洛克威爾自動化 (ROK) 2002 Q3 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today' conference is being recorded. Later in the call we will open up the lines for questions. If you have a question at that time, please press the star key followed by the digit one. At this time I would like to turn the call over to Tom Mullany, Rockwell Automation vice-president and treasurer. Mr. Mullany, please go ahead, sir.

Thank you, Marijane. Good morning everyone and welcome to Rockwell Automation quarterly conference call. I'm Tom Mullany, vice-president and treasurer. And on the line with me today is our chief financial officer, Michael Bless. Please note that before we begin today our comments 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 our SEC files. During this call we will provide you with an overview of our third quarter results for fiscal year 2002. At the end of my remarks Mike will make a few comments and in the time remaining take your questions. As a reminder the company's investment in Rockwell Scientific Company which was formerly reported as the science center in last years results is accounted for using the equity method and the company's proportional share of earnings or losses are now included in general corporate net. Our EPS for the third quarter came in at 47 cents per share. This result includes the following items. A tax benefit of 16 cents per share resulting from the resolution of certain tax matters from the period 1995 to 1999. Also a benefit of two sent per share from a reduction in the fiscal 2002 effective tax rate from 27 percent to 24 percent, and income of two cents per share from an intellectual property settlement. Income from continuing operations was 90 million dollars. Excluding the effect of the above items, third quarter net income was $52 million or 27 cents per share. On a comparable basis last years' third quarter earnings from continuing operations before special charges and the tax benefit were $9 million or five cents per share. Earnings last year would have been $21 million or 11 cents per share when amortization or good will and certain other intangible assets is also excluded. Revenues in the quarter were $995 million compared to 1 billion 27 million in last year's third quarter. Excluding the sales for the science center last year of $22 million, revenues are down one percent versus last years's third quarter. On a sequential basis revenues increased by four percent from the second quarter of this year. Now looking at the third quarter result for each of our business segments. Control systems revenues were $788 million, a nice increase over last years's third quarter sales of $784 million. On a year-over-year basis control systems US sales were up four percent from last year's third quarter. Excluding translation which had a negligible impact on oversales, control systems international ship knowledge were down four percent versus last year CHT the breakdown by region is as follows. Shipments were down 16 percent in Canada, down five percent in Europe, up six percent in Asia Pacific, and up six percent in Latin America. Now looking at these results on a sequential basis, controls systems overall sales were up five percent versus the second quarter. Regionally US sales were up seven percent from the second quarter. Excluding a positive translation impact of one percent, international shipments were about flat. Again, the breakdown by region on a sequential basis is as follows: . Shipments were down nine percent in Canada, they were flat in Europe, they were down three percent in Latin America, and they were up 14 percent in Asia Pacific. Again, this is versus the second quarter in 2002. Control systems third quarter operating earnings were $91 million, up 38 percent from the $66 million reported in last year's third quarter. Operating earnings were primarily impacted by higher volume in the US as well as the cost reduction actions that have been implemented since last year. Sales of our integrated logic architect you're increased more than 30 percent over last year, while our global manufacturing solutions business had strong both driven by process solutions. On a sequential basis control systems operating earning were up $10 million or 12 percent, primarily due to the $39 million or five percent increase in volume. Return on sales was 11.5 percent for the for the quarter compared to the returns of 10.8 percent in this years second quarter, and the significant improvement over the 8.4 percent in last year's third quarter. Now turning to power systems. Power systems revenues were $178 million compared to last year's sales of $187 million. On a sequential basis power system sales were up one percent from the second quarter as a sales increase in the mechanical business offset a slight sales decrease in the motors business. Power systems had operating earnings of $15 million in the quarter, up 25 percent over last year, and also up 25 percent from the second quarter due to the benefits of cost reduction actions. Return on sales was 8.4 percent in the quarter, up from 6.8 percent last quarter and improvement over the 6.4 percent last year's third quarter. First point contract, formerly the electronic commerce business, had third quarter revenues of $29 million down from the 34 million reported in last year's third quarter. Operating earnings of $1 million were up from last year's third quarter loss of $1 million. Some other items to note for the quarter, general corporate net expenseof $9 million in the quarter was lower than the expected primarily due to the $5 million of income for the intellectual property assessment and lower corporate spending. Interest expense for the quarter was $17 million compared to $20 million last year and $27 million in the second quarter. Excluding the $30 tax benefit our tax rate was reduced to 24 percent from 27 percent primarily due to tax planning initiatives. Diluted average share were 190.4 million for the quarter and outstanding shares at June 30th were 185.8 million shares. Looking at the nine months year-to-date results. Revenues for the nine months were $2 billion $892 million, coming paired to 3 billion 309 million last year CHT segment operating earnings of 281 million dollars compared to 397 million last year. Income from continuing operations before the accounting change was 177 million dollars or 94 cents per share. Including the faz 142 charge and the results of discontinued operations, the year-to-date net income was $72 million or 38 cents. Now let's look at the preliminary balance sheet incomes. Cash was $214 million up 27 million from last quarter. Debt bother long and short-term is reported at $967 million, down 47 million from last quarter. Debt to total capital ratio is 38 percent. Share earnings equity was 1.508 million at the end of June which is up $48 million from last quarter. Book value per share was $8.50 at the end of June, up from $8.29 at the end of March. And finally, free cash flow was $122 million for the quarter and $224 million for the first nine months. That concludes the summary for the quarterly results. Now I'd like to turn the call over to Michael Bless for his comments. Mike.

Thanks a lot, Tom. And thanks everybody for joining us this morning. We really appreciate it given all the news out there and everything else that you guys all have to cover. We're really pleased with the quarter that we just completed. Let me go through a couple high level comments, expound a little bit on what Tom took you through. A couple comments about some of the unusual items that we trial real hard to cull out in the earnings release the make sure you guys got the visibility that you need on what those items were, talk a little bit about business performance and a couple other items. It's end obviously by giving you go a little bit more color what we see for the first call quarter that we just entered. As Tom sales sequential sales growth was up about four percent this quarter which was within the expectations that we set out when we first gave you have guidance for the quarter back in April when we had our earnings call for the second quarter. Two important items to note during this quarter that were important trends that we hope will continue over the longer term, obviously. First is that in addition to continued good progress on the services and solutions side that Tom took you through, we did have some nice sequential growth this quarter in our product businesses and control systems. And that's really the first quarter here than we've seen some good progress there. So we've gratified by that. Just as meaningful as Tom did take you through we had some nice growth in the US market principally in control systems. Some very good sequential growth. Again, this is the first quarter where we have really seen some decent growth there. On the sequential sales growth as Tom said we had nice profit conversion, segment operating profits up 14 percent, EPS up almost 30 percent, 29 percent to be precise. Margins again as Tom alluded to are now segment operating margins for the company are up 90 basis points quarter over quarter and up 300 basis points from the lowe we had when sales fell significantly during the third quarter last year. Again, before we go into a little bit more color on the business, let me tick through some. These unusual items. I think we spelled them out in the earnings release. On the tax benefit to which Tom alluded, a big number here obviously, $30 million of after tax benefit, 16 cents a share. As you might recall we had a similar item in the second quarter and at that time I told you that that item in the second quarter was due to resolution with the IRS of all but one of the items relating to their completion of their audit for some historical tax years of ours. I also told you that there was one remaining item and we were going into, rather than going in a typical court proceeding on that item, we and the IRS both agreed to go into a mediation process on that in May. That process took place. This is obviously the result of that. It was obviously a good result for us. We're very pleased with it. This concludes the IRS's audit for those years and obviously we're moving on now. So good result there. Tom took you through the reduction in the effective tax rate from 27 to 24 percent. Again, I think he pointed out really just normal tax planning initiatives that during the quarter did reach their fruition and therefore go into the effective rate here. The reduction from 27 to 24 resulted in net income this quarter about $4 million higher than it would have been at the old rate of 27 percent. If you have done the math it looks like a bigger result than one might expect. The way the accounting works, as most of you know, is that you not only provide for the new rate - or at the new rate, I should say, in this quarter, but you go back to the prior quarter this fiscal year and catch up. I guess that's not a technical term. Or reprovide for those quarters at the fiscal rate. So the catch up effect, that effect was $4 million of net income this quarter, about. Looking forward to the next year while we are on the tax rate, we continue to believe as we've been telling you that 30 percent is the right rate to use as you build your earnings model. And frankly, as we build our plans for next fiscal year. Couple things contributing to that. First some of these initiative that have resulted in this very attractive rate of 24 percent for the last two years some of those initiatives simply won't continue into next fiscal year. We have many, though will and that results in had a 30 percent rate significantly below the statutory rate, so weighted average statutory rates in the countries in which we operate. Second it's just the way the math works. As pretax income obviously increases and we do plan on it increasing next year, the effect of the tax planning initiatives that you have in your effective tax rate becomes less. Just the way the math works. So the favorable impact of those things become less and the rate naturally goes up. So 30 percent again continues to be a good rate to use as you build your estimates for next year. Lastly on the so called unusual items. The IP gain was pretty straightforward. Just two companies that we were pursuing for having infringed on one of our patents, obviously, we settled with those companies, $5 million was the cash settlement and that gets that one behind us. Looking on the performance of the business, Tom did a nice job of taking you through the detail as usual. So I won't flesh that out. You have noticed that control systems did have a night quarter, sales up about five percent sequentially. I will note that a little over one point of that five points of growth was due to acquisitions. So the sequential impact of the acquisitions, principally pro pack and the Samsung business in the third quarter over the second fiscal quarter. As I said the US did show some good growth for really for the first quarter since last year's down turn. And as Tom pointed out logics and GMS continues with their strong momentum. I would point out that the GMS growth continues to come from those areas, frankly, in which we've been investing that aren't tied to product sales. So things like process business to which Tom alluded, things like the information related businesses, consulting, manufacturing business solutions, those are the areas in GMS that continued to grow nicely. Tom pointed out power systems. You've had a chance to look at the result. About flattish at the top line. Some good progress in our mechanical business offset a little bit about some slowness in a couple of the months businesses, key end markets during this quarter. On the profit side we're real pleased with both businesses there. On power systems you've seen the results. A good increase in profit on the flat sales. Margins now in the mid eight percent at power systems. Continued excellent progress by that management team on their lean initiatives and cost containment activities. We're very pleased by those result of same at control systems. Good improvement there as Tom took you through, margins up about 70 basis points to 11 and a half percent. If you had a chance to look at the sequential profit conversion, that is the sequential increase in profits over the sequential increase in sales, you'll note that it wasn't quite as high as it was during the second quarter. Still very good conversion. As I said, well in excess of the increase in sales. Not quite as high as Q2. The real reason for that, the principal Ryan for that was the acquisition to which I alluded. As I said, all over one point of the growth sequentially came from those acquisitions. And the profit impact of those acquisitions per se was about flattish. We had planned for those acquisitions to be really neither decretive or dilutive in the first couple quarters under our ownership and tracking rights of the plan. What we did have this quarter was a couple million dollars of integration expense that hit the bottom line. Mostly things like conversion of the acquired company's IT symptoms and things like that over to ours. We obviously exceptions those items as they are incurred. We don't put them on the balance sheet or anything like that. That dragged down control systems profitability as stated for the quarter. But again, still very good incremental profit conversion at control systems as well. Quickly on the balance sheet and then I'll move on. Tom took you through it. Cash flow very strong for the quarter in excess of $120 million, in excess of 2220 million for the year. That's free cash flow obviously. Across the board I wound be point to one particular item or one fact business. Very good performance across the board. I will say that we continue to have room for improvement in our inventory management and we're going to be focusing on that a whole lot especially as business continues to grow here over the near term. As Tom alluded to he gave you the detail, net debt is down $70 million from March. We're pleased with that performance. You might have noticed if you had a chance to look at the preliminary balance sheet data that short-term data stated on the face of the balance sheet looks like it's way up from March. Really what is is an effect of $150 million of notes that mature next April. Now that they are inside of a year's maturity they get restated from long-term to short-term debt. The important item or the swing item I might say in short-term debt is commercial paper, down nicely from March from 90 million to $45 million. So good progress. Net debt to capital of 32 percent. We ended the quarter, frankly the lowest living since the spin off from Collins. So good progress there. We're going to get on to talk about the fourth quarter. I want to hit one topic that's obviously on everybody's mind. That's the issue of employee stock options. There's been a lot of estimates, lot of people trying to do some pro forma work on our company as well as other companies and what the effect might or might not be if we started expensing employee stock options. A lot of that data has been frankly bad data for us because as people have gone and look at our historical data it's now obvious, last data we have out there in our 10-K from last year includes a large number of stock options granted at the time to employees that are now employees of Rockwell Collins. So they are no longer applicable to our company. Let me just give you some data so you under the context of this issue here at Rockwell. If we did begin expensing options in fiscal 2003, and if you just simply assume that we issued the same number of options this year as we did last year to those employees that are now Rockwell Automation employees, kind of an apples to apples comparison, the effect on our pretax income in fiscal 03, pretax, would be a little under $4 million so about a penny a share after tax on an EPS basis. That's a straight black shoals valuation. It doesn't contemplate a reduction for illiquidity or nontransferability or any of those kinds of things. Just straight black shoals around the current stock price and current volatility and all that kind of good stuff. At the end of the first three years, as you know, at least the way fab 123 now works, is that you recognize the expense based on the fair value of the options as they invest. So that's the first year's effect. After the first three years when you're at more of a stead state, the effect would simply be three times that or a little over $12 million, a nickel share on an EPS basis. Is that obviously assumes that we keep grant k the same number of openings and that the openings don't increase or decrease in value. And we sure hope that the options will increase in value over time as the share price increases. To answer the question before somebody asks it, obviously we thought a lot about this issue. The senior management here at Rockwell along with our board of directors. We really do think that some form of option expense treatment is inevitability. What we're not sure of, however, is whether the unilateral adoption that you've seen out there by certain companies is right or wrong. It's obviously going to lead to noncomparability of results both in terms of companies that do and don't adopt and within companies that do adopt, frankly, valuation methods are all over the board. You have black shoals, you have more of a market base pricing that some companies have adopted, you have the whole debate of fair versus intrinsic value. We thought a lot about this. I hope it's evident to you. But we're not sure again whether unilateral adoption is the right thing. When some kind of expense adoption is regulated or mandated by some kind of deliberative body, and we do think it's when not if, we don't think we'll change, at least right now, the number of options that I was just alluding to that we have been issuing. As I told you, and as I think I told you, the management options here at Rockwell just aren't as big an issue as they are at some other companies. So we are watching it closely and studying it closely and we'll update you as our thinking progresses. Okay. Moving on to the outlook for the fourth quarter [inaudible]. The evidence that we see out there as you saw in the press release frankly remains quite contradictory. Activity levels in many of the areas that are very [inaudible] important to [inaudible]. As I said we're now nearing readiness for release. And as for our release they translate into orders and sales for us relatively quickly. In the same vein inventories at our company continued to invest in that business. We spend a lot of time really educating our key accounts on what we can do for them. Though kind of dialogs are moving from what I call the pre selling stage into mapping out real projects that will turn into resales for us. So good progress there. I might mention as well that our market share in our product areas has continued to show excellent trends. We obviously look at our market share on a monthly basis. But frankly the monthly statistics can get distorted by regional trends and a big project here or there. Looking at our market share in year-over-year product category over the last four to six quarters, we're in every single product category in the US. Frankly in some product categories up by a couple percentage points of share. And so that's obviously quite meaningful. And again we're gratified to see that. Lastly on the acquisitions, good progress continues to be made across the board there. Principally our pro pack acquisition continues to drive terrific progress in our process solutions business. In the context of all that, obvious my, all those favorable trends, we frankly have yet to see a solid and repeatable trend in our near term activity. Our order levels have remained relatively erratic. For example, June, which is typically a strong month for our automation businesses, started out quite strong and weakened throughout the month a little bit. A trend, frankly, a reverse of what we have seen in the last couple years, and a reverse of what we counted on this year. July actually started off a little stronger than we might have expected and frankly stronger than it has in past years. So it's all over the board at this point. Trends long-term continue to look favorable but erratic as it exists right now. Obviously the Mr. Uncertainty in the general environment is contributing to this. In this environment we're planning for the business to be relatively flat sequentially quarter-over-quarter with maybe a little bit of growth and the EPS guidance is consistent with that. I would say lastly, and then I will stop here and take your questions, that the long term, I would say the mid to long term continues to look quite good. If you look at the last two quarters that we just finished here, quarter two and quarter three, we produced sequential sales growth of two and four percent respectively in those two quarters. Remember that was an environment in certainly capital investment in manufacturing equipment and business investment generally [inaudible] increased [inaudible] along with other factors we talked about [inaudible] you get a little bit in some of these measures and you've seen the forecast out there for business [inaudible] significant [inaudible] which I'm in the aware. But the kind of results that we just posed and the type of results that are embedded in our outlook for logics and process don't include any discernible jump 00:26:56 in that product suite from the Honeywell product [inaudible].

[Inaudible].

Just a follow-up question. You mentioned the results from power being boosted by, you know, good cost cuts. You didn't make the same type of comment from control systems, Inc. What have you done, just to remind us with regard to restructuring control systems over the last four quarters.

Sure, Bob. Absolutely. We did as you recall take a relatively large cost reduction action in both the third and fourth quarters. Principally the large charge that we recorded in Q4. The incremental benefits of that obviously gave us good sequential profit in the earlier parts of this year. And frankly the incremental benefit of that, if this is where your question is headed, has basically flattened out to that on a year-over-year basis. Obviously as Tom took you through, profits are up partially based on sales growth, partially based on those restructuring actions. But increment alley you're not going to see very much increment all profit growth in control systems based on those actions.

Could you give me an idea of what sort of floor space reduction that cost takeout [inaudible] control systems, how many plants to close, how much floor space, how much in the way of hard infrastructure and or census did you actually take out.

It was, Bob, much more heavily people related than it was floor space related. I don't want to speculate now. We did take out a couple, what I term, secondary and tertiary plants, a bunch of secondary and tertiary offices and things like that. None of our major manufacturing plants in the US or overseas did we close down. In terms of floor space, boy, that's really hard to estimate. We continue to take out floor space on just a quarter by quarter basis working on our lean initiatives and other things. That doesn't mean you shut down a factory forever, but it does mean you can get your work down with less and less floor space and reduce your infrastructure costs somewhat.

Okay. Thanks, Mike.

You bet, Bob.

Our next question comes from Mark [Cosneric] Midwest Research.

Good morning, Mike, Tom. I'm wondering if you guys could help me a little bit on the end markets and control systems for the quarter and then also while you're at it some comments on the outlook going through some of the majors.

Absolutely, Mark. Let me just tick down the line and you can follow up if I don't hit the one in which you're most interesting. On the consumer and life sciences side we had good continued progress throughout the quarter, lots of new products there those areas, principally on the consumer side. I'm talking about our customer's products. So good decent sequential growth. And I'd say the outlook for those markets is more of about the same. I would point out in the life sciences area, it's obviously pharma and biotech and things like that, you've seen the very well publicized problems that some of those manufacturers are having. And as you know and as we said, that's just where GMS and most specifically this pro pack acquisition is aimed in terms of helping those customers manufacture. So we do think we're going to have some good opportunities going forward. Automotive as I said did pick up during the quarter, principally in North America. Good progress there. As you well know, those customers off ours, those manufacturers are running the plant hard. So MRO spending continues to be okay. Nothing like what we saw in 1999 and 2000, but from a sequential basis and versus la year, pretty good progress there. We've yet to see any of the big, big project business start to come back to which I alluded. Lot of stuff going from the drawing board into actual planning, but none of that has really been released that. Maybe one or two little things hitting during the quarter. So we believe in terms of forward looking to the extent that those get released that will obviously have a good effect going forward.

Mike, is that specific to auto, that comment?

Pardon me, Mark. Yes, absolutely. That was specific to auto.

Thanks.

Let me keep going. Natural resources, I alluded a couple of power systems markets were real weak, the most principal of that was mining which has been and will continue to be a good market for power systems. As you know that's a real important market for the reliance motors business. That's got some week necessary now due to the seasons and conditions for the winters, there's a lot of coal piled up in parking lots around the country. And those coal manufacturers and miners, rather, have just kind of slowed down for a while and they are buying less motors. Again, great market for us long-term but some weakness here in the near term. Same thing in oil and gas, lots of activity in that market three, four, fire quarters ago. It's tapered off. We see that one as flattish going forward. Those are really the key end markets. Not a lot of change in the other natural resource markets, metal. The only of only other one I talk about is paper which frankly has gotten agent bit better. You've seen what pricing has done in those markets and we've seen a little bit of increased activity. Nothing near the big kind of systems orders jobs we saw a couple years ago but a little bit of incremental activity in those markets.

Mike, these larger orders across the board, not just automotive but others, are you experiencing any pushout or delays in that activity, things that you thought might drop into third quarter, next quarter, being pushed out into late in the year or 03.

No, Mark, I think we've convinced you, we certainly convinced ourselves, we've been very very cautious about counting on making any of those orders. Is we just kind of continued to to, obviously, we haven't seen any cancel yet and we watch those very carefully. But we've yet to factor the booking of any of those into our forecast yet. So the answer to your question specifically is no.

Okay. And then final, just a detail. I think I missed the control systems North America year over year sales.

It was up sequential with seven. Four percent I think Mark , four percent.

Thank you very much.

We next go to Richard Eastman with Robert W. Baird.

Hi, Mike.

Hi Rick.

Couple things. I wanted to spend a second on this profit conversion number because doing the same math, I guess the assumption here is that we need to pull a little bit of revenue out from the acquisitions. And then in addition, the profit itself was penalized by some integration expenses.

Yeah, if you want to do it that way. We need to manage the business acquisitions. We have to with acquisitions, without acquisitions produce good profit growth. We think we're doing that. But to do the kind of analysis I think you're aimed at, the answer is yes. As I said, acquisitions added nine, 10 million-ish of sequential revenue Q3 over Q2. And the profit attached to those, as I said, was basically nil. But we did book a couple million dollars of integration expense. If you wanted to do that kind of analysis, I think you're headed in the right direction.

Okay. Okay. I wanted to explore growth in the GMS business seems to have accelerated quarter to quarter.

Sure.

Is that seasonal?

No.

And secondly, is that linked in this any form or fashion to the logics growth?

Not seasonal at all really that business. And before I answer your question, no, I just want to think. To the answer to your second question, Rick, is no as well. There's really not a link between the GMS business and logics. The only one that I would even recite as a little bit linked is, as you know, inside our GMS business as well as all the other things is our software business. And as we sell new logics hardware we generally sell a logic programming software package along with it. Is that's a stretch, but it's the only link that I can even think of.

Okay. It's not process driven?

Process driven meaning process as we define it, our process solutions business?

Yes.

Process is driving GMS but logics per se, no.

Okay. And just the last thing. When one looks at some of the business you've booked now in GMS and the acceleration there, do you have any better comfort level here that we've got enough business in backlog or growing business there in backlog that we can start to drive better growth here as we go forward?

Rick, the answer to that question is no. I mean, other than a few specific areas like asset management when we book in an asset management contract and we, you know, it's a 12 month or even longer kind of contract, we get a sense of backlog. But in a lot of ways these are still kind of project related businesses. They get booked. We perform for the customer, we recognize the revenue, we move on to the next. Obviously we're trying to make it a more and more repeatable business. As you said at the beginning of your question we did have nice sequential and last year growth there GMS. But I still wouldn't cite it as a backlog driven business at this point.

Okay. Great. Thank you.

You bet.

We'll next go to John [Belotti] with UBS Warburg.

Mike, can you give us a sense of where you think utilization rates are for your customers overall. Have we seen any meaningful pickup is there?

No, John. I would say, depending on the industry you're talking about, they are in the mid '70s. And that might range as low as mid to high 50s for semiconductor crowd although that one is picking up a little bit, and some higher rates in some of the consumer related and pharmaceutical industries. But I would say our customers are a pretty good microcosm of the general environment. You know where capacity utilization stands. It's in the 75 and a half to 76 percent utilization rate. And that's where our customers are.

Okay. So with that, are you overall as far as your product lines, are you seeing any disproportionate weighting of legacy products versus new products in terms of sales?

Other than logic, of course, which is inherently a new product.

Right.

I would say no, John. It's pretty much across the board. And specifically this quarter really was nice progress across the board.

Okay. Thanks.

You bet.

We'll next go to Nicole [pilla] with Banc of America securities.

Hi, guys. First of all, thanks for being so forthcoming with the unusual item contribution, of the EPS.

Thanks for noting that.

On the sequential operating profit growth, as you sid, it was the first quarter of increase growth in the products category, since that is lower margin, would that have impacted the sequential growth or moderated it in OP in the control systems business?

No. You know, depending upon where the product growth comes from, Nicole, it could be higher or it could be lower. I'd say this quarter just looking down the mix, it was kind of right in line average. So I wouldn't infer an effect on the sequential profit growth from that mix of product versus services, if that's kind of what you're asking about.

Okay. Great. And on power systems, motors were down this quarter after being up last quarter. Is there anything seasonal going on there?

No, it's really just the end market. One I addressed in response to Mark's question, and that was mining. We have some great business and a couple great OEM customers in that business, and they just kicked their buying down third quarter and probably next quarter as well. And the end market that's been weak is the HVAC market. We have some great OEM customer, the big guys in that market that you would. And just given weather related patterns their orders and our sales to them are just down. But nothing seasonal per se this quarter.

Okay. And I guess lastly on outlook for 03, any comment on that? I know you've been hesitant to do that [inaudible] visibility concensus. And then also could you quantify or have you looked at the impact of pensions in terms of next year.

In terms of next year I still keep us in the hesitant category. As Tom has continued to say, and I hope you take us at our word, as soon as we see a trend that we can come close to defining a trend, we're going to say it and give guys more than a quarter going forward. I know it's frustrating. It's frustrating for us as well. From a pension standpoint, we don't have any pension income. We did take our rate of return down this year. I don't see any change going forward in terms of our pension expense from this year to next.

Okay. Great. Thank you.

Thanks, Nicole.

We'll next go to Martin [Frankee] with Goldman Sachs.

Hey, Mike.

Hi, Martin.

I have a question looking forward. You've had tremendous sequential profit margin improvement. But if you would kind of run the numbers for the fourth quarter with flattish kind of sales and 28 cents a share of EPS plus or minus, it implies that you're operating profit margin is starting to plateau. And I think you hinted at this earlier when you said that the benefits of your cost reductions, the program that you took last year, is starting to come no full fruition.

Go ahead. You're right on. But keep going.

Okay. So I guess any number of things flow through from this. So one is that, A, am I on the right path. B, does it apply that you need volume in order to get further margin improvement. And C, how do you feel about the cost structure given revenues at this point. And would you be thinking about an additional charge to try to improve profit margins from here.

Sure, Martin, the answer to A and B are both yes. We, to the extent that revenue growth will stall here, and again we're not counting on it stalling over the intermediate to long-term. We're a little bit worried about it this quarter simply because of the external environment specifically. But as we said, the incremental effect of the restructuring here generally has been factored into our results. And a we also said future increases in operating margins really due depend upon, all other things being equal, I'll get to C in a minute, due depend on incremental revenue growth. And as you said and we said, when the incremental growth comes we are managing the expense as a business very tight to give good incremental profits conversion. Now, on your C, I would say on this one we're very consistent and we haven't changed our tune here either. To the extent that we see things continuing to improving over the mid to long-term, we think our cost structure is right. And we think that with some decent volume here in 03 and 04, we're going to get back the kind of margins that we expect in this business and that you guys expect from us. To the extent that we saw something different happening, like a double dip recession or somethingn like that, we'd take a hard look at restructuring is this cost structure. But short of that we think we have it where it needs to be. We think our managers are doing a god job of keeping these things really screwed down until we see some appreciable and discernible trends of growth.

Okay. Let's sort of slice it another way. A year ago you took the charges.

Right.

And you had had a certain expectation for how revenues would recover over the 12 to 24 months. Where is Rockwell now relative to that expectation?

That's a good question, Martin. I think probably revenues were covered, I guess that's the right word, about in line with our expectations. No one was expecting even, if I think back to, let's see, it would be nine months ago, no one was expecting, as Tom has repeatedly said, the kind of growth that we've have had coming out of the last couple recisions, most principally the one in the earlier 1990s. Is it going to be here depending upon what happens over the next couple quarters, a little slower than anybody would like, I think time will only tell and that's why we're being a little bit hesitant here in terms of our expectations for the next quarter. But I'd say it's relatively in line?.

Okay. Thanks.

Sure.

We'll next go to Jeff Sprague with Salomon Smith Barney.

Good morning.

Hi, Jeff.

Hi. Just a couple follow-ups. First on GMS, maybe you said it. But can you give the actual revenue growth in GMS versus growth in products.

Sure. I've got GMS. I'd have to add up all the products. We could do it by math, Jeff. For the previous quarter GMS was up eight percent versus prior year 14 percent. And there's a bunch of factors in there. Obviously acquisitions contribute some of that. As well as I said we got within GMS a mix of businesses of the true service and solution related business is up. Some of the things tie more to product sales down a little bit. So it's a mix that we're trying to manage. And I'd have to go do the math for you to by inference do all the products versus the GMS I just gave you. It's pretty easy math to do.

I was more interested in the GMS specifically.

Okay.

That's fine. I was also - I mean, it kind of goes to some of these questions about the outlook and capacity utilization that you've addressed. But do you have any early read on kind of growth or lack thereof of your customers' capital spending lance in 03 versus 02? You know, is there a set [inaudible] on a couple day off site session with some of [inaudible].

[Inaudible]. We obviously in addition [inaudible] new in the external and having our counter, whoever's estimates you look at for capital spending manufacturing, capital spending nor next year, our customers are right in line with those.

How about your own capital spending in 03. Are you up or down?

We're right now in the middle of put of putting together our annual plan for 03. I would say versus our budget for this year we'll probably be flattish to up a little bit.

Okay. And finally on the tax. Can you elaborate a little bit more on what the going on with pushing it down in 02. And I understand the profit mix aspect. You know, levelling it back off in 03. But does some of that relate to tax credits that are expiring? Any additional color there would be helpful.

We do have tax credits expiring this year. We have plans in place to utilize those. And the net effect of all that was already in the 27 percent. These were just a couple items, Jeff, that the way obviously that this effective tax rate calculation works is that you don't figure the items in the effective tax rate calculation until they have progressed to the point where [inaudible] I say reached fruition. That's not a technical term. But you've got confidence that they are real and good and they are going to affect this years's tax provision. And you're not talking about very big dollars here, a couple million dollars of tax items either way [inaudible] given the rate of earnings right now. It sounds like a nonanswer. It's really not. It's just some minor things that have added to a couple million dollars worth of items.

Okay. Thank you very much.

Our next question comes from Elisa Kaufman with Credit Suisse First Boston.

Yes. Good morning. I was just wondering on the income of five million from receivable settlement on intellectual property, does that flow through your general corporate net or is it allocated to one particular segment.

No, it goes right through general corporate net. And that's one of the reasons the corporate line was down so far this quarter. Corporate spending was down a little bit, a couple million dollars, but the big item was that $5 million of IP settlement.

And the other adjustments just adjust the tacks in the quarter. Correct?

That's correct.

Thanks so much. Have a good day.

Thank you.

We'll next go to Pat English with fiduciary management incorporated.

Good morning.

Hi, Pat.

Mike, first one on the shares outstanding. I believe you said shares out at June 30th were 185 and change.

That's correct.

But weighted average was 190.

Diluted was 190.

Okay. Last quarter's diluted quarter end was 188.

That's correct.

And in the power systems area can you remind us kind of what the mix is in the motor market for end markets, just rough percentages, mining, oil, gas, HVAC, if you can give us any ideas there that would be helpful.

You just hit the big ones there. Motors has a pretty wide dispersion of end markets. I would say of those - you hit, I'm trying to think, the three biggest ones. None of those are bigger than ten, 15 percent. In that range. So you say 15 percent tops, tops, tops for those three. Then you have a wide range of consumer application, food, beverages, really all over. Material handling is a big market. I'm just thinking out loud here.

The vast majority are the smaller motors rather than the large motors.

The vast majority of sales dollars is the majority. I don't know about vast majority but a solid majority. Two thirds, three quarters, something like that.

And Mike, could you remind me how you bill multiyear asset management service.

Those are real easy. Month by month as the revenue is earned we book them.

Great. Thanks a lot guys.

Thanks.

We'll next go to Barry Hanes with Sage Asset Management.

Hi. Good morning. You probably covered pieces of this in some other questions. I was just interested in if you look at the variable margin on a sequential basis. It looked to me like it was in the 35 percent range. Last quarter it was meaningfully higher. I think it was in the 70 plus percent range. Was that largely because cost cut sequentially was bigger last quarter than third quarter, or were there other things going on in terms of mix or what have you that would have accounted for that. And is 35 percent a kind of number that we should look for going forward, or was there something in there that was making it a little bit less than it would normally be. Thanks.

You bet. First thing in the second quarter there may have been, again, a little bit of incremental restructuring benefit quarter over quarter but it would have been a small number. Maybe a couple million dollars of incremental benefit. As I said most of those actions were personnel related. They were taken last year. The people were out in the first couple weeks , certainly by the middle of the first first quarter. So benefit was a little built increment all in the second quarter but not a lot. So that's number one. Number two an effect as we talked about of the acquisitions that we did make and just the relative profit mix sequential quarter over quarter produced by those acquisitions. And then I think just a general profit mix which will always vary quarter over quarter of how sales came in and what the margins on those sales were. Last question, mid 30 percent kind of sequential conversion. It's hard, again, without knowing what the mix is going to be going forward. I'd say that's certainly a reasonable level. We wouldn't expect it to be any less than that depending upon the mix. We would expect it to be potentially better than that.

Great. Thanks a lot.

Operator, I think we may have one more questioner on the line.

We will take our final question from Mark [Coseneric] with Midwest research.

I snuck in under the wire. A couple clean-up. Where do share repurchases fit into the strategy here with the stock price down and your decap pretty reasonable.

We've just been talking about that as a senior management team so it's very timely. And I really wouldn't pin it so of on the value of the stock which obviously we think is crazy. But we've tried not to vary or plan our share of purchase activity just based on the price of the equity at any given time. What we've said to ourselves, to our board and to you guys is that when we were convinced that cash flow was going in the right direction repeatedly, we would get back in the market. And we're to that point where we are, we do believe that cash flow is on the right track. And we do plan on getting back in the market here in the in the so distant future. We do have, as you know, a little over $100 million outstanding on our last Ford authorization and so we will be in the market here especially at these kind of stock prices. It's hard not to say that with the stock where it is.

And secondly any broad kind of indication you can give me on price realization in the quarter across the mix of products.

Yeah. Pricing, I wouldn't say it was up appreciably, Mark, but it's hanging in there and in certain product areas going okay. I do not have a pinpoint estimate for you. So I'd say flattest to maybe up certainly under a point and certainly a half a point or under.

Okay. And then finally, any kind of directional comment you can give us on the inventory in the distribution channel.

Flat as a board quarter over quarter. We track it to the dollar.

How about how far down is it from a year ago, some kind of benchmark.

I'm trying to do the math in my head. It's down to about 15 to 20 percent almost, off the top of my head.

And is that reasonable that it could rebound back to that level, or have there been some structural changes [inaudible].

We think there have been some structural changes. Actually one I'd say is structural. The other is more circumstantial or reflective of the current environment. The structural one is just consolidation continues to occur in our channels. And we believe that will continue to happen. And obviously one would hope that as they continue to consolidate they get nor efficient from an inventory standpoint. That's part of the investment thesis there. The second thing is you guys all know how tight credit is these days especially for small and medium size businesses. And a lot of our distributors are small and medium size businesses. And I think people there had to learn to manage their businesses a whole lot tighter. That's not necessarily structural. Tom just handed me a piece of paper. The exact answer to your question is 13 percent down. I was a little high.

That would be from a year ago.

That's correct.

Thanks a lot for your time.

Okay, operator, that concludes our call. I want to thank everyone for calling in today. And if you have any further questions, feel free to call my office.

Thank you. That does conclude today's call. At this 00:57:37 time you may disconnect. Thank you for your participation.