洛克威爾自動化 (ROK) 2003 Q1 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's conference call 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's Vice President and Treasurer. Mr. Mullany, please go ahead, sir.

Thank you, Cynthia. Good morning, everyone, and welcome to Rockwell Automation's quarterly conference call. I'm Tom Mullany, Vice President and Treasurer, and on the line with me today is our Chief Financial Officer, Mike Bless.

Before we begin, please note that our comments today will include statements relating to future results of the company and are 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 filings.

During this call, we will provide you with an overview of our first quarter results for fiscal year 2003. At the end of my review, Mike will make a few comments and, in the time remaining, take your questions.

First quarter net income was $42 million, or 22 cents per share. Last year's first quarter income before an accounting change was $29 million, or 16 cents per share. Last year's first quarter results also included a charge of $129 million, which equated to $100 million after tax, or 58 cents per share, related to the adoption of FAS 142. This resulted in a net loss of $79 million, or 42 cents per share, last year. Revenues in this quarter were $984 million, up about 5 percent over last year's first quarter revenues of $939 million.

Now let's turn to the results for each of our business segments. Control systems revenues were $787 million, up 9 percent over last year's first quarter sales of $723 million. Sales of our integrated Lodgics (ph) architecture increased by more than 37 percent over last year, while sales in our global manufacturing solutions business increased by 8 percent over last year's first quarter.

Control systems U.S. sales in the first quarter were up 6 percent from last year's first quarter. Excluding translation, which had a negligible impact on quarterly sales, control systems' international shipments were up 12 percent versus last year.

The breakdown by region is as follows -- shipments were up 3 percent in Canada, up 4 percent in Europe, up 27 percent in Asia-Pacific, and up 28 percent in Latin America. Control systems' first quarter operating earnings were $86 million, up 28 percent from the 67 million reported in last year's first quarter. Operating earnings included expenses for targeted cost reduction actions of approximately $7 million in the quarter. Return on sales was 10.9 percent for the quarter, compared to the return of 9.3 percent in last year's first quarter.

Now turning to power systems, power systems revenues were $171 million, down 4 percent from last year's first quarter sales of $178 million. Electrical, or motors, sales were down 3 percent, while mechanical sales were down 5 percent. Power systems had operating earnings of $8 million in the quarter compared to $11 million last year, primarily due to the lower volume. Return on sales was 4.7 percent versus 6.2 percent last year.

Looking at FirstPoint Contact (ph), FirstPoint Contact had first quarter revenues of $26 million, down from the 38 million reported last year. Operating earnings were break-even compared to last year's first quarter earnings of $2 million.

Some other items to note for the quarter. General corporate net expense was $12 million, compared to $18 million last year. General corporate net includes approximately $2 million of income from the company's investment in Rockwell Scientific Company. Interest expense for the quarter was $15 million compared to 16 million last year. The effective tax rate was 30 percent compared to 27 percent last year. Diluted average shares were 189.4 million, and outstanding shares at December 31st were 185 million even.

Now, looking at the preliminary balance sheet information, cash was 307 million, up $18 million from last quarter. Debt, both long- and short-term, was $938 million, up $1 million from last quarter. Debt to total cap ratio is 36.6 percent. Shareowners' equity was 1,612,000,000 at the end of December, which is up $3 million from last quarter. Book value per share was $8.71 at the end of December, up from 8.66 at the end of September. And finally, free cash flow is $89 million for the quarter, compared to 68 million in last year's first quarter. We repurchased approximately 1.4 million shares during the quarter at a total cost of $28 million.

That concludes my summary of the quarterly results. Now I'd like to turn the call over to Mike Bless for his comments - Mike.

Thanks a lot, Tom, and thanks, everybody, for joining us this morning. I'm going to just give a little bit more color on top of what Tom said about the results for the quarter, and then we're going to get right to your questions. We know it's a -- it's a busy morning for corporate earnings releases.

The team here is pretty pleased with the quarter that we just -- that we just turned in, and let me give you, as I said, a little bit more -- a little bit more detail on the results. Control systems, as Tom said, had nice growth versus the first quarter of last year, and really that growth was solid across the control systems business. Both the product side of the house, on one hand, and the GMS part of the business on the other hand, had consistent growth over the first quarter of last year.

It's important to remember, though -- and we've talked about this a lot -- that the product business, from a comparison standpoint, is coming from a much lower base. As you'll recall, now, six quarters ago, in the middle of our fiscal '01, when the manufacturing economy went into the major recession into which it went, the product businesses were down that quarter in the mid-20 percent -- 22 percent, 23 percent, 24 percent, and GMS was down, but nothing even close to that, and after that, GMS started to grow and had nice sequential growth last year. So the point being that we're pleased with the performance on both sides of the house from a growth standpoint.

Importantly, as well, as Tom pointed out, the performance of our Lodgics business continues to be just outstanding, and we couldn't be more pleased with it. Those of you who know the company know that this is our next-generation control architecture, and quite frankly, you've heard Don Davis, our CEO, say that it's the foundation, at least over on the control systems side of the basis, of most things that we do in the company, and it is critical to our future, and the performance of it, market acceptance of it, customers' reviews of it, continues to be just outstanding.

From an end market perspective, frankly, the relative strength was across the board. Our two biggest end markets in control systems, those being consumer products and transportation, both showed the best relative growth of our end markets around the world in control systems this quarter. There were no real big jobs of note. It was just a general increase in activity that led to the results for the quarter. Life sciences end market, which is not one of our biggest, but one of our fastest-growing, showed good relative growth, that obviously being pharmaceuticals and biotech customers.

Importantly, for the first time in -- boy, it's got to be several years now, a couple of our more troublesome end markets, natural resource-based end markets like food -- pardon me, like forest and paper products and metals, didn't degrade at all. In fact, a couple of them showed a little bit of sequential and -- growth over last year, so we were encouraged to see that.

And lastly, from a growth perspective in control systems, the results that we saw really were end demand driven. Our distributor inventories remained absolutely flat this quarter. That is the same condition in power systems when we get to it. And those inventories reached a low point in the middle of last year and haven't budged. So obviously, we were -- we were heartened to see that it really was end demand pulling through these additional sales.

We continue to be very encouraged by market share gains in control systems, frankly, across every product category in North America, and this is a trend that has been out there for a couple of years now in control systems, and continued strongly this quarter as well. As I said, it's across every major control systems product category in North America.

Overseas, the data is harder to get. It's not reported with the precision with which it's reported here in North America. But you heard Tom detail the kind of growth we're getting in those regional markets in, obviously, very difficult economic conditions in Latin America specifically, and in Europe as well. So, given that, we're convinced that we're taking share in those regions, and are very happy with the performance there. And net-net, I think all these results show -- continue to show the management team here, anyway, that this business is extremely well-positioned, control systems, as global economic conditions improve.

Turning to profit very quickly -- Tom covered it, so I won't say much more. Operating margin just shy of 11 percent, which we were happy with. Excluding the cost of the cost reduction actions to which Tom referred, that profit margin and the profit conversion on the increased sales were exactly in line with what we were expecting, and they're very consistent -- that result -- with control systems getting back to the kind of profitability that we're convinced it can get back to, and frankly, that it enjoyed just two years ago. So, right on track from a profit conversion standpoint.

Turning quickly to power systems, sales were down year -- versus last year, as we expected. Power systems had, as you recall -- even during the weak economic environment last year, they had a pretty strong first quarter. In fact, I'd say they had a very strong first quarter last year, and we had predicted sales were going to be down and they were.

The mix was a bit different than we were expecting. As Tom detailed, the electrical business, which is really our motors business plus the service component of power systems, was down a little bit less than mechanical was, and therefore, the mix was, as I said -- we had expected both businesses to be down about the same. Given that performance -- or given that sales decline, we're happy with the operating performance of power systems. They turned in a good quarter, and we're convinced that that business is positioned real well as we -- as we get into the second quarter and for the remainder of the year.

Tom touched on the other items, so I won't go through them very much on the income statement. You saw good performance at corporate. I wouldn't read that low level of $12 million as anything like a trend to continue for a couple reasons. One is, as you know, some of the corporate items tend to increase in spending throughout the year, and as Tom detailed, we did get $2 million of equity income this past quarter from our investment in Rockwell Scientific Company. That's a little bit more than it normally is. So, if you're looking to -- for a trend in that, or for an estimate for the full year, something in the order of 65-ish million for general corporate net expense for the year is probably the right range to use, rather than any kind of number that would be implied by the first quarter result.

Tom talked about interest expense, down a little bit versus last year. No commercial paper outstanding at all this quarter, as we were running significant cash balances in the U.S. The liquidity is very good, and I'll touch on that in a minute.

Tax rate, as we expected, came in at 30 percent. Cost us about a penny of our EPS versus last year's first quarter. Shares held constant, as Tom said. We did get back into the marketplace, as we told you we would in November, and had pretty good activity throughout the quarter, which held the share base flat, despite the option exercises which came in the quarter as we expected.

So, all in all, from a financial performance income statement standpoint, certainly the team here is pretty pleased with the results. Sales growth up about 5 percent, EPS growth up about 38 percent.

Just quickly turning to the balance sheet and related issues, the company finished the quarter in outstanding financial condition. You've seen that, if you've had a chance to turn to the balance sheet and the cash flow information. Free cash flow came in at more than double net income. It was terrific performance from across the board. All three of our businesses, FirstPoint Contact, power systems, and control systems, turned in terrific cash flow performance.

From a line item standpoint, really good performance across the board. Receivables down, although offset by a commensurate reduction in payables. Inventories flat versus September, but if you look back 12 months ago, inventories are down about -- a little over $40 million, about 8 percent, while sales have driven -- have grown 5 percent, as we have said, and we think that's terrific performance. As I've -- we've told you here over the last couple quarters, inventory management has become a major issue here at Rockwell, and I think you see the results of it here. We're very pleased with the businesses' performance on inventory. We're going to continue to drive there.

Cap ex, as you've seen, started out very low -- $15 million. We've told you what our budget is for the year, $125 million to $150 million, again, depending upon business conditions. So, even if you annualized that cap ex budget and adjusted, if you will, first quarter free cash flow for an even rate of capital expenditures, you still get a very strong result -- maybe 60 percent, 65 percent in excess of net income, and we're going to continue to drive the performance on the cash flow side.

Quickly, on the balance sheet, as Tom said, it looks real strong. Cash now over $300 million. Rose a little bit, increased a little bit from September despite the repurchase activity. And as you've seen, and as we announced, we made a very small acquisition, $5 million acquisition of some very critical intellectual property in the CNC (ph) area from a German company in the middle of the quarter.

Debt to cap now about 36.5 percent, as Tom said. As you know, we've got a bond issue coming due in April, $150 million principal amount, and we continue to expect that we're looking at our options. We continue to expect that we'll just simply refund that issue out of -- out of cash on hand. That would drive the debt to cap down to about 33 percent. Strong credit ratings, as you've seen. Strong credit statistics. And we've got very good with our rating agencies, all three of whom we went and visited in December.

Looking out over the balance of the year quickly, and then we will turn to your questions, we, like others, see a lot of cross-currents of information and activity in our marketplaces. As you know, our first quarter that we just ended did start out strong, and it remained strong throughout the quarter, particularly in December, where we normally see -- almost always see a downturn in activity beginning in about the middle of the month for the obvious reasons. Activity in December, frankly, stayed strong and continued to strengthen throughout the month. It finally did die down a little bit in the last day or two of the month, but it did stay strong through then, and that obviously is what drove our performance to be a bit better than we had expected it to be in the first quarter.

In talking to our customers and distributors, they remain generally optimistic about the remainder of the year. They're optimistic that things have stabilized. They're optimistic that things should improve throughout the remainder of the year, or certainly by the remainder of the year. What they're a little bit unsure of, and unwilling to commit to, frankly unable to commit to at this point, is simply the timing of any meaningful increases in underlying economic activity in these industrial markets. And obviously, it goes without saying that they are concerned during the near term here about business conditions over the next several months, principally related to geopolitical conditions around the world and other items with which you're all familiar.

Boiling that all down, our outlook for the rest of the year at this point isn't vastly different from what it was when we saw many of you in early December in New York. We do remain confident that our markets have stabilized, and if these conditions do -- the first quarter conditions do continue throughout the year at a minimum, we'll be able to turn in performance at the $1.10 -- in the $1.10 area. We do remain cautious in the near term, for all the reasons that I cited that our customers and distributors are looking at. We do remain relatively cautious here about business conditions in the near term.

January, frankly, has started out as a first month in a quarter normally would. It's a little weak -- certainly weaker than the incoming orders and other rates we were seeing in December. But we're watching this thing very, very closely.

As you've seen, this business remains really highly leveraged to very, very small increases in general economic activity, and frankly the operating results of the company, as you've also seen, remain highly leveraged to increases in our sales volume, profit conversion, and such. So we continue to believe that, if we do see some very modest increases here in underlying economic activity throughout the year, as we did tell you in December, that we will be able to turn in earnings now in the $1.20 range, as we said in our earnings announcement this morning.

And with that, Tom, I think I'll call it quits and we can take a couple questions.

Thank you, Mike. Before we open it up for questions, I'd just like to remind everybody to try to limit them to one or two related subjects so we can get as many questions on the line as we can.

Operator, we'd now like to open the lines for questions.

Thank you, gentlemen. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone telephone. We will proceed in the order that you signal. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, to ask a question, press star 1.

We will take our first question from Bob Cornell with Lehman Brothers. Please go ahead.

Hey, good morning, everybody. It certainly was a good quarter. Encouraging.

You know, you make a comment here that you're opening the Center of Excellence in Shen-Zen in China, and one of the thoughts that's been in the back of my mind for a while is just, you know, what happens to Rockwell's business as people migrate production facilities out of North America and into Asia, and clearly you're seeing that trend and following it. I mean, do you see, you know, some of the installed base, you know, in the North American market dissipating, and are you following it to Asia, you know, and what is this Center of Excellence going to do for you in that China market?

... great questions, Bob, and thanks for the comments about the quarter. Yes to all of those. Let me first answer what the real purpose of that center in Shen-Zen is. It really -- the purpose of it really isn't to follow over North American customers. It's to go after Chinese OEMs, principally with motion and similar applications to serve the indigenous market.

That having been said, we are doing a lot of business with our global accounts in China, people like P&G and others. We could cite the long list and you know who's -- Bob, you know who's on them. And so we do see the trend continuing. It hasn't been a flood yet. We're watching it very closely, and we're trying to invest ahead of it. We're investing in China, Bob -- this is getting a little bit, perhaps, afield of the heart of your question. We're investing in China in a number of different ways, not only to exploit the indigenous market -- and that's the purpose of this Shen-Zen OEM center, and to follow our own customers, but frankly our own conferring. We feel it's important to have a major presence in China.

For example, our next-generation of IEC pushbuttons, which is a major, major product line for us, we're going to build in China. Those have been built, historically, for the last couple decades, in Italy. So we're trying to take a balanced approach in China and exploit that critical market for all it's got to offer in a number of different ways.

How big are you -- you said the Asian sales were up 20-something percent. I mean, how big is the Asian sales base at this point?

Pardon me. Asia, Bob, in total is in the 200 millions, whereas in China, it's about a third of that.

Thanks.

We will take our next question from Mark Koznarek with Midwest Research. Please go ahead.

Yeah. I've got a question on the automotive space. With the fact that you've completed that acquisition of power automation, and I guess you had had, you know, some sort of marketing relationship with them for six months or so before that. Does that fully plug the gap that you need to reenter the powertrain side of the business, and can you talk about what kind of opportunity presents itself over the next 12 months or so that you didn't have access to before?

Yeah. That's a great question, Mark, and you got it right. The -- that acquisition was targeted, absolutely, into the powertrain side of the automotive customer base where motion-centric applications, CNC applications, are -- technology are absolutely critical.

As you know, Mark, and as many people on the phone know, we've got tremendous strength and tremendous market share in the automotive space on the -- on the body shop, power -- and assembly side of the house, where discrete applications are critical technology. And where our shares are -- on the other side of the house, our shares are good, but we think there's an enormous amount of opportunity to increase them to close to what we have or commensurate with what we have on the body and assembly side.

Mark, as you said, that company we have been working with for some time, really not on a -- from a marketing standpoint, but to embed their CNC -- soft CNC technology into our Lodgics architecture. For a variety of reasons, we decided to make this acquisition to hasten the time to market for this product and to make the whole thing just flow together better -- number one, because we wanted to control the technology; number two, to be quite frank, because that company -- it's actually a publicly listed company in Germany on the new market there, ran into some financial difficulties, and that's critical technology for us.

A long-winded way of saying we believe, Mark, the answer to your question is yes. This was our chosen technology partner, and it opens up an enormous amount of opportunities. Frankly, a couple of key dialogs that we're in right now, none of which, unfortunately, I can talk about. None of them are orders yet - that, per the guys who run our global automotive business, we just, quite frankly, would not have been in a year ago, six months ago even, before we solidified this relationship with power automation.

Well, Mike, asking it maybe a different way is that if -- you mentioned that you expect to, over time, equalize shares. Would that be a pickup in, you know, hundreds of millions of dollars of increase that you would expect to be getting over time from this side of the business or, you know, is there a pipeline of potential projects that's, you know, sizable, hundreds of millions? Is there any way to quantify the opportunity here?

Good question, Mark. Let me touch your second one first. There is not a near-term, you know, hundreds of millions of dollars of projects in the pipeline. That's just not the way the business works. But when we set out to build this powertrain business, Don really challenged the business leaders, as we were allocating resources here, to make sure that this was a -- in your words, a couple hundred million dollar market potential for us. And we believe it is over time. Now, time could be a couple of years here, but we think we can build a very meaningful business in powertrain. On top of one that we have right now, but much more meaningful than we have.

Great. Thank you.

You bet.

We will take our next question from Richard Eastman with Robert W. Baird. Please go ahead.

Hi. Just a couple of questions. I mean, one is, could you just speak to the $7 million of cost savings that occurred in the quarter that were run through the P&L? Is (ph) all of that fall into the controls segment of the business?

Yes, Rick, it does.

OK. And then secondly, on Lodgics, could you just detail, perhaps, some specific applications or market sectors where you feel particularly good about market share gains and what's driving that? Is it functionality or integration capabilities or what?

Yeah. I mean, you hit the -- a couple of the key differentiators of Lodgics, and then I'll go to answer your question. But ease of integration here, programming ease, time to market, cost of setting up a line with Lodgics because of the interoperability. Those are all things that customers are really telling us are unique in the marketplace at this point.

I just want to point out one thing. I don't know if you're -- your question, Rick, inferred something else, but the share gains that we're seeing are certainly in the -- in the PLC/Lodgics space. We call it -- or NEMA calls it PLC and related. But they're also across the board. We saw excellent gains in the electromechanical product areas, in the power product areas, really just across all of our product lines.

But Lodgics -- those are the kind of applications. It's right in the heart of what we've always done, with the noted benefit of opening up, as we've said, a lot of motion applications. We're spending a lot of time talking about motion here. We just finished talking about it with Mark's question on power automation. But as we've told you guys, it's a key, key growth area for us. And the proof in the pudding here now is over 40 percent of new Lodgics orders are being ordered with motion processors with it, and you can just see that number increasing, whereas that -- you know, whereas before when we would sell -- we still do sell PLC-5s, a motion processor, a motion controller order didn't always go with those orders, so it's a -- it's a key differentiator for us. And really, Rick, it's across the spectrum of our applications. There's no one in particular that Lodgics is looking to exploit.

Did the PLC piece of the business still grow year over year in the quarter?

Yes, it did.

OK. Thank you.

You're welcome.

We will take our next question from Nicole Parent with Bank of America. Please go ahead.

Good morning, guys. How are you?

Hi, Nicole. How are you?

Just wanted to get a little bit more clarity on power systems. Control systems certainly had a great quarter, but when you look at power systems -- and I can understand that the first quarter of last year was strong, you know, coming off of the money-losing fourth quarter in the prior quarter ...

Yes.

... I guess I'm just trying to get a sense -- the margins here are much worse than I thought, and probably much worse than they've been over the last, you know, five quarters, and I'm just trying to get a sense of, you know, both on a sequential and year over year, how we should look at this going forward. Is this a more sustainable run rate for the operating profitability of the business? Kind of the dynamics there, I guess.

Yeah. Great questions, and you're right, Nicole. The margin, other than the margin -- the money-losing quarter, which was Q4 of '01, hasn't been down at that level since -- my data here showing Q1 of '01, so, you know, a good eight quarters ago.

Let me talk about it. it. Number one, the margin itself was driven by the mix. As I said, as you all know, Dodge carries higher margins than reliance. And just given the mix of results this quarter, from a shipment standpoint, that's what drove the margin. If you look at the conversion over last year, sales were down about 7 million, as Tom said, profits down about 3, so conversion kind of in line with what we're expecting. You know, $1 million here or there. You're going to get to the law of small numbers.

And the answer to your last question is no. We're convinced that margins in power systems this year are going to increase from last year. As you know, they were in the mid-7s last year. I know that means that we've got some making-up to do here, but we still think this business, given the mix of business right now and where it's heading, can earn margins in the, you know, high single digits.

It was a short quarter for power systems. They even had a little bit short of a quarter just in terms of their selling days than control systems. It sounds like a lot of reasons conspiring here. As I said, the absolute level of sales wasn't markedly different from what we were expecting the mix, to be frank, was a little bit different. But, no, you ought to expect higher margins from power, and if they don't get there, we need to tell you why.

And as a follow-up, could you just talk a little bit about pricing trends? I guess you would think, based on the strength of Lodgics and GMS and the pull-through that you just highlighted in Lodgics, you might be able to get some price, as opposed to some of the older products or systems. Could you elaborate a little bit more and give us any detail you might have?

Absolutely. It's actually interestingly the other way around, but let me take a step back. In -- we put through, in control systems, an Allen-Bradley brand a price increase every year in November, so that goes in the book in November. Now, as you know, a lot of your contracts are negotiated, so it takes sometimes a year or more to get that weeded (ph) in, but in terms of just book kind of business, we should start seeing some of that. We don't plan -- in the guidance we've given you or in our own plans, we don't plan for very much price realization at all. Basically, pricing flat or up, you know, under 50 basis points.

How have we been doing? And then I'll get to kind of the interplay between the Lodgics and old generation PLC in a minute. How have we been doing? We've been -- from a pricing realization standpoint, based on all the data we have, we certainly haven't been up over the last quarter or year, but we haven't seen a lot of degradation either. Every quarter, based on our best ability to analyze it, Nicole, it's been kind of, you know, up 50 basis points one quarter, down 50 basis points net across the product lines one quarter, but kind of within that range.

Now, going to the first part of your question, the way we do this, obviously, when we bring out a new product, like any technology business, it's certainly not as acute as a PC manufacturer, but Lodgics carries a markedly lower price tag, form, fit, and function comparable, than the PLC side, which it's, you know, slowly going to replace. As we detailed in New York in December, it might be 20 percent, 30 percent below on an equivalent basis. But we're delivering more functionality and the market share we're taking on things like motion, as we just increase the units we're selling, not just of discrete controllers, but of motion processors and whatnot, makes up for that.

At the same time -- and we've done these product transitions before -- we're trying to be pretty intelligent in the way we price the older generation products. I guess I'll leave it at that. But I think you know what I'm saying.

Great. Thank you.

OK, Nicole.

We will take our next question from John Baliotti with UBS Warburg. Please go ahead.

Hi, Mike.

Hi, John.

I was wondering if you could characterize, with respect to controls, what the demand was driven by. You know, was it repair/replacement, upgrades, or new installation? Was there anything that stuck out?

Let me answer it for GMS specifically first, and then I'll get to the business as a whole. Well, let me just take the business as a whole, because it's an easy answer. It's really across the board.

OK.

It was an increase in MRO levels. What our distributors call just the flow business, I guess is a term of art (ph). And in terms of big jobs, as I said, you know, we continue to see some decent activity in the automotive space, but no real, you know, big million, million, million dollar jobs that flowed through this quarter.

In GMS, most of the jobs that are getting funded, and obviously on which we're booking revenues now, are ROI driven. In debriefing our GMS guys, they're absolutely adamant on that point, that to get funds released -- I'm talking about from customers these days, obviously -- these are mainly ROI-driven projects where we have to literally go in there and, on a very down and dirty financial analysis basis, show that there is cost justification for going in and doing something. So that's a specific part of the business.

On the rest of it, it really is just kind of a slow and gradual raising of the water level across the board.

How tied are you to the ROI calculation that you do for them?

We're -- in terms of our -- what we get paid?

Yes.

Not at all. You know, we've tried to sell a couple jobs that way when we've gone in and customers have said, "There's no money to do that, but we'd really like to do it," and we've gone in and made a proposal that says -- and we're doing this very carefully because this, as you all know, doing business in this type of way is relatively new to our company, and we've watched and seen other people get into trouble with gain sharing in other areas, so we're doing this test cases at a time where we'll go in and propose, "OK, you can't pay for it, we'll share the upside for you -- with you."

So far no one has taken us up on it. We've had a couple of notable examples where people have come back said OK, I'll just buy the service and the related products from you. But we're -- you know, I would be surprised if this year we didn't have some test cases in that area. We're watching those very carefully, because we're not going to -- we're just not going to let ourselves get into trouble on that area.

So, despite the low capacity utilization levels sort of generally, the ROI that you're showing them is still compelling?

It is compelling, John. Absolutely.

OK. Thanks.

You bet.

We will take our next question from Quint Nufer with Lazard. Please go ahead.

Good morning, guys.

Hey, Quint.

Since we had no seasonal falloff in the first quarter at controls, I'm assuming that the second quarter should not show the seasonal $20 million to $25 million increase in revenue. Is that -- does that logic work?

The only reason, Quint, it doesn't work as directly as maybe you're thinking is seasonally yes, but there are a couple more just selling days in the second quarter than there were in the first. So just in terms -- from that input alone, you ought to see a little bit of absolute dollar increase in the second quarter.

OK. So a slight sequential improvement?

You got it.

OK. Then, the restructuring in the controls segment, this $7 million in the quarter, any left? And if so ...

Yes.

... how does that run out?

Yes. We did -- as we said in December, there is a little bit still scheduled for Q2 and Q3, given the way the actions do schedule out here, and as you may know, there's been some changes in GAAP as to how you account for severance and other cost-reduction activities. We're obviously making sure that we follow the accounting rules properly. But it's -- for the second quarter, it's a fraction of what it was in the first quarter. Maybe a couple million dollars. And a very small amount in Q3 that might aggregate to a million bucks.

OK. Thank you.

You bet.

We will take our next question from Jeff Sprague with Salomon Smith Barney. Please go ahead.

Hi. Good morning.

Good morning, Jeff.

Good morning.

A couple of times, you alluded to the fact there was no major projects rolling through. I'm just wondering, as you look out, though, is there visibility of some things on the horizon, you know, that kind of make you feel a little bit better about the year? And also, I guess, again, just kind of coming back to the strength in December, you know, it kind of sounds like you were a little surprised, your distributors were a little surprised, maybe even your customers themselves were a little surprised. You know, as you kind of look at what happened, do you think it was, you know, some of this normal lumpiness we've had, or do you think there's actually a little bit of traction out there, generally speaking, in some of these markets?

Sure, Jeff. Let me answer the second question first. We do think there's some traction out there. Gradual traction. What we can't call, at this point, or frankly we wish we could, but we're having trouble calling, is, you know, the pace with which that traction is going to hold and whether there is or isn't going to be kind of a respite here as people sit on the sidelines and wait to see what's going to happen in the Middle East and North Korea or whatever, and we're not, certainly, trying to blame anything on that. But it does cloud the visibility picture. There's no doubt about it.

What happened in December. We were a little bit surprised by it. As we told you, the quarter started off well, and it continued well throughout December. We just didn't see the kind of falloff that we would normally have expected. Customers surprised to see it.

Jeff, I can't answer that question. Distributors, the answer to the question is yes. They were planning for the -- you know, the normal Christmas slowdown, and frankly, we didn't see it. I would note -- and then I'll get to your question about orders in a second. I would note that the strength in December not only related to shipments, the incoming order rates were good as well. In fact, we even built up a little bit of backlog in the month. We were trying to ship everything customers wanted, but just because of the strength of the incoming orders, we actually did build up a little bit of backlog in some key product areas in the month, and we were also encouraged by that.

Your first question, Jeff. There are no monster orders out there. As we've told you over the last couple of quarters, the activity in the automotive space has been decent, and those orders continue to get booked. The way these orders work, as I know you know, Jeff, they -- the order gets booked, obviously, in a specific month and quarter, but the actual shipments and, therefore, recognition of the revenues run out over months and months and months, normally quarters and quarters. So it could be nine months' worth of revenues that you get from one order. But to try to boil down an answer to your question, no, there are no big, big jobs we see there right now that we're counting in the -- in the guidance that we're giving you.

Great. And just a little housekeeping item. We've got a couple of small deals over the last year. Can you give us just the -- kind of the core organic revenue numbers?

Sure, sure. In the -- in this quarter, Q1 of this year over Q1 of last year, there was about $16.5 million of incremental revenues from acquisitions.

And that would have been all -- or basically all in control systems?

All in control systems.

Yes. All right. Thanks.

You bet.

We will take our next question from Michael Regan with Credit Suisse First Boston. Please go ahead.

Mr. Regan, your line is open.

One second.

Hi.

Hello?

Hi. Sorry, Mike.

No problem, Mike. How you doing?

I'm doing great.

Good.

I was just wondering if you could put in perspective -- it sounds like you don't want to get too positive on the economy, despite what you saw ...

Mike, we want to. Believe me, we would love to. But given what we're seeing right now, we're just -- we're just not there quite yet.

Well, what I'm trying to get at is, the results in power systems, even when you look back to the first quarter of '01, despite the strength in the first quarter of '02 versus the weakness in power systems versus the strength in control systems -- and again, you said within control systems, it was across the board, you know, no big jobs. So the two -- the two pieces of information don't seem to foot, and I'm wondering if you can give any additional detail as to why that might be.

In -- from a control systems to power systems relationship, or power systems going back to ...

Control systems to power systems.

I got you.

I mean, they should be, you know, fairly related.

That's a fair point, Michael, and no, I can't give any -- we don't have any specific reasons. If you look at just the rate of incoming orders and outgoing shipments, quarter over quarter, control Q4 going into Q1 and power going Q4 into Q1, power was a little bit lower. There's no question about it. But not in order of magnitude lower about it. We just got into the situation here, as I said, where the mix in power systems, electrical motors, basically, versus mechanical, just drove out that margin of a little under 5 percent.

The end markets that -- to which power systems is most fundamentally exposed also aren't quite as strong or didn't -- weren't quite as strong this past quarter as those to which control systems is more closely aligned. Again, consumer and transportation being the big guys for control systems. Power, as you know, is much more tied to some of the natural resource-based markets, HVAC and things like that, and HVAC in particular had a pretty crummy quarter.

So, some of it end market driven, some of it just mix driven. We're -- I'll say it again. We're expecting power systems to have a good second quarter.

OK. Thank you.

Sure, Mike.

We will take our next question from Blair Brumley with American Express Financial Advisors. Please go ahead.

Thanks. Good morning, Mike and Tom.

Hi, Blair. How are you?

Very well, thanks. Can you give us an update, quickly, on your distribution -- on your distributor situation in Texas? Did that have any outsize impact on the numbers in the quarter at all? Have you guys gotten that straightened away now?

I've got answers to all of those questions. Number one, it did not have any impact at all. We had fully reserved it in the fourth quarter, and that situation, as far as the financial reporting standpoint, is now completed. We have gotten it squared away. What we've done is the company that -- for which we wrote off the receivable basically went into a Chapter 7. It was basically liquidated, although I did -- do think it ended up in an 11, it was equivalent to a Chapter 7 liquidation. The various parts of it were sold off.

Before that happened, we had appointed new distributors in all our key markets in the Houston area, in the Corpus Christi area, and in the New Orleans area. This company also had our -- had our distributorship in that part of Louisiana. So we appointed existing Allen-Bradley distributors, very strong ones, in all those regions, and we're off to the races.

In fact, we were just meeting last week with our guys who are in charge of our channel relationships, and they were reporting that the initial market share gains in Houston that we've experienced have been terrific. So it was, as we've told you guys before, a situation that was deteriorating over years down in Houston, and frankly, if you're looking for a white side of this cloud, it enabled us finally to get out from under a bad situation, and obviously cost us a lot of money to do it in terms of writing off that bad debt and getting with some market partners who were going to drive our business better down there.

Very good. Thanks so much.

Sure thing.

We will take our next question from Barry Haimes with Sage Asset Management. Please go ahead.

Good morning. Mike, I had a question. I was just looking at control systems and, you know, just looking at (inaudible) margin, you know, Delta operating profit to Delta sales. It came out to 29.7 percent. Is -- was there something going on such that it wasn't stronger than that, even?

Sure. Just the two things that we've cited, Barry, one being the cost reduction actions that we've taken this quarter that were a net negative this quarter, and as I said, there may be $1 million or $2 million again next quarter, but those -- the whole net situation there, if you will, ought to turn into a positive in Q2, as we start to get the positive effects of those things that counted as expenses in Q1. That was a little bit confusing, but hopefully you understood where I was heading. So, if you kind of add back that expense, the pro forma conversion margin -- and you're doing the math exactly the way we do it -- was in the range that we expect from this business.

OK. Great. Thanks.

OK.

We will take our next question from Patrice Lambert with CIC Securities. Please go ahead.

Good morning. Just two quick follow-up questions. First, on distributors, I would like to understand, you said that distributors eventually (inaudible) flat, and we heard from (inaudible), for instance (ph), we sense (inaudible) that they were expecting some ramp-up or, let's say, a good increase in sales in '03. I would like to see what is your opinion about it. And second question is about final (ph) segment. Which final segment did support your sales, and which final segment did drag down your sales? Thank you very much.

No problem, Patrice. Good questions.

On the distribution question, I think what we saw -- and I haven't seen what Granger (ph) said, but I do think what we saw squares pretty well with what Granger was saying. Our distributors are saying, and did see in the first quarter, as we said, a pickup in their sales, in their end demand. What they've been reluctant to do to date is to add to their inventories, which are very, very low. You've seen all the data coming from all the sources, including the Fed manufacturing inventories in both distribution and at customers are at a low point in -- I forget the amount of time, but they're at a historical low point.

So I -- just guessing, I think what we were seeing, anyway -- now, Granger, we don't do any business with Granger. They're not part of our channel. But I do think what we're seeing sounds consistent with what you just said Granger are saying.

From a final segment -- do you mean end markets? Is that what you're referring to?

Yes, end market, yes.

Yeah. OK. Just to restate it again, what we're seeing outsize growth from -- meaning relative strength versus the average -- would be consumer products which, for us, is in the control systems business anyway, more than a third of our business, and it's a very wide category of end markets -- everything from food and beverage manufacturers to health products, diaper manufacturers, and things like that. So a very wide variety of manufacturers. And transportation also had relative strength, transportation obviously being automotive. A little bit of aerospace, though that didn't do much for us this quarter. Tire, rubber, glass, other markets that are affiliated with the automotive and related industries.

The ones that I would cite that dragged us down a little bit would -- all to Michael Regan's point, would all be on the power systems side. Most specifically, HVAC markets, air conditioner manufacturers, and others that are important customers for power systems are having a really lousy time of it, and their orders to us and our sales to them have been down. And some of the natural resource based markets to which power systems is more exposed -- mining and construction -- just didn't grow this quarter, though we do see some hopeful signs coming from them over the next several quarters. Does that answer the question?

Thank you very much.

You're welcome.

We will take a follow-up question from Mark Koznarek with Midwest Research. Please go ahead.

Yes. Couple things. I'm just wondering, with the increased outlook for the year, $1.10 to $1.20, you know, before, when you introduced the old one, you said top-line environment of two percent to four percent. Have you raised the top-line outlook to correspond to the higher EPS guidance?

Mark, yes, but it's in tens of basis points, not in anything -- I think it still rounds to maybe 2.5 percent to four percent.

OK. Then, share repurchase. What should we think about for the remainder of the year?

Yeah. That's a good question. And we're looking at that right now. We had a $28 million quarter, as you said. Our plans right now do not call for that kind of rate for the full fiscal year, but -- so you may see, on average, a little bit less than that. Some of this will depend upon business conditions, some of this will depend upon the stock price. So you might ratchet it down a little bit, by a third or so per quarter, but we're still going to be in the market.

OK. And then finally, can you review the increased pension and OPEB (ph) expenses for '03 having '02, since that's such a hot topic for everybody?

Yeah, most definitely. Our -- FAS 87, our pension expenses year over year, are up in the $10 million to $15 million region, about 15. And two-thirds of that is produced directly from our reduction in our expected rate of return to 8.5 percent, which is what we're using for fiscal '03.

On other post-retirement benefits, there's a wide variety of things there. Net-net, we're going to have an increase there, but nothing like what we were seeing as we were putting our plans together five, six months ago. We've taken, I think as -- I know as we've shared with you guys, Mark, some very major and drastic actions, regrettably, but without a choice, in our post-retirement benefits. Most specifically, obviously, retiree healthcare, where we've drastically changed, as many other companies have done, the company's contribution and the employee's contribution. We still provide a significant benefit to employees -- to retirees and employees, but we changed the benefit big time here.

So that's a long-winded way of saying our -- the growth in our expense in OPEBs, and again, it's figured into the guidance we've given you, is maybe in the $10 million-ish range, maybe even a little bit less than that, versus what we were seeing before we made those changes, which was many, many multiples of that number.

OK. And those are incrementals we're talking about for 2002?

'03 over '02, correct.

Right. Thanks very much.

Sure, Mark.

And operator, I think we have time for one more question.

We will take our final question from Alexander Mitchell from SAC Capital Management. Please go ahead.

Mark asked one of the questions. Can you address the balance sheet in general, and where is the ideal debt to capital and -- I mean, you talked about share repurchase ...

Sure.

... talk about acquisitions and dividends going forward?

Sure. Good question. We think the right kind of leverage to run with, from a debt to book cap standpoint -- and that, we know, is not, sometimes, the best measure, is in the low to mid-30s, and, you know, pro forma for the repayment of this bond issue in early April, that's where we'll be. We're going to -- as I said before, we're going to refund -- right now, if we had to do it, we would refund those bonds -- repay those bonds out of cash.

Dividend is absolutely solid as you would expect, though we don't intend to increase the dividend in the foreseeable future. We'll continue to have that dividend obligation in the $120 million-ish annual range. We think where we are right now is the right -- is the optimal capitalization for the company -- A credit, access to the commercial paper markets, which, you know, generally is important for this company. We haven't been in the market now, what, Tom, five months, something like that, given the cash balances we've been running here in the U.S. and the significant liquidity we've had. But we think in a kind of a weak A credit where we are right now is the right, optimal capital structure for the company.

Was there anything specific you wanted addressed?

No, that was it. Thanks.

Yes. You bet.

OK. That concludes our session today. I want to thank everyone for joining us, and operator, I'll turn it over to you to close out the session.

This will conclude today's conference call. We thank you for your participation, and you may disconnect at this time.