Current assets:

Cash and cash equivalents

Receivables

Inventories

Deferred income taxes

Other current assets

Assets available for sale (Note 13)

 

 

Total current assets

 

Property, net

Goodwill

Other intangible assets, net

Prepaid pension

Other assets

Assets available for sale (Note 13)

 

 

TOTAL

 

 

Current liabilities:

Short-term debt

Current portion of long-term debt

Accounts payable

Compensation and benefits

Income taxes payable

Other current liabilities

Liabilities associated with assets available for sale (Note 13)

 

 

Total current liabilities

 

Long-term debt

Retirement benefits

Deferred income taxes

Other liabilities

Liabilities associated with assets available for sale (Note 13)

 

Commitments and contingent liabilities (Note 12)

 

Shareowners’ equity:

Common stock (shares issued: 216.4)

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Common stock in treasury, at cost (shares held:

March 31, 2007, 58.6; September 30, 2006, 45.6)

 

 

Total shareowners’ equity

 

 

TOTAL

 

Sales

Cost of sales

 

Gross profit

 

Selling, general and administrative expenses

Other income

Interest expense

 

 

Income from continuing operations before income taxes

Income tax provision

 

 

 

Income from discontinued operating activities of Power Systems

Gain on sale of Power Systems (Note 13 and 14)

Other

 

Income from discontinued operations

 

 

 

 

 

Continuing operations

Discontinued operations

 

Net income

 

 

 

Continuing operations

Discontinued operations

 

Net income

 

 

 

 

 

Basic

 

Diluted

 

 

Net income

Income from discontinued operations

 

Income from continuing operations

 

 

Adjustments to arrive at cash provided by (used for) operating activities:

Depreciation

Amortization of intangible assets

Share-based compensation expense

Retirement benefits expense

Pension trust contributions

Net gain on disposition of property

Income tax benefit from the exercise of stock options

Excess income tax benefit from the exercise of stock options

Changes in assets and liabilities, excluding effects of foreign currency adjustments:

Receivables

Inventories

Accounts payable

Compensation and benefits

Income taxes

Other assets and liabilities

 

 

 

 

Capital expenditures

Acquisition of businesses

Proceeds from sale of property and business

Other investing activities

 

 

 

 

Net (repayment) issuance of short-term debt

Cash dividends

Purchases of treasury stock

Proceeds from the exercise of stock options

Excess income tax benefit from the exercise of stock options

Other financing activities

 

 

 

Effect of exchange rate changes on cash

 

 

 

 

Cash Provided by Discontinued Operating Activities

Cash (Used for) Provided by Discontinued Investing Activities

Cash Used for Discontinued Financing Activities

 

 

 

 

 

In the opinion of management of Rockwell Automation, Inc. (the Company or Rockwell Automation), the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting solely of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 and the updates to certain sections thereof contained in our Current Report on Form 8-K filed on April 27, 2007. The results of operations for the three- and six-month periods ended March 31, 2007 are not necessarily indicative of the results for the full year. All date references to years and quarters herein refer to our fiscal year and fiscal quarter unless otherwise stated.

On January 31, 2007, we completed the divestiture of our Dodge mechanical and Reliance Electric motors and motor repair services businesses to Baldor Electric Company (Baldor). These were the principal businesses of our former Power Systems operating segment. These businesses are reported as a discontinued operation in the Condensed Consolidated Financial Statements for all periods presented.

In March 2006, we sold the assets of our ElectroCraft Engineered Solutions (ElectroCraft) business. ElectroCraft is reported as a discontinued operation in the Condensed Consolidated Financial Statements for all periods presented.

Effective October 1, 2006, we realigned our internal management reporting structure. As a result of this realignment, we now report our historical Control Systems operating segment as two new operating segments: Architecture & Software and Control Products & Solutions. Additionally, the drives and drives related parts and services business from our former Power Systems operating segment was also realigned to report through the Control Products & Solutions segment. We no longer report our former Power Systems operating segment as a continuing operation as a result of the sale of this segment’s principal businesses on January 31, 2007.

Cash and cash equivalents include time deposits, certificates of deposit and commercial paper with original maturities of three months or less at the time of purchase. For the quarter ended March 31, 2007, cash and cash equivalents include investments in commercial paper with original maturities of up to 120 days at the time of purchase, with remaining maturities of less than 90 days.

Receivables are stated net of allowances for doubtful accounts of $12.2 million at March 31, 2007 and $11.2 million at September 30, 2006. In addition, receivables are stated net of an allowance for certain customer returns, rebates and incentives of $11.8 million at March 31, 2007 and $8.5 million at September 30, 2006.

At the end of each interim reporting period, we estimate a base effective tax rate, which is the effective tax rate that we expect for the full fiscal year based on our most recent forecast of pretax income, permanent book and tax differences and global tax planning strategies. We use this base rate to provide for income taxes on a year-to-date basis, excluding the effect of significant unusual or extraordinary items or items that are reported net of their related tax effects. We recognize the tax effect of significant unusual or extraordinary items or items that are reported net of their related tax effects in the period in which they occur.

We present basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the applicable period. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted EPS is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding share-based compensation awards, which requires us to compute total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which the total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on EPS, and accordingly, we exclude them from the calculation of diluted EPS. For the three and six months ended March 31, 2007, share-based compensation awards of 1.4 million and 1.7 million shares, respectively, were excluded from the diluted EPS calculation because they were antidilutive. For the three and six months ended March 31, 2006, share-based compensation awards of 1.0 million and 1.3 million shares, respectively, were excluded from the diluted EPS calculation because they were antidilutive.

The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares (in millions):

Weighted average outstanding shares

Basic weighted average outstanding shares

Effect of dilutive securities

Stock options

Restricted stock

 

 

Diluted weighted average outstanding shares

 

During the quarter ended March 31, 2007, we repurchased 96,839 shares of our common stock for $5.8 million that did not settle until April 2007. In September 2006, we repurchased 359,200 shares of our common stock for $20.6 million that did not settle until October 2006. These outstanding purchases were recorded in accounts payable at March 31, 2007 and September 30, 2006.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS 159 is effective for us beginning in fiscal 2009. We do not believe SFAS 159 will have a material effect on our financial statements and related disclosures.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132R (SFAS 158). SFAS 158 requires companies to recognize the funded status of pension and other postretirement benefit plans on sponsoring employers’ balance sheets and to recognize changes in the funded status in the year the changes occur. It also requires the measurement date of plan assets and obligations to occur at the end of the employers’ fiscal year. SFAS 158 is effective for us at the end of fiscal 2007, except for the change in measurement date, which is effective for us in fiscal 2009. Based on the funded status of our pension and postretirement benefit plans as reported in our Annual Report on Form 10-K dated September 30, 2006, we would have recorded approximately a 15 percent decrease in shareowners’ equity had SFAS 158 been effective at that date. It is unlikely that FAS 158 will affect our results of operations, our loan covenant compliance or our other financial arrangements. The ultimate effect on our financial statements depends upon the discount rate at our fiscal 2007 measurement date (June 30, 2007) and actual returns on our pension plan assets during the year.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for us beginning in fiscal 2008. We are evaluating the interpretation to determine the effect on our financial statements and related disclosures.

Effective October 1, 2005, we adopted SFAS 123(R), Share-Based Payment (SFAS 123(R)), using the modified prospective application transition method. Before we adopted SFAS 123(R), we accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We recognized $7.7 million and $14.7 million in share-based compensation expense in income from continuing operations during the three- and six-months ended March 31, 2007, respectively. We recognized $6.7 million and $12.5 million in share-based compensation expense in income from continuing operations during the three- and six-months ended March 31, 2006, respectively.

Our annual grant of share-based compensation generally takes place during the first quarter of each fiscal year. The number of shares granted to all employees and the weighted average fair value per share during the periods presented was (in thousands except per share amounts):

Stock options

Performance shares

Restricted stock awards

 

Total shares granted

 

In February 2007, our Control Products & Solutions segment acquired ProsCon Holdings Ltd., a process solutions systems integrator headquartered in Ireland. Its areas of expertise include process technology and control systems and information technology, and it serves customers primarily in the pharmaceutical and biotechnology industries.

In January 2006, our Control Products & Solutions segment acquired Caribbean Integration Engineers, Inc. (CIE). CIE offers engineering services in control systems integration, process automation, computer system validation and IT solutions. In December 2005, our Architecture & Software segment acquired Datasweep, Inc., a provider of production management software.

The results of operations of these businesses have been included in the Condensed Consolidated Statement of Operations since the dates of acquisition. Pro forma financial information and allocation of the purchase price is not presented as the effects of these acquisitions are not material to our results of operations and financial position.

Inventories consist of (in millions):

Finished goods

Work in process

Raw materials, parts, and supplies

 

 

Inventories

 

We report inventories net of the allowance for excess and obsolete inventory of $33.9 million at March 31, 2007 and $31.4 million at September 30, 2006.

Property consists of (in millions):

Land

Buildings and improvements

Machinery and equipment

Construction in progress

 

Total

Less accumulated depreciation

 

 

Property, net

 

Changes in the carrying amount of goodwill for the six months ended March 31, 2007 are (in millions):

Balance as of September 30, 2006

Acquisition of business

Translation and other

 

 

Balance as of March 31, 2007

 

Other intangible assets consist of (in millions):

Amortized intangible assets:

Computer software products

Other

 

Total amortized intangible assets

Intangible assets not subject to amortization

 

Total

 

Amortized intangible assets:

Computer software products

Other

 

Total amortized intangible assets

Intangible assets not subject to amortization

 

Total

 

The increase in other intangible assets results primarily from our preliminary purchase price allocation associated with our acquisition of ProsCon Holdings Ltd.

The Allen-Bradley^® trademark has been determined to have an indefinite life, and therefore is not subject to amortization.

Estimated amortization expense is $26.6 million in 2007, $26.5 million in 2008, $20.3 million in 2009, $11.6 million in 2010 and $10.1 million in 2011.

We performed the annual evaluation of our goodwill and indefinite life intangible assets for impairment as required by SFAS No. 142, Goodwill and Other Intangible Assets, during the second quarter of 2007 and concluded that no impairments exist.

Other current liabilities consist of (in millions):

Advance payments from customers and deferred revenue

Customer returns, rebates and incentives

Unrealized losses on foreign exchange contracts

Product warranty obligations

Taxes other than income taxes

Special charges (Note 16)

Other

 

Other current liabilities

 

We record a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Most of our products are covered under a warranty period that runs for twelve months from either the date of sale or from installation to an end-user or OEM customer. We also record a liability for specific warranty matters when they become probable and reasonably estimable. Our product warranty obligations are included in other current liabilities in the Condensed Consolidated Balance Sheet.

Changes in the product warranty obligations for the six months ended March 31, 2007 and 2006 are (in millions):

Balance at beginning of period

Warranties recorded at time of sale

Adjustments to pre-existing warranties

Payments

 

Balance at end of period

 

Long-term debt consists of (in millions):

6.15% notes, payable in 2008

6.70% debentures, payable in 2028

5.20% debentures, payable in 2098

Long-term debt of foreign subsidiaries

Unamortized discount

 

Subtotal

Less current portion

 

Long-term debt

 

We issued an aggregate of $800 million principal amount of our 6.15% notes, 6.70% debentures and 5.20% debentures in January 1998. The debt offering yielded approximately $750.0 million of proceeds. We issued the 5.20% debentures at a discount, and the 6.15% notes and 6.70% debentures at par.

In September 2002, we entered into an interest rate swap contract (the Swap) that effectively converted our $350.0 million aggregate principal amount of 6.15% notes, payable in 2008, to floating rate debt based on six-month LIBOR. The floating rate was 7.79 percent at March 31, 2007 and 8.02 percent at September 30, 2006. As permitted by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, we have designated the Swap as a fair value hedge. Accordingly, the fair value of the Swap was recorded in other liabilities in the Condensed Consolidated Balance Sheet with a corresponding adjustment to the carrying value of the underlying debt at March 31, 2007 and September 30, 2006. The fair value of the Swap, based upon quoted market prices for contracts with similar maturities, was a liability of $4.4 million at March 31, 2007 and a liability of $6.8 million at September 30, 2006.

On October 26, 2004, we entered into a five-year $600.0 million unsecured revolving credit facility. Our $600.0 million credit facility remains in effect and we have not drawn down under it at March 31, 2007 or September 30, 2006. Borrowings under our credit facility bear interest based on short-term money market rates in effect during the period the borrowings are outstanding. The terms of our credit facility contain covenants under which we would be in default if our debt-to-total-capital ratio was to exceed 60 percent. We were in compliance with all covenants under our credit facility at March 31, 2007 and September 30, 2006. In addition to our $600.0 million credit facility, short-term unsecured credit facilities of approximately $122.3 million at March 31, 2007 were available to foreign subsidiaries.

On September 29, 2006, we entered into a 364-day $250.0 million unsecured revolving credit facility. We terminated this facility effective March 30, 2007, as we no longer considered the liquidity provided by this facility to be necessary.

There were no significant commitment fees or compensating balance requirements under any of our credit facilities. Borrowings under our credit facilities during the three- and six-months ended March 31, 2007 and 2006 were not significant.

Our short-term debt obligations at September 30, 2006 primarily related to commercial paper borrowings. We had no commercial paper borrowings outstanding at March 31, 2007 and $219.0 million of commercial paper borrowings outstanding at September 30, 2006. At September 30, 2006 the weighted average interest rate and maturity period of the commercial paper outstanding were 5.4 percent and three days, respectively.

The components of net periodic benefit cost in income from continuing operations are (in millions):

Service cost

Interest cost

Expected return on plan assets

Amortization:

Prior service cost

Net actuarial loss

 

 

Net periodic benefit cost

 

Service cost

Interest cost

Amortization:

Prior service cost

Net actuarial loss

 

 

Net periodic benefit cost

 

Excluded from this net periodic benefit cost table but included in income from discontinued operations in the Condensed Consolidated Statement of Operations is pre-tax pension benefit cost of $1.9 million and $3.1 million and pre-tax other postretirement benefit cost of $2.7 million and $4.1 million for the three months ended March 31, 2007 and March 31, 2006, respectively. Excluded from this net periodic benefit cost table but included in income from discontinued operations in the Condensed Consolidated Statement of Operations is pre-tax pension benefit cost of $3.3 million and $6.1 million and pre-tax other postretirement benefit cost of $4.7 million and $8.3 million for the six months ended March 31, 2007 and March 31, 2006, respectively. Also in the three months ended March 31, 2007, we recognized a pension curtailment loss of $0.4 million, an other postretirement benefits curtailment gain of $45.2 million and an additional other postretirement benefits settlement gain of $11.4 million related to the sale of our Dodge mechanical and Reliance Electric motors and motor repair services businesses that is reflected in Income from discontinued operations in the Condensed Consolidated Statement of Operations. We retained the pension liability related to the eligible Power Systems participants in our U.S. Plan and Canada Salary Plan and the other postretirement benefit liability for eligible U.S. non-union and Canada Salary retirees after the date of sale of our Dodge mechanical and Reliance Electric motors and motor repair services businesses, which will result in ongoing net periodic benefit cost for us. Pension liabilities for our Canada Hourly Plan and Mexico Dodge Plan, as well as other postretirement liabilities, including for U.S. union active and retiree participants, have been transferred with these businesses.

In the first six months of 2007 and 2006, we made a voluntary contribution of $8.0 million and $450.0 million, respectively, to our U.S. qualified pension plan trust, which increased our prepaid pension asset in the Condensed Consolidated Balance Sheet. We made both the 2007 and 2006 contributions in the first quarter.

Comprehensive income consists of (in millions):

Net income

Other comprehensive income:

Currency translation adjustments

Net unrealized (losses) gains on cash flow hedges

Unrealized gains on investment securities

Other

 

 

Other comprehensive income

 

 

Comprehensive income

 

Unrealized gains on investment securities includes unrealized income of $3.9 million at March 31, 2007 related to our investment in Baldor common stock acquired in the sale of the principal businesses of our former Power Systems operating segment. The investment is recorded in other current assets as an available-for-sale security, with a fair value at March 31, 2007 of $59.6 million. Under the terms of our agreement with Baldor, we are generally not permitted to publicly sell or distribute this investment for six months following the close of the sale.

Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, safety and health, intellectual property, employment and contract matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we believe the disposition of matters that are pending or have been asserted will not have a material adverse effect on our business or financial condition.

We (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. Currently there are thousands of claimants in lawsuits that name us as defendants, together with hundreds of other companies. The great bulk of the complaints, however, do not identify any of our products or specify which of these claimants, if any, were exposed to asbestos attributable to our products; and past experience has shown that the vast majority of the claimants will never identify any of our products. In addition, when our products appear to be identified, in some cases they are from divested businesses, and we are indemnified for most of the costs. However, we have agreed to defend and indemnify asbestos claims associated with products manufactured or sold by our Dodge mechanical and Reliance Electric motors and motor repair services businesses prior to their divestiture by us, which occurred on January 31, 2007. But in all cases, for those claimants who do show that they worked with our products, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of our products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants.

We have maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insured retentions, for most of these claims. We initiated litigation in the Milwaukee County Circuit Court on February 12, 2004 to enforce the insurance policies against Nationwide Indemnity Company and Kemper Insurance, the insurance carriers that provided liability insurance coverage to our former Allen-Bradley subsidiary. As a result, the insurance carriers have paid some past defense and indemnity costs and have agreed to pay the substantial majority of future defense and indemnity costs for Allen-Bradley asbestos claims, subject to policy limits. If either carrier becomes insolvent or the policy limits of either carrier are exhausted, our share of future defense and indemnity costs may increase. However, coverage under excess policies may be available to pay some or all of these costs.

The uncertainties of asbestos claim litigation and the long term solvency of our insurance carriers make it difficult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material adverse effect on our financial condition.

In connection with the divestiture of our former aerospace and defense businesses (the A&D Business) to The Boeing Company (Boeing), we agreed to indemnify Boeing for certain matters related to operations of the A&D Business for periods prior to the divestiture. In connection with the spinoffs of our former automotive component systems business, semiconductor systems business and Rockwell Collins avionics and communications business, the spun-off companies have agreed to indemnify us for substantially all contingent liabilities related to the respective businesses, including environmental and intellectual property matters.

In conjunction with the sale of our Dodge mechanical and Reliance Electric motors and motor repair services businesses, we agreed to indemnify Baldor for all damages related to certain legal, legacy environmental and asbestos matters of these businesses arising prior to January 31, 2007. We estimate the potential future payments we could incur under these indemnifications may approximate $32.5 million, of which $26.8 million has been accrued as of March 31, 2007.

We have, from time to time, divested certain of our businesses. In connection with such divestitures, lawsuits, claims and proceedings may be instituted or asserted against us related to the period that we owned the businesses.

In many countries we provide a limited intellectual property indemnity as part of our terms and conditions of sale. We also at times provide limited intellectual property indemnities in other contracts with third parties, such as contracts concerning: the development and manufacture of our products; the divestiture of businesses; and the licensing of intellectual property. Due to the number of agreements containing such provisions, we are unable to estimate the maximum potential future payments. However, we believe that future payments, if any, would not be material to our business or financial condition.

During the three-months ended March 31, 2007, we increased our environmental accruals by $13.7 million ($8.5 million after tax or $0.05 per diluted share) as a result of an anticipated legal settlement during the quarter and changes in estimated remediation costs at three sites as a result of new information. As of March 31, 2007, we have recorded accruals for environmental matters of $77.2 million, of which $27.7 million relates to conditional asset retirement obligations.

Our minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year aggregated $265.2 million as of March 31, 2007 and are payable as follows (in millions):

2007 (6 months)

2008

2009

2010

2011

Beyond 2011

 

Total

 

Most of our operating leases contain renewal options for varying periods, and certain leases include options to purchase the leased property. Commitments from third parties under sublease agreements having noncancelable lease terms in excess of one year aggregated $9.0 million as of March 31, 2007 and are receivable through 2009 at approximately $3.3 million per year.

The following is a summary of the composition of income from discontinued operations included in the Condensed Consolidated Statement of Operations (in millions):

Power Systems net income from operations

Gain on sale of Power Systems (net of tax expense of $194.7 million)

ElectroCraft net loss from operations

Loss on sale of ElectroCraft (net of tax benefit of $0.9 million)

Other

 

Income from discontinued operations

 

During the six months ended March 31, 2007, we recorded a change in estimate of a contingent liability related to a divested business, resulting in income of $9.0 million with no income tax effect. We also recorded income of $4.9 million ($3.0 million after tax) related to resolutions of certain of the claims associated with the former Rockwell International Corporation’s former operation of the Rocky Flats facility for the U.S. Department of Energy. We also incurred $1.7 million ($1.1 million after tax) of professional services fees related to these and other discontinued operations matters.

Summarized results of Power Systems and ElectroCraft net income from operations are (in millions):

Sales

 

Income before income taxes

Income tax expense

 

Net income

 

Cash and cash equivalents

Receivables

Inventories

Other current assets

 

Current assets available for sale

 

 

Property, net

Goodwill

Other intangible assets, net

Other assets

 

Non-current assets available for sale

 

 

Accounts payable

Compensation and benefits

Other current liabilities

 

Current liabilities associated with assets available for sale

 

 

Retirement benefits

Deferred income taxes

Other liabilities

 

Non-current liabilities associated with assets available for sale

 

The base tax rate determined as provided under Income Taxes in Note 1 (which excludes the effect of significant unusual or extraordinary items or items that are reported net of their related tax effects) for the full year is estimated at approximately 31 percent based on our current forecast of pretax income, permanent book and tax differences and global tax planning strategies for our continuing operations. The effective tax rate for the second quarter of 2007 was 25 percent which is lower than the base tax rate as it includes a benefit of nearly 2 percentage points related to special charges and a discrete benefit of 3 percentage points related to the resolution of various prior year federal and state tax matters recognized during the second quarter.

The tax rate applied to our discontinued operations for the six months ended March 31, 2007 was approximately 39 percent. This rate reflects that most of the taxable income from discontinued operations is generated in higher tax jurisdictions. The income tax benefit of $264.0 million recognized in the first quarter of 2007 represents a deferred tax asset on the difference between our tax basis in the stock of the Power Systems subsidiaries that were sold and the book value of their net assets as well as the reversal of the deferred tax liabilities that will not be realized due to the stock sale. In accordance with the FASB Emerging Issues Task Force Issue 93-17, Recognition of Deferred Tax Assets for a Parent Company’s Excess Tax Basis in the Stock of a Subsidiary that Is Accounted for as a Discontinued Operation, the tax benefit is recognized upon classification of the subsidiaries as a discontinued operation, which occurred in our first quarter of 2007.

Rockwell Automation is a provider of industrial automation control and information products and services. We determine our operating segments based on the information used by our chief operating decision maker, our Chief Executive Officer, to allocate resources and assess performance. Based upon these criteria, we are organized based upon products and services and have two operating segments: Architecture & Software and Control Products & Solutions.

The Architecture & Software segment contains all elements of our integrated control and information architecture capable of connecting the customer’s entire manufacturing enterprise.

Architecture & Software’s Integrated Architecture™ and Logix controllers perform multiple types of control and monitoring applications, including discrete, batch, continuous process, drive system, motion and machine safety across various industrial machinery, plants and processes, and supply real time information to supervisory software and plant-wide information systems.

Architecture & Software’s products include control platforms, software, I/O devices, communication networks, high performance rotary and linear motion control systems, electronic operator interface devices, condition based monitoring systems, sensors, industrial computers and machine safety components. These products are deployed widely across industries to end users and OEMs to reduce total cost of ownership, maximize asset utilization, improve time to market and reduce manufacturing business risk.

The Control Products & Solutions segment combines a comprehensive portfolio of intelligent motor control and industrial control products, with the customer support and application knowledge necessary to implement an automation or information solution on the plant floor. This comprehensive portfolio includes:

Low voltage and medium voltage electro-mechanical and electronic motor starters, motor and circuit protection devices, AC/DC variable frequency drives, push buttons, signaling devices, relays and timers and condition sensors.

Value-added packaged solutions, including configured drives, motor control centers and custom engineered panels for OEM and end-user applications.

Automation and information solutions, including custom-engineered hardware and software systems for discrete, process, motion, drives and manufacturing information applications.

Services designed to help to maximize a customer’s automation investment and provide total life-cycle support, including multi-vendor customer technical support and repair, asset management and training.

Sales

Architecture & Software

Control Products & Solutions

 

Total

 

 

Segment Operating Earnings

Architecture & Software

Control Products & Solutions

 

Total

Purchase accounting depreciation and amortization

General corporate — net (a)

Special charges

Interest expense

Income tax provision

 

 

Income from continuing operations

 

Identifiable assets for each of our operating segments and Corporate were (in millions):

Architecture & Software

Control Products & Solutions

Corporate

 

 

Total

 

Identifiable assets at Corporate consist principally of cash, net deferred income tax assets, prepaid pension and property. Property shared by the segments and used in operating activities is also reported in Corporate identifiable assets. Corporate identifiable assets include shared net property balances of $154.7 million at March 31, 2007 and $144.4 million at September 30, 2006 for which depreciation expense has been allocated to segment operating earnings based on the expected benefit to be realized by each segment.

During the three-months ended March 31, 2007, we recorded special charges of $43.5 million ($27.7 million after tax or $0.17 per diluted share) related to various restructuring actions designed to execute on our cost productivity initiatives and to advance our globalization strategy. Actions include workforce reductions, realignment of administrative functions, and rationalization and consolidation of global operations. In the Condensed Consolidated Statement of Operations, $21.8 million of the special charges were recorded in cost of sales, while $21.7 million was recorded in selling, general and administrative expenses.

Total cash expenditures in connection with these actions are expected to approximate $39.0 million. Non-cash charges include write-downs of certain inventory, machinery and equipment totaling $4.5 million. The asset charges amounted to the full carrying value of the assets written down, as we do not expect to receive any recovery from these assets.

economic and political changes in global markets where we compete, such as currency exchange rates, inflation rates, interest rates, recession, policies of foreign governments and other external factors we cannot control, and U.S. and local laws affecting our activities abroad and compliance therewith;

successful development of advanced technologies and demand for and market acceptance of new and existing products;

general global and regional economic, business or industry conditions, including levels of capital spending in industrial markets;

the availability, effectiveness and security of our legacy and future information technology systems;

competitive product and pricing pressures;

disruption of our operations due to natural disasters, acts of war, strikes, terrorism, or other causes;

intellectual property infringement claims by others and the ability to protect our intellectual property;

our ability to successfully address claims by taxing authorities in the various jurisdictions where we do business;

our ability to attract and retain qualified personnel;

the uncertainties of litigation;

disruption of our North American distribution channel;

the availability and price of components and materials;

successful execution of our cost productivity and our globalization initiatives; and

other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission filings.

investments in manufacturing capacity, including upgrades, modifications, and expansions of existing manufacturing facilities, and the creation of new manufacturing facilities;

our customers’ needs for greater productivity, cost reduction, quality, and overall global competitiveness;

industry factors that include our customers’ new product introductions, trends in the actual and forecasted demand for our customers’ products or services, and the regulatory and competitive environments in which our customers operate;

levels of global industrial production;

regional factors that include local political, social, regulatory and economic circumstances; and

the seasonal capital spending patterns of our customers due to their annual capital budgeting processes and their working schedules.

Industrial Equipment Spending, which is an economic statistic compiled by the Bureau of Economic Analysis (BEA). This statistic provides insight into spending trends in the broad U.S. industrial economy, which includes our primary customer base. This measure, over the longer term, has proven to have reasonable predictive value, and to be a good directional indicator of our growth trend.

Capacity Utilization, which is an indication of plant operating activity published by the Federal Reserve. Historically there has been a meaningful correlation between Capacity Utilization and the level of capital investment made by our customers in their manufacturing base.

The Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), which is an indication of the level of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting.

March 2007

December 2006

 

September 2006

June 2006