Success - Rockwell Collins

Rockwell collinswoRld HeadquaRteRs400 collins Road necedaR Rapids, iowa 52498319 295-1000www.Rockwellcollins.com

147-0801-000-Rc 80m ss© copyright 2007, Rockwell collins, inc.all Rights Reserved. printed in usa. all logos, trademarks or service marks used herein are the property of their respective owners.

Accelerating Success2007 AnnuAl RepoRt

Ro

ck

well c

ollin

S An

nu

Al R

epoR

t 20

07

Our perfOrmance demOnstrates the “staying pOwer” inherent in the cOmpany’s shared services business mOdel and the balanced fOcus On Our gOvernment and cOmmercial systems businesses.

Clayton M. Joneschairman, president and

chief executive Officer

dear shareOwners i am pleased to report that 2007 was another terrific year for rockwell collins. we met or exceeded expectations and our long-term growth and performance targets in each of these areas: sales, earnings per share, cash flow from operations and return on invested capital. we also further solidified growth prospects in the commercial and government segments of our business with key wins and new product introductions.

Our performance demonstrates the “staying power” inherent in the company’s shared services business model and the balanced focus on our government and commercial systems businesses. it is also a testament to the leadership of the company and the hard work of all rockwell collins employees.

for 2007, sales increased 14% to $4.415 billion, earnings per share grew 26%, and we delivered operating cash flow of $607 million, 104% of net income, adding another year to a history of consistently outstanding financial performance.

Over the last five years, our revenues have grown at an average annual rate of 12%, we have converted an average of 126% of our profit after tax into operating cash flow, and return on invested capital has improved each year since 2002, coming in at 33% in 2007. in addition, since 2002 earnings per share has increased 170%, an average annual rate of 22%. ultimately, this performance has resulted in significant value for our shareowners. Over the past five years, we delivered an aggregate total return to shareowners in excess of 250%.

certainly the robust market conditions in the commercial and government segments contributed to our ability to deliver these results. in commercial systems, delivery rates across the entire range of aircraft, from light business jets through large air transport platforms, continue to hold strong. we are capitalizing on these opportunities by extending our market reach and earning additional market share through new aircraft wins.

2

to customers and our intention to deliver leading-edge capabilities in the future. a centralized advanced technol-ogy group and centers of excellence for major technology areas allow us to leverage technology investments across the commercial and government product portfolios, maxi-mizing the returns on these investments.

it is important to note that this level of spending has not come at the expense of higher levels of profitability, as our government and commercial systems businesses both achieved operating margin levels that were at all-time highs, and growth in earnings per share has exceeded our rate of revenue growth in each of the last five years — growing at nearly double the rate of revenues in 2007.

looking ahead, i feel confident that we have solid strate-gies in place that will allow us to continue this success. we have identified and are pursuing areas of opportunity that are ripe for growth. we have actions in place to further streamline our processes, reduce cycle time and enhance our already strong engineering capabilities. Our custom-ers are realizing the benefits these actions bring and are rewarding us with higher levels of system integration responsibility on programs such as the avionics subsys-tems integration for the boeing 787 and the mission system integration on the u.s. navy’s fleet of e-6b aircraft.

i don’t want to imply that the road in front of us is free of obstacles. there will certainly be challenges ahead, and we know what is acceptable performance today won’t be acceptable tomorrow. however, i am confident in the leadership of this company, the focus on execution, and commitment to delivering on promises. we intend to build on our track record of consistent growth and superior financial performance.

i believe that 2008 will be another solid year for rockwell collins. we will continue to reap the benefits from strong markets, a balanced business, and the operational lever-age of our efficient business model. we expect to deliver another year of earnings per share growth well in excess of sales despite significant investments in r&d to fuel profitable growth in the future.

as good as our performance has been, i believe our best days are still ahead. through the teamwork and com-mitment of our employees around the world, we are working hard to achieve the full potential of rockwell collins. we are doing this by continuing to focus on the fundamentals — achieving productivity gains through enterprise-wide lean activities, making smart investments in innovative technologies, and meeting customer com-mitments. while this is easy to say, we know it is hard to do — and challenging to sustain. but it is a recipe that has worked well so far.

thank you for your confidence in our company. we will work hard to earn and deserve that trust — every day.

claytOn m. JOneschairman, president and chief executive Officer

this year, we introduced pro line fusion™, the next- generation avionics system for business and regional jets. this new offering extends our product set, expands mar-ket reach and allows us to further strengthen an already solid position in this market segment. Our launch cus-tomer for this new system, bombardier aerospace, will be equipping its global family of aircraft with pro line fusion.

we also announced key head-up guidance system posi-tions on gulfstream and bombardier aircraft and received certification for these systems on the dassault falcon 7x business jet and the embraer 190 regional jet.

in the air transport market segment, our dedication and hard work on the integrated avionics and pilot controls for the boeing 787 dreamliner are coming to fruition. the subsystems we are developing and integrating are on schedule and being delivered to boeing in preparation for the aircraft’s first flight.

Our success winning positions for airline-selectable sys-tems on new aircraft deliveries was also stellar this year. between 2002 and 2006, international carriers, particu-larly those in asia, accounted for most of the opportunities in the air transport segment. in 2007, we began to see increased activity from u.s. carriers. notably we were selected to provide the avionics for continental airlines’ order of more than 100 boeing 737 and 777 aircraft.

government systems continues to demonstrate solid growth rates. among the key offerings that make this suc-cess possible is the common avionics architecture system being deployed on the united states army’s helicopter fleet. Our innovative open architecture solutions for mili-tary helicopter avionics provided a competitive edge as we won positions on several international programs including the agustawestland aw149 and the eurocopter german ch-53 g heavy lift helicopter, as well as upgrade programs for other branches of the u.s. military.

we extended our already strong position in military tanker/ transport avionics upgrades with wins on several interna-tional c-130 upgrade programs, including singapore and thailand. this brings the total to nine countries around the world that have selected rockwell collins’ open architec-ture avionics for their c-130 platforms.

the continued deployment of troops in iraq and afghani-stan is driving a need for systems that enable situational awareness. the need for this capability is so great, we have ramped up production of our advanced gps technology, and delivered a total of more than 125,000 handheld and embedded gps systems this year alone.

in today’s global marketplace, it is more important than ever to deliver on your promises. companies are judged on their ability to perform. at rockwell collins, we have a proven track record of delivering on commitments. through a continued focus on lean electronicssm we are able to drive efficiencies, allowing us to achieve outstand-ing performance in quality and on-time delivery.

winning new programs requires a significant investment in research and development. Over the last five years we have invested, on average, 18% of sales on new technolo-gies and development programs. for 2007, that investment topped $825 million. these expenditures in r&d are a testament to our focus on providing innovative solutions

3

sales ( in millions )

Cash provided by operating aCtivities ( in millions )

earnings per share

return on invested Capital*

shareowner return perforManCe**fiscal years ended september 30

** the cumulative total return table and adjacent line graph compare the cumulative total share-owner return on the company’s common stock against the cumulative total return of the s&p 500 — aerospace and defense index (peer group) and the s&p 500 — composite stock index (s&p 500) for the five-year period ended september 30, 2007, assuming in each case a fixed investment of $100 at the respective closing prices on september 30, 2002, and reinvest-ment of all cash dividends.

cumulative total returns

2002 2003 2004 2005 2006 2007

rockwell collins, inc. 100.00 116.95 174.21 229.10 262.87 353.57

peer group 100.00 102.03 136.54 158.36 191.93 255.06

s&p 500 100.00 124.40 141.64 158.99 176.16 205.13

* the company calculates return on invested capital (rOic) as net income excluding after-tax interest expense, divided by the average of invested capital at the begin-ning and end of the fiscal year. invested capital is calculated as the sum of total shareowners’ equity (excluding defined benefit accounting adjustments impacting accumulated other comprehensive loss) and total debt, less cash and cash equiva-lents. for 2007, the company revised its definition of rOic to exclude defined ben-efit accounting adjustments impacting accumulated other comprehensive loss. all rOic percentages presented have been calculated under the revised definition.

shareowner return graph

4

success dOes nOt cOme Overnight.

5

it is built Over time, by fOcusing On the right gOals and by exercising the discipline tO deliver against thOse gOals.

6

buildingstrength

venue™ — the next-generation Cabin systeM

at rockwell Collins, we’re transforming the passenger flight

experience with technologically advanced cabin management

systems. with the introduction of our new venue system,

passengers on board all classes of business aircraft can have

a high-definition home theatre experience, options for

telephone and internet connectivity, as well as access to

personal digital devices and ipods® in flight.

7

SucceSSful companieS are built on strong foundations. our balanced focus on government and commercial business, supported by our shared services business model, has proven to deliver growth and profitability. through this approach, we are able to leverage developments across market segments and businesses to deliver and support technologically advanced solutions our customers desire.

our recently introduced pro line fusion™ avionics system for business and regional jets exemplifies this approach. pro line fusion leverages the success of earlier pro line systems and delivers advanced functionality to meet emerging requirements. this introduction brings together synthetic and enhanced vision capabilities from our advanced technology center and head-up guidance portfolio; pilot controls from our electro-mechanical systems portfolio; advances in weather radar from our surveillance portfolio; and integrated processing comput-ers from our military portfolio. the result is a robust system that will extend rockwell collins’ leadership position for years to come.

9

of courSe, winning the business is only “step one.” Successful companies must deliver as promised — and nowhere is this more imperative than in our mission-critical industry. rockwell collins’ reputation is built on the ability to execute on time and on budget, with promised quality and performance.

our reliability and performance have made us the supplier of choice for military gpS. combat troops depend on rockwell collins handheld gpS receivers to provide situational awareness in the battlefield. to meet its current demand, the military asked us to ramp up production of the Defense advanced gpS receiver (Dagr), the military handheld standard for gpS position, navigation and situational awareness. we delivered nearly 150,000 units to our forces fight-ing overseas on or ahead of schedule — a production rate faster than we have ever achieved. and we did so while meeting the highest quality and reliability standards. we also leveraged expertise in handheld gpS to bring the performance advantages to embedded applications. by reducing the size, weight and power requirements and enhancing ease of use, our cus-tomers are able to realize the benefits of gpS technology in much smaller systems.

driving perfOrmance

supporting the a380

when singapore airlines took delivery of the very first a380

this year, rockwell Collins was there with a fully integrated

support solution for this important new member of the

singapore fleet. rockwell Collins’ dispatch 100sm program

delivers outstanding performance, guaranteed availability

and reduced, more predictable costs through a price per flight

hour contract. to date, more than 1,500 aircraft worldwide

are supported through these dispatch programs.

10

creatingOppOrtunity

11

our experience, expertiSe and exceptional performance in communications, navigation, displays and open systems architectures position us to provide complete integrated avionics systems for a broad range of platforms. this has afforded us the opportunity to play a more significant system integration role for some of our customers.

You need to look no further than the boeing 787 Dreamliner to see how our integration expertise is making an impact on the aerospace industry. boeing selected rockwell collins as the supplier, systems integrator and support provider of the Dreamliner’s flight deck display system and crew alerting system, pilot controls, communication and surveillance systems, the aircraft’s common data network, and the core network cabinet. our commitment to this aircraft is far-reaching. a comprehensive support solution provides airlines with options to meet their operational needs.

on the military side, we have delivered on-time, on-budget upgrades to the u.S. air force as the flight deck systems integrator for the c/Kc-135 global air traffic management program. and the success of the common avionics architecture System (caaS) has established us as a lead-ing provider for numerous military rotary wing platforms. this system incorporates common, reusable processing elements in an open systems architecture based on commercial standards.

the networked Military

today’s military requires unprecedented levels of

connectivity to facilitate network Centric operations

(nCo). rockwell Collins is playing an important role in

making nCo a reality by providing advanced capabilities in

communications and networking, navigation, information

display and subsystems integration. our open systems

architecture solutions, such as Caas, provide the backbone

for integrating the products needed to bring connectivity,

dynamic interoperability and precision to the warfighter.

12

Making a differenCe in our CoMMunities

at rockwell collins, all employees share a single vision — working together creating the most trusted source of communication and aviation electronics solutions. we are making this vision a reality by building a diverse, global culture that values teamwork, integrity, innovation, leadership and an unwavering dedication to our customers and the communities where we live and work.

we’ve built a reputation for making a difference in our communities through a commitment to education, human services, the arts and improving our environment. not only do we fund these initiatives through a charitable giving program, but employees pledge their time in sup-port of them as well. this year, they donated more than 90,000 volunteer hours to improve the quality of life in the areas where we live and work.

among the programs our employees support is rockwell collins’ engineering experiences education initiative. this initiative focuses on activities that provide students with a real-world connection to classroom learning.

Engaging thE futurE rockwell collins employees work with students of all ages to enhance their interest in math and science through interactive hands-on activities, such as robotics challenges, lego®

league and future city competitions. it is through these activities that young people develop a lifelong interest in technology and innovation, inspiring them for the future.

13

visionworking together creating the most trusted source of communication and aviation electronic solutions

roCkwell Collins at-a-glanCerockwell collins is a pioneer in the development and deployment of innovative communication and aviation electronic solutions for both commercial and government applications. our expertise in flight deck avionics, cabin electronics, mission communications, information management, and simulation and training is delivered by approximately 19,500 employees, and a global service and support network that crosses 27 countries.

governMent systeMs

key CustoMers: u.S. Department of Defense, foreign militaries, original equipment manufacturers (oems)

CoMMerCial systeMs

key CustoMers: aircraft manufacturers, airlines, business aircraft operators

goals• Superior customer value

• Sustainable and profitable growth

• global leadership in served markets

• talented and motivated people

integrated business Model

• efficient operation of a shared services infrastructure

• leverage investments in common systems and processes

• centers of excellence maximizing technology reuse

• employee incentive targets promoting cross-business opportunity

Core CoMpetenCies

• integrated systems for mobile platforms

• communication

• navigation

• Situational awareness

• flight control

• cabin management

• information management

• Services

• Simulation

Financialcontents

15 Management’sDiscussionandanalysisof FinancialconditionandResultsofoperations

29 Management’sResponsibilityforFinancialstatements

30 Management’sReportoninternalcontroloverFinancialReporting

31 ReportofindependentRegisteredPublicaccountingFirm

32 ReportofindependentRegisteredPublicaccountingFirm

33 consolidatedstatementofFinancialPosition

34 consolidatedstatementofoperations

35 consolidatedstatementofcashFlows

36 consolidatedstatementofshareowners’equityandcomprehensiveincome

37 notestoconsolidatedFinancialstatements

62 selectedFinancialData

63 Directorsandofficers

64 corporateinformation

ROckwell cOllins annual RepORt 2007

Management’sDiscussionandanalysisofFinancialconditionandResultsofoperations

15

thefollowingdiscussionandanalysisshouldbereadinconjunctionwithourconsolidatedfinancialstatementsandnotestheretoaswellasourannualReportonForm10-Kfortheyearendedseptember30,2007filedwiththesecuritiesandexchangecommission(sec).thefollowingdiscussionandanalysiscontainsforward-lookingstatementsandestimatesthatinvolverisksanduncertainties.actualresultscoulddiffermateriallyfromtheseestimates.Factorsthatcouldcauseorcontributetodifferencesfromestimatesincludethosediscussedunder“cautionarystatement”belowandunder“RiskFactors”inourannualReportonForm10-Kfortheyearendedseptember30,2007.

Weoperateona52/53weekfiscalyearendingontheFridayclosesttoseptember30.Foreaseofpresentation,septem-ber30isutilizedconsistentlythroughoutManagement’sDiscussionandanalysisofFinancialconditionandResultsofoperationstorepresentthefiscalyearenddate.alldatereferencescontainedhereinrelatetoourfiscalyearunlessotherwisestated.

OVERVIEW AND OUTLOOKin2007wecontinuedtoimproveenterprise-wideoperat-ingperformanceandefficientlydeliveredonourcustomercommitmentswhichledtoanotheryearofexcellentfinancialresultshighlightedby:

• a14percentincreaseintotalrevenuesto$4.42billion

• a26percentincreaseindilutedearningspershareto$3.45

• operatingcashflowof$607million,or104percentofnetincome

Withtheseresults,wehavenowmetorexceededourstatedlong-termaverageannualgrowthandperformancetargetsineachoftheseareasforafourthconsecutiveyear.thesetargetsare:

• salesgrowthof10percent;8percentorganic

• earningspersharegrowthintherangeof13to15percent

• cashflowfromoperationsof100to130percentofnetincome

thecombinationofoverallstrongmarketconditions,marketsharegainsinanumberofareasinbothourcommercialandGovernmentsystemsbusinesses,thesuccessfulopera-tionofourbalancedandefficientbusinessmodel,andourdisciplinedcapitaldeploymentstrategy,continuedtobethedrivingforcebehindourabilitytodelivertheseconsistentlyimprovingfinancialresults.

in2007,asignificantportionofourrevenuegrowthwasderivedfromareasofthedefenseandcommercialaerospace

marketswherewehavedemonstratedanabilitytogainmar-ketshare.theserepresentareaswehavestrategicallydefinedasfocusedareasofgrowthforourcompany,includingfixedandrotarywingintegratedelectronicsystemsandnetworkedcommunicationsolutionsinthedefensemarketaswellasairtransportandbusinessaircraftflightdeckavionicssystemsinthecommercialaerospacemarket.thesesharegains,combinedwithstrongmarketconditionsandournearlyequalexposuretocommercialaerospaceanddefensemarkets,ledtoourabilitytodeliveradouble-digitrateofgrowthintotalcompanysales.

throughtheoperationofourhighly-integratedandefficientsharedservicebusinessmodelwewereabletoonceagainconverthigheryear-over-yearrevenuesintoanevenhigherrateofprofitabilitygrowth.ourcommercialsystemsbusinessdeliveredoperatingearningsof$485million,anincreaseof31percentover2006.ourGovernmentsystemsbusinessdeliveredoperatingearningsof$441million,anincreaseof10percentover2006.theseprofitabilitylevelswereachievedwhileatthesametimeincreasingourinvestmentsinresearchanddevelopmentactivitiesby$105million,or15percent,to$827million.

ourstrongoperatingcashflow,whichtotaled104percentofournetincome,allowedustoexecuteonourstatedcapitaldeploymentstrategy.Wecompletedonebusinessacquisitionandreturnedasignificantportionofourremain-ingoperatingcashflowtoourshareownersintheformofanincreasedannualdividendrateand$333millioninsharerepurchases.theimpactofourongoingsharerepurchaseprogramallowedustoonceagainenhanceshareownervalueasitprovidedanincremental3percentagepointsofearningspersharegrowth.

aswelookto2008,weexpecttogenerateanotheryearofexcellentfinancialperformancehighlightedbythefollowingprojectedresults:

• totalsalesintherangeof$4.70billionto$4.75billion

• earningspershareintherangeof$3.80to$3.95

• cashflowfromoperationsintherangeof$675millionto$725million

• Researchanddevelopmentexpendituresintherangeof$925millionto$950million

as2008isexpectedtobeanotheryearofsignificantinvest-mentinresearchanddevelopmentprojectsaimedatsecuringopportunitiesforfuturerevenuegrowth,thesuccessfuloperationofourefficientbusinessmodelandthecontinuedexecutionofourcapitaldeploymentstrategywillagainbecalledupontobekeycontributorstomeetourprojection


Management’sDiscussionandanalysisof

FinancialconditionandResultsofoperations

16forearningspersharegrowthataratewellinexcessofourprojectedrevenuegrowth.

seethefollowingoperatingsegmentsectionsforfurtherdiscussionof2007andanticipated2008segmentresults.Foradditionaldisclosureonsegmentoperatingearningsseenote23intheconsolidatedfinancialstatements.

RESULTS OF OPERATIONSthefollowingmanagementdiscussionandanalysisofresultsofoperationsisbasedonreportedfinancialresultsfor2005through2007andshouldbereadinconjunctionwithourconsolidatedfinancialstatementsandthenotesthereto.

Consolidated Financial Results

sales>

(dollarsinmillions) 2007 2006 2005

Domestic $2,987 $2,616 $2,312

international 1,428 1,247 1,133

total $4,415 $3,863 $3,445

Percentincrease 14% 12%

totalsalesin2007increased14percentto$4,415millioncomparedto2006.salesfromacquiredbusinesses,primar-ilyevans&sutherlandcomputercorporation’smilitaryandcommercialsimulationbusiness(thee&ssimulationBusiness),contributed$60million,or2percentagepointsofthesalesgrowth.theremainderofthesalesincreaseresultedfrom19percentorganicrevenuegrowthinourcommercialsystemsbusinessand7percentorganicrevenuegrowthinourGovernmentsystemsbusiness.Domesticsalesgrowthcontinuestobedrivenbystrongdemandforcommercialproductsandsystemstooriginalequipmentmanufactur-ersandairlines.inaddition,GovernmentsystemscontinuedtoexperiencestrongdemandfromtheU.s.government.internationalsaleswereimpactedbystrongdemandfromthecommercialaerospacemarket,favorableforeigncurrencyexchangeratesasaresultoftheweakenedU.s.dollar,aswellasincrementalsalesfromthee&ssimulationBusiness,partiallyoffsetbycertaineuropeandefense-relatedprogramsthathavecompleted.

totalsalesin2006increased12percentto$3,863millioncomparedto2005.telDiX,acquiredonMarch31,2005,andthee&ssimulationBusiness,acquiredonMay26,2006,provided$44millionand$20million,respectively,oratotalof2percentagepointsofthissalesgrowth.theremainderofthesalesincreaseresultedfrom11percentorganicrevenuegrowthinourcommercialsystemsbusinessand10percentorganicrevenuegrowthinourGovernmentsystemsbusi-ness.DomesticsalesgrowthcontinuedtobedrivenbystrongdemandfromtheU.s.governmentandastrengtheningcom-mercialaerospacemarket,evidencedbyincreasingproductionratesatoriginalequipmentmanufacturersandhigheraircraftflighthourswhichhaveresultedinincreasedsalesofcom-mercialavionicsproductsandservices.internationalsalesgrowthwasalsoduetothestrengtheningofthecommercial

aerospacemarketaswellastheacquisitionsoftelDiXandthee&ssimulationBusiness.

costoFsales>

totalcostofsalesissummarizedasfollows:


totalcostofsales $3,092 $2,752 $2,502

Percentoftotalsales 70.0% 71.2% 72.6%

costofsalesconsistsofallcostsincurredtodesignandmanufactureourproductsandincludesresearchanddevelop-ment,rawmaterial,labor,facility,productwarrantyandotherrelatedexpenses.

theimprovementincostofsalesasapercentageoftotalsalesin2007incomparisonto2006isprimarilyduetoacombinationofincreasedsalesvolume,productivityimprove-ments,lowerretirementbenefitcosts,andthebenefitofa$5millionfavorableadjustmenttotherestructuringreserveincludedincostofsalesin2007comparedtoan$11millionrestructuringchargeincludedincostofsalesin2006.theseimprovementsin2007werepartiallyoffsetbyhigherincen-tivecompensationandresearchanddevelopmentcosts.

theimprovementincostofsalesasapercentageoftotalsalesin2006incomparisonto2005isprimarilyduetohighersalesvolumecombinedwithproductivityimprove-ments,loweremployeeincentivecompensationcosts,andtheabsenceofthe$15millionwrite-offofcertainindefinite-livedKaisertradenamesfrom2005.theseimprovementswerepartiallyoffsetby$11millionofrestructuringchargesincludedincostofsales,higherpensioncosts,expensingstock-basedcompensation,andtheimpactofincrementallowermarginrevenuesfromourtelDiXande&ssimulationBusinessacquisitions.

Researchanddevelopment(R&D)expenseisincludedasacomponentofcostofsalesandissummarizedasfollows:


customer-funded $480 $443 $348

company-funded 347 279 243

total $827 $722 $591

Percentoftotalsales 19% 19% 17%

R&Dexpenseconsistsprimarilyofpayroll-relatedexpensesofemployeesengagedinresearchanddevelopmentactivities,engineeringrelatedproductmaterialsandequipment,andsubcontractingcosts.totalR&Dexpenseincreased$105mil-lion,or15percent,from2006to2007.thecustomer-fundedportionofR&Dexpenseincreasedprimarilyduetoseveraldefense-relatedprogramsthatareintheirdevelopmentphases,includingJointtacticalRadiosystem(JtRs)andFuturecombatsystems(Fcs),aswellasothernetworkedcommuni-cationsprogramsandrotarywingandfixedwingflightdeckandmissionelectronicsystemdevelopmentprograms.inaddition,customer-fundeddevelopmentfortheBoeing787and747-8programscontributedtotheincreaseincustomer-fundedR&Dexpense.thecompany-fundedportionofR&D




17expenseincreasedprimarilyduetospendingoncertainnewbusinessjetplatforms,thedevelopmentofournextgenera-tionflightdeckandcabinsystemsforthebusinessaircraftmarket,andtheenhancementofcapabilitiesofotherprod-uctsandsystems.

totalR&Dexpenseincreased$131million,or22percent,from2005to2006.thecustomer-fundedportionofR&Dexpenseincreasedprimarilyduetoseveraldefense-relatedprogramsthatwereintheirdevelopmentphases,includingGroundelementMinimumessentialemergencycommunicationsnetworksystem(GeMs),Fcsandotheradvancedcommuni-cationandadvanceddatalinkprograms.thecompany-fundedportionofR&DexpenseincreasedprimarilyduetoincreasedspendingontheaRJ-21regionaljet,theBoeing787program,andvariousnewbusinessjetprograms.

lookingforwardto2008,totalR&Dexpensesareexpectedtoincreasebyapproximately13percentover2007andbeintherangeof$925millionto$950million,orabout20%oftotalcompanysales.theforecastfor2008includesanticipatedincreasesincompany-fundedinitiativesinbothcommercialandGovernmentsystems,withahigherrateofincreaseincustomer-fundedprojects.thehighercompany-fundedR&D,whichisexpectedtorepresentabout40%oftotalR&Dexpen-ditures,isprincipallyduetohigherinvestmentsrelatedtonewairtransport,businessandregionaljetplatforms,severalofwhichwearecurrentlypursuing,aswellasinvestmentsaimedatenhancingthecapabilitiesofourcorecommercialandGovernmentsystemsproductsandsystemsoffer-ings.theseincreaseswillbepartiallyoffsetbyasignificantdecreaseininvestmentsrelatedtotheBoeing787program.theincreaseincustomer-fundedR&DisprincipallyrelatedtorecentlyawardedandanticipatedGovernmentsystemsdevel-opmentprogramsincludingthecombatsearchandrescue(csaR-X)andGermancH-53heavylifthelicopterpro-grams,theKc-Xaerialrefuelingtankerprogram,variousc-130aircraftavionicsmodernizationprograms,andtheJtRs—airborne,Maritime,Fixedprogram(JtRs-aMF).

sellinG,GeneRalanDaDMinistRativeeXPenses>


selling,generalandadministrative

expenses $482 $441 $402

Percentoftotalsales 10.9% 11.4% 11.7%

selling,generalandadministrative(sG&a)expensesconsistprimarilyofpersonnel,facility,andotherexpensesrelatedtoemployeesnotdirectlyengagedinmanufacturing,researchordevelopmentactivities.theseactivitiesincludemarketingandbusinessdevelopment,finance,legal,informationtechnology,andotheradministrativeandmanagementfunctions.sG&aexpensesincreased$41millionin2007ascomparedto2006,primarilyduetohighersalesvolumeandhigherincentivecompensationcosts,partiallyoffsetbyproductivityimprove-ments,lowerretirementbenefitcostsandtheabsenceof$3millionofrestructuringchargesincludedinsG&ain2006.

sG&aexpensesincreased$39millionin2006ascomparedto2005,primarilyduetohigherpayrollandpensionexpenses,expensingstock-basedcompensation,$3millionofrestruc-turingchargesincludedinsG&a,aswellasouracquisitionsofthee&ssimulationBusinessandtelDiX.theseincreaseswerepartiallyoffsetbyproductivityimprovementsandloweremployeeincentivecompensationcosts.

inteResteXPense>

(inmillions) 2007 2006 2005

interestexpense $13 $13 $11

interestexpenseremainedflatat$13millioninboth2007and2006primarilyduetoanincreaseininterestratesoffsetbyalowerlevelofdebtoutstanding.

theincreaseininterestexpensefrom2005to2006isprimar-ilyduetoanincreaseintheaverageinterestraterelatedtothevariableportionofourlong-termdebtaswellastwovariablerateloanagreementsenteredintoinJune2006tofacilitateourimplementationofthecashrepatriationprovi-sionsoftheamericanJobscreationactof2004.

otHeRincoMe,net>

(inmillions) 2007 2006 2005

otherincome,net $(15) $(32) $(17)

Forinformationregardingthefluctuationsinotherincome,net,seenote15intheconsolidatedfinancialstatements.

incoMetaXeXPense>


incometaxexpense $258 $212 $151

effectiveincometaxrate 30.6% 30.8% 27.6%

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)


thedifferencebetweenoureffectivetaxrateandthestatu-torytaxrateisprimarilytheresultofthetaxbenefitsderivedfromtheResearchandDevelopmenttaxcredit(R&Dtaxcredit),whichprovidesataxbenefitoncertainincremen-talR&Dexpenditures,theextraterritorialincomeexclusion(eti),whichprovidesataxbenefitonexportsales,andtheDomesticManufacturingDeductionundersection199(DMD),whichprovidesataxbenefitonU.s.basedmanufacturing.

theR&DtaxcreditexpiredeffectiveDecember31,2005.theeffectivetaxratefor2006reflects3monthsofbenefitrelated




18totheR&Dtaxcredit.our2007effectiveincometaxrateincludesabouta1.5percentagepointretroactivebenefitfrom9monthsofR&Dtaxcreditsapplicabletothe2006fiscalyearduetothepassageoflegislationinthefirstquarterof2007thatretroactivelyreinstatedandextendedtheavailabilityofR&DtaxcreditsbeyondDecember31,2006.

inoctober2004,theamericanJobscreationactof2004(theact)wassignedintolaw.theactrepealsandreplacestheetiwithanewdeductionforincomegeneratedfromqualifiedproductionactivitiesbyU.s.manufacturers.theetiexporttaxbenefitcompletelyphasedoutDecember31,2006andtheDMDbenefitwillbephasedinthroughfiscal2010.For2007,theavailableDMDtaxbenefitisone-thirdofthefullbenefitthatwillbeavailablein2011.theamountofDMDtaxbenefitavailablein2008,2009and2010willbetwo-thirdsofthefullbenefit.asaresult,theacthadanadverseimpactonoureffectivetaxratein2007andisexpectedtohaveanadverseimpactonoureffectivetaxrateforyears2008through2010.

theactprovidesforaspecialone-timedeductionof85percentofcertainforeignearningsrepatriatedintotheU.s.fromnon-U.s.subsidiariesthroughseptember30,2006.During2006,werepatriated$91millionincashfromnon-U.s.subsidiariesintotheU.s.undertheprovisionsoftheact.therepatriationdidnotimpactoureffectiveincometaxratefortheyearendedseptember30,2006asa$2milliontaxliabilitywasestablishedduring2005whenthedecisionwasmadetorepatriatetheforeignearnings.

For2008,oureffectiveincometaxrateisexpectedtobeintherangeof32.5percentto33.5percentincomparisontoour2007effectiveincometaxrateof30.6percent.thehigherforecastedeffectiveincometaxratefor2008isprincipallyduetotheabsenceoftheretroactiveR&Dtaxcreditbenefitrecognizedin2007andhigherprojectedtaxableincome.theprojected2008effectivetaxrateassumesR&Dtaxcreditsareavailablefortheentirefiscalyear,althoughlegislationauthorizingR&DtaxcreditsbeyondDecember31,2007hasyettobeenacted.

netincoMeanDDilUteDeaRninGsPeRsHaRe>

(dollarsandsharesinmillions, exceptpershareamounts) 2007 2006 2005

netincome $585 $477 $396

netincomeasapercentofsales 13.3% 12.3% 11.5%

Dilutedearningspershare $3.45 $2.73 $2.20

Weightedaveragedilutedcommonshares 169.7 174.5 180.2

netincomein2007increased23percentto$585million,or13.3percentofsales,fromnetincomein2006of$477mil-lion,or12.3percentofsales.Dilutedearningspershareincreased26percentin2007to$3.45,comparedto$2.73in2006.earningspersharegrowthexceededthegrowthrateinnetincomeduetothefavorableeffectofoursharerepur-chaseprogram.theseincreaseswereprimarilyduetohighersalesvolumecoupledwithproductivityimprovements.otheritemsaffectingcomparabilitybetween2007and2006aredetailedbelow.

netincomein2006increased20percentto$477million,or12.3percentofsales,fromnetincomein2005of$396mil-lion,or11.5percentofsales.Dilutedearningspershareincreased24percentin2006to$2.73,comparedto$2.20in2005.earningspersharegrowthexceededthegrowthrateinnetincomeduetothefavorableeffectofoursharerepur-chaseprogram.theseincreaseswereprimarilyduetohighersalesvolumecoupledwithproductivityimprovements.otheritemsaffectingcomparabilitybetween2006and2005aredetailedbelow.

iteMsaFFectinGcoMPaRaBility>

incomebeforeincometaxeswasimpactedbytheitemsaffectingcomparabilitysummarizedinthetablebelow.theidentificationoftheseitemsisimportanttotheunderstand-ingofourresultsofoperations.

(inmillions) 2007 2006 2005

Gainonsaleofcorporate-levelequity

affiliatea $ — $ 20 $ —

stock-basedcompensation (17) (18) —

Restructuring(charge)adjustmentsb 5 (14) —

tradenameswrite-offc — — (15)

Decreasetoincomebeforeincometaxes $(12) $(12) $(15)

a GainonthesaleofRockwellscientificcompany,llc,anequityaffiliatethatwasjointlyownedwithRockwellautomation,inc.(seenote8intheconsolidatedfinancialstatements).

b Restructuringchargerelatedtodecisionstoimplementcertainbusinessrealignmentandfacilityrationalizationactions.theadjustmentin2007isprimarilyduetolowerthanexpectedemployeeseparationcosts.

c thetradenameswrite-offrelatestocertainfinite-livedKaisertradenames(seenote7intheconsolidatedfinancialstatements).

Segment Financial Results

GOVERNmENT SySTEmS

overviewandoutlook ourGovernmentsystemsbusinesssuppliesdefensecommunicationsanddefenseelectronicssystems,products,andservices,whichincludesubsystems,displays,navigationequipmentandsimulationsystems,totheU.s.DepartmentofDefense,othergovernmentagen-cies,civilagencies,defensecontractorsandforeignministriesofdefense.theshortandlong-termperformanceofourGovernmentsystemsbusinessisaffectedbyanumberoffactors,includingtheamountandprioritizationofdefensespendingbytheU.s.andinternationalgovernments,whichisgenerallybasedontheunderlyingpoliticallandscapeandsecurityenvironment.

Weexpect2008torepresentanotheryearofhigherlevelsofauthorizedglobaldefensefunding,withpriorityremaininghighfordefenseelectronicsandcommunicationssolutionsthatmeetthefollowingneedsofglobalmilitaryforces:

• networkedandinteroperablecommunications

• Modernizedaviationandmissionelectronicssystems

• enhancedsituationalawareness

• Precisionnavigationandguidancesystems




19thesepriorityrequirementsmatchupwellwithourcapabili-tiesandtheareasthatwearefocusedonforfuturegrowthinourGovernmentsystemsbusiness.specifically,we’vedefinedourgrowthareasasnetworkedcommunications,opensys-temsarchitectureandmunitionsnavigationandadvancedsensors.ineachoftheseareas,wehavealreadysecuredorarecompetingforsignificantprogrampositionsthatwillenableustocontinuetodeliverabove-marketratesoforganicrev-enuegrowth.someexamplesofkeypositionsinthesegrowthareasincludeourinvolvementintheJtRsprogram,Fcsandawiderangeoffixedwingandrotarywingcockpitandmis-sionelectronicssystemsonKc-135refuelingtankers,c-130cargoaircraftandhelicopterssuchastheBlackhawk,chinook,seastallionandseveralinternationalplatforms.Wealsohavestrongpositionsinthedevelopmentandproductionofhandheldandembeddednavigationdevicesaswellaspreci-sionguidancesystemsforsmallermissilesandmunitions.Weexpectourcurrentandfuturepositionsinthesefocusareastocontinuetobedriversforourgrowthgoingforward.

RisksaffectingfutureperformanceofourGovernmentsystemsbusinessinclude,butarenotlimitedto,thepotentialimpactsofgeopoliticalevents,theoverallfundingandpriori-tizationoftheU.s.andinternationaldefensebudgets,andourabilitytowinnewbusiness,successfullydevelopinnovativesolutionsforourcustomers,andexecuteprogramspursuanttocontractualrequirements.

in2008,Governmentsystemsrevenuesareexpectedtoincreaseandaccountforabouthalfofthecompany’stotalprojectedrevenues.therevenuegrowthisexpectedtobederivedfromprogramsfocusedonmeetingglobalmilitaryrequirementsforthedevelopmentandprocurementofnetworkedcommunicationssystems,modernizedelectronics,andsystemsthatprovideprecisionguidanceandenhancedsituationalawarenesscapabilities.Revenuesfromtherecentlycompletedacquisitionofinformationtechnology&applicationscorporation(itac)areexpectedtocontributeapproximatelyonepercentagepointofGovernmentsystems’revenuegrowth.salesofDefenseadvancedGPsReceivers(DaGR)areexpectedtobeflattoslightlylower.WeprojectGovernmentsystems’2008operatingmarginstobeslightlylowerthanthe19.8percentsegmentoperatingmarginreportedin2007primarilyduetoexpectingahigherpro-portionof2008revenuestobederivedfromlowermargindevelopmentprograms.

ForadditionaldisclosureonGovernmentsystems’segmentoperatingearningsseenote23intheconsolidatedfinancialstatements.

GoveRnMentsysteMs’sales>

thefollowingtablerepresentsGovernmentsystems’salesbyproductcategory:


Defenseelectronics $1,510 $1,413 $1,232

Defensecommunications 721 630 578

total $2,231 $2,043 $1,810


Defenseelectronicssalesincreased$97million,or7percent,in2007comparedto2006.salesfromacquiredbusinesses,primarilythee&ssimulationBusiness,contributed$35mil-lion,or3percentagepointsofthesalesgrowthwhileorganicsalesincreased$62million,or4percent.theincreaseinorganicsaleswasprimarilyduetohigherDaGRequipmentsalesandhigherrevenuesfromvariousrotaryandfixedwingaircraftelectronicssystemsprograms,partiallyoffsetbylowersalesfromsimulationandtrainingprogramsandcertaineuropeanprogramsthathavecompleted.

Defensecommunicationssalesincreased$91million,or14percent,in2007comparedto2006.thisincreasewaspri-marilyduetohigherrevenuesfromJtRsandothernetworkedcommunicationdevelopmentprogramsaswellashigheraRc-210radiohardwareanddevelopmentprogramrevenues.

Defenseelectronicssalesincreased$181million,or15percent,in2006comparedto2005.telDiX,acquiredonMarch31,2005,provided$44million,or4percentagepointsofthissalesgrowth.thee&ssimulationBusiness,acquiredonMay26,2006,provided$12million,or1percentagepointofthissalesgrowth.Defenseelectronicsorganicsalesincreased$125million,or10percent,in2006comparedto2005.thissalesgrowthisprimarilyduetohigherrevenuesfromthefollowing:

• Globalpositioningsystemequipmentprograms

• Flightdeckandmissionelectronicsystemsprograms,includingvariousprogramsfornewandupgradedmilitaryhelicopters,basedonouropensystemsarchitecture

• Helmetmountedtacticalaircraftdisplayprograms

theseincreasesindefenseelectronicssaleswerepartiallyoffsetbyadecreaseinsimulationandtrainingrevenuesprimarilyduetodelayedcustomerprocurements.

Defensecommunicationssalesincreased$52million,or9percent,in2006comparedto2005.thisincreaseinsalesisattributabletohigheradvancedcommunicationsanddatalinkdevelopmentprogramsandaRc-210radioequipmentrevenueswhichmorethanoffsetlowerJtRsdevelopmentprogramrevenues.

GoveRnMentsysteMs’seGMentoPeRatinGeaRninGs>


segmentoperatingearnings $441 $402 $328

Percentofsales 19.8% 19.7% 18.1%




20Governmentsystems’operatingearningsincreased$39mil-lion,or10percent,in2007comparedto2006primarilyduetothecombinationofhighersales,productivityimprovements,netfavorablecontractadjustments,andlowerretirementbenefitcosts,partiallyoffsetbyhigherincentivecompensa-tionandresearchanddevelopmentcosts.

Governmentsystems’operatingearningsincreased$74mil-lion,or23percent,in2006comparedto2005primarilyduetoincreasedsalesvolume.Governmentsystems’operatingearn-ingsasapercentofsalesfor2006was19.7percentcomparedwith18.1percentfor2005.operatingmarginswereimpactedbyproductivityimprovementsandloweremployeeincentivecompensationcosts,partiallyoffsetbyhigherpensioncostsandtheimpactofincrementallowermarginrevenuesfromourtelDiXande&ssimulationBusinessacquisitions.

COmmERCIAL SySTEmS

overviewandoutlook ourcommercialsystemsbusinessisasupplierofaviationelectronicssystems,products,andservicestocustomerslocatedthroughouttheworld.thecustomerbaseiscomprisedoforiginalequipmentmanu-facturers(oeMs)ofcommercialairtransport,businessandregionalaircraft,commercialairlines,fractionalandotherbusinessaircraftoperators.thenearandlong-termperfor-manceofourcommercialsystemsbusinessisimpactedbygeneralworldwideeconomichealth,commercialairlineflighthours,thefinancialconditionofairlinesworldwide,aswellascorporateprofits.

in2008,weexpectcommercialaerospacemarketconditionstocontinuetobestrong,drivenbyanumberofanticipatedfactors,including:

• Positiveeconomicconditions,includingcontinuedprojectedgrowthincorporateprofitabilityandworldwideGDP

• introductionofnew,moreefficientaircraftmodels

• stronginternationaldemandfornewaircraft

• Highairlineloadfactorsandimprovingairlineprofitability

• Projectedgrowthinworldwideairtraffic

• Recordhighbacklogsformanufacturersofairtransportaircraftandcontinuedsolidorderbooksforbusinessaircraftmanufacturers

allofthesefactorsareexpectedtoleadtohigherproductionratesofnewairtransport,businessandregionalaircraftaswellasincreaseddemandforaftermarketservice,supportandequipmentretrofitactivities.

Riskstothecommercialaerospacemarketinclude,amongotherthings:

• theoccurrenceofanunexpectedgeopoliticaleventthatcouldhaveasignificantimpactondemandforairtravelandairlinedemandfornewaircraft

• thepotentialramificationsofthenegativeimpactthatthecurrenthighleveloffuelpricesarehavingontheprofitabil-ityofourairlineandotheraircraftoperatorcustomers

Risksrelatedtoourabilitytocapitalizeonthecommercialaerospacemarketrecoveryandattainourstatedenterpriselong-termgrowthtargetsinclude,amongotherthings:

• ourabilitytodevelopproductsandexecuteonprogramspursuanttocontractualrequirements,suchasthedevelop-mentofsystemsandproductsfortheBoeing787andbusinessjetoeMs

• thesuccessfuldevelopmentandmarketacceptanceofneworenhancedproduct,systemandservicesolutions

in2008,commercialsystemsrevenuesareexpectedtoincreaseandaccountforabouthalfofthecompany’stotalprojectedrevenues.theincreasedrevenuesareexpectedtoresultfromthepositiveimpactofanticipatedstrongmarketconditionsandexpectedsharegains,particularlyintheairtransportavionicsandbusinessaircraftmarketareas,partiallyoffsetbytheimpactofareductioninwide-bodyaircraftin-flightentertainment(iFe)productsandsystemsrevenuesofabout$50million,principallyrelatedtoreducedafter-marketretrofitactivities.thedeclineofwide-bodyaircraftiFeproductsandsystemsrevenuesisduetoourstrategicdecisionannouncedinseptember2005toshiftresearchanddevelopmentresourcesawayfromtraditionaliFesystemsfornextgenerationwide-bodyaircrafttoactivitiesfocusedonhighervalue-addedinformationmanagementsolutions.2008segmentoperatingmarginisexpectedtoincreaseoverthe22.2percentoperatingmarginreportedin2007primarilyduetothesignificantoperatingleveragecommercialsystemsderivesfromincrementalrevenues.

Foradditionaldisclosureoncommercialsystems’segmentoperatingearningsseenote23intheconsolidatedfinancialstatements.

coMMeRcialsysteMs’sales>

thefollowingtablerepresentscommercialsystems’salesbyproductcategory:


airtransportaviationelectronics $1,175 $ 968 $ 881

Businessandregionalaviation

electronics 1,009 852 754

total $2,184 $1,820 $1,635


Prioryear2005and2006airtransportaviationelectronicsandbusinessandregionalaviationelectronicsproductcat-egorysaleshavebeenreclassifiedtoconformtothecurrentyearpresentation.

airtransportaviationelectronicssalesincreased$207million,or21percent,in2007comparedto2006.incrementalsalesfromthee&ssimulationBusinesscontributed$20million,or2percentagepointsoftherevenuegrowth.the19percentorganicsalesincreaseisprimarilyduetohigheravionics




21productsandsystemssalestoairlinesandoeMsandhigheraftermarketrevenues,includinginitialsalesofequipmentforBoeing787simulators,aswellashigherserviceandsupportandiFerevenues.Businessandregionalaviationelectronicssalesincreased$157millionor18percent,in2007comparedto2006.thissalesgrowthisattributedprimarilytohigheravionicssalestobusinessjetoeMsandhigheraftermarketserviceandsupportandavionicsretrofitandsparesrevenues.

airtransportaviationelectronicssalesincreased$87million,or10percent,in2006comparedto2005.thee&ssimulationBusiness,acquiredonMay26,2006,provided$8million,or1percentagepointofthissalesgrowth.airtransportaviationelectronicsorganicsalesincreaseisprimarilyduetohighersalesofflight-deckavionicsrelatedtohigheroeMdeliveriesandretrofitsandsparesactivities,partiallyoffsetbyloweriFesystemandregulatorymandaterevenues.Businessandregionalaviationelectronicssalesincreased$98million,or13percent,in2006comparedto2005.thissalesgrowthisattributedtosignificantlyhighersalesofbusinessjetflight-deckavionicsandcabinelectronicssystemsandproductsandhigherserviceandsupportrevenues,partiallyoffsetbyloweravionicssalestoregionaljetoeMsandlowerregulatorymandateprogramrevenues.

thefollowingtablerepresentscommercialsystems’salesbasedonthetypeofproductorservice:

(inmillions) 2007 2006 2005

originalequipment $1,097 $ 929 $ 778

aftermarket 1,087 891 857

total $2,184 $1,820 $1,635

originalequipmentsalesincreased$168million,or18per-cent,in2007comparedto2006.thisincreasewasprimarilyduetohigherairtransportavionicsandiFesalesaswellashigherbusinessjetavionicsproductsandsystems.aftermarketsalesincreased$196million,or22percent,in2007comparedto2006.incrementalsalesfromthee&ssimulationBusinesscontributed$20million,or2percent-agepointsoftherevenuegrowth.organicaftermarketsalesincreased$176million,or20percent,duetohighersalesacrossallproductcategories,withparticularstrengthinairtransportavionicssparessalesresultingfromtheinitialsalesofequipmentforBoeing787simulatorsaswellasbusinessandregionalaftermarketactivities.

originalequipmentsalesincreased$151million,or19per-cent,in2006comparedto2005duetosignificantlyhighersalesofflight-deckavionicsandcabinelectronicssystemsandproductsfornewbusinessjetaircraftandhighersalesofflight-deckavionicsfornewairtransportaircraft.thesesalesincreaseswerepartiallyoffsetbyloweravionicssystemssalestoregionaljetoeMsandloweriFesystemsales.aftermarketsalesincreased$34million,or4percent,in2006comparedto2005asaresultofhigheravionicsretrofitandsparessales,higherserviceandsupportrevenues,andincrementale&ssimulationBusinessrevenues,partiallyoffsetbylowerregula-torymandateprogramandiFesystemretrofitrevenues.

coMMeRcialsysteMs’seGMentoPeRatinGeaRninGs>


segmentoperatingearnings $485 $370 $296

Percentofsales 22.2% 20.3% 18.1%

commercialsystems’operatingearningsincreased$115mil-lion,or31percent,to$485million,or22.2percentofsales,in2007comparedto$370million,or20.3percentofsales,in2006.theincreaseinoperatingearningsandoperatingmar-ginwasprimarilyduetothecombinationofhigherorganicrevenues,productivityimprovements,andlowerretirementbenefitcosts,partiallyoffsetbyhigherincentivecompensa-tionandresearchanddevelopmentcosts.

commercialsystems’operatingearningsincreased$74mil-lion,or25percent,to$370million,or20.3percentofsales,in2006comparedto$296million,or18.1percentofsales,in2005.thesesignificantincreaseswereprimarilyduetothecombinationofincreasedsalesvolume,productivityimprove-ments,andloweremployeeincentivecompensationcostswhichmorethanoffsethigherresearchanddevelopmentandpensioncosts.

GeneRalcoRPoRate,net>

(inmillions) 2007 2006 2005

Generalcorporate,net $(58) $(60) $(55)

Generalcorporate,netwasrelativelyflatin2007incom-parisonto2006aslowerretirementbenefitcostsoutpacedhigherincentivecompensationcosts.

theincreaseingeneralcorporate,netin2006over2005isprimarilyduetohigherpensioncostspartiallyoffsetbyloweremployeeincentivecompensationcosts.

Retirement Plansnetbenefitexpenseforpensionbenefitsandotherretire-mentbenefitsisasfollows:

(inmillions) 2007 2006 2005

Pensionbenefits $ 9 $70 $31

otherretirementbenefits (5) (2) 1

netbenefitexpense $ 4 $68 $32

PensionBenefits Weprovidepensionbenefitstomostofouremployeesintheformofdefinedbenefitpensionplans.overthepastnumberofyears,thecostofprovidingretire-mentbenefitsunderadefinedbenefitstructurehasbecomeincreasinglyuncertainduetochangesindiscountratesandthevolatilityinthestockmarket.inresponse,weamendedourU.s.qualifiedandnon-qualifiedpensionplansin2003coveringallsalaryandhourlyemployeesnotcoveredbycollec-tivebargainingagreementstodiscontinuebenefitaccrualsforsalaryincreasesandservicesrenderedafterseptember30,2006(thePensionamendment)andmadesignificantcontri-butionstoourpensionplans.concurrently,wereplacedthisbenefitbysupplementingourexistingdefinedcontributionsavingsplantoincludeanadditionalcompanycontributioneffectiveoctober1,2006.thesupplementalcontributionto




22ourexistingdefinedcontributionsavingsplanwas$28millionin2007.Webelievethisnewbenefitstructurewillachieveourobjectiveofprovidingbenefitsthatarebothvaluedbyouremployeesandwhosecostsandfundingrequirementsaremoreconsistentandpredictableoverthelong-term.

Definedbenefitpensionexpensefortheyearsendedseptem-ber30,2007,2006,and2005was$9million,$70million,and$31million,respectively.increasesinthefundedstatusofourpensionplansin2007,primarilyduetoincreasesinthediscountrateusedtomeasureourpensionobligationsandthePensionamendment,weretheprimarydriversforthedecreaseindefinedbenefitpensionexpensein2007incomparisonto2006.Decreasesinthefundedstatusofourpensionplans,primarilyduetodecreasesinthediscountrateusedtomeasureourpensionobligationsandhigherthananticipatedpensionableearnings,drovetheincreaseindefinedbenefitpensionexpensein2006over2005.

During2007,thefundedstatusofourpensionplansimprovedfromadeficitof$275millionatseptember30,2006toadeficitof$64millionatseptember30,2007,primarilyduetohigherthanexpectedassetreturnsandanincreaseinthediscountrateusedtomeasureourpensionobligationsfrom6.5percentto6.6percent.

in2008,definedbenefitpensionplancostsareexpectedtodecreasebyapproximately$13million.thedecreaseisprimarilyduetothefavorableimpactofanincreaseinthedefinedbenefitpensionplanvaluationdiscountrateusedtomeasureourpensionexpensefrom6.1percentto6.6percent.

ourobjectivewithrespecttothefundingofourpensionplansistoprovideadequateassetsforthepaymentoffuturebenefits.Pursuanttothisobjective,wewillfundourpen-sionplansasrequiredbygovernmentalregulationsandmayconsiderdiscretionarycontributionsasconditionswarrant.Webelieveourstrongfinancialpositioncontinuestoprovideustheopportunitytomakediscretionarycontributionstoourpensionfundwithoutinhibitingourabilitytopursuestrate-gicinvestments.

otherRetirementBenefits Weprovideretireemedicalandlifeinsurancebenefitstosubstantiallyallofouremployees.Wehaveundertakentwomajoractionsoverthepastfewyearswithrespecttothesebenefitsthathaveloweredboththecur-rentandfuturecostsofprovidingthesebenefits:

• inJulyof2002,thepre-65andpost-65retireemedicalplanswereamendedtoestablishafixedcontributiontobepaidbythecompany.additionalpremiumcontributionswillberequiredfromparticipantsforallcostsinexcessofthisfixedcontributionamount.thisamendmenthaselimi-natedtherisktoourcompanyrelatedtohealthcarecostescalationsforretireemedicalbenefitsgoingforwardasadditionalcontributionswillberequiredfromretireesforallcostsinexcessofourfixedcontributionamount.

• asaresultoftheMedicarePrescriptionDrug,improvementandModernizationactof2003,weamendedourretiree

medicalplansonJune30,2004todiscontinuepost-65prescriptiondrugcoverageeffectiveJanuary1,2008.Uponterminationofthesebenefits,post-65retireeswillhavetheoptionofreceivingthesebenefitsthroughMedicare.onaverage,weexpectthattheprescriptiondrugbenefittobeprovidedbyMedicarewillbebetterthanthebenefitprovidedbyourcurrentpost-65drugplanasaresultofthefixedcompanycontributionplandesignimplementedin2002.

otherretirementbenefitsexpense(income)fortheyearsendedseptember30,2007,2006,and2005was$(5)million,$(2)million,and$1million,respectively.thechangeinotherretirementbenefitsexpense(income)in2007and2006wasprimarilyduetothemajoractionsdiscussedabove.Weexpectotherretirementbenefitsincomeofapproximately$2millionin2008,primarilyduetotheactionsdiscussedabove.

FINANCIAL CONDITION AND LIQUIDITy

Cash Flow Summaryourabilitytogeneratesignificantcashflowfromoperat-ingactivitiescoupledwithouraccesstothecreditmarketsenablesourcompanytoexecuteourgrowthstrategiesandreturnvaluetoourshareowners.During2007,significantcashexpendituresaimedatfuturegrowthandenhancedshare-ownervaluewereasfollows:

• $333millionofsharerepurchases

• $125millionofpropertyadditions

• $107millionofdividendpayments

• $32millionforbusinessacquisitions,netofcashacquired

oPeRatinGactivities>

(inmillions) 2007 2006 2005

cashprovidedbyoperatingactivities $607 $595 $574

increaseincashprovidedbyoperatingactivitiesof$12mil-lionin2007comparedto2006isprimarilyduetohighernetincomepartiallyoffsetbyhighertaxpaymentsandincreasesinworkingcapital,particularlyinventoriesandreceivables,tosupporthighersalesvolumesandthelaunchofnewcommer-cialandmilitaryaircraftprograms.

theincreaseincashflowsprovidedbyoperatingactivitiesof$21millionin2006comparedto2005wasprincipallyduetohighernetincomeof$81millionandlowerpensionplancontributionsof$48million,partiallyoffsetby$104millioninhigherincometaxpayments.

in2008,cashprovidedbyoperatingactivitiesisexpectedtobeintherangeof$675millionto$725million,ananticipatedincreaseofabout15percentover2007cashprovidedbyoperatingactivities.theprojectedincreaseisprincipallyduetothepositiveimpactofhighernetincomeandimprovedworkingcapitalperformanceintheareasofinventoriesandreceivables,partiallyoffsetbyhigherincometaxpaymentsandahigherlevelofdeferredpre-productionengineering




23costsrelatedtonewaircraftprograms.theprojected2008cashprovidedbyoperatingactivitiesrangecanaccommodateadiscretionaryU.s.qualifieddefinedbenefitpensionplancontributionupto$75million.inaddition,theprojected2008cashprovidedbyoperatingactivitiesrangeanticipatesthecollectionofapproximately$70millionto$80millionofreceivablesrelatedtotheBoeing787program.collectionofthesereceivablesduring2008maybeatriskduetotheprojecteddelayindeliveryofthefirstaircraftuntillateincalendaryear2008.

investinGactivities>

(inmillions) 2007 2006 2005

cashusedforinvestingactivities $(153) $(159) $(134)

netcashpaidforacquisitionswas$32millionin2007comparedto$100millionin2006.capitalexpendituresdecreasedto$125millionin2007from$144millionin2006.Wealsoreceivedproceedsof$14millionin2007fromtherecoveryofalicensefee,whilein2006wereceivedproceedsof$84millionfromthesaleofRockwellscientificcompany,llc,anequityaffiliatethatwasjointlyownedwithRockwellautomation,inc.

netcashpaidforthe2006businessacquisitionswas$100millioncomparedto$19millionofnetcashpaidforthetelDiXacquisitionin2005.ProceedsfromthesaleofRockwellscientificcompany,llc,anequityaffiliatethatwasjointlyownedwithRockwellautomation,inc.,were$84mil-lionin2006.capitalexpendituresincreasedto$144millionin2006from$111millionin2005.

Weexpectcapitalexpendituresfor2008tobeapproximately$170million,orabout3.6%ofsales.thehigherlevelofprojectedspendingin2008isprimarilyduetotheconstruc-tionofnewengineeringfacilitiesincedarRapids,iowaandRichardson,texasaswellasanincreasedlevelofinvestmentintestequipment,allinsupportofrecentandanticipatedprogramwinsthatcontinuetodriveourgrowth.

FinancinGactivities>

(inmillions) 2007 2006 2005

cashusedforfinancingactivities $(373) $(441) $(487)

thechangeincashusedforfinancingactivitiesin2007over2006isattributedtothefollowingfactors:

• in2007werepurchased4.6millionsharesofcommonstockatacostof$314millioncomparedtorepurchasesof9.3millionsharesatacostof$492millionin2006.inaddi-tion,in2007wepaid$19millionrelatedtothesettlementofanacceleratedsharerepurchaseagreementexecutedin2006.

• in2007wereceived$61millionfromtheexerciseofstockoptionscomparedto$73millionin2006.

• in2007wepaidcashdividendsof$107millioncomparedto$96millionin2006.

• in2007werepaid$27millionofthe$46millionlong-termvariablerateloanfacilitiesthatwereenteredintoin2006.

thechangeincashusedforfinancingactivitiesin2006comparedto2005isprimarilyduetotwovariablerateloanagreementsenteredintoin2006thatprovided$46millionofcashtofacilitateourimplementationofthecashrepatriationprovisionsoftheamericanJobscreationactof2004.otherfactorsimpactingcashusedforfinancingactivitiesin2006includethefollowing:

• in2006werepurchased9.3millionsharesofcommonstockatacostof$492millioncomparedto10.6millionsharesatacostof$498millionin2005.

• in2006wereceived$73millionfromtheexerciseofstockoptionscomparedto$96millionin2005.

• Wepaidcashdividendsof$96millionin2006comparedto$85millionin2005reflectinganincreaseinourquarterlydividendfrom12centsto16centspershareeffectivethethirdquarterof2006.

• Wereceiveda$28millionexcesstaxbenefitfromtheexerciseofstockoptionsin2006.inconnectionwiththeadoptionofsFas123Rasofoctober1,2005,theexcesstaxbenefitfromtheexerciseofstockoptionsisclassifiedasafinancingactivity,in2006.During2005,excesstaxbenefitsfromtheexerciseofstockoptionswereclassifiedasanoperatingactivity.

shareRepurchaseProgram strongcashflowfromoperationsprovidedfundsforrepurchasingourcommonstockunderoursharerepurchaseprogramasfollows:

(inmillions,exceptpershareamounts) 2007 2006 2005

amountofsharerepurchases $333 $492 $498

numberofsharesrepurchased 4.6 9.3 10.6

Weightedaveragepricepershare $68.31 $52.82 $47.20

in2007wepaid$19million,whichisreflectedinthetableabove,relatedtothesettlementofanacceleratedsharerepurchaseagreementexecutedin2006.inoctober2007(subsequenttoyear-end),weenteredintoanacceleratedsharerepurchaseagreementwithaninvestmentbankunderwhichwerepurchased3millionsharesofouroutstandingcommonssharesforaninitialpriceof$224millionwhichreducedouroverallauthorizationto$16million.seenote18intheconsolidatedfinancialstatementsforfurtherdiscussionofthisagreement.Historically,wehaveexecutedsharerepur-chaseswhencashflowfromoperationsisnotbeingusedforotherinvestingorfinancingactivities,suchasacquisitionsordebtreduction.

Dividends Wedeclaredandpaidcashdividendsof$107mil-lion,$96million,and$85millionin2007,2006,and2005,respectively.theincreaseincashdividendsin2007and2006wastheresultofanincreaseinthequarterlycashdividendfrom12centsto16centspersharebeginningwiththedivi-dendpaidJune5,2006.Basedonourcurrentdividendpolicy,wewillpayquarterlycashdividendswhich,onanannual




24basis,willequal$0.64pershare.Weexpecttofunddividendsusingcashgeneratedfromoperations.thedeclarationandpaymentofdividends,however,willbeatthesolediscretionoftheBoardofDirectors.

Liquidityinadditiontocashprovidedbyoperatingactivities,weutilizeacombinationofshort-termandlong-termdebttofinanceoperations.ourprimarysourceofshort-termliquidityisthroughborrowingsinthecommercialpapermarket.ouraccesstothatmarketisfacilitatedbythestrengthofourcreditratingsandan$850millioncommittedcreditfacil-itywithseveralbanks(RevolvingcreditFacility).ourcurrentratingsasprovidedbyMoody’sinvestorsservice(Moody’s),standard&Poor’sandFitch,inc.area-1/a/a,respectively,forlong-termdebtandP-1/a-1/F-1,respectively,forshort-termdebt.Moody’s,standard&Poor’sandFitch,inc.havestableoutlooksonourcreditrating.

Underourcommercialpaperprogram,wemaysellupto$850millionfaceamountofunsecuredshort-termpromis-sorynotesinthecommercialpapermarket.thecommercialpapernotesmaybearinterestormaybesoldatadiscountandhaveamaturityofnotmorethan364daysfromtimeofissuance.Borrowingsunderthecommercialpaperprogramareavailableforworkingcapitalneedsandothergeneralcor-poratepurposes.therewerenocommercialpaperborrowingsoutstandingatseptember30,2007.

ourRevolvingcreditFacilityconsistsofan$850millionfive-yearunsecuredrevolvingcreditagreemententeredintoonMay24,2005andamendedin2007toextendthetermto2012,withoptionstofurtherextendthetermforuptotwoone-yearperiodsand/orincreasetheaggregateprincipalamountupto$1.2billion.theseoptionsaresubjecttotheapprovalofthelenders.theRevolvingcreditFacilityexistsprimarilytosupportourcommercialpaperprogram,butisavailabletousintheeventouraccesstothecommercialpapermarketisimpairedoreliminated.ouronlyfinancialcovenantundertheRevolvingcreditFacilityrequiresthatwemaintainaconsolidateddebttototalcapitalizationratioofnotgreaterthan60percent.ourdebttototalcapital-izationratioatseptember30,2007was11percent.theRevolvingcreditFacilitycontainscovenantsthatrequireustosatisfycertainconditionsinordertoincurdebtsecuredbyliens,engageinsale/leasebacktransactions,ormergeorconsolidatewithanotherentity.theRevolvingcreditFacilitydoesnotcontainanyratingdowngradetriggersthatwouldacceleratethematurityofourindebtedness.inaddition,short-termcreditfacilitiesavailabletoforeignsubsidiaries

amountedto$63millionasofseptember30,2007,ofwhich$24millionwasutilizedtosupportcommitmentsintheformofcommerciallettersofcredit.therearenosignificantcom-mitmentfeesorcompensatingbalancerequirementsunderanyofourcreditfacilities.atseptember30,2007,therewerenoborrowingsoutstandingunderanyofourcreditfacilities.

inadditiontoourcreditfacilitiesandcommercialpaperprogram,wehaveashelfregistrationstatementfiledwiththesecuritiesandexchangecommissioncoveringupto$750millionindebtsecurities,commonstock,preferredstockorwarrantsthatmaybeofferedinoneormoreofferingsontermstobedeterminedatthetimeofsale.onnovember20,2003,weissued$200millionofdebtdueDecember1,2013(thenotes)undertheshelfregistrationstatement.thenotescontaincovenantsthatrequireustosatisfycertaincondi-tionsinordertoincurdebtsecuredbyliens,engageinsale/leasebacktransactions,ormergeorconsolidatewithanotherentity.atseptember30,2007,$550millionoftheshelfregis-trationwasavailableforfutureuse.

DuringJune2006weenteredintotwovariablerateloanagreementstofacilitateourimplementationofthecashrepatriationprovisionsoftheamericanJobscreationactof2004asfollows:

• Five-yearunsecuredvariablerateloanfacilityagreementfor11.5millionBritishpounds($21million).thisloanfacilitywasrepaidin2007.

• Five-yearunsecuredvariablerateloanfacilityagreementfor20.4millioneuros($25million).

thevariablerateloanfacilityagreementcontainscustomaryloancovenants,noneofwhicharefinancialcovenants.Failuretocomplywithcustomarycovenantsortheoccurrenceofcus-tomaryeventsofdefaultcontainedintheagreementwouldrequiretherepaymentofanyoutstandingborrowingsundertheagreement.asofseptember30,2007,$24millionwasoutstandingunderthevariablerateloanfacilityagreement.

ifourcreditratingsweretobeadjusteddownwardbytheratingagencies,theimplicationsofsuchactionscouldincludeimpairmentoreliminationofouraccesstothecommercialpapermarketandanincreaseinthecostofborrowing.intheeventthatwedonothaveaccesstothecommercialpapermarket,alternativesourcesoffundingcouldincludeborrow-ingsundertheRevolvingcreditFacility,fundsavailablefromtheissuanceofsecuritiesunderourshelfregistration,andpotentialassetsecuritizationstrategies.




25Contractual Obligationsthefollowingtablesummarizescertainofourcontractualobligationsasofseptember30,2007,aswellaswhentheseobliga-tionsareexpectedtobesatisfied:

PayMentsDUeByPeRioD

(inmillions) total lesstHan1yeaR 1–3yeaRs 4–5yeaRs tHeReaFteR

long-termdebt $ 224 $ — $ — $24 $200

interestonlong-termdebt 65 11 22 20 12

non-cancelableoperatingleases 178 41 67 33 37

Purchaseobligations:

Purchaseorders 1,027 850 166 10 1

Purchasecontracts 41 19 21 1 —

total $1,535 $921 $276 $88 $250

Purchaseobligationsincludepurchaseordersandpurchasecontracts.Purchaseordersareexecutedinthenormalcourseofbusinessandmayormaynotbecancelable.Purchasecon-tractsincludeagreementswithsuppliersunderwhichthereisacommitmenttobuyaminimumamountofproductsorpayaspecifiedamountregardlessofactualneed.Generally,itemsrepresentedinpurchaseobligationsarenotreflectedasliabilitiesonourstatementofFinancialPosition.

Wealsohaveobligationswithrespecttopensionandotherpost-retirementbenefitplans.seenote11intheconsolidatedfinancialstatements.

interestpaymentsunderlong-termdebtobligationsexcludethepotentialeffectsoftherelatedinterestrateswapcon-tracts.seenote10intheconsolidatedfinancialstatements.

Weleasecertainofficeandmanufacturingfacilitiesaswellascertainmachineryandequipmentundervariousleasecontractswithtermsthatmeettheaccountingdefinitionofoperatingleases.ourcommitmentsundertheseoperatingleases,intheformofnon-cancelablefutureleasepay-ments,arenotreflectedasaliabilityonourstatementofFinancialPosition.

RECENTLy ISSUED ACCOUNTING STANDARDSForinformationrelatedtorecentlyissuedaccountingstan-dards,seenote2intheconsolidatedfinancialstatements.

ENVIRONmENTALForinformationrelatedtoenvironmentalclaims,remediationeffortsandrelatedmatters,seenote20intheconsolidatedfinancialstatements.

CRITICAL ACCOUNTING POLICIESthepreparationofourfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamericarequiresustomakeestimates,judgments,andassumptionsthataffectourfinancialconditionandresultsofoperationsthatarereportedintheaccompanyingconsolidatedfinancialstatementsaswellastherelateddis-closureofassetsandliabilitiescontingentuponfutureevents.

Understandingthecriticalaccountingpoliciesdiscussedbelowandrelatedrisksisimportantinevaluatingourfinancialconditionandresultsofoperations.Webelievethefollowingaccountingpoliciesusedinthepreparationoftheconsolidatedfinancialstatementsarecriticaltoourfinancialconditionandresultsofoperationsastheyinvolveasignifi-cantuseofmanagementjudgmentonmattersthatareinherentlyuncertain.ifactualresultsdiffersignificantlyfrommanagement’sestimates,therecouldbeamaterialeffectonourfinancialcondition,resultsofoperationsandcashflows.Managementregularlydiscussestheidentificationand

developmentofthesecriticalaccountingpolicieswiththeauditcommitteeoftheBoardofDirectors.

Accounting for Long-Term Contractsasubstantialportionofoursalestogovernmentcustomersandcertainofoursalestocommercialcustomersaremadepursuanttolong-termcontractsrequiringdevelopmentanddeliveryofproductsoverseveralyearsandoftencontainfixed-pricepurchaseoptionsforadditionalproducts.certainofthesecontractsareaccountedforunderthepercentage-of-completionmethodofaccountingundertheamericaninstituteofcertifiedPublicaccountants’statementofPosition81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts.salesandearningsunderthepercentage-of-completionmethodarerecordedeitherasproductsareshippedundertheunits-of-deliverymethod(forproductioneffort),orbasedontheratioofactualcostsincurredtototalestimatedcostsexpectedtobeincurredrelatedtothecontractunderthecost-to-costmethod(fordevelopmenteffort).

thepercentage-of-completionmethodofaccountingrequiresmanagementtoestimatetheprofitmarginforeachindividualcontractandtoapplythatprofitmarginonauniformbasisassalesarerecordedunderthecontract.theestimationofprofitmarginsrequiresmanagementtomakeprojectionsofthetotalsalestobegeneratedandthetotalcoststhatwillbeincurredunderacontract.theseprojectionsrequiremanage-menttomakenumerousassumptionsandestimatesrelating




26toitemssuchasthecomplexityofdesignandrelateddevelop-mentcosts,performanceofsubcontractors,availabilityandcostofmaterials,laborproductivityandcost,overheadandcapitalcosts,andmanufacturingefficiency.thesecontractsoftenincludepurchaseoptionsforadditionalquantitiesandcustomerchangeordersforadditionalorrevisedproductfunctionality.salesandcostsrelatedtoprofitablepurchaseoptionsareincludedinourestimatesonlywhentheoptionsareexercisedwhilesalesandcostsrelatedtounprofitablepurchaseoptionsareincludedinourestimateswhenexerciseisdeterminedtobeprobable.salesrelatedtochangeordersareincludedinprofitestimatesonlyiftheycanbereliablyestimatedandcollectibilityisreasonablyassured.Purchaseoptionsandchangeordersareaccountedforeitherasanintegralpartoftheoriginalcontractorseparatelydependinguponthenatureandvalueoftheitem.anticipatedlossesoncontractsarerecognizedinfullintheperiodinwhichlossesbecomeprobableandestimable.

estimatesofprofitmarginsforcontractsaretypicallyreviewedbymanagementonaquarterlybasis.assumingtheinitialestimatesofsalesandcostsunderacontractareaccurate,thepercentage-of-completionmethodresultsintheprofitmarginbeingrecordedevenlyasrevenueisrecognizedunderthecontract.changesintheseunderlyingestimatesduetorevisionsinsalesandcostestimates,thecombiningofcontracts,ortheexerciseofcontractoptionsmayresultinprofitmarginsbeingrecognizedunevenlyoveracontractassuchchangesareaccountedforonacumulativebasisintheperiodestimatesarerevised.significantchangesinestimatesrelatedtoaccountingforlong-termcontractsmayhaveamaterialeffectonourresultsofoperationsintheperiodinwhichtherevisedestimateismade.

Income Taxesattheendofeachquarterlyreportingperiod,weestimateaneffectiveincometaxratethatisexpectedtobeapplicableforthefullfiscalyear.theestimateofoureffectiveincometaxrateinvolvessignificantjudgmentsresultingfromuncertain-tiesintheapplicationofcomplextaxregulationsacrossmanyjurisdictions,implementationoftaxplanningstrategies,andestimatesastothejurisdictionswhereincomeisexpectedtobeearned.theseestimatesmaybefurthercomplicatedbynewlaws,newinterpretationsofexistinglaws,andrulingsbytaxingauthorities.Duetothesubjectivityandcomplexnatureoftheseunderlyingissues,ouractualeffectiveincometaxrateandrelatedtaxliabilitiesmaydifferfromourinitialestimates.Differencesbetweenourestimatedandactualeffectiveincometaxratesandrelatedliabilitiesarerecordedintheperiodtheybecomeknownorasourestimatesarerevisedbasedonadditionalinformation.theresultingadjust-menttoourincometaxexpensecouldhaveamaterialeffectonourresultsofoperationsintheperiodtheadjustmentisrecorded.aonepercentagepointchangeinoureffectiveincometaxratewouldchangeourannualnetincomebyapproximately$8million.

Deferredtaxassetsandliabilitiesarerecordedfortaxcarry-forwardsandthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingandincometaxpurposes.Managementbelievesitismorelikelythannotthatthecurrentandlong-termdeferredtaxassetswillberealizedthroughthereductionoffuturetaxableincome.seenote16intheconsolidatedfinancialstatementsforfurtherdetailregard-ingdeferredtaxesandthefactorsconsideredinevaluatingdeferredtaxassetrealization.

Goodwillasofseptember30,2007,wehad$544millionofgoodwillresultingfromvariousacquisitions.Weperformimpairmenttestsongoodwillonanannualbasisduringthesecondquarterofeachfiscalyear,oronaninterimbasisifeventsorcircumstancesindicatethatitismorelikelythannotthatimpairmenthasoccurred.

Goodwillispotentiallyimpairedifthecarryingvalueofthereportingunitthatcontainsthegoodwillexceedsitsesti-matedfairvalue.thefairvaluesofourreportingunitsaredeterminedwiththeassistanceofthird-partyvaluationexpertsusingacombinationofanincomeapproach,whichestimatesfairvaluebaseduponfuturediscountedcashflows,andamarketapproach,whichestimatesfairvalueusingmarketmultiples,ratios,andvaluationsofasetofcomparablepubliccompanieswithinourindustry.

thevaluationmethodologyandunderlyingfinancialinforma-tionthatisusedtoestimatethefairvalueofourreportingunitsrequiressignificantjudgmentstobemadebymanage-ment.thesejudgmentsinclude,butarenotlimitedto,thelong-termprojectionsoffuturefinancialperformanceandtheselectionofappropriatediscountratesusedtopresentvaluefuturecashflows.ourfive-yearstrategicoperatingplanservesasthebasisforthesevaluationsandrepresentsourbestestimateoffuturebusinessconditionsinourindustryaswellasourabilitytocompete.Discountratesaredeterminedbasedupontheweightedaveragecostofcapitalforasetofcomparablecompaniesadjustedforrisksassociatedwithourdifferentoperations.ourgoodwillimpairmentteststhatwereperformedinthesecondquarterof2007yieldednoimpair-ments.iftherewasasignificantdownturninourbusiness,wecouldincuragoodwillimpairment.

WarrantyaccruedliabilitiesarerecordedonourstatementofFinancialPositiontoreflectourcontractualobligationsrelatingtowarrantycommitmentstoourcustomers.Weprovidewar-rantycoverageofvariouslengthsandtermstoourcustomersdependingonstandardofferingsandnegotiatedcontractualagreements.Werecordanestimateforwarrantyexpenseatthetimeofsalebasedonhistoricalwarrantyreturnratesandrepaircosts.Webelieveourprimarysourceofwarrantyriskrelatestoourin-flightentertainmentproductsandextendedwarrantytermsacrossallbusinesses.atseptember30,2007,wehaverecorded$213millionofwarrantyliabilities.




27shouldfuturewarrantyexperiencediffermateriallyfromourhistoricalexperience,wemayberequiredtorecordadditionalwarrantyliabilitieswhichcouldhaveamaterialadverseeffectonourresultsofoperationsandcashflowsintheperiodinwhichtheseadditionalliabilitiesarerequired.

Pension BenefitsWeprovideretirementbenefitstomostofouremployeesintheformofdefinedbenefitpensionplans.accountingstan-dardsrequirethecostofprovidingthesepensionplansbemeasuredonanactuarialbasis.theseaccountingstandardswillgenerallyreduce,butnoteliminate,thevolatilityofthereportedpensionobligationandrelatedpensionexpenseasactuarialgainsandlossesresultingfrombothnormalyear-to-yearchangesinvaluationassumptionsandthedifferencesfromactualexperiencearedeferredandamortized.theappli-cationoftheseaccountingstandardsrequiresmanagementtomakenumerousassumptionsandjudgmentsthatcansignificantlyaffectthesemeasurements.criticalassumptionsmadebymanagementinperformingtheseactuarialvalua-tionsincludetheselectionofdiscountratesandexpectationsonthefuturerateofreturnonpensionplanassets.

Discountratesareusedtodeterminethepresentvalueofourpensionobligationsandalsoaffecttheamountofpen-sionexpenserecordedinanygivenperiod.Weestimatethisdiscountratebasedontheratesofreturnofhighquality,fixed-incomeinvestmentswithmaturitydatesthatreflecttheexpectedtimehorizonthatbenefitswillbepaid(seenote11intheconsolidatedfinancialstatements).changesinthediscountratecouldhaveamaterialeffectonourreportedpensionobligationsandrelatedpensionexpense.

theexpectedrateofreturnisourestimateofthelong-termearningsrateonourpensionplanassetsandisbaseduponbothhistoricallong-termactualandexpectedfutureinvest-mentreturnsconsideringthecurrentinvestmentmixofplanassets.Differencesbetweentheactualandexpectedrateofreturnonplanassetscanimpactourexpenseforpensionbenefits.

Holdingallotherfactorsconstant,theestimatedimpacton2008pensionexpensecausedbyhypotheticalchangestokeyassumptionsisasfollows:

(dollarsinmillions) cHanGeinassUMPtion

assUMPtion 25BasisPointincRease 25BasisPointDecRease

Pensionobligation discountrate $5pensionexpensedecrease $5pensionexpenseincrease

expectedlong-term rateofreturnon planassets $5pensionexpensedecrease $5pensionexpenseincrease

Inventory Valuation Reservesinventoryvaluationreservesarerecordedinordertoreportinventoriesatthelowerofcostormarketvalueonourstate-mentofFinancialPosition.thedeterminationofinventoryvaluationreservesrequiresmanagementtomakeestimatesandjudgmentsonthefuturesalabilityofinventories.valua-tionreservesforexcess,obsolete,andslow-movinginventory

areestimatedbycomparingtheinventorylevelsofindividualpartstobothfuturesalesforecastsorproductionrequire-mentsandhistoricalusageratesinordertoidentifyinventorythatisunlikelytobesoldabovecost.otherfactorsthatmanagementconsidersindeterminingthesereservesincludeoverallmarketconditionsandotherinventorymanagementinitiatives.Managementcangenerallyreacttoreducethelikelihoodofsevereexcessandslow-movinginventoryissuesbychangingpurchasingbehaviorandpracticesprovidedtherearenoabruptchangesinmarketconditions.

Managementbelievesitsprimarysourceofriskforexcessandobsoleteinventoryisderivedfromthefollowing:

• ourin-flightentertainmentinventory,whichtendstoexperiencequickertechnologicalobsolescencethanourotherproducts.in-flightentertainmentinventoryatseptember30,2007was$97million.

• life-timebuyinventory,whichconsistsofinventorythatistypicallynolongerbeingproducedbyourvendorsbutforwhichwepurchasemultipleyearsofsupplyinordertomeetproductionandservicerequirementsoverthelifespanofaproduct.totallife-timebuyinventoryonhandatseptember30,2007was$100million.

atseptember30,2007,wehad$99millionofinventoryvalu-ationreservesrecordedon$1,019millionoftotalinventoryonhand.althoughmanagementbelievesthesereservesareadequate,anyabruptchangesinmarketconditionsmayrequireustorecordadditionalinventoryvaluationreserveswhichcouldhaveamaterialadverseeffectonourresultsofoperationsintheperiodinwhichtheseadditionalreservesarerequired.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT mARKET RISK

Interest Rate Riskinadditiontousingcashprovidedbynormaloperatingactivi-ties,weutilizeacombinationofshort-termandlong-termdebttofinanceoperations.ouroperatingresultsandcashflowsareexposedtochangesininterestratesthatcouldadverselyaffecttheamountofinterestexpenseincurredandpaidondebtobligationsinanygivenperiod.inaddition,changesininterestratescanaffectthefairvalueofourdebtobligations.suchchangesinfairvalueareonlyrelevanttotheextentthesedebtobligationsaresettledpriortomaturity.Wemanageourexposuretointerestrateriskbymaintaininganappropriatemixoffixedandvariableratedebtandwhenconsiderednecessary,wemayemployfinancialinstrumentsintheformofinterestrateswapstohelpmeetthisobjective.

atseptember30,2007,wehad$200millionof4.75percentfixedratelong-termdebtobligationsoutstandingwithacarryingvalueof$199millionandafairvalueof$192million.Weconverted$100millionofthisfixedratedebttofloat-ingratedebtbearinginterestatsix-monthliBoRless7.5basispointsbyexecuting“receivefixed,payvariable”interest




28rateswapcontracts.ahypothetical10percentincreaseordecreaseinaveragemarketinterestrateswouldhavedecreasedorincreasedthefairvalueofourlong-termdebt,exclusiveoftheeffectsoftheinterestrateswapcontracts,by$5millionand$5million,respectively.thefairvalueofthe$100millionnotionalvalueofinterestrateswapcontractswasa$1millionliabilityatseptember30,2007.ahypotheti-cal10percentincreaseordecreaseinaveragemarketinterestrateswoulddecreaseorincreasethefairvalueofourinterestrateswapcontractsby$2millionand$2million,respectively.inclusiveoftheeffectoftheinterestrateswaps,ahypotheti-cal10percentincreaseordecreaseinaveragemarketinterestrateswouldnothaveamaterialeffectonourpretaxincome.Formoreinformationrelatedtooutstandingdebtobligationsandderivativefinancialinstruments,seenotes10and17intheconsolidatedfinancialstatements.

Foreign Currency RiskWetransactbusinessinvariousforeigncurrencieswhichsubjectsourcashflowsandearningstoexposurerelatedtochangestoforeigncurrencyexchangerates.Weattempttomanagethisexposurethroughoperationalstrategiesandtheuseofforeigncurrencyforwardexchangecontracts(foreigncurrencycontracts).allforeigncurrencycontractsareexecutedwithcreditworthybanksandaredenominatedin

currenciesofmajorindustrialcountries.themajorityofournon-functionalcurrencyfirmandanticipatedreceivablesandpayablesarehedgedusingforeigncurrencycontracts.itisourpolicynottomanageexposuretonetinvestmentsinforeignsubsidiariesorenterintoderivativefinancialinstrumentsforspeculativepurposes.notionalamountsofoutstandingfor-eigncurrencyforwardexchangecontractswere$205millionand$190millionatseptember30,2007and2006,respec-tively.notionalamountsarestatedinU.s.dollarequivalentsatspotexchangeratesattherespectivedates.Principalcurrenciesthatarehedgedincludetheeuropeaneuro,Britishpoundsterling,andJapaneseyen.thedurationofforeigncur-rencycontractsisgenerallytwoyearsorless.thenetfairvalueoftheseforeigncurrencycontractsatseptember30,2007and2006werenetliabilitiesof$5millionand$3million,respectively.iftheU.s.dollarincreasedordecreasedinvalueagainstallcurrenciesbyahypothetical10percent,theeffectonthefairvalueoftheforeigncurrencycontracts,ourresultsofoperations,cashflows,orfinancialconditionwouldnotbesignificantatseptember30,2007.

Formoreinformationrelatedtooutstandingforeigncurrencyforwardexchangecontracts,seenote17intheconsolidatedfinancialstatements.

CAUTIONARy STATEmENTthisannualReporttoshareowners,anddocumentsthatareincorporatedbyreferencetoourannualReportonForm10-Kfiledwiththesec,containstatements,includingcertainprojectionsandbusinesstrends,accompaniedbysuchphrasesas“believes”,“estimates”,“expects”,“could”,“likely”,“anticipates”,“will”,“intends”,andothersimilarexpressions,thatareforward-lookingstatementsasdefinedinthePrivatesecuritieslitigationReformactof1995.actualresultsmaydiffermateriallyfromthoseprojectedasaresultofcertainrisksanduncertainties,includingbutnotlimitedtothepotentialimpactsofgeopoliticalevents,thefinancialconditionofourcustomers(includingmajorU.s.airlines),thehealthoftheglobaleconomy,thecontinuedrecoveryofthecommercialaerospaceindustryandthecontinuedsupportformilitarytransformationandmodernizationprograms;delaysrelatedtotheawardofdomesticandinternationalcontracts;thepotentialadverseimpactofoilpricesonthecommercialaerospaceindustry;thecostoftheglobalwaronterrorismonU.s.governmentmilitaryprocurementexpendituresandprogrambudgets;changesindomesticandforeigngovernmentspending,budgetaryandtradepoliciesadversetoourbusinesses;marketacceptanceofournewandexistingtechnologies,productsandservices;reliabilityofandcustomersatisfactionwithourproductsandservices;favorableoutcomesonorpotentialcancellationorrestructuringofcontracts,ordersorprogramprioritiesbyourcustomers;customerbankruptcies;recruitmentandretentionofqualifiedpersonnel;riskofalaborstrikeinfiscalyear2008ascollectivebargainingagreementsexpireinMay2008;performanceofoursuppliersandsubcontractors;risksinherentinfixedpricecontracts,particularlytheriskofcostoverruns;riskofsignificantdisruptiontoairtravel;ourabilitytoexecutetoourinternalperformanceplanssuchasourproductivityimprovementandcostreductioninitiatives;achievementofouracquisitionandrelatedintegrationplans;continuingtomaintainourplannedeffectivetaxrates,includingtheriskthatcongresswillnotenactresearchanddevelopmenttaxcreditlegislationapplicabletoalloffiscalyear2008;ourabilitytodevelopcontractcompliantsystemsandproductsandsatisfyourcontractualcommitments;riskoffinesandpenaltiesrelatedtononcompliancewithexportcontrolregulations;riskofassetimpairments;governmentclaimsrelatedtoourpensionplanfreeze;ourabilitytowinnewbusinessandconvertthoseorderstosaleswithinthefiscalyearinaccordancewithourannualoperatingplan;andtheuncertaintiesoftheoutcomeoflitigation,aswellasotherrisksanduncertainties,includingbutnotlimitedtothosedetailedhereinandfromtimetotimeinoursecuritiesandexchangecommissionfilings.theseforward-lookingstatementsaremadeonlyasofthedatehereof.

ROckwell cOllins annual RepORt 2007 29Management’sResponsibilityforFinancialstatements

We,themanagementteamofRockwellcollins,areresponsibleforthepreparation,integrityandobjectivityofthefinancialstatementsandotherfinancialinformationwehavepresentedinthisreport.thefinancialstatementswerepreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamerica,applyingourestimatesandjudgments.

Deloitte&touchellP,ourindependentregisteredpublicaccountingfirm,isretainedtoauditourfinancialstatements.theiraccompanyingreportisbasedonauditsconductedinaccordancewithstandardsofthePubliccompanyaccountingoversightBoard(Unitedstates),whichincludetheconsiderationofourinternalcontrolstodeterminethenature,timingandextentofauditteststobeapplied.

ourBoardofDirectorsexercisesitsresponsibilityforthesefinancialstatementsthroughitsauditcommittee,whichconsistsentirelyofindependent,non-managementBoardmembers.theauditcommitteemeetsregularlywiththeindependentregisteredpublicaccountingfirmandwiththecompany’sinternalauditors,bothprivatelyandwithmanagementpresent,toreviewaccounting,auditing,internalcontrolandfinancialreportingmatters.

Clayton M. Jones Patrick E. Allenchairman,President& seniorvicePresident&chiefexecutiveofficer chiefFinancialofficer

ROckwell cOllins annual RepORt 2007 30Management’sReportoninternalcontroloverFinancialReporting

ManagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingasdefinedinRules13a-15(f)and15d-15(f)underthesecuritiesexchangeactof1934.Rockwellcollins’internalcontroloverfinancialreportingisaprocessdesigned,underthesupervisionofthechiefexecutiveofficerandchiefFinancialofficer,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationofconsolidatedfinancialstatementsforexternalpurposesinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamerica.ourinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofRockwellcollins;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationofconsolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamerica,andthatourreceiptsandexpendituresarebeingmadeonlyinaccordancewithauthorizationsofRockwellcollins’managementanddirectors;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofourassetsthatcouldhaveamaterialeffectontheconsoli-datedfinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

ManagementassessedtheeffectivenessofRockwellcollins’internalcontroloverfinancialreportingasofseptember28,2007.inmakingthisassessment,managementusedthecriteriasetforthbythecommitteeofsponsoringorganizationsofthetreadwaycommissioninInternal Control-Integrated Framework.Basedonthisassessment,managementdeter-minedthatRockwellcollins,inc.maintainedeffectiveinternalcontroloverfinancialreportingasofseptember28,2007.

Management’sassessmentoftheeffectivenessofRockwellcollins’internalcontroloverfinancialreportingasofseptember28,2007hasbeenauditedbyDeloitte&touchellP,anindependentregisteredpublicaccountingfirm,asstatedintheirreportwhichisincludedherein.

Clayton M. Jones Patrick E. Allenchairman,President& seniorvicePresident&chiefexecutiveofficer chiefFinancialofficer

ROckwell cOllins annual RepORt 2007 31ReportofindependentRegisteredPublicaccountingFirm

totHeBoaRDoFDiRectoRsanD sHaReoWneRsoFRocKWellcollins,inc.

Wehaveauditedmanagement’sassessment,includedintheaccompanyingManagement’sReportoninternalcontroloverFinancialReporting,thatRockwellcollins,inc.andsubsidiaries(the“company”)maintainedeffectiveinternalcontroloverfinancialreportingasofseptember28,2007,basedoncriteriaestablishedin Internal Control — Integrated Frame-workissuedbythecommitteeofsponsoringorganizationsofthetreadwaycommission.thecompany’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.ourresponsibilityistoexpressanopiniononmanagement’sassessmentandanopinionontheeffectivenessofthecompany’sinternalcontroloverfinancialreportingbasedonouraudit.

WeconductedourauditinaccordancewiththestandardsofthePubliccompanyaccountingoversightBoard(Unitedstates).thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinions.

acompany’sinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,thecompany’sprincipalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbythecompany’sboardofdirectors,management,andotherpersonneltoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusionorimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedordetectedonatimelybasis.also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

inouropinion,management’sassessmentthatthecompanymaintainedeffectiveinternalcontroloverfinancialreportingasofseptember28,2007,isfairlystated,inallmaterialrespects,basedonthecriteriaestablishedinInternal Control — Integrated Frameworkissuedbythecommitteeofsponsoringorganizationsofthetreadwaycommission.alsoinouropinion,thecompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofseptember28,2007,basedonthecriteriaestablishedinInternal Control — Integrated Frameworkissuedbythecommit-teeofsponsoringorganizationsofthetreadwaycommission.

Wehavealsoaudited,inaccordancewiththestandardsofthePubliccompanyaccountingoversightBoard(Unitedstates),theconsolidatedfinancialstatementsasofandfortheyearendedseptember28,2007ofthecompanyandourreportdatedoctober31,2007,expressedanunqualifiedopiniononthosefinancialstatementsandincludedanexplanatoryparagraphregardingthecompany’schangeasofthebeginningoffiscal2006initsmethodofaccountingforemployeestock-basedcompensation,asofthebeginningoffiscalyear2007initsmeasurementdateforitsdefinedbenefitplans,andasofseptember28,2007initsmethodofaccountingforthefundedstatusofitsdefinedbenefitplans.

Minneapolis,Minnesotaoctober31,2007

ROckwell cOllins annual RepORt 2007 32ReportofindependentRegisteredPublicaccountingFirm

totHeBoaRDoFDiRectoRsanD sHaReoWneRsoFRocKWellcollins,inc.

WehaveauditedtheaccompanyingconsolidatedstatementoffinancialpositionofRockwellcollins,inc.andsubsidiaries(the“company”)asofseptember28,2007andseptember29,2006,andtherelatedconsolidatedstatementsofopera-tions,cashflows,andshareowners’equityandcomprehensiveincomeforeachofthethreeyearsintheperiodendedseptember28,2007.thesefinancialstatementsaretheresponsibilityofthecompany’smanagement.ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.

WeconductedourauditsinaccordancewiththestandardsofthePubliccompanyaccountingoversightBoard(Unitedstates).thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

inouropinion,suchconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofthecompanyasofseptember28,2007andseptember29,2006,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachofthethreeyearsintheperiodendedseptember28,2007,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedstatesofamerica.

asdiscussedinnote13totheconsolidatedfinancialstatements,asofthebeginningoffiscal2006thecompanychangeditsmethodofaccountingforemployeestock-basedcompensation.also,asdiscussedinnote11totheconsolidatedfinan-cialstatements,asofthebeginningoffiscal2007thecompanychangeditsmeasurementdateforitsdefinedbenefitplansandasofseptember28,2007thecompanychangeditsmethodofaccountingforthefundedstatusofitsdefinedbenefitplans.

Wehavealsoaudited,inaccordancewiththestandardsofthePubliccompanyaccountingoversightBoard(Unitedstates),theeffectivenessofthecompany’sinternalcontroloverfinancialreportingasofseptember28,2007,basedonthecriteriaestablishedinInternal Control — Integrated Frameworkissuedbythecommitteeofsponsoringorganizationsofthetreadwaycommissionandourreportdatedoctober31,2007expressedanunqualifiedopiniononmanagement’sassessmentoftheeffectivenessofthecompany’sinternalcontroloverfinancialreportingandanunqualifiedopinionontheeffectivenessofthecompany’sinternalcontroloverfinancialreporting.

Minneapolis,Minnesotaoctober31,2007

ROckwell cOllins annual RepORt 2007 33consolidatedstatementofFinancialPosition

sePteMBeR30

(inmillions,exceptpershareamounts) 2007 2006

ASSETScurrentassets: cashandcashequivalents $ 231 $ 144 Receivables 883 821 inventories 823 727 currentdeferredincometaxes 176 168 othercurrentassets 56 67 totalcurrentassets 2,169 1,927

Property 607 552intangibleassets 147 137Goodwill 544 517PrepaidPensionasset 88 —otherassets 195 145totalassets $3,750 $3,278

LIABILITIES AND SHAREOWNERS’ EQUITycurrentliabilities: accountspayable $ 395 $ 324 compensationandbenefits 305 268 advancepaymentsfromcustomers 304 246 Productwarrantycosts 213 189 incometaxespayable 29 54 othercurrentliabilities 213 243 totalcurrentliabilities 1,459 1,324

long-termDebt 223 245RetirementBenefits 359 421otherliabilities 136 82

shareowners’equity: commonstock($0.01parvalue;sharesauthorized:1,000;sharesissued:183.8) 2 2 additionalpaid-incapital 1,353 1,305 Retainedearnings 1,533 1,105 accumulatedothercomprehensiveloss (336) (393) commonstockintreasury,atcost(sharesheld:2007,18.0;2006,16.7) (979) (813) totalshareowners’equity 1,573 1,206totalliabilitiesandshareowners’equity $3,750 $3,278

seenotestoconsoliDateDFinancialstateMents.

ROckwell cOllins annual RepORt 2007 34consolidatedstatementofoperations

yeaRenDeDsePteMBeR30

(inmillions,exceptpershareamounts) 2007 2006 2005sales: Productsales $4,007 $3,482 $3,072 servicesales 408 381 373 totalsales 4,415 3,863 3,445costs,expensesandother: Productcostofsales 2,819 2,491 2,242 servicecostofsales 273 261 260 selling,generalandadministrativeexpenses 482 441 402 interestexpense 13 13 11 otherincome,net (15) (32) (17) totalcosts,expensesandother 3,572 3,174 2,898incomebeforeincometaxes 843 689 547incometaxprovision 258 212 151netincome $ 585 $ 477 $ 396

earningspershare: Basic $ 3.50 $ 2.77 $ 2.24 Diluted $ 3.45 $ 2.73 $ 2.20Weightedaveragecommonshares: Basic 167.1 172.0 177.0 Diluted 169.7 174.5 180.2cashdividendspershare $ 0.64 $ 0.56 $ 0.48


ROckwell cOllins annual RepORt 2007 35consolidatedstatementofcashFlows


(inmillions) 2007 2006 2005

OPERATING ACTIVITIES:netincome $ 585 $ 477 $ 396adjustmentstoarriveatcashprovidedbyoperatingactivities: Gainonsaleofequityaffiliate — (20) — Restructuringcharge(adjustment)andtradenameswrite-off (5) 14 15 Depreciation 96 85 85 amortizationofintangibleassets 22 21 19 stock-basedcompensation 17 18 — compensationandbenefitspaidincommonstock 58 50 69 taxbenefitfromexerciseofstockoptions 34 28 35 excesstaxbenefitfromstock-basedcompensation (33) (28) — Deferredincometaxes 43 33 31 Pensionplancontributions (90) (66) (114) changesinassetsandliabilities,excludingeffectsofacquisitions

andforeigncurrencyadjustments: Receivables (126) (78) (108) inventories (128) (43) (9) accountspayable 55 35 39 advancepaymentsfromcustomers 61 24 32 incometaxes (23) (12) 34 compensationandbenefits 41 (16) 30 otherassetsandliabilities — 73 20 cashProvidedbyoperatingactivities 607 595 574

INVESTING ACTIVITIES:Propertyadditions (125) (144) (111)acquisitionofbusinesses,netofcashacquired (32) (100) (19)Proceeds(payments)fromsaleofinvestmentinequityaffiliate (2) 84 —acquisitionofintangibleassets (8) — (7)Proceedsfromsettlementofdiscontinuedlicenseagreement 14 — —Proceedsfromdispositionofproperty — 1 3 cashUsedforinvestingactivities (153) (159) (134)

FINANCING ACTIVITIES:Purchasesoftreasurystock (333) (492) (498)cashdividends (107) (96) (85)Proceedsfromexerciseofstockoptions 61 73 96netproceedsfromissuanceoflong-termdebt — 46 —excesstaxbenefitfromstock-basedcompensation 33 28 —Paymentsonlong-termdebt (27) — — cashUsedforFinancingactivities (373) (441) (487)effectofexchangeratechangesoncashandcashequivalents 6 4 (4)netchangeincashandcashequivalents 87 (1) (51)cashandcashequivalentsatBeginningofyear 144 145 196cashandcashequivalentsatendofyear $ 231 $ 144 $ 145


ROckwell cOllins annual RepORt 2007 36consolidatedstatementofshareowners’equityandcomprehensiveincome


(inmillions) 2007 2006 2005

COmmON STOCKBeginningandendingbalance $ 2 $ 2 $ 2

ADDITIONAL PAID-IN CAPITALBeginningbalance 1,305 1,263 1,228taxbenefitfromexerciseofstockoptions 33 28 35stock-basedcompensation 17 18 —other (2) (4) —endingbalance 1,353 1,305 1,263

RETAINED EARNINGSBeginningbalance 1,105 771 492netincome 585 477 396cashdividends (107) (96) (85)sharesissuedunderstockoptionandbenefitplans (45) (47) (32)Definedbenefitplansremeasurementadjustment (5) — —endingbalance 1,533 1,105 771

ACCUmULATED OTHER COmPREHENSIVE INCOmE (LOSS)Beginningbalance (393) (604) (397)Minimumpensionliabilityadjustment 369 199 (200)Definedbenefitplansrecognitionadjustment (329) — —currencytranslationgain(loss) 19 11 (6)Foreigncurrencycashflowhedgeadjustment (2) 1 (1)endingbalance (336) (393) (604)

COmmON STOCK IN TREASURyBeginningbalance (813) (493) (192)sharerepurchases (333) (492) (498)sharesissuedfromtreasury 167 172 197endingbalance (979) (813) (493)totalshareowners’equity $1,573 $1,206 $ 939

COmPREHENSIVE INCOmEnetincome $ 585 $ 477 $ 396othercomprehensiveincome(loss),netofdeferred

taxes(2007,$(216);2006,$(117);2005,$117) 386 211 (207)comprehensiveincome $ 971 $ 688 $ 189


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


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.


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.


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


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


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


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


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.


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


8. OTHER ASSETS

otherassetsaresummarizedasfollows: sePteMBeR30


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


customerincentives $117 $125

contractreserves 18 37

other 78 81

othercurrentliabilities $213 $243


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


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.


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


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)


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.


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:


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.


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)


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


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.


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.


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


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


Retirementbenefits $ 55 $119

intangibles (8) (4)

Property (62) (68)

stock-basedcompensation 11 6

other,net (39) (19)

long-termdeferredincometaxes $(43) $ 34

long-termdeferredincometaxassetsandliabilitiesareincludedintheconsolidatedstatementofFinancialPositionasfollows: sePteMBeR30


otherassets $ 1 $34

otherliabilities (44) —

long-termdeferredincometaxes $(43) $34

Managementbelievesitismorelikelythannotthatthecurrentandlong-termdeferredtaxassetswillberealizedthroughthereductionoffuturetaxableincome.significantfactorsconsideredbymanagementinitsdeterminationoftheprobabilityoftherealizationofthedeferredtaxassetsinclude:(a)thehistoricaloperatingresultsofRockwellcollins($1,408millionofUnitedstatestaxableincomeoverthepastthreeyears),(b)expectationsoffutureearnings,and(c)the


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)


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


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.


changesinthecarryingamountofaccruedproductwarrantycostsaresummarizedasfollows: sePteMBeR30


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).


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.


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.


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:


commercialsystems — — —

corporate — — 59

totalinvestmentsinequityaffiliates $ 10 $ 13 $ 71

Depreciationandamortization:



totaldepreciationandamortization $ 118 $ 106 $ 104

capitalexpendituresforproperty:



totalcapitalexpendituresforproperty $ 125 $ 144 $ 111

earnings(losses)fromequityaffiliates:


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.


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

ROckwell cOllins annual RepORt 2007 62selectedFinancialData

thefollowingselectedfinancialdatashouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandnotestheretoincludedelsewhereinthisannualreport.thestatementofoperations,statementofFinancialPositionandotherdatahasbeenderivedfromourauditedfinancialstatements. yeaRsenDeDsePteMBeR30

(inmillions,exceptpershareamounts) 2007a 2006b 2005c 2004d 2003e

STATEmENT OF OPERATIONS DATA:sales $4,415 $3,863 $3,445 $2,930 $2,542costofsales 3,092 2,752 2,502 2,144 1,866selling,generalandadministrativeexpenses 482 441 402 356 341incomebeforeincometaxes 843 689 547 430 368netincome 585 477 396 301 258Dilutedearningspershare 3.45 2.73 2.20 1.67 1.43

STATEmENT OF FINANCIAL POSITION DATA:Workingcapitalf $ 710 $ 603 $ 596 $ 699 $ 530Property 607 552 473 418 401Goodwillandintangibleassets 691 654 571 550 440totalassets 3,750 3,278 3,148 2,874 2,591short-termdebt — — — — 42long-termdebt 223 245 200 201 —shareowners’equityg 1,573 1,206 939 1,133 833

OTHER DATA:capitalexpenditures $ 125 $ 144 $ 111 $ 92 $ 69Depreciationandamortization 118 106 104 109 105Dividendspershare 0.64 0.56 0.48 0.39 0.36

STOCK PRICE:High $74.69 $60.41 $49.80 $38.08 $27.67low 54.38 43.25 34.40 25.18 17.20

a includes(i)$17millionofstock-basedcompensationexpense($11millionaftertaxes)and(ii)a$5millionfavorableadjustmenttothe2006restructuringchargediscussedinitem(b)below.the$5millionadjustmentin2007isprimarilyduetolowerthanexpectedemployeeseparationcosts($3milliongainaftertaxes).

b includes(i)$18millionofstock-basedcompensationexpense($12millionaftertaxes),(ii)$20milliongainonthesaleofRockwellscientificcompany,llc,anequityaffiliatethatwasjointlyownedwithRockwellautomation,inc.($13millionaftertaxes)and(iii)$14millionrestructuringchargerelatedtodecisionstoimplementcertainbusinessrealignmentandfacilityrationalizationactions($9millionaftertaxes).

c includes(i)$10millionreductioninincometaxexpenserelatedtotheresolutionofcertaindeferredtaxmattersthatexistedpriortoourspin-offin2001and(ii)$15millionwrite-offofcertainindefinite-livedKaisertradenames($10millionaftertaxes).thetradenamewrite-offwasrecordedincostofsales.

d includes(i)$5milliongain($3millionaftertaxes)relatedtofavorableinsurancesettlements,(ii)$7milliongain($4millionaftertaxes)relatedtotheresolutionofalegalmatterbroughtbyus,and(iii)$7millionimpairmentloss($4millionaftertaxes)relatedtoourinvestmentintenzingcommunications,inc.

e includesa$20milliongain($12millionaftertaxes)relatedtoafavorabletaxrulingonanover-fundedlifeinsurancereservetrustfund.f Workingcapitalconsistsofallcurrentassetsandliabilities,includingcashandshort-termdebt.g 2007shareowners’equityincludes(i)a$360million(aftertax)adjustmenttorecordthefundedstatusofourpensionandotherretirementbenefitplansonthestatement

ofFinancialPositionand(ii)a$5millionadjustmenttoRetainedearnings(aftertax)relatedtothechangeinmeasurementdatefromJune30toseptember30foralldefinedbenefitplans.seenote11intheconsolidatedfinancialstatementsforfurtherinformationrelatedtotheseadjustments.

ROckwell cOllins annual RepORt 2007 63Directorsandofficers

BOARD OF DIRECTORS

Clayton M. Joneschairman,PresidentandchiefexecutiveofficerRockwell Collins, Inc.

Donald R. BeallchairmanemeritusRockwell

Anthony J. CarboneRetiredvicechairmanoftheBoardandseniorconsultantThe Dow Chemical Company

Michael P. C. CarnsGeneral,UsaF(Retired)Privateconsultant

Chris A. DavisGeneralPartnerForstmann Little & Co.

Mark DoneganchairmanandchiefexecutiveofficerPrecision Castparts Corp.

Ralph E. EberhartGeneral,UsaF(Retired)PresidentArmed Forces Benefit Association

Andrew J. PolicanoDean,thePaulMerageschoolofBusinessUniversity of California, Irvine

Cheryl L. ShaverschairmanandchiefexecutiveofficerGlobal Smarts, Inc.

Joseph F. Toot, Jr.RetiredPresidentandchiefexecutiveofficerThe Timken Company

COmmITTEES

Audit Committee

Joseph F. Toot, Jr., chairman

Chris A. Davis

Andrew J. Policano

Board Nominating and Governance Committee

Michael P. C. Carns, chairman

Andrew J. Policano

Cheryl L. Shavers

Compensation Committee

Anthony J. Carbone, chairman

Mark Donegan

Joseph F. Toot, Jr.

Executive Committee

Donald R. Beall, chairman

Anthony J. Carbone

Clayton M. Jones

Technology Committee

Cheryl L. Shavers, chairman

Donald R. Beall

Michael P. C. Carns

EXECUTIVE OFFICERS

Clayton M. Joneschairman,Presidentandchiefexecutiveofficer

Barry M. AbzugseniorvicePresident,corporateDevelopment

Patrick E. AllenseniorvicePresidentandchiefFinancialofficer

John-Paul E. BesongseniorvicePresident,eBusiness

Gary R. ChadickseniorvicePresident,Generalcounselandsecretary

Gregory S. ChurchillexecutivevicePresidentandchiefoperatingofficer,Governmentsystems

Ronald W. KirchenbauerseniorvicePresident,HumanResources

Nan MattaiseniorvicePresident,engineeringandtechnology

Jeffrey A. MooreseniorvicePresident,operations

Robert K. OrtbergexecutivevicePresidentandchiefoperatingofficer,commercialsystems

Marsha A. SchultevicePresident,Finance&controller

Kent L. StatlerexecutivevicePresident,Rockwellcollinsservices

Douglas E. Stensketreasurer

ROckwell cOllins annual RepORt 2007 64corporateinformation

Rockwell Collins, Inc.WorldHeadquarters400collinsRoadnecedarRapids,iowa52498319-295-1000www.rockwellcollins.com

Investor Relationssecuritiesanalystsshouldcall:Daniele.crookshankvicePresident,investorRelations319-295-7575

Corporate Public RelationsMembersofthenewsmediashouldcall:319-295-2123

Annual Meetingthecompany’sannualmeetingofshareownerswillbeheldontuesday,February12,2008,nearitsWorldHeadquartersat:thecedarRapidsMarriott1200collinsRoadnecedarRapids,iowa

anoticeofthemeetingandproxymaterialwillbemadeavailabletoshareownersinlateDecember2007.

Independent AuditorsDeloitte&touchellP400oneFinancialPlaza120southsixthstreetMinneapolis,Mn55402-1844

Transfer Agent and RegistrarWellsFargoshareownerservicesP.o.Box64874st.Paul,Mn55164-0874888-253-4522or651-450-4064

161n.concordexchangesouthst.Paul,Mn55075-1139888-253-4522or651-450-4064

Corporate Governanceourcorporategovernancedocumentsareavailableonourwebsiteatwww.rockwellcollins.com.thesedocumentsincludeourRestatedcertificateofincorporation,By-laws,BoardofDirectorsGuidelinesoncorporateGovernance,committeecharters,BoardMembershipcriteriaandcodeofethics,categoricalstandardsandPolicyforDirectorindependence,andRelatedPersontransactionPolicy.thecertificationsofourceoandcFopursuanttoRule13a-14(a)underthesecuritiesexchangeactof1934,asadoptedpursuanttosection302ofthesarbanes-oxleyactof2002,havebeenfiledasexhibitstoourForm10-Kforthefiscalyearendedseptember28,2007andtheceo’sannualcertificationregardingourcompliancewiththenyse’scorporategovernancelistingstandardshasbeentimelysubmitted.

Shareowner Servicescorrespondenceaboutshareownership,dividendpayments,transferrequirements,changesofaddress,loststockcertificates,andaccountstatusmaybedirectedto:WellsFargoshareownerservicesP.o.Box64874st.Paul,Mn55164-0874888-253-4522or651-450-4064www.shareowneronline.com

shareownerswishingtotransferstockshouldsendtheirwrittenrequest,stockcertificate(s)andotherrequireddocumentsto:WellsFargoshareownerservicesP.o.Box64874st.Paul,Mn55164-0874888-253-4522or651-450-4064www.shareowneronline.com

shareownersneedingfurtherassistanceshouldcall:319-295-4045

Forcopiesoftheannualreport,Forms10-KandForms10-q,pleasecall:RockwellcollinsinvestorsRelations319-295-7575

Shareowner Service Plus PlanSM

UndertheWellsFargoshareownerservicePlusPlansM,shareownersofrecordmayelecttoreinvestallorapartoftheirdividends,tohavecashdividendsdirectlydepositedintheirbankaccountsandtodepositsharecertificateswiththeagentforsafekeeping.theseservicesareprovidedwithoutchargetotheparticipatingshareowner.

inaddition,theplanallowsparticipatingshareownersattheirowncosttomakeoptionalcashinvestmentsinanyamountfrom$100to$100,000peryearortosellalloranypartofthesharesheldintheiraccounts.

Participationintheplanisvoluntary,andshareownersofrecordmayparticipateorterminatetheirparticipationatanytime.Forabrochureandfulldetailsoftheprogram,pleasedirectinquiresto:WellsFargoshareownerservicesinvestmentPlanservicesP.o.Box64856st.Paul,Mn55164-0856888-253-4522or651-450-4064

Stock Exchangecommonstock(symbol:col)newyorkstockexchange

Des

ign

: seq

uel

stu

DiO

, new

yO

Rk

ph

OtO

gRa

phy:

RO

y Zi

pste

in

Rockwell collinswoRld HeadquaRteRs400 collins Road necedaR Rapids, iowa 52498319 295-1000www.Rockwellcollins.com

147-0801-000-Rc 80m ss© copyright 2007, Rockwell collins, inc.all Rights Reserved. printed in usa. all logos, trademarks or service marks used herein are the property of their respective owners.

Accelerating Success2007 AnnuAl RepoRt

Ro

ck

well c

ollin

S An

nu

Al R

epoR

t 20

07

Success - Rockwell Collins

Documents

Transcript of Success - Rockwell Collins