september 30 2001 current liabilities amounts 21 million september 30 2002 9 million september 30 2001 company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts company designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges material 10 shareowners’ equity common stock september 30 2002 authorized stock company consisted one billion shares common stock par value 1 per share 25 million shares preferred stock without par value september 30 2002 287 million shares common stock reserved various employee incentive plans changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 common stock although board directors authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right notes consolidated financial statements continued 10 shareowners’ equity continued accumulated comprehensive loss accumulated comprehensive loss consisted following millions unrealized gains cash flow hedges 7 million 4 million tax 2002 22 million 15 million tax 2001 reclassified earnings offset losses hedged items amounts reclassified earnings 2000 approximately 3 million net unrealized losses cash flow hedges september 30 2002 reclassified earnings 2003 management expects unrealized losses offset hedged items recognized earnings 11 stock options purchase common stock company granted various incentive plans board action directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans 76 million september 30 2002 none incentive plans presently permits options granted november 30 2009 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options performancevesting options expire ten years date granted vest earlier date market price company’s common stock reaches specified level predetermined period time certain financial performance criteria met b period six nine years date granted notes consolidated financial statements continued 11 stock options continued information relative stock options follows shares thousands approximately 11 million performancevesting options exercisable september 30 2002 connection spinoff number exercise prices certain options adjusted order preserve intrinsic value options outstanding immediately spinoff certain options option holders received combination rockwell automation rockwell collins options adjustments made number exercise prices options preserve intrinsic value rockwell automation rockwell collins options outstanding immediately spinoff outstanding rockwell automation options held rockwell collins employees generally converted rockwell collins options none information 2000 options outstanding beginning 2001 grants 2001 restated reflect adjustments made connection spinoff following table summarizes information stock options outstanding september 30 2002 shares thousands remaining life years closing price company’s common stock new york stock exchangecomposite transactions reporting system september 30 2002 1627 per share notes consolidated financial statements continued 11 stock options continued company’s net income earnings per share would reduced following pro forma amounts company accounted stockbased plans using fair value method provided sfas 123 accounting stockbased compensation millions except per share amounts 2001 pro forma net income includes 6 million 4 million tax two cents per diluted share pro forma compensation expense related spinoff rockwell collins pro forma effect stock options net income 2002 may indicative pro forma effect net income future years per share weighted average fair value options granted 299 2002 879 2001 1630 2000 fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions per share weighted average fair value options granted 2001 2000 restated reflect spinoff notes consolidated financial statements continued 12 retirement benefits company sponsors pension postretirement benefit plans employees pension plans cover company’s employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees generally based specified benefit amounts years service company’s policy fund pension obligations conformity funding requirements applicable laws governmental regulations postretirement benefits form retirement medical plans cover company’s united states employees provide payment certain medical costs eligible employees dependents upon retirement pension plan obligations attributable rockwell automation’s domestic active employees former employees control systems power systems firstpoint contact businesses retained rockwell automation proportionate share pension plan assets transferred former rockwell international corporation domestic qualified plan rockwell retirement plan new pension plan established rockwell automation connection spinoff rockwell collins assumed rockwell retirement plan company also retained liabilities postretirement benefits active former employees tables reflect continuing rockwell automation plans components net periodic benefit cost follows millions company recognized curtailment gain 9 million 2000 special termination benefit charges 3 million 2001 3 million 2000 notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued connection spinoff pension plan obligations attributable rockwell science center domestic active former employees proportionate share pension plan assets transferred rockwell retirement plan new pension plan established rsc also assumed obligation postretirement benefits active former employees company uses actuarial measurement date june 30 measure benefit obligations significant assumptions used determining benefit obligations net periodic benefit cost summarized follows weighted averages decreasing 55 2017 discount rate compensation increase rate health care cost trend rate assumptions determined measurement date expected return plan assets assumption determined previous measurement date effective october 1 2002 company amended united states postretirement healthcare benefit program order mitigate increasing cost postretirement healthcare services change phased follows effective january 1 2004 company per amendment program implemented 1992 contribute 50 percent amount excess 2003 per capita amount however company’s 2004 contribution shall limited 75 percent increase 2003 per capita amount effective january 1 2005 company limit future per capita maximum contribution calendar 2004 per capita contribution effect change reduce benefit obligation 62 million net periodic benefit cost 2003 approximately 32 million approximately 20 percent lower cost would without implementing change pension benefits projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 1325 million 1137 million 961 million respectively 2002 measurement date june 30 93 million 78 million 20 million respectively 2001 measurement date postretirement benefits assumed health care cost trend rates significant effect amounts reported retiree medical plans onepercentage point change assumed health care cost trend rates would following effect millions notes consolidated financial statements continued 12 retirement benefits continued defined contribution savings plans company also sponsors certain defined contribution savings plans eligible employees expense related plans 21 million 2002 22 million 2001 21 million 2000 13 special charges 2001 company recorded special charges 91 million 60 million tax 32 cents per diluted share costs associated consolidation closing facilities realignment administrative functions reduction workforce primarily north america approximately 2000 employees asset impairments special charges reflected consolidated statement operations year ended september 30 2001 cost sales selling general administrative expenses amounts 50 million 41 million respectively company completed actions september 30 2002 total cash expenditures connection actions expected approximate 50 million company spent approximately 43 million september 30 2002 41 million related employee severance separation costs connection spinoff rockwell collins assumed liability employee severance separation costs resulting actions approximately 7 million result actions taken september 30 2002 workforce reductions completed remaining balance september 30 2002 relates salary continuation benefit payments terminated employees special charges included writedowns carrying amount goodwill certain facilities machinery equipment totaling approximately 27 million resulting decision shut certain facilities exit nonstrategic operations charges represented difference fair values assets carrying values fair value determined management basis various customary valuation techniques revenues results operations businesses product lines exited material charges utilization years ended september 30 2001 2002 summarized follows millions company evaluates adequacy reserves recorded prior years makes necessary revisions changes estimates periods occur remaining balances september 30 2002 related charges taken previous years significant 2001 company recorded adjustment 8 million reduction cost sales 2 million reduction selling general administrative expenses primarily result lower expected employee separation lease termination costs associated actions taken prior years notes consolidated financial statements continued 14 discontinued operations summarized results company’s rockwell collins avionics communications business follows millions results operations company’s rockwell collins avionics communications business 2001 include 21 million costs directly related spinoff net benefit 3 million discontinued operations 2002 reflects resolution certain obligations related two discontinued businesses related payments approximately 36 million made 2002 reflected cash used discontinued operations accompanying consolidated statement cash flows 15 related party transactions following spinoff company rockwell collins owned 50 percent rockwell scientific company llc rsc formerly whollyowned subsidiary company known rockwell science center september 30 2002 company’s investment rsc 50 million included assets beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company agreement rsc pursuant rsc perform research development services company 2004 company obligated pay rsc minimum 3 million services 2003 4 million services 2004 company incurred approximately 3 million research development services performed rsc year ended september 30 2002 september 30 2002 amount due rsc research development services significant company shares equally rockwell collins providing 4 million line credit rsc bears interest greater company’s rockwell collins’ commercial paper borrowing rate september 30 2002 outstanding borrowings line credit september 30 2002 company sole guarantor performance rsc lease agreement one rsc’s facilities total future minimum lease payments lease approximately 7 million lease agreement term ends 2011 effective october 2002 company rockwell collins guarantees onehalf lease obligation rsc company owns 25 percent colinx llc colinx company provides logistics ecommerce services company paid colinx approximately 15 million 2002 6 million 2001 primarily logistics services addition colinx paid company approximately 3 million 2002 2 million 2001 use facilities owned company services notes consolidated financial statements continued 16 income expense components income expense net follows millions 2000 company recorded 32 million gain sale real estate partially offset loss 14 million sale power systems business recorded 28 million income resulting demutualization metropolitan life insurance company 17 income taxes components income tax provision follows millions 2002 company resolved certain tax matters period 19951999 resolution resulted 48 million reduction company’s income tax provision 11 million reflected tax refund claims current income tax provision 37 million reflected united states deferred income tax provision 2001 company reached agreement various taxing authorities refund claims related certain prior years recorded 22 million reduction income tax provision notes consolidated financial statements continued 17 income taxes continued net current deferred income tax assets september 30 2002 2001 consist tax effects temporary differences related following millions net longterm deferred income tax liabilities september 30 2002 2001 consist tax effects temporary differences related following millions management believes likely current longterm deferred tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 346 million united states taxable income past three years b expectations future earnings c extended period time retirement medical liability paid valuation allowance established september 30 2002 deferred tax assets related nonunited states state local net operating loss carryforwards 12 million capital loss carryforwards 8 million state tax credit carryforwards 3 million utilization uncertain carryforward period majority nonunited states net operating loss carryforwards indefinite carryforward period state local net operating loss carryforwards ends 2007 2022 capital loss carryforwards expire 2007 carryforward period state tax credit carryforwards ends 2003 2011 notes consolidated financial statements continued 17 income taxes continued effective income tax rate differed united states statutory tax rate reasons set forth 48 million reduction 2002 income tax provision resulting resolution certain tax matters period 19951999 reflected effective income tax rate tax refund claims 47 resolution prior period tax matters 160 income tax provisions calculated based upon following components income continuing operations income taxes cumulative effect accounting change millions provision made united states state additional nonunited states income taxes related approximately 261 million undistributed earnings foreign subsidiaries intended permanently reinvested practical determine united states federal income tax liability would payable earnings permanently reinvested company anticipates filing 2003 federal research experimentation tax credit refund claim approximately 100 million years 1997 2001 claim subject audit internal revenue service ultimate potential tax benefit claim currently known therefore benefit recognized financial reporting purposes notes consolidated financial statements continued 18 supplementary financial statement information income taxes paid interest payments related discontinued operations 2001 2000 significant minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 208 million september 30 2002 payable follows millions 2003 47 2004 42 2005 35 2006 25 2007 20 2007 39 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 42 million september 30 2002 receivable 2008 approximately 7 million per year 19 commitments contingent liabilities federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect company’s liquidity capital resources competitive position financial condition company designated potentially responsible party 15 superfund sites excluding sites company’s records disclose involvement company’s potential liability finally determined assumed third parties management estimates total reasonably possible costs company could incur remediation superfund sites september 30 2002 14 million 8 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2002 management estimated highest total reasonably possible costs company could incur matters 51 million company recorded environmental accruals matters 19 million addition matters company assumed certain environmental liabilities connection 1995 acquisition reliance electric company reliance company indemnified exxonmobil corporation exxon substantially costs associated reliance matters september 30 2002 company recorded liability approximately 29 million receivable approximately 28 million reliance matters management estimates highest total reasonably possible costs matters approximately 37 million company substantially indemnified exxon based assessment management believes company’s expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect company’s liquidity capital resources competitive position financial condition management cannot assess possible effect compliance future requirements notes consolidated financial statements continued 19 commitments contingent liabilities continued various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment contract matters connection divestiture former aerospace defense businesses ad business boeing company boeing rockwell automation agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs company’s former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify rockwell automation substantially contingent liabilities related respective businesses including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect company’s business financial condition company time divested certain businesses connection divestitures may lawsuits claims proceedings instituted asserted company related period businesses owned company addition company guaranteed performance payment certain contracts divested businesses including 60 million lease obligation company’s former semiconductor systems business lease obligation company’s former semiconductor systems business secured real property subject lease within range estimated fair values real property consideration guarantee company receive 250000 per quarter conexant december 31 2003 management expects released guarantee december 31 2003 cases company indemnified obligations divested businesses management believes judgments company related matters claims pursuant guarantees would material adverse effect company’s business financial condition connection sale power systems business 2000 company entered supply agreement buyer business agreement requires minimum purchases company approximately 21 million per year december 31 2005 event purchases less 21 million given year company may incur penalties percentage amount actual purchases less contractual minimum period based upon current estimates future purchases management company believe penalties payable terms agreement would material company’s business financial condition 20 business segment information rockwell automation provider industrial automation power control information products services company organized based upon products services three operating segments consisting control systems power systems firstpoint contact company 50 percent ownership interest rsc accounts interest rsc using equity method control systems control systems operating segment supplier industrial automation products systems software services focused helping customers control improve manufacturing processes divided three units components packaged applications group cpag automation control information group acig global manufacturing solutions gms cpag produces industrial components power control motor management products packaged engineered products supplies electromechanical solidstate products including motor starters contactors push buttons signaling devices termination protection devices relays timers notes consolidated financial statements continued 20 business segment information continued discrete condition sensors variable speed drives cpag’s sales account approximately 40 percent control systems sales acig’s products include programmable logic controllers plcs used automate control monitoring industrial plants processes typically consist computer processor inputoutput devices company’s logixtm integrated architecture integrates multiple types controls disciplines including discrete process drive motion control across various factory floor operating systems acig also produces distributed inputoutput platforms high performance rotary linear motion control systems electronic operator interface devices plant floor industrial computers machine safety components acig’s sales account approximately 40 percent control systems sales gms provides multivendor automation information systems solutions help customers improve manufacturing operations solutions include multivendor customer support training software consulting implementation asset management process batch manufacturing solutions gms’s sales account approximately 20 percent control systems sales power systems power systems operating segment divided two operating units mechanical power transmission business mechanical industrial motor drive business electrical mechanical’s products include mounted bearings gear reducers standard mechanical drives conveyor pulleys couplings bushings clutches motor brakes electrical’s products include industrial engineered motors standard ac dc drives addition power systems provides product repair motor mechanical maintenance solutions plant maintenance training consulting services oem’s end users distributors firstpoint contact firstpoint contact operating segment provides customer contact center solutions support multiple channels voice email web wireless open interaction infrastructure products include automatic call distributors computer telephony integration software information collection reporting queuing management systems call center systems consulting services notes consolidated financial statements continued 20 business segment information continued following tables reflect sales operating results company’s reportable segments years ended september 30 millions represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporate net certain amounts prior periods reclassified reflect transfer management responsibility business control systems power systems effective january 1 2002 addition reclassifications made result adoption eitf issue 0114 see note 1 effective october 1 2001 company adopted sfas 142 result adopting sfas 142 company longer amortizes goodwill certain intangible assets deemed indefinite useful life amortization goodwill intangible assets deemed indefinite useful life 56 million 2001 53 million 2000 among considerations company evaluates performance allocates resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonrecurring special charges gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments goodwill intangible asset amortization depreciation inventory purchased research development charges intersegment sales made market prices accounting policies used preparing segment information consistent described note 1 special charges discussed note 13 notes consolidated financial statements continued 20 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property 50 percent ownership interest rsc notes consolidated financial statements continued 20 business segment information continued company conducts significant portion business activities outside united states following tables reflect geographic sales property geographic region millions sales attributed geographic regions based country destination 21 quarterly financial information unaudited net income 2002 includes charge 129 million 108 million tax 58 cents per diluted share impairment goodwill trademark connection adoption sfas 142 first quarter b reduction income tax provision 18 million 10 cents per diluted share resolution certain tax matters second quarter c reduction income tax provision 30 million 16 cents per diluted share favorable resolution certain tax matters third quarter income 5 million 4 million tax two cents per diluted share favorable settlement intellectual property matters third quarter e income 4 million 3 million tax two cents per diluted share favorable settlement intellectual property matters fourth quarter f charge 4 million 3 million tax two cents per diluted share related asset impairment severance firstpoint contact fourth quarter notes consolidated financial statements continued 21 quarterly financial information unaudited continued net income 2001 includes charges 69 million 45 million tax 25 cents per diluted share costs associated realignment actions third quarter b charges 22 million 15 million tax eight cents per diluted share costs associated realignment actions fourth quarter c income 18 million 12 million tax six cents per diluted share resulting favorable settlement intellectual property matter fourth quarter independent auditors’ report board directors shareowners rockwell automation inc audited accompanying consolidated balance sheet rockwell automation inc subsidiaries september 30 2002 2001 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2002 audits also included financial statement schedule listed index item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell automation inc subsidiaries september 30 2002 2001 results operations cash flows three years period ended september 30 2002 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 3 consolidated financial statements october 1 2001 company adopted statement financial accounting standards 142 “goodwill intangible assets” deloitte touche llp milwaukee wisconsin november 6 2002 item 9item 8 consolidated financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations rockwell automation inc company rockwell automation certain prior year amounts reclassified conform current year presentation june 29 2001 company completed spinoff rockwell collins avionics communications business certain assets liabilities independent separately traded publicly held company spinoff connection spinoff outstanding shares common stock rockwell collins inc rockwell collins distributed rockwell automation shareowners basis one rockwell collins share outstanding rockwell automation share time spinoff rockwell collins made special payment company 300 million net assets rockwell collins june 29 2001 approximately 12 billion including 300 million debt incurred make special payment company recorded decrease shareowners’ equity consolidation consolidated financial statements company include accounts company subsidiaries company controlling financial interest significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates used accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory impairment longlived assets product warranty obligations retirement benefits selfinsurance liabilities litigation claims contingencies including environmental matters income taxes revenue recognition sales generally recorded following occurred agreement sale exists product delivery acceptance occurred services rendered pricing fixed determinable collection reasonably assured contracts customer purchase orders generally used determine existence arrangement shipping documents customer acceptance applicable used verify delivery company assesses whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment company assesses collectibility based primarily creditworthiness customer determined credit checks analysis well customer’s payment history company records accruals customer returns rebates incentives time shipment based upon historical experience changes accruals may required future returns rebates incentives differ historical experience rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales products services provided shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued cash equivalents cash equivalents includes time deposits certificates deposit original maturities three months less receivables stated net allowances doubtful accounts 28 million september 30 2003 45 million september 30 2002 decrease allowance balance primarily relates writeoff 9 million distributor receivable 3 million account collections allowance previously provided remainder decrease resulted company’s regular review allowance considering factors historical experience credit quality age accounts receivable balances addition receivables stated net allowance certain customer rebates incentives 5 million september 30 2003 6 million september 30 2002 inventories stated lower cost market using firstin firstout fifo average methods market determined basis estimated realizable values property stated cost depreciation property provided generally using straightline accelerated methods 15 40 years buildings improvements 3 14 years machinery equipment significant renewals enhancements capitalized replaced units written maintenance repairs well renewals minor amounts charged expense intangible assets goodwill intangible assets generally result business acquisitions company accounts business acquisitions assigning purchase price tangible intangible assets liabilities assets acquired liabilities assumed recorded fair values excess purchase price amounts assigned recorded goodwill since october 1 2001 upon adoption statement financial accounting standard sfas 142 goodwill intangible assets sfas 142 goodwill intangible assets indefinite useful lives longer systematically amortized instead reviewed impairment excess carrying value estimated fair value charged results operations distributor networks computer software products patents intangible assets finite useful lives amortized straightline basis estimated useful lives generally ranging 3 40 years impairment longlived assets company evaluates recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount asset may fully recoverable company evaluates recoverability goodwill intangible assets indefinite useful lives annually frequently events circumstances indicate asset might impaired asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair value assets disposed reported lower carrying amount fair value less cost sell management determines fair value using discounted future cash flow analysis accepted valuation techniques notes consolidated financial statements continued 1 basis presentation accounting policies continued company performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2003 concluded impairments existed result sale majority company’s ownership interest reliance electric limited japan rej see note 17 investments affiliates company ability exert significant influence control including rockwell scientific company llc rsc accounted using equity method accounting accordingly company’s proportional share respective affiliate’s earnings losses included income expense consolidated statement operations investments affiliates company ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate rockwell automation’s financial position results operations cash flows derivative financial instruments company uses derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks foreign currency forward exchange contracts used offset changes amount future cash flows associated intercompany transactions generally forecasted occur within one year cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies interest rate swap contracts periodically used manage balance fixed floating rate debt company’s accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy company execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollar translated us dollars using exchange rates end respective period sales costs expenses translated average exchange rates effective respective period foreign currency translation adjustments included component accumulated comprehensive loss currency transaction gains losses included results operations period incurred research development expenses research development rd costs expensed incurred 130 million 2003 131 million 2002 158 million 2001 rd expenses included cost sales consolidated statement operations customerfunded rd 61 million 2001 related primarily company’s formerly whollyowned 50 percent owned subsidiary rockwell science center customerfunded rd material 2003 2002 earnings per share company presents two earnings per share eps amounts basic diluted basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent notes consolidated financial statements continued 1 basis presentation accounting policies continued shares outstanding year difference basic diluted eps solely attributable stock options company uses treasury stock method calculate effect outstanding stock options stock options exercise price exceeds average market price period antidilutive effect eps accordingly excluded calculation shares excluded diluted eps calculation year ended september 30 2003 years ended september 30 2002 2001 options 40 million 59 million shares respectively excluded diluted eps calculation antidilutive stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees stock options granted prices equal fair market value company’s common stock grant dates therefore compensation expense recognized connection stock options granted employees compensation expense resulting grants restricted stock recognized period service performed following table illustrates effect net income earnings per share fair valuebased method provided sfas 123 accounting stockbased compensation applied outstanding unvested awards year 2001 pro forma net income includes 6 million 4 million tax 2 cents per diluted share pro forma compensation expense related spinoff rockwell collins pro forma effect stock options net income 2003 may indicative pro forma effect net income future years per share weighted average fair value options granted 298 2003 299 2002 879 2001 per share weighted average fair value options granted 2001 restated reflect spinoff fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions notes consolidated financial statements continued 1 basis presentation accounting policies continued environmental matters company records accruals environmental matters period responsibility probable cost reasonably estimated revisions accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified company records liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites company responsible party company records liability total estimated costs remediation future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable company records receivable estimated recovery recently adopted accounting standards july 2002 financial accounting standards board fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 addresses financial accounting reporting associated exit disposal activities sfas 146 company measure costs associated exit disposal activity fair value recognize costs period liability incurred rather date commitment exit disposal plan company adopted sfas 146 january 1 2003 november 2002 fasb issued fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 provides guidance disclosures made guarantor interim annual financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception certain guarantees liability fair value obligation undertaken issuing guarantee company adopted fin 45 2003 november 2002 eitf reached consensus issue 0021 accounting revenue arrangements multiple deliverables eitf 0021 eitf 0021 establishes criteria determine whether arrangement contains multiple deliverables divided separate units accounting arrangement consideration allocated among separate units eitf 0021 effective arrangements entered june 30 2003 january 2003 fasb issued fasb interpretation 46 consolidation variable interest entities fin 46 fin 46 requires company consolidate variable interest entities company controlling financial interest fin 46 also requires disclosures variable interest entities company required consolidate significant variable interest company adopted consolidation requirements fin 46 february 1 2003 adoption sfas 146 fin 45 eitf 0021 fin 46 effect company’s financial position results operations shareowners’ equity 2 acquisitions businesses march 2003 company’s control systems segment acquired certain assets assumed certain liabilities weidmüller holding ag’s weidmüller north american business addition company entered master brand label agreement technologydesign exchange joint product development efforts weidmüller acquisition enhances company’s position providing iec international standard electrical technologies connection products used connect factory automation systems basic electrical switches notes consolidated financial statements continued 2 acquisitions businesses continued february 2003 company’s control systems segment acquired substantially assets assumed certain liabilities interwave technology inc consulting integrator focusing manufacturing solutions acquisition expands company’s manufacturing information solutions capability accelerates ability integrate realtime information customers’ manufacturing plant floors business systems aggregate cash purchase price businesses acquired 2003 approximately 26 million company would required make additional cash payments certain future operating performance criteria met acquired businesses management believes additional cash payments would recorded goodwill would material effect company’s financial position results operations shareowners’ equity assets acquired liabilities assumed recorded estimated fair values excess purchase price estimated fair value acquired tangible intangible assets recorded goodwill see note 3 goodwill intangible assets acquired connection acquisitions september 2002 company’s control systems segment acquired engineering services system integration assets spel spol sro acquisition accelerated establishment company complete solution provider central europe also strategically located company region future growth opportunities may 2002 company’s control systems segment acquired assets assumed certain liabilities controller division samsung electronics company limited’s mechatronics business controller division company combined existing korean business controller division form new business operates name rockwell samsung automation creates technologies design development automation products acquisition expanded company’s existing operations korea furthered company’s design product development capabilities supported future commercial operational expansion asia pacific region march 2002 company’s control systems segment acquired stock propack data gmbh propack provider manufacturing information systems pharmaceutical regulated industries acquisition broadened company’s position pharmaceuticals market enhanced company’s process solutions business enabled company expand reach manufacturing information markets january 2002 company’s control systems segment acquired stock tesch gmbh electronic products safety relay manufacturer expanding company’s machine safety product research development capabilities aggregate cash purchase price businesses acquired 2002 majority related acquisition propack approximately 71 million connection controller division transaction company would required make additional cash payments certain future operating performance criteria met acquired business management believes additional cash payments would recorded goodwill would material effect company’s financial position results operations shareowners’ equity assets acquired liabilities assumed recorded fair values excess purchase price estimated fair value acquired tangible intangible assets recorded goodwill see note 3 goodwill intangible assets acquired connection acquisitions amounts recorded liabilities assumed connection acquisitions 1 million 2003 6 million 2002 acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates notes consolidated financial statements continued 2 acquisitions businesses continued acquisition pro forma financial information allocation purchase price presented combined effect acquisitions material company’s results operations financial position 3 goodwill intangible assets connection adoption sfas 142 2002 management determined company’s allenbradley reliance dodge trademarks indefinite useful lives accordingly management performed transitional intangible asset impairment test resulted impairment charge 56 million 35 million tax 19 cents per diluted share related reliance trademark used primarily power systems impairment charge represents excess carrying amount trademark estimated fair value determined management assistance independent valuation experts utilizing relief royalty valuation method estimates benefit company resulting owning rather licensing trademark also connection adoption sfas 142 company completed transitional goodwill impairment test 2002 result impairment charge 73 million tax 39 cents per diluted share recorded related goodwill power systems reporting unit fair value reporting unit estimated using combination valuation techniques including present value expected future cash flows historical valuations comparable businesses previous method determining impairment prescribed sfas 121 accounting impairment longlived assets longlived assets disposed utilized undiscounted cash flow approach initial impairment assessment sfas 142 utilizes fair value approach trademark impairment charge goodwill impairment charge discussed result change accounting method determining impairment goodwill certain intangible assets charges recorded cumulative effect accounting change amount 129 million 108 million tax 58 cents per diluted share october 1 2001 accompanying consolidated statement operations changes carrying amount goodwill years ended september 30 2002 2003 follows millions includes adjustments goodwill resolution tax matters relating tax returns filed reliance electric company reliance prior acquisition rockwell automation 1995 notes consolidated financial statements continued 3 goodwill intangible assets continued results periods prior adoption sfas 142 restated following table reconciles reported income continuing operations accounting change net income earnings per share would resulted year ended september 30 2001 sfas 142 adopted effective october 1 2000 millions except per share amounts notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets september 30 2003 september 30 2002 consisted following millions computer software products amortization expense approximately 17 million 2003 approximately 14 million 2002 approximately 11 million 2001 unamortized intangible assets consist trademarks determined indefinite life change carrying amount unamortized intangible assets year ended september 30 2003 relates impairment resulting sale majority company’s ownership interest rej see note 17 estimated amortization expense 26 million 2004 22 million 2005 19 million 2006 19 million 2007 18 million 2008 connection acquisitions 2003 see note 2 company acquired 4 million intangible assets 3 million assigned distributor networks weightedaverage amortization period intangible assets acquired 2003 approximately 5 years connection acquisitions 2002 see note 2 company acquired 12 million intangible assets 9 million assigned computer software products weightedaverage amortization period intangible assets acquired 2002 approximately 5 years amortization period computer software products acquired 2002 6 years notes consolidated financial statements continued 4 inventories summarized follows millions inventories reported net allowance excess obsolete inventory 56 million september 30 2003 53 million september 30 2002 5 property summarized follows millions 6 shortterm debt shortterm debt consists following millions included current portion longterm debt september 30 2003 8 million industrial development revenue bonds company expects repay january 2004 prior maturity included current portion longterm debt september 30 2002 150 million principal amount 680 notes retired maturity april 2003 weighted average interest rate shortterm bank borrowings 28 percent september 30 2002 september 30 2003 company 675 million unsecured committed credit facilities available support commercial paper borrowings 3375 million expiring october 2003 3375 million expiring october 2005 october 2003 company entered new 3375 million credit facility expiring october 2004 outstanding commercial paper balances reduce amount available borrowings unsecured committed credit facilities terms credit facilities contain covenant company would default company’s debt capital ratio exceed 60 percent addition 675 million credit facilities shortterm unsecured credit facilities available foreign subsidiaries amounted 121 million september 30 2003 significant commitment fees compensating balance requirements company’s credit facilities notes consolidated financial statements continued 7 current liabilities current liabilities summarized follows millions 8 product warranty obligations company records liability product warranty obligations time sale customer based upon historical warranty experience term warranty generally twelve months company also records liability specific warranty matters become known reasonably estimable company’s product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations follows millions 9 longterm debt longterm debt consists following millions notes consolidated financial statements continued 9 longterm debt continued september 2002 company entered interest rate swap contract swap effectively converted 350 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 352 percent september 30 2003 421 percent september 30 2002 fair value swap based upon quoted market prices contracts similar maturities approximately 10 million september 30 2003 6 million september 30 2002 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended company designated swap fair value hedge accordingly fair value swap recorded assets consolidated balance sheet carrying value underlying debt increased 360 million september 30 2003 356 million september 30 2002 accordance sfas 133 interest payments 55 million 2003 63 million 2002 79 million 2001 interest payments related discontinued operations 2001 significant 10 financial instruments company’s financial instruments include short longterm debt foreign currency forward exchange contracts interest rate swap policy company enter derivative financial instruments speculative purposes fair value shortterm debt approximates carrying value due shortterm nature carrying value longterm debt 773 million september 30 2003 919 million september 30 2002 fair value longterm debt based upon quoted market prices similar issues 844 million september 30 2003 976 million september 30 2002 foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2003 2002 company outstanding foreign currency forward exchange contracts primarily consisting contracts euro pound sterling canadian dollar swiss franc net carrying value foreign currency forward exchange contracts 42 million september 30 2003 15 million september 30 2002 represented approximate fair value based upon quoted market prices contracts similar maturities foreign currency forward exchange contracts recorded current assets amounts 5 million september 30 2003 6 million september 30 2002 current liabilities amounts 47 million september 30 2003 21 million september 30 2002 company anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts company designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges material 11 shareowners’ equity common stock september 30 2003 authorized stock company consisted one billion shares common stock par value 1 per share 25 million shares preferred stock without par value september 30 2003 223 million shares common stock reserved various incentive plans notes consolidated financial statements continued 11 shareowners’ equity continued changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 common stock although board directors authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right accumulated comprehensive loss accumulated comprehensive loss consisted following millions 2003 company adjusted currency translation deferred income taxes approximately 25 million resulting decision made company permanently reinvest earnings certain foreign subsidiaries unrealized losses cash flow hedges 24 million 15 million tax reclassified earnings 2003 offset gains hedged items unrealized gains cash flow hedges 7 million 4 million tax 2002 22 million 15 million tax 2001 reclassified earnings offset losses hedged items approximately 28 million 18 million tax net unrealized losses cash flow hedges september 30 2003 reclassified earnings 2004 management expects unrealized losses offset hedged items recognized earnings notes consolidated financial statements continued 12 stock options purchase common stock company granted various incentive plans board action directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan company may grant 16 million shares company common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans approximately 54 million september 30 2003 none employee incentive plans presently permits options granted november 30 2009 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options performancevesting options expire ten years date granted vest earlier date market price company’s common stock reaches specified level predetermined period time certain financial performance criteria met b period six seven years date granted information relative stock options follows shares thousands approximately 1 million performancevesting options exercisable september 30 2003 connection spinoff number exercise prices certain options adjusted order preserve intrinsic value options outstanding immediately spinoff certain options option holders received combination rockwell automation rockwell collins options adjustments made number exercise prices options preserve intrinsic value rockwell automation rockwell collins options outstanding immediately spinoff outstanding rockwell automation options held rockwell collins employees generally converted rockwell collins options grants 2001 restated reflect adjustments made connection spinoff notes consolidated financial statements continued 12 stock options continued following table summarizes information stock options outstanding september 30 2003 shares thousands remaining life years closing price company’s common stock new york stock exchangecomposite transactions reporting system september 30 2003 2625 13 retirement benefits company sponsors pension postretirement benefit plans employees pension plans cover company’s employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service company’s policy respect funding pension obligation fund minimum amount required applicable laws governmental regulations company may discretion fund amounts excess minimum amount required laws regulations postretirement benefits primarily form retirement medical plans cover company’s united states employees provide payment certain medical costs eligible employees dependents upon retirement connection spinoff rockwell collins assumed former rockwell international corporation domestic qualified pension plan rockwell retirement plan pension plan obligations attributable rockwell automation’s domestic active employees former employees control systems power systems firstpoint contact businesses retained rockwell automation proportionate share pension plan assets transferred former rockwell international corporation domestic qualified plan rockwell retirement plan new pension plan established rockwell automation company also retained liabilities postretirement benefits active former employees tables reflect continuing rockwell automation plans notes consolidated financial statements continued 13 retirement benefits continued components net periodic benefit cost follows millions company recognized special termination benefit charges 3 million 2001 benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 13 retirement benefits continued 2003 company recorded increase minimum pension liability 280 million resulting primarily unfavorable actual returns plan assets relative expected return plan assets decline discount rates used calculate benefit obligations recognition deferred tax asset 108 million net reduction shareowners equity resulting adjustment 170 million june 2003 company made 50 million voluntary contribution company’s primary us qualified pension plan trust compared 2002 contribution 24 million related spinoff rockwell collins company uses actuarial measurement date june 30 measure benefit obligations pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost fiscal years ended september 30 2003 2002 2001 follows net benefit obligation assumptions significant assumptions used determining benefit obligations september 30 summarized follows weighted averages 1 result plan amendment adopted effective october 1 2002 fully described accordance sfas 106 employers’ accounting postretirement benefit pensions company’s postretirement healthcare liabilities recalculated date amendment using 65 percent discount rate discount rate applicable date plan amendment company’s related net periodic benefit cost 2003 29 million consists expense 7 percent discount notes consolidated financial statements continued 13 retirement benefits continued rate period july 1 2002 september 30 2002 expense 65 percent discount rate period october 1 2002 june 30 2003 2 healthcare cost trend rate reflects estimated increase gross medical claims costs required disclosed sfas 132 employers’ disclosures pensions postretirement benefits gross healthcare cost trend rate decrease 55 2009 result plan amendment adopted effective october 1 2002 fully described effective retiree medical cost increase company approach zero percent 2005 effective october 1 2002 company amended united states postretirement healthcare benefit program order mitigate increasing cost postretirement healthcare services change phased follows effective january 1 2004 company per amendment program implemented 1992 contribute 50 percent amount excess 2003 per capita amount however company’s calendar 2004 contribution shall limited 75 percent increase 2003 per capita amount effective january 1 2005 company limit future per capita maximum contribution calendar 2004 per capita contribution postretirement benefits including effect october 1 2002 plan amendment onepercentage point change assumed health care cost trend rates would following effect millions pension benefits projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 1734 million 1486 million 1063 million respectively 2003 measurement date june 30 1325 million 1137 million 961 million respectively 2002 measurement date defined contribution savings plans company also sponsors certain defined contribution savings plans eligible employees expense related plans 25 million 2003 2002 2001 14 special charges 2001 company recorded special charges 91 million 60 million tax 32 cents per diluted share costs associated consolidation closing facilities realignment administrative functions reduction workforce primarily north america approximately 2000 employees asset impairments company completed actions september 30 2002 total cash expenditures connection actions approximate 50 million primarily relate employee severance separation costs substantially spent september 30 2003 connection spinoff rockwell collins assumed liability employee severance separation costs resulting actions approximately 7 million notes consolidated financial statements continued 14 special charges continued special charges included writedowns carrying amount goodwill certain facilities machinery equipment totaling approximately 27 million resulting decision shut certain facilities exit nonstrategic operations charges represented difference fair values assets carrying values fair value determined management basis various customary valuation techniques special charges reflected consolidated statement operations year ended september 30 2001 cost sales amount 50 million selling general administrative expenses amount 41 million 15 discontinued operations benefit 7 million 4 million tax discontinued operations 2003 reflects income favorable determination legal proceeding related company’s former operation rocky flats facility department energy net benefit 3 million discontinued operations 2002 reflects resolution certain obligations related two discontinued businesses related payments approximately 36 million made 2002 reflected cash used discontinued operations accompanying consolidated statement cash flows summarized results company’s rockwell collins avionics communications business year ended september 30 2001 follows millions results operations company’s rockwell collins avionics communications business 2001 include 21 million costs directly related spinoff 16 related party transactions company owns 50 percent rsc ownership interest accounted using equity method company’s investment rsc 54 million september 30 2003 50 million september 30 2002 included assets consolidated balance sheet company agreement rsc pursuant rsc performs research development services company 2004 company obligated pay rsc minimum 3 million services 2004 company incurred approximately 3 million research development services performed rsc 2003 2002 september 30 2003 2002 amounts due rsc research development services rsc cost sharing arrangements significant company shares equally rockwell collins owns 50 percent rsc providing 4 million line credit rsc bears interest greater company’s rockwell collins’ commercial paper borrowing rate september 30 2003 2002 outstanding borrowings line credit addition company rockwell collins guarantees onehalf lease agreement one rsc’s facilities total future minimum lease payments lease approximately 6 million lease agreement term ends december 2011 company owns 25 percent colinx llc colinx company provides logistics ecommerce services ownership interest accounted using equity method company paid colinx approximately 15 million 2003 2002 6 million 2001 primarily logistics services addition colinx paid company approximately 2 million 2003 3 million 2002 2 million notes consolidated financial statements continued 16 related party transactions continued 2001 use facilities owned company services amounts due colinx september 30 2003 2002 significant 17 income expense components income expense follows millions 2003 company sold majority ownership interest rej resulting loss approximately 8 million 3 million tax 1 cent per diluted share loss includes 9 million noncash charge related impairment reliance trademark aftertax loss sale includes 2 million benefit resulting company’s ability utilize capital loss carryforwards valuation allowance previously provided proceeds transaction totaled approximately 10 million 18 income taxes components income tax provision follows millions 2003 company recognized earnings tax benefit 69 million related federal research experimentation credit refund claim years 1997 2001 federal portion claim subject approval joint committee taxation united states congress related state tax benefits subject approval various state tax authorities majority proceeds claim expected received netted liability arising notes consolidated financial statements continued 18 income taxes continued audit upon conclusion current federal audit cycle expected 2005 future annual income tax benefit related research experimentation expenditures expected significant 2002 company resolved certain tax matters period 19951999 resolution resulted 48 million reduction company’s income tax provision 11 million reflected tax refund claims current income tax provision 37 million reflected united states deferred income tax provision 2001 company reached agreement various taxing authorities refund claims related certain prior years recorded 22 million reduction income tax provision net current deferred income tax assets september 30 2003 2002 consist tax effects temporary differences related following millions net longterm deferred income tax liabilities september 30 2003 2002 consist tax effects temporary differences related following millions total deferred tax assets 511 million september 30 2003 447 million september 30 2002 total deferred tax liabilities 337 million september 30 2003 378 million september 30 2002 management believes likely current longterm deferred tax assets realized reduction future taxable income significant factors considered management determination probability realization deferred tax assets include historical operating results company 404 million united states taxable income past three years b expectations future earnings c extended period time retiree medical liability paid notes consolidated financial statements continued 18 income taxes continued net operating loss capital loss tax credit carryforwards related carryforward periods september 30 2003 summarized follows millions valuation allowance 47 million established september 30 2003 certain carryforwards utilization uncertain effective income tax rate differed united states statutory tax rate reasons set forth second quarter 2003 tax benefit approximately 2 million recognized result company’s ability utilize certain capital loss carryforwards valuation allowance previously provided ability utilize capital loss carryforwards result sale majority company’s ownership interest rej took place second quarter 2003 48 million reduction 2002 income tax provision resulting resolution certain tax matters period 19951999 reflected effective income tax rate tax refund claims 47 resolution prior period tax matters 160 notes consolidated financial statements continued 18 income taxes continued income tax provisions calculated based upon following components income continuing operations income taxes cumulative effect accounting change millions provision made united states state additional nonunited states income taxes related approximately 200 million undistributed earnings foreign subsidiaries intended permanently reinvested 2003 company adjusted currency translation deferred income taxes approximately 25 million resulting decision made company permanently reinvest earnings certain foreign subsidiaries practical determine united states federal income tax liability would payable earnings permanently reinvested income taxes paid 85 million 2003 37 million 2002 213 million 2001 income taxes paid related discontinued operations 2001 significant 19 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations company thus far compliance environmental requirements resolution environmental claims accomplished without material effect company’s liquidity capital resources competitive position financial condition company designated potentially responsible party 14 superfund sites excluding sites company’s records disclose involvement company’s potential liability finally determined assumed third parties management estimates total reasonably possible costs company could incur remediation superfund sites september 30 2003 17 million 7 million accrued various lawsuits claims proceedings asserted company alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2003 management estimated total reasonably possible costs company could incur matters 52 million company recorded environmental accruals matters 21 million addition matters company assumed certain environmental liabilities connection 1995 acquisition reliance company indemnified exxonmobil corporation exxon substantially costs associated reliance matters september 30 2003 company recorded liability approximately 26 million receivable approximately 25 million reliance matters management estimates total reasonably possible costs matters approximately 37 million company substantially indemnified exxon based assessment management believes company’s expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect company’s liquidity capital resources competitive position financial condition management cannot assess possible effect compliance future requirements notes consolidated financial statements continued 19 commitments contingent liabilities continued purchase commitments connection sale power systems business 2000 company entered supply agreement buyer business agreement requires minimum purchases company approximately 21 million per year december 31 2005 prices management believes higher available vendors event purchases less 21 million given year company may incur penalties 25 percent amount actual purchases less contractual minimum period penalties paid company terms supply agreement approximately 2 million 2003 approximately 1 million 2002 liability recorded connection supply agreement approximately 3 million september 30 2003 approximately 6 million september 30 2002 see note 16 discussion company’s commitments related parties lease commitments minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 214 million september 30 2003 payable follows millions 2004 48 2005 38 2006 29 2007 25 2008 17 2008 57 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 22 million september 30 2003 receivable 2009 approximately 4 million per year leases contain renewal options varying periods certain leases include options purchase leased property end lease term rental expense 83 million 2003 84 million 2002 86 million 2001 matters various lawsuits claims proceedings may instituted asserted company relating conduct business including pertaining product liability intellectual property safety health employment contract matters connection divestiture former aerospace defense businesses ad business boeing company boeing rockwell automation agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs company’s former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify rockwell automation substantially contingent liabilities related respective businesses including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably company management believes disposition matters pending asserted material adverse effect company’s business financial condition company time divested certain businesses connection divestitures may lawsuits claims proceedings instituted asserted company related period businesses owned company addition company guaranteed performance payment certain contracts divested businesses including 60 million lease obligation company’s former semiconductor systems business conexant systems inc conexant lease obligation conexant secured real property subject lease within range estimated fair values real property consideration guarantee company receives 250000 per quarter conexant december 31 2003 guarantee expires 2005 management believes judgments company related matters claims pursuant guarantees would material adverse effect company’s business financial condition notes consolidated financial statements continued 20 business segment information rockwell automation provider industrial automation power control information products services company organized based upon products services three operating segments consisting control systems power systems firstpoint contact company 50 percent ownership interest rsc accounts interest rsc using equity method control systems control systems operating segment supplier industrial automation products systems software services focused helping customers control improve manufacturing processes divided three units components packaged applications group cpag automation control information group acig global manufacturing solutions gms cpag produces industrial components power control motor management products packaged engineered products supplies electromechanical solidstate products including motor starters contactors push buttons signaling devices termination protection devices relays timers discrete condition sensors variable speed drives cpag’s sales account approximately 40 percent control systems’ sales acig’s products include programmable logic controllers plcs used automate control monitoring industrial plants processes typically consist computer processor inputoutput devices company’s logix integrated architecture integrates multiple types controls disciplines including discrete process drive motion safety control across various factory floor operating systems acig also produces distributed io inputoutput platforms high performance rotary linear motion control systems electronic operator interface devices plant floor industrial computers machine safety components acig’s sales account approximately 40 percent control systems’ sales gms provides multivendor automation information systems solutions help customers improve manufacturing operations solutions include multivendor customer support training software consulting implementation asset management manufacturing information solutions discrete targeted batch process industries gms’s sales account approximately 20 percent control systems’ sales power systems power systems operating segment divided two units mechanical power transmission business mechanical industrial motor drive business electrical mechanical’s products include mounted bearings gear reducers standard mechanical drives conveyor pulleys couplings bushings clutches motor brakes electrical’s products include industrial engineered motors standard ac dc drives addition power systems provides product repair motor mechanical maintenance solutions plant maintenance training consulting services oem’s end users distributors firstpoint contact firstpoint contact operating segment provides customer contact center solutions support multiple channels voice email web wireless open interaction infrastructure products include automatic call distributors computer telephony integration software information collection reporting queuing management systems call center systems consulting services notes consolidated financial statements continued 20 business segment information continued following tables reflect sales operating results company’s reportable segments years ended september 30 millions represents sales segment operating earnings rockwell science center third quarter 2001 beginning fourth quarter 2001 company’s 50 percent ownership interest rsc accounted using equity method company’s proportional share rsc’s earnings losses included general corporate net effective october 1 2001 company adopted sfas 142 result adopting sfas 142 company longer amortizes goodwill certain intangible assets deemed indefinite useful life amortization goodwill intangible assets deemed indefinite useful life 56 million 2001 among considerations company evaluates performance allocates resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonrecurring special charges gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments goodwill intangible asset amortization depreciation inventory purchased research development charges intersegment sales made market prices accounting policies used preparing segment information consistent described note 1 special charges discussed note 14 notes consolidated financial statements continued 20 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property 50 percent ownership interest rsc company conducts significant portion business activities outside united states following tables reflect geographic sales property geographic region millions sales attributed geographic regions based country origin notes consolidated financial statements continued 21 quarterly financial information unaudited net income 2003 includes tax benefit 69 million 37 cents per diluted share related settlement us federal research experimentation refund claim b income 7 million 4 million tax 2 cents per diluted share reflected discontinued operations favorable determination legal proceeding related company’s former operation rocky flats facility department energy c charge 5 million 3 million tax 2 cents per diluted share due higher estimated future costs environmental remediation near russellville kentucky facility company’s former measurement flow control business notes consolidated financial statements continued 21 quarterly financial information unaudited continued net income 2002 includes charge 129 million 108 million tax 58 cents per diluted share impairment goodwill trademark connection adoption sfas 142 b reduction income tax provision 18 million 10 cents per diluted share resolution certain tax matters c reduction income tax provision 30 million 16 cents per diluted share favorable resolution certain tax matters income 5 million 4 million tax 2 cents per diluted share favorable settlement intellectual property matters e income 4 million 3 million tax 2 cents per diluted share favorable settlement intellectual property matters f charge 4 million 3 million tax 2 cents per diluted share related asset impairment severance firstpoint contact independent auditors’ report board directors shareowners rockwell automation inc audited accompanying consolidated balance sheet rockwell automation inc subsidiaries september 30 2003 2002 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2003 audits also included financial statement schedule listed index item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell automation inc subsidiaries september 30 2003 2002 results operations cash flows three years period ended september 30 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 3 consolidated financial statements october 1 2001 company adopted statement financial accounting standards 142 “goodwill intangible assets” deloitte touche llp milwaukee wisconsin november 5 2003 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information products services following description basis presentation consolidated financial statements description significant accounting policies basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations certain prior year amounts reclassified conform current year presentation june 2001 completed spinoff rockwell collins avionics communications business certain assets liabilities independent separately traded publicly held company september 2004 sold firstpoint contact business firstpoint contact classified discontinued operation consolidated financial statements periods presented consolidation consolidated financial statements company include accounts company subsidiaries company controlling financial interest significant intercompany accounts transactions eliminated consolidation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates used accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory impairment longlived assets product warranty obligations retirement benefits selfinsurance liabilities litigation claims contingencies including environmental matters income taxes revenue recognition sales generally recorded following occurred agreement sale exists product delivered according contract terms acceptance may required contract terms occurred services rendered pricing fixed determinable collection reasonably assured generally use contracts customer purchase orders determine existence arrangement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based primarily creditworthiness customer determined credit evaluations analysis well customer’s payment history record accruals customer returns rebates incentives time revenue recognition based upon historical experience adjustments accrual may required actual returns rebates incentives differ historical experience changes assumptions used estimate accrual rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales products services provided shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued cash equivalents cash equivalents includes time deposits certificates deposit original maturities three months less receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 252 million september 30 2004 267 million september 30 2003 addition receivables stated net allowance certain customer rebates incentives 78 million september 30 2004 54 million september 30 2003 inventories stated lower cost market using firstin firstout fifo average methods market determined basis estimated realizable values property stated cost depreciation property calculated using straightline method 15 40 years buildings improvements 3 14 years machinery equipment significant renewals enhancements capitalized replaced units written maintenance repairs well renewals minor amounts charged expense intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions assigning purchase price tangible intangible assets liabilities assets acquired liabilities assumed recorded fair values excess purchase price amounts assigned recorded goodwill since october 1 2001 upon adoption statement financial accounting standard sfas 142 goodwill intangible assets sfas 142 goodwill intangible assets indefinite useful lives longer systematically amortized instead reviewed impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations distributor networks computer software products patents intangible assets finite useful lives amortized straightline basis estimated useful lives generally ranging 3 40 years impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount asset determined impaired impairment recognized measured amount recorded amount asset exceeds fair value assets disposed reported lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis accepted valuation techniques 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million notes consolidated financial statements continued 1 basis presentation accounting policies continued investments affiliates ability exert significant influence control including rockwell scientific company llc rsc accounted using equity method accounting accordingly proportional share respective affiliate’s earnings losses included income expense consolidated statement operations investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks foreign currency forward exchange contracts used offset changes amount future cash flows associated intercompany transactions generally forecasted occur within one year cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies interest rate swap contracts periodically used manage balance fixed floating rate debt accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollar translated us dollars using exchange rates end respective period sales costs expenses translated average exchange rates effective respective period foreign currency translation adjustments included component accumulated comprehensive loss currency transaction gains losses included results operations period incurred research development expenses research development rd costs expensed incurred 1217 million 2004 1216 million 2003 1232 million 2002 rd expenses included cost sales consolidated statement operations income taxes record liability income tax exposures probable amount reasonably estimated determination probability estimate liability reflect relevant tax law applied us taking account particular country state taxing authority earnings per share present basic diluted per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year difference basic diluted eps solely attributable stock options use treasury stock method calculate effect outstanding stock options stock options exercise price notes consolidated financial statements continued 1 basis presentation accounting policies continued exceeds average market price outofthemoney options period antidilutive effect eps accordingly excluded calculation years ended september 30 2004 2003 2002 options 01 million 11 million 36 million shares excluded diluted eps calculation antidilutive stockbased compensation account stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees stock options granted prices equal fair market value common stock grant dates therefore compensation expense generally recognized connection stock options granted employees compensation expense resulting grants restricted stock recognized period service performed following table illustrates effect net income earnings per share fair valuebased method provided sfas 123 accounting stockbased compensation applied outstanding unvested awards year millions except per share amounts net income reported pro forma net income 2004 include 29 million tax compensation expense resulting modifications made certain stock options connection sale firstpoint contact business per share weighted average fair value options granted 720 2004 298 2003 299 2002 fair value option estimated date grant subsequent date option adjustment using blackscholes pricing model following assumptions notes consolidated financial statements continued 1 basis presentation accounting policies continued selfinsurance liabilities record accruals selfinsured claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims assistance independent actuarial consultant using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated changes accruals made periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation future expenditures environmental remediation obligations discounted present value recovery insurers third parties determined probable record receivable estimated recovery recently adopted accounting standards december 2003 medicare prescription drug improvement modernization act 2003 act signed law act provides federal subsidy sponsors retiree healthcare benefit plans provide prescription drug benefit least actuarially equivalent medicare part may 2004 financial accounting standards board fasb staff issued fasb staff position fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp fas 1062 supercedes fasb staff position fas 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 effective interim annual periods beginning june 15 2004 adopted fsp fas 1062 fourth quarter 2004 impact decrease postretirement obligations 169 million result fiscal 2005 expense expected decrease 20 million 2 acquisitions businesses 2003 acquisitions march 2003 control systems segment acquired certain assets assumed certain liabilities weidmüller holding ag’s weidmüller north american business connection therewith entered master brand label agreement technologydesign exchange joint product development efforts weidmüller february 2003 control systems segment acquired substantially assets assumed certain liabilities interwave technology inc consulting integrator focusing manufacturing solutions aggregate cash purchase price businesses 257 million amounts recorded liabilities assumed approximately 10 million 2002 acquisitions september 2002 control systems segment acquired engineering services system integration assets spel spol sro may 2002 control systems segment acquired assets assumed certain liabilities controller division samsung electronics company limited’s mechatronics notes consolidated financial statements continued 2 acquisitions businesses continued business march 2002 control systems segment acquired stock propack data gmbh propack provider manufacturing information systems pharmaceutical regulated industries january 2002 control systems segment acquired stock tesch gmbh electronic products safety relay manufacturer aggregate cash purchase price businesses acquired 2002 majority related acquisition propack 710 million amounts recorded liabilities assumed approximately 60 million assets acquired liabilities assumed businesses acquired 2003 2002 recorded estimated fair values excess purchase price estimated fair value acquired tangible intangible assets recorded goodwill see note 3 goodwill intangible assets acquired connection acquisitions accounted purchases accordingly results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information allocation purchase price presented combined effect acquisitions material results operations financial position 3 goodwill intangible assets connection adoption sfas 142 2002 determined allenbradley reliance dodge trademarks indefinite useful lives accordingly performed transitional intangible asset impairment test resulted impairment charge 561 million 352 million tax 019 per diluted share related reliance trademark used primarily power systems impairment charge represents excess carrying amount trademark estimated fair value determined assistance independent valuation experts utilizing relief royalty valuation method estimates benefit us resulting owning rather licensing trademark also connection adoption sfas 142 completed transitional goodwill impairment test 2002 result impairment charge 726 million tax 039 per diluted share recorded related goodwill power systems reporting unit fair value reporting unit estimated using combination valuation techniques including present value expected future cash flows historical valuations comparable businesses previous method determining impairment prescribed sfas 121 accounting impairment longlived assets longlived assets disposed utilized undiscounted cash flow approach initial impairment assessment sfas 142 utilizes fair value approach trademark impairment charge goodwill impairment charge discussed result change accounting method determining impairment goodwill certain intangible assets charges recorded cumulative effect accounting change amount 1287 million 1078 million tax 058 per diluted share october 1 2001 accompanying consolidated statement operations notes consolidated financial statements continued 3 goodwill intangible assets continued changes carrying amount goodwill years ended september 30 2003 2004 follows millions performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2004 concluded impairments existed intangible assets consisted following millions computer software products amortization expense 160 million 2004 138 million 2003 113 million 2002 allenbradley reliance dodge trademarks determined indefinite life therefore subject amortization notes consolidated financial statements continued 3 goodwill intangible assets continued estimated amortization expense 232 million 2005 200 million 2006 199 million 2007 193 million 2008 156 million 2009 4 inventories summarized follows millions inventories reported net allowance excess obsolete inventory 462 million september 30 2004 534 million september 30 2003 5 property summarized follows millions 6 debt shortterm debt consists following millions notes consolidated financial statements continued 6 debt continued longterm debt consists following millions september 2002 entered interest rate swap contract swap effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 427 percent september 30 2004 352 percent september 30 2003 fair value swap based upon quoted market prices contracts similar maturities 37 million september 30 2004 104 million september 30 2003 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended designated swap fair value hedge accordingly fair value swap recorded assets consolidated balance sheet september 30 2004 2003 carrying value underlying debt increased 3537 million september 30 2004 3604 million september 30 2003 accordance sfas 133 september 30 2004 6750 million unsecured committed credit facilities 3375 million expiring october 2004 3375 million expiring october 2005 facilities available general corporate purposes including support commercial paper borrowings october 26 2004 entered new fiveyear 6000 million unsecured revolving credit facility replaced facility expiring date facility expiring october 2005 cancelled date borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenant would default debt capital ratio exceed 60 percent addition 6000 million credit facility shortterm unsecured credit facilities available foreign subsidiaries amounted 1304 million september 30 2004 significant commitment fees compensating balance requirements credit facilities interest payments 409 million 2004 547 million 2003 631 million 2002 notes consolidated financial statements continued 7 current liabilities current liabilities summarized follows millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience term warranty generally twelve months also record liability specific warranty matters become known reasonably estimable changes product warranty obligations follows millions 9 financial instruments financial instruments include shortterm debt longterm debt foreign currency forward exchange contracts interest rate swap following summary carrying value fair value financial instruments millions shortterm debt table excludes current portion longterm debt fair value shortterm debt approximates carrying value due shortterm nature fair value longterm debt based upon quoted market prices similar issues fair value foreign currency forward exchange contracts based quoted market prices contracts similar maturities foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2004 2003 outstanding foreign currency forward exchange contracts primarily consisting contracts euro pound sterling notes consolidated financial statements continued 9 financial instruments continued swiss franc australian dollar canadian dollar foreign currency forward exchange contracts recorded current assets amounts 42 million september 30 2004 47 million september 30 2003 current liabilities amounts 120 million september 30 2004 466 million september 30 2003 anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges material 10 shareowners’ equity common stock september 30 2004 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2004 245 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 common stock although board directors authorized reduce 20 threshold triggering rights less 10 upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right notes consolidated financial statements continued 10 shareowners’ equity continued accumulated comprehensive loss accumulated comprehensive loss consisted following millions 2003 adjusted accumulated currency translation adjustments deferred income taxes approximately 250 million resulting decision permanently reinvest earnings certain foreign subsidiaries unrealized losses cash flow hedges 366 million 221 million tax 2004 242 million 150 million tax 2003 reclassified earnings offset gains hedged items unrealized gains 67 million 42 million tax reclassified earnings 2002 offset losses hedged items approximately 67 million 40 million tax net unrealized losses cash flow hedges september 30 2004 reclassified earnings 2005 expect unrealized losses offset hedged items recognized earnings 11 stock options purchase common stock granted various incentive plans board action directors officers key employees prices equal fair market value stock dates options granted plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan authorized grant 240 million shares common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans approximately 104 million september 30 2004 none employee incentive plans presently permits options granted november 30 2009 stock options generally expire ten years date granted vest three years timevesting options exception performancevesting options performancevesting options expire ten years date granted vest earlier date market price common stock reaches specified level predetermined period time b period seven years date granted notes consolidated financial statements continued 11 stock options continued information relative stock options follows shares thousands following table summarizes information stock options outstanding september 30 2004 shares thousands remaining life years closing price common stock september 30 2004 3870 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees upon retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents upon retirement notes consolidated financial statements continued 12 retirement benefits continued components net periodic benefit cost follows millions included net periodic benefit cost table income discontinued operations consolidated statement operations pretax pension benefit cost 28 million 18 million 15 million pretax postretirement benefit cost 11 million 02 million 10 million related firstpoint contact years ended september 30 2004 2003 2002 respectively retained pension liability related eligible firstpoint contact participants postretirement benefit liability eligible retirees date sale result ongoing net periodic benefit cost us also 2004 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 23 million related sale firstpoint contact business reflected income discontinued operations consolidated statement operations notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions 2004 recorded decrease minimum pension liability 1117 million resulting primarily pension plan contributions considering reduction deferred tax asset 421 million resulting decrease minimum pension liability decrease intangible notes consolidated financial statements continued 12 retirement benefits continued pension asset 14 million net increase shareowners’ equity reflected reduction accumulated comprehensive loss 682 million 2004 made voluntary contributions 1250 million us qualified pension plan trust 2003 made voluntary contribution 500 million us qualified pension plan trust accumulated benefit obligation pension plans 17681 million 2004 measurement date 16558 million 2003 measurement date use actuarial measurement date june 30 measure benefit obligations pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost september 30 follows weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations september 30 summarized follows weighted averages 1 result plan amendment adopted effective october 1 2002 fully described accordance sfas 106 employers’ accounting postretirement benefits pensions postretirement healthcare liabilities recalculated date amendment using 65 percent discount rate discount rate applicable date plan amendment related net periodic benefit cost 2003 291 million consists expense using 70 percent discount rate notes consolidated financial statements continued 12 retirement benefits continued period july 1 2002 september 30 2002 expense using 65 percent discount rate period october 1 2002 june 30 2003 2 healthcare cost trend rate reflects estimated increase gross medical claims costs required disclosed sfas 132 employers’ disclosures pensions postretirement benefits result plan amendment adopted effective october 1 2002 fully described effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assuming gross healthcare cost trend rate decrease 55 2010 3 decreasing 55 2010 effective october 1 2002 amended united states postretirement healthcare benefit program order mitigate increasing cost postretirement healthcare services change phased follows effective january 1 2004 per amendment program implemented 1992 began contributing 50 percent amount excess 2003 per capita amount however calendar 2004 contribution limited 75 percent increase 2003 per capita amount effective january 1 2005 limit future per capita maximum contribution calendar 2004 per capita contribution result medicare prescription drug improvement modernization act 2003 act included reduction accumulated projected benefit obligation 169 million september 30 2004 related certain postretirement benefit plans adjustment net periodic postretirement benefit cost fiscal 2004 net periodic postretirement benefit cost fiscal 2005 expected decrease 20 million result act determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios consulted considered opinions financial professionals developing appropriate return assumptions resulted selection weighted average longterm rate return assets assumption weightedaverage asset allocations september 30 asset category follows investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk accomplished investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2004 2003 pension plans investments common stock certain nonus countries operate legal requirements financial incentives provided companies prefund pension obligations instances benefit payments typically paid directly cash become due rather creation separate pension fund estimated future payments expect contribute approximately 640 million related worldwide pension plans 313 million postretirement benefit plans 2005 notes consolidated financial statements continued 12 retirement benefits continued following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits light october 1 2002 plan amendment discussed onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2004 2003 measurement dates june 30 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 247 million 2004 239 million 2003 2002 notes consolidated financial statements continued 13 discontinued operations following summary composition income discontinued operations included consolidated statement operations millions firstpoint contact 2004 sold firstpoint contact business cash proceeds note convertible minority interest corporate parent buyer note term ten years convertible option term conversion mandatory event initial public offering buyer’s corporate parent event buyer’s corporate parent acquired value assigned convertible note date transaction approximately 270 million results operations firstpoint contact 2002 2004 well gain sale reflected income discontinued operations consolidated statement operations summarized results firstpoint contact follows millions rocky flats 2004 recorded benefit 76 million 46 million tax result final judgment defense claim legal proceeding related former operation rocky flats facility department energy amount addition income 73 million 44 million tax recognized 2003 related rocky flats defense claim legal proceeding march 2004 received 151 million related matter amount included net related tax consolidated statement cash flows cash provided discontinued operations net benefit 32 million tax discontinued operations 2002 reflects resolution certain obligations related two discontinued businesses related payments approximately 357 million made 2002 included cash used discontinued operations accompanying consolidated statement cash flows 14 related party transactions 50 percent rsc ownership interest accounted using equity method investment rsc 575 million september 30 2004 539 million september 30 2003 included assets consolidated balance sheet notes consolidated financial statements continued 14 related party transactions continued agreement rsc pursuant rsc performs research development services us 2004 obligated pay rsc minimum 25 million services 2005 incurred 37 million 2004 30 million 2003 31 million 2002 research development services performed rsc september 30 2004 amount due rsc research development services 07 million september 30 2004 amount due rsc cost sharing arrangements significant september 30 2003 amounts due rsc significant share equally rockwell collins owns 50 percent rsc providing 40 million line credit rsc bears interest greater rockwell collins’ commercial paper borrowing rate september 30 2004 2003 outstanding borrowings line credit october 2004 line credit increased 60 million us rockwell collins still sharing equally addition rockwell collins guarantee onehalf lease agreement one rsc’s facilities total future minimum lease payments lease 55 million lease agreement term ends december 2011 25 percent colinx llc colinx company provides logistics ecommerce services ownership interest accounted using equity method paid colinx 171 million 2004 152 million 2003 151 million 2002 primarily logistics services addition colinx paid us approximately 22 million 2004 24 million 2003 27 million 2002 use facilities services amounts due colinx september 30 2004 2003 significant 15 income expense components income expense follows millions 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million 2003 sold majority ownership interest reliance electric limited japan rej resulting loss 84 million 25 million tax 001 per diluted share loss includes 93 million noncash charge related impairment reliance trademark cash proceeds transaction totaled 104 million notes consolidated financial statements continued 16 income taxes components income tax provision follows millions 2004 recognized tax benefits 463 million income continuing operations 184 million income discontinued operations related following items • 345 million resulting resolution certain tax matters part related former businesses majority benefits recognized related nonus tax matters addition agreement taxing authority related treatment investment amount 115 million reflected reduction united states income tax provision 213 million reflected reduction nonunited states income tax provision 17 million reflected reduction state local income tax provision • 43 million related additional state tax benefits associated us research experimentation credit refund claim 2003 see discussion • 259 million related refund state california period 1989 1991 amount 75 million included reduction income tax provision 184 million included income discontinued operations 2003 recognized earnings tax benefit 694 million related federal research experimentation credit refund claim years 1997 2001 amount 664 million reflected reduction united states income tax provision 30 million reflected reduction state local income tax provision portion proceeds claim received 2004 upon conclusion current federal audit cycle expected 2005 remaining proceeds claim expected netted liability arising audit future annual income tax benefit related research experimentation expenditures expected significant 2002 resolved certain tax matters period 19951999 resolution resulted 482 million reduction united states income tax provision notes consolidated financial statements continued 16 income taxes continued net current deferred income tax assets september 30 2004 2003 consist tax effects temporary differences related following millions net longterm deferred income tax liabilities september 30 2004 2003 consist tax effects temporary differences related following millions total deferred tax assets 3546 million september 30 2004 5070 million september 30 2003 total deferred tax liabilities 2482 million september 30 2004 3358 million september 30 2003 believe likely current longterm deferred tax assets realized reduction future taxable income reflected tax attributes carried forward significant factors considered determination probability realization deferred tax assets include historical operating results 3567 million united states taxable income past three years b expectations future earnings c extended period time retiree medical liability paid notes consolidated financial statements continued 16 income taxes continued net operating loss capital loss tax credit carryforwards related carryforward periods september 30 2004 summarized follows millions valuation allowance 630 million established september 30 2004 certain carryforwards future utilization uncertain united states capital loss carryforward increased 2004 191 million result sale firstpoint contact business valuation allowance increased like amount due uncertainty realizing future tax benefit capital loss 2004 reduced prior year’s state valuation allowance 113 million result likely amount state carryforward attributes utilized light expectation trend taxable income likely sustained subsequent years allowing utilization state carryforwards addition reduced prior year’s valuation allowance 23 million result ability utilize certain nonunited states carryforwards 2003 recognized tax benefit 26 million result ability utilize certain capital loss carryforwards valuation allowance previously provided ability utilize capital loss carryforward resulted sale majority ownership interest rej 2003 effective income tax rate differed united states statutory tax rate reasons set forth notes consolidated financial statements continued 16 income taxes continued income tax provisions calculated based upon following components income continuing operations income taxes cumulative effect accounting change millions provision made united states state additional nonunited states income taxes related 3400 million undistributed earnings foreign subsidiaries intended permanently reinvested practical determine united states federal income tax liability would payable earnings permanently reinvested income taxes paid 300 million 2004 845 million 2003 369 million 2002 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 15 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2004 128 million 50 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2004 estimated total reasonably possible costs could incur matters 671 million recorded net environmental accruals matters 326 million addition matters assumed certain environmental liabilities connection 1995 acquisition reliance indemnified exxonmobil corporation exxon substantially costs associated reliance matters september 30 2004 recorded liability 230 million receivable 218 million reliance matters estimate total reasonably possible costs matters 366 million substantially indemnified exxon based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements notes consolidated financial statements continued 17 commitments contingent liabilities continued purchase commitments connection sale power systems business 2000 entered supply agreement buyer business agreement requires us purchase least 210 million per year december 31 2005 prices believe higher available vendors event purchases less 210 million given year may incur penalties 25 percent amount actual purchases less contractual minimum period penalties paid terms supply agreement 13 million 2004 18 million 2003 liability recorded connection supply agreement 13 million september 30 2004 35 million september 30 2003 see note 14 discussion commitments related parties lease commitments rental expense 852 million 2004 807 million 2003 822 million 2002 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 2109 million september 30 2004 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 173 million september 30 2004 receivable 2009 approximately 35 million per year leases contain renewal options varying periods certain leases include options purchase leased property end lease term matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability intellectual property safety health employment contract matters like thousands companies named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims uncertainties asbestos claim litigations uncertainties related collection insurance coverage make difficult accurately predict ultimate resolution asbestos claims subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition connection divestiture former aerospace defense businesses ad business boeing company boeing agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent notes consolidated financial statements continued 17 commitments contingent liabilities continued liabilities related respective businesses including environmental intellectual property matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition time divested certain businesses connection divestitures may lawsuits claims proceedings instituted asserted us related period owned businesses addition guaranteed performance payment certain contracts divested businesses including 600 million lease obligation former semiconductor systems business conexant systems inc conexant lease obligation conexant secured real property subject lease within range estimated fair values real property consideration guarantee received 250000 per quarter conexant december 31 2003 receive 500000 per quarter conexant december 31 2004 unless released guarantee prior thereto expect released guarantee 2005 many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments however believe future payments would material business financial condition 18 business segment information rockwell automation provider industrial automation power control information products services organized based upon products services two operating segments control systems power systems control systems control systems operating segment supplier industrial automation products systems software services focused helping customers control improve manufacturing processes divided three business groups components packaged applications group cpag automation control information group acig global manufacturing solutions gms cpag supplies industrial components power control motor management products packaged engineered products systems supplies motor starters contactors push buttons signaling devices termination protection devices relays timers condition sensors adjustable speed drives motor control centers drive systems cpag’s sales account approximately 40 percent control systems’ sales acig’s core products used control monitor industrial plants processes typically consist processor inputoutput io devices integrated architecture logix controllers perform multiple types controls applications including discrete batch continuous process drive system motion machine safety across various factory floor operations acig’s products include controllers control platforms io devices high performance rotary linear motion control systems electronic operator interface devices sensors plant floor industrial computers machine safety components acig’s sales account approximately 40 percent control systems’ sales gms provides multivendor automation information systems solutions help customers improve manufacturing operations solutions include multivendor customer support training software automation systems integration asset management manufacturing information solutions discrete targeted batch process industries gms’s sales account approximately 20 percent control systems’ sales notes consolidated financial statements continued 18 business segment information continued power systems power systems operating segment divided two businesses dodge mechanical reliance electrical mechanical’s products include mounted bearings gear reducers mechanical drives conveyor pulleys couplings bushings clutches motor brakes electrical’s products include industrial engineered motors adjustable speed drives product repair motor mechanical maintenance solutions training consulting services oem’s endusers distributors following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonrecurring special charges gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales either market price cost plus markup necessarily represent market price accounting policies used preparing segment information consistent described note 1 notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property 50 percent ownership interest rsc conduct significant portion business activities outside united states following tables reflect geographic sales property geographic region millions sales attributed geographic regions based country origin notes consolidated financial statements continued 19 quarterly financial information unaudited amounts first second third quarters adjusted amounts reflected quarterly reports form 10q filed respective periods reflect former firstpoint contact business discontinued operation see note 13 additional information regarding sale firstpoint contact net income 2004 includes b net tax benefit 43 million 002 per diluted share related additional state tax benefits associated previously reported us federal research experimentation credit refund claim c income 76 million 46 million tax 002 per diluted share reflected discontinued operations final judgment legal proceeding related former operation rocky flats facility department energy tax benefit 345 million 018 per diluted share related resolution certain tax matters e tax benefit 259 million 014 per diluted share related tax refunds state california 75 million included continuing operations reduction income tax expense 184 million included income discontinued operations f gain sale 335 million 321 million tax 017 per diluted share resulting sale firstpoint contact reflected income discontinued operations g charges 263 million 163 million tax 009 per diluted share associated ongoing facilities rationalization program notes consolidated financial statements continued 19 quarterly financial information unaudited continued amounts adjusted amounts reflected quarterly reports form 10q filed respective periods reflect former firstpoint contact business discontinued operation see note 13 additional information regarding sale firstpoint contact net income 2003 includes b tax benefit 694 million 037 per diluted share related settlement us federal research experimentation credit refund claim c income 73 million 44 million tax 002 per diluted share reflected discontinued operations favorable determination legal proceeding related former operation rocky flats facility department energy charge 47 million 28 million tax 002 per diluted share due higher estimated future costs environmental remediation legacy site report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheet rockwell automation inc subsidiaries “company” september 30 2004 2003 related consolidated statements operations shareowners equity cash flows comprehensive income three years period ended september 30 2004 audits also included financial statement schedule listed index item 15a 2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company september 30 2004 2003 results operations cash flows three years period ended september 30 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 3 consolidated financial statements october 1 2001 company adopted statement financial standards 142 “goodwill intangible assets” deloitte touche llp milwaukee wisconsin november 15 2004 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information products services basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations certain prior year amounts reclassified conform current year presentation september 2004 sold firstpoint contact business firstpoint contact classified discontinued operation consolidated financial statements periods presented principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries significant intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence control primary beneficiary including rockwell scientific company llc rsc accounted using equity method accounting accordingly proportional share respective affiliate’s earnings losses included income expense consolidated statement operations investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory impairment longlived assets product warranty obligations retirement benefits litigation claims contingencies including environmental matters income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition record sales products services representing approximately 90 percent consolidated sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress towards completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided amounts accrued time recognition sale distributor direct sale customer accruals reported current liability balance sheet right setoff exists reduction accounts receivable cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 184 million september 30 2005 252 million september 30 2004 addition receivables stated net allowance certain customer returns rebates incentives 94 million september 30 2005 78 million september 30 2004 inventories stated lower cost market using firstin firstout fifo method market determined basis estimated realizable values property stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill statement financial accounting standard sfas 142 goodwill intangible assets requires goodwill intangible assets indefinite useful lives reviewed impairment annually frequently events circumstances indicate impairment may present rather amortized previous standards required excess carrying value estimated fair value charged results operations amortize distributor networks computer software products patents intangible assets finite useful lives straightline basis estimated useful lives generally ranging 3 40 years impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis accepted valuation techniques 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks use foreign currency forward exchange contracts offset changes amount future cash flows associated intercompany transactions expected occur within next four years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contracts manage balance fixed floating rate debt accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income currency transaction gains losses included results operations period incurred notes consolidated financial statements continued 1 basis presentation accounting policies continued research development expenses expense research development rd costs incurred costs 1386 million 2005 1217 million 2004 1216 million 2003 include rd expenses cost sales consolidated statement operations income taxes record liability income tax exposures probable amount reasonably estimated tax benefits related claims also recognized become probable reasonably estimable determination probability estimate liability tax benefit reflect relevant tax law applied us taking account particular country state taxing authority earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year effect stock options represents entire difference basic diluted eps use treasury stock method calculate effect outstanding stock options stock options exercise price exceeds average market price outofthemoney options period antidilutive effect eps accordingly exclude calculation antidilutive options years ended september 30 2005 20013 shares 2004 51938 shares 2003 1073119 shares excluded diluted eps calculation stockbased compensation account stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees grant stock options prices equal fair market value common stock grant dates therefore recognize compensation expense connection stock options granted employees recognize compensation expense grants restricted stock period employee’s service notes consolidated financial statements continued 1 basis presentation accounting policies continued following table illustrates effect net income earnings per share fair valuebased method provided sfas 123 accounting stockbased compensation applied outstanding unvested awards year millions except per share amounts pro forma net income 2005 includes additional 49 million tax compensation expense recognized second quarter 2005 retirement eligible stock option participants previously reported compensation expense participants vesting period stock options granted retirement eligible plan participants retire retirement plans first anniversary grant date continue vest postretirement accordance plan provisions agreements related thereto plan participant retires less twelve months grant date options grant forfeited stock compensation expense grants plan participants retirement eligible grant date retirement eligible less twelve months grant date reported pro forma net income twelve month period grant date report stock compensation expense grants plan participants become retirement eligible twelve thirtysix months grant date pro forma net income period grant date retirement eligibility date pro forma net income 2004 includes 36 million tax expense related performancevesting options vested first quarter 2004 result market price common stock reaching specified level predetermined period time net income reported pro forma net income 2004 include 29 million tax compensation expense resulting modifications made certain stock options connection sale firstpoint contact business see recent accounting pronouncements discussion stockbased compensation per share weighted average fair value options granted 1260 2005 720 2004 298 2003 notes consolidated financial statements continued 1 basis presentation accounting policies continued estimated fair value option date grant using blackscholes pricing model following assumptions product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims assistance third party actuarial consultant using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery recent accounting pronouncements march 2005 fasb issued interpretation 47 fin 47 clarify guidance included sfas 143 accounting asset retirement obligations fin 47 requires companies recognize liability fair value legal obligation perform asset retirement activities conditional future event amount reasonably estimated amounts cannot reasonably estimated certain disclosures required unrecognized asset retirement obligations interpretation must adopted fourth quarter 2006 currently evaluating interpretation determine effect financial statements related disclosures december 2004 fasb issued revised sfas 123 sharebased payment sfas 123r sfas 123r requires compensation cost related sharebased payment transactions including stock options restricted stock recognized financial statements compensation cost measured based grantdate fair value instruments issued using option pricing model recognized requisite service period required implement sfas 123r 2006 fiscal year sfas 123r apply awards granted implementation date previouslygranted awards unvested implementation date effect adoption sfas 123r currently estimated approximately 17 20 million 009 011 per share aftertax 2006 however actual sharebased compensation expense 2006 depends number factors including fair value awards time grant notes consolidated financial statements continued 1 basis presentation accounting policies continued november 2004 fasb issued sfas 151 inventory costs sfas 151 sfas 151 requires abnormal amounts idle facility expense freight handling costs spoilage recognized currentperiod charges sfas 151 requires allocation fixed production overhead inventory based normal capacity production facilities unallocated overhead must recognized expense period incurred sfas 151 effective inventory costs incurred beginning first quarter 2006 believe adoption sfas 151 material effect financial statements related disclosures 2 acquisitions businesses 2005 acquisitions september 1 2005 power systems segment acquired assets quality rewind electric inc’s motor repair management business based ft mcmurray alberta canada 2003 acquisitions march 2003 control systems segment acquired certain assets assumed certain liabilities weidmüller holding ag’s weidmüller north american business february 2003 control systems segment acquired substantially assets assumed certain liabilities interwave technology inc consulting integrator focusing manufacturing solutions aggregate cash purchase price businesses 257 million amounts recorded liabilities assumed approximately 10 million results operations businesses included consolidated statement operations since respective dates acquisition pro forma financial information allocation purchase price acquisitions presented combined effect acquisitions material results operations financial position 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2004 2005 millions performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2005 concluded impairments existed notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets consist millions computer software products amortization expense 148 million 2005 160 million 2004 138 million 2003 allenbradley reliance dodge trademarks determined indefinite life therefore subject amortization estimated amortization expense 172 million 2006 171 million 2007 165 million 2008 128 million 2009 115 million 2010 4 inventories consist millions report inventories net allowance excess obsolete inventory 459 million september 30 2005 462 million september 30 2004 notes consolidated financial statements continued 5 property consists millions 6 longterm debt longterm debt consists millions september 2002 entered interest rate swap contract swap effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 623 percent september 30 2005 427 percent september 30 2004 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended designated swap fair value hedge accordingly fair value swap recorded liabilities assets consolidated balance sheet corresponding adjustment carrying value underlying debt september 30 2005 2004 fair value swap based upon quoted market prices contracts similar maturities 63 million september 30 2005 37 million september 30 2004 october 26 2004 entered fiveyear 6000 million unsecured revolving credit facility borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenant would default debttototal capital ratio exceed 60 percent addition 6000 million credit facility shortterm unsecured credit facilities approximately 115 million september 30 2005 available foreign subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities 2005 significant interest payments 456 million 2005 409 million 2004 547 million 2003 notes consolidated financial statements continued 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation enduser oem customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions 9 financial instruments financial instruments include longterm debt foreign currency forward exchange contracts interest rate swap following summary carrying value fair value financial instruments millions base fair value longterm debt upon quoted market prices similar issues base fair value foreign currency forward exchange contracts quoted market prices contracts similar maturities foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2005 2004 outstanding foreign currency forward exchange contracts primarily consisting contracts euro swiss franc notes consolidated financial statements continued 9 financial instruments continued canadian dollar british pound sterling australian dollar foreign currency forward exchange contracts recorded current assets amounts 222 million september 30 2005 42 million september 30 2004 current liabilities amounts 40 million september 30 2005 120 million september 30 2004 anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges significant 10 shareowners’ equity common stock september 30 2005 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2005 203 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 percent common stock although board directors authorized reduce 20 percent threshold triggering rights less 10 percent upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 unless earlier exchanged redeemed 001 per right notes consolidated financial statements continued 10 shareowners’ equity continued accumulated comprehensive loss accumulated comprehensive loss consists millions unrealized losses cash flow hedges 112 million 68 million tax 2005 366 million 221 million tax 2004 reclassified earnings offset gains hedged items approximately 46 million 28 million tax net unrealized gains cash flow hedges september 30 2005 reclassified earnings 2006 expect unrealized gains offset hedged items recognized earnings 11 stock options granted options purchase common stock various incentive plans board action directors officers key employees prices equal fair market value stock grant dates plans provide option price certain options granted plans may paid cash shares common stock combination thereof 2000 longterm incentives plan authorized grant 240 million shares common stock nonqualified options incentive stock options stock appreciation rights restricted stock shares available future grant payment various incentive plans approximately 80 million september 30 2005 none employee incentive plans presently permits options granted november 30 2009 stock options generally expire ten years grant date vest three years information relative stock options follows shares thousands notes consolidated financial statements continued 11 stock options continued following table summarizes information stock options outstanding september 30 2005 shares thousands remaining life years closing price common stock september 30 2005 5290 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2005 2004 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost millions included net periodic benefit cost table income discontinued operations consolidated statement operations pretax pension benefit cost 28 million 18 million years ended september 30 2004 2003 respectively pretax postretirement benefit cost 11 million 02 million years ended september 30 2004 2003 respectively related firstpoint contact retained pension liability related eligible firstpoint contact participants postretirement benefit liability eligible retirees date sale result ongoing net periodic benefit cost us also 2004 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 23 million related sale firstpoint notes consolidated financial statements continued 12 retirement benefits continued contact business reflected income discontinued operations consolidated statement operations benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued 2005 recorded increase minimum pension liability 4688 million resulting primarily discount rate change considering increase deferred tax asset 1850 million resulting increase minimum pension liability decrease intangible pension asset 96 million net decrease shareowners’ equity reflected increase accumulated comprehensive loss 2934 million effective 2006 amended us pension plan eliminate early retirement subsidy certain employees effect amendment reduction pension obligation approximately 70 million corresponding reduction annual pension expense recognized average remaining service life plan participants 2005 made voluntary contributions 1500 million us qualified pension plan trust including 1000 million contributed fourth quarter also made contributions 175 million nonus pension plan trusts fourth quarter 2005 2004 contributed 1250 million us qualified pension plan trust accumulated benefit obligation pension plans 23571 million 2005 measurement date 17681 million 2004 measurement date use actuarial measurement date june 30 measure benefit obligations calculate net periodic benefit cost pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages 1 result plan amendment adopted effective october 1 2002 accordance sfas 106 employers’ accounting postretirement benefits pensions postretirement healthcare liabilities recalculated date amendment using 65 percent discount rate discount rate applicable date plan amendment related net periodic benefit cost 2003 291 million consists expense using 70 percent discount rate period july 1 2002 september 30 2002 expense using 65 percent discount rate period october 1 2002 june 30 2003 2 healthcare cost trend rate reflects estimated increase gross medical claims costs required disclosed sfas 132 employers’ disclosures pensions postretirement benefits result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 55 2011 3 decreasing 425 2011 effective october 1 2002 amended united states postretirement healthcare benefit program order mitigate increasing cost postretirement healthcare services effective january 1 2004 began contributing 50 percent amount excess 2003 per capita amount however calendar 2004 contribution limited 75 percent increase 2003 per capita amount effective january 1 2005 limit future per capita maximum contribution calendar 2004 per capita contribution result finalization 2005 rules medicare prescription drug improvement modernization act 2003 act included additional reduction accumulated projected benefit obligation 135 million september 30 2005 related certain postretirement benefit plans reduction accumulated projected benefit obligation 169 million included september 30 2004 net periodic postretirement benefit cost 2005 decreased 20 million expected decrease 2006 additional 1 million result act adjustment net periodic postretirement benefit cost 2004 determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios consulted considered opinions financial professionals developing appropriate return assumptions resulted selection notes consolidated financial statements continued 12 retirement benefits continued weighted average longterm rate return assets assumption weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2005 2004 pension plans common stock certain nonus countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund estimated future payments contributed 450 million us pension plan trust october 2005 addition expect contribute approximately 25 million related worldwide pension plans 302 million postretirement benefit plans 2006 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions notes consolidated financial statements continued 12 retirement benefits continued pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2005 2004 measurement dates june 30 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 245 million 2005 252 million 2004 242 million 2003 13 discontinued operations following summary composition income discontinued operations included consolidated statement operations millions firstpoint contact 2004 sold firstpoint contact business cash proceeds note convertible minority interest corporate parent buyer value assigned convertible note date transaction approximately 270 million september 2005 note converted nonvoting equity shares accounted cost method historical cost value 270 million used value equity shares date conversion fair value available investment equity shares publicly traded accordingly practicable estimate value results operations firstpoint contact 2003 2004 well gain sale reflected income discontinued operations consolidated statement operations summarized results firstpoint contact follows millions rocky flats 2004 recorded benefit 76 million 46 million tax result final judgment defense claim legal proceeding related former operation rocky flats facility department notes consolidated financial statements continued 13 discontinued operations continued energy amount addition income 73 million 44 million tax recognized 2003 related rocky flats defense claim legal proceeding 14 related party transactions 50 percent rsc ownership interest accounted using equity method investment rsc 588 million september 30 2005 575 million september 30 2004 included assets consolidated balance sheet agreement rsc pursuant rsc performs research development services us incurred 28 million 2005 37 million 2004 30 million 2003 research development services performed rsc september 30 2005 amounts due rsc significant september 30 2004 amount due rsc research development services 07 million september 30 2004 amount due rsc cost sharing arrangements significant share equally rockwell collins inc rockwell collins owns 50 percent rsc providing 60 million line credit rsc bears interest greater rockwell collins’ commercial paper borrowing rate september 30 2005 2004 outstanding borrowings line credit addition rockwell collins guarantee onehalf lease agreement one rsc’s facilities total future minimum lease payments lease 48 million lease agreement term ends december 2011 25 percent colinx llc colinx company provides logistics ecommerce services ownership interest accounted using equity method paid colinx 182 million 2005 171 million 2004 152 million 2003 primarily logistics services addition colinx paid us approximately 28 million 2005 22 million 2004 24 million 2003 use facilities services amounts due colinx september 30 2005 2004 significant 15 income expense components income expense millions 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million 2003 sold majority ownership interest reliance electric limited japan rej resulting loss 84 million 25 million tax 001 per diluted share loss includes 93 million noncash charge related impairment reliance trademark cash proceeds transaction totaled 104 million notes consolidated financial statements continued 16 income taxes components income tax provision follows millions 2005 recognized net tax benefit 197 million income continuing operations 216 million income discontinued operations related current former businesses net tax benefits included income continuing operations primarily related resolution claims tax matters connection closure federal audit cycle years 1998 2002 addition net tax benefits include effect trueup estimated tax audit contingency accruals connection closure 1998 2002 audit net tax benefits included discontinued operations relate primarily closure 1998 2002 audit 75 million prior year state tax refund divested business 113 million resolution various tax matters divested businesses 28 million 2004 recognized tax benefits 463 million income continuing operations 184 million income discontinued operations related following items • 345 million resulting resolution certain tax matters part related former businesses majority benefits recognized related nonus tax matters addition agreement taxing authority related treatment investment amount 115 million reflected reduction united states income tax provision 213 million reflected reduction nonunited states income tax provision 17 million reflected reduction state local income tax provision • 43 million related additional state tax benefits associated us research experimentation credit refund claim 2003 see discussion • 259 million related refund state california period 1989 1991 amount 75 million included reduction income tax provision 184 million included income discontinued operations 2003 recognized earnings tax benefit 694 million related federal research experimentation credit refund claim years 1997 2001 amount 664 million reflected reduction united states income tax provision 30 million reflected reduction state local income tax provision notes consolidated financial statements continued 16 income taxes continued net current deferred income tax assets september 30 2005 2004 consist tax effects temporary differences related following millions total deferred tax assets 4268 million september 30 2005 3551 million september 30 2004 total deferred tax liabilities 1356 million september 30 2005 1473 million september 30 2004 reclassified tax audit accrual september 30 2004 deferred income taxes noncurrent liabilities consolidated balance sheet reclassification resulted remaining net noncurrent deferred tax asset 121 million september 30 2004 reported noncurrent asset consolidated balance sheet believe likely realize current longterm deferred tax assets reduction future taxable income reflected tax attributes carried forward significant factors considered determining probability realization deferred tax assets include historical operating results 2610 million united states taxable income past three years b expected future earnings c extended period time retiree medical benefits paid notes consolidated financial statements continued 16 income taxes continued net operating loss capital loss tax credit carryforwards valuation allowances related carryforward periods september 30 2005 millions valuation allowance september 30 2005 noted carryforwards future use uncertain 2005 valuation allowance decreased 75 million result basis adjustment connection filing 2004 income tax return related sale firstpoint contact recording valuation allowance nonus net operating losses operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies recorded accrual 1031 million 1117 million september 30 2005 2004 respectively reflects estimate likely outcome current future audits recorded liabilities consolidated balance sheet change accrual reflects reduction 346 million related primarily settlement 1998 2002 us federal audit offset increase 260 million accrual changes estimates additional interest related previously identified income tax exposures final determination tax audits changes estimates may result additional future income tax expense benefit notes consolidated financial statements continued 16 income taxes continued effective income tax rate differed united states statutory tax rate reasons set forth calculated income tax provisions based upon following components income continuing operations income taxes millions provided us deferred taxes cumulative earnings nonus affiliates reinvested indefinitely earnings relate ongoing operations september 30 2005 approximately 5100 million availability us foreign tax credits practicable determine us state income tax liabilities would payable earnings reinvested indefinitely deferred taxes provided nonus affiliates plan remit earnings income taxes paid 1348 million 2005 300 million 2004 845 million 2003 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 12 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2005 71 million 38 million accrued notes consolidated financial statements continued 17 commitments contingent liabilities continued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2005 estimated total reasonably possible costs could incur matters 825 million recorded environmental accruals matters 343 million addition matters assumed certain environmental liabilities connection 1995 acquisition reliance indemnified exxonmobil corporation exxon substantially costs associated reliance matters september 30 2005 recorded liability 226 million receivable 214 million reliance matters estimate total reasonably possible costs matters 350 million substantially indemnified exxon based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements lease commitments rental expense 880 million 2005 852 million 2004 807 million 2003 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 2065 million september 30 2005 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 136 million september 30 2005 receivable 2010 approximately 27 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies great bulk complaints however identify products specify claimants exposed asbestos attributable products past experience shown notes consolidated financial statements continued 17 commitments contingent liabilities continued vast majority claimants never identify products addition products appear identified frequently divested businesses indemnified costs claimants show worked products nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims initiated litigation milwaukee county circuit court february 12 2004 enforce insurance policies nationwide indemnity company kemper insurance carriers provided liability insurance coverage former allenbradley subsidiary result insurance carriers paid past defense indemnity costs agreed pay substantial majority future defense indemnity costs allenbradley asbestos claims subject policy limits either carrier becomes insolvent policy limits either carrier exhausted share future defense indemnity costs may increase however coverage excess policies may available pay costs uncertainties asbestos claim litigation long term solvency insurance companies make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition connection divestiture former aerospace defense businesses ad business boeing company boeing agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters time divested certain businesses connection divestitures lawsuits claims proceedings may instituted asserted us related period owned businesses many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments however believe future payments would material business financial condition 18 business segment information rockwell automation provider industrial automation power control information products services organized based upon products services two operating segments control systems power systems control systems control systems operating segment supplies industrial automation products systems software services focused helping customers control improve manufacturing processes control systems notes consolidated financial statements continued 18 business segment information continued includes two main business groups components packaged applications group cpag automation control information group acig cpag supplies industrial components power control motor management products packaged engineered products systems supplies motor starters contactors push buttons signaling devices termination protection devices relays timers condition sensors adjustable speed drives motor control centers drive systems cpag’s sales account approximately 40 percent control systems’ sales acig’s core products used primarily control monitor industrial plants processes typically consist processor software inputoutput devices acig’s integrated architecture logix controllers perform multiple types control applications including discrete batch continuous process drive system motion machine safety across various factory floor operations acig’s products include controllers control platforms devices high performance rotary linear motion control systems electronic operator interface devices sensors industrial computers machine safety components acig’s sales account approximately 45 percent control systems’ sales addition control systems’ offering also includes services solutions multivendor customer support training automation systems integration asset management manufacturing information solutions discrete targeted batch process industries power systems power systems operating segment consists two business groups dodge mechanical reliance electrical mechanical’s products include mounted bearings gear reducers mechanical drives conveyor pulleys couplings bushings clutches motor brakes electrical’s products include industrial engineered motors adjustable speed drives product repair motor mechanical maintenance solutions training consulting services oem’s endusers distributors following tables reflect sales operating results reportable segments years ended september 30 millions notes consolidated financial statements continued 18 business segment information continued among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales either market price cost plus markup necessarily represent market price preparing segment information use accounting policies consistent described note 1 following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets property 50 percent ownership interest rsc conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country origin notes consolidated financial statements continued 19 quarterly financial information unaudited income continuing operations 2005 includes net tax benefit 197 million 010 per diluted share primarily related resolution claims tax matters connection closure federal audit cycle years 1998 2002 b insurance claim 114 million 78 million tax 004 per diluted share related recovery previously incurred legal costs c special charges 215 million 142 million tax 008 per diluted share associated realignment administrative functions reduction workforce europe control systems segment facility closure power systems segment operating earnings control systems power systems include special charges 165 million 50 million respectively quarter ended september 30 2005 special charges included consolidated statement operations year ended september 30 2005 cost sales selling general administrative expenses amounts 94 million 121 million respectively expect total cash expenditures aftertax connection actions approximately 114 million related employee severance separation costs mostly incurred first half 2006 noncash charges 28 million aftertax relate writedown property fair value determined management using customary valuation techniques see note 13 additional information discontinued operations notes consolidated financial statements continued 19 quarterly financial information unaudited continued income continuing operations 2004 includes net tax benefit 43 million 002 per diluted share related additional state tax benefits associated previously reported us federal research experimentation credit refund claim b tax benefit 345 million 018 per diluted share related resolution certain tax matters c tax benefit 75 million 004 per diluted share related tax refunds state california charges 263 million 163 million tax 009 per diluted share associated ongoing facilities rationalization program e see note 13 additional information discontinued operations 20 subsequent events november 2005 company completed saleleaseback transaction 24 properties including land buildings improvements affixed properties lease terms vary five fifteen years depending property classified operating leases net proceeds sale approximately 148 million used repay commercial paper borrowings three sold properties resulted loss 20 million recognized first quarter 2006 remaining properties resulted gain sale 36 million amortized rent expense term respective leases average operating lease commitment first five years 12 million per year 10 million per year thereafter october 11 2005 issued unsecured commercial paper obligations 3000 million various maturities 1 28 days used proceeds partially fund 450 million voluntary contribution us qualified pension trust report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheet rockwell automation inc subsidiaries “company” september 30 2005 2004 related consolidated statements operations shareowners equity cash flows comprehensive income three years period ended september 30 2005 audits also included financial statement schedule listed index item 15a 2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company september 30 2005 2004 results operations cash flows three years period ended september 30 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting september 30 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated november 10 2005 expressed unqualified opinion management’s assessment company’s internal control financial reporting deloitte touche llp milwaukee wisconsin november 10 2005 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information products services basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations september 2004 sold firstpoint contact business firstpoint contact classified discontinued operation consolidated financial statements periods presented june 2006 announced intention divest dodge mechanical reliance electric motors motor repair services businesses reflected continuing operations periods presented criteria discontinued operations prescribed statement financial accounting standards sfas 144 accounting impairment disposal longlived assets met september 30 2006 date standard requires criteria assessed november 7 2006 announced entered definitive agreement sell businesses baldor electric company baldor 18 billion comprised 175 billion cash 50 million baldor common stock transaction subject customary closing conditions regulatory approval expected close second quarter fiscal 2007 principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries significant intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence control primary beneficiary accounted using equity method accounting accordingly proportional share respective affiliate’s earnings losses included income expense consolidated statement operations investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory impairment longlived assets product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition record sales products services representing approximately 90 percent consolidated sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided amounts accrued time recognition sale distributor direct sale customer accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 152 million september 30 2006 184 million september 30 2005 addition receivables stated net allowance certain customer returns rebates incentives 85 million september 30 2006 94 million september 30 2005 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill notes consolidated financial statements continued 1 basis presentation accounting policies continued statement financial accounting standard sfas 142 goodwill intangible assets requires goodwill intangible assets indefinite useful lives reviewed impairment annually frequently events circumstances indicate impairment may present rather amortized previous standards required excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize intangible assets finite useful lives straightline basis estimated useful lives generally ranging 5 40 years distributor networks 3 10 years computer software products 6 14 years patents 3 14 years intangible assets impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks use foreign currency forward exchange contracts offset changes amount future cash flows associated intercompany transactions expected occur within next three years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contracts manage balance fixed floating rate debt accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 1604 million 2006 1386 million 2005 1217 million 2004 include rd expenses cost sales consolidated statement operations income taxes record liability income tax exposures probable amount reasonably estimated tax benefits related claims also recognized become probable reasonably estimable determining probability estimability liability tax benefit consider relevant tax law applied us particular country state taxing authority notes consolidated financial statements continued 1 basis presentation accounting policies continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards sharebased compensation awards total employee proceeds exceed average market price period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2006 905455 shares 2005 20013 shares 2004 51938 shares excluded diluted eps calculation following table reconciles basic weighted average outstanding shares diluted weighted average outstanding shares millions sharebased compensation effective october 1 2005 adopted sfas 123r sharebased payment sfas 123r using modified prospective application transition method recognize sharebased compensation expense grants sharebased compensation awards straightline basis service period award recipient see note 11 additional information sfas 123r requires us report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow prior 2006 adoption sfas 123r reported entire tax benefit related exercise stock options operating cash flow product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery notes consolidated financial statements continued 1 basis presentation accounting policies continued conditional asset retirement obligations account conditional asset retirement obligations financial accounting standards board fasb interpretation 47 accounting conditional asset retirement obligations fin 47 accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional see note 17 additional information related obligations recent accounting pronouncements september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r sfas 158 sfas 158 requires companies recognize funded status pension postretirement benefit plans sponsoring employers’ balance sheets recognize changes funded status year changes occur also requires measurement date plan assets obligations occur end employers’ fiscal year sfas 158 effective us end fiscal 2007 except change measurement date effective us fiscal 2008 effect financial statements dependent upon discount rate fiscal 2007 measurement date june 30 2007 actual returns pension plan assets year expect statement result reduction shareowners’ equity unlikely fas 158 affect loan covenant compliance financial arrangements september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements also establishes fair value hierarchy prioritizes information used developing assumptions pricing asset liability sfas 157 effective us beginning fiscal 2008 evaluating statement determine effect financial statements related disclosures september 2006 securities exchange commission sec issued staff accounting bulletin 108 financial statements considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 sab 108 requires companies quantify impact correcting misstatements including carryover reversing effects prior year misstatements current year financial statements pronouncement effective us fiscal 2007 believe sab 108 material effect financial statements related disclosures june 2006 fasb issued interpretation 48 accounting uncertainty income taxes fin 48 fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 accounting income taxes fin 48 prescribes recognition threshold retirement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective us beginning fiscal 2008 evaluating interpretation determine effect financial statements related disclosures notes consolidated financial statements continued 2 acquisitions divestitures 2006 acquisitions divestitures may 2006 control systems segment acquired gepa mbh provider change management software industrial automation process control industrial information technology january 2006 control systems segment acquired caribbean integration engineers inc cie offers engineering services control systems integration process automation computer system validation solutions control systems segment also acquired datasweep inc provider production management software december 2005 results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented effects acquisitions material results operations financial position march 2006 control systems segment sold assets electrocraft engineered solutions business discontinued operations related sale presented effect divestiture material results operations financial position also sold investment rockwell scientific company llc rsc 2006 see note 14 additional information related sale 2005 acquisitions september 1 2005 power systems segment acquired assets quality rewind electric inc’s motor repair management business quality rewind based ft mcmurray alberta canada 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2005 2006 millions performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2006 concluded impairments existed notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets consist millions 2006 connection final purchase price allocations quality rewind datasweep inc cie see note 2 recorded intangible assets 217 million 90 million assigned computer software products 19 million intangible assets subject amortization remainder classified intangible assets preliminary purchase price allocation associated acquisition gepa mbh includes allocation 18 million computer software products 12 million intangible assets computer software products amortization expense 164 million 2006 148 million 2005 160 million 2004 allenbradley® reliance® reliance electrictm dodge® cietm trademarks indefinite life therefore subject amortization estimated amortization expense 261 million 2007 241 million 2008 172 million 2009 86 million 2010 74 million 2011 inventories consist millions report inventories net allowance excess obsolete inventory 414 million september 30 2006 459 million september 30 2005 notes consolidated financial statements continued property consists millions decrease land buildings improvements balances 2006 result saleleaseback transaction 24 properties occurred year see note 17 additional information longterm debt consists millions issued aggregate 800 million principal amount 615 notes 670 debentures 520 debentures january 1998 debt offering yielded approximately 7500 million proceeds issued 520 debentures discount 615 notes 670 debentures par september 2002 entered interest rate swap contract swap effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 802 percent september 30 2006 623 percent september 30 2005 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended designated swap fair value hedge accordingly fair value swap recorded liabilities consolidated balance sheet corresponding adjustment carrying value underlying debt september 30 2006 2005 fair value swap based upon quoted market prices contracts similar maturities liability 68 million september 30 2006 liability 63 million september 30 2005 october 26 2004 entered fiveyear 6000 million unsecured revolving credit facility september 29 2006 entered 364day 2500 million unsecured revolving credit facility credit facilities remain effect drawn either september 30 2006 2005 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2006 2005 addition 6000 2500 million credit facilities shortterm unsecured credit facilities approximately 1252 million september 30 2006 available foreign subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities 2006 significant interest payments 604 million 2006 456 million 2005 409 million 2004 notes consolidated financial statements continued 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation enduser oem customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions 9 financial instruments financial instruments include longterm debt foreign currency forward exchange contracts interest rate swap following summary carrying value fair value financial instruments millions base fair value longterm debt upon quoted market prices similar issues base fair value foreign currency forward exchange contracts quoted market prices contracts similar maturities foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2006 2005 outstanding foreign currency forward exchange contracts primarily consisting contracts relating euro british pound sterling south korean swiss franc foreign currency forward exchange contracts recorded current assets amounts 19 million september 30 2006 222 million september 30 2005 current liabilities amounts 85 million september 30 2006 40 million september 30 2005 anticipate material adverse effect results operations financial position relating foreign currency forward exchange contracts designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges significant also hold financial instruments consisting cash accounts receivable accounts payable shortterm debt carrying value assets liabilities reported consolidated balance sheet approximate fair value notes consolidated financial statements continued common stock september 30 2006 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2006 170 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2006 repurchased 04 million shares common stock 206 million settle october 2006 outstanding purchases recorded accounts payable september 30 2006 preferred share purchase rights outstanding share common stock provides holder one preferred share purchase right rights become exercisable person group without approval board directors acquires offers acquire 20 percent common stock although board directors authorized reduce 20 percent threshold triggering rights less 10 percent upon exercise right entitles holder 1100th share series junior participating preferred stock company junior preferred stock price 250 subject adjustment upon acquisition company right rights held acquirer generally exercisable 500 worth either common stock company common stock acquirer 250 certain circumstances right may exchanged company one share common stock 1100th share junior preferred stock rights expire december 6 2006 accumulated comprehensive loss accumulated comprehensive loss consists millions unrealized gains cash flow hedges 34 million 20 million tax 2006 losses 112 million 68 million tax 2005 reclassified earnings offset losses gains respectively hedged items approximately 13 million 08 million tax net unrealized losses cash flow hedges september 30 2006 reclassified earnings 2007 expect unrealized losses offset hedged items recognized earnings notes consolidated financial statements continued effective october 1 2005 adopted sfas 123r using modified prospective application transition method adopted sfas 123r accounted sharebased compensation accordance accounting principles board opinion 25 accounting stock issued employees restricted stock sharebased employee compensation cost reflected net income october 1 2005 sfas 123r requires us report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow october 1 2005 reported entire tax benefit related exercise stock options operating cash flow 2006 recognized 295 million sharebased compensation expense total income tax benefit recognized related sharebased compensation 2006 103 million recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2006 total unrecognized compensation cost related sharebased compensation awards 306 million net estimated forfeitures expect recognize weighted average period approximately 13 years 2000 longterm incentives plan amended authorizes us deliver 24 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common restricted stock approximately 59 million shares 2000 longterm incentives plan 04 million shares 2003 directors stock plan remain available future grant payment september 30 2006 use treasury stock deliver shares common stock plans 2000 longterm incentives plan permit sharebased compensation awards granted november 30 2009 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2006 2005 2004 1767 1260 720 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based fiveyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using weighted average daily historical volatility 90 percent stock price past four years period since spinoff rockwell collins inc implied volatility 10 percent based upon exchange traded options common stock determined blend historical volatility implied volatility better reflects future market conditions better indicates expected volatility purely historical volatility determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued summary stock option activity years ended september 30 2006 2005 2004 table presents stock option activity years ended september 30 2006 2005 2004 millions performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted 2006 143100 performance share awards granted 286200 shares common stock could delivered payment grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period performance share awards outstanding september 30 2005 september 30 2006 140500 performance shares outstanding per share fair value performance shares granted year ended september 30 2006 6324 determined using monte carlo simulation following assumptions notes consolidated financial statements continued average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using weighted average daily historical volatility 90 percent stock price past four years period since spinoff rockwell collins inc implied volatility 10 percent based upon exchange traded options common stock determined blend historical volatility implied volatility better reflects future market conditions better indicates expected volatility purely historical volatility determined average sp 500 expected volatility using daily historical volatility period january 2002 december 2004 restricted stock also grant restricted stock awards certain employees restrictions lapse periods ranging three five years value restricted stock awards closing market value common stock date grant summary restricted stock activity years ended september 30 2006 2005 2004 follows prior year pro forma expense following table illustrates effect net income earnings per share fair valuebased method provided sfas 123 accounting stockbased compensation applied outstanding unvested awards periods adopted sfas 123r millions expect per share amounts notes consolidated financial statements continued pro forma net income 2005 includes additional 49 million tax compensation expense recognized second quarter 2005 retirement eligible stock option participants previously reported compensation expense participants vesting period stock options granted retirement eligible plan participants retire retirement plans first anniversary grant date continue vest postretirement accordance plan provisions agreements related thereto plan participant retires less twelve months grant date options grant forfeited stock compensation expense grants plan participants retirement eligible grant date retirement eligible less twelve months grant date reported pro forma net income twelve month period grant date report stock compensation expense grants plan participants become retirement eligible twelve thirtysix months grant date pro forma net income period grant date retirement eligibility date pro forma net income 2004 includes 36 million tax expense related performancevesting options vested first quarter 2004 result market price common stock reaching specified level predetermined period time net income reported pro forma net income 2004 include 29 million tax compensation expense resulting modifications made certain stock options connection sale firstpoint contact business sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2006 2005 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost millions included net periodic benefit cost table loss income discontinued operations consolidated statement operations pretax pension benefit cost 28 million year ended september 30 2004 pretax postretirement benefit cost 11 million year ended september 30 2004 related firstpoint contact retained pension liability related eligible firstpoint contact participants postretirement benefit liability eligible retirees date sale result ongoing net periodic benefit cost us also 2004 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 23 million related sale firstpoint contact business reflected income discontinued operations consolidated statement operations notes consolidated financial statements continued benefit obligation plan assets funded status net liability information summarized follows millions 2006 recorded decrease minimum pension liability 6561 million resulting primarily discount rate change 4500 million contribution us qualified pension plan 2006 decrease minimum pension liability related deferred tax asset resulted net increase shareowners’ equity reflected decrease accumulated comprehensive loss 4013 million 2005 amended us pension plan effective 2006 eliminate early retirement subsidy certain employees effect amendment reduction pension obligation approximately 70 million recognized 2005 corresponding reduction annual pension expense recognized average remaining service life plan participants 2006 made voluntary contributions 4500 million us qualified pension plan trust 2005 contributed 1500 million us qualified pension plan trust notes consolidated financial statements continued accumulated benefit obligation pension plans 21644 million 2006 measurement date 23571 million 2005 measurement date use actuarial measurement date june 30 measure benefit obligations plan assets calculate net periodic benefit cost pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages notes consolidated financial statements continued effective october 1 2002 amended united states postretirement healthcare benefit program order mitigate increasing cost postretirement healthcare services effective january 1 2004 began contributing 50 percent amount excess 2003 per capita amount however calendar 2004 contribution limited 75 percent increase 2003 per capita amount effective january 1 2005 limit future per capita maximum contribution calendar 2004 per capita contribution result finalization 2005 rules medicare prescription drug improvement modernization act 2003 act included additional reduction accumulated projected benefit obligation 135 million september 30 2005 amortized expense average remaining service life determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2006 2005 pension plans common stock certain nonus countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund estimated future payments expect contribute approximately 500 million related worldwide pension plans 239 million postretirement benefit plans 2007 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2006 2005 measurement dates june 30 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 270 million 2006 245 million 2005 252 million 2004 following summary composition loss income discontinued operations included consolidated statement operations millions rocky flats 2006 recorded 50 million 30 million aftertax accrual legal contingencies related former aerospace defense businesses’ operation rocky flats facility us department energy 2004 recorded benefit 76 million 46 million tax result final judgment defense claim legal proceeding related former aerospace defense businesses’ operation rocky flats facility us department energy notes consolidated financial statements continued firstpoint contact 2004 sold firstpoint contact business cash proceeds note convertible minority interest corporate parent buyer value assigned convertible note date transaction approximately 270 million september 2005 note converted nonvoting equity shares accounted cost method historical cost value 270 million used value equity shares date conversion july 2006 received cash dividend 255 million respect equity shares resulting recapitalization distribution cash shareholders management recorded dividend income 14 million remaining 241 million return capital value equity shares recorded september 30 2006 29 million fair value available investment equity shares publicly traded accordingly practicable estimate fair value results operations firstpoint contact 2004 well gain sale reflected loss income discontinued operations consolidated statement operations summarized results firstpoint contact follows millions september 2006 rockwell collins inc rockwell collins sold investment rsc aggregate 1675 million cash prior date sale rockwell collins owned 50 percent rsc part transaction among things retained certain licenses intellectual property owned rsc additionally incurred expenses funded certain rsc cash balances connection sale obligated pay rsc 28 million 2007 12 million 2009 recorded gain sale 199 million 120 million tax 007 per share agreement rsc pursuant rsc performs research development services us expiring september 30 2009 incurred 23 million 2006 28 million 2005 37 million 2004 research development services performed rsc september 30 2006 2005 amounts due rsc significant 2006 sold portion ownership interest colinx llc colinx company provides logistics ecommerce services resulting gain 08 million reducing ownership interest 25 percent 20 percent account ownership interest using equity method paid colinx 216 million 2006 182 million 2005 171 million 2004 primarily logistics services addition colinx paid us approximately 38 million 2006 28 million 2005 22 million 2004 use facilities services amounts due colinx september 30 2006 2005 significant notes consolidated financial statements continued components income expense millions pretax gain sale rsc 199 million included 2006 net gain loss dispositions property business investment 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million components income tax provision follows millions 2006 recognized tax benefits income continuing operations resulting • 138 million related resolution certain tax matters claims related closure us federal audit cycle years 2003 2004 various state tax audits • 154 million related resolution certain nonus tax matters primarily relating cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property • 272 million related reversal valuation allowances capital loss carryforwards 2005 recognized net tax benefits resulting notes consolidated financial statements continued 2004 recognized tax benefits resulting following items • 345 million income continuing operations related resolution certain nonus tax matters addition agreement taxing authority related treatment investment 115 million reported reduction united states income tax provision 213 million reported reduction nonunited states income tax provision 17 million reported reduction state local income tax provision • 259 million related refund state california period 1989 1991 75 million reported reduction income tax provision income continuing operations 184 million reported loss income discontinued operations net current deferred income tax assets september 30 2006 2005 consist tax effects temporary differences related following millions net longterm deferred income tax liabilities assets september 30 2006 2005 consist tax effects temporary differences related following millions total deferred tax assets 3034 million september 30 2006 4268 million september 30 2005 total deferred tax liabilities 2442 million september 30 2006 1356 million september 30 2005 believe likely realize current longterm deferred tax assets reduction future taxable income reflected tax attributes carried forward significant factors considered determining probability realization deferred tax assets include historical operating results 6435 million united states taxable income past three years expected future earnings notes consolidated financial statements continued net operating loss capital loss tax credit carryforwards valuation allowances related carryforward periods september 30 2006 millions valuation allowance september 30 2006 noted carryforwards future use less likely 2006 valuation allowance increased 70 million result audit settlements decreased 272 million result planned utilization capital loss carryforwards related sale investment rsc planned sale dodge mechanical reliance electric motors motor repair services businesses 2005 valuation allowance decreased 75 million result basis adjustment connection filing 2004 income tax return related sale firstpoint contact recording valuation allowance nonus net operating losses operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies recorded accrual 851 million 1031 million september 30 2006 2005 respectively reflects estimate likely outcome current future audits accrual recorded liabilities consolidated balance sheet net change accrual 180 million reflects reduction 183 million related settlement 2003 2004 us federal audit various state audits net 133 million reduction due changes estimates related current year audit developments 136 million increase primarily related current year taxes interest previously identified income tax exposures final determination tax audits changes estimates may result additional future income tax expense benefit notes consolidated financial statements continued effective income tax rate differed united states statutory tax rate reasons set forth calculated income tax provisions based upon following components income continuing operations income taxes millions provided us deferred taxes cumulative earnings nonus affiliates reinvested indefinitely earnings relate ongoing operations september 30 2006 approximately 7460 million availability us foreign tax credits practicable determine us state income tax liabilities would payable earnings reinvested indefinitely deferred taxes provided nonus affiliates plan remit earnings income taxes paid 2147 million 2006 1348 million 2005 300 million 2004 environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 14 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2006 104 million 33 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2006 estimated total reasonably possible costs could incur matters 787 million recorded environmental accruals matters 329 million addition matters assumed certain environmental liabilities connection 1995 acquisition reliance indemnified exxonmobil corporation exxon substantially costs associated matters indemnity applies liabilities give exxon notice december 29 2006 september 30 2006 recorded liability 224 million receivable 213 million matters estimate total reasonably possible costs matters 270 million substantially indemnified exxon notes consolidated financial statements continued 17 commitments contingent liabilities continued based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations effective september 30 2006 adopted fin 47 clarifies guidance included sfas 143 accounting asset retirement obligations sfas 143 fin 47 companies must accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise application fin 47 resulted charge net tax 181 million included consolidated statement operations year ended september 30 2006 cumulative effect change accounting principle liability conditional asset retirement obligations recognized september 30 2006 result application fin 47 293 million recorded liabilities consolidated balance sheet pro forma amounts fin 47 applied periods dollars millions except per share amounts lease commitments rental expense 977 million 2006 880 million 2005 852 million 2004 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3599 million september 30 2006 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 103 million september 30 2006 receivable 2009 approximately 33 million per year leases contain renewal options varying periods certain leases include options purchase leased property notes consolidated financial statements continued 17 commitments contingent liabilities continued lease commitments continued 2006 completed saleleaseback transaction 24 properties including land buildings improvements affixed properties lease terms vary five fifteen years depending property classified operating leases net proceeds sale approximately 1475 million three sold properties resulted loss 18 million recognized 2006 remaining properties resulting gain sale 369 million amortized rent expense term respective leases net book value sold assets removed balance sheet except three properties retained right reacquire subdivided portion adjacent vacant land properties remove assets balance sheet upon reconveyance vacant land termination right net proceeds related three properties 186 million reported noncurrent liabilities consolidated balance sheet 2004 sold facility saleleaseback transaction third party resulting 206 million pretax loss net cash proceeds sale 190 million matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies great bulk complaints however identify products specify claimants exposed asbestos attributable products past experience shown vast majority claimants never identify products addition products appear identified frequently divested businesses indemnified costs claimants show worked products nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims initiated litigation milwaukee county circuit court february 12 2004 enforce insurance policies nationwide indemnity company kemper insurance carriers provided insurance coverage former allenbradley subsidiary result insurance carriers paid past defense indemnity costs agreed pay substantial majority future defense indemnity costs allenbradley asbestos claims subject policy limits either carrier becomes insolvent policy limits either carrier exhausted share future defense indemnity costs may increase however coverage excess policies may available pay costs notes consolidated financial statements continued 17 commitments contingent liabilities continued uncertainties asbestos claim litigation long term solvency insurance companies make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition connection divestiture former aerospace defense businesses ad business boeing company boeing agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters time divested certain businesses connection divestitures lawsuits claims proceedings may instituted asserted us related period owned businesses many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments however believe future payments would material business financial condition 2007 plan execute certain cost productivity initiatives likely include workforce reductions facility rationalization actions consistent planned divestiture power systems operating segment globalization cost productivity efforts costs associated actions recorded relevant recognition criteria met rockwell automation provider industrial automation power control information products services organized based upon products services two operating segments control systems power systems control systems control systems operating segment supplies industrial automation products systems software services focused helping customers control improve manufacturing processes control systems includes two main business groups components packaged applications group cpag automation control information group acig cpag supplies industrial components power control motor management products packaged engineered products systems supplies motor starters contactors push buttons signaling devices termination protection devices relays timers condition sensors adjustable speed drives motor control centers drive systems cpag’s sales account approximately 39 percent control systems’ sales acig’s core products used primarily control monitor industrial plants processes typically consist processor software inputoutput io devices acig’s integrated architecture logix controllers perform multiple types control applications including discrete batch continuous process drive system motion machine safety across various factory floor operations acig’s products include controllers control platforms software io devices high performance rotary linear motion control systems electronic operator interface devices sensors industrial computers machine safety components acig’s sales account approximately 45 percent control systems’ sales addition control systems’ offerings also include services solutions multivendor customer support training automation systems integration asset management manufacturing information solutions discrete targeted batch process industries notes consolidated financial statements continued 18 business segment information continued effective october 1 2006 realigned internal management reporting structure reporting structure changes include realignment control systems’ services solutions offerings report components packaged applications group cpag business group additionally power systems drives related parts services business realigned also report cpag business group result changes internal management reporting structure begin reporting historical control systems operating segment two separate operating segments first quarter 2007 power systems power systems operating segment consists two business groups dodge mechanical reliance electrical mechanical’s products include mounted bearings gear reducers mechanical drives conveyor pulleys couplings bushings clutches motor brakes electrical’s products include industrial engineered motors adjustable speed drives product repair motor mechanical maintenance solutions training consulting services oem’s endusers distributors following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales either market price cost plus markup necessarily represent market price preparing segment information use accounting policies consistent described note 1 notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property also included 50 percent ownership interest rsc corporate identifiable assets september 30 2005 2004 conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination notes consolidated financial statements continued 19 quarterly financial information unaudited notes consolidated financial statements continued 19 quarterly financial information unaudited continued notes consolidated financial statements continued june 2006 announced intention divest dodge mechanical reliance electric motors motor repair services businesses principal businesses power systems operating segment date announcement fiscal year end received expressions interest potential buyers conducted management presentations responded buyer due diligence activities subsequent fiscal year end received bids prospective buyers completed contract negotiations november 7 2006 announced entered definitive agreement sell businesses baldor electric company 18 billion comprised 175 billion cash 50 million baldor common stock expect recognize gain transaction’s effective tax rate lower statutory tax rate transaction subject customary closing conditions regulatory approval expected close second quarter fiscal 2007 subsequent filings businesses reported discontinued operations assets liabilities businesses sold report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2006 2005 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2006 audits also included financial statement schedule listed index item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position rockwell automation inc subsidiaries september 30 2006 2005 results operations cash flows three years period ended september 30 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 11 consolidated financial statements october 1 2005 company adopted statement financial accounting standard 123r shared based payments described note 17 consolidated financial statements september 30 2006 company adopted fasb interpretation 47 accounting conditional asset retirement obligations also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting september 30 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated november 9 2006 expressed unqualified opinion management’s assessment company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp milwaukee wisconsin november 9 2006 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations march 2006 sold assets electrocraft engineered solutions electrocraft business electrocraft reported discontinued operation consolidated financial statements periods presented january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor electric company baldor principal businesses former power systems operating segment businesses reported discontinued operation consolidated financial statements periods presented principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence control primary beneficiary accounted using equity method accounting accordingly proportional share respective affiliates earnings losses included income consolidated statement operations investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory share based compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition approximately 90 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize revenue software products related services accordance statement position sop 972 software revenue recognition issued american institute certified public accountants notes consolidated financial statements continued 1 basis presentation accounting policies continued recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 124 million september 30 2007 112 million september 30 2006 notes consolidated financial statements continued 1 basis presentation accounting policies continued addition receivables stated net allowance certain customer returns rebates incentives 81 million september 30 2007 85 million september 30 2006 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware internal use software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill intangible assets also include costs software developed software business sold leased otherwise marketed accounted statement financial accounting standard sfas 86 accounting costs computer software sold leased otherwise marketed sfas 142 goodwill intangible assets requires goodwill intangible assets indefinite useful lives reviewed impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize customer relationships computer software products technology intangible assets finite useful lives straightline basis estimated useful lives generally ranging 3 20 years impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks use foreign currency forward notes consolidated financial statements continued 1 basis presentation accounting policies continued exchange contracts offset changes amount future cash flows associated intercompany transactions expected occur within next three years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contracts manage balance fixed floating rate debt accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy execute instruments creditworthy banks enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 1431 million 2007 1485 million 2006 1280 million 2005 include rd expenses cost sales consolidated statement operations income taxes record liability income tax exposures probable amount reasonably estimated tax benefits related claims also recognized become probable reasonably estimable determining probability estimability liability tax benefit consider relevant tax law applied us particular country state taxing authority earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2007 1385840 shares 2006 905455 shares 2005 20013 shares excluded diluted eps calculation notes consolidated financial statements continued 1 basis presentation accounting policies continued following table reconciles basic weighted average outstanding shares diluted weighted average outstanding shares millions weighted average outstanding shares basic weighted average outstanding shares 1587 1766 1831 effect dilutive securities stock options 24 32 41 restricted stock 01 diluted weighted average outstanding shares 1612 1799 1872 sharebased compensation effective october 1 2005 adopted sfas 123r sharebased payment sfas 123r using modified prospective application transition method recognize sharebased compensation expense grants sharebased compensation awards generally straightline basis service period award recipient see note 11 additional information sfas 123r requires us report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow prior 2006 adoption sfas 123r reported entire tax benefit related exercise stock options operating cash flow product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations account conditional asset retirement obligations financial accounting standards board fasb interpretation 47 accounting conditional asset retirement obligations fin 47 accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional see note 17 information related obligations notes consolidated financial statements continued 1 basis presentation accounting policies continued recent accounting pronouncements sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r sfas 158 became effective us september 30 2007 sfas 158 requires us recognize asset liability consolidated balance sheet reflecting funded status pension postretirement benefit plans currentyear changes funded status recognized shareowners’ equity sfas 158 change existing criteria measurement periodic benefit costs plan assets benefit obligations additionally sfas 158 requires us measure funded status date consolidated balance sheet september 30 2009 required adopt sfas 158 september 30 2007 would recognized additional minimum pension liability pursuant provisions sfas 87 employers’ accounting pensions sfas 87 effect recognizing additional minimum pension liability included table column labeled “prior adopting sfas 158” see note 12 details pension postretirement plans june 2007 financial accounting standards board fasb ratified emerging issues task force issue 0611 accounting income tax benefits dividends sharebased payment awards eitf 0611 eitf 0611 specifies companies recognize income tax benefit received dividends paid employees holding equityclassified nonvested shares equityclassified nonvested share units equityclassified outstanding share options b charged retained earnings sfas 123r eitf 0611 effective us beginning 2009 believe eitf 0611 material effect financial statements related disclosures february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits companies choose measure fair value many financial instruments certain items currently required measured fair value sfas 159 effective us beginning 2009 believe sfas 159 material effect financial statements related disclosures september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements also establishes fair value hierarchy prioritizes information used developing assumptions pricing asset liability sfas 157 effective us beginning fiscal 2009 believe sfas 157 material effect financial statements expand disclosures accordance requirements sfas 157 upon adoption june 2006 fasb issued interpretation 48 accounting uncertainty income taxes fin 48 became effective us october 1 2007 fin 48 clarifies accounting uncertainty income notes consolidated financial statements continued 1 basis presentation accounting policies continued taxes recognized enterprise’s financial statements accordance sfas 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition shareowners’ equity decrease 10 million result adoption fin 48 october 1 2008 2 acquisitions divestitures acquisitions 2007 control products solutions segment acquired industrial control services group limited business ics triplex proscon holdings ltd proscon aggregate purchase price two acquisitions approximately 2688 million cash ics triplex headquartered united kingdom acquired july 2007 leading global supplier critical control safety solutions process industries develops delivers maintains advanced products solutions high availability faulttolerant applications process industry segments worldwide serves primarily oil gas chemicals power generation industries proscon process solutions systems integrator headquartered ireland acquired february 2007 areas expertise include process technology control systems information technology serves customers primarily pharmaceutical biotechnology industries recorded intangible assets 1260 million resulting preliminary purchase price allocations ics triplex proscon acquisitions pending finalization intangible asset valuation matters intangible assets assigned include 527 million customer relationships 12year weighted average useful life 293 million technology 10year weighted average useful life 145 million intangible assets 7year weighted average useful life 295 million intangible assets subject amortization related ics triplex™ trademark recorded charge 13 million fourth quarter 2007 process research development cost sales related acquisition ics triplex recognized goodwill 1391 million related transactions none expected deductible local tax purposes assigned full amount goodwill control products solutions segment may 2006 architecture software segment acquired gepa mbh provider change management software industrial automation process control industrial information technology january 2006 control products solutions segment acquired caribbean integration engineers inc cie offers engineering services control systems integration process automation computer system validation solutions architecture software segment also acquired datasweep inc provider production management software december 2005 2006 connection purchase price allocations datasweep inc cie gepa mbh recorded intangible assets 223 million 108 million assigned technology 41 million assigned customer relationships remainder classified intangible assets results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented individual effects acquisitions material results operations financial position notes consolidated financial statements continued 2 acquisitions divestitures continued divestitures january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor principal businesses former power systems operating segment see note 13 information september 2006 rockwell collins inc rockwell collins sold investment rockwell scientific company llc rsc aggregate 1675 million cash sale rockwell collins owned 50 percent rsc part transaction among things retained certain licenses intellectual property owned rsc additionally incurred expenses funded certain rsc cash balances connection sale obligated pay rsc 28 million 2007 obligated pay rsc 12 million 2009 recorded gain sale 199 million 120 million tax 007 per share 2006 march 2006 architecture software segment sold assets electrocraft engineered solutions business see note 13 information 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2006 2007 millions intangible assets consist millions notes consolidated financial statements continued 3 goodwill intangible assets continued computer software products represent costs computer software sold leased otherwise marketed accounted sfas 86 reclassified nonsfas 86 software received conjunction certain acquisitions computer software products category technology category chart conform current year presentation computer software products amortization expense 97 million 2007 118 million 2006 118 million 2005 allenbradley® ics triplex™ trademarks indefinite life therefore subject amortization estimated amortization expense 343 million 2008 252 million 2009 169 million 2010 135 million 2011 117 million 2012 performed annual evaluation goodwill indefinite life intangible assets impairment required sfas 142 goodwill intangible assets second quarter 2007 concluded impairments exist 4 inventories consist millions report inventories net allowance excess obsolete inventory 363 million september 30 2007 314 million september 30 2006 notes consolidated financial statements continued 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions issued aggregate 800 million principal amount 615 notes 670 debentures 520 debentures january 1998 debt offering yielded approximately 7500 million proceeds issued 520 debentures discount 615 notes 670 debentures par september 2002 entered interest rate swap contract swap effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 780 percent september 30 2007 802 percent september 30 2006 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended designated swap fair value hedge accordingly fair value swap recorded liabilities consolidated balance sheet corresponding adjustment carrying value underlying debt september 30 2007 2006 fair value swap based upon quoted market prices contracts similar maturities liability 18 million september 30 2007 liability 68 million september 30 2006 october 26 2004 entered fiveyear 6000 million unsecured revolving credit facility 6000 million credit facility remains effect drawn september 30 2007 2006 borrowings credit facility bear interest based shortterm money market rates effect notes consolidated financial statements continued 6 longterm shortterm debt continued period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2007 2006 addition 6000 million credit facility shortterm unsecured credit facilities approximately 1723 million september 30 2007 available foreign subsidiaries september 29 2006 entered 364day 2500 million unsecured revolving credit facility terminated facility effective march 30 2007 longer considered liquidity provided facility necessary significant commitment fees compensating balance requirements credit facilities borrowings credit facilities 2007 2006 significant shortterm debt obligations primarily relate commercial paper borrowings commercial paper borrowings outstanding 1730 million september 30 2007 2190 million september 30 2006 september 30 2007 weighted average interest rate original maturity period commercial paper outstanding 51 percent three days respectively september 30 2006 weighted average interest rate original maturity period commercial paper outstanding 54 percent three days respectively interest payments 643 million 2007 586 million 2006 456 million 2005 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation enduser oem customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet notes consolidated financial statements continued 8 product warranty obligations continued changes product warranty obligations millions 9 financial instruments financial instruments include longterm debt foreign currency forward exchange contracts interest rate swap following summary carrying value fair value financial instruments millions base fair value longterm debt upon quoted market prices similar issues base fair value foreign currency forward exchange contracts quoted market prices contracts similar maturities foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2007 2006 outstanding foreign currency forward exchange contracts primarily consisting contracts relating euro british pound sterling swiss franc singapore dollar south korean foreign currency forward exchange contracts recorded current assets amounts 52 million september 30 2007 19 million september 30 2006 current liabilities amounts 382 million september 30 2007 85 million september 30 2006 designated certain foreign currency forward exchange contracts related forecasted intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges significant also hold financial instruments consisting cash accounts receivable accounts payable shortterm debt carrying value assets liabilities reported consolidated balance sheet approximate fair value 10 shareowners’ equity common stock september 30 2007 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2007 146 million shares common stock reserved various incentive plans notes consolidated financial statements continued 10 shareowners’ equity continued changes outstanding common shares summarized follows millions september 2007 repurchased 01 million shares common stock 75 million settle october 2007 outstanding purchases recorded accounts payable september 30 2007 september 2006 repurchased 04 million shares common stock 206 million settle october 2006 outstanding purchases recorded accounts payable september 30 2006 accumulated comprehensive loss accumulated comprehensive loss consists millions unrealized losses cash flow hedges 64 million 39 million tax 2007 gains 34 million 20 million tax 2006 reclassified earnings offset gains losses respectively hedged items approximately 138 million 85 million tax net unrealized losses cash flow hedges september 30 2007 reclassified earnings 2008 expect unrealized losses offset hedged items recognized earnings unrealized gains investment securities includes unrealized income net tax 25 million 2007 related investment baldor common stock acquired sale principal businesses former power systems operating segment investment recorded current assets availableforsale security fair value september 30 2007 340 million 11 sharebased compensation effective october 1 2005 adopted sfas 123r using modified prospective application transition method adopted sfas 123r accounted sharebased compensation accordance accounting principles board opinion 25 accounting stock issued employees restricted stock sharebased employee compensation cost reflected net income october 1 2005 sfas 123r requires us report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow october 1 2005 reported entire tax benefit related exercise stock options operating cash flow notes consolidated financial statements continued 11 sharebased compensation continued 2007 2006 recognized 290 million 255 million sharebased compensation expense income continuing operations respectively total income tax benefit related sharebased compensation recorded continuing operations 102 million 2007 88 million 2006 recognize compensation expense grants sharebased compensation awards generally straightline basis service period award recipient september 30 2007 total unrecognized compensation cost related sharebased compensation awards 297 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2000 longterm incentives plan amended authorizes us deliver 24 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common restricted stock approximately 49 million shares 2000 longterm incentives plan 04 million shares 2003 directors stock plan remain available future grant payment september 30 2007 use treasury stock deliver shares common stock plans 2000 longterm incentives plan permit sharebased compensation awards granted november 30 2009 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2007 2006 2005 2002 1767 1260 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based fiveyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using weighted average daily historical volatility 90 percent stock price past five years implied volatility 10 percent based upon exchange traded options common stock determined blend historical volatility implied volatility better reflects future market conditions better indicates expected volatility purely historical volatility determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity years ended september 30 2007 2006 2005 table presents stock option activity years ended september 30 2007 2006 2005 millions notes consolidated financial statements continued 11 sharebased compensation continued performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted 2007 granted 99300 performance share awards 198600 shares common stock could delivered payment 2006 granted 143100 performance share awards 286200 shares common stock could delivered payment grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period september 30 2007 september 30 2006 performance share awards outstanding 206021 140500 respectively per share fair value performance share awards granted year ended september 30 2007 september 30 2006 7224 6324 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatilities using daily historical volatility period november 2002 november 2005 2006 award november 2003 november 2006 2007 award restricted stock also grant restricted stock awards certain employees members board directors restrictions lapse periods ranging one five years value restricted stock awards closing market value common stock date grant notes consolidated financial statements continued 11 sharebased compensation continued summary restricted stock activity years ended september 30 2007 2006 2005 follows prior year pro forma expense following table illustrates effect net income earnings per share fair valuebased method provided sfas 123 accounting stockbased compensation applied outstanding unvested awards periods adopted sfas 123r millions expect per share amounts pro forma net income 2005 includes additional 49 million tax compensation expense retirement eligible stock option participants previously reported compensation expense participants notes consolidated financial statements continued 11 sharebased compensation continued vesting period stock options granted retirement eligible plan participants retire retirement plans first anniversary grant date continue vest postretirement accordance plan provisions agreements related thereto plan participant retires less twelve months grant date options grant forfeited stock compensation expense grants plan participants retirement eligible grant date retirement eligible less twelve months grant date reported pro forma net income twelve month period grant date report stock compensation expense grants plan participants become retirement eligible twelve thirtysix months grant date pro forma net income period grant date retirement eligibility date 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2007 2006 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement effective september 30 2007 adopted sfas 158 see note 1 incremental effects adoption sfas 158 consolidated balance sheet september 30 2007 components net periodic benefit cost income continuing operations millions excluded net periodic benefit cost table included income discontinued operations consolidated statement operations pretax pension benefit cost 38 million 120 million 106 million pretax postretirement benefit cost 48 million 167 million 122 million years ended september 30 2007 2006 2005 respectively also 2007 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 451 million additional postretirement benefits settlement gain 110 million related sale dodge mechanical reliance electric motors motor repair services businesses reflected income discontinued operations consolidated statement operations connection sale dodge mechanical reliance electric motors motor repair services businesses retained pension liability related eligible power systems participants us plan canada salary plan notes consolidated financial statements continued 12 retirement benefits continued postretirement benefit liability eligible us nonunion canada salary retirees date sale result ongoing net periodic benefit cost us pension liabilities canada hourly plan mexico dodge plan well postretirement liabilities including us union active retiree participants transferred sale businesses benefit obligation plan assets funded status net liability information summarized follows millions amounts recognized shareowners’ equity 2007 pursuant sfas 158 see note 1 notes consolidated financial statements continued 12 retirement benefits continued amounts included accumulated comprehensive loss net tax september 30 2007 yet recognized net periodic benefit cost follows millions included accumulated comprehensive loss september 30 2007 prior service credits 195 million 119 million net tax net actuarial loss 322 million 197 million net tax net transition obligation 06 million 03 million net tax expected recognized pension postretirement net periodic benefit cost fiscal year ending september 30 2008 2005 amended us pension plan effective 2006 eliminate early retirement subsidy certain employees amendment reduced pension obligation approximately 70 million 2005 also reduced annual pension expense recognized average remaining service life plan participants 2007 2006 2005 voluntarily contributed 80 million 4500 million 1500 million us qualified pension plan trust accumulated benefit obligation pension plans 23164 million 2007 measurement date 21614 million 2006 measurement date use actuarial measurement date june 30 measure benefit obligations plan assets calculate net periodic benefit cost pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages 1 healthcare cost trend rate reflects estimated increase gross medical claims costs required disclosed sfas 132 employers’ disclosures pensions postretirement benefits result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 550 2011 2 decreasing 450 2012 determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2007 2006 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund notes consolidated financial statements continued 12 retirement benefits continued estimated future payments expect contribute approximately 35 million related worldwide pension plans 243 million postretirement benefit plans 2008 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2007 2006 measurement dates june 30 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 243 million 2007 234 million 2006 212 million 2005 notes consolidated financial statements continued 13 discontinued operations following summary composition income discontinued operations included consolidated statement operations millions power systems january 31 2007 sold dodge mechanical reliance electric motors motor repair services businesses baldor 18 billion comprised 175 billion cash approximately 16 million shares baldor common stock results operations gain sale businesses reported income discontinued operations consolidated financial statements periods presented assets liabilities sold classified assets available sale liabilities associated assets available sale consolidated balance sheet september 30 2006 electrocraft engineered solutions 2006 architecture software segment sold assets electrocraft engineered solutions business accordingly reflected results business discontinued operation periods presented 2007 recorded change estimate contingent liability related divested business resulting income 90 million income tax effect also recorded net charge 16 million 10 million tax related legal matters associated former rockwell international corporation’s operation rocky flats facility us department energy professional services fees related discontinued operations matters 2006 recorded 50 million 30 million tax accrual legal contingencies related former rockwell international corporation’s operation rocky flats facility us department energy notes consolidated financial statements continued 13 discontinued operations continued summarized results summarized results power systems electrocraft operations millions assets classified available sale liabilities classified associated assets available sale consolidated balance sheet 14 special charges 2007 recorded special charges 435 million 277 million tax 017 per diluted share related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions include workforce reductions realignment administrative functions rationalization consolidation global operations majority charges relate notes consolidated financial statements continued 14 special charges continued severance benefits recognized pursuant sfas 112 employers’ accounting postemployment benefits amendment fasb statements 5 43 consolidated statement operations 218 million special charges recorded cost sales 217 million recorded selling general administrative expenses expect total cash expenditures associated actions approximate 390 million paid 53 million september 30 2007 noncash charges include writedowns certain inventory machinery equipment totaling 45 million asset charges amounted full carrying value assets written expect receive recovery assets 15 income components income millions pretax gain sale 50 percent interest rsc 199 million included 2006 net gain loss dispositions property investment 16 income taxes components income tax provision follows millions notes consolidated financial statements continued 16 income taxes continued 2007 recognized tax benefits income continuing operations resulting • 217 million related resolution certain tax matters claims related closure 2005 us federal audit cycle various state tax audits 2006 recognized tax benefits income continuing operations resulting • 130 million related resolution certain tax matters claims related closure us federal audit cycle years 2003 2004 various state tax audits • 154 million related resolution certain nonus tax matters primarily relating cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property • 272 million related reversal valuation allowances capital loss carryforwards 2005 recognized net tax benefits resulting • 193 million income continuing operations related resolution claims tax matters well effect trueup estimated tax audit contingency accruals connection closure us federal audit cycle years 1998 2002 • 220 million income discontinued operations related closure 1998 2002 us federal audit 79 million prior year state tax refund divested business 113 million resolution various tax matters divested businesses 28 million net current deferred income tax assets september 30 2007 2006 consist tax effects temporary differences related following millions notes consolidated financial statements continued 16 income taxes continued net longterm deferred income tax assets liabilities september 30 2007 2006 consist tax effects temporary differences related following millions total deferred tax assets 3036 million september 30 2007 3107 million september 30 2006 total deferred tax liabilities 655 million september 30 2007 1890 million september 30 2006 believe likely realize current longterm deferred tax assets reduction future taxable income reflected tax attributes carried forward significant factors considered determining probability realization deferred tax assets include historical operating results 8802 million united states taxable income past three years expected future earnings net operating loss capital loss tax credit carryforwards valuation allowances related carryforward periods september 30 2007 millions notes consolidated financial statements continued 16 income taxes continued valuation allowance september 30 2007 noted carryforwards future use less likely 2006 valuation allowance increased 70 million result audit settlements decreased 272 million result planned utilization capital loss carryforwards related sale investment rsc sale dodge mechanical reliance electric motors motor repair services businesses operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property well various us state tax matters comprise significant income tax exposures regularly assess position regard tax exposures record liabilities uncertain tax positions related interest penalties according principles sfas 5 accounting contingencies recorded accrual 1045 million 851 million september 30 2007 2006 respectively reflects estimate likely outcome current future audits accrual recorded liabilities consolidated balance sheet net change accrual 194 million reflects 262 million reduction related combined closure federal state audits years 1998 2005 340 million increase related discontinued operations 115 million increase primarily related current year taxes interest previously identified income tax exposures final determination tax audits changes estimates may result additional future income tax expense benefit effective income tax rate differed united states statutory tax rate reasons set forth notes consolidated financial statements continued 16 income taxes continued calculated income tax provisions based upon following components income continuing operations income taxes millions provided us deferred taxes cumulative earnings nonus affiliates reinvested indefinitely earnings relate ongoing operations september 30 2007 approximately 8600 million availability us foreign tax credits practicable determine us state income tax liabilities would payable earnings reinvested indefinitely deferred taxes provided nonus affiliates plan remit earnings income taxes paid 4273 million 2007 including 1900 million related gain sale dodge mechanical reliance electric motors motor repair services businesses 2147 million 2006 1348 million 2005 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 11 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2007 102 million 32 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2007 estimated total reasonably possible costs could incur matters 651 million recorded environmental accruals matters 266 million addition matters assumed certain environmental liabilities related federal pacific electric former subsidiary reliance connection 1995 acquisition reliance retained following sale dodge mechanical reliance electric motors motor repair services businesses indemnified exxonmobil corporation exxon substantially costs associated matters indemnity applies liabilities gave exxon notice december 29 2006 september 30 2007 recorded liability 230 million receivable 217 million matters estimate total reasonably possible costs matters 273 million substantially indemnified exxon based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection notes consolidated financial statements continued 17 commitments contingent liabilities continued expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations effective september 30 2006 adopted fin 47 clarifies guidance included sfas 143 accounting asset retirement obligations sfas 143 fin 47 companies must accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise application fin 47 resulted charge net tax 177 million included consolidated statement operations year ended september 30 2006 cumulative effect change accounting principle september 30 2007 recorded liabilities asset retirement obligations 53 million current liabilities 218 million liabilities recorded 287 million liabilities obligations september 30 2006 pro forma amounts fin 47 applied periods millions except per share amounts notes consolidated financial statements continued 17 commitments contingent liabilities continued lease commitments rental expense 977 million 2007 883 million 2006 820 million 2005 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 2795 million september 30 2007 payable follows millions 707 548 357 258 217 beyond 2012 708 total 2795 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 67 million september 30 2007 receivable 2009 approximately 31 million per year leases contain renewal options varying periods certain leases include options purchase leased property 2006 completed saleleaseback transaction eight properties including land buildings improvements affixed properties lease terms vary five fifteen years depending property classified operating leases net proceeds sale approximately 899 million two sold properties resulted loss 16 million recognized 2006 remaining properties resulting gain sale 211 million amortized rent expense term respective leases net book value sold assets removed balance sheet matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition like thousands companies including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies great majority cases allege exposure asbestoscontaining product predecessors manufactured sold addition products appear identified cases divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity notes consolidated financial statements continued 17 commitments contingent liabilities continued products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims initiated litigation milwaukee county circuit court february 12 2004 enforce insurance policies nationwide indemnity company kemper insurance carriers provided liability insurance coverage former allenbradley subsidiary result insurance carriers paid past defense indemnity costs agreed pay substantial majority future defense indemnity costs allenbradley asbestos claims subject policy limits either carrier becomes insolvent policy limits either carrier exhausted share future defense indemnity costs may increase however coverage excess policies may available pay costs uncertainties asbestos claim litigation long term solvency insurance companies make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition connection divestiture former aerospace defense businesses ad business boeing company boeing agreed indemnify boeing certain matters related operations ad business periods prior divestiture connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped purchase price estimate potential future payments could incur indemnifications may approximate 325 million 96 million accrued current liabilities 161 million accrued liabilities september 30 2007 time divested certain businesses connection divestitures lawsuits claims proceedings may instituted asserted us related period owned businesses many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments however believe future payments would material business financial condition 18 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive notes consolidated financial statements continued 18 business segment information continued officer allocate resources assess performance based upon criteria organized based upon products services two operating segments architecture software control products solutions architecture software architecture software segment contains elements integrated control information architecture capable connecting customer’s entire manufacturing enterprise • architecture software’s integrated architecture logix controllers perform multiple types control monitoring applications including discrete batch continuous process drive system motion machine safety across various industrial machinery plants processes supply real time information supervisory software plantwide information systems • architecture software’s products include control platforms software io devices communication networks high performance rotary linear motion control systems electronic operator interface devices condition based monitoring systems sensors industrial computers machine safety components products deployed widely across industries end users oems reduce total cost ownership maximize asset utilization improve time market reduce manufacturing business risk control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products customer support application knowledge necessary implement automation information solution plant floor comprehensive portfolio includes • low voltage medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives contactors push buttons signaling devices termination protection devices relays timers condition sensors • valueadded packaged solutions including configured drives motor control centers custom engineered panels oem enduser applications • automation information solutions including customengineered hardware software systems discrete process motion drives manufacturing information applications • services designed help maximize customer’s automation investment provide total lifecycle support including multivendor customer technical support repair asset management training predictive preventative maintenance solutions services comprise approximately 50 percent segment’s sales includes products manufacture purchase others extent products sold solution service offerings notes consolidated financial statements continued 18 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price costs incurred related shared segment operating activities allocated segments using methodology consistent expected benefit notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 1797 million 1444 million 1269 million september 30 2007 2006 2005 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 871 million 607 million 431 million 2007 2006 2005 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination notes consolidated financial statements continued 19 quarterly financial information unaudited see note 13 information discontinued operations b income continuing operations includes special charges 435 million 277 million tax 017 per diluted share see note 14 information income continuing operations cumulative effect accounting change includes gain sale rsc 199 million 120 million tax 007 per diluted share b see note 13 information discontinued operations c see note 17 information cumulative effect accounting change report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2007 2006 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2007 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission described management’s report internal control financial reporting management excluded assessment internal control financial reporting industrial control services group limited dba ics triplex acquired july 2 2007 whose financial statements constitute 13 7 net total assets respectively 1 net sales 0 net income consolidated financial statements year ended september 30 2007 accordingly audit include internal control financial reporting ics triplex company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described note 11 consolidated financial statements october 1 2005 company adopted statement financial accounting standard 123r shared based payments described note 17 consolidated financial statements september 30 2006 company adopted fasb interpretation 47 accounting conditional asset retirement obligations described note 12 consolidated financial statements september 30 2007 company adopted financial accounting standard 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 8788 106 132r opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc subsidiaries september 30 2007 2006 results operations cash flows three years period ended september 30 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 15 2007 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive loss income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations evaluated subsequent events date time issuance financial statements november 18 2009 january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor electric company baldor principal businesses former power systems operating segment businesses reported discontinued operation consolidated financial statements periods presented principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition product solution revenues consist industrial automation power control information hardware software products customengineered systems service revenues include multivendor customer technical support repair asset management optimization consulting training approximately 80 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 218 million september 30 2009 174 million september 30 2008 addition receivables stated net allowance certain customer returns rebates incentives 88 million september 30 2009 132 million september 30 2008 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware internal use software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 7 20 years customer relationships 3 17 years technology 3 10 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies accounting method derivative financial instruments based upon designation instruments hedges us gaap policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 1700 million 2009 1913 million 2008 1669 million 2007 include rd expenses cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued income taxes prior october 1 2007 recorded liability income tax exposures probable amount could reasonably estimated tax benefits related claims also recognized became probable reasonably estimable determining probability estimability liability tax benefit considered relevant tax law applied us particular country state taxing authority beginning october 1 2007 changed accounting uncertain tax positions accordance changes us gaap determine whether likely tax position sustained upon examination based technical merits position tax positions meet likely recognition threshold measure tax position determine amount benefit recognize financial statements recognize interest penalties related unrecognized tax benefits tax expense earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2009 75 million shares 2008 28 million shares 2007 14 million shares excluded diluted eps calculation following table reconciles basic weighted average outstanding shares diluted weighted average outstanding shares millions sharebased compensation recognize sharebased compensation expense grants sharebased compensation awards generally straightline basis service period award recipient report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued notes consolidated financial statements continued 1 basis presentation accounting policies continued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements october 2009 financial accounting standards board fasb issued accounting standards update asu 200914 certain revenue arrangements include software elements asu 200914 asu 200914 changes accounting model revenue arrangements include tangible products software elements requires hardware components tangible product containing software components always excluded software revenue guidance provides guidance vendor must allocate arrangement consideration deliverables arrangement includes tangible products software adopted guidance contained asu 200914 effective october 1 2009 believe material effect financial statements related disclosures october 2009 fasb issued asu 200913 multipledeliverable revenue arrangements asu 200913 asu 200913 establishes selling price hierarchy determining selling price deliverable replaces term “fair value” revenue allocation guidance “selling price” eliminates residual method allocation requiring arrangement consideration allocated inception arrangement deliverables using relative selling price method requires vendor determine best estimate selling price manner consistent used determine price sell deliverable standalone basis adopted guidance contained asu 200913 effective october 1 2009 believe material effect financial statements related disclosures december 2008 fasb issued new accounting guidance expands disclosures plan assets defined benefit pension postretirement plans expanded disclosures include investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fair value measurements using significant unobservable inputs changes plan assets significant concentrations risk within plan assets disclosures become effective us end fiscal 2010 believe material effect financial statements plan expand relevant disclosures upon adoption june 2008 fasb issued new accounting guidance specifies unvested sharebased awards contain nonforfeitable rights dividends dividend equivalents participating securities included computation earnings per share pursuant twoclass method guidance effective us fiscal 2010 may result reduction earnings per share 001 certain prior future periods april 2008 fasb issued new accounting guidance intended improve consistency useful life recognized intangible asset period expected cash flows used measure fair value asset us gaap adopted guidance effective october 1 2009 believe material effect financial statements related disclosures notes consolidated financial statements continued 1 basis presentation accounting policies continued march 2008 fasb ratified new accounting guidance requires nonrefundable maintenance deposits accounted deposit expensed capitalized underlying maintenance performed determined amount deposit probable used fund future maintenance recognized expense time determination made adopted guidance effective october 1 2009 believe material effect financial statements related disclosures december 2007 fasb issued new accounting guidance requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair value also requires acquirer recognize measure goodwill acquired business combination gain bargain purchase prescribes evaluate nature financial effects business combination also provides guidance accounting preacquisition gain loss contingencies acquisition related transaction costs adopted guidance effective october 1 2009 believe material effect financial statements related disclosures december 2007 fasb issued new accounting guidance establishes accounting reporting standards noncontrolling minority interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary ownership interest consolidated entity reported equity consolidated financial statements establishes single method accounting changes parent’s ownership interest subsidiary result deconsolidation adopted guidance effective october 1 2009 believe material effect financial statements related disclosures september 2006 fasb issued new accounting guidance defines fair value establishes framework measuring fair value expands disclosures fair value measurements also establishes fair value hierarchy prioritizes information used developing assumptions pricing asset liability adopted guidance financial assets liabilities effective october 1 2008 nonfinancial assets liabilities effective october 1 2009 adoption new accounting guidance material effect financial statements financial assets liabilities see note 9 expanded disclosures presented accordance requirements believe adoption guidance nonfinancial assets liabilities material effect financial statements 2 acquisitions divestitures acquisitions 2009 control products solutions segment acquired assets assumed certain liabilities xi’an hengsheng science technology company limited hengsheng delivers automation solutions electrical power heavy process industries central western china also acquired majority assets assumed certain liabilities automation business rutter hinz inc hinz offers industrial control systems engineering related support domain expertise industrial automation process control power distribution specifically oil gas industry well resourcebased industries aggregate purchase price two acquisitions 307 million recorded goodwill 142 million intangible assets 84 million resulting preliminary purchase price allocations hengsheng hinz intangible assets assigned include 12 million technology 8year weighted average useful life 59 million customer relationships 10year weighted average useful life 13 million intangible assets 4year weighted average useful life expect 63 million goodwill deductible tax purposes 2008 architecture software segment acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion aggregate purchase price three acquisitions 1129 million cash acquired cedes may 2008 swissbased cedes supplier safety measuring light curtains well safety nonsafety optoelectronics control units related accessories industrial applications also acquired incuity supplier enterprise manufacturing intelligence emi software may 2008 incuity’s software provides realtime intelligence business decision support improve operations reduce production waste providing valuable management insight company’s operations acquired pavilion company recognized leader advanced process control production optimization environmental compliance solutions process hybrid industries november 2007 notes consolidated financial statements continued 2 acquisitions divestitures continued recorded intangible assets 431 million goodwill 693 million resulting final purchase price allocations cedes incuity pavilion acquisitions intangible assets assigned include 340 million technology 15year weighted average useful life 66 million customer relationships 9year weighted average useful life 25 million intangible assets 4year weighted average useful life assigned full amount goodwill architecture software segment none goodwill recorded expected deductible tax purposes fiscal 2007 control products solutions segment acquired industrial control services group limited business ics triplex proscon holdings ltd proscon aggregate purchase price two acquisitions approximately 2688 million cash ics triplex headquartered united kingdom acquired july 2007 leading global supplier critical control safety solutions process industries develops delivers maintains advanced products solutions high availability faulttolerant applications process industry segments worldwide serves primarily oil gas chemicals power generation industries proscon process solutions systems integrator headquartered ireland acquired february 2007 areas expertise include process technology control systems information technology serves customers primarily pharmaceutical biotechnology industries recorded intangible assets 1217 million resulting final purchase price allocations ics triplex proscon acquisitions intangible assets assigned include 495 million customer relationships 12year weighted average useful life 283 million technology 10year weighted average useful life 144 million intangible assets 7year weighted average useful life 295 million intangible assets subject amortization related ics triplex™ trademark recorded charge 13 million 2007 inprocess research development cost sales related acquisition ics triplex recognized goodwill 1420 million related transactions none expected deductible tax purposes assigned full amount goodwill control products solutions segment results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented individual effects acquisitions material results operations financial position divestitures january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor principal businesses former power systems operating segment see note 13 information notes consolidated financial statements continued 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2008 2009 millions intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 158 million 2009 145 million 2008 97 million 2007 allenbradley® ics triplex™ trademarks indefinite life therefore subject amortization estimated amortization expense 308 million 2010 288 million 2011 250 million 2012 185 million 2013 138 million 2014 performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2009 concluded none assets impaired notes consolidated financial statements continued 4 inventories consist millions report inventories net allowance excess obsolete inventory 532 million september 30 2009 397 million september 30 2008 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions december 2007 issued aggregate 500 million principal amount 565 notes due 2017 625 debentures due 2037 debt offering yielded approximately 4935 million proceeds used repay maturity 615 notes due january 15 2008 general corporate purposes notes consolidated financial statements continued 6 longterm shortterm debt continued march 16 2009 replaced former fiveyear 6000 million unsecured revolving credit facility two new unsecured revolving credit facilities totaling 5350 million new facilities borrowing limits 2675 million one facility threeyear term facility 364day term 364day credit facility includes termout option allows us borrow march 15 2010 2675 million term loan one year drawn credit facilities september 30 2009 2008 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2009 2008 addition two 2675 million credit facilities shortterm unsecured credit facilities approximately 1697 million september 30 2009 available nonus subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities 2009 2008 significant shortterm debt obligations primarily relate commercial paper borrowings september 30 2009 commercial paper borrowings outstanding commercial paper borrowings outstanding september 30 2008 1000 million weighted average interest rate maturity period commercial paper outstanding september 30 2008 22 percent six days respectively interest payments 628 million 2009 634 million 2008 643 million 2007 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies expected occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet report comprehensive loss income effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify forward exchange contracts among counterparties minimize exposure one entities forward exchange contracts denominated currencies major industrial countries notional values forward exchange contracts outstanding september 30 2009 9024 million 3690 million designated cash flow hedges contracts significant notional values relate transactions denominated british pound sterling united states dollar euro canadian dollar us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability value forward exchange contracts using market approach use internally developed valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2009 assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued pretax amount gains losses recorded comprehensive loss income related forward exchange contracts designated cash flow hedges would recorded consolidated statement operations designated cash flow hedges millions approximately 92 million 57 million net tax net unrealized losses cash flow hedges september 30 2009 reclassified earnings next 12 months expect net unrealized losses offset hedged items recognized earnings pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented amount recognized earnings result ineffective cash flow hedges significant pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented also hold financial instruments consisting cash accounts receivable accounts payable shortterm debt longterm debt carrying value cash accounts receivable accounts payable shortterm debt reported consolidated balance sheet approximates fair value base fair value longterm debt upon quoted market prices similar issues following summary carrying value fair value longterm debt millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2009 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value 2009 retired 35 million shares common stock held treasury shares designated authorized unissued september 30 2009 175 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2008 repurchased 01 million shares common stock 35 million settle october 2008 september 2007 repurchased 01 million shares common stock 75 million settle october 2007 outstanding purchases recorded accounts payable september 30 2008 2007 accumulated comprehensive loss accumulated comprehensive loss consists millions notes consolidated financial statements continued 11 sharebased compensation 2009 2008 2007 recognized 278 million 325 million 290 million sharebased compensation expense respectively total income tax benefit related sharebased compensation 91 million 2009 110 million 2008 102 million 2007 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2009 total unrecognized compensation cost related sharebased compensation awards 294 million net estimated forfeitures expect recognize weighted average period approximately 16 years 2008 longterm incentives plan 2008 plan authorizes us deliver 72 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2008 plan 2000 longterm incentives plan terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2008 plan approximately 48 million shares 2008 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2009 september 30 2009 01 million potential shares delivered performance share awards cancelled 2000 plan available future awards 2008 plan use treasury stock deliver shares common stock plans 2008 plan permit sharebased compensation awards granted february 6 2018 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2009 2008 2007 775 1757 2002 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based fiveyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using weighted average daily historical volatility stock price past five years determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity years ended september 30 2009 2008 2007 table presents stock option activity years ended september 30 2009 2008 2007 millions notes consolidated financial statements continued 11 sharebased compensation continued performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period summary performance share activity years ended september 30 2009 2008 2007 follows maximum potential shares delivered payment fiscal 2009 2008 awards 372400 shares 216012 shares respectively 13 percent payout target number shares awarded fiscal 2007 maximum 10618 shares delivered payment awards december 2009 per share fair value performance share awards granted year ended september 30 2009 2008 2007 3182 7032 7224 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatilities using daily historical volatility period february 2006 december 2008 2009 award december 2004 december 2007 2008 award november 2003 november 2006 2007 award notes consolidated financial statements continued 11 sharebased compensation continued restricted stock restricted stock units grant restricted stock certain employees previously granted restricted stock nonemployee directors beginning 2008 nonemployee directors may elect receive portion compensation restricted stock units restrictions lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant summary restricted stock restricted stock unit activity years ended september 30 2009 2008 2007 follows notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2007 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement 2008 used actuarial measurement date june 30 measure benefit obligations plan assets calculate net periodic benefit cost pension postretirement benefits 2009 changed measurement date september 30 due change us gaap recorded reduction retained earnings 122 million 78 million net tax fourth quarter 2009 related change september 30 2007 changed accounting defined benefit pension postretirement plans due change us gaap result recorded reduction equity 2002 million net deferred tax benefit 1290 million reduction equity recorded accumulated comprehensive loss components net periodic benefit cost millions excluded net periodic benefit cost table included income discontinued operations consolidated statement operations pretax pension benefit cost 38 million pretax postretirement benefit cost 48 million year ended september 30 2007 also 2007 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 451 million additional postretirement benefits settlement gain 110 million items related dodge mechanical reliance electric motors motor repair services businesses sale thereof reflected income discontinued operations consolidated statement operations connection sale dodge mechanical reliance electric motors motor repair services businesses retained pension liability related eligible power systems participants us plan canada salary plan postretirement benefit liability eligible us nonunion canada salary retirees date sale result ongoing net periodic benefit cost us pension liabilities canada hourly plan mexico dodge plan well postretirement liabilities including us union active retiree participants transferred sale businesses notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued amounts included accumulated comprehensive loss net tax september 30 2009 2008 yet recognized net periodic benefit cost follows millions 2009 recognized prior service credits 152 million 94 million net tax net actuarial losses 263 million 164 million net tax net transition obligation 03 million 02 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2008 2010 expect recognize prior service credits 152 million 94 million net tax net actuarial losses 503 million 319 million net tax net transition obligation 04 million 03 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2009 2007 voluntarily contributed 80 million us qualified pension plan trust accumulated benefit obligation pension plans 26105 million 2009 measurement date 23167 million 2008 measurement date net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2009 2008 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund notes consolidated financial statements continued 12 retirement benefits continued estimated future payments expect contribute approximately 29 million related worldwide pension plans 19 million postretirement benefit plans 2010 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2009 2008 measurement dates september 30 2009 june 30 2008 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 305 million 2009 333 million 2008 243 million 2007 notes consolidated financial statements continued 13 discontinued operations following summary composition income discontinued operations included consolidated statement operations millions power systems january 31 2007 sold dodge mechanical reliance electric motors motor repair services businesses baldor 18 billion comprised 175 billion cash approximately 16 million shares baldor common stock results operations gain sale businesses reported income discontinued operations consolidated financial statements periods presented 2009 recorded benefit 45 million 28 million net tax related change estimate legal contingencies associated former rockwell international corporation’s ric’s operation rocky flats facility us department energy 2007 recorded change estimate contingent liability related divested business resulting income 90 million income tax effect also recorded net charge 16 million 10 million tax related resolutions certain claims professional service fees related discontinued operations matters offset benefit related legal matters associated ric’s operation rocky flats facility us department energy doe summarized results summarized results power systems operations millions notes consolidated financial statements continued 14 restructuring charges special items 2009 recorded restructuring charges 604 million 418 million tax 029 per diluted share related actions designed better align cost structure current economic conditions majority charges relate severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2009 recorded 210 million restructuring charges cost sales recorded 394 million selling general administrative expenses expect total cash expenditures associated actions approximately 507 million 2008 recorded special items 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions include workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units majority charges relate severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2008 recorded 41 million special items cost sales 466 million recorded selling general administrative expenses 2007 recorded special items 435 million 277 million tax 017 per diluted share related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions include workforce reductions realignment administrative functions rationalization consolidation global operations consolidated statement operations year ended september 30 2007 218 million special items recorded cost sales 217 million recorded selling general administrative expenses paid 626 million 166 million 53 million related charges years ended september 30 2009 2008 2007 respectively accruals remaining restructuring actions currency translation items 608 million september 30 2009 15 expense income components expense income millions notes consolidated financial statements continued 16 income taxes selected income tax data continuing operations millions income taxes paid included 79 million 2008 1900 million 2007 related gain sale dodge mechanical reliance electric motors motor repair services businesses 2009 recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary 2008 income continuing operations included benefit 56 million related resolution various tax matters claims 2007 income continuing operations included benefit 217 million related resolution certain tax matters claims related closure 2005 us federal audit cycle various state tax audits effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued 16 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 6165 million september 30 2009 4412 million september 30 2008 total deferred tax liabilities 907 million september 30 2009 860 million september 30 2008 provided us deferred taxes portion 13690 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested subsidiaries practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 16 income taxes continued tax attributes related valuation allowances september 30 2009 millions valuation allowance decreased 13 million 2009 increased 25 million 2008 unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments recognized 67 million decrease shareowners’ equity october 1 2007 related change accounting uncertain tax positions october 1 2007 amount unrecognized tax benefits 1165 million 714 million net 451 million offsetting tax benefits amount unrecognized tax benefits would reduced effective tax rate recognized 376 million balance 338 million attributable discontinued operations would impacted effective tax rate continuing operations recognized reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued 16 income taxes continued gross unrecognized tax benefits offsetting tax benefits millions believe reasonably possible amount unrecognized tax benefits could reduced 279 million amount offsetting tax benefits could reduced 11 million next 12 months result resolution worldwide tax matters lapses statutes limitations recognize interest penalties related unrecognized tax benefits tax expense accrued interest penalties 258 million 18 million september 30 2009 240 million 20 million september 30 2008 respectively recognized 80 million interest 02 million penalties 2009 conduct business globally routinely audited various tax jurisdictions operate us federal tax returns 2007 2009 wisconsin tax returns 2003 2009 tax returns major states countries 1998 2009 remain subject examinations taxing authorities 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 14 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2009 95 million 43 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2009 estimated total reasonably possible costs could incur matters 1132 million recorded environmental accruals matters 308 million addition matters retained ownership federal pacific electric fpe former subsidiary reliance following sale dodge mechanical reliance electric motors motor repair services businesses certain liabilities fpe substantially indemnified exxonmobil corporation september 30 2009 fpe recorded liability 231 million receivable 220 million matters liability receivable included consolidated balance sheet estimate total reasonably possible costs could incurred fpe matters 294 million notes consolidated financial statements continued 17 commitments contingent liabilities continued based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise september 30 2009 recorded liabilities asset retirement obligations 29 million current liabilities 239 million liabilities recorded 51 million current liabilities 228 million liabilities obligations september 30 2008 lease commitments rental expense 1147 million 2009 1163 million 2008 977 million 2007 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3191 million september 30 2009 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 26 million september 30 2009 receivable 2015 approximately 04 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases ric’s divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants notes consolidated financial statements continued 17 commitments contingent liabilities continued maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide administers kemper buyout funds entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims kemper buyout funds depleted believe arrangements continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legal legacy environmental asbestos matters businesses including certain damages pertaining foreign corrupt practices act arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 259 million 111 million accrued current liabilities 113 million accrued liabilities september 30 2009 recorded 105 million 129 million current liabilities respectively september 30 2008 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments notes consolidated financial statements continued 18 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains elements integrated control information architecture capable controlling customer’s plant floor connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers condition based monitoring systems informationenabled logix controllers provide integrated multidiscipline control modular scaleable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system examples mes applications production scheduling asset management tracking genealogy manufacturing business intelligence • architecture software products including rotary linear motion control products sensors machine safety components control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products customer support application knowledge necessary implement automation information solution plant floor comprehensive portfolio includes • low voltage medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives contactors push buttons signaling devices termination protection devices relays timers condition sensors • valueadded packaged solutions including configured drives motor control centers customengineered panels oem enduser applications • automation information solutions including customengineered hardware software systems discrete process motion drives manufacturing information applications • services designed help maximize customer’s automation investment provide total lifecycle support including multivendor customer technical support repair customized safety solutions asset management training predictive preventative maintenance notes consolidated financial statements continued 18 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2044 million 1983 million 1797 million september 30 2009 2008 2007 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 562 million 823 million 871 million 2009 2008 2007 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada sell products primarily independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors outside united states canada sell products combination direct sales distributors sales largest distributor 2009 2008 2007 9 10 percent total sales notes consolidated financial statements continued 19 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2009 2008 related consolidated statements operations shareowners’ equity cash flows comprehensive loss income three years period ended september 30 2009 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2009 2008 results operations cash flows three years period ended september 30 2009 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission described note 16 consolidated financial statements october 1 2007 company changed method accounting uncertain income tax positions discussed note 12 consolidated financial statements september 30 2007 company changed method accounting company’s defined benefit pension postretirement benefit plans deloitte touche llp milwaukee wisconsin november 18 2009 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income loss millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition product solution revenues consist industrial automation power control information hardware software products customengineered systems service revenues include multivendor customer technical support repair asset management optimization consulting training approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 179 million september 30 2010 218 million september 30 2009 addition receivables stated net allowance certain customer returns rebates incentives 164 million september 30 2010 88 million september 30 2009 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware internal use software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 10 years trademarks 7 20 years customer relationships 3 17 years technology 3 30 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies accounting method derivative financial instruments based upon designation instruments hedges us gaap policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 1989 million 2010 1700 million 2009 1913 million 2008 include rd expenses cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize financial statements earnings per share beginning fiscal 2010 changed accounting earnings per share eps result new accounting guidance issued financial accounting standards board fasb resulted reduction earnings per share 001 certain periods guidance requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units present basic diluted eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2010 49 million shares 2009 75 million shares 2008 28 million shares excluded diluted eps calculation following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense grants sharebased compensation awards generally straightline basis service period award recipient product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements december 2009 fasb issued new accounting guidance company determines entity insufficiently capitalized controlled voting rights consolidated determination whether company required consolidate entity based among things entity’s purpose design company’s ability direct activities entity significantly impact entity’s economic performance adopted guidance effective october 1 2010 material effect financial statements related disclosures june 2009 fasb issued new guidance accounting transfers financial assets requires entities provide information regarding sales securitized financial assets similar transactions particularly entity continuing exposure risks related transferred financial assets guidance eliminates concept “qualifying special purpose entity” changes requirements derecognizing financial assets requires additional disclosures adopted guidance effective october 1 2010 material effect financial statements related disclosures december 2008 fasb issued new accounting guidance expands disclosures plan assets defined benefit pension postretirement plans expanded disclosures include investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fair value measurements using significant unobservable inputs changes plan assets significant concentrations risk within plan assets adopted guidance expanded relevant disclosures september 30 2010 see note 12 notes consolidated financial statements continued 2 acquisitions divestitures acquisitions 2009 control products solutions segment acquired assets assumed certain liabilities xi’an hengsheng science technology company limited hengsheng delivers automation solutions electrical power heavy process industries central western china control products solutions segment also acquired majority assets assumed certain liabilities automation business rutter hinz inc hinz offers industrial control systems engineering related support domain expertise industrial automation process control power distribution oil gas industry resourcebased industries aggregate purchase price two acquisitions 307 million recorded goodwill 136 million intangible assets 88 million resulting final purchase price allocations hengsheng hinz intangible assets assigned include 63 million customer relationships 10year weighted average useful life 12 million technology 8year weighted average useful life 13 million intangible assets 4year weighted average useful life expect 59 million goodwill deductible tax purposes 2008 architecture software segment acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion aggregate purchase price three acquisitions 1129 million cash acquired cedes may 2008 swissbased cedes supplier safety measuring light curtains well safety nonsafety optoelectronics control units related accessories industrial applications also acquired incuity supplier enterprise manufacturing intelligence emi software may 2008 incuity’s software provides realtime intelligence business decision support improve operations reduce production waste providing valuable management insight company’s operations acquired pavilion company recognized leader advanced process control production optimization environmental compliance solutions process hybrid industries november 2007 recorded intangible assets 431 million goodwill 693 million resulting final purchase price allocations cedes incuity pavilion acquisitions intangible assets assigned include 340 million technology 15year weighted average useful life 66 million customer relationships 9year weighted average useful life 25 million intangible assets 4year weighted average useful life assigned full amount goodwill architecture software segment none goodwill recorded expected deductible tax purposes results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented individual effects acquisitions material results operations financial position divestitures january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor principal businesses former power systems operating segment see note 13 information notes consolidated financial statements continued 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2010 2009 millions intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 136 million 2010 158 million 2009 145 million 2008 allenbradley® trademark indefinite life therefore subject amortization 2010 determined ics triplextm trademark longer indefinite life january 1 2010 began amortizing asset estimated useful life 10 years using straightline method estimated amortization expense 341 million 2011 318 million 2012 256 million 2013 207 million 2014 160 million 2015 performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2010 concluded assets impaired notes consolidated financial statements continued inventories consist millions report inventories net allowance excess obsolete inventory 463 million september 30 2010 532 million september 30 2009 property consists millions 6 longterm shortterm debt longterm debt consists millions notes consolidated financial statements continued 6 longterm shortterm debt continued march 16 2009 replaced former fiveyear 6000 million unsecured revolving credit facility two new unsecured revolving credit facilities totaling 5350 million individual borrowing limit 2675 million one facility threeyear term facility 364day term march 15 2010 replaced former 364day 2675 million unsecured revolving credit facility new 364day 3000 million unsecured revolving credit facility increasing current borrowing capacity two facilities 5675 million new credit facility includes termout option allows us borrow march 14 2011 3000 million term loan one year drawn credit facilities september 30 2010 2009 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2010 2009 separate shortterm unsecured credit facilities approximately 1353 million september 30 2010 available nonus subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities fiscal 2010 2009 significant shortterm debt obligations primarily relate commercial paper borrowings september 30 2010 2009 commercial paper borrowings outstanding interest payments 594 million 2010 628 million 2009 634 million 2008 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet report comprehensive loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify forward exchange contracts among counterparties minimize exposure one entities forward exchange contracts denominated currencies major industrial countries value forward exchange contracts using market approach use internally developed valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2010 notional values forward exchange contracts outstanding september 30 2010 7181 million 3753 million designated cash flow hedges contracts significant notional values relate transactions denominated united states dollar british pound sterling euro us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued pretax amount gains losses recorded comprehensive loss related forward exchange contracts designated cash flow hedges would recorded consolidated statement operations designated cash flow hedges millions approximately 15 million 10 million net tax net unrealized gains cash flow hedges september 30 2010 reclassified earnings next 12 months expect net unrealized gains offset hedged items recognized earnings pretax amount losses gains reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented amount recognized earnings result ineffective cash flow hedges significant pretax amount losses gains forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented also hold financial instruments consisting cash accounts receivable accounts payable shortterm debt longterm debt carrying value cash accounts receivable accounts payable shortterm debt reported consolidated balance sheet approximates fair value base fair value longterm debt upon quoted market prices similar issues following summary carrying value fair value longterm debt millions notes consolidated financial statements continued common stock september 30 2010 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value 2009 retired 35 million shares common stock held treasury shares designated authorized unissued september 30 2010 198 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2010 repurchased 19700 shares common stock 12 million settle october 2010 september 2008 repurchased 01 million shares common stock 35 million settle october 2008 outstanding purchases recorded accounts payable september 30 2010 2008 accumulated comprehensive loss accumulated comprehensive loss consists millions notes consolidated financial statements continued 2010 2009 2008 recognized 363 million 278 million 325 million sharebased compensation expense respectively total income tax benefit related sharebased compensation 119 million 2010 91 million 2009 110 million 2008 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2010 total unrecognized compensation cost related sharebased compensation awards 336 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2008 longterm incentives plan amended 2008 plan authorizes us deliver 112 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2008 plan 2000 longterm incentives plan terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2008 plan approximately 67 million shares 2008 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2010 september 30 2010 01 million potential shares delivered performance share awards cancelled 2000 plan available future awards 2008 plan use treasury stock deliver shares common stock plans 2008 plan permit sharebased compensation awards granted february 6 2018 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2010 2009 2008 1359 775 1757 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based fiveyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent fiveyear period grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued summary stock option activity years ended september 30 2010 2009 2008 table presents stock option activity years ended september 30 2010 2009 2008 millions notes consolidated financial statements continued performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period summary performance share activity years ended september 30 2010 2009 2008 follows maximum potential shares delivered payment fiscal 2010 2009 awards 284400 shares 360000 shares respectively 42 percent payout target number shares awarded fiscal 2008 maximum 43767 shares delivered payment awards december 2010 13 percent payout target number shares awarded fiscal 2007 10618 shares delivered payment awards december 2009 per share fair value performance share awards granted year ended september 30 2010 2009 2008 5481 3182 7032 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date notes consolidated financial statements continued restricted stock restricted stock units grant restricted stock certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions restricted stock generally lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant summary restricted stock restricted stock unit activity years ended september 30 2010 2009 2008 follows notes consolidated financial statements continued sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employee eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected change policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2010 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement 2008 used actuarial measurement date june 30 measure benefit obligations plan assets calculate net periodic benefit cost pension postretirement benefits 2009 changed measurement date september 30 required us gaap recorded reduction retained earnings 122 million 78 million net tax fourth quarter 2009 related change components net periodic benefit cost millions notes consolidated financial statements continued benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued amounts included accumulated comprehensive loss net tax september 30 2010 2009 yet recognized net periodic benefit cost follows millions 2010 recognized prior service credits 155 million 96 million net tax net actuarial losses 505 million 322 million net tax net transition obligation 07 million 04 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2009 2011 expect recognize prior service credits 131 million 83 million net tax net actuarial losses 700 million 444 million net tax net transition obligation 06 million 04 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2010 made discretionary pretax contribution 1500 million us qualified pension plan trust accumulated benefit obligation pension plans 29688 million 26105 million september 30 2010 2009 respectively net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2010 2009 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund notes consolidated financial statements continued valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2010 2009 common stock valued closing price reported active market individual securities traded corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price reported active market individual securities traded common collective trusts registered investment companies valued net asset value nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity investments valued estimated fair value determined respective investment company based net asset value investment units held year end subject judgment consists insurance contracts nonus investments held insurance companies fixed income investments real estate insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value investments held insurance companies fixed income investments valued recent closing price reported active market individual securities traded methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date following table presents pension plans’ investments measured fair value refer note 9 information regarding levels fair value hierarchy investments fair value september 30 2010 notes consolidated financial statements continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2010 estimated future payments expect contribute approximately 36 million related worldwide pension plans 18 million postretirement benefit plans 2011 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2010 2009 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 233 million 2010 305 million 2009 333 million 2008 notes consolidated financial statements continued 2010 recorded 213 million tax benefit result resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors repair services businesses also recorded net 26 million aftertax benefit relating changes estimate environmental legal matters divested businesses 2009 recorded benefit 45 million 28 million net tax related change estimate legal contingencies associated former rockwell international corporation’s ric’s operation rocky flats facility us department energy 2010 recorded accrual adjustments 81 million primarily related severance accruals employee attrition differed original estimates recorded adjustments 50 million benefit selling general administrative expenses 31 million benefit cost sales currently anticipate remaining accrual balance 99 million paid next 12 months 2009 recorded restructuring charges 604 million 418 million tax 029 per diluted share related actions designed better align cost structure thencurrent economic conditions majority charges related severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2009 recorded 210 million restructuring charges cost sales recorded 394 million selling general administrative expenses expect total cash expenditures associated actions approximately 507 million 2008 recorded special items 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions included workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units majority charges related severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2008 recorded 41 million special items cost sales 466 million recorded selling general administrative expenses 2007 recorded special items 435 million 277 million tax 017 per diluted share related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions include workforce reductions realignment administrative functions rationalization consolidation global operations consolidated statement operations year ended september 30 2007 218 million special items recorded cost sales 217 million recorded selling general administrative expenses notes consolidated financial statements continued 14 restructuring charges special items continued following tables set forth summary restructuring activities 2010 2009 respectively millions components expense income millions notes consolidated financial statements continued selected income tax data continuing operations millions income taxes paid included 79 million 2008 related gain sale dodge mechanical reliance electric motors motor repair services businesses 2010 recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits 2009 recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary 2008 income continuing operations included benefit 56 million related resolution various tax matters claims effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 6271 million september 30 2010 6165 million september 30 2009 total deferred tax liabilities 1057 million september 30 2010 907 million september 30 2009 provided us deferred taxes portion 16530 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested subsidiaries practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued tax attributes related valuation allowances september 30 2010 millions valuation allowance decreased 171 million 2010 primarily due utilization nonus capital loss carryforward decreased 13 million 2009 unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments recognized 67 million decrease shareowners’ equity october 1 2007 related change accounting uncertain tax positions october 1 2007 amount unrecognized tax benefits 1165 million 714 million net 451 million offsetting tax benefits amount unrecognized tax benefits would reduced effective tax rate recognized 376 million balance 338 million attributable discontinued operations would impacted effective tax rate continuing operations recognized reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued gross unrecognized tax benefits offsetting tax benefits primarily consisting tax receivables deposits recorded assets millions 2010 amount unrecognized tax benefits decreased 280 million 269 million net offsetting tax benefits result resolution domestic international tax matters amount 211 million 200 million net offsetting tax benefits related discontinued dodge mechanical reliance electric motors repair services businesses impact continuing operations next 12 months believe reasonably possible amount unrecognized tax benefits could reduced 297 million amount offsetting tax benefits could reduced 301 million result resolution worldwide tax matters lapses statutes limitations recognize interest penalties related unrecognized tax benefits tax expense accrued interest penalties 249 million 17 million september 30 2010 258 million 18 million september 30 2009 respectively recognized 44 million interest 02 million penalties 2010 conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2007 longer subject state local foreign income tax examinations years 2003 notes consolidated financial statements continued environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 15 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2010 107 million 48 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2010 estimated total reasonably possible costs could incur matters 1073 million recorded environmental accruals matters 339 million addition matters retained ownership federal pacific electric fpe following sale dodge mechanical reliance electric motors motor repair services businesses certain liabilities fpe substantially indemnified exxonmobil corporation september 30 2010 fpe recorded liability 233 million receivable 222 million matters liability receivable included consolidated balance sheet estimate total reasonably possible costs could incurred fpe matters 314 million based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise september 30 2010 recorded liabilities asset retirement obligations 79 million current liabilities 227 million liabilities recorded 29 million current liabilities 239 million liabilities obligations september 30 2009 notes consolidated financial statements continued 17 commitments contingent liabilities continued lease commitments rental expense 1060 million 2010 1147 million 2009 1163 million 2008 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3415 million september 30 2010 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 22 million september 30 2010 receivable 2016 approximately 04 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases ric’s divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide administers kemper buyout funds entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims kemper buyout funds depleted believe arrangements continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability notes consolidated financial statements continued 17 commitments contingent liabilities continued uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses including certain damages pertaining foreign corrupt practices act arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 206 million 64 million accrued current liabilities 111 million accrued liabilities september 30 2010 recorded 111 million 113 million current liabilities respectively september 30 2009 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments notes consolidated financial statements continued rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scaleable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system examples mes applications production scheduling asset management tracking genealogy manufacturing business intelligence • architecture software products including rotary linear motion control products sensors machine safety components control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application knowledge project management necessary implement automation information solution plant floor total lifecycle customer support maintenance comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives contactors push buttons signaling devices termination protection devices relays timers condition sensors • solutions ranging valueadded packaged solutions configured drives motor control centers automation information solutions provide design integration customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including multivendor customer technical support repair customized safety solutions asset management training predictive preventative maintenance notes consolidated financial statements continued 18 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2932 million 2044 million 1983 million september 30 2010 2009 2008 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 391 million 562 million 823 million 2010 2009 2008 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada sell products primarily independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors outside united states canada sell products combination direct sales distributors sales largest distributor 2010 2009 2008 approximately 10 percent total sales notes consolidated financial statements continued 19 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2010 2009 related consolidated statements operations shareowners’ equity cash flows comprehensive income loss three years period ended september 30 2010 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2010 2009 results operations cash flows three years period ended september 30 2010 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 18 2010 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation power control information hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence vsoe based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit original maturities three months one year time purchase investments stated cost approximates fair value receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 225 million september 30 2013 280 million september 30 2012 addition receivables stated net allowance certain customer returns rebates incentives 89 million september 30 2013 79 million september 30 2012 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 10 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill notes consolidated financial statements continued 1 basis presentation accounting policies continued review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 10 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies accounting method derivative financial instruments based upon designation instruments hedges us gaap policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 2607 million 2013 2476 million 2012 2439 million 2011 include rd expenses cost sales consolidated statement operations material previously issued financial statements corrected certain amounts previously included classification rd costs years ended september 30 2012 2011 result previously reported rd costs years ended september 30 2012 2011 decreased 115 million 105 million respectively income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes notes consolidated financial statements continued 1 basis presentation accounting policies continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2013 12 million shares 2012 23 million shares 2011 21 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements july 2013 financial accounting standards board fasb issued new guidance financial statement presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists guidance requires entities present unrecognized tax benefit financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward extent net operating loss carryforward similar tax loss tax credit carryforward available reporting date settle additional income taxes would result disallowance tax position tax law require use entity intend use deferred tax asset purpose unrecognized tax benefit presented financial statements liability combined deferred tax asset guidance effective us prospectively reporting periods beginning october 1 2014 adoption guidance expected material impact consolidated financial statements march 2013 fasb issued new guidance related release cumulative translation adjustment related entitys investment foreign entity guidance clarifies guidance subtopic 83030 foreign currency matters translation financial statements applies release cumulative translation adjustment net income reporting entity either sells part investment foreign entity ceases controlling financial interest subsidiary group assets constitute business within foreign entity guidance effective us prospectively reporting periods beginning october 1 2014 adoption guidance expected material impact consolidated financial statements february 2013 fasb issued new accounting guidance requires entities present either face financial statements notes significant amounts reclassified accumulated comprehensive income respective line items net income affected reclassification amount reclassified required reclassified net income entirety reporting period amounts required reclassified entirety net income entities required crossreference disclosures provide additional detail amounts guidance effective us prospectively reporting periods beginning october 1 2013 enhanced disclosures adoption guidance expected material impact consolidated financial statements notes consolidated financial statements continued 2 acquisitions october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd harbin located harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products purchase price acquisition 848 million recorded goodwill 711 million attributable assembled workforce technical expertise designing engineering manufacturing medium voltage drive products served market expansion assigned full amount goodwill control products solutions segment none goodwill recorded expected deductible tax purposes march 2012 acquired certain assets assumed certain liabilities softswitching technologies corporation softswitching industrial power quality detection protection systems provider united states recorded goodwill associated acquisition april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates hiprom process control automation systems integrator mining mineral processing industry south africa may 2011 purchased majority stake equity lektronix limited affiliate lektronix independent industrial automation repairs service provider europe asia purchased remaining minority shares 109 million december 2011 aggregate purchase price hiprom lektronix acquisitions 588 million recorded goodwill 348 million attributable intangible assets meet criteria separate recognition including assembled workforce industrywide technical expertise customer service capabilities assigned full amount goodwill hiprom lektronix control products solutions segment none goodwill recorded expected deductible tax purposes fair values weighted average useful lives assigned acquired identifiable intangible assets acquisitions results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented effects acquisitions material results operations financial position 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2013 2012 millions notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 131 million 2013 159 million 2012 168 million 2011 allenbradley® trademark indefinite life therefore subject amortization estimated amortization expense 315 million 2014 346 million 2015 317 million 2016 284 million 2017 171 million 2018 performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2013 concluded assets impaired 4 inventories consist millions notes consolidated financial statements continued 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions may 22 2013 replaced former fouryear 7500 million unsecured revolving credit facility expiring march 2015 new fiveyear 7500 million unsecured revolving credit facility expiring may 2018 increase aggregate amount credit facility 2500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrowed credit facilities years ended september 30 2013 2012 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1216 million september 30 2013 available nonus subsidiaries borrowings nonus credit facilities fiscal 2013 2012 significant compliance covenants credit facilities years ended september 30 2013 2012 significant commitment fees compensating balance requirements credit facilities shortterm debt obligations primarily relate commercial paper borrowings commercial paper borrowings outstanding 1790 million september 30 2013 1570 million september 30 2012 september 30 2013 weighted average interest rate maturity period commercial paper outstanding 017 percent five days respectively september 30 2012 weighted average interest rate maturity period commercial paper outstanding 027 percent six days respectively interest payments 597 million 2013 590 million 2012 601 million 2011 notes consolidated financial statements continued 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs 12 months either date sale installation also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2013 2012 2011 report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify forward exchange contracts among counterparties minimize exposure one entities forward exchange contracts denominated currencies major industrial countries notional values forward exchange contracts outstanding september 30 2013 8883 million 5913 million designated cash flow hedges currency pairs buysell comprising significant contract notional value united states dollar usdeuro usdcanadian dollar swiss franceuro mexican pesousd singapore dollarusd usdbrazilian real swiss franccanadian dollar also use foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries currency effects debt obligations reflected accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally 144 million 146 million foreign currency denominated debt designated net investment hedges september 30 2013 2012 respectively us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued pretax amount gains losses recorded comprehensive income loss related hedges would recorded consolidated statement operations designated millions approximately 35 million 22 million net tax net unrealized losses cash flow hedges september 30 2013 reclassified earnings next 12 months expect net unrealized losses offset hedged items recognized earnings pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related losses gains hedged items periods presented amount recognized earnings result ineffective hedges significant pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented notes consolidated financial statements continued 9 derivative instruments fair value measurement continued also hold financial instruments consisting cash shortterm investments shortterm debt longterm debt fair values cash shortterm investments shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2013 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2013 122 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2013 repurchased 60000 shares common stock 64 million settle october 2013 september 2012 repurchased 110000 shares common stock 76 million settle october 2012 outstanding purchases recorded accounts payable september 30 2013 2012 accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2013 2012 2011 millions notes consolidated financial statements continued 11 sharebased compensation 2013 2012 2011 recognized 411 million 435 million 395 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 125 million 2013 138 million 2012 129 million 2011 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2013 total unrecognized compensation cost related sharebased compensation awards 372 million net estimated forfeitures expect recognize weighted average period approximately 16 years 2012 longterm incentives plan 2012 plan authorizes us deliver 68 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 55 million shares 2012 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2013 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2013 2012 2011 2518 2349 2139 respectively total intrinsic value stock options exercised 1317 million 439 million 1573 million 2013 2012 2011 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity year ended september 30 2013 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period threeyear performance period ending september 30 2013 180 percent payout target number shares maximum 127000 shares delivered payment awards december 2013 summary performance share activity year ended september 30 2013 follows 1performance shares granted assuming achievement performance goals target 2adjustments due number shares vested fiscal 2010 awards end threeyear performance period ended september 30 2012 higher target number shares following table summarizes information performance shares vested years ended september 30 notes consolidated financial statements continued 11 sharebased compensation continued per share fair value performance share awards granted years ended september 30 2013 2012 2011 9815 10157 8700 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions restricted stock generally lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2013 2012 2011 8017 7373 6900 respectively total fair value shares vested years ended september 30 2013 2012 2011 94 million 62 million 45 million respectively summary restricted stock restricted stock unit activity year ended september 30 2013 follows notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans however made voluntary contributions 3000 million 1500 million us qualified pension plan 2012 2011 respectively postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost millions notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2013 2012 yet recognized net periodic benefit cost follows millions 2013 recognized prior service credits 132 million 84 million net tax net actuarial losses 1490 million 957 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2012 2014 expect recognize prior service credits 129 million 82 million net tax net actuarial losses 1028 million 665 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2013 accumulated benefit obligation pension plans 35632 million 38653 million september 30 2013 2012 respectively notes consolidated financial statements continued 12 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages 1 healthcare cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 550 2017 2 decreasing 450 2017 determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category notes consolidated financial statements continued 12 retirement benefits continued investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2013 2012 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2013 2012 common stock valued closing price reported active market individual securities traded mutual funds valued closing price reported active market individual funds traded corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price reported active market individual securities traded common collective trusts valued net asset value nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported active market individual securities traded notes consolidated financial statements continued 12 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 9 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2013 notes consolidated financial statements continued 12 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2012 notes consolidated financial statements continued 12 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2013 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2012 estimated future payments expect contribute 411 million related worldwide pension plans 151 million postretirement benefit plans 2014 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 12 retirement benefits continued postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2013 2012 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 409 million 2013 382 million 2012 312 million 2011 13 discontinued operations 2011 recorded net 07 million benefit settlement indemnification baldor electric company certain tax matters related divested businesses partially offset change estimate environmental matter pertaining discontinued business 14 income expense components income expense millions 2013 income included 192 million gain favorable resolution certain intellectual property commercial legal matters notes consolidated financial statements continued 15 income taxes selected income tax data continuing operations millions 2013 recognized net discrete tax benefits 227 million primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit 2012 recognized net discrete tax benefits 21 million primarily related favorable resolution tax matters various global jurisdictions 2011 recognized net discrete tax benefits 250 million related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued 15 income taxes continued operate certain nonus tax jurisdictions various government sponsored tax incentive programs expire 2016 2019 may extended certain additional requirements met tax incentive programs reduced effective income tax rate 39 43 50 percentage points 2013 2012 2011 respectively deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 4938 million september 30 2013 7159 million september 30 2012 total deferred tax liabilities 1287 million september 30 2013 1244 million september 30 2012 provided us deferred taxes 24270 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested outside us practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 15 income taxes continued tax attributes related valuation allowances september 30 2013 millions material change valuation allowance 2013 2012 unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state nonus taxing authorities various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued 15 income taxes continued amount gross unrecognized tax benefits would reduce effective tax rate recognized 408 million 703 million 751 million september 30 2013 2012 2011 respectively accrued interest penalties related unrecognized tax benefits 124 million 201 million september 30 2013 2012 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 67 million 31 million 97 million 2013 2012 2011 respectively unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 271 million september 30 2013 believe reasonably possible amount gross unrecognized tax benefits could reduced 164 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2010 longer subject state local nonus income tax examinations years 2003 16 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties september 30 2013 estimated total reasonably possible costs could incur matters 1170 million 1023 million net related receivables recorded environmental liability 522 million 459 million net related receivables matters 522 million recorded liability 366 million relates discounted ongoing operating maintenance expenditures addition matters certain environmental liabilities substantially indemnified exxonmobil corporation september 30 2013 recorded liability 304 million receivable 288 million matters estimate total reasonably possible costs could incur matters 306 million based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect liquidity capital resources competitive position financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise september 30 2013 september 30 2012 recorded 23 million 34 million respectively current liabilities 220 million 224 million respectively liabilities obligations notes consolidated financial statements continued 16 commitments contingent liabilities continued lease commitments rental expense 1196 million 2013 1150 million 2012 1115 million 2011 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3580 million september 30 2013 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 12 million september 30 2013 receivable 2017 approximately 03 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect financial condition results operations notes consolidated financial statements continued 16 commitments contingent liabilities continued time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 114 million 03 million accrued current liabilities 92 million accrued liabilities september 30 2013 recorded 16 million 88 million current liabilities respectively september 30 2012 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products september 30 2013 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact operating results financial position cash flows however extent valid indemnification claims arise future payments us could significant could material adverse effect results operations cash flows particular period 17 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system • architecture software products including rotary linear motion control products sensors machine safety components notes consolidated financial statements continued 17 business segment information continued control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers condition sensors • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair customized safety solutions asset management training predictive preventative maintenance following tables reflect sales operating results reportable segments years ended september 30 millions 1beginning fiscal 2013 redefined segment operating earnings exclude nonoperating pension costs nonoperating pension costs reclassified separate line item within table periods presented costs previously included operating earnings segment general corporatenet nonoperating pension costs consist defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impacts plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business continue include service cost amortization prior service cost business segment incurred expense components net periodic benefit cost represent operating cost providing pension benefits employees among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonoperating pension costs certain nonrecurring corporate initiatives gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 17 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2992 million 3180 million 3157 million september 30 2013 2012 2011 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 619 million 597 million 538 million 2013 2012 2011 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada certain countries sell products primarily independent distributors remaining countries sell products combination direct sales distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2013 2012 2011 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 18 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2013 2012 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2013 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2013 2012 results operations cash flows three years period ended september 30 2013 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 18 2013 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation power control information hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit original maturities longer three months longer one year time purchase investments stated cost approximates fair value receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowance doubtful accounts 194 million september 30 2014 225 million september 30 2013 addition receivables stated net allowance certain customer returns rebates incentives 116 million september 30 2014 89 million september 30 2013 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internaluse software stated cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill notes consolidated financial statements continued 1 basis presentation accounting policies continued review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies expected occur within next two years cash flow hedges accounting method derivative financial instruments based upon designation instruments hedges us gaap also enter similar contracts designate hedges offset transaction gains losses associated certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 2901 million 2014 2607 million 2013 2476 million 2012 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes notes consolidated financial statements continued 1 basis presentation accounting policies continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2014 08 million shares 2013 12 million shares 2012 23 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements may 2014 financial accounting standards board issued new standard revenue recognition contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep approach recognizing revenue based individual performance obligations contract new standard also require additional qualitative quantitative disclosures contracts customers significant judgments made applying revenue guidance assets recognized costs obtain fulfill contract guidance effective us reporting periods beginning october 1 2017 currently evaluating impact adoption guidance consolidated financial statements related disclosures notes consolidated financial statements continued 2 goodwill intangible assets changes carrying amount goodwill years ended september 30 2014 2013 millions year ended september 30 2014 recognized goodwill 357 million intangible assets 414 million resulting acquisitions vmonitor llc affiliates vmonitor global technology leader wireless solutions oil gas industry jacobs automation jacobs leader intelligent track motion control technology assigned full amount goodwill related vmonitor control products solutions segment assigned full amount goodwill related jacobs architecture software segment year ended september 30 2013 recognized goodwill 711 million intangible assets 111 million resulting acquisition medium voltage drives business harbin jiuzhou electric co ltd harbin located harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products assigned full amount goodwill control products solutions segment 2 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 94 million 2014 131 million 2013 159 million 2012 allenbradley® trademark indefinite life therefore subject amortization estimated amortization expense 307 million 2015 341 million 2016 300 million 2017 239 million 2018 180 million 2019 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2014 concluded assets impaired identify impairment indicators remainder fiscal 2014 would require impairment analysis 3 inventories consist millions notes consolidated financial statements continued 4 property net property consists millions 5 longterm shortterm debt longterm debt consists millions september 30 2014 2013 total borrowing capacity five year unsecured revolving credit facility expiring may 2018 7500 million increase aggregate amount credit facility 2500 million subject consent banks credit facility borrowed credit facility years ended september 30 2014 2013 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1266 million september 30 2014 available nonus subsidiaries borrowings nonus credit facilities fiscal 2014 2013 significant compliance covenants credit facilities years ended september 30 2014 2013 significant commitment fees compensating balance requirements credit facilities shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 3250 million september 30 2014 1790 million september 30 2013 weighted average interest rate commercial paper outstanding 017 percent september 30 2014 2013 interest payments 581 million 2014 597 million 2013 590 million 2012 notes consolidated financial statements continued 6 current liabilities current liabilities consist millions 7 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs 12 months either date sale installation also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 8 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies expected occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2014 2013 2012 report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries notional values foreign currency forward exchange contracts outstanding september 30 2014 8677 million 6412 million designated cash flow hedges currency pairs buysell comprising significant contract notional values united states dollar usdeuro swiss franceuro usdcanadian dollar mexican pesousd singapore dollarusd swiss franccanadian dollar also use foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries currency effects debt obligations reflected accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally 147 million 144 million foreign currency denominated debt designated net investment hedges september 30 2014 2013 respectively us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability notes consolidated financial statements continued 8 derivative instruments fair value measurement continued assets liabilities measured fair value recurring basis location consolidated balance sheet millions pretax amount gains losses recorded comprehensive income loss related hedges would recorded consolidated statement operations designated millions approximately 90 million 92 million tax net unrealized gains cash flow hedges september 30 2014 reclassified earnings next 12 months expect net unrealized gains offset hedged items recognized earnings pretax amount losses gains reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented amount recognized earnings result ineffective hedges significant pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented notes consolidated financial statements continued 8 derivative instruments fair value measurement continued also hold financial instruments consisting cash shortterm investments shortterm debt longterm debt fair values cash shortterm investments shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 9 shareowners’ equity common stock september 30 2014 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2014 101 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2014 repurchased 40757 shares common stock 45 million settle october 2014 september 2013 repurchased 60000 shares common stock 64 million settle october 2013 outstanding purchases recorded accounts payable september 30 2014 2013 respectively accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2014 2013 2012 millions 9 shareowners’ equity continued reclassifications accumulated comprehensive loss consolidated statement operations years ended september 30 2014 2013 2012 millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 11 information notes consolidated financial statements continued 10 sharebased compensation 2014 2013 2012 recognized 425 million 411 million 435 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 129 million 2014 125 million 2013 138 million 2012 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2014 total unrecognized compensation cost related sharebased compensation awards 383 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2012 longterm incentives plan 2012 plan authorizes us deliver 68 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 42 million shares 2012 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2014 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2014 2013 2012 3403 2518 2349 respectively total intrinsic value stock options exercised 1081 million 1317 million 439 million 2014 2013 2012 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 10 sharebased compensation continued summary stock option activity year ended september 30 2014 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period threeyear performance period ending september 30 2014 payout 187 percent target number shares maximum 154000 shares delivered payment awards december 2014 summary performance share activity year ended september 30 2014 follows 1performance shares granted assuming achievement performance goals target 2adjustments due number shares vested fiscal 2011 awards end threeyear performance period ended september 30 2013 higher target number shares following table summarizes information performance shares vested years ended september 30 notes consolidated financial statements continued 10 sharebased compensation continued pershare fair value performance share awards granted years ended september 30 2014 2013 2012 10848 9815 10157 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2014 2013 2012 10969 8017 7373 respectively total fair value shares vested years ended september 30 2014 2013 2012 64 million 94 million 62 million respectively summary restricted stock restricted stock unit activity year ended september 30 2014 follows notes consolidated financial statements continued 11 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans however made voluntary contributions 3000 million us qualified pension plan 2012 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost millions notes consolidated financial statements continued 11 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2014 2013 yet recognized net periodic benefit cost follows millions 2014 recognized prior service credits 129 million 81 million net tax net actuarial losses 1026 million 664 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2013 2015 expect recognize prior service credits 172 million 108 million net tax net actuarial losses 1260 million 826 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2014 accumulated benefit obligation pension plans 39602 million 35632 million september 30 2014 2013 respectively notes consolidated financial statements continued 11 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost included consolidated statement operations period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations included consolidated balance sheet weighted averages 1 healthcare cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 550 2017 2 decreasing 450 2017 determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category notes consolidated financial statements continued 11 retirement benefits continued investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2014 2013 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2014 2013 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued net asset value determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued 11 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 8 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2014 notes consolidated financial statements continued 11 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2013 notes consolidated financial statements continued 11 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2014 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2013 estimated future payments expect contribute 455 million related worldwide pension plans 152 million postretirement benefit plans 2015 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 11 retirement benefits continued postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2014 2013 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 438 million 2014 409 million 2013 382 million 2012 12 income expense components income expense millions income included 80 million gain 2014 192 million gain 2013 favorable resolutions certain intellectual property commercial legal matters notes consolidated financial statements continued 13 income taxes selected income tax data millions 2013 recognized net discrete tax benefits 227 million primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit effective tax rate reconciliation us federal statutory rate effective tax rate operate certain nonus tax jurisdictions various government sponsored tax incentive programs expire 2016 2019 may extended certain additional requirements met tax benefit attributable incentive programs 429 million 031 per diluted share 2014 382 million 027 per diluted share 2013 419 million 029 per diluted share 2012 notes consolidated financial statements continued 13 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 5291 million september 30 2014 4938 million september 30 2013 total deferred tax liabilities 1321 million september 30 2014 1287 million september 30 2013 provided us deferred taxes 27810 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested outside us practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 13 income taxes continued tax attributes related valuation allowances september 30 2014 millions material change valuation allowance 2014 2013 unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state nonus taxing authorities various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued 13 income taxes continued amount gross unrecognized tax benefits would reduce effective tax rate recognized 389 million 408 million 703 million september 30 2014 2013 2012 respectively accrued interest penalties related unrecognized tax benefits 81 million 124 million september 30 2014 2013 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 40 million 67 million 31 million 2014 2013 2012 respectively unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 229 million september 30 2014 believe reasonably possible amount gross unrecognized tax benefits could reduced 238 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 91 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2012 longer subject state local nonus income tax examinations years 2003 14 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties september 30 2014 estimated total reasonably possible costs could incur matters 1050 million 900 million net related receivables recorded environmental liability 600 million 470 million net related receivables matters 600 million recorded liability 406 million relates discounted ongoing operating maintenance expenditures addition matters certain environmental liabilities substantially indemnified exxonmobil corporation september 30 2014 recorded liability 279 million receivable 267 million matters estimate total reasonably possible costs could incur matters 306 million based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect liquidity capital resources competitive position financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise september 30 2014 september 30 2013 recorded 03 million 23 million respectively current liabilities 219 million 220 million respectively liabilities obligations notes consolidated financial statements continued 14 commitments contingent liabilities continued lease commitments rental expense 1216 million 2014 1196 million 2013 1150 million 2012 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3398 million september 30 2014 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 08 million september 30 2014 receivable 2018 approximately 02 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect financial condition results operations notes consolidated financial statements continued 14 commitments contingent liabilities continued time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 92 million 08 million accrued current liabilities 70 million accrued liabilities september 30 2014 recorded 03 million 92 million current liabilities respectively september 30 2013 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products september 30 2014 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact operating results financial position cash flows however extent valid indemnification claims arise future payments us could significant could material adverse effect results operations cash flows particular period 15 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organized products solutions services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting business enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system • products including rotary linear motion control products sensors machine safety components notes consolidated financial statements continued 15 business segment information continued control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers condition sensors • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair asset management training predictive preventative maintenance safety network consulting following tables reflect sales operating results reportable segments years ended september 30 millions 1beginning fiscal 2013 redefined segment operating earnings exclude nonoperating pension costs nonoperating pension costs reclassified separate line item within table periods presented costs previously included operating earnings segment general corporatenet nonoperating pension costs consist defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impacts plan curtailments settlements components net periodic benefit cost primarily relate changes pension assets liabilities result market performance consider costs unrelated operating performance business continue include service cost amortization prior service cost business segment incurred expense components net periodic benefit cost represent operating cost providing pension benefits employees among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonoperating pension costs certain nonrecurring corporate initiatives gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 15 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2941 million 2992 million 3180 million september 30 2014 2013 2012 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 562 million 619 million 597 million 2014 2013 2012 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada certain countries sell products primarily independent distributors remaining countries sell products combination direct sales distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2014 2013 2012 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 16 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2014 2013 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2014 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2014 2013 results operations cash flows three years period ended september 30 2014 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 18 2014 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc rockwell automation company leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation power control information hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit original maturities longer three months shorter one year time purchase investments stated cost approximates fair value receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowance doubtful accounts 220 million september 30 2015 194 million september 30 2014 addition receivables stated net allowance certain customer returns rebates incentives 92 million september 30 2015 116 million september 30 2014 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internaluse software stated cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 273 million 246 million 229 million accrued within accounts payable current liabilities september 30 2015 2014 2013 respectively intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill notes consolidated financial statements continued 1 basis presentation accounting policies continued review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs certain longterm debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3073 million 2015 2901 million 2014 2607 million 2013 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes notes consolidated financial statements continued 1 basis presentation accounting policies continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2015 14 million shares 2014 08 million shares 2013 12 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements april 2015 financial accounting standards board fasb issued new guidance requiring debt issuance costs presented balance sheet direct deduction carrying amount related outstanding debt liability rather asset guidance effective us october 1 2016 however elected early adopt guidance retrospectively september 30 2015 included 94 million 52 million debt issuance costs associated longterm debt reduction longterm debt previously included within assets september 30 2015 2014 respectively may 2014 fasb issued new standard revenue recognition contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep approach recognizing revenue based individual performance obligations contract new standard also require additional qualitative quantitative disclosures contracts customers significant judgments made applying revenue guidance assets recognized costs obtain fulfill contract guidance effective us reporting periods beginning october 1 2018 currently evaluating impact adoption guidance consolidated financial statements related disclosures notes consolidated financial statements continued 2 goodwill intangible assets changes carrying amount goodwill years ended september 30 2015 2014 millions year ended september 30 2015 recognized goodwill 149 million intangible assets 54 million resulting acquisition assets esc services inc global provider lockouttagout services solutions assigned full amount goodwill related esc services inc control products solutions segment year ended september 30 2014 recognized goodwill 357 million intangible assets 414 million resulting acquisitions vmonitor llc affiliates vmonitor global technology leader wireless solutions oil gas industry jacobs automation jacobs leader intelligent track motion control technology assigned full amount goodwill related vmonitor control products solutions segment assigned full amount goodwill related jacobs architecture software segment notes consolidated financial statements continued 2 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 94 million 2015 94 million 2014 131 million 2013 allenbradley® trademark indefinite life therefore subject amortization estimated amortization expense 293 million 2016 261 million 2017 199 million 2018 173 million 2019 144 million 2020 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2015 concluded assets impaired identify impairment indicators remainder fiscal 2015 would require impairment analysis 3 inventories consist millions notes consolidated financial statements continued 4 property net property consists millions 5 longterm shortterm debt longterm debt consists millions february 2015 issued 6000 million aggregate principal amount longterm notes public offering consisted 3000 million 2050 notes payable march 2020 notes 3000 million 2875 notes payable march 2025 notes issued discount debt offering yielded 5943 million net proceeds used net proceeds offering primarily repay outstanding commercial paper remaining proceeds used general corporate purposes upon issuance notes entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount 2020 notes 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 0763 percent 2020 notes 1173 percent 2025 notes september 30 2015 designated swaps fair value hedges aggregate fair value interest rate swap contracts september 30 2015 net unrealized gain 54 million individual contracts recorded liabilities consolidated balance sheet corresponding adjustments carrying value underlying debt additional information related interest rate swap contracts included note 8 shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2015 commercial paper borrowings outstanding 3250 million september 30 2014 weighted average interest rate commercial paper outstanding 017 percent september 30 2014 notes consolidated financial statements continued 5 longterm shortterm debt continued march 24 2015 replaced former fiveyear 7500 million unsecured revolving credit facility new fiveyear 10 billion unsecured revolving credit facility expiring march 2020 increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed either credit facility periods ended september 30 2015 september 30 2014 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1212 million september 30 2015 available nonus subsidiaries borrowings nonus credit facilities september 30 2015 september 30 2014 significant commitment fees compensating balance requirements credit facilities interest payments 608 million 2015 581 million 2014 597 million 2013 6 current liabilities current liabilities consist millions 7 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 8 derivative instruments fair value measurement use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related hedging instruments associated longterm debt included note 5 additional information related impacts cash flow hedges comprehensive loss income included note 9 types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive loss income effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2015 us dollarequivalent gross notional amount 7297 million foreign currency forward exchange contracts designated cash flow hedges pretax amount gains recorded comprehensive loss income related cash flow hedges would recorded consolidated statement operations designated millions pretax amount losses gains reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 200 million 152 million tax net unrealized gains cash flow hedges september 30 2015 reclassified earnings next 12 months expect net unrealized gains offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2015 gross notional amount 4069 million foreign currency forward exchange contracts 137 million foreign currency denominated debt designated net investment hedges notes consolidated financial statements continued 8 derivative instruments fair value measurement continued pretax amount losses gains recorded comprehensive loss income related net investment hedges would recorded consolidated statement operations designated millions fair value hedges use interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively convert notes fixed rate debt floating rate debt designate contracts fair value hedges hedge changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense impact earnings due ineffective fair value hedges september 30 2015 aggregate notional value interest rate swaps designated fair value hedges 6000 million pretax amount net gains recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net losses hedged debt instruments periods presented millions derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2015 us dollarequivalent gross notional amount 2126 million foreign currency forward exchange contracts designated hedging instruments pretax amount gains forward exchange contracts designated hedging instruments recognized consolidated statement operations millions fair value financial instruments us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability notes consolidated financial statements continued 8 derivative instruments fair value measurement continued recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2015 2014 2013 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 13492 million september 30 2015 currency pairs buysell comprising significant contract notional values united states dollar usdeuro usdswiss franc usdcanadian dollar swiss franceuro mexican pesousd singapore dollarusd swiss franccanadian dollar value interest rate swap contracts using market approach based observable market inputs including publicized swap curves assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 8 derivative instruments fair value measurement continued also hold financial instruments consisting cash shortterm investments shortterm debt longterm debt fair values cash shortterm investments shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 9 shareowners’ equity common stock september 30 2015 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2015 90 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2015 2014 125 million 45 million respectively outstanding common stock share repurchases recorded accounts payable settle next fiscal year material previously issued financial statements corrected certain amounts rollforward additional paidin capital within consolidated statement shareowners’ equity year ended september 30 2014 within rollforward additional paidin capital income tax benefits sharebased compensation decreased 118 million sharebased compensation expense increased 118 million accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2015 2014 2013 millions notes consolidated financial statements continued 9 shareowners’ equity continued reclassifications accumulated comprehensive loss consolidated statement operations years ended september 30 2015 2014 2013 millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 11 information notes consolidated financial statements continued 10 sharebased compensation 2015 2014 2013 recognized 415 million 425 million 411 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 132 million 129 million 125 million 2015 2014 2013 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2015 total unrecognized compensation cost related sharebased compensation awards 368 million net estimated forfeitures expect recognize weighted average period approximately 16 years 2012 longterm incentives plan 2012 plan authorizes us deliver 68 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 28 million shares 2012 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2015 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2015 2014 2013 2670 3403 2518 respectively total intrinsic value stock options exercised 461 million 1081 million 1317 million 2015 2014 2013 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 10 sharebased compensation continued summary stock option activity year ended september 30 2015 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period threeyear performance period ending september 30 2015 payout 93 target number shares maximum 68000 shares delivered payment awards december 2015 summary performance share activity year ended september 30 2015 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2014 awards end threeyear performance period ended september 30 2014 higher target number shares following table summarizes information performance shares vested years ended september 30 2015 2014 2013 notes consolidated financial statements continued 10 sharebased compensation continued pershare fair value performance share awards granted years ended september 30 2015 2014 2013 10370 10848 9815 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2015 2014 2013 11502 10969 8017 respectively total fair value shares vested years ended september 30 2015 2014 2013 80 million 64 million 94 million respectively summary restricted stock restricted stock unit activity year ended september 30 2015 follows also granted seven thousand shares unrestricted common stock nonemployee directors year ended september 30 2015 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2015 2014 2013 11143 10886 7665 respectively notes consolidated financial statements continued 11 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans make voluntary contributions us qualified pension plan 2015 2014 2013 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost income millions notes consolidated financial statements continued 11 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2015 2014 yet recognized net periodic benefit cost follows millions 2015 recognized prior service credits 172 million 108 million net tax net actuarial losses 1232 million 804 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2014 2016 expect recognize prior service credits 140 million 89 million net tax net actuarial losses 1271 million 829 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2015 offered lumpsum distributions certain deferred vested participants us defined benefit plans related payments totaled 1088 million settlement charge required recorded accumulated benefit obligation pension plans 39793 million 39602 million september 30 2015 2014 respectively notes consolidated financial statements continued 11 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost included consolidated statement operations period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations included consolidated balance sheet weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 550 2018 us plans 450 2017 nonus plans october 2014 us society actuaries released new mortality table rp2014 new mortality improvement scale mp2014 used mortality tables measure us pension obligation september 30 2015 change mortality assumptions resulted 2221 million increase projected benefit obligation notes consolidated financial statements continued 11 retirement benefits continued determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2015 2014 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2015 2014 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued net asset value determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued 11 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 8 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2015 notes consolidated financial statements continued 11 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2014 notes consolidated financial statements continued 11 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2015 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2014 estimated future payments expect contribute 470 million related worldwide pension plans 117 million postretirement benefit plans 2016 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 11 retirement benefits continued postretirement benefits one percentage point change assumed health care cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2015 2014 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 463 million 2015 438 million 2014 409 million 2013 12 expense income components expense income millions expense income included 80 million gain 2014 192 million gain 2013 favorable resolutions certain intellectual property commercial legal matters notes consolidated financial statements continued 13 income taxes selected income tax data millions 2013 recognized net discrete tax benefits 227 million primarily related favorable resolution tax matters various global jurisdictions retroactive extension us federal research development tax credit effective tax rate reconciliation us federal statutory rate effective tax rate operate certain nonus tax jurisdictions various government sponsored tax incentive programs expire 2017 2019 may extended certain additional requirements met tax benefit attributable incentive programs 365 million 027 per diluted share 2015 429 million 031 per diluted share 2014 382 million 027 per diluted share 2013 notes consolidated financial statements continued 13 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities september 30 2015 2014 millions total deferred tax assets 6451 million september 30 2015 5291 million september 30 2014 total deferred tax liabilities 1281 million september 30 2015 1321 million september 30 2014 provided us deferred taxes 30590 million undistributed earnings company’s subsidiaries since earnings current plans continue indefinitely reinvested outside us practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 13 income taxes continued tax attributes related valuation allowances september 30 2015 millions valuation allowance decreased 56 million 2015 primarily due expiration nonus net operating loss carryforwards unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state nonus taxing authorities various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued 13 income taxes continued amount gross unrecognized tax benefits would reduce effective tax rate recognized 439 million 389 million 408 million september 30 2015 2014 2013 respectively accrued interest penalties related unrecognized tax benefits 51 million 81 million september 30 2015 2014 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits recognized 24 million 40 million 67 million 2015 2014 2013 respectively unrecognized tax benefits recognized net impact income tax provision including recognition interest penalties offsetting tax assets would 265 million september 30 2015 believe reasonably possible amount gross unrecognized tax benefits could reduced 310 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 145 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2012 longer subject state local nonus income tax examinations years 2003 14 commitments contingent liabilities obligations expected recoveries related environmental remediation costs conditional asset retirement obligations recorded indemnification matters september 30 2015 2014 follows september 30 2015 estimated total reasonably possible costs could incur environmental remediation costs indemnification liabilities 1433 million 1011 million net related receivables environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties notes consolidated financial statements continued 14 commitments contingent liabilities continued environmental remediation cost liabilities related expected recoveries september 30 2015 follows millions 1 includes 393 million related discounted ongoing operating maintenance expenditures based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect liquidity capital resources competitive position financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise conditional asset retirement obligations related expected recoveries september 30 2015 2014 follows millions significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2015 2014 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack notes consolidated financial statements continued 14 commitments contingent liabilities continued impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale indemnification liabilities related expected recoveries september 30 2015 2014 follows millions included certain environmental indemnification liabilities substantially indemnified exxonmobil corporation recorded liability 260 million 279 million related receivable 247 million 267 million september 30 2015 2014 respectively many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products september 30 2015 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact operating results financial position cash flows however extent valid indemnification claims arise future payments us could significant could material adverse effect results operations cash flows particular period notes consolidated financial statements continued 14 commitments contingent liabilities continued lease commitments rental expense 1170 million 2015 1216 million 2014 1196 million 2013 september 30 2015 minimum future rental commitments operating leases noncancelable lease terms excess one year payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 08 million september 30 2015 receivable 2019 approximately 02 million per year leases contain renewal options varying periods certain leases include options purchase leased property 15 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantages businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organized products solutions services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting business enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes enables customers improve manufacturing productivity meet regulatory requirements • products including rotary linear motion control products sensors machine safety components control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair asset management training predictive preventative maintenance safety network consulting notes consolidated financial statements continued 15 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 2015 2014 2013 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonoperating pension costs certain nonrecurring corporate initiatives gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit following tables summarize identifiable assets september 30 2015 2014 2013 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions notes consolidated financial statements continued 15 business segment information continued identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2668 million 2941 million 2992 million september 30 2015 2014 2013 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 367 million 562 million 619 million 2015 2014 2013 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada certain countries sell products primarily independent distributors remaining countries sell products combination direct sales distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2015 2014 2013 attributable segments approximately 10 percent total sales 16 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2015 2014 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2015 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2015 2014 results operations cash flows three years period ended september 30 2015 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 17 2015 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc rockwell automation company leader industrial automation information makes customers productive world sustainable basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation information solutions hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products solutions services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit original maturities longer three months shorter one year time purchase investments stated cost approximates fair value receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowance doubtful accounts 245 million september 30 2016 220 million september 30 2015 addition receivables stated net allowance certain customer returns rebates incentives 79 million september 30 2016 92 million september 30 2015 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internaluse software stated cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 299 million 273 million 246 million accrued within accounts payable current liabilities september 30 2016 2015 2014 respectively intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill notes consolidated financial statements continued 1 basis presentation accounting policies continued review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs certain longterm debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3193 million 2016 3073 million 2015 2901 million 2014 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes notes consolidated financial statements continued 1 basis presentation accounting policies continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2016 22 million shares 2015 14 million shares 2014 08 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements march 2016 financial accounting standards board fasb issued new standard sharebased compensation among changes existing guidance standard requires entities record excess income tax benefit deficiency sharebased compensation within income tax provision rather within additional paidin capital guidance effective us reporting periods beginning later october 1 2017 currently evaluating impact adoption guidance consolidated financial statements related disclosures february 2016 fasb issued new standard accounting leases requires lessees recognize rightofuse assets lease liabilities leases among changes existing lease accounting guidance new standard also requires additional qualitative quantitative disclosures leasing activities guidance effective us reporting periods beginning october 1 2019 currently evaluating impact adoption guidance consolidated financial statements related disclosures november 2015 fasb issued new guidance requires deferred income taxes classified balance sheet noncurrent assets liabilities rather separating current noncurrent deferred income taxes based classification related assets liabilities requirement effective us later october 1 2017 however elected adopt earlier december 31 2015 upon adoption guidance retrospectively reclassified 1512 million deferred income taxes current assets noncurrent assets september 30 2015 may 2014 fasb issued new standard revenue recognition related contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep approach recognizing revenue based individual performance obligations contract new standard also require additional qualitative quantitative disclosures contracts customers significant judgments made applying revenue guidance assets recognized costs obtain fulfill contract guidance effective us reporting periods beginning october 1 2018 currently evaluating impact adoption guidance consolidated financial statements related disclosures notes consolidated financial statements continued 2 goodwill intangible assets changes carrying amount goodwill years ended september 30 2016 2015 millions year ended september 30 2016 recognized goodwill 727 million intangible assets 575 million resulting three acquisitions march 2016 acquired magnemotion inc manufacturer intelligent conveying systems september 2016 acquired automation control products acp provider centralized thin client remote desktop server management software maverick technologies maverick systems integrator assigned full amount goodwill related magnemotion inc acp architecture software segment full amount goodwill related maverick control products solutions segment september 30 2016 purchase accounting figures associated acp maverick preliminary finalized within permitted measurement period year ended september 30 2015 recognized goodwill 149 million intangible assets 54 million resulting acquisition assets esc services inc global provider lockouttagout services solutions assigned full amount goodwill related esc services inc control products solutions segment notes consolidated financial statements continued 2 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 115 million 2016 94 million 2015 94 million 2014 estimated amortization expense 301 million 2017 251 million 2018 220 million 2019 190 million 2020 184 million 2021 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2016 concluded assets impaired 3 inventories consist millions notes consolidated financial statements continued 4 property net property consists millions 5 longterm shortterm debt longterm debt consists millions february 2015 upon issuance notes payable march 2020 notes march 2025 notes entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 1281 percent 2020 notes 1691 percent 2025 notes september 30 2016 aggregate fair value interest rate swap contracts september 30 2016 net unrealized gain 195 million designated swaps fair value hedges individual contracts recorded assets consolidated balance sheet corresponding adjustments carrying value underlying debt additional information related interest rate swap contracts included note 8 september 30 2016 2015 total borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed either credit facility years ended september 30 2016 2015 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent separate shortterm unsecured credit facilities approximately 1212 million september 30 2016 available nonus subsidiaries borrowings nonus credit facilities september 30 2016 2015 significant commitment fees compensating balance requirements credit facilities shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 4486 million september 30 2016 weighted average interest rate commercial paper outstanding 057 percent september 30 2016 commercial paper borrowings outstanding september 30 2015 interest payments 692 million 2016 608 million 2015 581 million 2014 notes consolidated financial statements continued 6 current liabilities current liabilities consist millions 7 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable changes product warranty obligations millions notes consolidated financial statements continued 8 derivative instruments fair value measurement use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related impacts cash flow hedges comprehensive loss income included note 9 types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive loss income effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2016 us dollarequivalent gross notional amount 6632 million foreign currency forward exchange contracts designated cash flow hedges pretax amount losses gains recorded comprehensive loss income related cash flow hedges would recorded consolidated statement operations designated millions pretax amount losses gains reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 54 million pretax net unrealized losses cash flow hedges september 30 2016 reclassified earnings next 12 months expect net unrealized losses offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2016 gross notional amount 4650 million foreign currency forward exchange contracts designated net investment hedges notes consolidated financial statements continued 8 derivative instruments fair value measurement continued pretax amount gains losses recorded comprehensive income loss related net investment hedges would recorded consolidated statement operations designated millions fair value hedges use interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively convert notes fixed rate debt floating rate debt designate contracts fair value hedges hedge changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense impact earnings due ineffective fair value hedges september 30 2016 aggregate notional value interest rate swaps designated fair value hedges 6000 million pretax amount net gains recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net losses hedged debt instruments periods presented millions derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2016 us dollarequivalent gross notional amount 2557 million foreign currency forward exchange contracts designated hedging instruments pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations millions notes consolidated financial statements continued 8 derivative instruments fair value measurement continued fair value financial instruments us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2016 2015 2014 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 13839 million september 30 2016 currency pairs buysell comprising significant contract notional values united states dollar usdeuro usdswiss franc usdcanadian dollar swiss franceuro swiss franccanadian dollar singapore dollarusd mexican pesousd value interest rate swap contracts using market approach based observable market inputs including publicized swap curves assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 8 derivative instruments fair value measurement continued also hold financial instruments consisting cash shortterm investments shortterm debt longterm debt fair values cash shortterm investments shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 9 shareowners’ equity common stock september 30 2016 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2016 131 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2016 2015 53 million 125 million respectively outstanding common stock share repurchases recorded accounts payable settle next fiscal year accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2016 2015 2014 millions notes consolidated financial statements continued 9 shareowners’ equity continued reclassifications accumulated comprehensive loss consolidated statement operations years ended september 30 2016 2015 2014 millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 11 information notes consolidated financial statements continued 10 sharebased compensation 2016 2015 2014 recognized 405 million 415 million 425 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 129 million 132 million 129 million 2016 2015 2014 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2016 total unrecognized compensation cost related sharebased compensation awards 345 million net estimated forfeitures expect recognize weighted average period approximately 16 years 2012 longterm incentives plan amended 2012 plan authorizes us deliver 118 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 64 million shares 2012 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2016 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2016 2015 2014 2128 2670 3403 respectively total intrinsic value stock options exercised 219 million 461 million 1081 million 2016 2015 2014 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 10 sharebased compensation continued summary stock option activity year ended september 30 2016 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period summary performance share activity year ended september 30 2016 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2016 awards end threeyear performance period ended september 30 2015 lower target number shares following table summarizes information performance shares vested years ended september 30 2016 2015 2014 threeyear performance period ending september 30 2016 payout 10 percent target number shares maximum 7000 shares delivered payment awards december 2016 notes consolidated financial statements continued 10 sharebased compensation continued pershare fair value performance share awards granted years ended september 30 2016 2015 2014 8764 10370 10848 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2016 2015 2014 10538 11502 10969 respectively total fair value shares vested years ended september 30 2016 2015 2014 70 million 80 million 64 million respectively summary restricted stock restricted stock unit activity year ended september 30 2016 follows also granted approximately 10000 shares unrestricted common stock nonemployee directors year ended september 30 2016 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2016 2015 2014 9879 11143 10886 respectively notes consolidated financial statements continued 11 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans make voluntary contributions us qualified pension plan 2016 2015 2014 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost income millions notes consolidated financial statements continued 11 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2016 2015 yet recognized net periodic benefit cost follows millions 2016 recognized prior service credits 140 million 89 million net tax net actuarial losses 1268 million 827 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2015 2017 expect recognize prior service credits 98 million 65 million net tax net actuarial losses 1555 million 1021 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2016 2015 offered lumpsum distributions certain deferred vested participants us defined benefit plans related payments totaled 1088 million settlement charge required recorded accumulated benefit obligation pension plans 44291 million 39793 million september 30 2016 2015 respectively notes consolidated financial statements continued 11 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost included consolidated statement operations period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations included consolidated balance sheet weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 550 2018 us plans 450 2017 nonus plans october 2014 us society actuaries released new mortality table rp2014 new mortality improvement scale mp2014 used mortality tables measure us pension obligation september 30 2015 change mortality assumptions resulted 2221 million increase projected benefit obligation october 2015 us society actuaries released new mortality improvement scale mp2015 used measure us pension obligation september 30 2016 change mortality assumptions resulted 280 million decrease projected benefit obligation notes consolidated financial statements continued 11 retirement benefits continued determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2016 2015 pension plans directly common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2016 2015 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value nav reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued 11 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 8 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2016 notes consolidated financial statements continued 11 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2015 notes consolidated financial statements continued 11 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2016 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2015 estimated future payments expect contribute 492 million related worldwide pension plans 106 million postretirement benefit plans 2017 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 11 retirement benefits continued postretirement benefits one percentage point change assumed health care cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2016 2015 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 386 million 2016 463 million 2015 438 million 2014 12 income expense components income expense millions income expense included 80 million gain 2014 favorable resolutions certain intellectual property commercial legal matters notes consolidated financial statements continued 13 income taxes selected income tax data millions effective tax rate reconciliation us federal statutory rate effective tax rate operate certain nonus tax jurisdictions governmentsponsored tax incentive programs primary benefit expire 2019 programs may extended reduced incentives certain additional requirements met tax benefit attributable incentive programs 339 million 026 per diluted share 2016 365 million 027 per diluted share 2015 429 million 031 per diluted share 2014 notes consolidated financial statements continued 13 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities september 30 2016 2015 millions provided us deferred taxes 32740 million undistributed earnings certain nonus subsidiaries since earnings determined indefinitely reinvested outside us thus subject us income taxes foreign withholding taxes practicable estimate amount additional taxes may payable upon distribution earnings believe likely realize deferred tax assets reduction future taxable income deferred tax assets reflected tax attributes related valuation allowances september 30 2016 millions notes consolidated financial statements continued 13 income taxes continued unrecognized tax benefits reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 324 million 439 million 389 million september 30 2016 2015 2014 respectively accrued interest penalties related unrecognized tax benefits 52 million 51 million september 30 2016 2015 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 01 million 24 million 40 million 2016 2015 2014 respectively expect amount gross unrecognized tax benefits change significantly next 12 months conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2014 longer subject state local nonus income tax examinations years 2003 14 commitments contingent liabilities obligations expected recoveries related environmental remediation costs conditional asset retirement obligations recorded indemnification matters september 30 2016 2015 follows september 30 2016 estimated total reasonably possible costs could incur environmental remediation indemnification liabilities 1336 million 1052 million net related receivables environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect business financial condition results operations notes consolidated financial statements continued 14 commitments contingent liabilities continued designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties environmental remediation cost liabilities related expected recoveries september 30 2016 follows millions 1 includes 516 million related discounted ongoing operating maintenance expenditures based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect business financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise conditional asset retirement obligations related expected recoveries september 30 2016 2015 follows millions significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2016 2015 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations notes consolidated financial statements continued 14 commitments contingent liabilities continued including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability also rights historic insurance policies provide indemnity defense costs selfinsured retentions claims arising certain asbestos liabilities relating divested measurement flow control business initiated litigation several insurers pursue coverage claims subject carriers policy limits case pending los angeles county superior court september 2016 entered settlement agreements certain insurance company defendants exchange lump sum payment lamorak insurance company bought remaining liability released insurance obligations relating measurement flow control business certain underwriters lloyd’s london certain london market insurance companies entered cost share agreement pay portion future defense indemnity costs measurement flow control asbestos claims believe arrangement continue provide partial coverage asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect business financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale notes consolidated financial statements continued 14 commitments contingent liabilities continued indemnification liabilities related expected recoveries september 30 2016 2015 follows millions included certain environmental indemnification liabilities substantially indemnified exxonmobil corporation recorded liability 110 million 260 million related receivable 108 million 247 million september 30 2016 2015 respectively many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products september 30 2016 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact business financial condition results operations however extent valid indemnification claims arise future payments us could significant could material adverse effect business financial condition results operations particular period lease commitments rental expense 1155 million 2016 1170 million 2015 1216 million 2014 september 30 2016 minimum future rental commitments operating leases noncancelable lease terms excess one year payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year significant september 30 2016 leases contain renewal options varying periods certain leases include options purchase leased property notes consolidated financial statements continued 15 business segment information rockwell automation leader industrial automation information makes customers productive world sustainable determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organize products solutions services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting business enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution systems mes information solutions software enables customers improve operational productivity meet regulatory requirements • products including sensors machine safety components linear motion control products control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware information software • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair asset management training predictive preventative maintenance safety network consulting notes consolidated financial statements continued 15 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 2016 2015 2014 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonoperating pension costs certain nonrecurring corporate initiatives gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit following tables summarize identifiable assets september 30 2016 2015 2014 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions notes consolidated financial statements continued 15 business segment information continued identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2648 million 2668 million 2941 million september 30 2016 2015 2014 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 507 million 367 million 562 million 2016 2015 2014 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination countries sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2016 2015 2014 attributable segments approximately 10 percent total sales 16 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented notes consolidated financial statements continued 17 rocky flats settlement 1975 1989 rockwell international corporation ric operated rocky flats facility colorado us department energy doe 1990 class landowners near rocky flats sued ric dow chemical another former operator facility may 2016 parties agreed settle case doe authorized settlement agreement subject court approval dow chemical pay 3750 million aggregate resolve claims ric’s contract doe federal law ric entitled indemnification doe settlement amount ric acquired boeing 1996 agreed indemnify boeing ric’s liabilities related rocky flats received benefits ric’s corresponding indemnity rights doe expect fully reimbursed doe obligation 24375 million settlement either pay amounts due expect pay 2425 million within next 12 months promptly pursue reimbursement doe however uncertain whether government indemnification reimbursement process completed time payment due september 30 2016 liability included within current liabilities consolidated balance sheet indemnification receivable 24375 million september 30 2016 also included within assets consolidated balance sheet report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2016 2015 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2016 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2016 2015 results operations cash flows three years period ended september 30 2016 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 15 2016 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc “rockwell automation” “the company” leader industrial automation information makes customers productive world sustainable basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation information solutions hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products solutions services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit fixed income securities original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit fixed income securities original maturities longer three months time purchase less one year period end investments meeting definition security accounted availableforsale stated fair value investments stated cost approximates fair value receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowance doubtful accounts 249 million september 30 2017 245 million september 30 2016 addition receivables stated net allowance certain customer returns rebates incentives 119 million september 30 2017 79 million september 30 2016 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internaluse software stated cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 296 million 299 million 273 million accrued within accounts payable current liabilities september 30 2017 2016 2015 respectively notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs certain longterm debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3482 million 2017 3193 million 2016 3073 million 2015 include rd expenses cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award amount unearned sharebased compensation costs attributed future services sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2017 07 million shares 2016 22 million shares 2015 14 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued notes consolidated financial statements continued 1 basis presentation accounting policies continued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional recent accounting pronouncements march 2017 fasb issued new standard regarding presentation net periodic pension postretirement benefit costs standard requires service cost component reported income statement line item compensation costs arising services rendered related employees period components net periodic benefit cost required presented separately service cost component either separate line item within another appropriate line item disclosure costs recorded standard also requires service cost component eligible capitalization applicable standard effective us reporting periods starting october 1 2018 currently evaluating impact adoption standard consolidated financial statements related disclosures march 2016 financial accounting standards board fasb issued new standard sharebased compensation requirement effective us later october 1 2017 however elected adopt earlier october 1 2016 standard requires entities record excess income tax benefit deficiency sharebased compensation within income tax provision rather within additional paidin capital change reduced income tax provision 290 million year ended september 30 2017 standard also requires benefit deficiency classified operating cash flow rather financing cash flow requirement record benefit deficiency within income tax provision effective prospective basis elected adopt cash flow presentation requirement prospective basis adoption requirements new standard material impact consolidated financial statements related disclosures february 2016 fasb issued new standard accounting leases requires lessees recognize rightofuse assets lease liabilities leases among changes existing lease accounting guidance new standard also requires additional qualitative quantitative disclosures leasing activities standard effective us reporting periods beginning october 1 2019 currently evaluating impact adoption standard consolidated financial statements related disclosures may 2014 fasb issued new standard revenue recognition related contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep principlesbased approach recognizing revenue underlying principle recognize revenue promised goods services transferred customers amount reflects consideration expected received goods services new standard also require additional qualitative quantitative disclosures contracts customers significant judgments made applying revenue guidance assets recognized costs obtain fulfill contract adopt new standard modified retrospective method first quarter fiscal 2019 cumulative effect initially applying guidance recognized retained earnings adoption date established project plan crossfunctional implementation team adopt new standard process identifying implementing necessary changes accounting policies processes controls systems enable compliance new standard continue evaluate impact adoption standard consolidated financial statements related disclosures notes consolidated financial statements continued 2 goodwill intangible assets changes carrying amount goodwill years ended september 30 2017 2016 millions year ended september 30 2016 recognized goodwill 727 million intangible assets 575 million resulting three acquisitions march 2016 acquired magnemotion inc manufacturer intelligent conveying systems september 2016 acquired automation control products acp provider centralized thin client remote desktop server management software maverick technologies maverick systems integrator assigned full amount goodwill related magnemotion inc acp architecture software segment full amount goodwill related maverick control products solutions segment notes consolidated financial statements continued 2 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 98 million 2017 115 million 2016 94 million 2015 estimated amortization expense 275 million 2018 245 million 2019 214 million 2020 206 million 2021 187 million 2022 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2017 concluded assets impaired 3 inventories consist millions notes consolidated financial statements continued 4 property net property consists millions 5 longterm shortterm debt longterm debt consists millions february 2015 upon issuance notes payable march 2020 notes march 2025 notes entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 1755 percent 2020 notes 2165 percent 2025 notes september 30 2017 aggregate fair value interest rate swap contracts september 30 2017 net unrealized loss 46 million designated swaps fair value hedges individual contracts recorded liabilities consolidated balance sheet corresponding adjustments carrying value underlying debt additional information related interest rate swap contracts included note 9 september 30 2017 2016 total borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed credit facility years ended september 30 2017 2016 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding december 2016 amended financial covenant credit facility previous financial covenant limited debttototalcapital ratio 60 percent replaced minimum ebitdatointerest ratio 30 10 ebitdatointerest ratio defined amendment ratio consolidated ebitda defined amendment preceding four quarters consolidated interest expense period believe new covenant provides us greater financial flexibility separate shortterm unsecured credit facilities approximately 1284 million september 30 2017 available nonus subsidiaries borrowings nonus credit facilities september 30 2017 2016 significant commitment fees compensating balance requirements credit facilities notes consolidated financial statements continued 5 longterm shortterm debt continued shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 3500 million september 30 2017 4486 million september 30 2016 weighted average interest rate commercial paper outstanding 126 percent september 30 2017 057 percent september 30 2016 interest payments 742 million 2017 692 million 2016 608 million 2015 6 current liabilities current liabilities consist millions 7 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable changes product warranty obligations millions 8 investments invest certificates deposit time deposits commercial paper fixed income securities investments meeting us gaap definition security classified availableforsale september 30 2017 2016 unrealized gains losses availableforsale investments included consolidated balance sheet component accumulated comprehensive loss net deferred taxes realized gains losses included net income investments consist millions pretax gross unrealized gains losses availableforsale investments material september 30 2017 pretax gross realized gains losses availableforsale investments material years ended september 30 2017 2016 september 30 2017 10 million outstanding purchases investments recorded accounts payable settle next fiscal year evaluated investments fair value less amortized cost impairment individual security basis september 30 2017 assessment included consideration intent ability hold security credit risks specific security determined declines fair value investments temporary september 30 2017 accordingly recognize impairment charges net income table summarizes contractual maturities investments september 30 2017 millions actual maturities may differ contractual maturities borrowers may right prepay certain obligations classification investments current noncurrent based nature investment reasonably expected realized investments included following line items within consolidated balance sheet millions information regarding fair value investments contained note 9 financial statements 9 derivative instruments fair value measurement use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related impacts cash flow hedges comprehensive income loss included note 10 notes consolidated financial statements continued 9 derivative instruments fair value measurement continued types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2017 us dollarequivalent gross notional amount 7412 million foreign currency forward exchange contracts designated cash flow hedges pretax amount losses gains recorded comprehensive income loss related cash flow hedges would recorded consolidated statement operations designated millions pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 154 million pretax net unrealized losses cash flow hedges september 30 2017 reclassified earnings next 12 months expect net unrealized losses offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2017 gross notional amount 6773 million foreign currency forward exchange contracts designated net investment hedges pretax amount losses gains recorded comprehensive income loss related net investment hedges would recorded consolidated statement operations designated millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued fair value hedges use interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively convert notes fixed rate debt floating rate debt designate contracts fair value hedges hedge changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense impact earnings due ineffective fair value hedges september 30 2017 aggregate notional value interest rate swaps designated fair value hedges 6000 million pretax amount net losses gains recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net gains losses hedged debt instruments periods presented millions derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2017 us dollarequivalent gross notional amount 2249 million foreign currency forward exchange contracts designated hedging instruments pretax amount losses gains forward exchange contracts designated hedging instruments recognized consolidated statement operations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued fair value financial instruments us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability derivative instruments recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2017 2016 2015 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 16434 million september 30 2017 currency pairs buysell comprising significant contract notional values united states dollar usdeuro usdswiss franc usdcanadian dollar swiss franceuro value interest rate swap contracts using market approach based observable market inputs including publicized swap curves fair value derivatives location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued investments recognize availableforsale investments fair value consolidated balance sheet valuation methodologies used investments measured fair value described follows certificates deposit time deposits investments stated cost approximates fair value commercial paper investments stated amortized cost approximates fair value corporate debt securities valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets assetbacked securities valued using discounted cash flow approach maximizes observable inputs current yields benchmark instruments includes adjustments certain risks may observable credit liquidity risks methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date hold level 3 investments transfers levels fair value measurements periods presented fair values investments millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued financial instruments also hold financial instruments consisting cash shortterm debt longterm debt fair values cash shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2017 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2017 108 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2017 outstanding common stock share repurchases recorded accounts payable september 30 2016 53 million outstanding common stock share repurchases recorded accounts payable settle 2017 accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2017 2016 2015 millions notes consolidated financial statements continued 10 shareowners’ equity continued reclassifications accumulated comprehensive loss consolidated statement operations years ended september 30 2017 2016 2015 millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 12 information notes consolidated financial statements continued 11 sharebased compensation 2017 2016 2015 recognized 385 million 405 million 415 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 123 million 129 million 132 million 2017 2016 2015 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2017 total unrecognized compensation cost related sharebased compensation awards 346 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2012 longterm incentives plan amended 2012 plan authorizes us deliver 118 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 56 million shares 2012 plan 02 million shares 2003 directors stock plan remain available future grant payment september 30 2017 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2017 2016 2015 2570 2128 2670 respectively total intrinsic value stock options exercised 1411 million 219 million 461 million 2017 2016 2015 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity year ended september 30 2017 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period summary performance share activity year ended september 30 2017 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2014 awards end threeyear performance period ended september 30 2016 lower target number shares following table summarizes information performance shares vested years ended september 30 2017 2016 2015 threeyear performance period ending september 30 2017 payout 187 percent target number shares maximum 139000 shares delivered payment awards december 2017 notes consolidated financial statements continued 11 sharebased compensation continued pershare fair value performance share awards granted years ended september 30 2017 2016 2015 17437 8764 10370 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2017 2016 2015 13832 10538 11502 respectively total fair value shares vested years ended september 30 2017 2016 2015 76 million 70 million 80 million respectively summary restricted stock restricted stock unit activity year ended september 30 2017 follows also granted approximately 8000 shares unrestricted common stock nonemployee directors year ended september 30 2017 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2017 2016 2015 12968 9879 11143 respectively notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans however made voluntary contribution 2000 million us qualified pension plan 2017 make voluntary contributions us qualified pension plan 2016 2015 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost income millions notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2017 2016 yet recognized net periodic benefit cost follows millions 2017 recognized prior service credits 98 million 64 million net tax net actuarial losses 1552 million 1018 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2016 2018 expect recognize prior service credits 49 million 35 million net tax net actuarial losses 1154 million 752 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2017 accumulated benefit obligation pension plans 42522 million 44291 million september 30 2017 2016 respectively notes consolidated financial statements continued 12 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost included consolidated statement operations period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations included consolidated balance sheet weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 550 2019 us plans change 2018 nonus plans notes consolidated financial statements continued 12 retirement benefits continued determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2017 2016 pension plans directly common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2017 2016 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value nav reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued 12 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 9 information regarding levels fair value hierarchy accordance asc subtopic 82010 certain investments measured fair value using nav equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy line items presented consolidated financial statements guidance subtopic effective us starting fiscal 2017 required adopted retrospective basis accordingly certain investments classified fair value hierarchy prior year presented single fair value outside hierarchy following table presents pension plans’ investments measured fair value september 30 2017 notes consolidated financial statements continued 12 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2016 notes consolidated financial statements continued 12 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2017 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2016 estimated future payments expect contribute 538 million related worldwide pension plans 97 million postretirement benefit plans 2018 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 12 retirement benefits continued postretirement benefits one percentage point change assumed health care cost trend rates would material impact service interest cost components postretirement benefit obligation pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2017 2016 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 415 million 2017 386 million 2016 463 million 2015 13 income expense components income expense millions september 2017 sold w interconnections inc subsidiaries included within control products solutions segment approximately 940 million recorded pretax gain 608 million result divestiture included within income expense consolidated statement operations notes consolidated financial statements continued 14 income taxes selected income tax data millions effective tax rate reconciliation us federal statutory rate effective tax rate operate certain nonus tax jurisdictions governmentsponsored tax incentive programs may extended certain additional requirements met program generates primary benefit expire 2022 tax benefit attributable programs 434 million 033 per diluted share 2017 339 million 026 per diluted share 2016 365 million 027 per diluted share 2015 notes consolidated financial statements continued 14 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities september 30 2017 2016 millions provided us deferred taxes 35260 million undistributed earnings certain nonus subsidiaries since earnings determined indefinitely reinvested outside us thus subject us income taxes foreign withholding taxes practicable estimate amount additional taxes may payable upon distribution earnings believe likely realize deferred tax assets reduction future taxable income deferred tax assets reflected tax attributes related valuation allowances september 30 2017 millions notes consolidated financial statements continued 14 income taxes continued unrecognized tax benefits reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 311 million 324 million 439 million september 30 2017 2016 2015 respectively accrued interest penalties related unrecognized tax benefits 40 million 52 million september 30 2017 2016 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 12 million 01 million 24 million 2017 2016 2015 respectively believe reasonably possible amount gross unrecognized tax benefits could reduced 95 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 44 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2014 longer subject state local nonus income tax examinations years 2003 15 commitments contingent liabilities obligations expected recoveries related environmental remediation costs conditional asset retirement obligations recorded indemnification matters september 30 2017 2016 follows september 30 2017 estimated total reasonably possible costs could incur environmental remediation indemnification liabilities 1213 million 984 million net related receivables environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect business financial condition results operations notes consolidated financial statements continued 15 commitments contingent liabilities continued designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties environmental remediation cost liabilities related expected recoveries september 30 2017 follows millions 1 includes 475 million related discounted ongoing operating maintenance expenditures based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect business financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise conditional asset retirement obligations related expected recoveries september 30 2017 2016 follows millions significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2017 2016 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations notes consolidated financial statements continued 15 commitments contingent liabilities continued including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability also rights historic insurance policies provide indemnity defense costs selfinsured retentions claims arising certain asbestos liabilities relating divested measurement flow control business initiated litigation several insurers pursue coverage claims subject carriers policy limits case pending los angeles county superior court september 2016 entered settlement agreements certain insurance company defendants exchange lump sum payment lamorak insurance company bought remaining liability released insurance obligations relating measurement flow control business certain underwriters lloyd’s london certain london market insurance companies entered cost share agreement pay portion future defense indemnity costs measurement flow control asbestos claims believe arrangement continue provide partial coverage asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect business financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale notes consolidated financial statements continued 15 commitments contingent liabilities continued indemnification liabilities related expected recoveries september 30 2017 2016 follows millions included certain environmental indemnification liabilities substantially indemnified exxonmobil corporation recorded liability 66 million 110 million related receivable 62 million 108 million september 30 2017 2016 respectively many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products september 30 2017 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact business financial condition results operations however extent valid indemnification claims arise future payments us could significant could material adverse effect business financial condition results operations particular period lease commitments rental expense 1151 million 2017 1155 million 2016 1170 million 2015 september 30 2017 minimum future rental commitments operating leases noncancelable lease terms excess one year payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year significant september 30 2017 leases contain renewal options varying periods certain leases include options purchase leased property notes consolidated financial statements continued 16 business segment information rockwell automation leader industrial automation information makes customers productive world sustainable determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organize products solutions services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting business enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution systems mes information solutions software enables customers improve operational productivity meet regulatory requirements • products including sensors machine safety components linear motion control products control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware information software • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair asset management training predictive preventative maintenance safety network consulting notes consolidated financial statements continued 16 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 2017 2016 2015 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices nonoperating pension costs certain nonrecurring corporate initiatives gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit following tables summarize identifiable assets september 30 2017 2016 2015 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions notes consolidated financial statements continued 16 business segment information continued identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2593 million 2648 million 2668 million september 30 2017 2016 2015 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 696 million 507 million 367 million 2017 2016 2015 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination countries sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2017 2016 2015 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 17 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented 18 rocky flats settlement 1975 1989 rockwell international corporation ric operated rocky flats facility colorado us department energy doe 1990 class landowners near rocky flats sued ric dow chemical another former operator facility may 2016 parties agreed settle case doe authorized settlement court approved settlement agreement dow chemical agreed pay 3750 million aggregate resolve claims ric’s contract doe federal law ric entitled indemnification doe portion settlement amount 24375 million ric acquired boeing 1996 agreed indemnify boeing ric’s liabilities related rocky flats received benefits ric’s corresponding indemnity rights doe pursuant settlement agreement fiscal 2016 ric paid initial amount 125 million plaintiff class escrow fund january 2017 doe fulfilled indemnification obligation paying 24375 million full amount rics obligation settlement agreement transferred plaintiff class escrow fund result required make payment settlement agreement report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2017 2016 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2017 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc subsidiaries september 30 2017 2016 results operations cash flows three years period ended september 30 2017 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 15 2017 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc “rockwell automation” “the company” leader industrial automation information makes customers productive world sustainable basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory discount valuation ptc inc ptc common stock sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition recognize revenue realized realizable earned product solution sales consist industrial automation information solutions hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured hardware software products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple hardware software products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional hardware software products solutions services provided accruals reported current liability consolidated balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit fixed income securities original maturities three months less time purchase receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables recorded net allowance doubtful accounts 171 million september 30 2018 249 million september 30 2017 addition receivables recorded net allowance certain customer returns rebates incentives 87 million september 30 2018 119 million september 30 2017 inventories recorded lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values investments include time deposits certificates deposit fixed income securities equity securities investments original maturities longer three months time purchase less one year period end classified shortterm investments classified longterm fixed income securities meeting definition security accounted availableforsale recorded fair value equity securities recorded fair value investments recorded cost approximates fair value property including internaluse software recorded cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 10 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 432 million 296 million 299 million accrued within accounts payable current liabilities september 30 2018 2017 2016 respectively notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs certain longterm debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries notes consolidated financial statements continued 1 basis presentation accounting policies continued fair value financial instruments record various financial instruments recorded fair value us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability hold financial instruments consisting cash shortterm debt fair values cash shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments also hold financial instruments consisting longterm debt investments derivatives valuation methodologies financial instruments described notes 5 8 9 12 financial statements methods described notes may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3718 million 2018 3482 million 2017 3193 million 2016 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award amount unearned sharebased compensation costs attributed future services sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2018 09 million shares 2017 07 million shares 2016 22 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units notes consolidated financial statements continued 1 basis presentation accounting policies continued following table reconciles basic diluted eps amounts millions except per share amounts sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional notes consolidated financial statements continued 1 basis presentation accounting policies continued recently issued accounting pronouncements march 2017 fasb issued new standard regarding presentation net periodic pension postretirement benefit costs standard requires service cost component reported income statement line item compensation costs arising services rendered related employees period components net periodic benefit cost required presented separately service cost component either separate line item within another appropriate line item disclosure costs recorded standard also requires service cost component eligible capitalization applicable standard effective us reporting periods starting october 1 2018 applied retrospectively nonservice components net periodic pension postretirement benefit cost reclassified income expense consolidated statement operations upon adoption new standard expense 238 million 776 million 678 million years ended september 30 2018 2017 2016 respectively february 2016 fasb issued new standard accounting leases requires lessees recognize rightofuse assets lease liabilities leases among changes existing lease accounting guidance new standard also requires additional qualitative quantitative disclosures leasing activities standard effective us reporting periods beginning october 1 2019 currently evaluating impact adoption standard consolidated financial statements related disclosures may 2014 fasb issued new standard revenue recognition related contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep principlesbased approach recognizing revenue underlying principle recognize revenue promised goods services transferred customers amount reflects consideration expected received goods services new standard also require additional qualitative quantitative disclosures contracts customers significant judgments made applying revenueguidance assets recognized costs obtain fulfill contract adopted new revenue standard using modified retrospective transition method results adjustment opening balance retained earnings october 1 2018 adoption date estimated cumulative impact adopting new standard increase opening balance sheet retained earnings less 10 million primary drivers impact changes capitalization deferral certain contract costs timing revenue net costs software licenses bundled services projects previously accounted completed contract basis partially offset deferral revenue net costs related allocation revenue hardware software products services provided customers free charge incentives expect adoption material impact consolidated financial statements including presentation revenues consolidated statement operations notes consolidated financial statements continued 2 goodwill intangible assets changes carrying amount goodwill millions year ended september 30 2018 recognized goodwill 68 million intangible assets 30 million resulting one acquisition november 2017 acquired odos imaging limited odos scottish technology company provides threedimensional timeofflight sensing systems industrial imaging applications acquisition enables us expand existing capabilities bringing 3d timeofflight sensor technology industrial applications assigned full amount goodwill related odos architecture software segment intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 118 million 2018 98 million 2017 115 million 2016 notes consolidated financial statements continued 2 goodwill intangible assets continued estimated amortization expense 254 million 2019 226 million 2020 216 million 2021 189 million 2022 177 million 2023 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2018 concluded assets impaired 3 inventories consist millions 4 property net property consists millions 5 longterm shortterm debt longterm debt consists millions february 2015 upon issuance notes payable march 2020 notes march 2025 notes entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 2759 percent 2020 notes 3169 percent 2025 notes september 30 2018 aggregate fair value interest rate swap contracts september 30 2018 net unrealized loss 240 million designated swaps notes consolidated financial statements continued 5 longterm shortterm debt continued fair value hedges individual contracts recorded liabilities consolidated balance sheet corresponding adjustments carrying value underlying debt additional information related interest rate swap contracts included note 9 september 30 2018 2017 total borrowing capacity unsecured revolving credit facility expiring march 2020 10 billion increase aggregate amount credit facility 3500 million subject consent banks credit facility borrowed credit facility years ended september 30 2018 2017 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding december 2016 amended financial covenant credit facility previous financial covenant limited debttototalcapital ratio 60 percent replaced minimum ebitdatointerest ratio 30 10 ebitdatointerest ratio defined amendment ratio consolidated ebitda defined amendment preceding four quarters consolidated interest expense period believe new covenant provides us greater financial flexibility separate shortterm unsecured credit facilities approximately 1560 million september 30 2018 available nonus subsidiaries borrowings nonus credit facilities september 30 2018 2017 significant commitment fees compensating balance requirements credit facilities shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding 5500 million september 30 2018 3500 million september 30 2017 weighted average interest rate commercial paper outstanding 227 percent september 30 2018 126 percent september 30 2017 interest payments 755 million 2018 742 million 2017 692 million 2016 longterm debt measured fair value following table presents carrying amounts estimated fair values longterm debt measured fair value consolidated balance sheet millions base fair value longterm debt upon quoted market prices similar issues therefore consider level 2 fair value measurement fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges refer note 1 information regarding levels fair value hierarchy 6 current liabilities current liabilities consist millions 7 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable changes product warranty obligations millions 8 investments consist millions record investments fixed income equity securities classified availableforsale investments trading investments fair value availableforsale investments invest certificates deposit time deposits commercial paper fixed income securities classified availableforsale unrealized gains losses availableforsale investments included consolidated balance sheet component accumulated comprehensive loss net deferred taxes realized gains losses included net income availableforsale investments consist millions pretax gross unrealized losses availableforsale investments 27 million september 30 2018 pretax gross realized gains losses availableforsale investments material years ended september 30 2018 2017 september 30 2018 outstanding purchases availableforsale investments recorded accounts payable evaluated availableforsale investments fair value less amortized cost impairment individual security basis september 30 2018 assessment included consideration intent ability hold security notes consolidated financial statements continued 8 investments continued credit risks specific security determined declines fair value investments temporary september 30 2018 accordingly recognize impairment charges net income table summarizes contractual maturities investments september 30 2018 millions actual maturities may differ contractual maturities borrowers may right prepay certain obligations classification availableforsale investments current noncurrent based nature investment reasonably expected realized investments included following line items within consolidated balance sheet millions trading investments july 19 2018 purchased 10582010 shares ptc common stock ptc shares private placement purchase price 9450 per share aggregate purchase price approximately 10 billion purchase ptc shares considered equity securities period approximately 3 years purchase subject entityspecific transfer restrictions subject certain exceptions following first anniversary purchase company allowed transfer aggregate 90day period number shares equal 10 ptcs total outstanding shares common stock first day 90day period 20 ptcs total outstanding shares common stock second year third year purchase ptc shares recorded fair value classified trading securities september 30 2018 fair value ptc shares 10900 million recorded longterm investments consolidated balance sheet year ended september 30 2018 gain 900 million related ptc shares recorded income expense consolidated statement operations september 30 2018 ptc shares valued using recent closing price ptc common stock quoted nasdaq resulting gain 1237 million less temporary discount lack marketability calculated using putoption model resulting loss 337 million marketability discount due instrumentspecific restriction ptc shares issued company private placement currently registered resale securities act 1933 amended however ptc shares contractually required registered ptc securities act 1933 amended within one year time discount reversed fair value investments recognize availableforsale trading investments fair value consolidated balance sheet valuation methodologies used investments measured fair value described certificates deposit time deposits investments recorded cost approximates fair value commercial paper investments recorded amortized cost approximates fair value corporate debt securities valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets assetbacked securities valued using discounted cash flow approach maximizes observable inputs current yields benchmark instruments includes adjustments certain risks may observable credit liquidity risks notes consolidated financial statements continued 8 investments continued equity securities valued using recent closing price ptc common stock quoted nasdaq less temporary discount lack marketability discount lack marketability reverse upon registration ptc shares calculated using putoption model includes observable unobservable inputs categorized level 3 fair value hierarchy primary inputs include historical implied ptc common stock volatility transfer restriction term refer note 1 information regarding levels fair value hierarchy transfers levels fair value measurements periods presented fair values investments millions table sets forth summary changes fair value level 3 investments millions upon purchase ptc shares recorded investment 9549 million investment consisted purchase price approximately 10 billion less loss 451 million includes 719 million valuation adjustment pending registration ptc shares partially offset gain 268 million resulting difference purchase price 9450 per share recent closing price ptc common stock quoted nasdaq purchase date unrealized gain 1351 million includes gain 969 million resulting appreciation ptc shares purchase date end fiscal year 382 million decrease valuation adjustment associated reduction expected term transfer restriction investment 10900 million september 30 2018 includes gain 1237 million investment 337 million valuation adjustment 9 derivative instruments use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related impacts cash flow hedges comprehensive income loss included note 10 notes consolidated financial statements continued 9 derivative instruments continued types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2018 us dollarequivalent gross notional amount 7547 million foreign currency forward exchange contracts designated cash flow hedges pretax amount gains losses recorded comprehensive income loss related cash flow hedges would recorded consolidated statement operations designated millions pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 57 million pretax net unrealized gains cash flow hedges september 30 2018 reclassified earnings next 12 months expect net unrealized gains offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2018 gross notional amount 810 million foreign currency forward exchange contracts designated net investment hedges pretax amount gains losses recorded comprehensive income loss related net investment hedges would recorded consolidated statement operations designated millions notes consolidated financial statements continued 9 derivative instruments continued fair value hedges use interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively convert notes fixed rate debt floating rate debt designate contracts fair value hedges hedge changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense impact earnings due ineffective fair value hedges september 30 2018 aggregate notional value interest rate swaps designated fair value hedges 6000 million pretax amount net losses gains recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net gains losses hedged debt instruments periods presented millions derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2018 us dollarequivalent gross notional amount 1947 million foreign currency forward exchange contracts designated hedging instruments pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations millions fair value derivative instruments recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2018 2017 2016 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 10304 million september 30 2018 currency pairs buysell comprising significant contract notional values united states dollar usdeuro usdcanadian dollar usdsingapore dollar usdswiss franc eurobritish pound usdmexican peso refer note 1 information regarding levels fair value hierarchy value interest rate swap contracts using market approach based observable market inputs including publicized swap curves notes consolidated financial statements continued 9 derivative instruments continued fair value derivatives location consolidated balance sheet millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2018 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2018 96 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2018 183 million outstanding common stock share repurchases recorded accounts payable september 30 2017 outstanding common stock share repurchases recorded accounts payable accumulated comprehensive loss changes accumulated comprehensive loss component years ended september 30 2018 2017 2016 millions notes consolidated financial statements continued 10 shareowners’ equity continued reclassifications accumulated comprehensive loss consolidated statement operations years ended september 30 2018 2017 2016 millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 12 information notes consolidated financial statements continued 11 sharebased compensation 2018 2017 2016 recognized 385 million 385 million 405 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 96 million 123 million 129 million 2018 2017 2016 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2018 total unrecognized compensation cost related sharebased compensation awards 411 million net estimated forfeitures expect recognize weighted average period approximately 18 years 2012 longterm incentives plan amended 2012 plan authorizes us deliver 118 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant payment restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 45 million shares 2012 plan 02 million shares 2003 directors stock plan remain available future grant payment september 30 2018 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2018 2017 2016 3529 2570 2128 respectively total intrinsic value stock options exercised 710 million 1411 million 219 million 2018 2017 2016 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity year ended september 30 2018 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period awards actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period summary performance share activity year ended september 30 2018 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2015 awards end threeyear performance period ended september 30 2017 higher target number shares following table summarizes information performance shares vested years ended september 30 2018 2017 2016 threeyear performance period ending september 30 2018 payout 200 percent target number shares maximum 145000 shares delivered payment awards december 2018 notes consolidated financial statements continued 11 sharebased compensation continued pershare fair value performance share awards granted years ended september 30 2018 2017 2016 21904 17437 8764 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2018 2017 2016 18841 13832 10538 respectively total fair value shares vested years ended september 30 2018 2017 2016 72 million 76 million 70 million respectively summary restricted stock restricted stock unit activity year ended september 30 2018 follows also granted approximately 7000 shares unrestricted common stock nonemployee directors year ended september 30 2018 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2018 2017 2016 18376 12968 9879 respectively notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate defined contribution plans effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans 2018 2017 2016 make voluntary contributions us qualified pension plan 2018 made voluntary contribution 2000 million us qualified pension plan 2017 make voluntary contributions us qualified pension plan 2016 sponsor various defined contribution savings plans allow eligible employees contribute portion income accordance plan specific guidelines contribute savings plans andor match percentage employee contributions certain limits company contributions defined contribution plans based age years service range 3 7 eligible compensation expense related plans 470 million 2018 415 million 2017 386 million 2016 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement net periodic benefit cost components net periodic benefit cost income millions significant assumptions used determining net periodic benefit cost income weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation benefit obligation plan assets funded status net liability information summarized follows millions actuarial gains recorded 2018 primarily result increase discount rate us plans increased 390 2017 435 2018 actuarial gains recorded 2017 primarily result increase discount rate us plans increased 375 2016 390 2017 amounts included accumulated comprehensive loss net tax september 30 2018 2017 yet recognized net periodic benefit cost follows millions 2018 recognized prior service credits 49 million 38 million net tax net actuarial losses 1151 million 843 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2017 notes consolidated financial statements continued 12 retirement benefits continued accumulated benefit obligation pension plans 39623 million 42522 million september 30 2018 2017 respectively information regarding pension plans projected benefit obligations excess fair value plan assets underfunded plans september 30 2018 2017 follows millions information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2018 2017 follows millions significant assumptions used determining benefit obligations weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 550 2020 us plans change 2019 nonus plans estimated future payments expect contribute 320 million related global pension plans 103 million postretirement benefit plans 2019 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 12 retirement benefits continued plan assets determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2018 2017 pension plans directly common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2018 2017 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value nav reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued 12 retirement benefits continued refer note 1 information regarding levels fair value hierarchy accordance asc subtopic 82010 certain investments measured fair value using nav equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy line items presented consolidated financial statements guidance subtopic effective us beginning fiscal 2017 following table presents pension plans’ investments measured fair value september 30 2018 notes consolidated financial statements continued 12 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2017 notes consolidated financial statements continued 12 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2018 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2017 august 2018 fasb issued new standard adds removes modifies various disclosures defined benefit postretirement benefit plans standard effective us reporting periods beginning october 1 2020 however elected adopt standard early september 30 2018 applied changes retrospectively periods presented herein adoption standard material impact disclosures 13 income expense components income expense millions september 2017 sold w interconnections inc subsidiaries included within control products solutions segment approximately 940 million recorded pretax gain 608 million result divestiture included within income expense consolidated statement operations change fair value investments includes gain investments valuation adjustment pending registration ptc shares additional information related investments included note 8 notes consolidated financial statements continued 14 income taxes selected income tax data millions provisional amounts december 22 2017 tax act enacted tax act significantly changes us tax law among things lowering statutory corporate income tax rate implementing modified territorial tax system imposing onetime transition tax accumulated earnings foreign subsidiaries previously deferred us tax transition tax fiscal year taxpayer certain provisions tax act impact us fiscal year 2018 including change federal statutory rate onetime transition tax provisions effective fiscal year 2019 including tax global intangible lowtax income gilti foreign subsidiaries deduction foreign derived intangible income fdii elimination domestic manufacturing deduction base rate reflects change us federal statutory rate 35 percent 21 percent resulting enactment tax act rate change effective us beginning fiscal year using blended rate annual period result blended statutory rate fiscal year 2018 2453 percent december 2017 sec issued staff accounting bulletin 118 sab 118 provides guidance company may recognize provisional estimates related effects tax act final impact tax act may differ provisional estimates result additional analysis provisions tax act interpretation additional guidance issued standardsetting regulatory bodies us treasury department fasb company complete accounting related tax act within oneyear measurement period allowed sab 118 result tax act revalued us deferred tax assets liabilities based rate expected reverse future either 2453 percent reversals 2018 21 percent reversals 2019 subsequent years recorded provisional amount 1044 million year ended september 30 2018 tax act requires transition tax computed based total post1986 earnings profits “ep” december 31 2017 previously deferred us income tax result required make reasonable estimates given september 30 fiscal year recorded provisional expense 3958 million transition tax liability foreign subsidiaries 2018 transition tax applied balance post1986 ep rates 155 percent cash assets defined tax act 8 percent noncash assets measured higher balance september 30 2018 notes consolidated financial statements continued 14 income taxes continued average ending balances september 30 2016 september 30 2017 estimates change result adjustments impacting ep distributions transactions impacting cash tax act company elect pay transition tax interestfree eight years 8 due first five years 15 year six 20 year seven 25 year eight recorded income taxes payable 3894 million consolidated balance sheet 311 million recorded within current liabilities 3583 million recorded within liabilities portion payable greater twelve months september 30 2018 tax act includes provision tax gilti foreign subsidiaries fasb allows companies adopt accounting policy either recognize deferred taxes gilti treat tax cost year incurred due complexity new gilti tax rules company continuing evaluate provision tax act application us gaap gilti provisions effective us beginning october 1 2018 company historically accounted earnings foreign subsidiaries indefinitely reinvested asc 74030 result broad changes us international tax system tax act company begin account substantially nonus subsidiaries immediately subject tax still concluding earnings indefinitely reinvested limited number subsidiaries nonus subsidiaries accounted immediately subject tax recorded deferred tax liabilities 348 million related foreign withholding taxes future distributions historic earnings deferred tax assets 99 million related us foreign tax credits attributable foreign withholding taxes company continues treat permanently invested earnings limited number subsidiaries due mainly local country repatriation restrictions provided deferred taxes undistributed earnings subsidiaries material effective tax rate reconciliation us federal statutory rate effective tax rate operate certain nonus tax jurisdictions governmentsponsored tax incentive programs may extended certain additional requirements met program generates primary benefit expire 2022 tax benefit attributable programs 523 million 041 per diluted share 2018 434 million 033 per diluted share 2017 339 million 026 per diluted share 2016 notes consolidated financial statements continued 14 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions believe likely realize deferred tax assets reduction future taxable income deferred tax assets reflected tax attributes related valuation allowances september 30 2018 millions notes consolidated financial statements continued 14 income taxes continued unrecognized tax benefits reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 201 million 311 million 324 million september 30 2018 2017 2016 respectively accrued interest penalties related unrecognized tax benefits 25 million 40 million september 30 2018 2017 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 15 million 12 million 01 million 2018 2017 2016 respectively believe reasonably possible amount gross unrecognized tax benefits could reduced 60 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 55 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2016 longer subject state local nonus income tax examinations years 2009 15 commitments contingent liabilities obligations expected recoveries related environmental remediation costs conditional asset retirement obligations recorded indemnification matters follows september 30 2018 estimated total reasonably possible costs could incur environmental remediation indemnification liabilities 1080 million 905 million net related receivables environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect business financial condition results operations notes consolidated financial statements continued 15 commitments contingent liabilities continued designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties environmental remediation cost liabilities related expected recoveries follows millions 1 includes 457 million related discounted ongoing operating maintenance expenditures based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect business financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise conditional asset retirement obligations related expected recoveries follows millions significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2018 2017 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations notes consolidated financial statements continued 15 commitments contingent liabilities continued including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability also rights historic insurance policies provide indemnity defense costs selfinsured retentions claims arising certain asbestos liabilities relating divested measurement flow control business following litigation several insurers pursue coverage claims entered separate agreements insurers resulted lump sum payments coverageinplace agreements believe arrangements provide substantial coverage future defense indemnity costs asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect business financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale notes consolidated financial statements continued 15 commitments contingent liabilities continued indemnification liabilities related expected recoveries follows millions included certain environmental indemnification liabilities substantially indemnified exxonmobil corporation recorded liability 47 million 66 million related receivable 45 million 62 million september 30 2018 2017 respectively many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture hardware software products september 30 2018 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact business financial condition results operations however extent valid indemnification claims arise future payments us could significant could material adverse effect business financial condition results operations particular period lease commitments rental expense 1203 million 2018 1151 million 2017 1155 million 2016 september 30 2018 minimum future rental commitments operating leases noncancelable lease terms excess one year payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year significant september 30 2018 leases contain renewal options varying periods certain leases include options purchase leased property notes consolidated financial statements continued 16 business segment information rockwell automation leader industrial automation information makes customers productive world sustainable determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organize hardware software products solutions services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting business enterprise architecture software broad portfolio hardware software products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution systems mes information solutions software enables customers improve operational productivity meet regulatory requirements • products including sensors machine safety components linear motion control products control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair asset management training predictive preventative maintenance safety network consulting notes consolidated financial statements continued 16 business segment information continued following tables reflect sales operating results reportable segments millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes costs related unsolicited emerson proposals first quarter fiscal 2018 interest expense costs related corporate offices nonoperating pension costs certain corporate initiatives gains losses investments valuation adjustment pending registration ptc shares gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit following tables summarize identifiable assets september 30 2018 2017 2016 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions notes consolidated financial statements continued 16 business segment information continued identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2344 million 2593 million 2648 million september 30 2018 2017 2016 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 576 million 696 million 507 million 2018 2017 2016 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination countries sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2018 2017 2016 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 17 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented 18 rocky flats settlement 1975 1989 rockwell international corporation ric operated rocky flats facility colorado us department energy doe 1990 class landowners near rocky flats sued ric dow chemical another former operator facility may 2016 parties agreed settle case doe authorized settlement court approved settlement agreement dow chemical agreed pay 3750 million aggregate resolve claims ric’s contract doe federal law ric entitled indemnification doe portion settlement amount 24375 million ric acquired boeing 1996 agreed indemnify boeing ric’s liabilities related rocky flats received benefits ric’s corresponding indemnity rights doe pursuant settlement agreement fiscal 2016 ric paid initial amount 125 million plaintiff class escrow fund january 2017 doe fulfilled indemnification obligation paying 24375 million full amount rics obligation settlement agreement transferred plaintiff class escrow fund result required make payment settlement agreement report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2018 2017 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2018 related notes schedule listed index item 15 a2 collectively referred financial statements also audited company’s internal control financial reporting september 30 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company september 30 2018 2017 results operations cash flows three years period ended september 30 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting september 30 2018 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp milwaukee wisconsin november 9 2018 served companys auditor since 1967 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts 1 cash dividends 388 per share 2019 351 per share 2018 304 per share 2017 see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc “rockwell automation” “the company” global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory discount valuation ptc inc “ptc” common stock sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition october 1 2018 adopted new standard revenue contracts customers using modified retrospective method applied contracts completed october 1 2018 results reporting periods beginning october 1 2018 presented new standard prior period amounts adjusted continue reported accordance previous standard see note 2 revenue recognition policy new standard policy previous standard follows recognize revenue realized realizable earned product solution sales consist industrial automation information solutions hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured hardware software products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple hardware software products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component service generally shortterm nature arrangements revenue allocated deliverable based element’s relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract notes consolidated financial statements continued method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns presented consolidated balance sheet right return asset refund liability incentives form rebates estimated individual customer level recorded reduction sales accruals incentives form additional hardware software products solutions services accounted increase cost sales may accelerate defer revenue recognition taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit fixed income securities original maturities three months less time purchase receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables recorded net allowance doubtful accounts 174 million september 30 2019 171 million september 30 2018 addition receivables recorded net allowance certain customer returns rebates incentives 124 million september 30 2019 87 million september 30 2018 inventories recorded lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values investments include time deposits certificates deposit fixed income securities equity securities investments original maturities longer three months time purchase less one year period end classified shortterm investments classified longterm fixed income securities meeting definition security accounted availableforsale recorded fair value equity securities recorded fair value investments recorded cost approximates fair value property including internaluse software recorded cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 10 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts notes consolidated financial statements continued payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 264 million 432 million 296 million accrued within accounts payable current liabilities september 30 2019 2018 2017 respectively intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 5 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs certain longterm debt use treasury locks manage potential change interest rates anticipation fixed rate debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities’ functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries notes consolidated financial statements continued fair value financial instruments record various financial instruments recorded fair value us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability hold financial instruments consisting cash shortterm debt fair values cash shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments also hold financial instruments consisting longterm debt investments derivatives valuation methodologies financial instruments described notes 6 9 10 13 methods described notes may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3789 million 2019 3718 million 2018 3482 million 2017 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award amount unearned sharebased compensation costs attributed future services sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2019 18 million shares 2018 09 million shares 2017 07 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units notes consolidated financial statements continued following table reconciles basic diluted eps amounts millions except per share amounts sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional notes consolidated financial statements continued recently adopted accounting pronouncements may 2014 financial accounting standards board fasb issued new standard referred accounting standards codification asc 606 revenue recognition related contracts customers standard supersedes nearly existing revenue recognition guidance involves fivestep principlesbased approach recognizing revenue underlying principle recognize revenue promised goods services transferred customers amount reflects consideration expected received goods services new standard also requires additional qualitative quantitative disclosures contracts customers significant judgments made applying revenue guidance assets recognized costs obtain fulfill contract adopted new revenue standard using modified retrospective transition method resulted adjustment opening balance retained earnings october 1 2018 adoption date information periods prior adoption date restated continues reported accounting standards effect period presented see note 2 additional accounting policies transition disclosures march 2017 fasb issued new standard regarding presentation net periodic pension postretirement benefit cost standard requires service cost component reported income statement line item compensation costs arising services rendered related employees period components net periodic benefit cost required presented separately service cost component either separate line item within another appropriate line item disclosure costs recorded standard also requires service cost component eligible capitalization applicable adopted new standard october 1 2018 applied standard retrospectively result applying pension standard retrospectively following adjustments made consolidated statement operations millions effective october 1 2018 realigned reportable segments transfer business activities segments also reclassified interest income general corporate net interest expense income net result prior period presentation reportable segments restated conform current segment reporting structure changes impact consolidated statement operations see note 17 additional information restatements recently issued accounting pronouncements february 2016 fasb issued new standard accounting leases requires lessees recognize rightofuse assets lease liabilities leases among changes existing lease accounting guidance new standard also requires additional qualitative quantitative disclosures leasing activities adopted new standard using modified retrospective transition method resulted cumulativeeffect adjustment opening balance retained earnings october 1 2019 adoption date cumulative impact adopting new standard expected immaterial estimated amount lease rightofuse assets corresponding lease liabilities expected recorded consolidated balance sheet upon adoption approximately 305 million 335 million implemented necessary changes accounting policies processes controls systems enable compliance new standard february 2018 fasb issued new standard regarding reporting comprehensive loss gives entities option reclassify tax effects tax cuts jobs act 2017 “tax act” stranded accumulated comprehensive loss retained earnings adopted new standard october 1 2019 elected reclassify tax effects approximately 147 million accumulated comprehensive loss retained earnings notes consolidated financial statements continued 2 revenue recognition adoption october 1 2018 adopted new standard revenue contracts customers using modified retrospective method applied contracts completed october 1 2018 results reporting periods beginning october 1 2018 presented new standard prior period amounts adjusted continue reported accordance previous standard result applying modified retrospective method following adjustments made consolidated balance sheet october 1 2018 millions recorded net increase opening retained earnings 61 million october 1 2018 reflects cumulative impact adopting new standard primary drivers impact retained earnings changes capitalization deferral certain contract costs timing revenue net costs software licenses bundled services projects previously accounted completed contract basis impact partially offset deferral revenue net costs related allocation revenue hardware software products services provided customers free charge incentives nature products services substantially revenue contracts customers recognize revenue promised products transferred services performed customers amount reflects consideration expect entitled exchange products services offerings consist industrial automation information products solutions services products include hardware software solutions include engineeredtoorder customengineered systems services include customer technical support repair asset management optimization consulting training also included services portion revenue related spare parts managed within services offering operations comprised architecture software segment control products solutions segment see note 17 information north america sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors performance obligations use executed sales agreements purchase orders determine existence customer contract customer contract determine products services promised customer distinct performance obligations product service distinct following criteria met contract inception customer benefit product service together readily available resources ii promise transfer product notes consolidated financial statements continued perform service separately identifiable promises contract fact regularly sell product service separately indicator customer benefit product service readily available resources objective assessing whether promises transfer products perform services distinct within context contract determine whether nature promise transfer products perform services individually whether promise transfer combined item items promised products services inputs promised product service distinct combine product service promised products services comprises bundle products services distinct may result accounting products services contract single performance obligation performance obligation contract determine whether performance obligation satisfied time performance obligation satisfied time meets following criteria customer simultaneously receives consumes benefits provided performance perform ii performance creates enhances asset customer controls asset created enhanced iii performance create asset alternative use enforceable right payment performance completed date one criteria met recognize revenue time using method depicts performance none criteria met control transfers customer point time recognize revenue point time products represent standard catalog products alternative use therefore recognize revenue point time control product transfers customer majority products control transfers upon shipment though contracts control may transfer upon delivery product revenue also includes revenue software licenses determined distinct performance obligations recognize related revenue point time customer provided right use license producttype contracts generally one year less length offer wide variety solutions services customers recognize revenue time point time based contract well type solution service one three criteria overtime revenue recognition met recognize revenue time cost incurred work performed based time elapsed depending type customer contract none criteria met recognize revenue point time control asset created enhanced transfers customer typically upon delivery half solutions services revenue contracts one year less length certain solutions services offerings right invoice customers amount corresponds performance completed date apply practical expedient measure progress recognize revenue based amount right invoice customer assessing whether alternative use asset consider contractual practical limitations include level cost customization asset required meet customer’s needs ii activities cost profit margin rework would required asset could directed another use iii portion asset could reworked alternative use times provide products services free charge customers incentives customers purchase products services represent distinct performance obligations allocate revenue based relative standalone selling price global warranties assurance nature represent distinct performance obligations see note 8 additional information disclosures occasionally offer extended warranties customers considered distinct performance obligation allocate revenue recognized extended warranty period account shipping handling activities performed control product transferred customer fulfillment cost applied practical expedient accrue costs shipping handling activities revenue recognized contractually agreed shipping handling activities occur unfulfilled performance obligations september 30 2019 expect recognize approximately 485 million revenue future periods unfulfilled performance obligations existing contracts customers expect recognize revenue approximately 310 million remaining performance obligations next 12 months remaining balance recognized thereafter applied practical expedient exclude value remaining performance obligations contracts original term one year less ii contracts recognize revenue proportion amount right invoice services performed amounts also include impact contract renewal options unexercised september 30 2019 notes consolidated financial statements continued transaction price transaction price amount consideration expect entitled exchange transferring products performing services customer estimate transaction price contract inception update estimate reporting period changes circumstances cases contract may involve variable consideration including rebates credits allowances returns similar items generally decrease transaction price use historical experience estimate variable consideration including constraint transaction price including discounts variable consideration allocated separate products services based relative standalone selling prices standalone selling prices determined based prices separately sell good service items sold separately estimate standalone selling price using available information market reference points observable data elected practical expedient exclude sales taxes similar taxes measurement transaction price significant payment terms standard payment terms vary globally result significant delay timing invoice payment occasionally negotiate payment terms contracting process typically include significant financing components contracts customers elected practical expedient adjust transaction price period transfer products performance services customer payment expected one year less products invoice time shipment typically significant contract balances solutions services well products timing may differ revenue recognition billing depending terms agreed customer may invoice advance performance may invoice performance revenue recognition exceeds billing recognize receivable billing exceeds revenue recognition recognize contract liability disaggregation revenue following series tables present revenue disaggregation geographic region types products services also present disaggregation categories two operating segments attribute sales geographic regions based country destination following reflects disaggregation revenues operating segment geographic region millions notes consolidated financial statements continued following reflects disaggregation revenues operating segment major types products services millions contract balances contract liabilities primarily relate consideration received advance performance contract significant contract assets september 30 2019 summary contract liabilities balance significant changes contract liabilities balance twelve months ended september 30 2019 due amounts billed partially offset revenue recognized included contract liabilities balance beginning period twelve months ended september 30 2019 recognized revenue approximately 2480 million included opening contract liabilities balance material amount revenue recognized twelve months ended september 30 2019 performance obligations satisfied partially satisfied previous periods costs obtain fulfill contract capitalize amortize certain incremental costs obtain fulfill contracts costs primarily consist incentives paid sales personnel considered incremental costs obtain customer contracts elected practical expedient expense incremental costs obtain contract duration one year less capitalized contract costs included assets consolidated balance sheet significant impairment loss relation capitalized costs period notes consolidated financial statements continued dual reporting accordance asc 606 disclosure impact adoption consolidated balance sheet follows millions accordance asc 606 disclosure impact adoption consolidated statement operations follows millions accordance asc 606 disclosure impact adoption consolidated statement comprehensive income follows millions notes consolidated financial statements continued accordance asc 606 disclosure impact adoption consolidated statement cash flows follows millions accordance asc 606 disclosure impact adoption consolidated statement shareowners’ equity follows millions 3 goodwill intangible assets changes carrying amount goodwill millions notes consolidated financial statements continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 104 million 2019 118 million 2018 98 million 2017 estimated amortization expense 234 million 2020 226 million 2021 199 million 2022 187 million 2023 168 million 2024 performed annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter 2019 concluded assets impaired 4 inventories consist millions notes consolidated financial statements continued 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions march 2019 issued 1 billion aggregate principal amount longterm notes registered public offering consisted 4250 million 3500 notes due march 2029 “2029 notes” 5750 million 4200 notes due march 2049 “2049 notes” issued discount net proceeds company debt offering 9876 million used net proceeds primarily repay outstanding commercial paper remaining proceeds used general corporate purposes entered treasury locks manage potential change interest rates anticipation issuance 10 billion fixed rate debt march 2019 treasury locks accounted cash flow hedges effective differentials paid treasury locks initially recorded accumulated comprehensive loss net tax effect result changes interest rates treasury locks time entered treasury locks time priced issued 2029 notes 2049 notes company made payment 357 million counterparty march 1 2019 357 million loss settlement treasury locks recorded accumulated comprehensive loss amortized term 2029 notes 2049 notes recognized adjustment interest expense consolidated statement operations february 2015 upon issuance notes payable march 2020 “2020 notes” march 2025 “2025 notes” entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount 2020 notes 2025 notes floating rate debt rate based threemonth libor plus fixed spread effective floating interest rates 2576 percent 2020 notes 2986 percent 2025 notes september 30 2019 aggregate fair value interest rate swap contracts september 30 2019 net unrealized gain 70 million designated swaps fair value hedges individual contracts recorded assets notes consolidated financial statements continued current liabilities consolidated balance sheet corresponding adjustments carrying value underlying debt additional information related interest rate swap contracts included note 10 november 13 2018 replaced former fiveyear 10 billion unsecured revolving credit facility new fiveyear 125 billion unsecured revolving credit facility expiring november 2023 increase aggregate amount credit facility 7500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrow either facility periods ended september 30 2019 2018 borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding credit facility contains covenants agree maintain ebitdatointerest ratio least 30 10 ebitdatointerest ratio defined credit facility ratio consolidated ebitda defined facility preceding four quarters consolidated interest expense period interest payments 975 million 2019 755 million 2018 742 million 2017 longterm debt measured fair value following table presents carrying amounts estimated fair values longterm debt measured fair value consolidated balance sheet millions base fair value longterm debt upon quoted market prices similar issues therefore consider level 2 fair value measurement fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges refer note 1 information regarding levels fair value hierarchy shortterm debt obligations primarily comprised commercial paper borrowings commercial paper borrowings outstanding september 30 2019 commercial paper borrowings 5500 million september 30 2018 weighted average interest rate commercial paper outstanding 227 percent september 30 2018 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable changes product warranty obligations millions 9 investments consist millions record investments fixed income equity securities classified availableforsale investments trading investments fair value availableforsale investments invest certificates deposit time deposits commercial paper fixed income securities classified availableforsale unrealized gains losses availableforsale investments included consolidated balance sheet component accumulated comprehensive loss net deferred taxes realized gains losses included net income availableforsale investments consist millions pretax gross unrealized losses availableforsale investments material september 30 2019 pretax gross realized gains losses availableforsale investments material years ended september 30 2019 2018 september 30 2019 outstanding purchases availableforsale investments recorded accounts payable evaluated availableforsale investments fair value less amortized cost impairment individual security basis september 30 2019 assessment included consideration intent ability hold security notes consolidated financial statements continued credit risks specific security determined declines fair value investments temporary september 30 2019 accordingly recognize impairment charges net income table summarizes contractual maturities investments september 30 2019 millions actual maturities may differ contractual maturities borrowers may right prepay certain obligations classification availableforsale investments current noncurrent based nature investment reasonably expected realized investments included following line items within consolidated balance sheet millions equity securities july 19 2018 purchased 10582010 shares ptc common stock “ptc shares” private placement purchase price 9450 per share aggregate purchase price approximately 10 billion “purchase” ptc shares considered equity securities period approximately 3 years purchase subject entityspecific transfer restrictions subject certain exceptions since first anniversary purchase company ability transfer aggregate 90day period number shares equal 10 ptc’s total outstanding shares common stock first day 90day period 20 ptc’s total outstanding shares common stock second year third year purchase ptc shares recorded fair value september 30 2019 fair value ptc shares 7215 million recorded longterm investments consolidated balance sheet year ended september 30 2019 loss 3685 million related ptc shares recorded income expense consolidated statement operations fiscal 2019 ptc shares registered ptc securities act 1933 amended discount lack marketability reversed fair value investments recognize availableforsale trading investments fair value consolidated balance sheet valuation methodologies used investments measured fair value described certificates deposit time deposits investments recorded cost approximates fair value commercial paper investments recorded amortized cost approximates fair value corporate debt securities valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets assetbacked securities valued using discounted cash flow approach maximizes observable inputs current yields benchmark instruments includes adjustments certain risks may observable credit liquidity risks notes consolidated financial statements continued equity securities prior registration ptc shares valued using recent closing price ptc common stock quoted nasdaq less temporary discount lack marketability discount lack marketability calculated using putoption model included observable unobservable inputs categorized level 3 fair value hierarchy result registration ptc shares reversal discount fiscal 2019 securities valued using recent closing price quoted nasdaq transferred level 3 level 1 refer note 1 information regarding levels fair value hierarchy transfers levels fair value measurements periods presented fair values investments millions table sets forth summary changes fair value level 3 investments millions 10 derivative instruments use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts treasury locks manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related impacts cash flow hedges comprehensive income loss included note 11 types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify notes consolidated financial statements continued gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2019 us dollarequivalent gross notional amount 7740 million foreign currency forward exchange contracts designated cash flow hedges entered treasury locks manage potential change interest rates anticipation issuance 10 billion fixed rate debt march 2019 treasury locks accounted cash flow hedges since hedge risk increase treasury rates forecasted interest payments anticipated fixedrate debt issuance pretax amount gains losses recorded comprehensive income loss related cash flow hedges would recorded consolidated statement operations designated millions pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 157 million pretax net unrealized gains cash flow hedges september 30 2019 reclassified earnings next twelve months expect net unrealized gains offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2019 gross notional amount 1103 million foreign currency forward exchange contracts designated net investment hedges pretax amount losses gains recorded comprehensive income loss related net investment hedges would recorded consolidated statement operations designated millions fair value hedges use interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively convert notes fixed rate debt floating rate debt designate contracts fair value hedges hedge changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense impact earnings due ineffective fair value hedges september 30 2019 aggregate notional value interest rate swaps designated fair value hedges 6000 million notes consolidated financial statements continued pretax amount net gains losses recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net gains losses hedged debt instruments periods presented millions derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2019 us dollarequivalent gross notional amount 3181 million foreign currency forward exchange contracts designated hedging instruments pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations millions fair value derivative instruments recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2019 2018 2017 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 12024 million september 30 2019 currency pairs buysell comprising significant contract notional values eurounited states dollar usd usdcanadian dollar usdswiss franc usdsingapore dollar refer note 1 information regarding levels fair value hierarchy value interest rate swap contracts using market approach based observable market inputs including publicized swap curves notes consolidated financial statements continued fair value derivatives location consolidated balance sheet millions notes consolidated financial statements continued 11 shareowners’ equity common stock september 30 2019 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2019 87 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2019 2018 93 million 183 million outstanding common stock share repurchases recorded accounts payable respectively accumulated comprehensive loss changes accumulated comprehensive loss component millions notes consolidated financial statements continued reclassifications accumulated comprehensive loss consolidated statement operations millions reclassified accumulated comprehensive loss cost sales selling general administrative expenses components included computation net periodic benefit costs see note 13 information notes consolidated financial statements continued 12 sharebased compensation 2019 2018 2017 recognized 431 million 385 million 385 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 69 million 96 million 123 million 2019 2018 2017 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2019 total unrecognized compensation cost related sharebased compensation awards 431 million net estimated forfeitures expect recognize weighted average period approximately 19 years 2012 longterm incentives plan amended “2012 plan” authorizes us deliver 118 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant payment restricted stock units shares relating awards 2012 plan 2008 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 34 million shares 2012 plan 02 million shares 2003 directors stock plan remain available future grant payment september 30 2019 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2019 2018 2017 3246 3529 2570 respectively total intrinsic value stock options exercised 358 million 710 million 1411 million 2019 2018 2017 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued summary stock option activity year ended september 30 2019 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period number shares actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period summary performance share activity year ended september 30 2019 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2016 awards end threeyear performance period ended september 30 2018 higher target number shares following table summarizes information performance shares vested years ended september 30 2019 2018 2017 threeyear performance period ending september 30 2019 payout 77 percent target number shares maximum approximately 28000 shares delivered payment awards december 2019 notes consolidated financial statements continued pershare fair value performance share awards granted years ended september 30 2019 2018 2017 15504 21904 17437 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one four years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average fair value restricted stock restricted stock unit awards granted years ended september 30 2019 2018 2017 17075 18841 13832 respectively total fair value shares vested years ended september 30 2019 2018 2017 78 million 72 million 76 million respectively summary restricted stock restricted stock unit activity year ended september 30 2019 follows also granted approximately 6000 shares unrestricted common stock nonemployee directors year ended september 30 2019 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2019 2018 2017 18239 18376 12968 respectively notes consolidated financial statements continued 13 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate defined contribution plans effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans 2019 2018 2017 make voluntary contributions us qualified pension plan 2019 2018 made voluntary contribution 2000 million us qualified pension plan 2017 sponsor various defined contribution savings plans allow eligible employees contribute portion income accordance plan specific guidelines contribute savings plans andor match percentage employee contributions certain limits company contributions defined contribution plans based age years service range 3 7 eligible compensation expense related plans 531 million 2019 470 million 2018 415 million 2017 postretirement benefits primarily form retirement medical plans cover employees us canada provide payment certain medical costs eligible employees dependents retirement net periodic benefit cost components net periodic benefit cost income millions service cost component included cost sales selling general administrative expenses consolidated statement operations components included income expense consolidated statement operations significant assumptions used determining net periodic benefit cost income weighted averages notes consolidated financial statements continued net benefit obligation benefit obligation plan assets funded status net liability information summarized follows millions actuarial losses recorded 2019 primarily result decrease discount rate us plans decreased 435 2018 330 2019 actuarial gains recorded 2018 primarily result increase discount rate us plans increased 390 2017 435 2018 approximately 76 percent 2019 global projected benefit obligation relates us pension plan amounts included accumulated comprehensive loss net tax yet recognized net periodic benefit cost follows millions 2019 recognized prior service credits 42 million 32 million net tax net actuarial losses 787 million 597 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2018 notes consolidated financial statements continued accumulated benefit obligation pension plans 45488 million 39623 million september 30 2019 2018 respectively information regarding pension plans projected benefit obligations excess fair value plan assets underfunded plans follows millions information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans follows millions significant assumptions used determining benefit obligations weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 500 2021 us plans change 2020 nonus plans estimated future payments expect contribute 322 million related global pension plans 74 million postretirement benefit plans 2020 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued plan assets determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2019 2018 pension plans directly common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2019 2018 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value nav reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently notes consolidated financial statements continued refer note 1 information regarding levels fair value hierarchy accordance asc subtopic 82010 certain investments measured fair value using nav equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy line items presented consolidated financial statements following table presents pension plans’ investments measured fair value september 30 2019 notes consolidated financial statements continued following table presents pension plans’ investments measured fair value september 30 2018 notes consolidated financial statements continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2019 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2018 14 income expense components income expense millions september 2017 sold w interconnections inc subsidiaries included within control products solutions segment approximately 940 million recorded pretax gain 608 million result divestiture included within income expense consolidated statement operations change fair value investments includes gain loss investments valuation adjustments related registration ptc shares additional information related investments included note 9 notes consolidated financial statements continued 15 income taxes selected income tax data millions tax act december 22 2017 tax act enacted tax act significantly changed us tax law among things lowering statutory corporate income tax rate implementing modified territorial tax system imposing onetime transition tax accumulated earnings foreign subsidiaries previously deferred us tax “transition tax” fiscal year taxpayer certain provisions tax act impacted us fiscal year 2018 including change federal statutory rate onetime transition tax provisions became effective fiscal year 2019 including tax global intangible lowtax income “gilti” foreign subsidiaries deduction foreign derived intangible income “fdii” elimination domestic manufacturing deduction fasb allows companies adopt accounting policy either recognize deferred taxes gilti treat cost year incurred company adopted accounting policy treat tax gilti tax cost year incurred base rate reflects change us federal statutory rate 35 percent 21 percent resulting enactment tax act statutory rate fiscal year 2019 21 percent december 2017 sec issued staff accounting bulletin 118 “sab 118” provides guidance company may recognize provisional estimates related effects tax act first quarter fiscal year 2019 company completed analysis impact tax act accordance sab 118 amounts longer considered provisional resulted change provisional amounts recorded fiscal year 2018 related revaluation us deferred tax assets liabilities onetime transition tax liability earnings foreign subsidiaries previously deferred us income tax notes consolidated financial statements continued effective tax rate reconciliation us federal statutory rate effective tax rate fiscal year 2019 recorded valuation allowance deferred tax assets associated loss fair value ptc shares resulted increase effective tax rate 75 corresponding valuation allowance 673 million described table operate certain nonus tax jurisdictions governmentsponsored tax incentive programs may extended certain additional requirements met program generates primary benefit expire 2022 tax benefit attributable programs 551 million 046 per diluted share 2019 523 million 041 per diluted share 2018 434 million 033 per diluted share 2017 notes consolidated financial statements continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions believe likely realize deferred tax assets reduction future taxable income deferred tax assets reflected tax attributes related valuation allowances september 30 2019 millions notes consolidated financial statements continued unrecognized tax benefits reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 199 million 201 million 311 million september 30 2019 2018 2017 respectively accrued interest penalties related unrecognized tax benefits 33 million 25 million september 30 2019 2018 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 08 million 15 million 12 million 2019 2018 2017 respectively believe reasonably possible amount gross unrecognized tax benefits could reduced 185 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 198 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2016 longer subject state local nonus income tax examinations years 2009 16 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect business financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect business financial condition results operations cannot assess possible effect compliance future requirements environmental remediation cost liabilities net related expected recoveries 563 million 522 million september 30 2019 2018 respectively conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate notes consolidated financial statements continued conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2019 2018 conditional asset retirement obligations net related expected recoveries 215 million 216 million september 30 2019 2018 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations following outlines additional background obligations associated asbestos divested businesses intellectual property including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago including products divested businesses agreed defend indemnify claims currently thousand claimants lawsuits name us defendants together hundreds companies cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants additionally maintained insurance coverage includes indemnity defense costs selfinsured retentions many claims believe arrangements provide substantial coverage future defense indemnity costs asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect business financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable believe liabilities material effect business financial condition results operations many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture hardware software products september 30 2019 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact business financial condition results operations however extent valid indemnification claims arise future payments us could significant could material adverse effect business financial condition results operations particular period lease commitments rental expense 1190 million 2019 1203 million 2018 1151 million 2017 september 30 2019 minimum future rental commitments operating leases noncancelable lease terms excess one year payable follows millions notes consolidated financial statements continued commitments third parties sublease agreements noncancelable lease terms excess one year significant september 30 2019 leases contain renewal options varying periods certain leases include options purchase leased property 17 business segment information rockwell automation inc global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organize hardware software products solutions services two operating segments architecture software control products solutions architecture software architecture software operating segment contains comprehensive portfolio automation information platforms including hardware software integrated portfolio capable controlling customers’ industrial processes manufacturing well providing connections enterprise business systems automation platform multidiscipline scalable ability handle applications discrete batchhybrid continuous process drives control motion control machine safety process safety products include programmable automation controllers design visualization simulation software human machine interface products networking products industrial computers sensing devices machine safety devices motion control products independent cart technology products information platform includes manufacturing execution system software analytics software enables customers improve operational productivity meet regulatory requirements platform enables enterprise visibility reduction unplanned downtime optimization processes control products solutions control products solutions operating segment combines comprehensive portfolio intelligent motor control industrial control products valueadded solutions complete portfolio professionally delivered lifecycle services comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters acdc variable frequency drives motor control circuit protection devices operator devices signaling devices termination protection devices relays timers electrical control accessories • valueadded solutions ranging preconfigured line load power solutions packaged drives motor control centers intelligent packaged power engineered order automation equipment solutions • professional lifecycle services combine technology domain expertise help maximize customers’ automation investment provide total lifecycle support design build sustain optimize automation investments broad portfolio includes safety security digital transformation consulting global automation information project delivery capabilities plant network cloud cybersecurity services asset management predictive analytics remote onsite managed support services notes consolidated financial statements continued following tables reflect sales operating results reportable segments millions effective october 1 2018 realigned reportable segments transfer business activities segments also reclassified interest income general corporate net interest expense income net retrospectively applied requirements new pension standard reclassifying nonoperating pension postretirement benefit cost segment operating earnings result prior period presentation reportable segments restated conform current segment reporting structure changes impact consolidated statement operations among considerations evaluate performance allocate resources based upon segment operating earnings income taxes costs related unsolicited emerson proposals first quarter fiscal 2018 interest expense income net costs related corporate offices nonoperating pension postretirement benefit credit cost certain corporate initiatives gains losses investments valuation adjustments related registration ptc shares gains losses disposition businesses purchase accounting depreciation amortization depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued following tables summarize identifiable assets september 30 2019 2018 2017 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2447 million 2344 million 2593 million september 30 2019 2018 2017 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 62 million 576 million 696 million 2019 2018 2017 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination sales north america include 36402 million related us countries sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2019 2018 2017 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 18 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented 19 subsequent event october 1 2019 completed formation joint venture sensia first fully integrated digital oilfield automation solutions provider sensia operates independent entity rockwell automation owning 53 schlumberger owning 47 joint venture part transaction made 250 million payment schlumberger funded cash hand see contractual cash obligations table financial condition mda control sensia october 1 2019 consolidated sensia financial results october 1 2019 rockwell automation record preliminary purchase price allocation assets acquired liabilities assumed connection formation sensia based estimated fair values acquisition date october 1 2019 completed analysis estimating fair value intangible assets acquired specifically customer relationships preliminary purchase price allocation follows millions notes consolidated financial statements continued assign full amount goodwill control products solutions segment goodwill recorded expected deductible tax purposes allocation purchase price identifiable assets based preliminary valuations performed determine fair value net assets acquisition date measurement period valuation net assets acquired ends soon information facts circumstances existed acquisition date becomes available exceed 12 months following acquisition date adjustments purchase price allocations may require change amounts allocated net assets periods adjustments determined fair value noncontrolling interest contributed business upon acquisition 294 million consolidated value sensia recorded fair value schlumberger’s contribution carrying value rockwell automation’s contribution expensed immaterial amount acquisitionrelated costs year ended september 30 2019 pro forma financial information pro forma consolidated sales year ended september 30 2019 approximately 69 billion impact earnings material preceding pro forma consolidated financial results operations 2019 formation sensia occurred october 1 2018 pro forma information presented informational purposes indicative results operations would achieved transaction occurred time report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2019 2018 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2019 related notes schedule listed index item 15 a2 collectively referred “financial statements” also audited company’s internal control financial reporting september 30 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company september 30 2019 2018 results operations cash flows three years period ended september 30 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting september 30 2019 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matter critical audit matter communicated matter arising currentperiod audit financial statements communicated required communicated audit committee 1 relates accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates retirement benefits us pension benefit obligation refer note 13 financial statements critical audit matter description company’s pension benefit obligation actuarially determined annual basis determination pension benefit obligation requires management make significant judgments related selection discount rates changes discount rates could significant impact pension benefit obligation management selected discount rates based upon analysis hypothetical portfolio bonds match expected cash flow pension plans company pension benefit obligation 4907 million september 30 2019 approximately 76 related us pension plans discount rate us pension plans change 25 basis points effect would 141 million change us projected benefit obligation given significance us pension obligation sensitivity change discount rate performing audit procedures evaluate whether management’s judgments regarding selection discount rate us pension plans appropriate required high degree auditor judgment increased extent effort including need involve actuarial specialists critical audit matter addressed audit procedures related selection discount rate us pension plans included following among others • tested effectiveness controls management’s accounting pension obligation including selection discount rate • assistance actuarial specialists evaluated company’s selection discount rate assessing appropriateness bonds included analysis used management evaluating criteria used select bonds testing characteristics investment grade bonds selected testing mathematical accuracy analysis used management recalculation benchmarking analysis used management independent yield curve analysis deloitte touche llp milwaukee wisconsin november 12 2019 served company’s auditor since 1967 item 9item 8 financial statements supplementary data consolidated balance sheet millions except per share amounts see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts 1 cash dividends 408 per share 2020 388 per share 2019 351 per share 2018 see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc “rockwell automation” “the company” global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable basis presentation consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majorityowned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates preparation consolidated financial statements accordance us gaap requires us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions including consolidation intangible assets goodwill impairment product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications leases income taxes account changes estimates assumptions prospectively warranted factuallybased experience revenue recognition october 1 2018 adopted new standard revenue contracts customers using modified retrospective method applied contracts completed october 1 2018 results reporting periods beginning october 1 2018 presented new standard prior period amounts adjusted continue reported accordance previous standard see note 2 revenue recognition policy new standard policy previous standard follows recognize revenue realized realizable earned product solution sales consist industrial automation information solutions hardware software products customengineered systems service sales include multivendor customer technical support repair asset management optimization consulting training service sales recorded consolidated statement operations associated control products solutions segment approximately 85 percent consolidated sales record sales following occurred persuasive evidence sales agreement exists pricing fixed determinable collection reasonably assured hardware software products delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple hardware software products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component service generally shortterm nature arrangements revenue allocated deliverable based element’s relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract methods accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract notes consolidated financial statements continued method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence sales agreement use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional hardware software products solutions services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time revenue recognition based primarily historical experience returns presented consolidated balance sheet right return asset refund liability incentives form rebates estimated individual customer level recorded reduction sales customer incentives additional hardware software products solutions services provided considered distinct performance obligations allocate revenue based relative standalone selling price incentive redeemed revenue recorded contract liability taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit fixed income securities original maturities three months less time purchase receivables record allowance doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables recorded net allowance doubtful accounts 152 million september 30 2020 174 million september 30 2019 addition receivables recorded net allowance certain customer returns rebates incentives 81 million september 30 2020 124 million september 30 2019 inventories recorded lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values investments include time deposits certificates deposit fixed income securities equity securities investments original maturities longer three months time purchase less one year period end classified shortterm investments classified longterm fixed income securities meeting definition security accounted availableforsale recorded fair value equity securities recorded fair value investments recorded cost approximates fair value notes consolidated financial statements continued property including internaluse software recorded cost calculate depreciation property using straightline method 5 40 years buildings improvements 3 20 years machinery equipment 3 10 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts property acquired year accrued within accounts payable current liabilities year end considered noncash investing activity excluded cash used capital expenditures consolidated statement cash flows capital expenditures 272 million 264 million 432 million accrued within accounts payable current liabilities september 30 2020 2019 2018 respectively goodwill intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill perform annual evaluation goodwill indefinite life intangible assets impairment required us gaap second quarter year frequently events circumstances change would likely reduce fair value reporting unit carrying value excess carrying value estimated fair value charged results operations annual evaluation goodwill may perform qualitative test determine whether likely fair value reporting unit less carrying amount order determine whether necessary perform quantitative goodwill impairment test performing quantitative goodwill impairment test determine fair value reporting unit combination income approach derived discounted cash flows market multiples approach using selected comparable public companies significant assumptions used income approach include management’s forecasted cash flows including estimated future revenue growth rates margins discount rate terminal value forecasted future revenue growth margins based management’s best estimate current future conditions discount rates determined using weighted average cost capital adjusted risk factors specific reporting unit level comparison market industry data terminal value estimated following common methodology calculating present value estimated perpetual cash flow beyond last projected period assuming constant discount longterm growth rates significant assumptions used market multiples approach include selection comparable public companies calculation appropriate market multiples amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 3 15 years trademarks 8 20 years customer relationships 2 17 years technology 5 30 years intangible assets intangible assets also include costs software developed purchased software business sold leased otherwise marketed amortization computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product impairment longlived assets evaluate recoverability recorded amount longlived assets including property operating lease rightofuse assets intangible assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage certain foreign currency risks enter contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years also use contracts hedge portions net investments certain nonus subsidiaries effect exchange rate fluctuations translation foreign currency balances us dollar additionally use derivative financial instruments form interest rate swap contracts manage borrowing costs notes consolidated financial statements continued certain longterm debt use treasury locks manage potential change interest rates anticipation fixed rate debt designate account derivative financial instruments hedges us gaap furthermore use foreign currency forward exchange contracts designated hedges offset transaction gains losses associated assets liabilities resulting intercompany loans transactions third parties denominated currencies entities’ functional currencies policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries fair value financial instruments record various financial instruments fair value us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability hold financial instruments consisting cash shortterm debt fair values cash shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments also hold financial instruments consisting longterm debt investments derivatives valuation methodologies financial instruments described notes 7 10 11 14 methods described notes may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 3715 million 2020 3789 million 2019 3718 million 2018 include rd expenses cost sales consolidated statement operations income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize consolidated financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes notes consolidated financial statements continued earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding restricted stock diluted eps amounts based upon weighted average number common commonequivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award amount unearned sharebased compensation costs attributed future services sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2020 16 million shares 2019 18 million shares 2018 09 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered insurance policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued notes consolidated financial statements continued environmental matters record liabilities environmental matters period responsibility probable costs reasonably estimated make changes liabilities periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties determine recovery insurers third parties probable right setoff exists record liability net estimated recovery determine recovery insurers third parties probable right setoff exist record liability total estimated costs remediation receivable estimated recovery environmental sites sole responsible party record liability total estimated costs remediation ongoing operating maintenance expenditures included environmental remediation obligations discounted present value probable future remediation period remaining environmental remediation obligations undiscounted due subjectivity timing andor amount future cash payments conditional asset retirement obligations record liabilities costs related legal obligations associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional leases operating leases primarily real estate vehicles equipment determine contract contains lease contract inception rightofuse rou asset corresponding lease liability recognized commencement contracts contain lease original term greater 12 months rou assets represent right use underlying asset lease term including periods renewal options reasonably certain exercised lease liabilities represent obligation make lease payments arising lease expense recognized straightline basis lease term operating leases original term 12 months less leasing arrangements require variable payments dependent usage may vary reasons payments insurance tax payments portion real estate leases generally subject annual changes based upon index changes based upon index treated variable lease payments variable portion lease payments included rou assets lease liabilities expensed incurred elected separate lease nonlease components contracts underlying asset classes accordingly expenses associated lease contract accounted lease expenses lease liabilities recognized contract commencement date based present value remaining lease payments lease term calculate lease liabilities use incremental borrowing rate determine incremental borrowing rate commencement date using unsecured borrowing rate adjusted collateralization lease term leases denominated currency us dollar collateralized borrowing rate foreign currency determined using us dollar foreign currency swap spread longterm lease liabilities presented operating lease liabilities current lease liabilities included current liabilities consolidated balance sheet rou assets recognized contract commencement date value related lease liability adjusted prepayments lease incentives received initial direct costs incurred operating lease rou assets presented operating lease rightofuse assets consolidated balance sheet lease expenses including amortization rou assets operating leases recognized straightline basis lease term recorded cost sales selling general administrative expenses consolidated statement operations notes consolidated financial statements continued recently adopted accounting pronouncements february 2016 fasb issued new standard accounting leases requires lessees recognize rou assets lease liabilities leases among changes existing lease accounting guidance standard also requires additional qualitative quantitative disclosures leasing activities adopted standard using modified retrospective transition method resulted immaterial cumulativeeffect adjustment opening balance retained earnings october 1 2019 adoption date amount lease rou assets corresponding lease liabilities recorded consolidated balance sheet upon adoption 316 million 329 million respectively implemented necessary changes accounting policies processes controls systems enable compliance standard february 2018 fasb issued new standard regarding reporting comprehensive loss gives entities option reclassify tax effects tax cuts jobs act 2017 “tax act” stranded accumulated comprehensive loss retained earnings adopted standard october 1 2019 elected reclassify tax effects approximately 147 million accumulated comprehensive loss retained earnings recently issued accounting pronouncements expect recently issued accounting pronouncements material impact consolidated financial statements related disclosures 2 revenue recognition adoption october 1 2018 adopted new standard revenue contracts customers using modified retrospective method applied contracts completed october 1 2018 results reporting periods beginning october 1 2018 presented new standard prior period amounts adjusted continue reported accordance previous standard recorded net increase opening retained earnings 61 million october 1 2018 reflects cumulative impact adopting new standard primary drivers impact retained earnings changes capitalization deferral certain contract costs timing revenue net costs software licenses bundled services projects previously accounted completed contract basis impact partially offset deferral revenue net costs related allocation revenue hardware software products services provided customers free charge incentives nature products services substantially revenue contracts customers recognize revenue promised products transferred services performed customers amount reflects consideration expect entitled exchange products services offerings consist industrial automation information products solutions services products include hardware software solutions include engineeredtoorder customengineered systems services include customer technical support repair asset management optimization consulting training also included services portion revenue related spare parts managed within services offering operations comprised architecture software segment control products solutions segment see note 19 information north america sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors performance obligations use executed sales agreements purchase orders determine existence customer contract customer contract determine products services promised customer distinct performance obligations product service distinct following criteria met contract inception customer benefit product service together readily available resources ii promise transfer product perform service separately identifiable promises contract fact regularly sell product service separately indicator customer benefit product service readily available resources notes consolidated financial statements continued objective assessing whether promises transfer products perform services distinct within context contract determine whether nature promise transfer products perform services individually whether promise transfer combined item items promised products services inputs promised product service distinct combine product service promised products services comprises bundle products services distinct may result accounting products services contract single performance obligation performance obligation contract determine whether performance obligation satisfied time performance obligation satisfied time meets following criteria customer simultaneously receives consumes benefits provided performance perform ii performance creates enhances asset customer controls asset created enhanced iii performance create asset alternative use enforceable right payment performance completed date one criteria met recognize revenue time using method depicts performance none criteria met control transfers customer point time recognize revenue point time products represent standard catalog products alternative use therefore recognize revenue point time control product transfers customer majority products control transfers upon shipment though contracts control may transfer upon delivery product revenue also includes revenue software licenses determined distinct performance obligations recognize related revenue point time customer provided right use license producttype contracts generally one year less length offer wide variety solutions services customers recognize revenue time point time based contract well type solution service one three criteria overtime revenue recognition met recognize revenue time cost incurred work performed based time elapsed depending type customer contract none criteria met recognize revenue point time control asset created enhanced transfers customer typically upon delivery half solutions services revenue contracts one year less length certain solutions services offerings right invoice customers amount corresponds performance completed date apply practical expedient measure progress recognize revenue based amount right invoice customer assessing whether alternative use asset consider contractual practical limitations include level cost customization asset required meet customer’s needs ii activities cost profit margin rework would required asset could directed another use iii portion asset could reworked alternative use times provide products services free charge customers incentives customers purchase products services represent distinct performance obligations allocate revenue based relative standalone selling price global warranties assurance nature represent distinct performance obligations see note 9 additional information disclosures occasionally offer extended warranties customers considered distinct performance obligation allocate revenue recognized extended warranty period account shipping handling activities performed control product transferred customer fulfillment cost applied practical expedient accrue costs shipping handling activities revenue recognized contractually agreed shipping handling activities occur unfulfilled performance obligations september 30 2020 expect recognize approximately 540 million revenue future periods unfulfilled performance obligations existing contracts customers expect recognize revenue approximately 280 million remaining performance obligations next 12 months remaining balance recognized thereafter applied practical expedient exclude value remaining performance obligations contracts original term one year less ii contracts recognize revenue proportion amount right invoice services performed amounts also include impact contract renewal options unexercised september 30 2020 notes consolidated financial statements continued transaction price transaction price amount consideration expect entitled exchange transferring products performing services customer estimate transaction price contract inception update estimate reporting period changes circumstances cases contract may involve variable consideration including rebates credits allowances returns similar items generally decrease transaction price use historical experience estimate variable consideration including constraint transaction price including discounts variable consideration allocated separate products services based relative standalone selling prices standalone selling prices determined based prices separately sell good service items sold separately estimate standalone selling price using available information market reference points observable data elected practical expedient exclude sales taxes similar taxes measurement transaction price significant payment terms standard payment terms vary globally result significant delay timing invoice payment occasionally negotiate payment terms contracting process typically include significant financing components contracts customers elected practical expedient adjust transaction price period transfer products performance services customer payment expected one year less products invoice time shipment typically significant contract balances solutions services well products timing may differ revenue recognition billing depending terms agreed customer may invoice advance performance may invoice performance revenue recognition exceeds billing recognize receivable billing exceeds revenue recognition recognize contract liability disaggregation revenue following series tables present revenue disaggregation geographic region types products services also present disaggregation categories two operating segments attribute sales geographic regions based country destination following reflects disaggregation revenues operating segment geographic region millions following reflects disaggregation revenues operating segment major types products services millions notes consolidated financial statements continued contract balances contract liabilities primarily relate consideration received advance performance contract significant contract assets september 30 2020 summary contract liabilities balance significant changes contract liabilities balance twelve months ended september 30 2020 due amounts billed partially offset revenue recognized included contract liabilities balance beginning period twelve months ended september 30 2020 recognized revenue approximately 2169 million included opening contract liabilities balance material amount revenue recognized twelve months ended september 30 2020 performance obligations satisfied partially satisfied previous periods costs obtain fulfill contract capitalize amortize certain incremental costs obtain fulfill contracts costs primarily consist incentives paid sales personnel considered incremental costs obtain customer contracts elected practical expedient expense incremental costs obtain contract duration one year less capitalized contract costs included assets consolidated balance sheet significant impairment loss relation capitalized costs period 3 goodwill intangible assets changes carrying amount goodwill millions notes consolidated financial statements continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 102 million 2020 104 million 2019 118 million 2018 estimated amortization expense 539 million 2021 510 million 2022 497 million 2023 468 million 2024 446 million 2025 2020 annual evaluation performed qualitative test architecture software control products solutions excluding sensia reporting units performed quantitative test sensia reporting unit based evaluations concluded assets impaired also assessed changes events circumstances subsequent annual test including related covid19 pandemic conditions within oil gas industry concluded triggering event would require interim quantitative testing occurred notes consolidated financial statements continued 4 acquisitions sensia joint venture october 1 2019 completed formation joint venture sensia fully integrated digital oilfield automation solutions provider rockwell automation owns 53 sensia schlumberger owns 47 sensia part transaction made 2470 million net cash payments schlumberger funded cash hand control sensia october 1 2019 consolidated sensia financial results part joint venture operations sensia regularly transacts schlumberger primarily relating purchases sales goods services transactions material rockwell automation year ended september 30 2020 recorded assets acquired liabilities assumed connection formation sensia based estimated fair values acquisition date october 1 2019 preliminary purchase price allocation follows millions intangible assets assigned include 2541 million customer relationships technology trade names approximately 11year weighted average useful life assigned full amount goodwill assets acquired control products solutions segment majority goodwill recorded expected deductible tax purposes assets valued using income approach specifically relief royalty method multiperiod excess earnings method relief royalty method calculates value based hypothetical payments would saved owning asset rather licensing multiperiod excess earnings method isolation cash flows single intangible asset measures fair value discounting present value values considered level 3 measurements us gaap fair value hierarchy key assumptions used valuation intangible assets included 1 discount rate 11 2 estimated remaining life technology trademarks 5 15 years 3 customer attrition rate ranging 75 25 fair value noncontrolling interest contributed business upon acquisition 2938 million consolidated value sensia october 1 2019 recorded fair value schlumbergers contribution carrying value rockwell automations contribution total incremental sales resulting sensia joint venture included consolidated results twelve months ended september 30 2020 approximately 1910 million notes consolidated financial statements continued acquisitions october 2019 acquired mestech services mestech global provider manufacturing execution systems manufacturing operations management digital solutions consulting systems integration services assigned full amount goodwill related acquisition control products solutions segment january 2020 acquired avnet data security ltd avnet israelbased cybersecurity provider 20 years experience providing cybersecurity services assigned full amount goodwill related acquisition control products solutions segment april 2020 acquired asem spa asem leading provider digital automation technologies assigned full amount goodwill related acquisition architecture software segment april 2020 also acquired kalypso lp kalypso privatelyheld usbased software delivery consulting firm specializing digital transformation industrial companies strong client base life sciences consumer products industrial hightech assigned full amount goodwill related acquisition control products solutions segment recorded assets acquired liabilities assumed connection acquisitions based estimated fair values respective acquisition dates preliminary aggregate purchase price allocation acquisitions follows millions intangible assets assigned include 765 million customer relationships technology trade names approximately 10year weighted average useful life assigned 1612 million goodwill architecture software segment 833 million goodwill control products solutions segment approximately 690 million goodwill recorded expected deductible tax purposes purchase consideration includes 258 million contingent consideration held escrow account recorded assets restricted cash consolidated balance sheet total sales included consolidated results four acquisitions twelve months ended september 30 2020 approximately 418 million allocation purchase price identifiable assets preceding acquisitions based preliminary valuations performed determine fair value net assets acquisition date measurement period valuation net assets acquired ends soon information facts circumstances existed acquisition dates becomes available exceed 12 months following acquisition date adjustments purchase price allocations may require change amounts allocated net assets acquired periods adjustments determined notes consolidated financial statements continued pro forma consolidated sales year ended september 30 2019 approximately 70 billion impact earnings material preceding pro forma consolidated financial results operations preceding acquisitions occurred october 1 2018 pro forma information presented informational purposes indicative results operations would achieved transaction occurred time acquisitionrelated costs recorded expenses preceding acquisitions year ended september 30 2020 material notes consolidated financial statements continued 5 inventories consist millions 6 property net property consists millions 7 longterm shortterm debt longterm debt consists millions shortterm debt september 30 2020 primarily consisted 235 million interestbearing loans schlumberger sensia originally due september 30 2020 due september 30 2021 shortterm loans schlumberger entered following formation sensia see note 4 additional information sensia april 2020 entered 4000 million senior unsecured 364day term loan credit agreement advanced full loan amount agreement addition existing 125 billion unsecured revolving credit facility expiring november 2023 remains available undrawn interest borrowings based shortterm money market rates effect period borrowings outstanding repaid 4000 million term loan september 2020 notes consolidated financial statements continued february 2015 upon issuance notes payable march 2020 “2020 notes” march 2025 “2025 notes” entered fixedtofloating interest rate swap contracts multiple banks effectively converted 6000 million aggregate principal amount floating rate debt rate based threemonth libor plus fixed spread prior settlement individual contracts recorded assets current liabilities consolidated balance sheet corresponding adjustments carrying value underlying debt march 2020 repaid 2020 notes classified current portion longterm debt september 30 2019 may 2020 settled interest swaps designated fair value hedge 2025 notes received 220 million counterparties 220 million gain settlement interest rate swaps recorded adjustment carrying value 2025 notes amortized remaining term notes adjustment interest expense consolidated statement operations additional information related interest rate swap contracts included note 11 march 2019 issued 1 billion aggregate principal amount longterm notes registered public offering consisted 4250 million 3500 notes due march 2029 “2029 notes” 5750 million 4200 notes due march 2049 “2049 notes” issued discount net proceeds company debt offering 9876 million used net proceeds primarily repay outstanding commercial paper remaining proceeds used general corporate purposes entered treasury locks manage potential change interest rates anticipation issuance 10 billion fixed rate debt march 2019 treasury locks accounted cash flow hedges effective differentials paid treasury locks initially recorded accumulated comprehensive loss net tax effect result changes interest rates treasury locks time entered treasury locks time priced issued 2029 notes 2049 notes company made payment 357 million counterparty march 1 2019 357 million loss settlement treasury locks recorded accumulated comprehensive loss amortized term 2029 notes 2049 notes recognized adjustment interest expense consolidated statement operations november 13 2018 replaced former fiveyear 10 billion unsecured revolving credit facility new fiveyear 125 billion unsecured revolving credit facility expiring november 2023 increase aggregate amount credit facility 7500 million subject consent banks credit facility incur early termination penalties connection termination former credit facility borrow either facility periods ended september 30 2020 2019 borrowings new credit facility bear interest based shortterm money market rates effect period borrowings outstanding credit facility contains covenants agree maintain ebitdatointerest ratio least 30 10 ebitdatointerest ratio defined credit facility ratio consolidated ebitda defined facility preceding four quarters consolidated interest expense period interest payments 1017 million 2020 975 million 2019 755 million 2018 longterm debt recorded fair value following table presents carrying amounts estimated fair values longterm debt recorded fair value consolidated balance sheet millions base fair value longterm debt upon quoted market prices similar issues therefore consider level 2 fair value measurement fair value longterm debt considers terms debt excluding impact derivative hedging activity carrying amount portion longterm debt impacted fixedtofloating interest rate swap contracts designated fair value hedges refer note 1 information regarding levels fair value hierarchy notes consolidated financial statements continued 8 current liabilities current liabilities consist millions 9 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable changes product warranty obligations millions 10 investments consist millions record investments fixed income equity securities classified availableforsale investments trading investments fair value notes consolidated financial statements continued availableforsale investments invest certificates deposit time deposits commercial paper fixed income securities classified availableforsale unrealized gains losses availableforsale investments included consolidated balance sheet component accumulated comprehensive loss net deferred taxes realized gains losses included net income availableforsale investments consist millions pretax gross realized unrealized gains losses availableforsale investments material 2020 2019 classification availableforsale investments current noncurrent based nature investment reasonably expected realized investments included following line items within consolidated balance sheet millions equity securities july 19 2018 purchased 10582010 shares ptc inc “ptc” common stock “ptc shares” private placement purchase price 9450 per share aggregate purchase price approximately 10 billion “purchase” ptc shares considered equity securities period approximately 3 years purchase subject entityspecific transfer restrictions subject certain exceptions since first anniversary purchase company ability transfer aggregate 90day period number ptc shares equal 10 ptc’s total outstanding shares common stock first day 90day period 20 ptc’s total outstanding shares common stock second year third year purchase ptc shares recorded fair value september 30 2020 fair value ptc shares 8753 million recorded longterm investments consolidated balance sheet recorded gain 1539 million loss 3685 million related ptc shares consolidated statement operations years ended september 30 2020 2019 respectively fair value investments recognize availableforsale trading investments fair value consolidated balance sheet valuation methodologies used investments measured fair value described certificates deposit time deposits investments recorded cost approximates fair value commercial paper investments recorded amortized cost approximates fair value corporate debt securities valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets notes consolidated financial statements continued assetbacked securities valued using discounted cash flow approach maximizes observable inputs current yields benchmark instruments includes adjustments certain risks may observable credit liquidity risks equity securities prior registration fiscal 2019 ptc shares valued using recent closing price ptc common stock quoted nasdaq less temporary discount lack marketability discount lack marketability calculated using putoption model included observable unobservable inputs categorized level 3 fair value hierarchy result registration ptc shares reversal discount fiscal 2019 securities valued using recent closing price quoted nasdaq transferred level 3 level 1 refer note 1 information regarding levels fair value hierarchy transfers levels fair value measurements periods presented fair values investments millions 11 derivative instruments use foreign currency forward exchange contracts foreign currency denominated debt obligations manage certain foreign currency risks also use interest rate swap contracts treasury locks manage risks associated interest rate fluctuations following information explains use value types derivative instruments impact consolidated financial statements additional information related impacts cash flow hedges comprehensive income loss included note 12 types derivative instruments hedging activities cash flow hedges enter foreign currency forward exchange contracts hedge exposure foreign currency exchange rate variability expected future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings extent forward exchange contracts designated cash flow hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective cash flow hedges september 30 2020 us dollarequivalent gross notional amount 8557 million foreign currency forward exchange contracts designated cash flow hedges entered treasury locks manage potential change interest rates anticipation issuance 10 billion fixed rate debt march 2019 treasury locks accounted cash flow hedges since hedge risk increase treasury rates forecasted interest payments anticipated fixedrate debt issuance notes consolidated financial statements continued pretax amount gains losses recorded comprehensive income loss related cash flow hedges would recorded consolidated statement operations designated millions pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related gains losses hedged items periods presented millions approximately 76 million pretax net unrealized losses cash flow hedges september 30 2020 reclassified earnings next twelve months expect net unrealized losses offset hedged items recognized earnings net investment hedges use foreign currency forward exchange contracts foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries net investment hedges effect exchange rate fluctuations translation foreign currency balances us dollar instruments designated net investment hedges meet effectiveness requirements net changes value designated hedging instruments recorded accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally extent forward exchange contracts foreign currency denominated debt designated net investment hedges ineffective changes value recorded earnings maturity date impact earnings due ineffective net investment hedges september 30 2020 gross notional amount 1411 million foreign currency forward exchange contracts designated net investment hedges pretax amount losses gains recorded comprehensive income loss related net investment hedges would recorded consolidated statement operations designated millions fair value hedges used interest rate swap contracts manage borrowing costs certain longterm debt february 2015 issued 6000 million aggregate principal amount fixed rate notes upon issuance notes entered fixedtofloating interest rate swap contracts effectively converted notes fixed rate debt floating rate debt designated contracts fair value hedges hedged changes fair value fixed rate notes resulting changes interest rates changes value fair value hedges recorded gains losses interest expense offset losses gains underlying debt instruments also recorded interest expense may 2020 settled outstanding interest rate swaps refer note 7 information regarding settlement interest rate swaps pretax amount net gains losses recognized within consolidated statement operations related derivative instruments designated fair value hedges fully offset related net gains losses hedged debt instruments periods presented millions notes consolidated financial statements continued derivatives designated hedging instruments certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based change fair value derivative financial instruments september 30 2020 us dollarequivalent gross notional amount 7583 million foreign currency forward exchange contracts designated hedging instruments pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations millions fair value derivative instruments recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2020 2019 2018 policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify foreign currency forward exchange contracts among counterparties minimize exposure one entities foreign currency forward exchange contracts usually denominated currencies major industrial countries us dollarequivalent gross notional amount forward exchange contracts totaled 17551 million september 30 2020 currency pairs buysell comprising significant contract notional values eurounited states dollar usd usdmexican peso usdcanadian dollar british poundusd usdswiss franc refer note 1 information regarding levels fair value hierarchy value interest rate swap contracts using market approach based observable market inputs including publicized swap curves fair value derivatives location consolidated balance sheet millions notes consolidated financial statements continued 12 shareowners’ equity common stock september 30 2020 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2020 173 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 30 2020 outstanding common stock share repurchases recorded accounts payable september 30 2019 93 million outstanding common stock share repurchases recorded accounts payable accumulated comprehensive loss changes accumulated comprehensive loss attributable rockwell automation component millions notes consolidated financial statements continued reclassifications accumulated comprehensive loss consolidated statement operations millions 1 components included computation net periodic benefit costs see note 14 information notes consolidated financial statements continued 13 sharebased compensation 2020 2019 2018 recognized 461 million 431 million 385 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 77 million 69 million 96 million 2020 2019 2018 respectively recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2020 total unrecognized compensation cost related sharebased compensation awards 512 million net estimated forfeitures expect recognize weighted average period approximately 19 years 2020 adopted shareowners approved 2020 longterm incentives plan “2020 plan” replaced 2012 longterm incentives plan amended “2012 plan” 2003 directors stock plan amended “directors plan” 2020 plan authorizes us deliver 130 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock directors plan authorized us deliver 05 million shares common stock upon exercise stock options upon grant payment restricted stock units shares relating awards 2012 plan terminate expiration forfeiture cancellation otherwise without issuance delivery shares settled cash lieu shares available awards 2020 plan approximately 129 million shares 2020 plan remain available future grant payment september 30 2020 use treasury stock deliver shares common stock plans 2020 plan permit sharebased compensation awards granted february 4 2030 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash alreadyowned shares common stock combination cash shares stock options expire ten years grant date vest ratably three years pershare weighted average fair value stock options granted years ended september 30 2020 2019 2018 3580 3246 3529 respectively total intrinsic value stock options exercised 1516 million 358 million 710 million 2020 2019 2018 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued summary stock option activity year ended september 30 2020 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance companies sp 500 index threeyear period number shares actually earned range zero percent 200 percent targeted number performance shares threeyear performance periods paid extent earned fiscal quarter following end applicable threeyear performance period summary performance share activity year ended september 30 2020 follows 1 performance shares granted assuming achievement performance goals target 2 adjustments due number shares vested fiscal 2017 awards end threeyear performance period ended september 30 2019 lower target number shares following table summarizes information performance shares vested years ended september 30 2020 2019 2018 threeyear performance period ending september 30 2020 payout 93 percent target number shares maximum approximately 32000 shares delivered payment awards december 2020 notes consolidated financial statements continued pershare fair value performance share awards granted years ended september 30 2020 2019 2018 26504 15504 21904 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock restricted stock units certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions employee restricted stock employee restricted stock units generally lapse periods ranging one five years director restricted stock units generally payable upon retirement value restricted stock restricted stock units closing market value common stock date grant weighted average fair value restricted stock restricted stock unit awards granted years ended september 30 2020 2019 2018 20036 17075 18841 respectively total fair value shares vested years ended september 30 2020 2019 2018 87 million 78 million 72 million respectively summary restricted stock restricted stock unit activity year ended september 30 2020 follows also granted approximately 6900 shares unrestricted common stock nonemployee directors year ended september 30 2020 weighted average grant date fair value unrestricted stock awards granted years ended september 30 2020 2019 2018 17151 18239 18376 respectively notes consolidated financial statements continued 14 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate defined contribution plans effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations required make contributions satisfy minimum funding requirements us pension plans 2020 2019 2018 made voluntary contribution 500 million us qualified pension plan 2020 make voluntary contributions us qualified pension plan 2019 2018 sponsor various defined contribution savings plans allow eligible employees contribute portion income accordance plan specific guidelines contribute savings plans andor match percentage employee contributions certain limits company contributions defined contribution plans based age years service range 3 7 eligible compensation however effective may 2020 november 2020 temporarily suspended 401k matching contribution us employees address thencurrent anticipated economic conditions resulting global covid19 pandemic expense related plans 509 million 2020 531 million 2019 470 million 2018 postretirement benefits primarily form retirement medical plans cover certain employees us canada provide payment certain medical costs eligible employees dependents retirement postretirement benefit plan closed employees hired december 31 2004 net periodic benefit cost components net periodic benefit cost income millions service cost component included cost sales selling general administrative expenses consolidated statement operations components included expense income consolidated statement operations notes consolidated financial statements continued significant assumptions used determining net periodic benefit cost income weighted averages net benefit obligation benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued actuarial losses recorded 2020 primarily result decrease discount rate us plans decreased 330 2019 290 2020 actuarial losses recorded 2019 primarily result decrease discount rate us plans decreased 435 2018 330 2019 approximately 76 percent 2020 global projected benefit obligation relates us pension plan amounts included accumulated comprehensive loss net tax yet recognized net periodic benefit cost follows millions 2020 recognized prior service credits 45 million 35 million net tax net actuarial losses 1487 million 1130 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2019 accumulated benefit obligation pension plans 46381 million 45488 million september 30 2020 2019 respectively information regarding pension plans projected benefit obligations excess fair value plan assets underfunded plans follows millions information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans follows millions significant assumptions used determining benefit obligations weighted averages 1 health care cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross health care cost trend rate decrease 500 2022 us plans change 2021 nonus plans notes consolidated financial statements continued estimated future payments expect contribute 838 million related global pension plans 58 million postretirement benefit plans 2021 following benefit payments include employees’ expected future service applicable expected paid millions plan assets determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2020 2019 pension plans directly common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2020 2019 common stock valued closing price reported active market individual securities traded mutual funds valued net asset value nav reported fund corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks notes consolidated financial statements continued government securities valued recent closing price active market individual securities traded absent active market utilizing observable inputs closing prices less frequently traded markets common collective trusts valued nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment real estate funds consists real estate funds provide indirect investment diversified multisector portfolio property assets publiclytraded real estate funds valued recent closing price reported six swiss exchange remainder valued estimated fair value determined respective fund manager based nav investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported markets individual securities traded may infrequently refer note 1 information regarding levels fair value hierarchy accordance asc subtopic 82010 certain investments measured fair value using nav equivalent practical expedient classified fair value hierarchy fair value amounts presented table intended permit reconciliation fair value hierarchy line items presented consolidated financial statements notes consolidated financial statements continued following table presents pension plans’ investments measured fair value september 30 2020 notes consolidated financial statements continued following table presents pension plans’ investments measured fair value september 30 2019 notes consolidated financial statements continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2020 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2019 15 expense income components expense income millions notes consolidated financial statements continued 16 income taxes selected income tax data millions effective tax rate reconciliation us federal statutory rate effective tax rate fiscal year 2020 reversed portion valuation allowance deferred tax assets associated change fair value ptc shares resulted decrease effective tax rate 27 corresponding valuation allowance 301 million described table operate certain nonus tax jurisdictions governmentsponsored tax incentive programs program generates primary benefit extended conditional upon meeting certain additional requirements 2032 tax benefit attributable programs 591 million 051 per diluted share 2020 551 million 046 per diluted share 2019 523 million 041 per diluted share 2018 notes consolidated financial statements continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions believe likely realize deferred tax assets reduction future taxable income deferred tax assets reflected tax attributes related valuation allowances september 30 2020 millions notes consolidated financial statements continued unrecognized tax benefits reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 255 million 199 million 201 million september 30 2020 2019 2018 respectively accrued interest penalties related unrecognized tax benefits 40 million 33 million september 30 2020 2019 respectively recognize interest penalties related unrecognized tax benefits income tax provision benefits expense recognized 07 million 08 million 15 million 2020 2019 2018 respectively believe reasonably possible amount gross unrecognized tax benefits could reduced 246 million next 12 months result resolution tax matters various global jurisdictions lapses statutes limitations unrecognized tax benefits recognized net reduction income tax provision including recognition interest penalties offsetting tax assets could 268 million conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2016 longer subject state local nonus income tax examinations years 2009 income tax liabilities 2960 million 3272 million related us transition tax act payable greater 12 months september 30 2020 2019 respectively recorded liabilities consolidated balance sheet 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect business financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties addition various lawsuits claims proceedings asserted us seeking remediation alleged environmental impairments principally previously owned properties based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect business financial condition results operations cannot assess possible effect compliance future requirements environmental remediation cost liabilities net related expected recoveries 592 million 563 million september 30 2020 2019 respectively notes consolidated financial statements continued conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimate conditional asset retirement obligations using sitespecific knowledge historical industry expertise significant changes liabilities incurred liabilities settled accretion expense revisions estimated cash flows periods ended september 30 2020 2019 conditional asset retirement obligations net related expected recoveries 228 million 215 million september 30 2020 2019 respectively matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations following outlines additional background obligations associated asbestos divested businesses intellectual property including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago including products divested businesses agreed defend indemnify claims currently thousand claimants lawsuits name us defendants together hundreds companies cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants additionally maintained insurance coverage includes indemnity defense costs selfinsured retentions many claims believe arrangements provide substantial coverage future defense indemnity costs asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect business financial condition results operations time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable believe liabilities material effect business financial condition results operations many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture hardware software products september 30 2020 aware material indemnification claims probable reasonably possible unfavorable outcome historically claims made indemnification agreements material impact business financial condition results operations however extent valid indemnification claims arise future payments us could significant could material adverse effect business financial condition results operations particular period 18 leases operating leases primarily real estate vehicles equipment leases remaining lease terms less one year approximately 17 years material amount finance leases elected package practical expedients permitted transition guidance within new standard accounting leases allows company carry forward historical assessments whether contracts contain leases lease classification initial direct costs also elected record lease rou assets lease liabilities leases original notes consolidated financial statements continued term 12 months less elected use remaining lease term purposes calculating incremental borrowing rate upon transition components lease expense follows millions 1 operating lease expense includes shortterm lease expense material 2 variable lease expense includes sublease income material rental expense accounted previous accounting standard 1190 million 2019 1203 million 2018 supplemental balance sheet information related leases follows millions maturities lease liabilities september 30 2020 follows millions undiscounted maturities operating leases accounted previous accounting standard september 30 2019 follows millions supplemental cash flow information related leases follows millions notes consolidated financial statements continued 19 business segment information rockwell automation inc global leader industrial automation digital transformation connect imaginations people potential technology expand humanly possible making world productive sustainable determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon information organize hardware software products solutions services two operating segments architecture software control products solutions architecture software architecture software operating segment contains comprehensive portfolio automation information platforms including hardware software integrated portfolio capable controlling customers’ industrial processes manufacturing well providing connections enterprise business systems automation platform multidiscipline scalable ability handle applications discrete batchhybrid continuous process drives control motion control machine safety process safety products include programmable automation controllers design visualization simulation software human machine interface products networking products industrial computers sensing devices machine safety devices motion control products independent cart technology products information platform includes manufacturing execution system software analytics software enables customers improve operational productivity meet regulatory requirements platform enables enterprise visibility reduction unplanned downtime optimization processes control products solutions control products solutions operating segment combines comprehensive portfolio intelligent motor control industrial control products valueadded solutions complete portfolio professionally delivered lifecycle services comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters acdc variable frequency drives motor control circuit protection devices operator devices signaling devices termination protection devices relays timers electrical control accessories • valueadded solutions ranging preconfigured line load power solutions packaged drives motor control centers intelligent packaged power engineered order automation equipment solutions • professional lifecycle services combine technology domain expertise help maximize customers’ automation investment provide total lifecycle support design build sustain optimize automation investments broad portfolio includes safety security digital transformation consulting global automation information project delivery capabilities plant network cloud cybersecurity services asset management predictive analytics remote onsite managed support services starting fiscal 2021 three operating segments intelligent devices software control lifecycle services intelligent devices segment includes drives motion safety sensing industrial components configuredtoorder products software control segment includes control visualization software hardware information software network security infrastructure lifecycle services segment includes consulting professional services solutions connected services maintenance services well sensia joint venture notes consolidated financial statements continued following tables reflect sales operating results reportable segments millions among considerations evaluate performance allocate resources based upon segment operating earnings purchase accounting depreciation amortization costs related corporate offices certain corporate initiatives costs related unsolicited emerson proposals first quarter fiscal 2018 nonoperating pension postretirement benefit credit cost gains losses investments valuation adjustments related registration ptc shares interest expense income net income taxes gains losses disposition businesses depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued following tables summarize identifiable assets september 30 2020 2019 2018 provision depreciation amortization amount capital expenditures property years ended reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 2582 million 2447 million 2344 million september 30 2020 2019 2018 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 190 million 62 million 576 million 2020 2019 2018 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination sales north america include 34251 million related us countries sell primarily independent distributors conjunction direct sales force countries sell combination direct sales force lesser extent independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2020 2019 2018 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 20 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented report independent registered public accounting firm shareowners board directors rockwell automation inc milwaukee wisconsin opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets rockwell automation inc subsidiaries “company” september 30 2020 2019 related consolidated statements operations comprehensive income cash flows shareowners’ equity three years period ended september 30 2020 related notes schedule listed index item 15 a2 collectively referred “financial statements” also audited company’s internal control financial reporting september 30 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company september 30 2020 2019 results operations cash flows three years period ended september 30 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting september 30 2020 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 1 consolidated financial statements company changed method accounting leases effective october 1 2019 due adoption accounting standards update asu 201602 leases topic 842 using modified retrospective approach basis opinions company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising currentperiod audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate acquisitions sensia joint venture valuation customer relationship assets refer note 4 financial statements critical audit matter description conjunction sensia joint venture formation company applied acquisition method accounting schlumbergers contributed businesses accordingly purchase price allocated assets acquired liabilities assumed based respective fair values including intangible assets 254 million 189 million related customer relationship assets management estimated fair value customer relationships using income approach specifically multiperiod excess earnings method fair value determination customer relationships required management make significant estimates assumptions related forecasted cash flows attributable existing customers customer attrition rates discount rates attrition rates ranging 75 25 used valuing customer relationship assets change customer attrition rate 250 basis points would result change 40 million intangible assets identified purchase accounting valuation customer relationships critical audit matter due subjective judgment required evaluate significant estimates made determining fair value including need involve fair value specialists performing audit procedures evaluate reasonableness management’s key assumptions estimates related forecasts cash flows attributable existing customers customer attrition rates discount rates critical audit matter addressed audit procedures related fair value customer relationship assets contributed schlumberger sensia included following among others • tested effectiveness controls valuation customer relationship intangible assets including management’s controls development key judgments including forecasts future cash flows customer attrition rates discount rates • assessed reasonableness forecasts future cash flows attributable existing customers comparing projections historical results industry data certain peer companies • assistance fair value specialists evaluated reasonableness 1 valuation methodology 2 customer attrition rates testing mathematical accuracy rate used comparing historical customer attrition data 3 discount rates included testing source information underlying determination discount rates testing mathematical accuracy calculations developing range independent estimates comparing discount rates selected management goodwill valuation sensia reporting unit refer note 3 financial statements critical audit matter description company performed impairment evaluation goodwill sensia reporting unit comparing estimated fair value reporting unit carrying value order estimate fair value reporting unit management required make significant estimates assumptions related discount rate forecasts future revenues earnings interest taxes depreciation amortization “ebitda” margins changes assumptions could significant impact fair value reporting unit amount goodwill impairment charge goodwill balance 1650 million september 30 2020 314 million related sensia reporting unit company tests goodwill impairment second quarter year annual measurement date company determined fair value sensia reporting unit exceeded carrying value therefore impairment recognized identified impairment evaluation goodwill sensia reporting unit critical audit matter inherent subjectivity involved management’s estimates assumptions related discount rate forecasts future revenues ebitda margins audit procedures evaluate reasonableness management’s estimates assumptions related selection discount rate forecasts future revenues ebitda margins required high degree auditor judgment increased extent effort including need involve fair value specialists critical audit matter addressed audit procedures related selection discount rate forecasts future revenues ebitda margins sensia reporting unit included following among others • tested effectiveness controls management’s goodwill impairment evaluation including selection discount rate management’s development forecasts future revenues ebitda margins • evaluated reasonableness management’s forecasts comparing forecasts 1 historical results 2 internal communications management board directors 3 forecasted information included analyst industry reports company peer companies including impact economic factors sensia’s oil gas customers • evaluated impact changes management’s forecasts annual measurement date september 30 2020 • assistance fair value specialists evaluated reasonableness discount rate 1 testing source information underlying determination discount rate 2 testing mathematical accuracy calculations 3 developing range independent estimates comparing discount rate selected management deloitte touche llp milwaukee wisconsin november 10 2020 served company’s auditor since 1967 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates control exercise significant influence accounted using equity method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition product solution revenues consist industrial automation power control information hardware software products customengineered systems service revenues include multivendor customer technical support repair asset management optimization consulting training service revenue recorded results operations associated control products solutions segment approximately 80 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered within category times enter arrangements involve delivery multiple products andor performance services installation commissioning timing delivery though varied based upon nature undelivered component generally shortterm nature arrangements revenue allocated deliverable based elements relative selling price provided delivered element value customers standalone basis arrangement includes general right return delivery performance undelivered items probable substantially control relative selling price obtained sources vendorspecific objective evidence vsoe based separate selling price similar item thirdparty evidence competitors priced similar items evidence available use best estimate selling price includes various internal factors pricing strategy market factors recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase shortterm investments shortterm investments include time deposits certificates deposit original maturities three months one year time purchase investments stated cost approximates fair value receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 280 million september 30 2012 261 million september 30 2011 addition receivables stated net allowance certain customer returns rebates incentives 79 million september 30 2012 80 million september 30 2011 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 10 years machinery equipment 3 8 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 2 10 years trademarks 7 20 years customer relationships 7 17 years technology 2 30 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies accounting method derivative financial instruments based upon designation instruments hedges us gaap policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 2591 million 2012 2544 million 2011 1989 million 2010 include rd expenses cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize financial statements based assertion likely outcome resulting examination including resolution related appeals litigation processes earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2012 23 million shares 2011 21 million shares 2010 49 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize sharebased compensation expense equity awards straightline basis service period award based fair value award grant date product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional reclassifications certain prior year amounts reclassified conform current year presentation recent accounting pronouncements july 2012 financial accounting standards board fasb issued guidance amend simplify rules related testing indefinitelived intangible assets goodwill impairment revised guidance allows entity perform initial qualitative assessment based entity’s events circumstances determine whether likely indefinitelived intangible asset impaired results qualitative assessment determine whether necessary perform quantitative impairment test new guidance effective us beginning october 1 2012 adoption guidance material effect consolidated financial statements related disclosures notes consolidated financial statements continued 2 acquisitions march 2012 acquired certain assets assumed certain liabilities softswitching technologies corporation softswitching industrial power quality detection protection systems provider united states recorded goodwill associated acquisition april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates hiprom process control automation systems integrator mining mineral processing industry south africa may 2011 purchased majority stake equity lektronix limited affiliate lektronix independent industrial automation repairs service provider europe asia purchased remaining minority shares 109 million december 2011 aggregate purchase price hiprom lektronix acquisitions 588 million recorded goodwill 348 million attributable intangible assets meet criteria separate recognition including assembled workforce industrywide technical expertise customer service capabilities assigned full amount goodwill hiprom lektronix control products solutions segment none goodwill recorded expected deductible tax purposes fair values weighted average useful lives assigned acquired identifiable intangible assets acquisitions results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented effects acquisitions material results operations financial position 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2012 2011 millions notes consolidated financial statements continued 3 goodwill intangible assets continued intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 159 million 2012 168 million 2011 136 million 2010 allenbradley® trademark indefinite life therefore subject amortization estimated amortization expense 311 million 2013 327 million 2014 270 million 2015 234 million 2016 194 million 2017 performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2012 concluded assets impaired 4 inventories consist millions notes consolidated financial statements continued 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions september 30 2012 2011 total current borrowing capacity unsecured revolving credit facility expires march 2015 7500 million borrowed credit facility september 30 2012 2011 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2012 2011 separate shortterm unsecured credit facilities approximately 1206 million september 30 2012 available nonus subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities fiscal 2012 2011 significant shortterm debt obligations primarily relate commercial paper borrowings september 30 2012 commercial paper outstanding 1570 million september 30 2012 weighted average interest rate maturity period commercial paper outstanding 027 percent six days respectively september 30 2011 commercial paper borrowings outstanding interest payments 590 million 2012 601 million 2011 594 million 2010 notes consolidated financial statements continued 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet value forward exchange contracts using market approach use valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2012 2011 2010 report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify forward exchange contracts among counterparties minimize exposure one entities forward exchange contracts denominated currencies major industrial countries notional values forward exchange contracts outstanding september 30 2012 9946 million 6146 million designated cash flow hedges currency pairs buy sell comprising significant contract notional value united states dollar usd euro usd canadian dollar swiss franc euro swiss franc usd singapore dollar usd swiss franc canadian dollar also use foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries currency effects debt obligations reflected accumulated comprehensive loss within shareowners’ equity offset gains losses recorded net investments globally 146 million 141 million foreign currency denominated debt designated net investment hedges september 30 2012 2011 respectively us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued pretax amount losses gains recorded comprehensive loss related hedges would recorded consolidated statement operations designated millions approximately 03 million 02 million net tax net unrealized gains cash flow hedges september 30 2012 reclassified earnings next 12 months expect net unrealized losses offset hedged items recognized earnings pretax amount losses gains reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related losses gains hedged items periods presented amount recognized earnings result ineffective hedges significant pretax amount losses gains forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented notes consolidated financial statements continued 9 derivative instruments fair value measurement continued also hold financial instruments consisting cash shortterm investments shortterm debt longterm debt fair values cash shortterm investments shortterm debt approximate carrying amounts reported consolidated balance sheet due shortterm nature instruments base fair value longterm debt upon quoted market prices similar issues following table presents carrying amounts estimated fair values financial instruments measured fair value consolidated balance sheet millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2012 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2012 191 million shares authorized common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2012 repurchased 110000 shares common stock 76 million settle october 2012 september 2011 repurchased 30000 shares common stock 17 million settle october 2011 outstanding purchases recorded accounts payable september 30 2012 2011 accumulated comprehensive loss accumulated comprehensive loss consists millions 11 sharebased compensation 2012 2011 2010 recognized 435 million 395 million 363 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 138 million 2012 129 million 2011 119 million 2010 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2012 total unrecognized compensation cost related sharebased compensation awards 399 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2012 longterm incentives plan 2012 plan authorizes us deliver 68 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2012 plan 2008 longterm incentive plan amended 2000 longterm incentives plan amended terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2012 plan approximately 69 million shares 2012 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2012 use treasury stock deliver shares common stock plans 2012 plan permit sharebased compensation awards granted february 7 2022 notes consolidated financial statements continued 11 sharebased compensation continued stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2012 2011 2010 2349 2139 1359 respectively total intrinsic value stock options exercised 439 million 1573 million 497 million 2012 2011 2010 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options summary stock option activity year ended september 30 2012 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period notes consolidated financial statements continued 11 sharebased compensation continued summary performance share activity year ended september 30 2012 follows maximum potential shares delivered payment fiscal 2012 2011 awards 179144 shares 146220 shares respectively 173 percent payout target number shares awarded fiscal 2010 maximum 232337 shares delivered payment awards december 2012 200 percent 42 percent payouts target number shares awarded fiscal 2009 2008 345432 43767 shares delivered payment awards december 2011 december 2010 respectively per share fair value performance share awards granted years ended september 30 2012 2011 2010 10157 8700 5481 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions restricted stock generally lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2012 2011 2010 7373 6900 4376 respectively total fair value shares vested years ended september 30 2012 2011 2010 62 million 45 million 53 million respectively summary restricted stock restricted stock unit activity year ended september 30 2012 follows notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2012 2011 2010 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost millions notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions amounts included accumulated comprehensive loss net tax september 30 2012 2011 yet recognized net periodic benefit cost follows millions 2012 recognized prior service credits 129 million 82 million net tax net actuarial losses 971 million 625 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2011 2013 expect recognize prior service credits 133 million 84 million net tax net actuarial losses 1495 million 960 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2012 2011 2010 made discretionary pretax contributions 3000 million 1500 million 1500 million respectively us qualified pension plan trust accumulated benefit obligation pension plans 38653 million 32649 million september 30 2012 2011 respectively notes consolidated financial statements continued 12 retirement benefits continued net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages 1 healthcare cost trend rate reflects estimated increase gross medical claims costs result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 550 2017 2 decreasing 450 2017 determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage targeted actual asset allocations september 30 asset category notes consolidated financial statements continued 12 retirement benefits continued investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2012 2011 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2012 2011 common stock valued closing price reported active market individual securities traded mutual funds valued closing price reported active market individual funds traded corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price reported active market individual securities traded common collective trusts valued net asset value nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity alternative equity valued estimated fair value determined respective fund manager based net asset value investment units held year end subject judgment real estate consists direct investment swiss real estate 2011 real estate funds real estate funds provide indirect investment diversified multisector portfolio property assets real estate funds valued recent closing price reported six swiss exchange insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments common collective trusts mix equity fixed income underlying assets fixed income investments valued recent closing price reported active market individual securities traded notes consolidated financial statements continued 12 retirement benefits continued methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 9 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2012 notes consolidated financial statements continued 12 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2011 company corrected classification certain pension plan investments related fair value hierarchy andor investment category year ended september 30 2011 within fair value hierarchy table level 1 increased 153 million level 2 decreased 202 million level 3 increased 49 million also reflected level 3 asset correction table summarizes changes fair market value pension plans level 3 assets notes consolidated financial statements continued 12 retirement benefits continued table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2012 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2011 estimated future payments expect contribute approximately 40 million related worldwide pension plans 16 million postretirement benefit plans 2013 following benefit payments include employees’ expected future service applicable expected paid millions notes consolidated financial statements continued 12 retirement benefits continued postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2012 2011 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 382 million 2012 312 million 2011 233 million 2010 13 discontinued operations 2011 recorded net 07 million benefit settlement indemnification baldor electric company certain tax matters related divested businesses partially offset change estimate environmental matter pertaining discontinued business 2010 recorded 213 million tax benefit result resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors repair services businesses also recorded net 26 million aftertax benefit relating changes estimate environmental legal matters divested businesses 14 expense components expense millions notes consolidated financial statements continued 15 income taxes selected income tax data continuing operations millions 2012 recognized net discrete tax benefits 21 million primarily related favorable resolution worldwide tax matters 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit 2010 recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued 15 income taxes continued operate certain nonus tax jurisdictions various government sponsored tax incentive programs expire 2016 2019 may extended certain additional requirements met tax incentive programs reduced effective income tax rate 43 50 59 percentage points 2012 2011 2010 respectively deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 7159 million september 30 2012 6828 million september 30 2011 total deferred tax liabilities 1244 million september 30 2012 1142 million september 30 2011 provided us deferred taxes 20810 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested outside us practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 15 income taxes continued tax attributes related valuation allowances september 30 2012 millions 2012 material change valuation allowance 2011 valuation allowance increased 61 million primarily due utilization nonus capital loss carryforward unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state nonus jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments reconciliation gross unrecognized tax benefits excluding interest penalties follows millions amount gross unrecognized tax benefits would reduce effective tax rate recognized 703 million 233 million net offsetting tax benefits september 30 2012 751 million 302 million net offsetting tax benefits september 30 2011 575 million 95 million net offsetting tax benefits september 30 2010 offsetting tax benefits primarily consist tax receivables recorded assets foreign tax credit items recorded deferred income taxes 2012 material change amount gross unrecognized tax benefits notes consolidated financial statements continued 15 income taxes continued next 12 months believe reasonably possible amount gross unrecognized tax benefits could reduced 12 million amount offsetting tax benefits could reduced 08 million result resolution worldwide tax matters lapses statutes limitations recognize interest penalties related income taxes income tax expense benefits expense recognized 31 million 97 million 09 million 2012 2011 2010 respectively accrued interest penalties 201 million 169 million september 30 2012 2011 respectively conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2009 longer subject state local nonus income tax examinations years 2003 16 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition results operations designated potentially responsible party 13 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2012 143 million 80 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2012 estimated total reasonably possible costs could incur matters 881 million recorded environmental accruals matters 389 million addition matters certain environmental liabilities substantially indemnified exxonmobil corporation september 30 2012 recorded liability 304 million receivable 291 million matters estimate total reasonably possible costs could incur matters 371 million based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material effect liquidity capital resources competitive position financial condition results operations cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise recorded 34 million current liabilities 224 million liabilities obligations september 30 2012 september 30 2011 recorded liabilities asset retirement obligations 47 million current liabilities 239 million liabilities notes consolidated financial statements continued 16 commitments contingent liabilities continued lease commitments rental expense 1150 million 2012 1115 million 2011 1060 million 2010 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3776 million september 30 2012 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 14 million september 30 2012 receivable 2017 approximately 03 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material effect business financial condition results operations including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases former rockwell international corporations divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material effect financial condition results operations notes consolidated financial statements continued 16 commitments contingent liabilities continued time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 135 million 16 million accrued current liabilities 88 million accrued liabilities september 30 2012 recorded 16 million 101 million current liabilities respectively september 30 2011 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments 17 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system • architecture software products including rotary linear motion control products sensors machine safety components notes consolidated financial statements continued 17 business segment information continued control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers condition sensors • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including technical support repair customized safety solutions asset management training predictive preventative maintenance following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit redefining segment operating earnings fiscal 2013 beginning fiscal 2013 changing definition segment operating earnings also exclude nonoperating pension costs nonoperating pension costs consist defined benefit plan interest cost expected return plan assets amortization actuarial gains losses impacts plan curtailments settlements continue include service cost amortization prior service cost business segment incurred expense notes consolidated financial statements continued 17 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 3180 million 3157 million 2932 million september 30 2012 2011 2010 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 597 million 538 million 391 million 2012 2011 2010 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada certain countries sell products primarily independent distributors remaining countries sell products combination direct sales distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2012 2011 2010 attributable segments approximately 10 percent total sales notes consolidated financial statements continued 18 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented see note 13 information discontinued operations 19 subsequent event october 2012 acquired certain assets medium voltage drives business harbin jiuzhou electric co ltd harbin leading manufacturer medium voltage drives direct current power supplies switch gear wind inverters headquartered harbin china acquisition strengthened presence asiapacific motor control market adding significant capabilities design engineering manufacturing medium voltage drive products preliminary purchase price acquisition 844 million accounting harbin acquisition incomplete time issued financial statements accordingly impracticable us make certain business combination disclosures amount goodwill intangibles acquired amount goodwill expected deductible tax purposes report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2012 2011 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2012 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2012 2011 results operations cash flows three years period ended september 30 2012 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 19 2012 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations march 2006 sold assets electrocraft engineered solutions electrocraft business electrocraft reported discontinued operation consolidated financial statements periods presented january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor electric company baldor principal businesses former power systems operating segment businesses reported discontinued operation consolidated financial statements periods presented principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence control primary beneficiary accounted using equity method accounting accordingly proportional share respective affiliates earnings losses included income consolidated statement operations investments affiliates ability exert significant influence accounted using cost method accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory share based compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition product solution revenues consist industrial automation power control information customengineered hardware software products systems service revenues include multivendor customer technical support repair asset management optimization consulting training approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered notes consolidated financial statements continued 1 basis presentation accounting policies continued recognize revenue software products related services accordance statement position sop 972 software revenue recognition issued american institute certified public accountants recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using either relationship actual costs incurred total estimated costs completion ii unitsofdelivery percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending end user original equipment manufacturer oem customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right setoff exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 174 million september 30 2008 124 million september 30 2007 addition receivables stated net allowance certain customer returns rebates incentives 132 million september 30 2008 81 million september 30 2007 notes consolidated financial statements continued 1 basis presentation accounting policies continued inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware internal use software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill sfas 142 goodwill intangible assets requires goodwill intangible assets indefinite useful lives reviewed impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 7 20 years customer relationships 3 17 years technology 3 10 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed accounted statement financial accounting standard sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts interest rate swap contracts manage foreign currency interest rate risks use foreign currency forward notes consolidated financial statements continued 1 basis presentation accounting policies continued exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies sometimes use interest rate swap contracts manage balance fixed floating rate debt accounting method derivative financial instruments based upon designation instruments hedges accounting principles generally accepted united states policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive income currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 1913 million 2008 1669 million 2007 1485 million 2006 include rd expenses cost sales consolidated statement operations income taxes prior october 1 2007 recorded liability income tax exposures probable amount could reasonably estimated tax benefits related claims also recognized became probable reasonably estimable determining probability estimability liability tax benefit considered relevant tax law applied us particular country state taxing authority beginning october 1 2007 account uncertain tax positions accordance financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes fin 48 determine whether likely tax position sustained upon examination based technical merits position tax positions meet likely recognition threshold measure tax position determine amount benefit recognize financial statements recognize interest penalties related unrecognized tax benefits tax expense earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing net income weighted average number common shares outstanding year diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2008 28 million shares 2007 14 million shares 2006 09 million shares excluded diluted eps calculation notes consolidated financial statements continued 1 basis presentation accounting policies continued following table reconciles basic weighted average outstanding shares diluted weighted average outstanding shares millions weighted average outstanding shares basic weighted average outstanding shares 1465 1587 1766 effect dilutive securities stock options 16 24 32 restricted stock 01 diluted weighted average outstanding shares 1482 1612 1799 sharebased compensation recognize sharebased compensation expense grants sharebased compensation awards generally straightline basis service period award recipient report tax benefit tax deduction related sharebased compensation excess recognized compensation costs excess tax benefits financing cash flow rather operating cash flow required sfas 123r share based payment product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations account conditional asset retirement obligations financial accounting standards board fasb interpretation 47 accounting conditional asset retirement obligations fin 47 accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional notes consolidated financial statements continued 1 basis presentation accounting policies continued recent accounting pronouncements sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r sfas 158 became effective us september 30 2007 sfas 158 requires us recognize asset liability consolidated balance sheet reflecting funded status pension postretirement benefit plans currentyear changes funded status recognized shareowners’ equity sfas 158 change existing criteria measurement periodic benefit costs plan assets benefit obligations additionally sfas 158 require us measure funded status date annual audited consolidated balance sheet september 30 2009 june 2008 fasb issued fasb staff position fsp eitf 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 fsp eitf 0361 specifies unvested sharebased awards contain nonforfeitable rights dividends dividend equivalents participating securities shall included computation earnings per share pursuant twoclass method fsp eitf 0361 effective us beginning 2010 evaluating fsp eitf 0361 determine effect financial statements related disclosures april 2008 fasb issued fsp fas 1423 determination useful life intangible assets fsp fas 1423 fsp fas 1423 intends improve consistency useful life recognized intangible asset sfas 142 goodwill intangible assets period expected cash flows used measure fair value asset sfas 141 revised 2007 business combinations sfas 141r accounting principles generally accepted united states fsp fas 1423 apply us beginning 2010 evaluating fsp fas 1423 determine effect financial statements related disclosures march 2008 fasb issues sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 amends expands disclosures required sfas 133 provide enhanced understanding company uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments affect entity’s financial position financial performance cash flows sfas 161 apply us beginning second quarter 2009 believe sfas 161 material effect financial statements expand disclosures accordance requirements sfas 161 upon adoption march 2008 fasb ratified emerging issues task force eitf issue 083 accounting lessees maintenance deposits lease arrangements eitf 083 eitf 083 requires nonrefundable maintenance deposits accounted deposit expensed capitalized underlying maintenance performed determined amount deposit probable used fund future maintenance recognized expense time determination made eitf 083 effective us beginning 2010 evaluating eitf 083 determine effect financial statements related disclosures december 2007 fasb issued sfas 141r sfas 141r requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date sfas 141r also requires acquirer recognize measure goodwill acquired business combination gain bargain purchase prescribes evaluate nature financial effects business combination also provides guidance accounting preacquisition gain loss contingencies acquisitionrelated transaction costs sfas 141r apply us beginning 2010 evaluating statement determine effect financial statements related disclosures notes consolidated financial statements continued 1 basis presentation accounting policies continued december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment arb 51 sfas 160 sfas 160 amends arb 51 establish accounting reporting standards noncontrolling minority interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary ownership interest consolidated entity reported equity consolidated financial statements establishes single method accounting changes parent’s ownership interest subsidiary result deconsolidation sfas 160 apply us beginning 2010 evaluating statement determine effect financial statements related disclosures june 2007 fasb ratified eitf issue 0611 accounting income tax benefits dividends sharebased payment awards eitf 0611 eitf 0611 specifies companies recognize income tax benefit received dividends paid employees holding equityclassified nonvested shares equityclassified nonvested share units equityclassified outstanding share options b charged retained earnings sfas 123r eitf 0611 effective us beginning 2009 believe eitf 0611 material effect financial statements related disclosures february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits companies choose measure fair value many financial instruments certain items currently required measured fair value sfas 159 effective us beginning 2009 elected fair value option allowed sfas 159 september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements also establishes fair value hierarchy prioritizes information used developing assumptions pricing asset liability sfas 157 apply us beginning fiscal 2009 financial assets liabilities fiscal 2010 nonfinancial assets liabilities believe sfas 157 material effect financial statements financial assets liabilities expand disclosures financial assets liabilities accordance requirements sfas 157 upon adoption evaluating statement determine effect financial statements related disclosures nonfinancial assets liabilities 2 acquisitions divestitures acquisitions 2008 architecture software segment acquired cedes safety automation ag cedes incuity software inc incuity pavilion technologies inc pavilion aggregate purchase price three acquisitions 1129 million cash acquired cedes may 2008 swissbased cedes supplier safety measuring light curtains well safety nonsafety optoelectronics control units related accessories industrial applications also acquired incuity supplier enterprise manufacturing intelligence emi software may 2008 incuity’s software provides realtime intelligence business decision support improve operations reduce production waste providing valuable management insight company’s operations acquired pavilion company recognized leader advanced process control production optimization environmental compliance solutions process hybrid industries november 2007 recorded intangible assets 419 million goodwill 699 million resulting preliminary purchase price allocations cedes incuity pavilion acquisitions pending finalization intangible asset valuations matters preliminary intangible assets assigned include 323 million notes consolidated financial statements continued 2 acquisitions divestitures continued technology 15year weighted average useful life 11 million customer relationships 16year weighted average useful life 85 million intangible assets 9year weighted average useful life assigned full amount goodwill architecture software segment none goodwill recorded expected deductible local tax purposes fiscal 2007 control products solutions segment acquired industrial control services group limited business ics triplex proscon holdings ltd proscon aggregate purchase price two acquisitions approximately 2688 million cash ics triplex headquartered united kingdom acquired july 2007 leading global supplier critical control safety solutions process industries develops delivers maintains advanced products solutions high availability faulttolerant applications process industry segments worldwide serves primarily oil gas chemicals power generation industries proscon process solutions systems integrator headquartered ireland acquired february 2007 areas expertise include process technology control systems information technology serves customers primarily pharmaceutical biotechnology industries recorded intangible assets 1217 million resulting final purchase price allocations ics triplex proscon acquisitions intangible assets assigned include 495 million customer relationships 12year weighted average useful life 283 million technology 10year weighted average useful life 144 million intangible assets 7year weighted average useful life 295 million intangible assets subject amortization related ics triplex™ trademark recorded charge 13 million fourth quarter 2007 inprocess research development cost sales related acquisition ics triplex recognized goodwill 1420 million related transactions none expected deductible local tax purposes assigned full amount goodwill control products solutions segment may 2006 architecture software segment acquired gepa mbh provider change management software industrial automation process control industrial information technology january 2006 control products solutions segment acquired caribbean integration engineers inc cie offers engineering services control systems integration process automation computer system validation solutions architecture software segment also acquired datasweep inc provider production management software december 2005 2006 connection purchase price allocations datasweep inc cie gepa mbh recorded intangible assets 223 million 108 million assigned technology 41 million assigned customer relationships remainder classified intangible assets results operations acquired businesses included condensed consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented individual effects acquisitions material results operations financial position divestitures january 31 2007 divested dodge mechanical reliance electric motors motor repair services businesses baldor principal businesses former power systems operating segment see note 13 information notes consolidated financial statements continued 2 acquisitions divestitures continued september 2006 rockwell collins inc rockwell collins sold investment rockwell scientific company llc rsc aggregate 1675 million cash sale rockwell collins owned 50 percent rsc part transaction among things retained certain licenses intellectual property owned rsc additionally incurred expenses funded certain rsc cash balances connection sale obligated pay rsc 28 million 2007 obligated pay rsc 12 million 2009 recorded gain sale 199 million 120 million tax 007 per share 2006 march 2006 architecture software segment sold assets electrocraft engineered solutions business see note 13 information 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2007 2008 millions notes consolidated financial statements continued 3 goodwill intangible assets continued computer software products represent costs computer software sold leased otherwise marketed accounted sfas 86 computer software products amortization expense 145 million 2008 97 million 2007 118 million 2006 allenbradley® ics triplex™ trademarks indefinite life therefore subject amortization estimated amortization expense 338 million 2009 276 million 2010 247 million 2011 213 million 2012 146 million 2013 performed annual evaluation goodwill indefinite life intangible assets impairment required sfas 142 goodwill intangible assets second quarter 2008 concluded impairments exist 4 inventories consist millions report inventories net allowance excess obsolete inventory 397 million september 30 2008 363 million september 30 2007 notes consolidated financial statements continued 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions december 2007 issued aggregate 500 million principal amount 565 notes due 2017 625 debentures due 2037 debt offering yielded approximately 4935 million proceeds used repay maturity 615 notes due january 15 2008 general corporate purposes issued aggregate 800 million principal amount 615 notes 670 debentures 520 debentures january 1998 debt offering yielded approximately 7500 million proceeds issued 520 debentures discount 615 notes 670 debentures par september 2002 entered interest rate swap contract swap effectively converted 3500 million aggregate principal amount 615 notes payable 2008 floating rate debt based sixmonth libor floating rate 780 percent september 30 2007 permitted sfas 133 accounting derivative instruments hedging activities sfas 133 amended designated swap fair value hedge accordingly fair value swap recorded liabilities consolidated balance sheet corresponding adjustment carrying value underlying debt september 30 2007 fair value swap based upon quoted market prices contracts similar maturities liability 18 million september 30 2007 swap matured january 15 2008 notes consolidated financial statements continued 6 longterm shortterm debt continued october 26 2004 entered fiveyear 6000 million unsecured revolving credit facility 6000 million credit facility remains effect drawn september 30 2008 2007 borrowings credit facility bear interest based shortterm money market rates effect period borrowings outstanding terms credit facility contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facility september 30 2008 2007 addition 6000 million credit facility shortterm unsecured credit facilities approximately 1677 million september 30 2008 available foreign subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities 2008 2007 significant shortterm debt obligations primarily relate commercial paper borrowings commercial paper borrowings outstanding 1000 million september 30 2008 1730 million september 30 2007 september 30 2008 weighted average interest rate maturity period commercial paper outstanding 225 percent six days respectively september 30 2007 weighted average interest rate maturity period commercial paper outstanding 51 percent three days respectively interest payments 634 million 2008 643 million 2007 586 million 2006 7 current liabilities current liabilities consist millions notes consolidated financial statements continued 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation enduser oem customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions 9 financial instruments financial instruments include longterm debt foreign currency forward exchange contracts interest rate swap matured january 15 2008 following summary carrying value fair value financial instruments millions base fair value longterm debt upon quoted market prices similar issues base fair value foreign currency forward exchange contracts quoted market prices contracts similar maturities foreign currency forward exchange contracts provide purchase sale foreign currencies specified future dates specified exchange rates september 30 2008 2007 outstanding foreign currency forward exchange contracts primarily consisting contracts relating swiss franc euro british pound sterling canadian dollar singapore dollar foreign currency forward exchange contracts recorded current assets amounts 61 million september 30 2008 52 million september 30 2007 assets amount 51 million september 30 2008 current liabilities amounts 162 million september 30 2008 382 million september 30 2007 liabilities amount 84 million september 30 2008 designated certain foreign currency forward exchange contracts related certain forecasted thirdparty sales intercompany transactions cash flow hedges amount recognized earnings result ineffectiveness cash flow hedges significant also hold financial instruments consisting cash accounts receivable accounts payable shortterm debt carrying value assets liabilities reported consolidated balance sheet approximate fair value notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2008 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value september 30 2008 181 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2008 repurchased 01 million shares common stock 35 million settle october 2008 september 2007 repurchased 01 million shares common stock 75 million settle october 2007 outstanding purchases recorded accounts payable september 30 2008 2007 accumulated comprehensive loss accumulated comprehensive loss consists millions unrealized losses cash flow hedges 257 million 158 million tax 64 million 39 million tax 2008 2007 respectively reclassified earnings offset gains hedged items approximately 137 million 84 million tax net unrealized losses cash flow hedges september 30 2008 reclassified earnings 2009 expect unrealized losses offset hedged items recognized earnings unrealized gains investment securities september 30 2007 includes 25 million unrealized income net tax related remaining investment baldor common stock acquired sale principal businesses former power systems operating segment investment recorded current assets availableforsale security fair value 340 million september 30 2007 sold remaining baldor common stock 2008 connection recognized pretax gain 62 million notes consolidated financial statements continued 11 sharebased compensation 2008 2007 2006 recognized 325 million 290 million 256 million sharebased compensation expense income continuing operations respectively total income tax benefit related sharebased compensation recorded continuing operations 110 million 2008 102 million 2007 88 million 2006 recognize compensation expense grants sharebased compensation awards generally straightline basis service period award recipient september 30 2008 total unrecognized compensation cost related sharebased compensation awards 326 million net estimated forfeitures expect recognize weighted average period approximately 18 years 2008 longterm incentives plan 2008 plan authorizes us deliver 72 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2008 plan 2000 longterm incentives plan terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2008 plan approximately 73 million shares 2008 plan 04 million shares 2003 directors stock plan remain available future grant payment september 30 2008 september 30 2008 02 million potential shares delivered performance share awards forfeited 2000 plan available future awards 2008 plan use treasury stock deliver shares common stock plans 2008 plan permit sharebased compensation awards granted february 6 2018 stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2008 2007 2006 1757 2002 1767 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based fiveyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using weighted average daily historical volatility stock price past five years determined expected term stock options using historical data adjusted estimated exercise dates unexercised options notes consolidated financial statements continued 11 sharebased compensation continued summary stock option activity years ended september 30 2008 2007 2006 table presents stock option activity years ended september 30 2008 2007 2006 millions notes consolidated financial statements continued 11 sharebased compensation continued performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period summary performance share activity years ended september 30 2008 2007 2006 follows maximum potential shares delivered payment 2008 2007 awards 227800 shares 169442 shares respectively payment 2006 awards total shareowner return comparison sp 500 adequate issuance common stock terms awards per share fair value performance share awards granted year ended september 30 2008 2007 2006 7032 7224 6324 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatilities using daily historical volatility period december 2004 december 2007 2008 award november 2003 november 2006 2007 award november 2002 november 2005 2006 award notes consolidated financial statements continued 11 sharebased compensation continued restricted stock restricted stock units grant restricted stock certain employees previously granted restricted stock nonemployee directors beginning 2008 nonemployee directors may elect receive portion compensation restricted stock units restrictions lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant summary restricted stock restricted stock unit activity years ended september 30 2008 2007 2006 follows notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2007 2006 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement components net periodic benefit cost income continuing operations millions excluded net periodic benefit cost table included income discontinued operations consolidated statement operations pretax pension benefit cost 38 million 120 million pretax postretirement benefit cost 48 million 167 million years ended september 30 2007 2006 respectively also 2007 recognized pension curtailment loss 04 million postretirement benefits curtailment gain 451 million additional postretirement benefits settlement gain 110 million costs loss gains related dodge mechanical reliance electric motors motor repair services businesses sale thereof reflected income discontinued operations consolidated statement operations connection sale dodge mechanical reliance electric motors motor repair services businesses retained pension liability related eligible power systems participants us plan canada salary plan postretirement benefit liability eligible us nonunion canada salary retirees date sale result ongoing net periodic benefit cost us pension liabilities canada hourly plan mexico dodge plan well postretirement liabilities including us union active retiree participants transferred sale businesses notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued amounts included accumulated comprehensive loss net tax september 30 2008 2007 yet recognized net periodic benefit cost follows millions 2008 recognized prior service credits 192 million 119 million net tax net actuarial losses 309 million 189 million net tax net transition obligation 04 million 03 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2007 expect recognize prior service credits 151 million 93 million net tax net actuarial losses 267 million 170 million net tax net transition obligation 04 million 03 million net tax pension postretirement net periodic benefit cost 2009 included accumulated comprehensive loss september 30 2008 2007 2006 voluntarily contributed 80 million 4500 million respectively us qualified pension plan trust accumulated benefit obligation pension plans 23167 million 2008 measurement date 23164 million 2007 measurement date use actuarial measurement date june 30 measure benefit obligations plan assets calculate net periodic benefit cost pension postretirement benefits net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages 1 healthcare cost trend rate reflects estimated increase gross medical claims costs required disclosed sfas 132 employers’ disclosures pensions postretirement benefits result plan amendment adopted effective october 1 2002 effective per person retiree medical cost increase zero percent beginning 2005 majority postretirement benefit plans assume gross healthcare cost trend rate decrease 550 2017 2 decreasing 450 2017 determining expected longterm rate return assets assumption equally consider historical performance future expected performance returns asset category well target asset allocation pension portfolios resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2008 2007 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund notes consolidated financial statements continued 12 retirement benefits continued estimated future payments expect contribute approximately 312 million related worldwide pension plans 203 million postretirement benefit plans 2009 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans 2008 2007 measurement dates june 30 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 333 million 2008 243 million 2007 234 million 2006 notes consolidated financial statements continued 13 discontinued operations following summary composition income discontinued operations included consolidated statement operations millions power systems january 31 2007 sold dodge mechanical reliance electric motors motor repair services businesses baldor 18 billion comprised 175 billion cash approximately 16 million shares baldor common stock results operations gain sale businesses reported income discontinued operations consolidated financial statements periods presented electrocraft engineered solutions 2006 architecture software segment sold assets electrocraft engineered solutions business accordingly reflected results business discontinued operation periods presented 2007 recorded change estimate contingent liability related divested business resulting income 90 million income tax effect also recorded net charge 16 million 10 million tax related resolutions certain claims professional service fees related discontinued operations matters offset benefit related legal matters associated former rockwell international corporation’s ric’s operation rocky flats facility us department energy doe 2006 recorded 50 million 30 million tax accrual legal contingencies related ric’s operation rocky flats facility doe summarized results summarized results power systems electrocraft operations millions notes consolidated financial statements continued 14 special charges fourth quarter 2008 recorded special charges 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions current year charge partially offset reversal 40 million 36 million net tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions include workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units majority charges relate severance benefits recognized pursuant sfas 112 employers’ accounting postemployment benefits amendment fasb statements 5 43 consolidated statement operations year ended september 30 2008 41 million special charges recorded cost sales 466 million recorded selling general administrative expenses expect total cash expenditures associated 2008 actions approximately 507 million made significant payments related charges september 30 2008 2007 recorded special charges 435 million 277 million tax 017 per diluted share related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions include workforce reductions realignment administrative functions rationalization consolidation global operations consolidated statement operations year ended september 30 2007 218 million special charges recorded cost sales 217 million recorded selling general administrative expenses paid 166 million related charges year ended september 30 2008 53 million year ended september 30 2007 accruals remaining 2007 restructuring actions 158 million september 30 2008 15 income components income millions pretax gain sale 50 percent interest rsc 199 million included 2006 net gain dispositions securities property investment notes consolidated financial statements continued 16 income taxes selected income tax data continuing operations millions income taxes paid included 79 million 2008 1900 million 2007 related gain sale dodge mechanical reliance electric motors motor repair services businesses 2008 income continuing operations included benefit 56 million related resolution various tax matters claims 2007 income continuing operations included benefit 217 million related resolution certain tax matters claims related closure 2005 us federal audit cycle various state tax audits 2006 recognized tax benefits income continuing operations resulting • 130 million related resolution certain tax matters claims related closure us federal audit cycle years 2003 2004 various state tax audits • 154 million related resolution certain nonus tax matters primarily relating cross jurisdictional transactions subsidiaries involving transfer price products services andor intellectual property • 272 million related reversal valuation allowances capital loss carryforwards notes consolidated financial statements continued 16 income taxes continued effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued 16 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 4412 million september 30 2008 3036 million september 30 2007 total deferred tax liabilities 860 million september 30 2008 655 million september 30 2007 notes consolidated financial statements continued 16 income taxes continued provided us deferred taxes portion 12390 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested subsidiaries practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings tax attributes related valuation allowances september 30 2008 millions valuation allowance increased 25 million 2008 increased 58 million 2007 unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments adopted provisions fin 48 october 1 2007 result recognized 67 million decrease shareowners’ equity date adoption amount unrecognized tax benefits 1165 million 714 million net 451 million offsetting indirect tax benefits amount unrecognized tax benefits would reduced effective tax rate recognized 376 million balance 338 million attributable discontinued operations would impacted effective tax rate continuing operations recognized notes consolidated financial statements continued 16 income taxes continued reconciliation gross unrecognized tax benefits excluding interest penalties 2008 follows millions september 30 2008 amount unrecognized tax benefits 1258 million 766 million net 492 million offsetting indirect tax benefits amount unrecognized tax benefits would reduce effective tax rate recognized 432 million balance 334 million attributable discontinued operations would impact effective tax rate continuing operations recognized believe reasonably possible amount unrecognized tax benefits could reduced 10 million next 12 months result resolution worldwide tax matters lapses statutes limitations recognize interest penalties related unrecognized tax benefits tax expense accrued interest penalties 240 million 20 million september 30 2008 168 million 20 million september 30 2007 respectively recognized 83 million interest 03 million penalties 2008 conduct business globally routinely audited various tax jurisdictions operate us federal tax returns 2006 2008 wisconsin tax returns 2003 2008 tax returns major states foreign jurisdictions 1998 2008 remain subject examination taxing authorities 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 12 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2008 100 million 42 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2008 estimated total reasonably possible costs could incur matters 876 million recorded notes consolidated financial statements continued 17 commitments contingent liabilities continued environmental accruals matters 291 million addition matters assumed certain environmental liabilities related federal pacific electric former subsidiary reliance connection 1995 acquisition reliance retained following sale dodge mechanical reliance electric motors motor repair services businesses substantially indemnified exxonmobil corporation exxon matters gave exxon notice december 29 2006 september 30 2008 recorded liability 227 million receivable 216 million matters estimate total reasonably possible costs matters 273 million substantially indemnified exxon matters arising december 29 2006 indemnified exxon based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations effective september 30 2006 adopted fin 47 clarifies guidance included sfas 143 accounting asset retirement obligations sfas 143 fin 47 companies must accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise application fin 47 resulted charge net tax 177 million included consolidated statement operations year ended september 30 2006 cumulative effect change accounting principle september 30 2008 recorded liabilities asset retirement obligations 51 million current liabilities 228 million liabilities recorded 53 million current liabilities 218 million liabilities obligations september 30 2007 pro forma amounts fin 47 applied periods millions except per share amounts notes consolidated financial statements continued 17 commitments contingent liabilities continued lease commitments rental expense 1163 million 2008 977 million 2007 883 million 2006 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 2754 million september 30 2008 payable follows millions 678 495 400 334 208 beyond 2013 639 total 2754 commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 37 million september 30 2008 primarily receivable 2009 leases contain renewal options varying periods certain leases include options purchase leased property 2006 completed saleleaseback transaction eight properties including land buildings improvements affixed properties lease terms vary five fifteen years depending property classified operating leases net proceeds sale approximately 899 million two sold properties resulted loss 16 million recognized 2006 remaining properties resulting gain sale 211 million amortized rent expense term respective leases net book value sold assets removed balance sheet matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousands claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases ric’s divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants notes consolidated financial statements continued 17 commitments contingent liabilities continued maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide receive administer kemper buyout funds entered cost share agreement pay substantial majority future defense indemnity costs allenbradley asbestos claims kemper buyout funds depleted believe arrangements continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition time divested certain businesses connection divestitures lawsuits claims proceedings may instituted asserted us related period owned businesses connection divestiture former aerospace defense businesses ad business boeing company boeing agreed indemnify boeing certain matters related operations ad business periods prior divestiture recorded accrual 45 million matters connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor costs damages related certain legal legacy environmental asbestos matters businesses including certain damages pertaining foreign corrupt practices act arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 276 million 105 million accrued current liabilities 129 million accrued liabilities september 30 2008 recorded 96 million 161 million current liabilities respectively september 30 2007 indemnifications many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments notes consolidated financial statements continued 18 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains elements integrated control information architecture capable controlling customer’s plant floor connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include programmable logic controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers condition based monitoring systems informationenabled logix controllers provide integrated multidiscipline control modular scaleable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system examples mes applications production scheduling asset management tracking genealogy manufacturing business intelligence • architecture software products including rotary linear motion control products sensors machine safety components control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products customer support application knowledge necessary implement automation information solution plant floor comprehensive portfolio includes • low voltage medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives contactors push buttons signaling devices termination protection devices relays timers condition sensors • valueadded packaged solutions including configured drives motor control centers custom engineered panels oem enduser applications • automation information solutions including customengineered hardware software systems discrete process motion drives manufacturing information applications • services designed help maximize customer’s automation investment provide total lifecycle support including multivendor customer technical support repair asset management training predictive preventative maintenance solutions services comprise approximately 55 percent segment’s sales includes products manufacture purchase others extent products sold solution service offerings notes consolidated financial statements continued 18 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses earnings losses equity affiliates considered part operations particular segment incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 1983 million 1797 million 1444 million september 30 2008 2007 2006 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 823 million 871 million 607 million 2008 2007 2006 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination notes consolidated financial statements continued 18 business segment information continued united states canada sell products primarily independent distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors outside united states canada sell products combination direct sales distributors sales largest distributor 2008 2007 2006 9 10 percent total sales 19 quarterly financial information unaudited income continuing operations includes net special charges 467 million 304 million tax 021 per diluted share see note 14 information see note 13 information discontinued operations b income continuing operations includes special charges 435 million 277 million tax 017 per diluted share see note 14 information report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2008 2007 related consolidated statements operations shareowners’ equity cash flows comprehensive income three years period ended september 30 2008 audits also included financial statement schedule listed index item 15a2 also audited company’s internal control financial reporting september 30 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedule opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2008 2007 results operations cash flows three years period ended september 30 2008 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission described note 16 consolidated financial statements october 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes described note 12 consolidated financial statements september 30 2007 company adopted financial accounting standard 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r deloitte touche llp milwaukee wisconsin november 17 2008 item 9item 8 financial statements supplementary data consolidated balance sheet millions see notes consolidated financial statements consolidated statement operations millions except per share amounts see notes consolidated financial statements consolidated statement cash flows millions see notes consolidated financial statements consolidated statement shareowners’ equity millions except per share amounts see notes consolidated financial statements consolidated statement comprehensive income loss millions see notes consolidated financial statements notes consolidated financial statements 1 basis presentation accounting policies rockwell automation inc company rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses basis presentation except indicated amounts reflected consolidated financial statements notes thereto relate continuing operations principles consolidation accompanying consolidated financial statements include accounts company whollyowned controlled majority owned subsidiaries intercompany accounts transactions eliminated consolidation investments affiliates ability exert significant influence accounted using equity cost methods accounting affiliated companies material individually aggregate financial position results operations cash flows use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap require us make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements revenues expenses periods reported actual results could differ estimates use estimates accounting among items customer returns rebates incentives allowance doubtful accounts excess obsolete inventory sharebased compensation acquisitions product warranty obligations retirement benefits litigation claims contingencies including environmental matters conditional asset retirement obligations contractual indemnifications income taxes account changes estimates assumptions prospectively warranted factually based experience revenue recognition product solution revenues consist industrial automation power control information hardware software products customengineered systems service revenues include multivendor customer technical support repair asset management optimization consulting training service revenue recorded results operations associated control product solutions segment approximately 85 percent consolidated sales record sales following occurred agreement sale exists pricing fixed determinable collection reasonably assured product delivered acceptance occurred may required according contract terms services rendered although majority sales agreements contain standard terms conditions control product solutions business also sells certain products solutions services require separate delivery divide arrangements separate deliverables revenue allocated deliverable based relative selling price element provided delivered elements value customers standalone basis delivery performance undelivered items probable substantially control recognize substantially remainder sales constructiontype contracts using either percentageofcompletion completed contract method accounting record sales relating contracts using percentageofcompletion method determine progress toward completion reasonably reliably estimable use completed contract method others percentageofcompletion method recognize sales gross profit work performed using relationship actual costs incurred total estimated costs completion percentageofcompletion method adjust sales gross profit revisions estimated total contract costs revenue period change identified record estimated losses contracts identified notes consolidated financial statements continued 1 basis presentation accounting policies continued use contracts customer purchase orders determine existence agreement sale use shipping documents customer acceptance applicable verify delivery assess whether fee fixed determinable based payment terms associated transaction whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit evaluations analysis well customer’s payment history shipping handling costs billed customers included sales related costs included cost sales consolidated statement operations returns rebates incentives primary incentive program provides distributors cash rebates account credits based agreed amounts vary depending customer distributor ultimately sells product also offer various incentive programs provide distributors direct sale customers cash rebates account credits additional products services based meeting specified program criteria certain distributors offered right return product subject contractual limitations record accruals customer returns rebates incentives time sale based primarily historical experience returns rebates incentives recognized reduction sales distributed cash customer account credits rebates incentives recognized cost sales additional products services provided accruals reported current liability balance sheet right offset exists reduction accounts receivable taxes revenue producing transactions taxes assessed governmental authorities revenue producing transactions including sales value added excise use taxes recorded net basis excluded revenue cash equivalents cash equivalents include time deposits certificates deposit original maturities three months less time purchase receivables record allowances doubtful accounts based customerspecific analysis general matters current assessments past due balances economic conditions receivables stated net allowances doubtful accounts 261 million september 30 2011 179 million september 30 2010 addition receivables stated net allowance certain customer returns rebates incentives 80 million september 30 2011 164 million september 30 2010 inventories stated lower cost market using firstin firstout fifo average cost methods market determined basis estimated realizable values property including internal use software stated cost calculate depreciation property using straightline method 15 40 years buildings improvements 3 14 years machinery equipment 3 10 years computer hardware internaluse software capitalize significant renewals enhancements write replaced units expense maintenance repairs well renewals minor amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued intangible assets goodwill intangible assets generally result business acquisitions account business acquisitions allocating purchase price tangible intangible assets acquired liabilities assumed fair values excess purchase price allocated amount recorded goodwill review goodwill intangible assets indefinite useful lives impairment annually frequently events circumstances indicate impairment may present excess carrying value estimated fair value charged results operations perform annual impairment test second quarter fiscal year amortize certain customer relationships accelerated basis period expect intangible asset generate future cash flows amortize intangible assets finite useful lives straightline basis estimated useful lives useful lives assigned range 2 10 years trademarks 7 20 years customer relationships 7 17 years technology 2 30 years intangible assets intangible assets also include costs software developed software business sold leased otherwise marketed amortization developed computer software products calculated productbyproduct basis greater unamortized cost beginning year times ratio current year gross revenue product total current anticipated future gross revenue product b straightline amortization remaining estimated economic life product c onefourth total deferred software cost project impairment longlived assets evaluate recoverability recorded amount longlived assets whenever events changes circumstances indicate recorded amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount determine asset impaired measure impairment recognized amount recorded amount asset exceeds fair value report assets disposed lower recorded amount fair value less cost sell determine fair value using discounted future cash flow analysis derivative financial instruments use derivative financial instruments form foreign currency forward exchange contracts manage foreign currency risks use foreign currency forward exchange contracts offset changes amount future cash flows associated certain thirdparty sale intercompany transactions expected occur within next two years cash flow hedges changes fair value certain assets liabilities resulting intercompany loans transactions third parties denominated foreign currencies accounting method derivative financial instruments based upon designation instruments hedges us gaap policy execute instruments global financial institutions believe creditworthy enter derivative financial instruments speculative purposes foreign currency forward exchange contracts usually denominated currencies major industrial countries foreign currency translation translate assets liabilities subsidiaries operating outside united states functional currency us dollar us dollars using exchange rates end respective period translate sales costs expenses average exchange rates effective respective period report foreign currency translation adjustments component comprehensive loss currency transaction gains losses included results operations period incurred research development expenses expense research development rd costs incurred costs 2544 million 2011 1989 million 2010 1700 million 2009 include rd expenses cost sales consolidated statement operations notes consolidated financial statements continued 1 basis presentation accounting policies continued income taxes account uncertain tax positions determining whether likely tax position sustained upon examination based technical merits position tax positions meet morelikelythannot recognition threshold determine amount benefit recognize financial statements earnings per share present basic diluted earnings per share eps amounts basic eps calculated dividing earnings available common shareowners income excluding allocation participating securities weighted average number common shares outstanding year excluding unvested restricted stock diluted eps amounts based upon weighted average number common equivalent shares outstanding year use treasury stock method calculate effect outstanding sharebased compensation awards requires us compute total employee proceeds sum amount employee must pay upon exercise award b amount unearned sharebased compensation costs attributed future services c amount tax benefits would credited additional paidin capital assuming exercise award sharebased compensation awards total employee proceeds award exceed average market price award period antidilutive effect eps accordingly exclude calculation antidilutive sharebased compensation awards years ended september 30 2011 21 million shares 2010 49 million shares 2009 75 million shares excluded diluted eps calculation us gaap requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid treated participating securities included computation earnings per share pursuant twoclass method participating securities composed unvested restricted stock nonemployee director restricted stock units following table reconciles basic diluted eps amounts millions except per share amounts notes consolidated financial statements continued 1 basis presentation accounting policies continued sharebased compensation recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient product workers’ compensation liabilities record accruals product workers’ compensation claims period probable reasonably estimable principal selfinsurance programs include product liability workers’ compensation selfinsure specified dollar amount claims exceeding amount specified limits covered policies purchased commercial insurers estimate liability majority selfinsured claims using claims experience periods valued environmental matters record accruals environmental matters period responsibility probable cost reasonably estimated make changes accruals periods estimated costs remediation change thirdparty environmental sites one potentially responsible party identified record liability estimated allocable share costs related involvement site well estimated allocable share costs related involvement insolvent unidentified parties environmental sites responsible party record liability total estimated costs remediation discount present value future expenditures environmental remediation obligations determine recovery insurers third parties probable record receivable estimated recovery conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional reclassifications certain prior year amounts reclassified conform current year presentation recent accounting pronouncements september 2011 financial accounting standards board fasb issued guidance amend simplify rules related testing goodwill impairment revised guidance allows entity make initial qualitative evaluation based entity’s events circumstances determine whether likely fair value reporting unit less carrying amount results qualitative assessment determine whether necessary perform currently required twostep impairment test new guidance effective us beginning october 1 2012 early adoption permitted adoption guidance material effect consolidated financial statements related disclosures june 2011 fasb issued new accounting guidance related presentation comprehensive income eliminates current option report comprehensive income components statement changes equity guidance entity elect present items net income comprehensive income one continuous statement two consecutive statements guidance effective us beginning october 1 2012 adoption guidance material effect consolidated financial statements related disclosures may 2011 fasb issued updated accounting guidance related fair value measurements disclosures result common fair value measurements disclosures us gaap international financial reporting standards guidance includes amendments clarify application existing fair value measurements disclosures addition amendments change principles requirements fair value measurements disclosures guidance effective us beginning january 1 2012 adoption guidance material effect consolidated financial statements related disclosures notes consolidated financial statements continued 2 acquisitions april 2011 acquired certain assets assumed certain liabilities hiprom pty ltd affiliates hiprom process control automation systems integrator mining mineral processing industry south africa may 2011 purchased majority stake equity lektronix limited affiliate lektronix independent industrial automation repairs service provider europe asia terms acquisition included mirroring put call options fixed price december 2011 respect remaining minority shares accordingly recorded lektronix share purchase acquisition outstanding equity interests corresponding liability 109 million related putcall option acquisition date aggregate purchase price hiprom lektronix acquisitions 588 million recorded goodwill 348 million attributable intangible assets meet criteria separate recognition including assembled workforce industrywide technical expertise customer service capabilities assigned full amount goodwill hiprom lektronix control products solutions segment none goodwill recorded expected deductible tax purposes 2009 control products solutions segment acquired assets assumed certain liabilities xi’an hengsheng science technology company limited hengsheng delivers automation solutions electrical power heavy process industries central western china control products solutions segment also acquired majority assets assumed certain liabilities automation business rutter hinz inc hinz offers industrial control systems engineering related support domain expertise industrial automation process control power distribution oil gas industry resourcebased industries aggregate purchase price two acquisitions 307 million recorded goodwill 136 million resulting final purchase price allocations hengsheng hinz expect 59 million goodwill deductible tax purposes fair values weighted average useful lives assigned acquired identifiable intangible assets acquisitions results operations acquired businesses included consolidated statement operations since dates acquisition pro forma financial information allocation purchase price presented effects acquisitions material results operations financial position notes consolidated financial statements continued 3 goodwill intangible assets changes carrying amount goodwill years ended september 30 2011 2010 millions intangible assets consist millions computer software products represent costs computer software sold leased otherwise marketed computer software products amortization expense 168 million 2011 136 million 2010 158 million 2009 allenbradley® trademark indefinite life therefore subject amortization estimated amortization expense 360 million 2012 323 million 2013 270 million 2014 214 million 2015 168 million 2016 performed annual evaluation goodwill indefinite life intangible assets impairment second quarter 2011 concluded assets impaired notes consolidated financial statements continued 4 inventories consist millions report inventories net allowance excess obsolete inventory 463 million september 30 2011 2010 5 property net property consists millions 6 longterm shortterm debt longterm debt consists millions notes consolidated financial statements continued 6 longterm shortterm debt continued march 14 2011 replaced former threeyear 2675 million unsecured revolving credit facility expiring march 2012 former 364day 3000 million unsecured revolving credit facility expiring march 2011 new fouryear 7500 million unsecured revolving credit facility march 15 2010 entered 364day 3000 million unsecured revolving credit facility drawn credit facilities september 30 2011 2010 borrowings credit facilities bear interest based shortterm money market rates effect period borrowings outstanding terms credit facilities contain covenants would default debttototalcapital ratio exceed 60 percent compliance covenants credit facilities september 30 2011 2010 separate shortterm unsecured credit facilities approximately 1278 million september 30 2011 available nonus subsidiaries significant commitment fees compensating balance requirements credit facilities borrowings credit facilities fiscal 2011 2010 significant shortterm debt obligations primarily relate commercial paper borrowings september 30 2011 2010 commercial paper borrowings outstanding interest payments 601 million 2011 594 million 2010 628 million 2009 7 current liabilities current liabilities consist millions 8 product warranty obligations record liability product warranty obligations time sale customer based upon historical warranty experience products covered warranty period runs twelve months either date sale installation customer also record liability specific warranty matters become known reasonably estimable product warranty obligations included current liabilities consolidated balance sheet changes product warranty obligations millions notes consolidated financial statements continued 9 derivative instruments fair value measurement use foreign currency forward exchange contracts manage certain foreign currency risks enter contracts offset changes amount future cash flows associated certain thirdparty intercompany transactions denominated foreign currencies forecasted occur within next two years cash flow hedges certain locations assets liabilities denominated currencies functional currencies resulting intercompany loans transactions third parties denominated foreign currencies also enter foreign currency forward exchange contracts designate hedging instruments offset transaction gains losses associated assets liabilities recognize derivative financial instruments either assets liabilities fair value consolidated balance sheet report comprehensive income loss effective portion gain loss derivative financial instruments designate qualify cash flow hedges reclassify gains losses earnings periods hedged transactions affect earnings gains losses derivative financial instruments elect hedge accounting recognized consolidated statement operations period based upon change fair value derivative financial instruments policy execute instruments major financial institutions believe creditworthy enter derivative financial instruments speculative purposes diversify forward exchange contracts among counterparties minimize exposure one entities forward exchange contracts denominated currencies major industrial countries notional values forward exchange contracts outstanding september 30 2011 7251 million 5216 million designated cash flow hedges currency pairs buy sell comprising significant contract notional value united states dollar usd euro usd canadian dollar swiss franc usd singapore dollar usd swiss franc canadian dollar swiss franc euro value forward exchange contracts using market approach use internally developed valuation model based inputs including forward spot prices currency interest rate curves change valuation techniques fiscal 2011 also use foreign currency denominated debt obligations hedge portions net investments nonus subsidiaries currency effects debt obligations reflected accumulated comprehensive loss within shareholders’ equity offset gains losses recorded net investments globally september 30 2011 141 million foreign currency denominated debt designated net investment hedges us gaap defines fair value price would received asset paid transfer liability exit price orderly transaction market participants principal advantageous market asset liability us gaap also classifies inputs used measure fair value following hierarchy level 1 quoted prices active markets identical assets liabilities level 2 quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability assets liabilities measured fair value recurring basis location consolidated balance sheet millions notes consolidated financial statements continued 9 derivative instruments fair value measurement continued pretax amount gains losses recorded comprehensive loss related hedges would recorded consolidated statement operations designated millions approximately 100 million 62 million net tax net unrealized gains cash flow hedges september 30 2011 reclassified earnings next 12 months expect net unrealized gains offset hedged items recognized earnings pretax amount gains losses reclassified accumulated comprehensive loss consolidated statement operations related derivative forward exchange contracts designated cash flow hedges offset related losses gains hedged items periods presented amount recognized earnings result ineffective hedges significant pretax amount gains losses forward exchange contracts designated hedging instruments recognized consolidated statement operations periods presented also hold financial instruments consisting cash accounts receivable accounts payable longterm debt carrying value cash accounts receivable accounts payable reported consolidated balance sheet approximates fair value base fair value longterm debt upon quoted market prices similar issues following summary carrying value fair value longterm debt millions notes consolidated financial statements continued 10 shareowners’ equity common stock september 30 2011 authorized stock company consisted one billion shares common stock par value 100 per share 25 million shares preferred stock without par value 2009 retired 35 million shares common stock held treasury shares designated authorized unissued september 30 2011 139 million shares common stock reserved various incentive plans changes outstanding common shares summarized follows millions september 2011 repurchased 30000 shares common stock 17 million settle october 2011 september 2010 repurchased 19700 shares common stock 12 million settle october 2010 outstanding purchases recorded accounts payable september 30 2011 2010 accumulated comprehensive loss accumulated comprehensive loss consists millions 11 sharebased compensation 2011 2010 2009 recognized 395 million 363 million 278 million pretax sharebased compensation expense respectively total income tax benefit related sharebased compensation expense 129 million 2011 119 million 2010 91 million 2009 recognize compensation expense grants sharebased compensation awards straightline basis service period award recipient september 30 2011 total unrecognized compensation cost related sharebased compensation awards 384 million net estimated forfeitures expect recognize weighted average period approximately 17 years 2008 longterm incentives plan amended 2008 plan authorizes us deliver 112 million shares common stock upon exercise stock options upon grant payment stock appreciation rights performance shares performance units restricted stock units restricted stock 2003 directors stock plan amended authorizes us deliver 05 million shares common stock upon exercise stock options upon grant shares common stock restricted stock units shares relating awards 2008 plan 2000 longterm incentives plan terminate expiration forfeiture cancellation otherwise without issuance delivery shares available awards 2008 plan approximately 50 million shares 2008 plan 03 million shares 2003 directors stock plan remain available future grant payment september 30 2011 use treasury stock deliver shares common stock plans 2008 plan permit sharebased compensation awards granted february 6 2018 notes consolidated financial statements continued 11 sharebased compensation continued stock options granted nonqualified incentive stock options purchase common stock various incentive plans prices equal fair market value stock grant dates exercise price stock options granted plans may paid cash shares common stock combination cash shares stock options expire ten years grant date vest ratably three years per share weighted average fair value stock options granted years ended september 30 2011 2010 2009 2139 1359 775 respectively total intrinsic value stock options exercised 1573 million 497 million 74 million 2011 2010 2009 respectively estimated fair value stock option date grant using blackscholes pricing model following assumptions average riskfree interest rate based us treasury security rates corresponding expected term effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date determined expected volatility using daily historical volatility stock price recent period corresponding expected term grant date determined expected term stock options using historical data adjusted estimated exercise dates unexercised options summary stock option activity year ended september 30 2011 performance share awards certain officers key employees also eligible receive shares common stock payment performance share awards granted grantees performance shares eligible receive shares common stock depending upon total shareowner return assuming reinvestment dividends relative performance sp 500 threeyear period notes consolidated financial statements continued 11 sharebased compensation continued summary performance share activity year ended september 30 2011 follows maximum potential shares delivered payment fiscal 2011 2010 awards 148960 shares 270460 shares respectively 200 percent payout target number shares awarded fiscal 2009 maximum 345432 shares delivered payment awards december 2011 42 percent 13 percent payouts target number shares awarded fiscal 2008 2007 43767 10618 shares delivered payment awards december 2010 december 2009 respectively per share fair value performance share awards granted years ended september 30 2011 2010 2009 8700 5481 3182 respectively determined using monte carlo simulation following assumptions average riskfree interest rate based threeyear us treasury security rate effect grant date expected dividend yield based expected annual dividend percentage market value common stock grant date expected volatilities determined using daily historical volatility recent threeyear period grant date restricted stock restricted stock units grant restricted stock certain employees nonemployee directors may elect receive portion compensation restricted stock units restrictions restricted stock generally lapse periods ranging one five years value restricted stock restricted stock units closing market value common stock date grant weighted average grant date fair value restricted stock restricted stock unit awards granted years ended september 30 2011 2010 2009 6900 4376 2938 respectively total fair value shares vested years ended september 30 2011 2010 2009 45 million 53 million 16 million respectively summary restricted stock restricted stock unit activity year ended september 30 2011 follows notes consolidated financial statements continued 12 retirement benefits sponsor funded unfunded pension plans postretirement benefit plans employees pension plans cover employees provide monthly pension payments eligible employees retirement pension benefits salaried employees generally based years credited service average earnings pension benefits hourly employees primarily based specified benefit amounts years service effective july 1 2010 closed participation us canada pension plans employees hired june 30 2010 employees hired june 30 2010 instead eligible participate employee savings plans company contributions based age years service range 3 7 eligible compensation effective october 1 2010 also closed participation uk pension plan employees hired september 30 2010 employees eligible defined contribution plan benefits provided plan participants hired july 1 2010 october 1 2010 respectively affected changes policy respect funding pension obligations fund minimum amount required applicable laws governmental regulations may however discretion fund amounts excess minimum amount required laws regulations 2011 2010 postretirement benefits primarily form retirement medical plans cover united states employees provide payment certain medical costs eligible employees dependents retirement 2009 changed measurement date september 30 required us gaap recorded reduction retained earnings 122 million 78 million net tax fourth quarter 2009 related change components net periodic benefit cost millions notes consolidated financial statements continued 12 retirement benefits continued benefit obligation plan assets funded status net liability information summarized follows millions notes consolidated financial statements continued 12 retirement benefits continued amounts included accumulated comprehensive loss net tax september 30 2011 2010 yet recognized net periodic benefit cost follows millions 2011 recognized prior service credits 129 million 82 million net tax net actuarial losses 701 million 448 million net tax net transition obligation 04 million 03 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2010 2012 expect recognize prior service credits 132 million 84 million net tax net actuarial losses 971 million 625 million net tax net transition obligation 02 million 02 million net tax pension postretirement net periodic benefit cost included accumulated comprehensive loss september 30 2011 2010 made discretionary pretax contributions 1500 million us qualified pension plan trust october 2011 made another discretionary pretax contribution 3000 million us qualified pension plan trust accumulated benefit obligation pension plans 32649 million 29688 million september 30 2011 2010 respectively net periodic benefit cost assumptions significant assumptions used determining net periodic benefit cost period ended september 30 weighted averages notes consolidated financial statements continued 12 retirement benefits continued net benefit obligation assumptions significant assumptions used determining benefit obligations weighted averages determining expected longterm rate return assets assumption consider actual returns plan assets long term adjusted forwardlooking considerations inflation interest rates equity performance active management plan’s invested assets also considered current expected mix plan assets setting assumption resulted selection weighted average longterm rate return assets assumption global weightedaverage asset allocations september 30 asset category investment objective pension funds related defined benefit plans meet plan’s benefit obligations maximizing longterm growth assets without undue risk strive achieve objective investing plan assets within target allocation ranges diversification within asset categories target allocation ranges guidelines adjusted periodically based ongoing monitoring plan fiduciaries investment risk controlled rebalancing target allocations periodic basis ongoing monitoring investment manager performance relative investment guidelines established manager september 30 2011 2010 pension plans common stock certain countries operate legal requirements financial incentives provided companies prefund pension obligations instances typically make benefit payments directly cash become due rather creating separate pension fund notes consolidated financial statements continued 12 retirement benefits continued valuation methodologies used pension plans’ investments measured fair value described follows changes methodologies used september 30 2011 2010 common stock valued closing price reported active market individual securities traded corporate debt valued either yields currently available comparable securities issuers similar credit ratings valued discounted cash flow approach maximizes observable inputs current yields similar instruments includes adjustments certain risks may observable credit liquidity risks government securities valued recent closing price reported active market individual securities traded common collective trusts registered investment companies valued net asset value nav determined custodian fund nav based fair value underlying assets owned fund minus liabilities divided number units outstanding private equity investments valued estimated fair value determined respective investment company based net asset value investment units held year end subject judgment insurance contracts valued aggregate amount accumulated contribution investment income less amounts used make benefit payments administrative expenses approximates fair value consists fixed income investments real estate fixed income investments valued recent closing price reported active market individual securities traded methods described may produce fair value calculation may indicative net realizable value reflective future fair values furthermore believe valuation methods appropriate consistent market participants use different methodologies assumptions determine fair value certain financial instruments could result different fair value measurement reporting date refer note 9 information regarding levels fair value hierarchy following table presents pension plans’ investments measured fair value september 30 2011 notes consolidated financial statements continued 12 retirement benefits continued following table presents pension plans’ investments measured fair value september 30 2010 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2011 table sets forth summary changes fair market value pension plans’ level 3 assets year ended september 30 2010 notes consolidated financial statements continued 12 retirement benefits continued estimated future payments expect contribute approximately 339 million related worldwide pension plans 17 million postretirement benefit plans 2012 following benefit payments include employees’ expected future service applicable expected paid millions postretirement benefits onepercentage point change assumed healthcare cost trend rates would following effect millions pension benefits information regarding pension plans accumulated benefit obligations excess fair value plan assets underfunded plans september 30 2011 2010 follows millions defined contribution savings plans also sponsor certain defined contribution savings plans eligible employees expense related plans 312 million 2011 233 million 2010 305 million 2009 notes consolidated financial statements continued 13 discontinued operations 2011 recorded net 07 million benefit settlement indemnification baldor electric company certain tax matters related divested businesses partially offset change estimate environmental matter pertaining discontinued business 2010 recorded 213 million tax benefit result resolution domestic tax matter relating january 2007 sale dodge mechanical reliance electric motors repair services businesses also recorded net 26 million aftertax benefit relating changes estimate environmental legal matters divested businesses 2009 recorded benefit 45 million 28 million net tax related change estimate legal contingencies associated former rockwell international corporation’s ric’s operation rocky flats facility us department energy 14 restructuring charges special items 2011 paid substantially 99 million accrual balance remaining september 30 2010 amount accrual adjustments noncash activity insignificant 2010 recorded accrual adjustments 81 million primarily related severance accruals employee attrition differed original estimates recorded adjustments 50 million benefit selling general administrative expenses 31 million benefit cost sales 2009 recorded restructuring charges 604 million 418 million tax 029 per diluted share related actions designed better align cost structure thencurrent economic conditions majority charges related severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2009 recorded 210 million restructuring charges cost sales recorded 394 million selling general administrative expenses 2008 recorded special items 507 million 340 million tax 023 per diluted share related restructuring actions designed better align resources growth opportunities reduce costs result current anticipated market conditions charge partially offset reversal 40 million 36 million tax 002 per diluted share severance accruals established part 2007 restructuring actions employee attrition differed original estimates 2008 restructuring actions included workforce reductions aimed streamlining administrative functions realigning selling resources highest anticipated growth opportunities consolidating business units majority charges related severance benefits recognized pursuant severance policy local statutory requirements consolidated statement operations year ended september 30 2008 recorded 41 million special items cost sales 466 million recorded selling general administrative expenses 2007 recorded special items 435 million 277 million tax 017 per diluted share related various restructuring actions designed execute cost productivity initiatives advance globalization strategy actions included workforce reductions realignment administrative functions rationalization consolidation global operations consolidated statement operations year ended september 30 2007 218 million special items recorded cost sales 217 million recorded selling general administrative expenses notes consolidated financial statements continued 14 restructuring charges special items continued following tables set forth summary restructuring activities 2010 millions 15 expense components expense millions notes consolidated financial statements continued 16 income taxes selected income tax data continuing operations millions 2011 recognized net discrete tax benefits 250 million related favorable resolution worldwide tax matters retroactive extension us federal research credit 2010 recognized discrete tax benefits 272 million primarily related favorable resolution tax matters partially offset discrete tax expenses 96 million primarily related impact change mexican tax law interest related unrecognized tax benefits 2009 recognized discrete tax benefits 205 million related retroactive extension us federal research tax credit resolution contractual tax obligation various state tax matters partially offset discrete tax expenses 42 million related nonus subsidiary effective tax rate reconciliation us federal statutory rate effective tax rate notes consolidated financial statements continued 16 income taxes continued deferred taxes tax effects temporary differences give rise net deferred income tax assets liabilities millions total deferred tax assets 6828 million september 30 2011 6271 million september 30 2010 total deferred tax liabilities 1142 million september 30 2011 1057 million september 30 2010 provided us deferred taxes 19060 million undistributed earnings company’s subsidiaries since earnings current plans continue permanently reinvested subsidiaries practicable estimate amount additional taxes may payable upon distribution believe likely realize current longterm deferred tax assets reduction future taxable income deferred tax assets reflected significant factors considered determining probability realization deferred tax assets include historical operating results expected future earnings notes consolidated financial statements continued 16 income taxes continued tax attributes related valuation allowances september 30 2011 millions valuation allowance increased 61 million 2011 decreased 171 million 2010 primarily due utilization nonus capital loss carryforward unrecognized tax benefits operate numerous taxing jurisdictions subject regular examinations various us federal state foreign jurisdictions various tax periods additionally retained tax liabilities rights tax refunds connection various divestitures businesses prior years income tax positions based research interpretations income tax laws rulings jurisdictions business due subjectivity interpretations laws rulings jurisdiction differences interplay tax laws jurisdictions well inherent uncertainty estimating final resolution complex tax audit matters estimates income tax liabilities may differ actual payments assessments reconciliation gross unrecognized tax benefits excluding interest penalties follows millions notes consolidated financial statements continued 16 income taxes continued amount gross unrecognized tax benefits would reduce effective tax rate recognized 751 million 302 million net offsetting tax benefits september 30 2011 575 million 95 million net offsetting tax benefits september 30 2010 852 million 409 million net offsetting tax benefits september 30 2009 offsetting tax benefits primarily consist tax receivables deposits recorded assets foreign tax credit item recorded deferred income taxes 2011 material change amount gross unrecognized tax benefits next 12 months believe reasonably possible amount gross unrecognized tax benefits could reduced 54 million amount offsetting tax benefits could increased 24 million result resolution worldwide tax matters lapses statutes limitations recognize interest penalties related unrecognized tax benefits tax expense accrued interest penalties 169 million 266 million september 30 2011 2010 respectively recognized benefits expense related interest penalties 97 million 09 million 24 million 2011 2010 2009 respectively conduct business globally routinely audited various tax jurisdictions operate longer subject us federal income tax examinations years 2009 longer subject state local foreign income tax examinations years 2003 notes consolidated financial statements continued 17 commitments contingent liabilities environmental matters federal state local requirements relating discharge substances environment disposal hazardous wastes activities affecting environment continue effect manufacturing operations thus far compliance environmental requirements resolution environmental claims accomplished without material effect liquidity capital resources competitive position financial condition designated potentially responsible party 14 superfund sites excluding sites records disclose involvement potential liability finally determined assumed third parties estimate total reasonably possible costs could incur remediation superfund sites september 30 2011 112 million 34 million accrued various lawsuits claims proceedings asserted us alleging violations federal state local environmental protection requirements seeking remediation alleged environmental impairments principally previously owned properties september 30 2011 estimated total reasonably possible costs could incur matters 853 million recorded environmental accruals matters 389 million addition matters certain environmental liabilities substantially indemnified exxonmobil corporation september 30 2011 recorded liability 313 million receivable 300 million matters estimate total reasonably possible costs could incur matters 367 million based assessment believe expenditures environmental capital investment remediation necessary comply present regulations governing environmental protection expenditures resolution environmental claims material adverse effect liquidity capital resources competitive position financial condition cannot assess possible effect compliance future requirements conditional asset retirement obligations accrue costs related legal obligation associated retirement tangible longlived asset results acquisition construction development normal operation longlived asset obligation perform asset retirement activity conditional even though timing method may conditional identified conditional asset retirement obligations include asbestos abatement remediation soil contamination beneath current previously divested facilities estimated conditional asset retirement obligations using sitespecific knowledge historical industry expertise recorded 47 million current liabilities 239 million liabilities obligations september 30 2011 september 30 2010 recorded liabilities asset retirement obligations 79 million current liabilities 227 million liabilities notes consolidated financial statements continued 17 commitments contingent liabilities continued lease commitments rental expense 1115 million 2011 1060 million 2010 1147 million 2009 minimum future rental commitments operating leases noncancelable lease terms excess one year aggregated 3561 million september 30 2011 payable follows millions commitments third parties sublease agreements noncancelable lease terms excess one year aggregated 18 million september 30 2011 receivable 2017 approximately 03 million per year leases contain renewal options varying periods certain leases include options purchase leased property matters various lawsuits claims proceedings may instituted asserted us relating conduct business including pertaining product liability environmental safety health intellectual property employment contract matters although outcome litigation cannot predicted certainty lawsuits claims proceedings may disposed unfavorably us believe disposition matters pending asserted material adverse effect business financial condition including subsidiaries named defendant lawsuits alleging personal injury result exposure asbestos used certain components products many years ago currently thousand claimants lawsuits name us defendants together hundreds companies cases claims involve products divested businesses indemnified costs however agreed defend indemnify asbestos claims associated products manufactured sold former dodge mechanical reliance electric motors motor repair services businesses prior divestiture us occurred january 31 2007 also responsible half costs liabilities associated asbestos cases ric’s divested measurement flow control business cases claimants show worked products divested businesses responsible nevertheless believe meritorious defenses substantial part due integrity products encapsulated nature asbestoscontaining components lack impairing medical condition part many claimants defend cases vigorously historically dismissed vast majority claims payment claimants maintained insurance coverage believe covers indemnity defense costs selfinsured retentions claims arising former allenbradley subsidiary following litigation nationwide indemnity company nationwide kemper insurance kemper insurance carriers provided liability insurance coverage allenbradley entered separate agreements april 1 2008 insurance carriers resolve responsibility ongoing future coverage allenbradley asbestos claims exchange lump sum payment kemper bought remaining liability released insurance obligations allenbradley nationwide entered cost share agreement us pay substantial majority future defense indemnity costs allenbradley asbestos claims believe arrangement nationwide continue provide coverage allenbradley asbestos claims throughout remaining life asbestos liability notes consolidated financial statements continued 17 commitments contingent liabilities continued uncertainties asbestos claim litigation make difficult predict accurately ultimate outcome asbestos claims uncertainty increased possibility adverse rulings new legislation affecting asbestos claim litigation settlement process subject uncertainties based experience defending asbestos claims believe lawsuits material adverse effect financial condition time divested certain businesses connection divestitures certain lawsuits claims proceedings may instituted asserted us related period owned businesses either agreed retain certain liabilities related periods liabilities fall upon us operation law instances divested business assumed liabilities however possible might responsible satisfy liabilities divested business unable connection spinoffs former automotive component systems business semiconductor systems business rockwell collins avionics communications business spunoff companies agreed indemnify us substantially contingent liabilities related respective businesses including environmental intellectual property matters conjunction sale dodge mechanical reliance electric motors motor repair services businesses agreed indemnify baldor electric company costs damages related certain legal legacy environmental asbestos matters businesses arising january 31 2007 maximum exposure would capped amount received sale estimate potential future payments could incur indemnifications may approximate 162 million 16 million accrued current liabilities 101 million accrued liabilities september 30 2011 recorded 64 million 111 million current liabilities respectively september 30 2010 indemnifications federal pacific electric nonoperating entity retained following sale dodge mechanical reliance electric motors motor repair services businesses dissolved pursuant delaware law march 31 2011 many countries provide limited intellectual property indemnity part terms conditions sale also times provide limited intellectual property indemnities contracts third parties contracts concerning development manufacture products divestiture businesses licensing intellectual property due number agreements containing provisions unable estimate maximum potential future payments notes consolidated financial statements continued 18 business segment information rockwell automation leading global provider industrial automation power control information solutions help manufacturers achieve competitive advantage businesses determine operating segments based information used chief operating decision maker chief executive officer allocate resources assess performance based upon criteria organized products services two operating segments architecture software control products solutions architecture software architecture software segment contains hardware software communication components integrated control information architecture capable controlling customer’s industrial processes connecting manufacturing enterprise architecture software broad portfolio products including • control platforms perform multiple control disciplines monitoring applications including discrete batch continuous process drives control motion control machine safety control platform products include controllers electronic operator interface devices electronic inputoutput devices communication networking products industrial computers informationenabled logix controllers provide integrated multidiscipline control modular scalable • software products include configuration visualization software used operate supervise control platforms advanced process control software manufacturing execution software mes addresses information needs factory floor customer’s enterprise business system • architecture software products including rotary linear motion control products sensors machine safety components control products solutions control products solutions segment combines comprehensive portfolio intelligent motor control industrial control products application expertise project management capabilities comprehensive portfolio includes • low medium voltage electromechanical electronic motor starters motor circuit protection devices acdc variable frequency drives push buttons signaling devices termination protection devices relays timers condition sensors • valueadded solutions ranging packaged solutions configured drives motor control centers automation information solutions provide design integration startup services customengineered hardware software systems primarily manufacturing applications • services designed help maximize customer’s automation investment provide total lifecycle support including multivendor customer technical support repair customized safety solutions asset management training predictive preventative maintenance notes consolidated financial statements continued 18 business segment information continued following tables reflect sales operating results reportable segments years ended september 30 millions among considerations evaluate performance allocate resources based upon segment operating earnings income taxes interest expense costs related corporate offices certain nonrecurring corporate initiatives gains losses disposition businesses incremental acquisition related expenses resulting purchase accounting adjustments intangible asset amortization depreciation inventory purchased research development charges depending product intersegment sales within single legal entity either cost plus markup necessarily represent market price sales legal entities appropriate transfer price allocate costs related shared segment operating activities segments using methodology consistent expected benefit notes consolidated financial statements continued 18 business segment information continued following tables summarize identifiable assets september 30 provision depreciation amortization amount capital expenditures property years ended september 30 reportable segments corporate millions identifiable assets corporate consist principally cash net deferred income tax assets prepaid pension property shared segments used operating activities also reported corporate identifiable assets corporate capital expenditures corporate identifiable assets include shared net property balances 3157 million 2932 million 2044 million september 30 2011 2010 2009 respectively depreciation expense allocated segment operating earnings based expected benefit realized segment corporate capital expenditures include 538 million 391 million 562 million 2011 2010 2009 respectively shared operating segments conduct significant portion business activities outside united states following tables present sales property geographic region millions attribute sales geographic regions based country destination united states canada certain countries sell products primarily independent distributors remaining countries sell products combination direct sales distributors sell large systems service offerings principally direct sales force though opportunities sometimes identified distributors sales largest distributor 2011 2010 2009 approximately 10 percent total sales notes consolidated financial statements continued 19 quarterly financial information unaudited note sum quarterly per share amounts necessarily equal annual per share amounts presented see note 13 information discontinued operations report independent registered public accounting firm board directors shareowners rockwell automation inc milwaukee wisconsin audited accompanying consolidated balance sheets rockwell automation inc “company” september 30 2011 2010 related consolidated statements operations shareowners’ equity cash flows comprehensive income loss three years period ended september 30 2011 audits also included financial statement schedules listed index item 15a2 also audited company’s internal control financial reporting september 30 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements financial statement schedules opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position rockwell automation inc september 30 2011 2010 results operations cash flows three years period ended september 30 2011 conformity accounting principles generally accepted united states america also opinion financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also opinion company maintained material respects effective internal control financial reporting september 30 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission deloitte touche llp milwaukee wisconsin november 14 2011 item 9 nannannannannannanitem 15 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2002 2001 consolidated statement operations years ended september 30 2002 2001 2000 consolidated statement cash flows years ended september 30 2002 2001 2000 consolidated statement shareowners’ equity years ended september 30 2002 2001 2000 consolidated statement comprehensive income years ended september 30 2002 2001 2000 notes consolidated financial statements independent auditors’ report 2 financial statement schedule years ended september 30 2002 2001 2000 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k company filed current report form 8k dated august 6 2002 respect statements oath principal executive officer principal financial officer required securities exchange commission order 4460 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc michael bless michael bless senior vice president chief financial officer principal financial officer william j calise jr william j calise jr senior vice president general counsel secretary david dorgan david dorgan vice president controller principal accounting officer dated november 25 2002 pursuant requirements securities exchange act 1934 report signed 25th day november 2002 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer betty c alewine director j michael cook director william h gray iii director william mccormick jr director john nichols director bruce rockwell director joseph f toot jr director kenneth f yontz director william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith certification chief executive officer h davis jr chairman board chief executive officer rockwell automation inc certify 1 reviewed annual report form 10k rockwell automation inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses h davis jr h davis jr chairman board chief executive officer date november 25 2002 certification chief financial officer michael bless senior vice president chief financial officer rockwell automation inc certify 1 reviewed annual report form 10k rockwell automation inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses michael bless michael bless senior vice president chief financial officer date november 25 2002 schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2002 2001 2000 includes allowances current longterm receivables b consists principally amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting company’s ability utilize foreign tax credit carryforwards valuation allowance recorded s1 index exhibits 10al copy company’s 1988 longterm incentives plan amended november 30 1994 filed exhibit 10dl company’s annual report form 10k year ended september 30 1994 file 11035 hereby incorporated reference 10a2 copy resolution board directors company adopted november 6 1996 amending company’s 1988 longterm incentives plan filed exhibit 4g1 registration statement 33317055 hereby incorporated reference 10a3 copy resolution board directors company adopted november 5 1997 increasing number shares authorized issuance company’s 1988 longterm incentives plan filed exhibit 10b2 company’s annual report form 10k year ended september 30 1997 hereby incorporated reference 10a4 1988 longterm incentives plan options granted march 1 1993 prior november 1 1993 filed exhibit 28a company’s quarterly report form 10q quarter ended march 31 1993 file 11035 hereby incorporated reference 10a5 forms stock option agreements company’s 1988 longterm incentives plan options granted november 1 1993 prior december 1 1994 filed exhibit 10d6 company’s annual report form 10k year ended september 30 1993 file 11035 hereby incorporated reference 10a6 forms stock option agreements company’s 1988 longterm incentives plan options granted december 1 1994 filed exhibit 10d7 company’s annual report form 10k year ended september 30 1994 file 11035 hereby incorporated reference 10a7 memorandum proposed amendments rockwell international corporation 1988 longterm incentives plan approved adopted board directors company june 6 2001 connection spinoff rockwell collins filed exhibit 10a8 company’s annual report form 10k year ended september 30 2001 hereby incorporated reference l0b1 copy company’s 1995 longterm incentives plan amended filed exhibit l0b1 company’s annual report form 10k year ended september 30 1998 hereby incorporated reference 10b2 forms stock option agreements company’s 1995 longterm incentives plan options granted prior december 3 1997 filed exhibit 10e2 company’s annual report form 10k year ended september 30 1994 file 11035 hereby incorporated reference 10b3 forms stock option agreements company’s 1995 longterm incentives plan options granted december 3 1997 august 31 1998 filed exhibit 10b3 company’s annual report form 10k year ended september 30 1998 hereby incorporated reference 10b4 form stock option agreement company’s 1995 longterm incentives plan options granted april 23 1998 filed exhibit 10b4 company’s annual report form 10k year ended september 30 1998 hereby incorporated reference 10b5 form stock option agreement company’s 1995 longterm incentives plan options granted august 31 1998 filed exhibit 10b5 company’s annual report form 10k year ended september 30 1998 hereby incorporated reference 10b6 form restricted stock agreement company’s 1995 longterm incentives plan filed exhibit 10e company’s quarterly report form 10q quarter ended december 31 1996 hereby incorporated reference 10b7 copy restricted stock agreement dated december 3 1997 company h davis jr filed exhibit 10c5 company’s annual report form 10k year ended september 30 1997 hereby incorporated reference 10b8 copy resolution board directors company adopted december 1 1999 decreasing number shares authorized issuance company’s 1995 longterm incentives plan 10b9 memorandum proposed amendments rockwell international corporation 1995 longterm incentives plan approved adopted board directors company june 6 2001 connection spinoff rockwell collins filed exhibit 10b8 company’s annual report form 10k year ended september 30 2001 hereby incorporated reference 10cl copy company’s directors stock plan amended february 2 2000 filed exhibit 101 company’s quarterly report form 10q quarter ended march 31 2000 hereby incorporated reference 10c2 form stock option agreement company’s directors stock plan options granted prior february 2 2000 filed exhibit 10d company’s quarterly report form 10q quarter ended march 31 1996 file 11035 hereby incorporated reference 10c3 forms restricted stock agreements company’s directors stock plan company william h gray iii william mccormick jr john nichols joseph f toot jr filed exhibit 10f company’s quarterly report form 10q quarter ended december 31 1996 hereby incorporated reference 10c4 form stock option agreement directors stock plan options granted february 2 2000 july 30 2001 filed exhibit 10c4 company’s annual report form 10k year ended september 30 2000 hereby incorporated reference 10c5 form restricted stock agreement directors stock plan restricted stock granted february 2 2000 filed exhibit 10c5 company’s annual report form 10k year ended september 30 2000 hereby incorporated reference 10c6 form restricted stock agreement payment portion annual retainer board service issuance shares restricted stock filed exhibit 10c6 company’s annual report form 10k year ended september 30 2000 hereby incorporated reference 10c7 form stock option agreement options granted july 31 2001 february 6 2002 service board company’s nonemployee directors filed exhibit 10c7 company’s annual report form 10k year ended september 30 2001 hereby incorporated reference 10d1 copy resolution board directors company adopted november 6 1996 adjusting outstanding awards company’s 1988 longterm incentives plan ii 1995 longterm incentives plan iii directors stock plan filed exhibit 4g2 registration statement 33317055 hereby incorporated reference 10d2 copy resolution board directors company adopted september 3 1997 adjusting outstanding awards company’s 1988 longterm incentives plan ii 1995 longterm incentives plan iii directors stock plan filed exhibit 10e3 company’s annual report form 10k year ended september 30 1997 hereby incorporated reference 10d3 memorandum adjustments outstanding options rockwell international corporation’s 1988 longterm incentives plan 1995 longterm incentives plan directors stock plan approved adopted board directors company connection spinoff conexant filed exhibit 10d3 company’s annual report form 10k year ended september 30 1999 hereby incorporated reference 10e1 copy company’s 2000 longterm incentives plan filed exhibit proxy statement company’s 2000 annual meeting hereby incorporated reference 10e2 forms stock option agreements company’s 2000 longterm incentives plan options granted prior july 31 2001 filed exhibit 10e2 company’s annual report form 10k year ended september 30 2000 hereby incorporated reference 10e3 form restricted stock agreement company’s 2000 longterm incentives plan filed exhibit 4d3 registration statement 33338444 hereby incorporated reference 10e4 memorandum proposed amendments rockwell international corporation 2000 longterm incentives plan approved adopted board directors company june 6 2001 connection spinoff rockwell collins filed exhibit 10e4 company’s annual report form 10k year ended september 30 2001 hereby incorporated reference 10e5 forms stock option agreements company’s 2000 longterm incentives plan options granted october 1 2001 filed exhibit 10e5 company’s annual report form 10k year ended september 30 2001 hereby incorporate reference 10e6 forms stock option agreements company’s 2000 longterm incentives plan options granted october 7 2002 10e7 memorandum adjustments outstanding options rockwell international corporation’s 1988 longterm incentives plan 1995 longterm incentives plan 2000 longterm incentives plan directors stock plan approved adopted board directors company june 6 2001 connection spinoff rockwell collins filed exhibit 10e6 company’s annual report form 10k year ended september 30 2001 hereby incorporated reference 10e8 copy resolutions compensation management development committee board directors company adopted december 5 2001 amending certain outstanding awards company’s 1995 longterm incentives plan 2000 longterm incentives plan filed exhibit 101 company’s quarterly report form 10q quarter ended december 31 2001 hereby incorporated reference 10e9 memorandum amendments outstanding restricted stock agreements company’s 1995 longterm incentives plan 2000 longterm incentives plan approved adopted compensation management development committee board directors company november 7 2001 filed exhibit 102 company’s quarterly report form 10q quarter ended december 31 2001 hereby incorporated reference 10e10 form restricted stock agreement company’s 2000 longterm incentives plan awards made november 7 2001 filed exhibit 103 company’s quarterly report form 10q quarter ended december 31 2001 hereby incorporated reference 10f1 copy company’s incentive compensation plan amended restated july 1 1997 filed exhibit 10f1 company’s annual report form 10k year ended september 30 1997 hereby incorporated reference 10g1 copy company’s deferred compensation plan amended effective october 1 1992 filed exhibit 10g1 company’s annual report form 10k year ended september 30 1993 file 11035 hereby incorporated reference 10g2 copy company’s deferred compensation plan amended restated june 1 2000 filed exhibit 4d registration statement 33334826 hereby incorporated reference 10h1 copy resolutions board directors company adopted november 3 1993 providing company’s deferred compensation policy nonemployee directors filed exhibit 10hl company’s annual report form 10k year ended september 30 1994 file 11035 hereby incorporated reference 10h2 copy resolutions compensation committee board directors company adopted july 6 1994 modifying company’s deferred compensation policy nonemployee directors filed exhibit 10h2 company’s annual report form 10k year ended september 30 1994 file 11035 hereby incorporated reference 10h3 copy resolutions board directors new rockwell international corporation adopted december 4 1996 providing deferred compensation policy nonemployee directors filed exhibit 10i3 company’s annual report form 10 k year ended september 30 1996 hereby incorporated reference l0i1 copy company’s annual incentive compensation plan senior executive officers filed exhibit company’s proxy statement 1996 annual meeting shareowners file 11035 hereby incorporated reference 10j1 restricted stock agreement dated december 6 1995 company h davis jr filed exhibit 1011 company’s annual report form 10k year ended september 30 1995 file 11035 hereby incorporated reference 10k1 form change control agreement company h davis jr bless w j calise jr j cohn k nosbusch j swann filed exhibit 104 company’s quarterly report form 10q quarter ended june 30 2001 hereby incorporated reference 10k2 form change control agreement company certain officers company filed exhibit 105 company’s quarterly report form 10q quarter ended june 30 2001 hereby incorporated reference 10l1 agreement plan distribution dated december 6 1996 among rockwell international corporation renamed boeing north american inc company formerly named new rockwell international corporation allenbradley company inc rockwell collins inc rockwell semiconductor systems inc rockwell light vehicle systems inc rockwell heavy vehicle systems inc filed exhibit l0b company’s quarterly report form 10q quarter ended december 31 1996 hereby incorporated reference 10l2 postclosing covenants agreement dated december 6 1996 among rockwell international corporation renamed boeing north american inc boeing company boeing na inc company formerly named new rockwell international corporation filed exhibit 10c company’s quarterly report form 10q quarter ended december 31 1996 hereby incorporated reference 10l3 tax allocation agreement dated december 6 1996 among rockwell international corporation renamed boeing north american inc company formerly named new rockwell international corporation boeing company filed exhibit 10d company’s quarterly report form 10q quarter ended december 31 1996 hereby incorporated reference 10ml distribution agreement dated september 30 1997 company meritor automotive inc filed exhibit 21 company’s current report form 8k dated october 10 1997 hereby incorporated reference 10m2 employee matters agreement dated september 30 1997 company meritor automotive inc filed exhibit 22 company’s current report form 8k dated october 10 1997 hereby incorporated reference 10m3 tax allocation agreement dated september 30 1997 company meritor automotive inc filed exhibit 23 company’s current report form 8k dated october 10 1997 hereby incorporated reference 10n1 distribution agreement dated december 31 1998 company conexant systems inc filed exhibit 21 company’s current report form 8k dated january 12 1999 hereby incorporated reference 10n2 amended restated employee matters agreement dated december 31 1998 company conexant systems inc filed exhibit 22 company’s current report form 8k dated january 12 1999 hereby incorporated reference 10n3 tax allocation agreement dated december 31 1998 company conexant systems inc filed exhibit 23 company’s current report form 8k dated january 12 1999 hereby incorporated reference 10o1 distribution agreement dated june 29 2001 among company rockwell collins inc rockwell scientific company llc filed exhibit 21 company’s current report form 8k dated july 11 2001 hereby incorporated reference 10o2 employee matters agreement dated june 29 2001 among company rockwell collins inc rockwell scientific company llc filed exhibit 22 company’s current report form 8k dated july 11 2001 hereby incorporated reference 10o3 tax allocation agreement dated june 29 2001 company rockwell collins inc filed exhibit 23 company’s current report form 8k dated july 11 2001 hereby incorporated reference 10p1 364day credit agreement october 29 2002 among company banks listed therein jpmorgan chase bank administrative agent 10p2 threeyear credit agreement dated october 29 2002 among company banks listed therein jpmorgan chase bank administrative agent computation ratio earnings fixed charges five years ended september 30 2002 list subsidiaries company independent auditors’ consent powers attorney authorizing certain persons sign annual report form 10k behalf certain directors officers company 99a1 certification periodic report chief executive officer pursuant section 906 sarbanesoxley act 2002 99a2 certification periodic report chief financial officer pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedule reports form 8k financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2003 2002 consolidated statement operations years ended september 30 2003 2002 2001 consolidated statement cash flows years ended september 30 2003 2002 2001 consolidated statement shareowners’ equity years ended september 30 2003 2002 2001 consolidated statement comprehensive income years ended september 30 2003 2002 2001 notes consolidated financial statements independent auditors’ report 2 financial statement schedule years ended september 30 2003 2002 2001 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement b reports form 8k company filed current report form 8k dated july 22 2003 respect announcing financial results quarter ended june 30 2003 items 7 12 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc michael bless michael bless senior vice president chief financial officer principal financial officer william j calise jr william j calise jr senior vice president general counsel secretary david dorgan david dorgan vice president controller principal accounting officer dated december 3 2003 pursuant requirements securities exchange act 1934 report signed 3rd day december 2003 following persons behalf registrant capacities indicated h davis jr chairman board chief executive officer principal executive officer betty c alewine director j michael cook director william h gray iii director verne g istock director william mccormick jr director bruce rockwell director david b speer director joseph f toot jr director kenneth f yontz director william j calise jr william j calise jr attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2003 2002 2001 includes allowances current longterm receivables b consists principally amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting company’s ability utilize foreign tax credit capital loss net operating loss carryforwards valuation allowance previously recorded s1 index exhibits see part iv item 15a3 exhibits incorporated referenceitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2004 2003 consolidated statement operations years ended september 30 2004 2003 2002 consolidated statement cash flows years ended september 30 2004 2003 2002 consolidated statement shareowners’ equity years ended september 30 2004 2003 2002 consolidated statement comprehensive income years ended september 30 2004 2003 2002 notes consolidated financial statements report independent registered public accounting firm 2 financial statement schedule years ended september 30 2004 2003 2002 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc james v gelly james v gelly senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer dated november 19 2004 pursuant requirements securities exchange act 1934 report signed 19th day november 2004 following persons behalf registrant capacities indicated authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2004 2003 2002 includes allowances current longterm receivables b consists principally amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting ability utilize foreign tax credit capital loss net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented s1 index exhibits see part iv item 15a3 exhibits incorporated referenceitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2005 consolidated statement operations years ended september 30 2005 2004 2003 consolidated statement cash flows years ended september 30 2005 2004 2003 consolidated statement shareowners’ equity years ended september 30 2005 2004 2003 consolidated statement comprehensive income years ended september 30 2005 2004 2003 notes consolidated financial statements report independent registered public accounting firm 2 financial statement schedule years ended september 30 2005 2004 2003 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated november 10 2005 pursuant requirements securities exchange act 1934 report signed 10th day november 2005 following persons behalf registrant capacities indicated authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2005 2004 2003 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory customer account credits customer returns rebates incentives adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded c represents reclassification amounts reported balance sheet accounts prior years amounts reported relate continuing operations periods presented s1 index exhibits see part iv item 15a3 exhibits incorporated referenceitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc james v gelly james v gelly senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer dated november 9 2006 pursuant requirements securities exchange act 1934 report signed 9th day november 2006 following persons behalf registrant capacities indicated keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director h davis jr director verne g istock director barry c johnson director william mccormick jr director bruce rockwell director david b speer director joseph f toot jr director kenneth f yontz director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2006 2005 2004 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory customer account credits customer returns rebates incentives adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded c represents classification amounts reported balance sheet accounts prior years relates 2006 audit adjustments tax authorities amounts reported relate continuing operations periods presented amounts discontinued operations significant s1 index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2007 2006 consolidated statement operations years ended september 30 2007 2006 2005 consolidated statement cash flows years ended september 30 2007 2006 2005 consolidated statement shareowners equity years ended september 30 2007 2006 consolidated statement comprehensive income years ended september 30 2007 2006 2005 notes consolidated financial statements report independent registered public accounting firm 2 financial statement schedule years ended september 30 2007 2006 2005 page schedule ii valuation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer dated november 15 2007 pursuant requirements securities exchange act 1934 report signed 15th day november 2007 following persons behalf registrant capacities indicated keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director verne g istock director barry c johnson director william mccormick jr director bruce rockwell director david b speer director joseph f toot jr director kenneth f yontz director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2007 2006 2005 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory customer account credits customer returns rebates incentives adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded c represents classification amounts reported balance sheet accounts prior years relates 2006 audit adjustments tax authorities amounts reported relate continuing operations periods presented s1 index exhibits see part iv item 15a3 exhibits incorporated referenceitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated november 18 2009 pursuant requirements securities exchange act 1934 report signed 18th day november 2009 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director verne g istock director barry c johnson director william mccormick jr director donald r parfet director bruce rockwell director david b speer director joseph f toot jr director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule valuation qualifying accounts disclosure schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2009 2008 2007 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented s1 index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2010 2009 consolidated statement operations years ended september 30 2010 2009 2008 consolidated statement cash flows years ended september 30 2010 2009 2008 consolidated statement shareowners’ equity years ended september 30 2010 2009 consolidated statement comprehensive loss income years ended september 30 2010 2009 2008 notes consolidated financial statements report independent registered public accounting firm schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated november 18 2010 pursuant requirements securities exchange act 1934 report signed 18th day november 2010 following persons behalf registrant capacities indicated schedule valuation qualifying accounts disclosure schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2010 2009 2008 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented s1 index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2013 2012 2011 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer dated november 18 2013 pursuant requirements securities exchange act 1934 report signed 18th day november 2013 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director j phillip holloman director verne g istock director barry c johnson director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2013 2012 2011 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2014 2013 2012 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer dated november 18 2014 pursuant requirements securities exchange act 1934 report signed 18th day november 2014 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director j phillip holloman director verne g istock director barry c johnson director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2014 2013 2012 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2015 2014 2013 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer dated november 17 2015 pursuant requirements securities exchange act 1934 report signed 17th day november 2015 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director j phillip holloman director verne g istock director barry c johnson director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director lisa payne director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2015 2014 2013 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2016 2015 2014 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer dated november 15 2016 pursuant requirements securities exchange act 1934 report signed 15th day november 2016 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer blake moret president chief executive officer principal executive officer director keith nosbusch chairman board betty c alewine director j phillip holloman director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director lisa payne director thomas w rosamilia director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2016 2015 2014 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2017 2016 2015 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc patrick p goris patrick p goris senior vice president chief financial officer dated november 15 2017 pursuant requirements securities exchange act 1934 report signed 15th day november 2017 following persons behalf registrant capacities indicated patrick p goris patrick p goris senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer blake moret president chief executive officer principal executive officer director keith nosbusch chairman board betty c alewine director j phillip holloman director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director lisa payne director thomas w rosamilia director patricia watson director rebecca w house rebecca w house attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2017 2016 2015 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2018 2017 2016 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc patrick p goris patrick p goris senior vice president chief financial officer dated november 9 2018 pursuant requirements securities exchange act 1934 report signed 9th day november 2018 following persons behalf registrant capacities indicated patrick p goris patrick p goris senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer blake moret chairman board president chief executive officer principal executive officer director keith nosbusch director j phillip holloman director steven r kalmanson director james p keane director lawrence kingsley director william mccormick jr director donald r parfet director lisa payne director thomas w rosamilia director patricia watson director rebecca w house rebecca w house attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2018 2017 2016 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2019 2018 2017 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc patrick p goris patrick p goris senior vice president chief financial officer dated november 12 2019 pursuant requirements securities exchange act 1934 report signed 12th day november 2019 following persons behalf registrant capacities indicated patrick p goris patrick p goris senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer blake moret chairman board president chief executive officer principal executive officer director j phillip holloman director steven r kalmanson director james p keane director lawrence kingsley director pam murphy director donald r parfet director lisa payne director thomas w rosamilia director patricia watson director rebecca w house rebecca w house attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2019 2018 2017 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded index exhibits see part iv item 15a3 exhibits incorporated reference management contract compensatory plan arrangementitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2020 2019 2018 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc patrick p goris patrick p goris senior vice president chief financial officer dated november 10 2020 pursuant requirements securities exchange act 1934 report signed 10th day november 2020 following persons behalf registrant capacities indicated patrick p goris patrick p goris senior vice president chief financial officer principal financial officer terry l riesterer terry l riesterer vice president controller principal accounting officer blake moret chairman board president chief executive officer principal executive officer director j phillip holloman director steven r kalmanson director james p keane director lawrence kingsley director pam murphy director donald r parfet director lisa payne director thomas w rosamilia director patricia watson director rebecca w house rebecca w house attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2020 2019 2018 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded index exhibits see part iv item 15a3 exhibits incorporated reference management contract compensatory plan arrangementitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries 2 financial statement schedule years ended september 30 2012 2011 2010 page schedule iivaluation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer dated november 19 2012 pursuant requirements securities exchange act 1934 report signed 19th day november 2012 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director verne g istock director barry c johnson director steven r kalmanson director james p keane director william mccormick jr director donald r parfet director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2012 2011 2010 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented index exhibitsitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2008 2007 consolidated statement operations years ended september 30 2008 2007 2006 consolidated statement cash flows years ended september 30 2008 2007 2006 consolidated statement shareowners’ equity years ended september 30 2008 2007 2006 consolidated statement comprehensive income years ended september 30 2008 2007 2006 notes consolidated financial statements report independent registered public accounting firm 2 financial statement schedule years ended september 30 2008 2007 2006 page schedule ii valuation qualifying accounts s1 schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto 3 exhibits management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized rockwell automation inc theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer dated november 21 2008 pursuant requirements securities exchange act 1934 report signed 21st day november 2008 following persons behalf registrant capacities indicated keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director verne g istock director barry c johnson director william mccormick jr director donald r parfet director bruce rockwell director david b speer director joseph f toot jr director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2008 2007 2006 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory customer account credits charged reserves customer returns rebates incentives adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded c relates 2006 audit adjustments tax authorities amounts reported relate continuing operations periods presented s1 index exhibits see part iv item 15a3 exhibits incorporated referenceitem 15 exhibits financial statement schedule financial statements financial statement schedule exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated balance sheet september 30 2011 2010 consolidated statement operations years ended september 30 2011 2010 2009 consolidated statement cash flows years ended september 30 2011 2010 2009 consolidated statement shareowners’ equity years ended september 30 2011 2010 2009 consolidated statement comprehensive income loss years ended september 30 2011 2010 2009 notes consolidated financial statements report independent registered public accounting firm schedules filed herewith omitted absence conditions required information called shown consolidated financial statements notes thereto management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated november 14 2011 pursuant requirements securities exchange act 1934 report signed 14th day november 2011 following persons behalf registrant capacities indicated theodore crandall theodore crandall senior vice president chief financial officer principal financial officer david dorgan david dorgan vice president controller principal accounting officer keith nosbusch chairman board president chief executive officer principal executive officer director betty c alewine director verne g istock director barry c johnson director steven r kalmanson director james p keane director william mccormick jr director donald r parfet director david b speer director douglas hagerman douglas hagerman attorneyinfact authority powers attorney filed herewith schedule ii rockwell automation inc valuation qualifying accounts years ended september 30 2011 2010 2009 includes allowances current longterm receivables b consists amounts written allowance doubtful accounts excess obsolete inventory adjustments resulting ability utilize foreign tax credits capital losses net operating loss carryforwards valuation allowance previously recorded amounts reported relate continuing operations periods presented s1 index exhibits