37 - Rockwell Collins...its fair value. Goodwill is potentially impaired if the carrying value of a...
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ROckwell cOllins annual RepORt 2007 37 notes to consolidated Financial statements 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION Rockwell collins, inc. (the company or Rockwell collins) provides design, production and support of communications and aviation electronics for military and commercial custom- ers worldwide. the company operates on a 52/53 week fiscal year ending on the Friday closest to september 30. For ease of presenta- tion, september 30 is utilized consistently throughout these financial statements and notes to represent the fiscal year end date. all date references contained herein relate to the company’s fiscal year unless otherwise stated. 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation the consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. the company’s investments in entities it does not control but over which it has the ability to exercise significant influence are accounted for under the equity method and are included in other assets. all intercompany transactions are eliminated. Revenue Recognition the company enters into sales arrangements that may provide for multiple deliverables to a customer. the company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established based on the prices charged when sold separately by the company. in general, revenues are sepa- rated between hardware, engineering services, maintenance services, and installation services. the allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods. sales related to long-term contracts requiring development and delivery of products over several years are accounted for under the percentage-of-completion method of accounting under the american institute of certified Public accountants’ statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. sales and earnings under these contracts are recorded either as products are shipped under the units-of-delivery method (for production effort), or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort). Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. sales and costs related to profitable purchase options are included in estimates only when the options are exercised while sales and costs related to unprofitable purchase options are included in estimates when exercise is determined to be probable. sales related to change orders are included in estimates only if they can be reliably estimated and collectibility is reasonably assured. anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. changes in estimates of profit or loss on contracts are included in earnings on a cumu- lative basis in the period the estimate is changed. sales related to long-term separately priced product mainte- nance or warranty contracts are accounted for based on the terms of the underlying agreements. certain contracts are fixed price contracts with sales recognized ratably over the contractual life, while other contracts have a fixed hourly rate with sales recognized based on actual labor or flight hours incurred. the cost of providing these services is expensed as incurred. the company recognizes sales for all other products or services when all of the following criteria are met: an agree- ment of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Research and Development the company performs research and development activities relating to the development of new products and the improvement of existing products. company-funded research and development programs are expensed as incurred and included in cost of sales. customer-funded research and development expenditures are accounted for as contract costs within cost of sales, and the reimbursement is accounted for as a sale. Cash and Cash Equivalents cash and cash equivalents includes time deposits and certificates of deposit with original maturity dates of three months or less. Allowance for Doubtful Accounts allowances are established in order to report receivables at net realizable value on the company’s statement of Financial Position. the determination of these allowances requires management of the company to make estimates and judg- ments as to the collectibility of customer account balances. these allowances are estimated for customers who are considered credit risks by reviewing the company’s collection experience with those customers as well as evaluating the customers’ financial condition. the company also considers both current and projected economic and market conditions. special attention is given to accounts with invoices that are past due. Past due is defined as any invoice for which payment
Transcript of 37 - Rockwell Collins...its fair value. Goodwill is potentially impaired if the carrying value of a...
ROckwell cOllins annual RepORt 2007 37notestoconsolidatedFinancialstatements
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Rockwellcollins,inc.(thecompanyorRockwellcollins)providesdesign,productionandsupportofcommunicationsandaviationelectronicsformilitaryandcommercialcustom-ersworldwide.
thecompanyoperatesona52/53weekfiscalyearendingontheFridayclosesttoseptember30.Foreaseofpresenta-tion,september30isutilizedconsistentlythroughoutthesefinancialstatementsandnotestorepresentthefiscalyearenddate.alldatereferencescontainedhereinrelatetothecompany’sfiscalyearunlessotherwisestated.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidationtheconsolidatedfinancialstatementsincludetheaccountsofthecompanyandallmajority-ownedsubsidiaries.thecompany’sinvestmentsinentitiesitdoesnotcontrolbutoverwhichithastheabilitytoexercisesignificantinfluenceareaccountedforundertheequitymethodandareincludedinotherassets.allintercompanytransactionsareeliminated.
Revenue Recognitionthecompanyentersintosalesarrangementsthatmayprovideformultipledeliverablestoacustomer.thecompanyidentifiesallgoodsand/orservicesthataretobedeliveredseparatelyunderasalesarrangementandallocatesrevenuetoeachdeliverablebasedonrelativefairvalues.Fairvaluesaregenerallyestablishedbasedonthepriceschargedwhensoldseparatelybythecompany.ingeneral,revenuesaresepa-ratedbetweenhardware,engineeringservices,maintenanceservices,andinstallationservices.theallocatedrevenueforeachdeliverableisthenrecognizedusingappropriaterevenuerecognitionmethods.
salesrelatedtolong-termcontractsrequiringdevelopmentanddeliveryofproductsoverseveralyearsareaccountedforunderthepercentage-of-completionmethodofaccountingundertheamericaninstituteofcertifiedPublicaccountants’statementofPosition81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts.salesandearningsunderthesecontractsarerecordedeitherasproductsareshippedundertheunits-of-deliverymethod(forproductioneffort),orbasedontheratioofactualcostsincurredtototalestimatedcostsexpectedtobeincurredrelatedtothecontractunderthecost-to-costmethod(fordevelopmenteffort).Purchaseoptionsandchangeordersareaccountedforeitherasanintegralpartoftheoriginalcontractorseparatelydependinguponthenatureandvalueoftheitem.salesandcostsrelatedtoprofitablepurchaseoptionsareincludedinestimatesonlywhentheoptions
areexercisedwhilesalesandcostsrelatedtounprofitablepurchaseoptionsareincludedinestimateswhenexerciseisdeterminedtobeprobable.salesrelatedtochangeordersareincludedinestimatesonlyiftheycanbereliablyestimatedandcollectibilityisreasonablyassured.anticipatedlossesoncontractsarerecognizedinfullintheperiodinwhichlossesbecomeprobableandestimable.changesinestimatesofprofitorlossoncontractsareincludedinearningsonacumu-lativebasisintheperiodtheestimateischanged.
salesrelatedtolong-termseparatelypricedproductmainte-nanceorwarrantycontractsareaccountedforbasedonthetermsoftheunderlyingagreements.certaincontractsarefixedpricecontractswithsalesrecognizedratablyoverthecontractuallife,whileothercontractshaveafixedhourlyratewithsalesrecognizedbasedonactuallabororflighthoursincurred.thecostofprovidingtheseservicesisexpensedasincurred.
thecompanyrecognizessalesforallotherproductsorserviceswhenallofthefollowingcriteriaaremet:anagree-mentofsaleexists,productdeliveryandacceptancehasoccurredorserviceshavebeenrendered,pricingisfixedordeterminable,andcollectionisreasonablyassured.
Research and Developmentthecompanyperformsresearchanddevelopmentactivitiesrelatingtothedevelopmentofnewproductsandtheimprovementofexistingproducts.company-fundedresearchanddevelopmentprogramsareexpensedasincurredandincludedincostofsales.customer-fundedresearchanddevelopmentexpendituresareaccountedforascontractcostswithincostofsales,andthereimbursementisaccountedforasasale.
Cash and Cash Equivalentscashandcashequivalentsincludestimedepositsandcertificatesofdepositwithoriginalmaturitydatesofthreemonthsorless.
Allowance for Doubtful Accountsallowancesareestablishedinordertoreportreceivablesatnetrealizablevalueonthecompany’sstatementofFinancialPosition.thedeterminationoftheseallowancesrequiresmanagementofthecompanytomakeestimatesandjudg-mentsastothecollectibilityofcustomeraccountbalances.theseallowancesareestimatedforcustomerswhoareconsideredcreditrisksbyreviewingthecompany’scollectionexperiencewiththosecustomersaswellasevaluatingthecustomers’financialcondition.thecompanyalsoconsidersbothcurrentandprojectedeconomicandmarketconditions.specialattentionisgiventoaccountswithinvoicesthatarepastdue.Pastdueisdefinedasanyinvoiceforwhichpayment
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hasnotbeenreceivedbytheduedatespecifiedonthebillinginvoice.theuncollectibleportionofreceivablesischargedagainsttheallowancefordoubtfulaccountswhencollec-tioneffortshaveceased.Recoveriesofreceivablespreviouslycharged-offarerecordedwhenreceived.
Inventoriesinventoriesarestatedatthelowerofcostormarketusingcostswhichapproximatethefirst-in,first-outmethod,lessrelatedprogresspaymentsreceived.inventoriedcostsincludedirectcostsofmanufacturing,certainengineeringcostsandallocableoverheadcosts.thecompanyregularlycomparesinventoryquantitiesonhandonapartlevelbasistoestimatedforecastsofproductdemandandproductionrequirementsaswellashistoricalusage.Basedonthesecom-parisons,managementestablishesanexcessandobsoleteinventoryreserveonanaggregatebasis.
thecompanydeferscertainpre-productionengineeringcostsaswork-in-processinventoryinconnectionwithlong-termsupplyarrangementsthatcontaincontractualguaranteesforreimbursementfromcustomers.suchcustomerguaran-teesgenerallytaketheformofaminimumorderquantitywithquantifiedreimbursementamountsiftheminimumorderquantityisnottakenbythecustomer.suchcostsaretypicallydeferredtotheextentofthecontractualguaranteesandaregenerallyamortizedoveraperiodof2to6yearsasacomponentofcostofsalesasrevenueisrecognizedontheminimumorderquantity.Deferredpre-productionengineer-ingcostswere$126millionand$96millionatseptember30,2007and2006,respectively.Pre-productionengineeringcostsincurredpursuanttosupplyarrangementsthatdonotcon-taincustomerguaranteesforreimbursementareexpensedasincurred.
Progress PaymentsProgresspaymentsrelatetobothreceivablesandinvento-riesandrepresentcashcollectedfromgovernment-relatedcontractswherebythegovernmentshavealegalrightofoffsetrelatedtothereceivableorlegaltitletothework-in-processinventory.
PropertyPropertyisstatedatacquisitioncost.Depreciationofpropertyisgenerallyprovidedusingacceleratedandstraight-linemethodsoverthefollowingestimatedusefullives:buildingsandimprovements,15–40years;machineryandequipment,6–12years;andinformationsystemssoftwareandhardware,3–10years.Depreciationmethodsandlivesarereviewedperiodicallywithanychangesrecordedonaprospectivebasis.
significantrenewalsandbettermentsarecapitalizedandreplacedunitsarewrittenoff.Maintenanceandrepairs,aswellasrenewalsofminoramounts,arechargedtoexpenseintheperiodincurred.thefairvalueofliabilitiesassociatedwiththeretirementofpropertyisrecordedwhenthereisalegalorcontractualrequirementtoincursuchcostsandthecostsarereasonablyestimable.Upontheinitialrecognitionofacontractualorlegalliabilityforanassetretirementobligation,thecompanycapitalizestheassetretirementcostbyincreas-ingthecarryingamountofthepropertybythesameamountastheliability.thisassetretirementcostisthendepreciatedovertheestimatedusefullifeoftheunderlyingproperty.thecompanyhadnosignificantassetretirementobligationsatseptember30,2007and2006.
Goodwill and Intangible AssetsGoodwillandintangibleassetsgenerallyresultfrombusi-nessacquisitions.Businessacquisitionsareaccountedforunderthepurchasemethodbyassigningthepurchasepricetotangibleandintangibleassetsacquiredandliabilitiesassumed,includingresearchanddevelopmentprojectswhichhavenotyetreachedtechnologicalfeasibilityandhavenoalternativefutureuse(purchasedresearchanddevelopment).assetsacquiredandliabilitiesassumedarerecordedattheirfairvalues;thefairvalueofpurchasedresearchanddevelop-mentisimmediatelychargedtoexpense;andtheexcessofthepurchasepriceovertheamountsassignedisrecordedasgoodwill.assetsacquiredandliabilitiesassumedareallocatedtothecompany’sreportingunitsbasedonthecompany’sintegrationplansandinternalreportingstructure.Purchasedintangibleassetswithfinitelivesareamortizedovertheirestimatedusefullives.Goodwillandintangibleassetswithindefinitelivesarenotamortized,butreviewedatleastannu-allyforimpairment.
Customer IncentivesRockwellcollinsprovidessalesincentivestocertaincommer-cialcustomersinconnectionwithsalescontracts.incentivesconsistingofcashpaymentsorcustomeraccountcreditsarerecognizedasareductionofsalesandincentivesconsistingoffreeproductarerecognizedascostofsales.
incentivesgiventocustomerspriortodeliveringproductsorperformingservicesarerecordedasacustomerrelationshipintangibleassetandamortizedovertheperiodthecompanyhasreceivedacontractuallyenforceablerightrelatedtotheincentive.incentivesincludedinintangibleassetswere$36millionand$13millionatseptember30,2007and2006,respectively.
incentivesearnedbycustomersbasedonpurchasesofcompanyproductsorservicesarerecognizedasaliabilitywhentherelatedsaleisrecorded.theliabilityfortheseincen-tivesisincludedinothercurrentliabilities.
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Impairment of Long-Lived Assetslong-livedassetsarereviewedforimpairmentwhenman-agementplanstodisposeofassetsorwheneventsorcircumstancesindicatethatthecarryingamountofalong-livedassetmaynotberecoverable.assetsheldfordisposalarereportedatthelowerofthecarryingamountorfairvaluelesscosttosell.Managementdeterminesfairvalueusingadiscountedfuturecashflowanalysisorotheracceptedvalu-ationtechniques.long-livedassetsheldforusearereviewedforimpairmentbycomparingthecarryingamountofanassettotheundiscountedfuturecashflowsexpectedtobegener-atedbytheassetoveritsremainingusefullife.ifanassetisconsideredtobeimpaired,theimpairmenttoberecognizedismeasuredastheamountbywhichthecarryingamountoftheassetexceedsitsfairvalue.
Goodwillandindefinite-livedintangibleassetsaretestedannuallyforimpairmentwithmorefrequenttestsperformedifindicationsofimpairmentexist.thecompany’sannualimpairmenttestingdateisinthesecondquarterofeachfiscalyear.impairmentforintangibleassetswithindefinitelivesexistsifthecarryingvalueoftheintangibleassetexceedsitsfairvalue.Goodwillispotentiallyimpairedifthecarryingvalueofareportingunitexceedsitsestimatedfairvalue.Managementdeterminesfairvalueusingadiscountedfuturecashflowanalysisorotheracceptedvaluationtechniques.thecompany’sannualimpairmenttestingperformedinthesecondquarterof2007,2006,and2005yieldednoimpairments.seenote7foradiscussionofthetradenameswrite-offrecordedinthefourthquarterof2005.
Advance Payments from Customersadvancepaymentsfromcustomersrepresentcashcollectedfromcustomersinadvanceofrevenuerecognition.
Environmentalliabilitiesforenvironmentalmattersarerecordedintheperiodinwhichitisprobablethatanobligationhasbeenincurredandthecostcanbereasonablyestimated.atenvironmentalsitesinwhichmorethanonepotentiallyresponsiblepartyhasbeenidentified,thecompanyrecordsaliabilityforitsestimatedallocableshareofcostsrelatedtoitsinvolvementwiththesiteaswellasanestimatedallo-cableshareofcostsrelatedtotheinvolvementofinsolventorunidentifiedparties.atenvironmentalsitesinwhichthecompanyistheonlyresponsibleparty,thecompanyrecordsaliabilityforthetotalestimatedcostsofremediation.costsoffutureexpendituresforenvironmentalremediationobliga-tionsdonotconsiderinflationandarenotdiscountedtopresentvalues.ifrecoveryfrominsurersorotherthirdpartiesisdeterminedtobeprobable,thecompanyrecordsareceiv-ablefortheestimatedrecovery.
Income Taxescurrenttaxliabilitiesandassetsarebaseduponanestimateoftaxespayableorrefundableinthecurrentyearforeachofthejurisdictionsinwhichthecompanytransactsbusiness.aspartofthedeterminationofitstaxliability,managementexercisesconsiderablejudgmentinassessingthepositionstakenbythecompanyinitstaxreturnsandestablishesreservesforprobabletaxexposures.thesereservesrepre-sentthebestestimateofamountsexpectedtobepaidandareadjustedovertimeasmoreinformationregardingtaxauditsbecomesavailable.Deferredtaxassetsandliabilitiesarerecordedfortheestimatedfuturetaxeffectsattributabletotemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesusedforfinancialreportingpurposesandtheirrespectivecarryingamountsforincometaxpurposes.Deferredtaxassetsarereducedbyavaluationallowancewhen,intheopinionofmanagement,itismorelikelythannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.
Derivative Financial Instrumentsthecompanyusesderivativefinancialinstrumentsintheformofforeigncurrencyforwardexchangecontractsandinterestrateswapcontractsforthepurposeofminimiz-ingexposuretochangesinforeigncurrencyexchangeratesonbusinesstransactionsandinterestrates,respectively.thecompany’spolicyistoexecutesuchinstrumentswithcreditworthybanksandnottoenterintoderivativefinancialinstrumentsforspeculativepurposesortomanageexposurefornetinvestmentsinforeignsubsidiaries.thesederivativefinancialinstrumentsdonotsubjectthecompanytoundueriskasgainsandlossesontheseinstrumentsgenerallyoffsetgainsandlossesontheunderlyingassets,liabilities,orantici-patedtransactionsthatarebeinghedged.
allderivativefinancialinstrumentsarerecordedatfairvalueinthestatementofFinancialPosition.Foraderivativethathasnotbeendesignatedasanaccountinghedge,thechangeinthefairvalueisrecognizedimmediatelythroughearnings.Foraderivativethathasbeendesignatedasanaccountinghedgeofanexistingassetorliability(afairvaluehedge),thechangeinthefairvalueofboththederivativeandunderlyingassetorliabilityisrecognizedimmediatelythroughearn-ings.Foraderivativedesignatedasanaccountinghedgeofananticipatedtransaction(acashflowhedge),thechangeinthefairvalueisrecordedonthestatementofFinancialPositioninaccumulatedothercomprehensivelosstotheextentthederivativeiseffectiveinmitigatingtheexposurerelatedtotheanticipatedtransaction.thechangeinthefairvaluerelatedtotheineffectiveportionofthehedge,ifany,isimmediatelyrecognizedinearnings.theamountrecordedwithinaccumulatedothercomprehensivelossisreclassifiedinearningsinthesameperiodduringwhichtheunderlyinghedgedtransactionaffectsearnings.thecompanydoesnotexcludeanyamountsfromthemeasureofeffectivenessforbothfairvalueandcashflowhedges.
ROckwell cOllins annual RepORt 2007 40notestoconsolidatedFinancialstatements
Use of EstimatesthefinancialstatementsofthecompanyhavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamerica,whichrequiremanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthefinancialstatements.actualresultscoulddifferfromthoseestimates.estimatesareusedinaccountingfor,amongotheritems,long-termcontracts,allowancesfordoubtfulaccounts,inventoryobsolescence,productwarrantycostliabilities,customerincentiveliabilities,retirementben-efits,incometaxes,environmentalmatters,recoverabilityoflong-livedassetsandcontingencies.estimatesandassump-tionsarereviewedperiodicallyandtheeffectsofchanges,ifany,arereflectedinthestatementofoperationsintheperiodthattheyaredetermined.
Concentration of Risksthecompany’sproductsandservicesareconcentratedwithintheaerospaceanddefenseindustrieswithcustomersconsistingprimarilyofmilitaryandcommercialaircraftmanu-facturers,commercialairlines,andtheUnitedstatesandinternationalgovernments.asaresultofthisindustryfocus,thecompany’scurrentandfuturefinancialperformanceislargelydependentupontheoveralleconomiccondi-tionswithintheseindustries.inparticular,thecommercialaerospacemarkethasbeenhistoricallycyclicalandsubjecttodownturnsduringperiodsofweakeconomicconditions,whichcouldbepromptedbyorexacerbatedbypoliticalorotherdomesticorinternationalevents.thedefensemarketmaybeaffectedbychangesinbudgetappropriations,pro-curementpolicies,politicaldevelopmentsbothdomesticallyandabroad,andotherfactors.Whilemanagementbelievesthecompany’sproductofferingsarewellpositionedtomeettheneedsofitscustomerbase,anymaterialdeteriorationintheeconomicandenvironmentalfactorsthatimpacttheaerospaceanddefenseindustriescouldhaveamaterialadverseeffectonthecompany’sresultsofoperations,finan-cialpositionorcashflows.
inadditiontotheoverallbusinessrisksassociatedwiththecompany’sconcentrationwithintheaerospaceanddefenseindustries,thecompanyisalsoexposedtoaconcentrationofcollectionriskoncreditextendedtocommercialairlines.accountsreceivableduefromU.s.andinternationalcom-mercialairlinesatseptember30,2007wasapproximately$23millionand$91million,respectively.thecompanyper-formsongoingcreditevaluationsonthefinancialconditionofallofitscommercialairlinecustomersandmaintainsallow-ancesforuncollectibleaccountsreceivablebasedonexpectedcollectibility.althoughmanagementbelievesitsallowancesareadequate,thecompanyisnotabletopredictwithcertaintythechangesinthefinancialstabilityofitscustomers.anymaterialchangeinthefinancialstatusofanyoneorgroupofcustomerscouldhaveamaterialadverseeffectonthecom-pany’sresultsofoperations,financialpositionorcashflows.
asofseptember30,2007,approximately12percentofthecompany’semployeeswererepresentedbycollectivebargainingagreements.collectivebargainingagreementsrepresentingapproximately11percentofthecompany’semployeesexpirewithinoneyear.Failuretoreachnewagree-mentswiththesecollectivebargainingunitscouldresultinworkstoppageswhichcouldadverselyaffectthecompany’sresultsofoperations,financialpositionorcashflows.
Recently Issued Accounting StandardsinFebruary2007,theFinancialaccountingstandardsBoard(FasB)issuedstatementofFinancialaccountingstandards(sFas)no.159,The Fair Value Option for Financial Assets and Financial Liabilities(sFas159).sFas159permitsentitiestochoosetomeasurecertaineligiblefinancialassetsandfinan-cialliabilitiesatfairvalue(thefairvalueoption).sFas159alsoestablishespresentationanddisclosurerequirementsdesignedtofacilitatecomparisonsbetweenentitiesthatchoosedifferentmeasurementattributesforsimilartypesofassetsandliabilities.Unrealizedgainsandlossesonitemsforwhichthefairvalueoptioniselectedwouldbereportedinearnings.sFas159iseffectiveforthecompany’syearendingseptember30,2009.thecompanyiscurrentlyevaluatingwhethertoelectthefairvalueoptionforeligiblefinancialassetsand/orfinancialliabilitiesandtheimpact,ifany,ofsFas159onthecompany’sfinancialstatements.
inseptember2006,theFasBissuedsFasno.158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)(sFas158).UndersFas158,com-paniesmust:a)recognizeanetliabilityorassettoreportthefundedstatusoftheirdefinedbenefitplansontheirstate-mentoffinancialposition,b)measureaplan’sassetsanditsobligationsthatdetermineitsfundedstatusasoftheendoftheemployer’sfiscalyear,andc)recognizechangesinthefundedstatusofadefinedbenefitplanintheyearinwhichthechangesoccurincomprehensiveincome.Duringthefirstquarterof2007,thecompanycompleteditsevaluationofsFas158andelectedtoadoptthemeasurementdateprovi-sionsofsFas158effectiveoctober1,2006.thecompanyadoptedtherecognitionprovisionsofsFas158asoftheendof2007asrequiredbysFas158.seenote11forfurtherinfor-mationregardingthecompany’sadoptionofsFas158.
inseptember2006,theFasBissuedsFasno.157,Fair Value Measurements(sFas157).sFas157definesfairvalue,establishesaframeworkformeasuringfairvalueingener-allyacceptedaccountingprinciples,andexpandsdisclosuresaboutfairvaluemeasurements.sFas157appliesunderotheraccountingpronouncementsthatrequireorpermitfairvaluemeasurements.sFas157indicates,amongotherthings,afairvaluemeasurementassumesthatthetransactiontosellanassetortransferaliabilityoccursintheprincipalmar-ketfortheassetorliabilityor,intheabsenceofaprincipal
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market,themostadvantageousmarketfortheassetorliability.sFas157iseffectiveforthecompany’syearendingseptember30,2009.thecompanyiscurrentlyevaluatingtheimpactofsFas157onthecompany’sfinancialstatements.
inJune2006,theFasBissuedFasBinterpretationno.48,Accounting for Uncertainty in Income Taxes (Fin48).Fin48clarifiestheaccountingforuncertaintyinincometaxesbyestablishingaminimumrecognitionthresholdataxpositionisrequiredtomeetbeforebeingrecognizedinthefinancialstatements.Fin48prescribesacomprehensivemodelforhowacompanyshouldrecognize,derecognize,measure,present,anddiscloseinitsfinancialstatementsuncertaintaxposi-tionsthatacompanyhastakenorexpectstotakeonataxreturn.inaddition,Fin48providesguidanceoninterestandpenalties,accountingininterimperiods,andtransition.thecompanywilladoptFin48effectiveoctober1,2007,withanycumulativeeffectoftheadoptionrecordedasanadjustmenttobeginningretainedearnings.Basedonthecompany’scurrentassessment,theadoptionofFin48isnotexpectedtohaveamaterialeffectonthecompany’sfinancialstatements.
3. ACQUISITIONS
Duringtheyearsendedseptember30,2007,2006and2005,thecompanycompletedfiveacquisitionsthataresumma-rizedasfollows:
intanGiBleassets
WeiGHteD Fiscal casH aveRaGe yeaR PURcHase Finite liFein(dollarsinmillions) acqUiReD PRice GooDWill liveD yeaRs
informationtechnology&
applicationscorporation 2007 $37 $25 $14 7
anzus,inc. 2006 19 12 9 7
iPUnwired,inc. 2006 10 7 3 8
e&ssimulationBusiness 2006 66 33 22 9
telDiXGmbH 2005 19 45 15 11
Information Technology & Applications Corporationonaugust10,2007,thecompanyacquired100percentofthesharesofinformationtechnology&applicationscorporation(itac).itac,locatedinReston,virginia,isaproviderofintel-ligence,surveillance,reconnaissanceandcommunicationssolutionstosupporttheglobalwaronterrorandhomelandsecurity.thetotalcashpurchaseprice,netofcashacquired,was$37million.thecompanyisintheprocessofallocatingthepurchasepriceandobtainingavaluationforacquiredintangibleassets.Basedonthecompany’spreliminaryallocationofthepurchaseprice,$25millionhasbeenallo-catedtogoodwilland$14milliontofinite-livedintangibleassetswithaweightedaveragelifeofapproximately7years.theexcesspurchasepriceovernetassetsacquiredreflectsthecompany’sviewthatthisacquisitionwillenhancethecompany’scommunicationsintelligencecapabilities.noneofthegoodwillresultingfromtheacquisitionistaxdeductible.GoodwillisincludedwithintheassetsoftheGovernmentsystemssegment.
Anzus, Inc.onseptember25,2006,thecompanyacquired100percentofthesharesofanzus,inc.(anzus).anzus,locatedinPoway,california,isadeveloperofsoftwarethatenableshigh-speedtacticaldatalinkprocessingandsensorcorrelationfortheU.s.DepartmentofDefenseaswellasinternationalgovernments.thetotalcashpurchaseprice,netofcashacquired,was$19million.Duringthefourthquarterof2007,thepurchasepriceallocationwasfinalizedwith$12millionofthepurchasepriceallocatedtogoodwilland$9milliontofinite-livedintan-gibleassetswithaweightedaveragelifeofapproximately7years.theexcesspurchasepriceovernetassetsacquiredreflectsthecompany’sviewthatthisacquisitionwillenhancethecompany’stacticaldatalinkintegrationsolutions.noneofthegoodwillresultingfromtheacquisitionistaxdeduct-ible.GoodwillisincludedwithintheassetsoftheGovernmentsystemssegment.
IP Unwired, Inc.onseptember5,2006,thecompanyacquired100percentofthesharesofiPUnwired,inc.(iPUnwired).iPUnwired,locatedinottawa,canada,isaproviderofadvanceddigitalcommunicationsandnetworkingtechnologyforU.s.andinternationalmilitarycustomers.thetotalcashpurchaseprice,netofcashacquired,was$10million.Duringthefourthquarterof2007,thepurchasepriceallocationwasfinalizedwith$7millionofthepurchasepriceallocatedtogoodwilland$3milliontofinite-livedintangibleassetswithaweightedaveragelifeofapproximately8years.theexcesspurchasepriceovernetassetsacquiredreflectsthecompany’sviewthatthisacquisitionwillstrengthenthecompany’snetwork-centricoperationalcapabilities.allgoodwillresultingfromtheacquisitionistaxdeductible.GoodwillisincludedwithintheassetsoftheGovernmentsystemssegment.
E&S Simulation BusinessonMay26,2006,thecompanyacquiredevans&sutherlandcomputercorporation’s(e&s)militaryandcommercialsimulationassetsandcertainliabilities,includingoperationsintheUnitedstatesandUnitedKingdom(thee&ssimulationBusiness).thee&ssimulationBusinessproduceshardwareandsoftwaretocreatevisualimagesforsimulation,training,engineering,andotherapplicationsthroughouttheworld.inconnectionwiththistransaction,thecompanyalsoenteredintoalaserprojectionsystemsagreementwithe&swherebythecompanyhasexclusiveandnon-exclusiverightstolaserprojectorsfortheacquiredbusinessandcertainofthecompany’sotherrelatedbusinesses.
thetotalcashpurchasepricewasapproximately$66mil-lion,whichisnetofa$5millionpost-closingpurchasepriceadjustmentreceivedbythecompanyinMarch2007.Duringthethirdquarterof2007,thepurchasepriceandpurchasepriceallocationwerefinalizedwith$33millionofthepurchasepriceallocatedtogoodwilland$22milliontofinite-livedintangibleassetswithaweightedaveragelifeof
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approximately9years.theexcesspurchasepriceovernetassetsacquiredreflectsthecompany’sviewthatthisacquisi-tionwillfurtherenhancethecompany’ssimulationandtrainingcapabilitiesandprovidemorerobustsolutionsforthecompany’scustomers.allgoodwillresultingfromtheacquisi-tionistaxdeductible.$22millionofgoodwillisincludedintheGovernmentsystemssegmentand$11millionofgood-willisincludedinthecommercialsystemssegment.
TELDIX GmbHonMarch31,2005,thecompanyacquired100percentofthestockoftelDiXGmbH(telDiX),aleadingproviderofmilitaryaviationelectronicsproductsandservices,basedinHeidelberg,Germany.telDiXsuppliesabroadportfolioofcomplexmilitaryaircraftcomputerproducts,advancedmechanicalspacemechanismsandrelatedsupportservicestomajorprimecontractorsthroughouteurope.theacqui-sitionoftelDiXhasbroadenedthecompany’seuropeanpresenceandprovidescomplementaryproductlinesthatshouldallowthecompanytoenhanceitsofferingstocustomersworldwideandshouldprovidenewchannel-to-marketopportunitiesforthecompany’sotherproductsandservices.in2006,telDiXwascombinedwiththecompany’sexistingGermanoperationsandisnowcalledRockwellcollinsDeutschlandGmbH.in2006,thepurchasepriceandpurchasepriceallocationwerefinalized.thecashpurchaseprice,netofcashacquired,was$19millionofwhich$45millionwasallocatedtogoodwilland$15milliontofinitelivedintangibleassetswithaweightedaveragelifeofapproximately11years.theexcesspurchasepriceovernetassetsacquiredreflectsthecompany’sviewthatthereareopportunitiestoexpanditsmarketshareintheeuropeanregion.approximately18percentofthegoodwillresultingfromthisacquisitionistaxdeductible.GoodwillisincludedwithintheassetsoftheGovernmentsystemssegment.
theresultsofoperationsoftheseacquiredbusinessesareincludedinthestatementofoperationssincetheirrespectivedatesofacquisition.Proformafinancialinformationisnotpresentedastheeffectoftheseacquisitionsisnotmaterialtothecompany’sresultsofoperations.
4. RECEIVABLES
Receivablesaresummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
Billed $715 $665
Unbilled 207 203
lessprogresspayments (30) (35)
total 892 833
lessallowancefordoubtfulaccounts (9) (12)
Receivables $883 $821
thecompanyexpectstobillandcollectallreceivablesout-standingasofseptember30,2007withinthenexttwelve
months.asofseptember30,2006,theportionofreceivablesoutstandingthatwerenotexpectedtobecollectedwithinthenexttwelvemonthswasapproximately$7million.
Unbilledreceivablesprincipallyrepresentsalesrecordedunderthepercentage-of-completionmethodofaccountingthathavenotbeenbilledtocustomersinaccordancewithappli-cablecontractterms.
5. INVENTORIES
inventoriesaresummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
Finishedgoods $187 $172
Workinprocess 362 318
Rawmaterials,parts,andsupplies 371 329
total 920 819
lessprogresspayments (97) (92)
inventories $823 $727
inaccordancewithindustrypractice,inventoriesincludeamountswhicharenotexpectedtoberealizedwithinoneyear.theseamountsprimarilyrelatetolife-timebuyinventoryandcertainpre-productionengineeringcostsnotexpectedtoberealizedwithinoneyearof$183millionand$146millionatseptember30,2007and2006,respectively.life-timebuyinventoryisinventorythatistypicallynolongerbeingproducedbythecompany’svendorsbutforwhichmultipleyearsofsupplyarepurchasedinordertomeetproductionandservicerequirementsoverthelifespanofaproduct.
6. PROPERTy
Propertyissummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
land $ 31 $ 30
Buildingsandimprovements 307 281
Machineryandequipment 769 709
informationsystemssoftwareandhardware 276 264
constructioninprogress 72 63
total 1,455 1,347
lessaccumulateddepreciation (848) (795)
Property $ 607 $ 552
Propertyadditionsacquiredbyincurringaccountspayable,whicharereflectedasanon-cashtransactioninthecompany’sconsolidatedstatementofcashFlows,were$29million,$14million,and$14millionatseptember30,2007,2006,and2005,respectively.
ROckwell cOllins annual RepORt 2007 43notestoconsolidatedFinancialstatements
7. GOODWILL AND INTANGIBLE ASSETS
changesinthecarryingamountofgoodwillaresummarizedasfollows: GoveRnMent coMMeRcial(inmillions) systeMs systeMs total
Balanceatseptember30,2005 $278 $180 $458
e&ssimulationBusinessacquisition 20 14 34
iPUnwiredacquisition 7 — 7
anzusacquisition 14 — 14
currencytranslationadjustments 4 — 4
Balanceatseptember30,2006 323 194 517
itacacquisition 25 — 25
Purchasepriceallocationadjustments (1) (3) (4)
currencytranslationadjustments 6 — 6
Balanceatseptember30,2007 $353 $191 $544
intangibleassetsaresummarizedasfollows: sePteMBeR30,2007 sePteMBeR30,2006
(inmillions) GRoss accUMaMoRt net GRoss accUMaMoRt net
intangibleassetswithfinitelives:
Developedtechnologyandpatents $156 $ (72) $ 84 $143 $(58) $ 85
licenseagreements 11 (3) 8 24 (6) 18
customerrelationships 67 (19) 48 41 (14) 27
trademarksandtradenames 12 (7) 5 11 (6) 5
intangibleassetswithindefinitelives:
trademarksandtradenames 2 — 2 2 — 2
intangibleassets $248 $(101) $147 $221 $(84) $137
customersthatitwouldnolongerusecertainindefinitelivedtradenamesrelatedtoKaiseraerospaceandelectronicscorporation(Kaiser),acquiredinDecember2000.asaresult,thecompanyrecordeda$15millionpre-taxwrite-offinthefourthquarterof2005.thetradenameswrite-offwasrecordedincostofsales.
amortizationexpenseforintangibleassetsfortheyearsendedseptember30,2007,2006and2005was$22million,$21million,and$19million,respectively.annualamortiza-tionexpenseforintangibleassetsfor2008,2009,2010,2011,and2012isexpectedtobe$24million,$24million,$26mil-lion,$27million,and$17million,respectively.
thecommercialsystemssegmentpaid$14millionforalicensefeeinprioryearsrelatedtoastrategicagreementwiththeBoeingcompany(Boeing)toprovideaglobalbroad-bandconnectivitysolutionforbusinessaircraftthroughthecompany’scollinseXchange™product.inthefourthquarterof2006,Boeingannouncedtheywouldexitthehigh-speedbroadbandcommunicationsconnectivitymarkets.During2007,thecompanyandBoeingreachedasettlementthatincluded,amongotherthings,repaymentbyBoeingof$14milliontothecompany,representingthecarryingvalueofthelicenseagreement.
inthefourthquarterof2005,thecompanycompletedacompany-widebrandinginitiativeandannouncedtoits
ROckwell cOllins annual RepORt 2007 44notestoconsolidatedFinancialstatements
8. OTHER ASSETS
otherassetsaresummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
long-termdeferredincometaxes(note16) $ 1 $ 34
long-termreceivables 73 9
investmentsinequityaffiliates 10 13
exchangeandrentalassets,netofaccumulated
depreciationof$95atseptember30,2007
and$91atseptember30,2006 37 37
other 74 52
otherassets $195 $145
Investments in Equity Affiliates investmentsinequityaffiliatesconsistofinvestmentsinjointventures,eachofwhichis50percentownedbythecompanyandaccountedforundertheequitymethod.thecompany’sjointventurescurrentlyconsistofvisionsystemsinternational,llc(vsi),Datalinksolutions,llc(Dls),integratedGuidancesystems,llc(iGs),andquestFlighttraininglimited(quest).
vsiisajointventurewithelbitsystems,ltd.forthejointpursuitofhelmetmountedcueingsystemsfortheworldwidemilitaryfixedwingaircraftmarket.
DlsisajointventurewithBaesystems,plcforthejointpur-suitoftheworldwidemilitarydatalinkmarket.
iGsisajointventurewithHoneywellinternationalinc.establishedinnovemberof2005forthejointpursuitofintegratedprecisionguidancesolutionsforworldwideguidedweaponssystems.
questisajointventurewithquadrantGroupplc(quadrant)thatprovidesaircrewtrainingservicesforprimarilytheUnitedKingdomMinistryofDefense.the50percentinvestmentinquestwasacquiredfromevans&sutherlandinMayof2006.
Rockwellscientificcompany,llc(Rsc)wasajointventurewithRockwellautomation,inc.(Rockwellautomation)thatwasengagedinadvancedresearchanddevelopmentoftechnologiesinelectronics,imagingandoptics,materialandcomputationalsciencesandinformationtechnology.onseptember15,2006,thecompanyandRockwellautomationsoldRsctoteledyneBrownengineering,inc.(teledyne)for$168millionincash,ofwhichthecompanyreceivedapproxi-mately$84million(50percent),excludingexpensesandcertainretainedliabilities.aspartofthesale,thecompanyenteredintoaserviceagreementtocontinuefundingcertainresearchperformedbyRscfor$7million,$7million,and$4millionfor2007,2008,and2009,respectively.inaddition,teledyneagreedtolicensecertainintellectualpropertyofRsc
tothecompany.Priortothesale,Rscperformedresearchanddevelopmenteffortsonbehalfofthecompanyintheamountof$9millionforeachoftheyearsendedseptember30,2006and2005.inthefourthquarterof2006,thecompanyrecordedapre-taxgainof$20million($13millionaftertaxes,or7centspershare)relatedtothesaleofRsc.thispre-taxgainwasrecordedinotherincome,net.
Undertheequitymethodofaccountingforinvestments,thecompany’sproportionateshareoftheearningsorlossesofitsequityaffiliatesareincludedinnetincomeandclassifiedasotherincome,netinthestatementofoperations.Forseg-mentperformancereportingpurposes,Rockwellcollins’shareofearningsorlossesofvsi,Dls,iGs,andquestareincludedintheoperatingresultsoftheGovernmentsystemssegment.Rscwasconsideredacorporate-levelinvestmentpriortoitssalein2006.
inthenormalcourseofbusinessorpursuanttotheunder-lyingjointventureagreements,thecompanymaysellproductsorservicestoequityaffiliates.thecompanydefersaportionoftheprofitgeneratedfromthesesalesequaltoitsownershipinterestintheequityaffiliatesuntiltheunder-lyingproductisultimatelysoldtoanunrelatedthirdparty.salestoequityaffiliateswere$128million,$139million,and$126millionfortheyearsendedseptember30,2007,2006,and2005,respectively.thedeferredportionofprofitgeneratedfromsalestoequityaffiliateswas$6millionand$7millionatseptember30,2007and2006,respectively.
Exchange and Rental Assetsexchangeandrentalassetsconsistofcompanyproductsthatareeitherloanedorrentedtocustomersonashort-termbasisinconnectionwithwarrantyandotherservicerelatedactivitiesorunderoperatingleases.theseassetsarerecordedatacquisitionorproductioncostanddepreciatedusingthestraight-linemethodovertheirestimatedliveswhichrangefrom3-11years.Depreciationmethodsandlivesarereviewedperiodicallywithanychangesrecordedonaprospectivebasis.
9. OTHER CURRENT LIABILITIES
othercurrentliabilitiesaresummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
customerincentives $117 $125
contractreserves 18 37
other 78 81
othercurrentliabilities $213 $243
ROckwell cOllins annual RepORt 2007 45notestoconsolidatedFinancialstatements
10. DEBT
Revolving Credit FacilitiesinMay2005,thecompanyenteredintoan$850millionfive-yearunsecuredrevolvingcreditfacilitywithvariousbanks.thiscreditfacilityexistsprimarilytosupportthecompany’scommercialpaperprogram,butmaybeusedforothercor-poratepurposesintheeventaccesstothecommercialpapermarketisimpairedoreliminated.thecreditfacilityincludesonefinancialcovenantrequiringthecompanytomaintainaconsolidateddebttototalcapitalizationratioofnotgreaterthan60percent.theratiowas11percentasofseptember30,2007.inaddition,thecreditfacilitycontainscovenantsthatrequirethecompanytosatisfycertainconditionsinordertoincurdebtsecuredbyliens,engageinsale/leasebacktransac-tions,ormergeorconsolidatewithanotherentity.BorrowingsunderthiscreditfacilitybearinterestatthelondoninterbankofferedRate(liBoR)plusavariablemarginbasedonthecompany’sunsecuredlong-termdebtratingor,atthecompany’soption,ratesdeterminedbycompetitivebid.
onMarch7,2007,thecompanyamendedtheRevolvingcreditFacilitytoextendthetermbyapproximatelytwoyears,withoptionstofurtherextendthetermforuptotwoone-yearperiodsand/orincreasetheaggregateprincipalamountupto$1.2billion.theseoptionsaresubjecttotheapprovalofthelenders.theamendmentalsoloweredcertainmarginsapplicabletointerestrates,reducedthefacilityfeerate,andmodifiedthefinancialcovenanttoexcludethesFas158equityimpactrelatedtodefinedbenefitplansfromthecalcu-lationoftheconsolidateddebttototalcapitalizationratio.
inaddition,short-termcreditfacilitiesavailabletoforeignsubsidiarieswere$63millionasofseptember30,2007,ofwhich$24millionwasutilizedtosupportcommitmentsintheformofcommerciallettersofcredit.atseptember30,2007and2006,therewerenosignificantcommitmentfeesorcompensatingbalancerequirementsunderanyofthecompany’screditfacilitiesandtherewerenoborrowingsoutstandingunderanyofthecompany’screditfacilitiesorthecommercialpaperprogram.
Long-Term DebtinJune2006,thecompanyenteredintoafive-yearunsecuredvariablerateloanfacilityagreementfor20.4millioneuros($25million).theinterestrateisvariableattheeurointer-bankofferedRateplus35basispointsandinterestispayablequarterly.theoutstandingbalanceofthisloanfacilitywas$24millionand$25millionatseptember30,2007and2006,respectively.theinterestratewas5.08percentand3.77percentatseptember30,2007and2006,respectively.thevariablerateloanfacilitycontainscustomaryloancovenants,noneofwhicharefinancialcovenants.Failuretocomplywithcustomarycovenantsortheoccurrenceofcustomaryeventsofdefaultcontainedintheagreementwouldrequiretherepaymentofanyoutstandingborrowingsundertheagreement.
inJune2006,thecompanyenteredintoafive-yearunsecuredvariablerateloanfacilityagreementfor11.5millionBritishpounds($21million).thisloanfacilitywasrepaidin2007.atseptember30,2006theoutstandingbalanceofthisloanfacilitywas$22millionandtheinterestratewas5.42percent.
inaddition,thecompanyhasashelfregistrationstatementfiledwiththesecuritiesandexchangecommissioncoveringupto$750millionindebtsecurities,commonstock,pre-ferredstockorwarrantsthatmaybeofferedinoneormoreofferingsontermstobedeterminedatthetimeofsale.onnovember20,2003,thecompanyissued$200millionof4.75percentfixedrateunsecureddebtundertheshelfregis-trationdueDecember1,2013(thenotes).interestpaymentsonthenotesaredueonJune1andDecember1ofeachyear.thenotescontaincertaincovenantsandeventsofdefault,includingrequirementsthatthecompanysatisfycertaincon-ditionsinordertoincurdebtsecuredbyliens,engageinsale/leasebacktransactions,ormergeorconsolidatewithanotherentity.in2004,thecompanyenteredintointerestrateswapcontractswhicheffectivelyconverted$100millionaggregateprincipalamountofthenotestofloatingratedebtbasedonsix-monthliBoRless7.5basispoints.seenote17foraddi-tionalinformationrelatingtotheinterestrateswapcontracts.atseptember30,2007,$550millionoftheshelfregistrationstatementwasavailableforfutureuse.
long-termdebtandareconciliationtothecarryingamountissummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
PrincipalamountofnotesdueDecember1,2013 $200 $200
Principalamountofvariablerateloanfacilities
dueJune2011 24 47
Fairvalueswapadjustment(note17) (1) (2)
long-termdebt $223 $245
thecompanywasincompliancewithalldebtcovenantsatseptember30,2007and2006.
interestpaidondebtfortheyearsendedseptember30,2007,2006,and2005was$13million,$11million,and$10million,respectively.
ROckwell cOllins annual RepORt 2007 46notestoconsolidatedFinancialstatements
11. RETIREmENT BENEFITS
thecompanysponsorsdefinedbenefitpension(PensionBenefits)andotherpostretirement(otherRetirementBenefits)planscoveringmostofitsU.s.employeesandcertainemployeesinforeigncountrieswhichprovidemonthlypensionandotherbenefitstoeligibleemployeesuponretirement.
SFAS 158 AdoptionDuringthefirstquarterof2007,thecompanychangeditsmeasurementdatefromJune30toseptember30forallofthecompany’sdefinedbenefitplans.inaccordancewiththemeasurementdatetransitionprovisionsofsFas158,thecompanyremeasuredbenefitobligationsandplanassetsasofthebeginningofthefiscalyear.asaresultofthisremea-surement,retirementbenefitliabilitiesincreased$141millionandaccumulatedothercomprehensivelossincreased$47million,primarilyduetoadeclineinthediscountrateforPensionBenefitsfrom6.5percentto6.1percent.thecompanyalsorecordedachargetoRetainedearningsof$5million,aftertax,whichwasthenetbenefitcostfortheperiodfromJuly1,2006toseptember30,2006.inaddition,theremeasurementdecreasedoverallretirementnetbenefitcostby$1millionforfiscal2007.
effectiveseptember30,2007,thecompanyadoptedtherecognitionprovisionsofsFas158andrecognizedthefundedstatusofthecompany’sretirementbenefitplansonthestatementofFinancialPosition.thecompanyhasrecognizedtheaggregateofalloverfundedplansasaPrepaidPensionassetandtheaggregateofallunderfundedplansasaRetirementBenefitliability.thecurrentportionoftheliabilityistheamountbywhichtheactuarialpresentvalueofbenefitsincludedinthebenefitobligationpayableinthenext12monthsexceedsthefairvalueofplanassetsandisreflectedincompensationandBenefitsinthestatementofFinancialPosition.
atseptember30,2007,thepreviouslyunrecognizeddif-ferencesbetweenactualamountsandestimatesbasedonactuarialassumptionsareincludedinaccumulatedothercomprehensivelossinthestatementofFinancialPositionasrequiredbysFas158.infutureperiods,thedifferencesbetweenactualamountsandestimatesbasedonactuarial
assumptionswillberecognizedincomprehensiveincomeintheperiodinwhichtheyoccur.theadoptionofthesFas158recognitionprovisionshadnoeffectonthecompany’sstatementofoperationsfortheyearendedseptember30,2007,orforanypriorperiodspresented,andwillnotaffectthecompany’sstatementofoperationsinfutureperiods.
theincrementaleffectonindividuallineitemsinthestatementofFinancialPositionofadoptingtherecogni-tionprovisionsofsFas158issummarizedasfollowsasofseptember30,2007: asset(liaBility)
BeFoRe aFteR aDoPtion aDoPtion(inmillions) oFsFas158 aDJUstMents oFsFas158
PrepaidPensionasset $ 541 $(453) $ 88
long-termDeferredincometaxes (236) 193 (43)
compensationandBenefits (311) 6 (305)
RetirementBenefits (284) (75) (359)
accumulatedother
comprehensiveloss 7 329 336
amountsrecognizedinaccumulatedothercomprehensivelossatseptember30,2007areasfollows: otHeR Pension RetiReMent BeneFits BeneFits
Priorservicecost $(135) $(140)
netactuarialloss 636 210
total $ 501 $ 70
Components of Expense (Income)thecomponentsofexpense(income)forPensionBenefitsandotherRetirementBenefitsaresummarizedbelow: otHeR PensionBeneFits RetiReMentBeneFits
(inmillions) 2007 2006 2005 2007 2006 2005
servicecost $ 8 $ 50 $ 36 $ 4 $ 4 $ 3
interestcost 151 140 141 15 15 18
expectedreturnon
planassets (189) (181) (177) (1) (1) (1)
amortization:
Priorservicecost (19) (18) (15) (39) (39) (39)
netactuarialloss 58 79 46 16 19 20
netbenefitexpense
(income) $ 9 $ 70 $ 31 $ (5) $ (2) $ 1
ROckwell cOllins annual RepORt 2007 47notestoconsolidatedFinancialstatements
Funded Status and Net Asset (Liability)thefollowingtablereconcilestheprojectedbenefitobligations(PBo),planassets,fundedstatus,andnetasset(liability)forthecompany’sPensionBenefitsandtheotherRetirementBenefits.the2007columnincludesthetwelve-monthperiodfromoctober1,2006toseptember30,2007.theRemeasurecolumnincludesthethree-monthperiodfromJuly1,2006toseptem-ber30,2006whichreflectsthechangeinmeasurementdatefromJune30toseptember30.the2006columnincludesthetwelve-monthperiodfromJuly1,2005toJune30,2006. PensionBeneFits otHeRRetiReMentBeneFits
(inmillions) 2007 ReMeasURe 2006 2007 ReMeasURe 2006
PBoatbeginningofperiod $2,557 $2,423 $2,742 $ 278 $ 271 $ 301
servicecost 8 9 50 4 4 4
interestcost 151 38 140 15 1 15
Discountratechange (164) 119 (357) (10) 9 —
actuariallosses(gains) 130 1 5 (5) (2) (19)
Planamendments — — (36) (15) — —
Benefitspaid (140) (34) (129) (29) (5) (30)
other 12 1 8 — — —
PBoatendofperiod 2,554 2,557 2,423 238 278 271
Planassetsatbeginningofperiod 2,207 2,148 2,061 15 15 14
actualreturnonplanassets 328 90 143 2 — 2
companycontributions 90 3 71 27 5 30
Benefitspaid (140) (34) (129) (29) (5) (30)
other 5 — 2 — — (1)
Planassetsatendofperiod 2,490 2,207 2,148 15 15 15
Fundedstatusofplans (64) (350) (275) (223) (263) (256)
contributionsaftermeasurementdate — — 1 — — —
Unamortizedamounts:
Priorservicecost — (153) (158) — (164) (173)
netactuarialloss — 866 802 — 245 242
netasset(liability) $ (64) $ 363 $ 370 $(223) $(182) $(187)
netasset(liability)consistsof:
Deferredtaxasset $ — $ 262 $ 234 $ — $ — $ —
Prepaidpensionasset 88 — — — — —
Retirementbenefitsliability (143) (346) (264) (213) (148) (153)
compensationandbenefitsliability (9) — — (10) (34) (34)
accumulatedothercomprehensiveloss — 447 400 — — —
netasset(liability) $ (64) $ 363 $ 370 $(223) $(182) $(187)
ROckwell cOllins annual RepORt 2007 48notestoconsolidatedFinancialstatements
theaccumulatedbenefitobligationforalldefinedben-efitpensionplanswas$2,547million,$2,548million,and$2,404millionatseptember30,2007,october1,2006,andseptember30,2006,respectively.
theestimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensivelossintonetdefined
benefitexpense(income)duringtheyearendingseptember30,2008areasfollows:
otHeR Pension RetiReMent BeneFits BeneFits
Priorservicecost $ (19) $ (33)
netactuarialloss 47 14
total $ 28 $ (19)
Actuarial Assumptionsthefollowingtablepresentsthesignificantassumptionsusedindeterminingthebenefitobligations.the2007columnrelatestothebenefitobligationsatseptember30,2007.theRemeasurecolumnrelatestothebenefitobligationsatoctober1,2006,whichreflectsthechangeinmeasurementdatefromJune30toseptember30.the2006columnrelatestothebenefitobligationatJune30,2006.
PensionBeneFits otHeRRetiReMentBeneFits
2007 ReMeasURe 2006 2007 ReMeasURe 2006
Discountrate 6.60% 6.10% 6.50% 6.50% 6.00% 6.50%
compensationincreaserate 4.50% 4.50% 4.50% — — —
thediscountratesusedtodeterminethebenefitobligationswerebasedonindividualbond-matchingmodelscomprisedofportfoliosofhigh-qualitycorporatebondswithprojectedcashflowsandmaturitydatesreflectingtheexpectedtimehorizonthatbenefitswillbepaid.Bondsincludedinthemodelportfoliosarefromacross-sectionofdifferentissuers,areratedaa-orbetter,arenon-callable,andhaveatleast$25millionoutstandingatthemeasurementdate.
significantassumptionsusedindeterminingthenetbenefitexpense(income)areasfollows: otHeR RetiReMent PensionBeneFits BeneFits
2007 2006 2007 2006
Discountrate 6.10% 5.30% 6.00% 5.30%
expectedlong-termreturnon
planassets 8.75% 8.75% 8.75% 8.75%
compensationincreaserate 4.50% 4.50% — —
Pre-65healthcarecostgross
trendrate* — — 11.00% 11.00%
Post-65healthcarecostgross
trendrate* — — 11.00% 11.00%
Ultimatetrendrate* — — 5.50% 5.50%
yearthattrendreachesultimaterate* — — 2013 2012
*Duetotheeffectofthefixedcompanycontribution,thenetimpactofanychangeintrendrateisnotsignificant.
expectedlong-termreturnonplanassetsforeachyearpresentedisbasedonbothhistoricallong-termactualandexpectedfutureinvestmentreturnsconsideringthecurrentinvestmentmixofplanassets.actuarialgainsandlossesinexcessof10percentofthegreateroftheprojectedbenefitobligationormarket-relatedvalueofassetsareamortized
onastraight-linebasisovertheaverageremainingserviceperiodofactiveparticipants.Priorservicecostsresultingfromplanamendmentsareamortizedinequalannualamountsovertheaverageremainingserviceperiodofaffectedactiveparticipantsorovertheremaininglifeexpectancyofaffectedretiredparticipants.thecompanyusesafive-year,market-relatedvalueassetmethodofamortizingthedifferencebetweenactualandexpectedreturnsonplanassets.
Pension Plan Benefitsthecompanyprovidespensionbenefitstomostofthecompany’sU.s.employeesintheformofnon-contributory,definedbenefitplansthatareconsideredqualifiedplansunderapplicablelaws.thebenefitsprovidedundertheseplansforsalariedemployeesaregenerallybasedonyearsofserviceandaveragecompensation.thebenefitsprovidedundertheseplansforhourlyemployeesaregenerallybasedonspecifiedbenefitamountsandyearsofservice.inaddi-tion,thecompanysponsorsanunfundednon-qualifieddefinedbenefitplanforcertainemployees.thecompanyalsomaintainstwopensionplansinforeigncountries,oneofwhichisunfunded.
inJune2003,thecompany’sU.s.qualifiedandnon-qualifieddefinedbenefitpensionplanswereamendedtodiscontinuebenefitaccrualsforsalaryincreasesandservicesrenderedafterseptember30,2006.thesechangesaffectallofthecompany’sdomesticpensionplansforallsalariedandhourlyemployeesnotcoveredbycollectivebargainingagreements.thecompanysupplementeditsexistingdefinedcontributionsavingsplaneffectiveoctober1,2006toincludeadditionalcompanycontributionswhichwere$28millionin2007.
ROckwell cOllins annual RepORt 2007 49notestoconsolidatedFinancialstatements
in2006,thecompany’sU.s.qualifieddefinedbenefitpen-sionplanwasalsoamendedtodiscontinuepre-retirementandpost-retirementlumpsumancillarydeathbenefits.theamendmentiseffectiveforactiveemployeeswhoareentitledtoadeferredvestedbenefitthatdieonorafteroctober1,2006,andforretireesundertheplanwhodieonorafterJanuary1,2007.theeffectofthisplanamendmentwastobothreducethebenefitobligationandincreasethefundedstatusofthecompany’sU.s.qualifiedpensionplanby$28millionatseptember30,2006.
alsoduring2006,thecompany’sUnitedKingdomdefinedbenefitpensionplanwasamendedtodiscontinuebenefitaccrualsforsalaryincreasesandservicesrenderedafterFebruary28,2009forallparticipants.concurrently,thecompanyenhanceditsexistingdefinedcontributionsavingsplaneffectiveMarch1,2006toincludeadditionalcompanycontributions.newhiresonorafterMarch1,2006participateonlyinthedefinedcontributionplan.existingemployeesmaychoosetomovetotheexpandeddefinedcontributionsavingsplananytimeafterMarch1,2006.theeffectofthisplanamendmentwastobothreducethebenefitobligationandincreasethefundedstatusofthecompany’sUnitedKingdompensionplanby$8millionatseptember30,2006.
Fortheyearsendedseptember30,2007and2006,thecompanymadecontributionstoitspensionplansasfollows:
(inmillions) 2007 2006
DiscretionarycontributionstoU.s.qualifiedplan $75 $50
contributionstointernationalplans 7 9
contributionstoU.s.non-qualifiedplan 8 7
total $90 $66
thecompany’sobjectivewithrespecttothefundingofitspensionplansistoprovideadequateassetsforthepaymentoffuturebenefits.Pursuanttothisobjective,thecompanywillfunditspensionplansasrequiredbygovernmentalregulationsandmayconsiderdiscretionarycontributionsasconditionswarrant.althoughnotrequiredtomakeanycon-tributionstoitsU.s.qualifiedpensionplanbygovernmentalregulations,thecompanyiscontemplatingmakingadiscre-tionarycontributionofupto$75millionin2008tofurtherimprovethefundedstatusofthisplan.contributionstothecompany’sinternationalplansandtheU.s.non-qualifiedplanareexpectedtototal$14millionin2008.
Other Retirement Benefitsotherretirementbenefitsconsistofretireehealthcareandlifeinsurancebenefitsthatareprovidedtosubstantiallyallofthecompany’sU.s.employeesandcovereddependents.employeesgenerallybecomeeligibletoreceivethesebenefitsiftheyretireafterage55withatleast10yearsofservice.Mostplansarecontributorywithretireecontributionsgenerallybaseduponyearsofserviceandadjustedannuallybythecompany.Retireemedicalplanspayastatedpercent-ageofexpensesreducedbydeductiblesandothercoverage,principallyMedicare.theamountthecompanywillcontrib-utetowardretireemedicalcoverageformostemployeesisfixed.additionalpremiumcontributionswillberequiredfromparticipantsforallcostsinexcessofthecompany’sfixedcontributionamount.asaresult,increasingordecreasingthehealthcarecosttrendratebyonepercentagepointwouldnothaveasignificantimpactonthecompany’scostofprovidingthesebenefits.Retireelifeinsuranceplansprovidecoverageataflatdollaramountorasamultipleofsalary.Withtheexceptionofcertainbargainingunitplans,otherRetirementBenefitsarefundedasexpensesareincurred.
otherRetirementBenefitplanamendmentsreducedthebenefitobligationby$15millionatseptember30,2007.theplanamendmentsprimarilyrelatedtothecompanynolongerprovidingpost-age65prescriptiondrugcoverageeffectiveJanuary1,2008.
Plan AssetstotalplanassetsforPensionBenefitsandotherRetirementBenefitsasofseptember30,2007and2006were$2,505millionand$2,163million,respectively.thecompanyhasestablishedinvestmentobjectivesthatseektopreserveandmaximizetheamountofplanassetsavailabletopayplanbenefits.theseobjectivesareachievedthroughinvestmentguidelinesrequiringdiversificationandallocationstrategiesdesignedtomaximizethelong-termreturnsonplanassetswhilemaintainingaprudentlevelofinvestmentrisk.theseinvestmentstrategiesareimplementedusingactivelyman-agedandindexedassets.targetandactualassetallocationsasofseptember30areasfollows:
taRGetMiX 2007 2006
equities 40%–70% 69% 68%
Fixedincome 25%–60% 30% 28%
alternativeinvestments 0%–15% — —
cash 0%– 5% 1% 4%
alternativeinvestmentsmayincluderealestate,hedgefunds,venturecapital,andprivateequity.therewerenoplanassetsinvestedinthesecuritiesofthecompanyasofseptember30,2007and2006oratanytimeduringtheyearsthenended.targetandactualassetallocationsareperiodicallyrebalancedbetweenassetclassesinordertomitigateinvestmentriskandmaintainassetclasseswithintargetallocations.
ROckwell cOllins annual RepORt 2007 50notestoconsolidatedFinancialstatements
Benefit Paymentsthefollowingtablereflectsestimatedbenefitpaymentstobemadetoeligibleparticipantsforeachofthenextfiveyearsandthefollowingfiveyearsinaggregate:
otHeR Pension RetiReMent(inmillions) BeneFits BeneFits
2008 $141 $25
2009 145 22
2010 150 22
2011 154 21
2012 160 20
2013–2017 907 98
substantiallyallofthePensionBenefitpaymentsrelatetothecompany’squalifiedfundedplanswhicharepaidfromthepensiontrust.
12. SHAREOWNERS’ EQUITy
Common Stockthecompanyisauthorizedtoissueonebillionsharesofcom-monstock,parvalue$0.01pershare,and25millionsharesofpreferredstock,withoutparvalue,ofwhich2.5millionsharesaredesignatedasseriesaJuniorParticipatingPreferredstockforissuanceinconnectionwiththeexerciseofpreferredsharepurchaserights.atseptember30,2007,10.4millionsharesofcommonstockwerereservedforissuanceundervariousemployeeincentiveplans.
Preferred Share Purchase RightseachoutstandingshareofcommonstockprovidestheholderwithonePreferredsharePurchaseRight(Right).theRightswillbecomeexercisableonlyifapersonorgroupacquires,orofferstoacquire,withoutpriorapprovaloftheBoardofDirectors,15percentormoreofthecompany’scommonstock.However,theBoardofDirectorsisauthorizedtoreducethe15percentthresholdfortriggeringtheRightstonotlessthan10percent.Uponexercise,eachRightentitlestheholderto1/100thofashareofseriesaJuniorParticipatingPreferredstockofthecompany(JuniorPreferredstock)atapriceof$125,subjecttoadjustment.
Uponacquisitionofthecompany,eachRight(otherthanRightsheldbytheacquirer)willgenerallybeexercisablefor$250worthofeithercommonstockofthecompanyorcommonstockoftheacquirerfor$125.incertaincircumstances,eachRightmaybeexchangedbythecompanyforoneshareofcom-monstockor1/100thofashareofJuniorPreferredstock.theRightswillexpireonJune30,2011,unlessearlierexchangedorredeemedat$0.01perRight.theRightshavetheeffectofsubstantiallyincreasingthecostofacquiringthecompanyinatransactionnotapprovedbytheBoardofDirectors.
Treasury Stockthecompanyrepurchasedsharesofitscommonstockasfollows:
(inmillions) 2007 2006 2005
amountofsharerepurchases $333 $492 $498
numberofsharesrepurchased 4.6 9.3 10.6
asdiscussedinnote18,thecompanypaid$19millionin2007relatedtothesettlementofanacceleratedsharerepurchaseagreementexecutedin2006,whichisreflectedinthetableabove.atseptember30,2007,thecompanywasauthorizedtorepurchaseanadditional$240millionofoutstandingstockunderthecompany’ssharerepurchaseprogram.inoctober2007(subsequenttoyear-end),thecompanyenteredintoanacceleratedsharerepurchaseagree-mentwithaninvestmentbankunderwhichthecompanyrepurchased3millionsharesofoutstandingstockforaninitialpriceof$224million.thisacceleratedsharerepurchasereducedtheamountofadditionalsharesthecompanyisauthorizedtorepurchaseunderthecurrentBoardofDirectorsauthorizationto$16million.inaddition,thecompanycanelecttosharesettleorcashsettletheacceleratedsharerepurchaseagreement.
Accumulated Other Comprehensive Lossaccumulatedothercomprehensivelossconsistsofthefollowing: sePteMBeR30
(inmillions) 2007 2006 2005
Unamortizedpensionandother
retirementbenefits,netoftaxes
of$211for2007 $(360) $ — $ —
Minimumpensionliabilityadjustment,
netoftaxesof$234for2006and
$351for2005 — (400) (599)
Foreigncurrencytranslationadjustment 27 8 (3)
Foreigncurrencycashflow
hedgeadjustment (3) (1) (2)
accumulatedothercomprehensiveloss $(336) $(393) $(604)
ROckwell cOllins annual RepORt 2007 51notestoconsolidatedFinancialstatements
13. STOCK-BASED COmPENSATION
Stock-Based Compensation ExpensePriortooctober1,2005,thecompanyaccountedforemployeestock-basedcompensationusingtheintrinsicvaluemethod.Undertheintrinsicvaluemethod,compensationexpenseisrecordedfortheexcessofthestock’squotedmar-ketpriceatthetimeofgrantovertheamountanemployeehadtopaytoacquirethestock.asthecompany’svariousincentiveplansrequirestockoptionstobegrantedatpricesequaltoorabovethefairmarketvalueofthecompany’scommonstockonthegrantdates,nocompensationexpensewasrecordedpriortooctober1,2005undertheintrinsicvaluemethod.
thecompanyadoptedsFasno.123(revised2004),Share-Based Payment(sFas123R)usingthemodifiedprospectivemethodasofoctober1,2005.Underthismethod,stock-basedcompensationexpensefor2007and2006includestherequisiteserviceperiodportionofthegrantdatefairvalueof:(a)allawardsofequityinstrumentsgrantedpriorto,butnotyetvestedasof,september30,2005;and(b)allawardsofequityinstrumentsgrantedsubsequenttoseptember30,2005.
stock-basedcompensationexpenseisrecognizedonastraight-linebasisovertherequisiteserviceperiod.totalstock-basedcompensationexpenseincludedwithintheconsolidatedstatementofoperationsfor2007and2006isasfollows:
(inmillions,exceptpershareamounts) 2007 2006
stock-basedcompensationexpenseincludedin:
Productcostofsales $ 4 $ 4
servicecostofsales 1 1
selling,generalandadministrativeexpenses 12 13
incomebeforeincometaxes $ 17 $ 18
netincome $ 11 $ 12
Basicanddilutedearningspershare $0.07 $0.07
inaccordancewiththemodifiedprospectiveadoptionmethodofsFas123R,financialresultsforthepriorperiodshavenotbeenrestated.
Stock-Based Compensation Program DescriptionUnderthecompany’s2001long-termincentivesPlanandDirectorsstockPlan,upto14.3millionsharesofcommonstockmaybeissuedbythecompanyasnon-qualifiedoptions,incentivestockoptions,performanceunits,performanceshares,stockappreciationrights,andrestrictedstock.sharesavailableforfuturegrantorpaymentundertheseplanswere0.5millionatseptember30,2007.
Underthecompany’s2006long-termincentivesPlan,upto11.0millionsharesofcommonstockmaybeissuedbythecompanyasnon-qualifiedoptions,incentivestockoptions,performanceunits,performanceshares,stockapprecia-tionrights,restrictedstock,restrictedstockunits,dividendequivalentrights,andotherawards.eachshareissuedpursuanttoanawardofrestrictedstock,restrictedstock
units,performanceshares,andperformanceunitscountsasthreesharesagainsttheauthorizedlimit.sharesavailableforfuturegrantorpaymentunderthisplanwere9.9millionatseptember30,2007.
optionstopurchasecommonstockofthecompanyhavebeengrantedundervariousincentiveplanstodirectors,officers,andotherkeyemployees.allofthecompany’sstock-basedincentiveplansrequireoptionstobegrantedatpricesequaltoorabovethefairmarketvalueofthecommonstockonthedatestheoptionsaregranted.theplansprovidethattheoptionpriceforcertainoptionsgrantedundertheplansmaybepaidbytheemployeeincash,sharesofcom-monstock,oracombinationthereof.certainoptionawardsprovideforacceleratedvestingifthereisachangeincontrol.stockoptionsgenerallyexpiretenyearsfromthedatetheyaregrantedandgenerallyvestratablyoverthreeyears.thecompanyhasanongoingsharerepurchaseplanandexpectstosatisfyshareoptionexercisesfromtreasurystock.
Historicallythecompanyhasutilizedstockoptionsasthepri-marycomponentofstock-basedcompensationawardsunderitslong-termincentiveplansforofficersandotherkeyemploy-ees.in2006,thecompanybeganusingfewerstockoptionsaspartoftheseawardsandintroducedmulti-yearperformancesharesandrestrictedstock.Boththeperformancesharesandrestrictedstockcliffvestattheendofthreeyears.thenumberofperformancesharesthatwillultimatelybeissuedisbasedonachievementofperformancetargetsoverathree-yearperiodthatconsiderscumulativesalesgrowthandreturnonsaleswithanadditionalpotentialadjustmentupordowndependingonthecompany’stotalreturntoshareownerscomparedtoagroupofpeercompanies.thecompany’sstock-basedcompensationawardsaredesignedtoalignmanagement’sinterestswiththoseofthecompany’sshare-ownersandtorewardoutstandingcompanyperformance.thecompany’sstock-basedcompensationawardsserveasanimportantretentiontoolbecausetheawardsgenerallyvestoverathree-yearperiodorcliffvestattheendofthreeyears.
Pro Forma Information for the Period Prior to Fiscal 2006thefollowingtableillustratestheeffectonnetincomeandearningspershareifthecompanyhadaccountedforitsstock-basedcompensationplansusingthefairvaluemethodfortheyearendedseptember30,2005:
(inmillions,exceptpershareamounts) 2005
netincome,asreported $396
stock-basedemployeecompensationexpenseincludedin
reportednetincome,netoftax —
stock-basedemployeecompensationexpensedetermined
underthefairvaluebasedmethod,netoftax (13)
Proformanetincome $383
earningspershare:
Basic–asreported $2.24
Basic–proforma $2.16
Diluted–asreported $2.20
Diluted–proforma $2.13
ROckwell cOllins annual RepORt 2007 52notestoconsolidatedFinancialstatements
General Option Informationthefollowingsummarizestheactivityofthecompany’sstockoptionsfor2007,2006,and2005:
2007 2006 2005
WeiGHteD WeiGHteD WeiGHteD aveRaGe aveRaGe aveRaGe(sharesinthousands) sHaRes eXeRcisePRice sHaRes eXeRcisePRice sHaRes eXeRcisePRice
numberofsharesunderoption:
outstandingatbeginningofyear 8,091 $28.16 10,428 $26.52 13,311 $24.37
Granted 456 58.36 590 45.22 1,337 36.88
exercised (2,388) 26.44 (2,848) 25.52 (4,172) 22.96
Forfeitedorexpired (29) 45.01 (79) 34.49 (48) 28.14
outstandingatendofyear 6,130 30.99 8,091 28.16 10,428 26.52
exercisableatendofyear 4,886 26.89 5,979 25.26 7,146 23.78
2007 2006 2005
Weighted-averagefairvalueperoptionofoptionsgranted $16.70 $13.46 $10.06
intrinsicvalueofoptionsexercised $94million $75million $88million
taxdeductionresultingfromintrinsicvalueofoptionsexercised $34million $27million $33million
theintrinsicvalueofoptionsoutstandingandoptionsexercisableatseptember30,2007was$258millionand$225million,respectively.
thefollowingtablesummarizesthestatusofthecompany’sstockoptionsoutstandingatseptember30,2007:
oPtionsoUtstanDinG oPtionseXeRcisaBle
WeiGHteDaveRaGe WeiGHteDaveRaGe
ReMaininG eXeRcise ReMaininG eXeRcise(sharesinthousands,remaininglifeinyears) sHaRes liFe PRice sHaRes liFe PRice
RangeofexercisePrices
$15.30to$29.13 3,512 $23.24 3,512 $23.24
$29.14to$37.78 1,594 35.23 1,187 34.77
$37.79to$52.20 560 45.02 181 45.13
$52.21to$70.64 464 58.26 6 55.49
total 6,130 5.4 30.99 4,886 4.7 26.89
thefollowingsummarizestheactivityofthecompany’sstockoptionsthathavenotvestedfortheyearsendedseptember30,2007,2006,and2005:
2007 2006 2005
WeiGHteD WeiGHteD WeiGHteD aveRaGe aveRaGe aveRaGe(sharesinthousands) sHaRes eXeRcisePRice sHaRes eXeRcisePRice sHaRes eXeRcisePRice
nonvestedatbeginningofyear 2,112 $36.39 3,282 $32.49 3,297 $27.51
Granted 456 58.36 590 45.22 1,337 36.88
vested (1,295) 33.61 (1,703) 34.35 (1,311) 26.35
Forfeitedorexpired (29) 45.01 (57) 36.12 (41) 29.21
nonvestedatendofyear 1,244 47.13 2,112 36.39 3,282 32.49
thetotalfairvalueofoptionsvestedwas$13million,$17million,and$11millionduringtheyearsendedseptember30,2007,2006,and2005,respectively.totalunrecognizedcompensationexpenseforoptionsthathavenotvestedasofseptember30,2007is$6millionandwillberecognizedoveraweightedaverageperiodof0.6years.
ROckwell cOllins annual RepORt 2007 53notestoconsolidatedFinancialstatements
Performance Shares, Restricted Shares, and Restricted Stock Units Informationthefollowingsummarizestheperformanceshares,restrictedshares,andrestrictedstockunitsasofseptember30,2007and2006:
PeRFoRMancesHaRes RestRicteDsHaRes RestRicteDstocKUnits
(inmillions,exceptsharesandpershareamounts, remaininglifeinyears) 2007 2006 2007 2006 2007 2006
outstandingatbeginningofyear 77,229 — 61,475 — 18,523 —
Granted 64,377 79,127 42,520 62,875 21,323 18,523
Restrictionsreleased — — (886) — (1,516) —
Forfeited (7,756) (1,898) (1,760) (1,400) — —
outstandingatendofyear 133,850 77,229 101,349 61,475 38,330 18,523
totalunrecognizedcompensationcosts $ 7 $ 5 $ 3 $ 2 $ — $ —
Weightedaveragefairvaluepershareofawardsgranted $58.36 $45.18 $58.69 $46.37 $65.32 $52.40
Weightedaverageliferemaining 1.6 2.1 1.7 1.9 — —
Stock Option Fair Value Informationthecompany’sdeterminationoffairvalueofoptionawardsonthedateofgrantusinganoption-pricingmodelisaffectedbythecompany’sstockpriceaswellasassumptionsregard-inganumberofsubjectivevariables.theseassumptionsinclude,butarenotlimitedto:thecompany’sexpectedstockpricevolatilityoverthetermoftheawards,theprojectedemployeestockoptionexerciseterm,theexpecteddivi-dendyield,andtherisk-freeinterestrate.changesintheseassumptionscanmateriallyaffecttheestimatedvalueofthestockoptions.
thefairvalueofeachoptiongrantedbythecompanywasestimatedusingabinomiallatticepricingmodelandthefol-lowingweightedaverageassumptions:
2007 2006 2005 GRants GRants GRants
Risk-freeinterestrate 4.55% 4.40% 3.55%
expecteddividendyield 1.09% 1.08% 1.50%
expectedvolatility 0.28 0.30 0.30
expectedlife 5years 5years 5years
theexpectedlifeofemployeestockoptionsrepresentstheweighted-averageperiodthestockoptionsareexpectedtoremainoutstanding.thebinomiallatticemodelassumesthatemployees’exercisebehaviorisafunctionoftheoption’sremainingexpectedlifeandtheextenttowhichtheoptionisin-the-money.thebinomiallatticemodelestimatestheprob-abilityofexerciseasafunctionofthesetwovariablesbasedontheentirehistoryofexercisesandforfeituresonallpastoptiongrantsmadebythecompany.
themaximumnumberofperformancesharesgrantedin2007thatcanbeissuedbasedontheachievementofperformancetargetsforfiscalyears2007through2009is149,789.themaximumnumberofperformancesharesgrantedin2006thatcanbeissuedbasedontheachievementofperformancetargetsforfiscalyears2006through2008is171,451.
Diluted Share EquivalentsDilutivestockoptionsoutstandingresultedinanincreaseinaverageoutstandingdilutedsharesof2.4million,2.5mil-lion,and3.2millionfor2007,2006,and2005,respectively.theaverageoutstandingdilutedsharescalculationexcludesoptionswithanexercisepricethatexceedstheaveragemar-ketpriceofsharesduringtheyear.lessthan0.1millionstockoptionswereexcludedfromtheaverageoutstandingdilutedsharescalculationin2007,2006and2005.Dilutiveperfor-manceshares,restrictedshares,andrestrictedstockunitsresultedinanincreaseinaverageoutstandingdilutivesharesof0.2millionin2007andlessthan0.1millionin2006.
Employee Benefits Paid in Company StockthecompanyoffersanemployeestockPurchasePlan(esPP)whichallowsemployeestohavetheirbasecompensationwithheldtopurchasethecompany’scommonstock.
PriortoJune1,2005,sharesofthecompany’scommonstockcouldbepurchasedundertheesPPatsix-monthintervalsat85percentofthelowerofthefairmarketvalueonthefirstorthelastdayoftheofferingperiod.thereweretwoofferingperiodsduringtheyear,eachlastingsixmonths,beginningonDecember1andJune1.
effectiveJune1,2005,theesPPwasamendedwherebysharesofthecompany’scommonstockarepurchasedeachmonthbyparticipantsat95percentofthefairmarketvalueonthelastdayofthemonth.
thecompanyisauthorizedtoissue9.0millionsharesundertheesPP,ofwhich4.5millionsharesareavailableforfuturegrantatseptember30,2007.theesPPisconsideredanon-compensatoryplanandaccordinglynocompensationexpenseisrecordedinconnectionwiththisbenefit.
ROckwell cOllins annual RepORt 2007 54notestoconsolidatedFinancialstatements
thecompanyalsosponsorsdefinedcontributionsavingsplansthatareavailabletothemajorityofitsemployees.theplansallowemployeestocontributeaportionoftheircompensationonapre-taxand/orafter-taxbasisinaccor-dancewithspecifiedguidelines.thecompanymatchesapercentageofemployeecontributionsusingcommonstockofthecompanyuptocertainlimits.employeesmaytrans-feratanytimealloraportionoftheirbalanceincompanycommonstocktoanyoftheotherinvestmentoptionsofferedwithintheplans.inaddition,effectiveoctober1,2006,thedefinedcontributionsavingsplanwasamendedtoincludeanadditionalcashcontributionbasedonanemployee’sageandservice.thecompany’sexpenserelatedtothesavingsplanswas$75million,$39million,and$35millionfor2007,2006and2005,respectively.
During2007,2006,and2005,0.9million,1.0million,and1.9millionshares,respectively,ofcompanycommonstockwereissuedtoemployeesunderthecompany’semployeestockpurchaseanddefinedcontributionsavingsplansatavalueof$58million,$50million,and$69millionfortherespectiveperiods.
14. RESEARCH AND DEVELOPmENT
Researchanddevelopmentexpenseconsistsofthefollowing:
(inmillions) 2007 2006 2005
customer-funded $480 $443 $348
company-funded 347 279 243
totalresearchanddevelopment $827 $722 $591
15. OTHER INCOmE, NET
otherincome,netconsistsofthefollowing:
(inmillions) 2007 2006 2005
Gainonsaleofequityaffiliatea $ — $(20) $ —
earningsfromequityaffiliates (8) (8) (11)
interestincome (4) (5) (5)
Royaltyincome (6) (5) (3)
other,net 3 6 2
otherincome,net $(15) $(32) $(17)
a seenote8foradiscussionofthegainonsaleofRockwellscientificcompany,llc.
16. INCOmE TAXES
thecomponentsofincometaxexpenseareasfollows:
(inmillions) 2007 2006 2005
current:
Unitedstatesfederal $189 $161 $104
non-Unitedstates 12 12 11
Unitedstatesstateandlocal 14 6 5
totalcurrent 215 179 120
Deferred:
Unitedstatesfederal 41 27 25
non-Unitedstates (1) 3 —
Unitedstatesstateandlocal 3 3 6
totaldeferred 43 33 31
incometaxexpense $258 $212 $151
netcurrentdeferredincometaxbenefitsconsistofthetaxeffectsoftemporarydifferencesrelatedtothefollowing: sePteMBeR30
(inmillions) 2007 2006
inventory $ 4 $ 8
Productwarrantycosts 73 67
customerincentives 31 28
contractreserves 12 10
compensationandbenefits 34 31
other,net 22 24
currentdeferredincometaxes $176 $168
netlong-termdeferredincometaxbenefits(liabilities)consistofthetaxeffectsoftemporarydifferencesrelatedtothefollowing: sePteMBeR30
(inmillions) 2007 2006
Retirementbenefits $ 55 $119
intangibles (8) (4)
Property (62) (68)
stock-basedcompensation 11 6
other,net (39) (19)
long-termdeferredincometaxes $(43) $ 34
long-termdeferredincometaxassetsandliabilitiesareincludedintheconsolidatedstatementofFinancialPositionasfollows: sePteMBeR30
(inmillions) 2007 2006
otherassets $ 1 $34
otherliabilities (44) —
long-termdeferredincometaxes $(43) $34
Managementbelievesitismorelikelythannotthatthecurrentandlong-termdeferredtaxassetswillberealizedthroughthereductionoffuturetaxableincome.significantfactorsconsideredbymanagementinitsdeterminationoftheprobabilityoftherealizationofthedeferredtaxassetsinclude:(a)thehistoricaloperatingresultsofRockwellcollins($1,408millionofUnitedstatestaxableincomeoverthepastthreeyears),(b)expectationsoffutureearnings,and(c)the
ROckwell cOllins annual RepORt 2007 55notestoconsolidatedFinancialstatements
extendedperiodoftimeoverwhichtheretirementbenefitliabilitieswillbepaid.
theeffectiveincometaxratedifferedfromtheUnitedstatesstatutorytaxrateforthereasonssetforthbelow:
2007 2006 2005
statutorytaxrate 35.0% 35.0% 35.0%
Researchanddevelopmentcredit (4.0) (0.8) (3.9)
extraterritorialincomeexclusion (0.5) (3.0) (2.9)
Domesticmanufacturingdeduction (0.7) (0.4) —
stateandlocalincometaxes 1.1 0.5 1.4
Resolutionofpre-spindeferredtaxmatters — — (1.9)
other (0.3) (0.5) (0.1)
effectiveincometaxrate 30.6% 30.8% 27.6%
incometaxexpensewascalculatedbasedonthefollowingcomponentsofincomebeforeincometaxes:
(inmillions) 2007 2006 2005
Unitedstatesincome $802 $642 $512
non-Unitedstatesincome 41 47 35
total $843 $689 $547
thefederalResearchandDevelopmenttaxcreditexpiredDecember31,2005.onDecember20,2006,thetaxReliefandHealthcareactof2006wasenacted,whichretroactivelyreinstatedandextendedtheResearchandDevelopmenttaxcreditfromJanuary1,2006toDecember31,2007.theretroactivebenefitforthepreviouslyexpiredperiodfromJanuary1,2006toseptember30,2006wasrecognizedandloweredthecompany’seffectivetaxratebyabout1.5per-centagepointsfortheyearendedseptember30,2007.
thephase-outperiodforthefederalextraterritorialincomeexclusion(eti)taxbenefitendedonDecember31,2006.theenactedfederalreplacementtaxbenefitforeti,theDomesticManufacturingDeduction(DMD),willapplytothefull2007year.For2007,theavailableDMDtaxbenefitisone-thirdofthefullbenefitthatwillbeavailablein2011.theamountofDMDtaxbenefitavailablein2008,2009and2010willbetwo-thirdsofthefullbenefit.
theinternalRevenueservice(iRs)iscurrentlyauditingthecompany’staxreturnsfortheyearsendedseptember30,2004and2005aswellascertainclaimsthecompanyfiledforprioryearsrelatedtotheeti.thecompanyhasreceivedpro-posedauditadjustmentsfromtheiRs.thecompanybelievesthatithasadequatelyprovidedforanytaxadjustmentsthatmayresultfromtheiRsincometaxexamination.
During2006,thecompanysettledaniRstaxreturnauditfortheyearsendedseptember30,2002and2003forallitemsotherthantheeti.theresultsoftheauditweresettledwith-outamaterialimpactonthecompany’sfinancialstatements.
During2005,thecompanysettledaniRstaxreturnauditfortheshortperiodreturnfiledforthethreemonthsendedseptember30,2001.thecompletionoftheiRs’sauditofthecompany’staxreturnsforthethree-monthshort-periodendedseptember30,2001enabledthecompanytoresolveestimatesinvolvingcertaindeferredtaxmattersexistingatthetimeofthespin-off.theresolutionofthesepre-spindeferredtaxmattersduring2005resultedina$10milliondecreasetothecompany’s2005incometaxexpense.
theamericanJobscreationactof2004(theact)providedforaspecialone-timedeductionof85percentofcertainforeignearningsrepatriatedintotheU.s.fromnon-U.s.subsidiar-iesthroughseptember30,2006.During2006,thecompanyrepatriated$91millionincashfromnon-U.s.subsidiariesintotheU.s.undertheprovisionsoftheact.therepatriationdidnotimpactthecompany’seffectiveincometaxratefortheyearendedseptember30,2006asa$2milliontaxliabilitywasestablishedduring2005whenthedecisionwasmadetorepatriatetheforeignearnings.
noprovisionhasbeenmadeasofseptember30,2007forUnitedstatesfederalorstate,oradditionalforeignincometaxesrelatedtoapproximately$79millionofundistributedearningsofforeignsubsidiarieswhichhavebeenorareintendedtobepermanentlyreinvested.thecompanyesti-matestheamountoftheunrecognizeddeferredtaxliabilitytobeapproximately$15millionatseptember30,2007.
thecompanypaidincometaxes,netofrefunds,of$212mil-lion,$164million,and$60million,in2007,2006,and2005,respectively.
17. FINANCIAL INSTRUmENTS
Fair Value of Financial Instrumentsthecarryingamountsandfairvaluesofthecompany’sfinan-cialinstrumentsareasfollows: asset(liaBility)
sePteMBeR30,2007 sePteMBeR30,2006
caRRyinG FaiR caRRyinG FaiR(inmillions) aMoUnt valUe aMoUnt valUe
cashandcashequivalents $ 231 $ 231 $ 144 $ 144
Deferredcompensationplan
investments 39 39 30 30
long-termdebt (223) (216) (245) (240)
interestrateswaps (1) (1) (2) (2)
Foreigncurrencyforward
exchangecontracts (5) (5) (3) (3)
acceleratedsharerepurchase
agreement(note18) — — — 2
thefairvalueofcashandcashequivalentsapproximatetheircarryingvalueduetotheshort-termnatureoftheinstru-ments.Fairvaluefordeferredcompensationplaninvestmentsisbasedonquotedmarketpricesandisrecordedatfairvaluewithinotherassets.Fairvalueinformationforlong-termdebtandinterestrateswapsisobtainedfromthirdparties
ROckwell cOllins annual RepORt 2007 56notestoconsolidatedFinancialstatements
andisbasedoncurrentmarketinterestratesandestimatesofcurrentmarketconditionsforinstrumentswithsimilarterms,maturities,anddegreeofrisk.thefairvalueofforeigncurrencyforwardexchangecontractsisestimatedbasedonquotedmarketpricesforcontractswithsimilarmaturities.thefairvalueoftheacceleratedsharerepurchaseagreementisbasedontheestimatedsettlementamountundertheagreementasdiscussedinnote18.thesefairvalueestimatesdonotnecessarilyreflecttheamountsthecompanywouldrealizeinacurrentmarketexchange.
Interest Rate Swapsthecompanymanagesitsexposuretointerestrateriskbymaintaininganappropriatemixoffixedandvariableratedebt,whichovertimeshouldmoderatethecostsofdebtfinancing.Whenconsiderednecessary,thecompanymayusefinancialinstrumentsintheformofinterestrateswapstohelpmeetthisobjective.onnovember20,2003,thecompanyenteredintotwointerestrateswapcontracts(theswaps)whichexpireonDecember1,2013andeffectivelyconvert$100millionofthe4.75percentfixedratelong-termnotestofloatingratedebtbasedonsix-monthliBoRless7.5basispoints.thecompanyhasdesignatedtheswapsasfairvaluehedgesandusesthe“short-cut”methodforassess-ingeffectiveness.accordingly,changesinthefairvalueoftheswapsareassumedtobeentirelyoffsetbychangesinthefairvalueoftheunderlyingdebtthatisbeinghedgedwithnonetgainorlossrecognizedinearnings.atseptember30,2007and2006,theswapsarerecordedatafairvalueof$1millionand$2million,respectively,withinotherliabilities,offsetbyafairvalueadjustmenttolong-termDebt(note10)of$1mil-lionand$2million,respectively.cashpaymentsorreceiptsbetweenthecompanyandthecounterpartiestotheswapsarerecordedasanadjustmenttointerestexpense.
Foreign Currency Forward Exchange Contractsthecompanytransactsbusinessinvariousforeigncurren-cieswhichsubjectsthecompany’scashflowsandearningstoexposurerelatedtochangesinforeigncurrencyexchangerates.theseexposuresariseprimarilyfrompurchasesorsalesofproductsandservicesfromthirdpartiesandintercompanytransactions.thecompanyhasestablishedaprogramthatutilizesforeigncurrencyforwardexchangecontracts(foreigncurrencycontracts)andattemptstominimizeitsexposure
tofluctuationsinforeigncurrencyexchangeratesrelatingtothesetransactions.Foreigncurrencycontractsprovidefortheexchangeofcurrenciesatspecifiedfuturepricesanddatesandreduceexposuretocurrencyfluctuationsbygenerat-inggainsandlossesthatareintendedtooffsetgainsandlossesontheunderlyingtransactions.Principalcurrenciesthatarehedgedincludetheeuropeaneuro,Britishpound,andJapaneseyen.thedurationofforeigncurrencycontractsisgenerallytwoyearsorless.themaximumdurationofaforeigncurrencycontractatseptember30,2007was154months.themajorityofthecompany’snon-functionalcur-rencyfirmandanticipatedreceivablesandpayablesthataredenominatedinmajorcurrenciesthatcanbetradedonopenmarketsarehedgedusingforeigncurrencycontracts.thecompanydoesnotmanageexposuretonetinvestmentsinforeignsubsidiaries.
notionalamountsofoutstandingforeigncurrencyforwardexchangecontractswere$205millionand$190millionatseptember30,2007and2006,respectively.notionalamountsarestatedinU.s.dollarequivalentsatspotexchangeratesattherespectivedates.thenetfairvalueoftheseforeigncurrencycontractsatseptember30,2007and2006werenetliabilitiesof$5millionand$3million,respectively.netlossesof$3millionand$1millionweredeferredwithinaccumulatedothercomprehensivelossrelatingtocashflowhedgesatseptember30,2007and2006,respectively.thecompanyexpectstore-classifyapproximately$3millionofthesenetlossesintoearningsoverthenext12months.therewasnosignificantimpacttothecompany’searningsrelatedtotheineffectiveportionofanyhedginginstrumentsduringthethreeyearsendedseptember30,2007.Gainsandlossesrelatedtoallforeigncurrencycontractsarerecordedincostofsales.
18. GUARANTEES AND INDEmNIFICATIONS
Product Warranty Costsaccruedliabilitiesarerecordedtoreflectthecompany’scontractualobligationsrelatingtowarrantycommitmentstocustomers.Warrantycoverageofvariouslengthsandtermsisprovidedtocustomersdependingonstandardofferingsandnegotiatedcontractualagreements.anestimateforwarrantyexpenseisrecordedatthetimeofsalebasedonthelengthofthewarrantyandhistoricalwarrantyreturnratesandrepaircosts.
ROckwell cOllins annual RepORt 2007 57notestoconsolidatedFinancialstatements
changesinthecarryingamountofaccruedproductwarrantycostsaresummarizedasfollows: sePteMBeR30
(inmillions) 2007 2006
Balanceatbeginningofyear $189 $172
Warrantycostsincurred (54) (52)
Productwarrantyaccrual 71 69
Reclassification 7 —
acquisitions — 1
Pre-existingwarrantyadjustments — (1)
Balanceatseptember30 $213 $189
Guaranteesinconnectionwiththeacquisitionofquestfromevans&sutherland,thecompanyenteredintoaparentcompanyguaranteerelatedtovariousobligationsofquest.thecompanyhasguaranteed,jointlyandseverallywithquadrant(theotherjointventurepartner),theperformanceofquestinrelationtoitscontractwiththeUnitedKingdomMinistryofDefense(whichexpiresin2030)andtheperformanceofcertainquestsubcontractors(upto$2million).inaddition,thecompanyhasalsopledgedequitysharesinquesttoguaranteepaymentbyquestofaloanagreementexecutedbyquest.intheeventofdefaultonthisloanagreement,thelendinginstitutioncanrequestthatthetrusteeholdingsuchequitysharessurrenderthemtothelendinginstitutioninordertosatisfyallamountsthenoutstandingundertheloanagreement.asofseptember30,2007,theoutstandingloanbalancewasapproximately$9million.quadranthasmadeanidenticalpledgetoguaranteethisobligationofquest.
shouldquestfailtomeetitsobligationsundertheseagreements,theseguaranteesmaybecomealiabilityofthecompanyandquadrant.asofseptember30,2007,thequestguaranteesarenotreflectedonthecompany’sconsolidatedstatementofFinancialPositionbecausethecompanybelievesthatquestwillmeetallofitsperformanceandfinancialobligationsinrelationtoitscontractwiththeUnitedKingdomMinistryofDefenseandtheloanagreement.
Letters of Creditthecompanyhascontingentcommitmentsintheformofcommerciallettersofcredit.outstandinglettersofcreditareissuedbybanksonthecompany’sbehalftosupportcertaincontractualobligationstoitscustomers.ifthecompanyfailstomeetthesecontractualobligations,theselettersofcreditmaybecomeliabilitiesofthecompany.totaloutstandinglet-tersofcreditatseptember30,2007were$118million.thesecommitmentsarenotreflectedasliabilitiesonthecompany’sstatementofFinancialPosition.
Accelerated Share Repurchasesinoctober2007(subsequenttoyear-end),thecompanyexecutedanacceleratedsharerepurchaseagreementwithaninvestmentbankunderwhich3millionsharesofthecompany’soutstandingcommonshareswererepurchasedforaninitialpriceof$224millionor$74.77pershare.theinitialpricewillbesubjecttoapurchasepriceadjustmentbasedonthevolume-weightedaveragepriceofthecompany’sshares,lessadiscount,overasubsequentperiodoftimethatendsnolaterthanDecember14,2007.
inseptember2006,thecompanyenteredintoanacceleratedsharerepurchaseagreementwithaninvestmentbankunderwhichthecompanyrepurchased4.7millionsharesofitsoutstandingcommonsharesataninitialpriceof$54.63pershare,representingtheseptember28,2006closingpriceofthecompany’scommonshares.initialconsiderationpaidtorepurchasethesharesof$257millionwasrecordedasatrea-surystockrepurchasein2006,whichresultedinareductionofshareowners’equity.theagreementcontainedaforwardsalecontractwherebythe4.7millionborrowedsharesheldbytheinvestmentbankthatweresoldtothecompanywerecoveredbysharepurchasesbytheinvestmentbankintheopenmarketoverasubsequentperiodoftimethatendedinDecember2006.theinitialpurchasepricewassubjecttoapurchasepriceadjustmentbasedonthevolume-weightedaveragepriceofthecompany’ssharespurchasedbytheinvestmentbankduringtheperiodlessadiscountasdefinedintheagreement.inDecember2006,thecompany,whichhadtheoptiontosharesettleorcashsettletheagreement,electedtopay$19millionincashtotheinvestmentbankinfullsettlementoftheagreementandrecordedthetransactionasareductionofshareowners’equity.the$19millionwaspaidtotheinvestmentbankinJanuary2007.
inaugust2005,thecompanyenteredintoacceleratedsharerepurchaseagreementswithaninvestmentbankunderwhichthecompanyrepurchased4millionsharesofitsoutstandingcommonsharesataninitialpriceof$196million,or$49.10pershare.theinitialpurchasepricewassubjecttoapurchasepriceadjustmentbasedonthevolume-weightedaveragepriceofthecompany’ssharesduringtheperiodfromaugust2005throughDecember2005,lessadiscount.thepurchasepriceadjustmentcouldhavebeensettled,atthecompany’soption,incashorinsharesofitscommonstock.inDecember2005,thecompany,atitsoption,received$8million(netofrelatedsettlementfeesandexpenses)insharesofitscom-monstockfromtheinvestmentbankinfullsettlementoftheagreements(0.2millionshares).
ROckwell cOllins annual RepORt 2007 58notestoconsolidatedFinancialstatements
19. CONTRACTUAL OBLIGATIONS AND OTHER COmmITmENTS
thefollowingtablereflectscertainofthecompany’snon-cancelablecontractualcommitmentsasofseptember30,2007: PayMentsDUeByPeRioD
(inmillions) 2008 2009 2010 2011 2012 tHeReaFteR total
non-cancelableoperatingleases $41 $36 $31 $18 $15 $ 37 $178
Purchasecontracts 19 13 8 1 — — 41
long-termdebt — — — 24 — 200 224
interestonlong-termdebt 11 11 11 10 10 12 65
total $ 71 $60 $50 $53 $25 $249 $508
Non-cancelable Operating Leasesthecompanyleasescertainofficeandmanufacturingfacilitiesaswellascertainmachineryandequipmentundervariousleasecontractswithtermsthatmeettheaccountingdefinitionofoperatingleases.someleasesincluderenewaloptions,whichpermitextensionsoftheexpirationdatesatratesapproximatingfairmarketrentalrates.Rentexpensefortheyearsendedseptember30,2007,2006,and2005was$29million,$27million,and$25million,respectively.thecompany’scommitmentsundertheseoperatingleases,intheformofnon-cancelablefutureleasepayments,arenotreflectedasaliabilityonitsstatementofFinancialPosition.
Purchase Contractsthecompanymayenterintopurchasecontractswithsuppli-ersunderwhichthereisacommitmenttobuyaminimumamountofproductsorpayaspecifiedamount.thesecom-mitmentsarenotreflectedasaliabilityonthecompany’sstatementofFinancialPosition.
Interest on Long-term Debtinterestpaymentsunderlong-termdebtobligationsexcludethepotentialeffectsoftherelatedinterestrateswapcontracts.
Indemnificationsthecompanyentersintoindemnificationswithlenders,coun-terpartiesintransactionssuchasadministrationofemployeebenefitplans,andothercustomaryindemnificationswiththirdpartiesinthenormalcourseofbusiness.thefollowingareotherthancustomaryindemnificationsbasedonthejudg-mentofmanagement.
thecompanybecameanindependent,publiclyheldcompanyonJune29,2001,whenRockwellinternationalcorporation(Rockwell),renamedRockwellautomationinc.,spunoffitsformeravionicsandcommunicationsbusinessandcertainotherassetsandliabilitiesofRockwellbymeansofadistri-butionofallthecompany’soutstandingsharesofcommonstocktotheshareownersofRockwellinatax-freespin-off(thespin-off).inconnectionwiththespin-off,thecompanymayberequiredtoindemnifycertaininsurersagainstclaimsmadebythirdpartiesinconnectionwiththecompany’slegacyinsurancepolicies.
inconnectionwithagreementsforthesaleofportionsofitsbusiness,thecompanyattimesretainstheliabilitiesofabusinessofvaryingamountswhichrelatetoeventsoccurringpriortoitssale,suchastax,environmental,litigationandemploymentmatters.thecompanyattimesindemnifiesthepurchaserofaRockwellcollinsbusinessintheeventthatathirdpartyassertsaclaimthatrelatestoaliabilityretainedbythecompany.
thecompanyalsoprovidesindemnificationsofvaryingscopeandamountstocertaincustomersagainstclaimsofproductliabilityorintellectualpropertyinfringementmadebythirdpartiesarisingfromtheuseofcompanyorcustomerproductsorintellectualproperty.theseindemnificationsgenerallyrequirethecompanytocompensatetheotherpartyforcertaindamagesandcostsincurredasaresultofthirdpartyproductliabilityorintellectualpropertyclaimsarisingfromthesetransactions.
theamountthecompanycouldberequiredtopayunderitsindemnificationagreementsisgenerallylimitedbasedonamountsspecifiedintheunderlyingagreements,orinthecaseofsomeagreements,themaximumpotentialamountoffuturepaymentsthatcouldberequiredisnotlimited.Whenapotentialclaimisassertedundertheseagreements,thecompanyconsiderssuchfactorsasthedegreeofprobabilityofanunfavorableoutcomeandtheabilitytomakeareason-ableestimateoftheamountofloss.aliabilityisrecordedwhenapotentialclaimisbothprobableandestimable.thenatureoftheseagreementspreventsthecompanyfrommak-ingareasonableestimateofthemaximumpotentialamountitcouldberequiredtopayshouldcounterpartiestotheseagreementsassertaclaim;however,thecompanycurrentlyhasnomaterialclaimspendingrelatedtosuchagreements.
ROckwell cOllins annual RepORt 2007 59notestoconsolidatedFinancialstatements
20. ENVIRONmENTAL mATTERS
thecompanyissubjecttofederal,stateandlocalregulationsrelatingtothedischargeofsubstancesintotheenviron-ment,thedisposalofhazardouswastes,andotheractivitiesaffectingtheenvironmentthathavehadandwillcontinuetohaveanimpactonthecompany’smanufacturingoperations.theseenvironmentalprotectionregulationsmayrequiretheinvestigationandremediationofenvironmentalimpairmentsatcurrentandpreviouslyownedorleasedproperties.inaddi-tion,lawsuits,claimsandproceedingshavebeenassertedonoccasionagainstthecompanyallegingviolationsofenvi-ronmentalprotectionregulations,orseekingremediationofallegedenvironmentalimpairments,principallyatpreviouslyownedorleasedproperties.asofseptember30,2007,thecompanyisinvolvedintheinvestigationorremediationofsevensitesundertheseregulationsorpursuanttolawsuitsassertedbythirdparties.Managementestimatesthatthetotalreasonablypossiblefuturecoststhecompanycouldincurforsixofthesesitesisnotsignificant.Managementestimatesthatthetotalreasonablypossiblefuturecoststhecompanycouldincurfromoneofthesesitestobeapproxi-mately$9million.thecompanyhasrecordedenvironmentalreservesforthissiteof$2millionasofseptember30,2007,whichrepresentsmanagement’sbestestimateoftheprob-ablefuturecostforthissite.
inaddition,thecompanyiscurrentlyinvolvedininvestigationorremediationofthreesitesrelatedtopropertiespurchasedinconnectionwiththecompany’sacquisitionofKaiseraerospace&electronicscorporation(Kaiser).Rockwellcollinshascertainrightstoindemnificationfromescrowfundssetasideatthetimeofacquisitionthatmanagementbelievesaresufficienttoaddressthecompany’spotentialliabilityfortheKaiserrelatedenvironmentalmatters.
todate,compliancewithenvironmentalregulationsandresolutionofenvironmentalclaimshasbeenaccomplishedwithoutmaterialeffectonthecompany’sliquidityandcapitalresources,competitivepositionorfinancialcondition.Managementbelievesthatexpendituresforenvironmentalcapitalinvestmentandremediationnecessarytocomplywithpresentregulationsgoverningenvironmentalprotectionandotherexpendituresfortheresolutionofenvironmentalclaimswillnothaveamaterialadverseeffectonthecompany’sbusi-nessorfinancialposition,butcouldpossiblybematerialtotheresultsofoperationsorcashflowsofanyonequarter.
21. LITIGATION
thecompanyissubjecttovariouslawsuits,claimsandproceedingsthathavebeenormaybeinstitutedorassertedagainstthecompanyrelatingtotheconductofthecompany’sbusiness,includingthosepertainingtoproductliability,intel-lectualproperty,safetyandhealth,exportingandimporting,contract,employmentandregulatorymatters.althoughtheoutcomeofthesematterscannotbepredictedwithcertaintyandsomelawsuits,claimsorproceedingsmaybedisposedofunfavorablytothecompany,managementbelievesthedispositionofmattersthatarependingorassertedwillnothaveamaterialadverseeffectonthecompany’sbusinessorfinancialposition,butcouldpossiblybematerialtotheresultsofoperationsorcashflowsofanyonequarter.
22. 2006 RESTRUCTURING CHARGE
theseptember2006restructuringchargewasrelatedtodecisionstoimplementcertainbusinessrealignmentandfacilityrationalizationactions.asaresultofthesedecisions,thecompanyrecordedchargesof$14millioninthefourthquarterof2006whichwascomprisedof$11millionofemployeeseparationcostsand$3millionoffacilityexitcosts.During2007,thecompanyadjustedtherestructuringreserveby$5millionprimarilyduetolowerthanexpectedemployeeseparationcosts.
changeintherestructuringreserveduring2007isasfollows: eMPloyee Facility sePaRation eXit(inmillions) costs costs total
Balanceatseptember30,2006 $11 $ 3 $14
Reserveadjustment (5) — (5)
cashpayments (6) (3) (9)
Balanceatseptember30,2007 $— $— $—
23. BUSINESS SEGmENT INFORmATION
Rockwellcollinsprovidesdesign,productionandsupportofcommunicationsandaviationelectronicsformilitaryandcommercialcustomersworldwide.thecompanyhastwooperatingsegmentsconsistingoftheGovernmentsystemsandcommercialsystemsbusinesses.
Governmentsystemssuppliesdefensecommunicationsanddefenseelectronicssystems,products,andservices,whichincludesubsystems,displays,navigationequipmentandsimulationsystems,totheU.s.DepartmentofDefense,othergovernmentagencies,civilagencies,defensecontractorsandforeignministriesofdefense.
commercialsystemsisasupplierofaviationelectronicssys-tems,products,andservicestocustomerslocatedthroughouttheworld.thecustomerbaseiscomprisedoforiginalequip-mentmanufacturers(oeMs)ofcommercialairtransport,businessandregionalaircraft,commercialairlines,fractionalandotherbusinessaircraftoperators.
ROckwell cOllins annual RepORt 2007 60notestoconsolidatedFinancialstatements
salesmadetotheUnitedstatesGovernmentwere36percent,39percent,and41percentoftotalsalesfortheyearsendedseptember30,2007,2006,and2005,respectively.
thefollowingtablereflectsthesalesandoperatingresultsforeachofthecompany’soperatingsegments:
(inmillions) 2007 2006 2005
sales:
Governmentsystems $2,231 $2,043 $1,810
commercialsystems 2,184 1,820 1,635
totalsales $4,415 $3,863 $3,445
segmentoperatingearnings:
Governmentsystems $ 441 $ 402 $ 328
commercialsystems 485 370 296
totalsegmentoperatingearnings 926 772 624
interestexpense (13) (13) (11)
earningsfromcorporate-levelequity
affiliate — 2 4
stock-basedcompensation (17) (18) —
Gainonsaleofequityaffiliate — 20 —
Restructuringandtradenames
write-off 5 (14) (15)
Generalcorporate,net (58) (60) (55)
incomebeforeincometaxes $ 843 $ 689 $ 547
thecompanyevaluatesperformanceandallocatesresourcesbasedupon,amongotherconsiderations,segmentoperat-ingearnings.thecompany’sdefinitionofsegmentoperatingearningsexcludesincometaxes,stock-basedcompensation,unallocatedgeneralcorporateexpenses,interestexpense,gainsandlossesfromthedispositionofbusinesses,non-recurringchargesresultingfrompurchaseaccountingsuchaspurchasedresearchanddevelopmentcharges,earningsandlossesfromcorporate-levelequityaffiliates,assetimpairmentcharges,andotherspecialitemsasidentifiedbymanagementfromtimetotime.intersegmentsalesarenotmaterialandhavebeeneliminated.theaccountingpoliciesusedinprepar-ingthesegmentinformationareconsistentwiththepoliciesdescribedinnote2.
theseptember2006restructuringchargeisrelatedtodeci-sionstoimplementcertainbusinessrealignmentandfacilityrationalizationactionsrelatedtotheoperatingsegmentsasfollows:Governmentsystems,$6million,andcommercialsystems,$8million.the2007adjustmenttotherestructur-ingchargeisrelatedtotheoperatingsegmentsasfollows:Governmentsystems,$3million,andcommercialsystems,$2million.
the2005tradenameswrite-offrelatedtothewrite-offofcertainindefinite-livedKaisertradenamesrelatedtotheoper-atingsegmentsasfollows:Governmentsystems,$9million,andcommercialsystems,$6million.
thefollowingtablessummarizetheidentifiableassetsandinvestmentsinequityaffiliatesatseptember30,aswellastheprovisionfordepreciationandamortization,theamountofcapitalexpendituresforproperty,andearnings(losses)fromequityaffiliatesforeachofthethreeyears
endedseptember30,foreachoftheoperatingsegmentsandcorporate:
(inmillions) 2007 2006 2005
identifiableassets:
Governmentsystems $1,472 $1,361 $1,169
commercialsystems 1,711 1,528 1,402
corporate 567 389 577
totalidentifiableassets $3,750 $3,278 $3,148
investmentsinequityaffiliates:
Governmentsystems $ 10 $ 13 $ 12
commercialsystems — — —
corporate — — 59
totalinvestmentsinequityaffiliates $ 10 $ 13 $ 71
Depreciationandamortization:
Governmentsystems $ 55 $ 48 $ 43
commercialsystems 63 58 61
totaldepreciationandamortization $ 118 $ 106 $ 104
capitalexpendituresforproperty:
Governmentsystems $ 65 $ 75 $ 48
commercialsystems 60 69 63
totalcapitalexpendituresforproperty $ 125 $ 144 $ 111
earnings(losses)fromequityaffiliates:
Governmentsystems $ 8 $ 6 $ 8
commercialsystems — — (1)
corporate — 2 4
totalearningsfromequityaffiliates $ 8 $ 8 $ 11
themajorityofthecompany’sbusinessesarecentrallylocatedandsharemanycommonresources,infrastructuresandassetsinthenormalcourseofbusiness.certainassetshavebeenallocatedbetweentheoperatingsegmentsprimar-ilybasedonoccupancyorusage,principallyproperty,plantandequipment.identifiableassetsatcorporateconsistprincipallyofcashandnetdeferredincometaxassetsforallyearspresented,theprepaidpensionassetfortheyearendedseptember30,2007,andtheinvestmentinRockwellscientificcompany,llcfortheyearendedseptember30,2005.
thefollowingtablesummarizessalesbyproductcategoryfortheyearsendedseptember30:
(inmillions) 2007 2006 2005
Defenseelectronics $1,510 $1,413 $1,232
Defensecommunications 721 630 578
airtransportaviationelectronics 1,175 968 881
Businessandregionalaviationelectronics 1,009 852 754
total $4,415 $3,863 $3,445
Productcategorydisclosuresfordefense-relatedproductsaredelineatedbasedupontheirunderlyingtechnologieswhiletheairtransportandbusinessandregionalaviationelectronicsproductcategoriesaredelineatedbaseduponthedifferenceinunderlyingcustomerbase,sizeofaircraft,andmarketsserved.2005and2006salesfortheairtrans-portaviationelectronicsandbusinessandregionalaviationelectronicsproductcategorysaleshavebeenreclassifiedtoconformtothecurrentyearpresentation.
ROckwell cOllins annual RepORt 2007 61notestoconsolidatedFinancialstatements
thefollowingtablereflectssalesfortheyearsendedseptember30andpropertyatseptember30bygeographicregion:
sales PRoPeRty
(inmillions) 2007 2006 2005 2007 2006 2005
Unitedstates $2,987 $2,616 $2,312 $559 $505 $428
europe 840 674 612 42 39 36
asia-Pacific 252 234 231 4 5 6
canada 218 223 208 — — —
africa/Middleeast 79 74 55 — — —
latinamerica 39 42 27 2 3 3
total $4,415 $3,863 $3,445 $607 $552 $473
salesareattributedtothegeographicregionsbasedonthecountryofdestination.
earningspershareamountsarecomputedindependentlyeachquarter.asaresult,thesumofeachquarter’spershareamountmaynotequalthetotalpershareamountfortherespectiveyear.
netincomeinthefirstquarterof2007includesadiscreteitemrelatedtotheretroactivereinstatementandextensionoftheResearchandDevelopmenttaxcredit,whichloweredthecompany’seffectivetaxratebyabout7percentagepoints.
netincomeinthefourthquarterof2006includes$13mil-lion($20millionbeforetaxes),or7centspershare,relatedtothegainonsaleofRockwellscientificcompany,llc.netincomeinthefourthquarterof2006alsoincludes$9million($14millionbeforetaxes),or5centspershare,forarestruc-turingchargerelatedtodecisionstoimplementcertainbusinessrealignmentandfacilityrationalizationactions.Grossprofitincludes$11millionrelatedtotherestructuringchargeinthefourthquarterof2006.
24. QUARTERLy FINANCIAL INFORmATION (UNAUDITED)
quarterlyfinancialinformationfortheyearsendedseptember30,2007and2006issummarizedasfollows:
2007qUaRteRs
(inmillions,except pershareamounts) FiRst seconD tHiRD FoURtH total
sales $ 993 $1,083 $1,113 $1,226 $4,415
Grossprofit(totalsalesless
productandservicecost
ofsales) 303 327 333 360 1,323
netincome 143 140 146 156 585
earningspershare:
Basic $0.85 $ 0.83 $ 0.87 $ 0.94 $ 3.50
Diluted $0.84 $ 0.82 $ 0.86 $ 0.93 $ 3.45
2006qUaRteRs
(inmillions,except pershareamounts) FiRst seconD tHiRD FoURtH total
sales $ 881 $ 957 $ 964 $1,061 $3,863
Grossprofit(totalsalesless
productandservicecost
ofsales) 251 276 288 296 1,111
netincome 104 114 121 138 477
earningspershare:
Basic $0.60 $0.66 $0.71 $ 0.80 $ 2.77
Diluted $0.59 $0.65 $0.70 $ 0.79 $ 2.73
