洛克威爾自動化 (ROK) 2001 Q2 法說會逐字稿

May I have your attention please. I would like to thank you for holding and welcome to Rockwell's quarterly call. I need to remind everyone that today's conference call is being recorded. Later in the conference call, we will open up the lines for questions. If you have a question at that time, please press the start key followed by the digit 1, again *1 to ask a question during the question and answer session and your line will be placed in the queue. At this time, I would like to turn the call over to Tom Bellini Rockwell's Vice President of Investor Relations. Mr. Bellini, please go ahead sir.

Thank you Abe. Good morning everyone and welcome to Rockwell's second quarter call. I am Tom Bellini, Vice President of Investor Relations and on the line with me today is our Chief Financial Officer, Michael Barnes. I would like to remind everyone that our comments today will include statements relating to future results of the company and our forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of various risks and uncertainties including, but not limited to those noted in our earnings release and those detailed from time to time in SEC filings. Today's call is also being web cast and you can use slides on the information being presented today thorough our web site at www.rockwell.com. During this call, we will provide you with an overview of our second quarter results for the fiscal year 2001. For the purpose of this call, we will be discussing the results for both continuing operations and discontinued business on a combined basis as well as reviewing the results for each of the business segments. Our business segments for continuing operations consist of automation control systems, automation power systems, and other businesses, which includes the electronic commerce business and the science center. As a result of our previously announced intention to spin off our Rockwell-Collins business, the Collins results are reported as a discontinued business. At the end of my review, Mike will make a few comments and also take your questions. Our earnings per share of the second quarter came in at 76 cents excluding the nonrecurring charge of 9 cents related to the in-flight network joint venture charge, which compares to last years EPS of 85 cents. Revenues were $1 billion 851 million up $67 million or 4% from last year's second quarter. The quarterly results reflect slightly lower sales in both control systems and power systems at automation with higher sales at Rockwell-Collins. Overall, operating income for the quarter was $256 million, a decrease of $32 million from last year's operating income of $288 million. Excluding the in-flight network charge in this quarter of $24 million and an $8 million onetime charge for a contract termination last year, operating income on comparable basis was down $16 million. Now looking at the second quarter results for each of our business segment: Automation control systems revenues were $904 million, about 1% decrease from last year sales. Excluding translation, which reduced the dollar value of sales by 2%, and excluding the positive impact of acquisitions, which increased sales by 1%. Control systems revenues were about flat with last year. Control systems international sales excluding translation impacts were up 5%, while US sales were down 1. The breakdown by region is as follows: Sales were up 17% in Asia-Pacific, up 7% in Europe, up 19% last in Latin America, and down 4% in Canada. Control systems second quarter operating earnings were $142 million down $16 million from FY 2000. Operative earnings were primarily impacted by lower North America in volume and unabsorbed manufacturing costs resulting from planned lower capacity utilization. Return on sales was 15.7% for the quarter compared to the last year's return of 17.3%. Now looking at automation power systems, automation power systems revenues were 199 million about 1% decrease from last year's sales. Sales for the motor business were up about 6%, while sales in the mechanical business were down about 6%. Power systems second quarter earnings were $19 million down $4 million from FY 2000. Operating earnings were primarily impacted by a change in product mix. Return on sales for the quarter was 9.5% compared to last year's return of 11.4%. Now looking at our other business segment, the other businesses segment, which includes electronic commerce and science center had second quarter revenues of $60 million, up about 5% and the $57 million reported in FY 2000. Operating earnings of $5 million were down from last year's earnings of $7 million. Due to the reversal of $3 million Y2K reserve in last year's second quarter. Return on sales was 8.3% for the quarter. Now turning to Rockwell-Collins business. Rockwell-Collins had revenues in the quarter of $688 million, up $73 million were at 12% from last year's second quarter, due primarily to the positive impact of acquisitions. The acquisitions included the Sony Trans Com that was completed on July 31st of last year and Kaiser's Aerospace and Electronics that was completed on December 1, 2000. Sales increases at Business and Regional Systems and Air Transport Systems partially offset sales declines excluding acquisitions at passenger systems and government systems. Rockwell-Collins operating income was $90 million, but excluding the nonrecurring charge, _______ 10 network operating income was $114 million. This represents a 14% increase over the last year's operating income of $100 million, which includes an $8 million government contract charge in last year's second quarter. Excluding the in-flight network charge, the return on sales was 16.6%. Overall net income of $125 million were 67 cents per share compares to $164 million or 85 cents per share in last year's second quarter. Again exclusion of $16 million after tax charge for in-flight network, overall net income is $141 million and earnings per share is 76 cents. General corporate net expense of $15 million in the quarter compared to zero amount last year, primarily due to the inclusion of a net gain of $18 million for the sale of property in last year's second quarter. Interest expense was $28 million compared to $17 million last year. Our overall tax rate for the first six months was 32.2% compared to last year's rate of 32.6%. The tax rate for continuing operations for the first six months was 31.4% and the tax rate for the discontinued Collins business was 33.1%. Diluted average shares were 185.3 million for the quarter and outstanding shares of March 31, were 182.8 million. Looking at the six-month to year date numbers, revenues for the six months of 3.5 billion were up a $103 million or 3% over the last year. Rockwell-Collins revenues were up 9%, while automation revenues were up about flat with last year. Operating income of 544 million excluding the $24 million charge for in-flight network was down $46 million from last year's comparable income of $590 million, which excludes one time items in the last year for six months as well. Net income of $259 million or $1.40 per share compares to $321 million or $67 per share last year. However, excluding the in-flight network charge, overall net income was $275 million and diluted EPS was about $1.49 per share. Now lets look at the preliminary balance sheet information. Cash was $190 million, up $32 million from last quarter. Debt, both long and short term is reported at $1 billion 336 million, down $34 million from last quarter. A debt to total capital ratio is 32%. Shareholders equity was 2 billion 794 million at the end of March, up 79 million from December 31, 2000. Book value for share was $15 and 28 cents at the end of March, up from $14 and 92 cents at the end of December. Free cash flow for the quarter amounted to $109 million. We had no share repurchases during the second quarter and finally our revenue mix of the quarter was 60% US commercial, 31% international, and 9% US Government. That wraps up my comments. Now I would like to turn the call over to Mike Barnes for his comments. Go ahead Mike. 00:10.17

Thanks Tom. Good morning everybody. Thank you very much for joining us. I want to comment on two or three topics that we have covered in our press release that you received earlier today, give you a little more color only on that. First, your are properly introduced in where we stand with respect to the Collins spin, as we indicated in our press release, we are on schedule. I can tell you that we filed all the documents that we need to with Internal Revenue Service and we have already answered their questions in writing and so we feel like this tax free ruling that we are seeking is well underway and we expect to give that soon. We did file our form 10 with Securities and Exchange Commission last week and that process is on plan, on schedule. We have done a lot of work, here inside the company, getting ready for this plan. We have completed, actually, most of the planning activities including, you know, everything from allocation of assets and liabilities for $20 business to restructuring pension plans, naming key executives, and we have also arranged financing for the Collins company and so all those processes are well underway and largely completed. We intend to begin our road shows for these, actually, both companies in early June and we will have those completed and all the rest, to the fact, that we completed such that the separation will be completed by the end of June. I can also tell you that we are highly confident about the business outlooks for each of these businesses stand alone companies and so we are quite pleased to have that whole thing is planning out. The second thing I might comment on regards the second quarter earnings report, Tom has done a very good job of reviewing what happened. Naturally, we are pleased with the sales and earnings that we have reported, particularly in light of this weak US economy that is continuing, we did better in automation sales frankly than we had expected, when we last talked to you back in January. Prior to that we had a relatively stronger month of March, but I can tell you this, this economy kind of ebbs and flows with our business when one month is pretty good, the next one is not as good, so we are going to have to wait and see how it plays out. About the quarter, the margins in automation will die on us as we had expected primarily due to the lower factory work that Tom mentioned earlier. This was a pillion end scale back of our factory work, so that we did not build excess inventory until, of course, that has an effect to my new term, overhead, which is reflected in our numbers, and I would expect that process would continue into and maybe through, at least, the third quarter. Obviously, we are going to be gauged in this based on what happens in the economy, but right now, that is our intention. Another reason that our margin rates were a little softer in automation this time was the mix geographically we were, as Tom pointed out, down a little bit in North America, both US and Canada. We were relatively strong in the non-North American markets, particularly in Asia-Pacific and in Latin America, and also we were also strong in Europe, but as you know from past discussion we have had on this, our profit rates for the business that we do overseas is not as high as the profit rates we get in the United States. Collins, on the other hand, they had a very good quarter. They are clearly benefitting from successful ________ of these two acquisitions that Tom mentioned, Kaiser and Trans Com. We have done a great lot of work to ensure that when we make acquisitions, that they are brought into the company in a very powerful way and that we get the benefit right off the bat and I think these were two very good examples of that. We also enjoyed continued strength in our core avionics business and our core business in regional and in air transport. These strengths, all said, seasonal, what I would call seasonable lumpiness or weakness in our government business and avionics is traditionally stronger in the second half of our fiscal year and that is true again this year, and also we were down in passenger assistance, again based on the timing of deliveries to key customers. We expect that to pull them up also in the second half, much like the governments. The third thing, I think probably merits a little more comment is our forward-looking statements. As you know, sometimes we give you total estimates of future earnings and sometimes we give you ranges, and I would say, typically, at this time of the year, when we did what halfway through the year, we got half of the money already in the bank, we give you a ______ estimate, but as you know this year is a unusually and also hard to call time. We have a view and a forecast of what we think we are going to do, but again when we give you a formal estimate, we want to be highly confident of it and I think that it is better to characterize it the way we did in our press release and that is to just indicate that a lot of what is going to happen to us in the next six months really does not depend on how we manage the business. We have to manage the business tight from a call standpoint, from a case usage standpoint and really would not do it any different depending on the economy. So, the main issue here is what we judge is going to happen in the general manufacturing economic environment and our internal forecast is that we are going to be kind of flattish to a little bit down in revenue in automation from 2Q to 3Q. Clearly we are in that period of time in Collins and then in 4Q, we are projecting an uptake. We think by the end the benefit of our increasing confidence, the impact of the interest rate reductions and that sort of thing will begin to help us and will forecast an uptake in business for automation in the fourth quarter and continuation of the increasing strength of revenue and profits in Collins. So, the effect scenario plays out, we are going to be at the high-end of street estimate. If on the other hand, this economy would have drop between Q2 and Q3 and that stay down or keep dropping in 4Q or they are not _______ or taking everything to effect then we are going to be nearer the low end of street estimates, and so that is the reason that we have given it this way. We believe the street estimate have done a credible job of bracketing the probable outcome here and at this point we are just giving you all the information we have got and you can form your own judgment as to how this economy is going to play up in the next two quarters. I will say this before I sign off and open it to questions, we really feel good about our business. We are confident that we have got the right new products, Tom commented about our new logic product. It is a good example of how these products are being received. Our service business is going nicely, software business, as I mentioned before, we got the right cost structure. We are sticking to that. We have got the right management in place and so as this economy improves, we ware going to be very well positioned to grow and continue delivering these 15-17% operating margins that we know we can do and that we have been delivering and we are highly confident about. So we will decide to wait and see how this economy plays out. I thank Tom and with that point I going to stop and see if anybody has any specific questions.

Okay Mike, thanks very much. Abe, we are now going to turn open the lines out for questions and I just was asked to remind everyone that we would like you to confine your questions to one or two related subjects and get back in the queue if could for any unrelated questions.

Thank you sir. Once again that is *1 to signal that you would like to ask a question. The first question will come from Bob Cornell at Lehmann Brothers.

Could you flush out little bit, you know, the mix of products, you know, the short cycle long cycle spot that would give you the idea this is going to, you know, improve over the balance of the year, Mike.

Yeah, Bob, as I have said the software and service business is up. It is performing fine for such kind of short cycle business. The component business really is not short cycle or long cycle as much as it is related to, I would say, industry sectors. We are assuming a growth in our consumer product, customer base nor strong growth or a low single digit growth, but that is the biggest market we served and it is up buying, you know, standard control products as well as some of our system type products and we are seeing a positive growth in the ____ part of our business. The place that we are seeing softness and, in fact, negative growth continues to be in the transportation area, which is you know, right now is about 23% of our business and that is recorded in the low 5, 6, 7, 8% lower.

Could you let me know, you know, I am wondering, I just has got off the Tico conference call and they talked about their automotive connected business, you know, which was very soft in the winter and nearly by this year, you know, December-January, you know, that has bounced back a bit. You know, is there anything about your business that suggest such a bounce back might be possible, some inventory work off on sometimes people that might be in front of us that would eliminate despite 8% drag you are talking about.

Bob, it is hard to call, when I am talking about the down, the lesser of numbers, it relates to the quarter as a whole, but as I mentioned earlier, we felt some strengthening late in the quarter, particularly in the month of March and it was to some extent in that area, but again the question is going to be whether or not that is the beginning of suffering or whether or not it is just a temporary bluff up. It is very hard to call. So, while transportation was down for the quarter, it was trending up in the latter part of the quarter, but at this point, we are continuing to play this as if the weakness in the economy is not over yet, that we are going to be looking at some additional softness at least through the third quarter. We are managing the business that way and if we get a surprise up that is great, but we are not counting on this. I will say we are still working as things that we are going to be as best flat with revenue in the third quarter probably a little bit down driven by this transportation sector, that is going on. This is the big question mark right now. We think that the consumer side will continue to be up a little bit not allowing to most of that in second quarter, we think it is going to be up for the balance of the year or in case we will continue to be up and another big sector for us is paper products has actually will forecast and then turn up a little bit, but the question mark is going to be transportation. I am pleased to hear what you said about Tico. Hopefully, that is confirming what we saw in the month of March. We are going to wait and see.

Good day looks good. Thanks Mike.

Our next question will come from Sheila McCarthy at Morgan Stanley.

Good morning everybody. Mike, can you comment on cash flow in the quarter and maybe talk specifically about receivables and inventory. Those were areas that were a little bit higher at the end of the last quarter.

Yeah, as Tom pointed out our cash flow, we were a little bit at the mark of 100 million free cash flow for the quarter, which was in line with our forecast, but you know, your real question is probably going to get out and how do we look to make our 500 million for the year and by the way, I would reaffirm that I think we are going to make that number for the year. There are two areas, in case that are cooling our cash flow here today. One, there is, again I would say, a little bit of seasonality in the payables area where we have had a fairly major pay down and our payables are, you will see, that reversed in the second half and not because we are going to stretch everybody up, but it is really more of a timing kind of issue and the other is inventory. Before I get to the inventory, which is an important one and I know you want to talk about receivables, really reflected some of the things I am talking about here, about the crammed in the quarter of our of our business volume. This has strengthened from January to February to March and we had a relatively good March and so we had received at the end of the quarter reflecting that it was worldwide. I expect that to end. Receivables was not a negative for the quarter, but I would expect that to be again better in the third quarter. So, I think the real issue here is inventory. So an inventory increase was driven almost entirely, not totally, but almost entirely by calls. There was some minor increase in inventories and automation steel related to the consolidation of our 11 operating units in Europe and one central warehouse region and putting some additional inventory in there to make sure that we met our customer delivery commitments and you saw our numbers that the unit volumes in Europe are rising, so we are protecting that, but the real issue was in Collins. In Collins, the inventory issues were primarily in the government part business and in the passenger part of business. For the government, it was an issue of timing of programs and frankly also timing of progress payments from the government and here again our forecast is that that will work out in the third and fourth quarter. The other was in passenger assistance. So we have some increase in inventory there, partly related to the Trans Com business that we bought, partly due to timing of some customer deliveries, but frankly partly due to also just higher bills of inventory that will be sold to customers later in the year. So the inventory is an issue that we are trying paying attention to, that we are working hard, that we are really focussed on very hard. I think the receivables and payable sides are clearly short-term kind of issues here. So, that would do it and frankly I will stick with my case for Tico.

Mike, do you have the numbers for inventory receivables and payables for the quarter that were not flushed out in the cash flow that you provided.

Yeah, I did that and I do not remember what was provided, but I can tell you that from the standpoint of receivables, the receivables did not go up in the quarter, they went down actually a little bit, but the increase was not payable, so again it was largely an inventory and it was in Collins. Collins' inventory went up in the order of $70 million, but again I would say it is kind of a third related to government progress payments, a third related to increased business, partially driven by the acquisitions of Trans com and Kaiser, and about a third in the passenger assistance area that I talked about earlier.

And then you said Automation inventory was flat?

Yeah, roughly flat. We had some mixed issues. There was a little bit of an increase in Europe, a little bit of a decrease here in the States.

Okay great, thank you.

Our next question will come from Jeff Spraig at Solomon, Smith, and Barney

Hi, good morning. I also missed the very beginning of the call. On the ISN write off in the quarter and I just rely the impact for the year. I am just curious Mike, you kind of affirmed the range for the year, you know, kind of upside and down side in various economic environments, but you know I think it would be probably an expectation when we formally read those estimates such as ongoing spending related to ISM. Could you just give us an idea of, you know, how much spending you plan to do, you know, kind of in the second half of the year as that, you know, now it is getting down as you have shut down the venture.

Yeah Jeff, the standing at the second half the year was going to be about what we wrote off, the $24 million, the pretax that we wrote off this quarter and so we have gone back and carefully analyzed that and reaffirmed that the net effect of ISM for the year would be mutual and just a little more color on that so that everybody understands what happened, we were, last year, along with our partner putting some money into the JV, to run the JV, and to make outside purchases and that sort of thing. In May end as it became clear to us that there was timing question at which point the Airlines really were going to make a decision about which way they wanted to go. We have ceased those investments, and we did however, make continued investments in, what I will call are I2S product in avionics, which continues to be a important product for the future. We are making some investments that would be directly related to contracts that we expected to get from the joint venture, ISN, which again would be tied to contracts from customers. Those contracts did not last and by the February 10th time frame, it became apparent to us that there was great uncertainty as to when in fact these order were going to come. We still believe that we are going to sell a lot of this kind of product, but it was not clear when the timing was going to come, so we made the decision from a conservative standpoint to go ahead and stop accruing these calls to the contract, write them off, and the level of spending that we are going to do in the second half on these kind of products will be lower than it otherwise would have been if we would have continued with this IF&JV. Now that does not mean we are going to cease investments in the integrated information system, I2S product in avionics. As I said, it is going to be a good product for us in the future, but the level of spending on that product will be $24 million less in the second half than it otherwise would have been if we would have continued with IF&JV.

Okay, then also related to the write off the #16 million that I see in the press release is after tax, the pretax, on that is also about $24 million.

That's correct.

Okay, thanks Mike.

Our next question will come from Will Potter at ING Bearings.

Thank you, you were talking about the third quarter, you were talking about that revenues being flat. If we could get a little more detail in those expectations. First of all, are we talking about flat with third quarter of 2000? Are we talking about automation strictly and could we break out what were the control, the power, and the other revenues for the third quarter of 2000 so that we can go through that and say what do we think would be flat and what would not be?

Well, let me clarify Will. Let's not misunderstand. What I was referring to first of all was automation. It was both control systems and power systems and what I was referring to was sequential, 2Q to 3Q, not a comparison to the third quarter of last year. In 2Q of 2001, we had sales of about $900 million slightly about $900 million in control systems and about $200 million in power systems. So, what I am saying is that our judgment is, if this economy would be such that in the third quarter, at least for our planning purposes, that those sales numbers will be, I use the word, flattish, but flattish to down a little bit and that is what I am talking about. We have combined those two. I also said that from 2Q to 3Q, we expected Collins' volume to be up meaningfully.

And do you see it change in the global mix in the third quarter versus the second quarter?

No, I guess I would, you know, again there is another absence of a crystal call, I think our judgment continues to be the softness will be in North America, both US and Canada and that we are not expecting as relatively a strong foreign markets, but continue to be positive comparisons in the foreign markets.

Okay great, thank you very much. 00:36.04

Our next question will come from Steve Binder at Aerostars.

Dear Mike, just a followup on that question. If you look at the last four years, I think except for fiscal year 1998, you typically saw the wrap up in the third quarter in automation. I mean, you touched on a little bit of that. What do you think is really, I mean, a different feel in the economy? You touched some of the foreign markets a little bit. What sort of different issue do you think?

I think it is the customers being cautious about their capital spending and holding back, till they see renewed confidence in merit customers, till they see the beneficial impact of the interest rate cuts, and obviously where they have programs if they need to go forward with their placing orders on our business is, you know, it is not bad. Certainly, not the kind of down turns we have seen in past contractions, which I think is a very very positive slant for the relative diversity of industries that we are not serving, but I think there is discretion available to them in terms of the timing, of their buys, but they are deferring and as I think it is as I said before, I think it is mostly in the transportation circle.

Is it that all to do with inventories of passenger assistance or is it reflection of any production difficulty?

No.

And lastly, with respect to the earnings guidance, previously it said in the 325 estimate that you assumed stable, you know, there was this conditions that was at least the wording, and now you are putting out the expectation to hit that number you need an increase in the fourth quarter. Is that really the change here?

No. I think again, I will talk with probably remind us the history of about what was said and prior, thanks, but I think what I have said in January is not that different than what I am saying and not really different from what I saying now. That was in January. I think I indicated to you weeks back that 2Q to be down, we expected 3Q to be flattish and we expected 4Q to be up, so I would stick with that right now, although the second quarter is a little better in volume than I expected in automation, but I would say again the 3Q is flattish to down little bit and I would say our forecast is that the fourth quarter is going to turn around in the range of 4-4.5% volume in automation. That is our internal forecast.

Yes, but if look back in Q, you had said that so many current level does affect the activity conditions to continue throughout the rest of the year and now you have hit the 325 number and now you say basically the general industrial business conditions would improve in the fourth quarter.

No, I think and I do not have the press release in front of me, but I think we have said, let me just make really sure of what we are saying here. We are saying that our forecast nor expectation to make the higher end, when we go the higher end and our expectation is that we will be looking at flattish or about the same level of conditions in the third quarter and improvement in the fourth quarter.

I know that. I am telling the previous release was flat, you know, stable conditions throughout the balance of the year, that is what I am saying.

Okay, well I do not know, but I think like I was just pointing out in a stable economy or economic conditions, we generally will see an uptake in the fourth quarter, just the way our pattern of the orders and sales were.

Okay.

Yeah, you know, just to make sure, you understand, what we are trying to say here is, I do not know, but our guess is necessarily any better than yours. You know, I do not know what is going to happen here in the third and fourth quarter and if tell you one month looks very good, the next month does not look good and it is kind of a mixed bag and all I am telling you is that we have got a call structure in place now that such when we get a little bit of help, a little bit of up take here in this volume, we are going to do very well, but on the other hand, if this economy continues to weaken, I still think that we are going to be within the range of analysts estimates, but I think in that case we are going to be near the lower end.

Okay, thank you.

We will now go to Nicholas Hayman of Prudential Security.

Hi guys, this is actually Rory Kelling. Can you flush out for me, I might have missed a little bit before. I think I heard you say that the growth that causes primarily driven by your two acquisitions. Can you kind of breakdown for us what the organic growth was with respect to both of those piece of the business.

Rory, I do not have the correct number, but I would say again that the growth largely was the impact of Trans Com and the government Kaiser business. Core growth was taken as a whole on call. I will say you should think about as being flattish but with good growth and business in regional, growth in air transport, all setting seasonal weakness in government, which was down and this timing of business in passenger assistance, which was there.

Can you give me an idea. If the economy continues to stay weak, and airline profitability continues to suffer, how that might potentially affect or what the correlation could be with some of the hardware that is made in connection with the Sony Trans Com part of your business.

We looked at that real hard. Our team Play Jones and his team worked at that very hard, has been reviewing it carefully, and our feeling is that based on what we are see now and what might happen with economy there for the next few and how that is toward the rear quarters. It is pretty well is what it is going to be and we are going to see this mass grow because just of where the backlog stands and what we know the business is going to be. So, I think the impact would be if the economy continues to weaken and if you see airlines back off, the impact would be, you know, beginning to be or might be near to the end of the of the calendar year or beyond. So, I do not think it is an issue that is going to affect you here in the next two or three quarters.

Okay, thank you very much.

Well now we have got Morton Sankie at Goldman Sachs

Continuing on with Collins, what is happening with the part and services and after market businesses.

Morton, if it continues to grow, we continue to focus on it, sometimes, we will say this that in the last year period we had a mandated retrofit program that helped us with and I forget now what the increase was last year, it may have been 20%, that is not the kind of thing that we think is sustainable long term, but our expectation is the service business will grow, you know, 10% a year, maybe a little bit more than that and I would say we stick with that.

Continuing on, as I recall there has been quarters in the last year where your parts and services business was running up 30-35% and you are saying it has come off of that now.

I am saying that because again those kind of growth rates were abnormally positively affected by some of these retrofit mandate programs that come along from time to time and we will service those when they arrive. So, you get a little bit of lumpiness, I think that by secular basis you will be thinking this that actually we are growing in the low double digits in about 10-15 is what I have used in my model for our review.

Now over where would this show up, would it show up in the commercial air transport or the business regional area?

Oh! Well, this business we run it separately has got its own vice president and general manager and own business team, but the financial results are sure where for the customer that things depend on the air transport government, passenger assistance are business related.

Okay, thanks.

Our next question will come from Kyle ______ at SG Cowen.

Yes, hi! guys

Ah! Well, it is great to hear from you.

My pleasure. My pleasure. Can you tell us, are you seeing any advance sign, Mike you know, that you might see softening in the commercial schedules looking out for in the business regional market.

The short answer is no. Now again, you know, what I would like to wait and see how that plays out, but right now, we are seeing growth and our forecast indicate that we are not going to keep going with the, you know, the very strong growth that we had over the last couple of years, we know that, but we do not see any overt down turn and we are looking again for positive comparisons for the next few quarters and they are various.

And last question. Obviously, you know the Collins business is an attractive business that might fit well with others. Would you consider any kind of offers or any kind of linkup prior to the spinout or, you know, does it look like you are kind of on the track to do the spinout and that is your plan and you really do not want to be pushed off that?

Well, I mean first of all, that would be upto the Board of Directors to decide and not me, but I would just say that we are, on the one hand, you know, our CEO and our board obviously ___ reasonable thing, but I will tell you, our intend is that this spin is going to happen. We are very forward down the road as I described all that earlier. We are highly confident about that and our intention is firmly that we are going to do the spinoff.

Thanks Mike a lot. We will now go to Alok Chopra at MFP Investors.

Hi! This question following up on the cash flow that you talked about earlier. In the first quarter, you had negative free cash and I do not have break down of all the numbers for this quarter but it looks like working capital increase again. Is your guidance for this year's $500 million in this pre cash flow before changes in the working capital or you are factoring that in and second unrelated question is going forward, are you going to file a separate balance sheets or cash flows for Colin's in your 10-Q versus the automation businesses.

Well, first of all, with regard to the cash flow forecast, yes we are assuming, assuming that we might on our internal forecast of business sales and profit. We are expecting we with a $500 million cash flow forecast and I think that continues to be a reasonable forecast. The first quarter was negative free cash flow, but again that was driven really by two things. One, a substantial pay down and payables which by the way to a lesser extent continued in the second quarter, that would re-burst itself in a meaningful way in the second Q and also with some built up in inventories that I have described a little bit earlier about what those were and why those were the case. So, the answer is yes, that we think our current forecast for the year is a reasonable forecast and we think we can make it. With respect to filling, yes first of all, there are going to road shows after these two companies in the month June, and at that time, you are going to see historical and forward-looking extra bucks, so the balance sheets for both those companies. In addition, when we report our third quarter earnings, we will report the total company Rockwell with the discontinued Collins in there and you will be able to see both of those business remain in the fourth quarter, and of course the two companies will be entirely separate and you will see their independent balance sheets at that time. So you will have that visibility, yes.

I just wanted to followup, if I may, in the form 10 that you filed for Collin recently, you said that there was a $400 million dividend being paid up to Rockwell. Could you tells us how much is the total credit facility that Collins will be having?

It will have a billion dollar credit facility.

Okay, the 400 is going to be in part in the revolver then?

Yeah, except it will not be banked but we will have the revolver and we will have the revolver backup to commercial paper. We will initially go with commercial paper.

Okay, thank you very much.

We are now going to Tom Isenberg and _____.

Yes, hello. Thanks for taking my call. This is a call of little bit different nature. As you know, GE is emerging with Honeywell and I guess Rockwell Collins is a competitor to Honeywell. They are looking for DOJ and EU approval and the EU has spoken about US complainants who maybe are afraid to complain to the DOJ or something and the analysts seemed to feel the avionics and listed the Rockwell would be hurt by this merger in certain ways. The competition would be toughened up, the GE owing Honeywell and I am wondering if you could comment on that, what your reaction to the merger is, and if you have lodged complaints with the EU, and then what some of your concerns would be?

Well, really to make comments on that merger, that is their business and so I will say this that we have great respect for a competition and certainly if General Electric would own alliance avionics business and Honeywell's avionics business, and we are able to bundle those products with other things they do and possibly with financing, obviously we are quite aware of the powerful nature of that. On the other hand, I will say this to you that at the time of varied allied Honeywell merger, there was a large concern about what that would do to Collins and I will just tell you very factually that are business is flat now.

When you put it together with GE.

That is certainly a powerful force, but we have to do is do the best we can to make sure that we have got the right products, the right pricing, the right quality, the right servicing store. We got a lot, frankly, advantages that they do not have in terms of our worldwide support, our capability, and that sort of thing. So we will wait and see how that plays out. I will say this, I do not think this is my barn stock and I do not think there is a slight ______ throughout our business, but certainly overtime, it would be something that will be a major force, that we will have to deal with.

Right, what you think is so major that the EU should stop the merger or impose various conditions or force GE to divest certain avionics products to some one like yourself or check stands in France to make the competition stronger?

I would say, GE and EU are, what we think probably does not matter that much I think that the EU is going do whatever they have got to do and it is true that now obviously they have helped us and they have our views only that I do not want to get into that right now, but the EU is going to do whatever they are going do. My guess is that anything that they might have to divest would be something that we would not likely have an interest in unless they are going to divest their financing arm.

Okay, you think that GE owing the financing arm is going to help them in some anticompetitive way or is financing freely available from ILFC and other people and banks etc.

I would think that if they chose to use that as a weapon, yes, it could be possibly be used in the wrong area.

So you think that the EU's concern are well founded perhaps. Yeah, perhaps.

Thanks. I appreciate the answers.

Gentlemen we have time for two more questions. The first of those will come from Nicole _____ at Bank of America.

Hi! Guys. I was just wondering, you said in the press release that logic products of strengthening, the demand for them. This has historically been one of those products where I think you have not seen as much growth as you would have like to of and I guess could you just comment on where this strength is coming from and also where you have seen in general PLC market demands and how, you know, how is that playing out as you start to look at what the customer base and we are still not seeing in capital spending increasing by our customers, you know, is the value proposition changing which I know is something that you have been looking hard at since the September of pre announcement.

Okay, Nicole, well you are very correct that the logics products we will be replacing overtime the traditional PLC products and we have got curve that show each one, you know, going forward all the time and of the rate at which the replacement takes place, the relative pricing of the products, the relative margins of the products and so, and I would say that it is doing about in line with our planned expectations, except for what I would categorize as the relatively soft transportation industries demand fall right now. In other words, if you had a normal demand and fall from transportation, the replacement would be going on exactly as we planned and you know, PLC is going to be out there and will be still for many years, but it I do not have any numbers here in front of me but let us say half of it has been replaced so far and continues and the product is working very well. There is good demand for it. I think so again, this is one of the examples where a customer who has go PLCs could buy the logic product, could pick up the additional features and functionality, could save some money. He may say, I am going that, but I will tell what, I can wait another quarter before I do it. Because, you know, the PLC is doing my job for me at the moment. I am going to make the changes it is a matter when, so logic is growing, PLC is coming down, and the rate of that is going to be, I think, had to have this economy lose forward.

Okay, Mike also I wanted to hear, if it is actually picking up a little bit but if you look at the sequential growth rate this is declining. Could you just comment on economy environment over there that you are seeing?

It is a mixed bag depending on the countries that you are talking about. What we are saying is we are seeing an increased, what I will characterize as unit volume. Now, you can argue about units whether or not there are direct replacements, but you should think in terms of our business growing in unit volume, dollars are growing less fast because some of the products like the logic product which we are selling now is less dollars per unit and you have a negative impact of currency. In this case, it is negative impact is about 2% and in fact that was the difference between us having a slightly down revenue quarter versus enough revenue quarter. I do not know where the yen or the Euro was going to go, we are gauging both currencies such that we are having essentially no material adverse effect on our PIL from this, though we are having negative impact on revenue. So, I would say that our European business is doing probably doing a little bit better than we expected. Our customers liked the products. We continue to do well with global accounts where some our traditional counts do business over billing, billing their business over there. They buy our products and so, I think that slightly our share has gone up. Now, my judgment is based on the data we have got, our share is kind of unchanged vis a vis Siemens and Schienedier, but Europe is doing probably a little better than lot of people mentally think it is doing.

Fair enough thanks.

Our final question comes from Chris Walters at First Manhattan.

Yes, I, first I was wondering what is name of the Collins spinoff on the form 10?

It is going to be called Rockwell-Collin.

But is that a public document?

Mike, it is filed under the New Rockwell Collins in the SEC.

I see.

My second question pertains to amortization that you report on the income statement, can you just aggregate between taxable and nontaxable goodwill and amortization items in both automation and Rockwell Collins?

Yeah, I am glad you asked that question and in all honesty if there is one think that I thought about before this call was started, is what the impact that was going to have on our earnings starting in fourth quarter, so I do know the answer as a matter of fact.

Right.

We have about, wait I have go a note here that I asked for a question and based on goodwill amortization our second quarter goodwill amortization is running 60 million after tax for the year, 48 million in automation and 12 million in Collins are 32 cents share for the year. So it is 8 cents per quarter. What is that has that really goes in effect, which we think will be July 1st, will be about 8 cents positive per quarter, of which about 80% will be in automation and 20% will be Collins.

And you actually have the breakdown between what would be nontaxable then and what is taxable, the total on a, say, on a pretax basis, what is taxable and nontaxable.

Well again, I do not know if I am answering the question right, but for a year 60 million is the after tax.

It is the after tax say, but what is pretax bases when you get up into the ....

I think the total annual earmark for taxable and nontaxable is about 120 a year.

Yeah,

Right Mike.

I do not have that written down but I remember it.

That is roughly 80-40 with that.

Okay very good Yep

Thank you very much.

Gentlemen, that concludes the question and answer phase of our call at this time. I will turn it back to you for any closing comments. Okay, thank Abe I want to thank everyone for joining us today and I appreciate you attendances and we will talk to you again the next quarterly earnings release. Thanks for joining us.

Thank you that does conclude our conference call at this time. Kindly disconnect.