洛克威爾自動化 (ROK) 2003 Q2 法說會逐字稿

Please stand by, we're about to begin.

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 1. At this time, I'd like to turn the call over to Mr. Tom Mullany, Rockwell Automation's Vice President and treasurer.

Please go ahead, sir.

Thank you, operator.

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, Michael Bless. 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 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 second 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.

Second quarter net income was $49 million or 26 cents per share. In the second quarter of 2003, the company sold the majority of its ownership interest in reliant's electric limited in Japan, resulting in a noncash loss of approximately $8 million, which is $3 million after-tax or 1 cent per diluted share. The after-tax loss on the sale includes a $2 million benefit resulting from the company's ability to utilize capital loss carry-forwards for which evaluation allowance had been provided. The proceeds from the transaction totaled approximately $10 million.

Last year's second quarter income of $61 million or 33 cents per share included a tax benefit of $18 million or 10 cents per share and a net benefit of $3 million or 2 cents per share related to discontinued operations. Excluding these items, last year's comparable income was $40 million or 21 cents per share. Revenues in the quarter were 1 billion, $29 million, up 7% over last year's second quarter revenues of $958 million. Now looking at the second quarter results for each of our business segments, control systems revenues were $830 million, up 11% over last year's first quarter sales -- I'm sorry, second quarter sales of $749 million. Excluding currency translation, sales were up approximately 7% over last year.

Control systems U.S. sales in the second quarter were up 4% from last year's second quarter. Excluding translation, control systems' international shipments were up 12% versus last year. In a breakdown by region is as follows. Shipments were up 4% in Canada, up 7% in Europe, up 25% in Asia Pacific and up 25% in Latin America.

A similar breakdown by region on a GAAP basis, which includes the effect of currency translation, is as follows: Sales were up 10% in Canada, up 29% in Europe, up 35% in Asia Pacific and down 12% in Latin America. Our integrated logics architecture business increased by about 40% over last year while our global manufacturing solutions business increased by 12% over last year's second quarter. Within GMS, our process solutions business grew about 40% over last year with the inclusion of the pro act data business acquired in March of 2002.

Control systems' second quarter operating earnings were $93 million, up 15% from the $81 million reported in last year's second quarter, primarily due to the higher volume, particularly in the lodgics business. Return on sales was 11.2% for the quarter, compared to the return of 10.8% in last year's second quarter. Now turning to power systems, power systems' revenues were $175 million, down slightly from last year's second quarter sales of $176 million. Electrical or motor sales were down 6% while mechanical sales were up 6%.

Our systems had operating earnings of $16 million in the quarter, compared to $12 million last year, primarily due to the benefit from continued cost reduction actions and favorable product mix. Return on sales was 9.1% in the quarter versus 6.8% in last year's second quarter. Now looking at FirstPoint contact, FirstPoint contact had second quarter revenues of $24 million, down from the $33 million reported last year. Operating earnings were break-even compared to last year's second quarter earnings of $1 million.

Now some other Toms note for the quarter, general corporate net expense was $14 million, compared to $16 million last year, primarily driven by lower corporate staff costs. Interest expense for the quarter was $15 million compared to $17 million last year as a result of reduced borrowing costs. The effective tax rate for the quarter was 25%. The tax rate this quarter was below the 30% projected rate due to the use of loss carry-forwards on the REJ transaction. Diluted average shares were $190.4 million for the quarter and outstanding shares of March 31 were $185.3 million.

Now looking at the six months year to date results, revenues for the six months were $2,013 million, compared to 1,897,000,000 last year, an increase of 6% over the first six months last year. Segment operating wrerngs $203 million, compared to $174 million last year, an increase of 17% over last year's first six months. And net income for the first six months was $91 million or 48 cents per share. For comparison purposes, last year's income from continuing operations before an accounting change was $87 million or 46 cents per share. Now, including the FAS 142 charge and the results of discontinued operations last year, the company reported a net loss of $18 million or 10 cents per share for the first six months last year.

Now looking at the preliminary balance sheet, cash was $296 million, down $11 million from last quarter. Debt, both long and short-term, is reported at $922 million, down $8 million from last quarter. Our debt to total cap ratio is 36%. Also as noted in our press release, we retired $150 million 6.8% bond that matured on April 16, 2003, using cash and commercial paper borrowings. Shareowners equity was $1,633,000,000 at the end of March, up $21 million from last quarter. Book value per share was $8.81, up from $8.72 at the end of December.

And finally, free cash flow was $70 million for the quarter and $159 -- $159 million for the first six months, compared to $102 million for the first six months last year. That concludes the summary of the quarterly results. Now over to Michael Bless for his comments. Mike?

Thanks very much, Tom. Thanks everybody for joining us this morning.

The team here is pretty pleased with the results that we just turned it this quarter, especially given the environment out there. I'm going to give you a couple quick highlights of the quarter, a little more color on what Tom said, then we will get right to the questions. As you've had a chance to see, if you had a chance to peek through the results, they came in generally in line with what we had been expecting here over the last calm of quarters and frankly, generally in line with what we've been seeing here over the last quarter or two. Sales growth, again, Fletch line with the expectations that we've had since the beginning of our fiscal year, frankly the end of last fiscal year as Tom noted, sales in the quarter were up 7% on a reported basis versus a comparable quarter of last year. Of that 3% from currency translation, so, 4% excluding the benefit of currency, obviously the currency impact is principally the weakening of the U.S. dollar against the euro.

As many of you recall, since we started talking about this year in November of last year, we've been expecting sales growth in the 2.5 to 4% this year over last year and so far as you can see, we're trending pretty well in line with that expectation. Obviously, I want to point out that the year-to-year growth will start to moderate as we go through the balance of this fiscal year, assuming that conditions remain relatively scant, our markets and I will talk about the outlook hear in a couple of minutes. Profit trends continue to be very good. We're on track to getting back to the kind of margins we expect out of this business and know we can produce in a more typical economic environment. And as Tom pointed out, we had another terrific quarter in cash flow.

The company's financial profile remains really strong. I will address that here with a couple of comments in a minute. A couple more comments on control systems and power systems before I get to the cash flow, you've had a chance to look at control systems, resulting up 7% for the quarter. Excluding the benefit of currency translation and frankly that's a little better in control systems than we had been expecting over the last couple of months. From an end market perspective, there's really been no change in the conditions in our end markets since we talked to you the last couple of times.

Let me pars that through just a little bit to remind you where we've been and continue to be. From a relative over performance standpoint, I really would underscore that word relative, but from a relative underperformance constant point, the two markets we're seeing decent growth in continue to be automotive and pharmaceutical and biotech. Automotive in specific is a little bit of a mixed market, as it relates to the big three U.S. manufacturers, as everyone well knows, their spending patterns have been stagnant at best. On the flip side, in the so-called transplant market, those foreign manufacturers -- nonU.S. manufacturers, manufacturing America Onlines in the continental United States, they've continued to spend significantly to build their market share here in the United States and we've had some excellent, excellent success amongst these manufacturers, including some very meaningful new Greenfield plants that they're building.

I will stop and note one particular order that we just received here over the last month, which is quite meaningful for us, first, it's a very large order for our company, numbered in the tens of millions of dollars. That order will deliver over the next six to eight quarters. In addition to the size, the reason it's meaningful is that we won the entire plant, let me tell you exactly what I'm talking about. As those of you know who follow the company, our traditional strength has been in discreet applications, so, the body and the assembly side of the automotive plant, where discreet control, the traditional PLC business is the dominating control architecture.

The other side of the plant, the so-called power train side of the plant, that's machining, engines and transmissions and things like that, that -- that side of the plant uses motion control as the principle control architecture and as most of you know, this company had not been as strong on the motion side as we have been frankly dominant on the discreet side. Due to the strength principally of our new logics architecture, the motion logics and the fact that motion logics obviously intergreats seamlessly to the rest of the logics architecture, we won the entire plant, which is a huge win for us, not only because it shows the market we can take an entire plant, obviously it will be a great reference account for us once it's up and running, but lastly, as you can see, it meaningfully increases the available market for us in a typical automotive application.

So, it's a great win for us. I can't talk about the customers quite yet, but hopefully here we will be able to do that over the next quarter or two. Moving along in pharma and biotech, again, strength in those markets driven by our profits logics and pro pack businesses, pro pack is an acquisition we made last year. Those are upgrades and modernizations and retrofits. But frankly, a couple of meaningful Greenfield plants being built both on the continental United States and in Puerto Rico.

Other markets, really no change. Food, beverage, oil and gas continue to be flattish, up a little bit as they've been since the beginning of the fiscal year and the other markets, paper, metal, things like that, I'd say flattish to down a little bit, but notably, we're not seeing the significant decreases in those markets that we were seeing over the last couple of years, so, a little bit of stabilization in those markets. Turning outside North America, as Tom detailed, I won't say much more. We had terrific performance regionally.

Europe was up a little bit year-over-year despite obviously very difficult economic and geopolitical conditions on the continent. Given, obviously, the continuing environment over there and frankly a little bit of softening recently in our incoming orders rates, we're continuing to watch the region very closely, but are very pleased with the performance, especially given the environment. Similarly, Asia, Latin America, up both in the mid-20%s, including translation. Like Europe, we're we're watching the regions very closely.

Latin America, almost to a country deteriorating economic conditions on that continent and obviously Asia, while the economy's are generally stable, one or two instances of deterioration in economies, places like North Korea and the obvious recent health scares there have us watching the regions very carefully. Order rates in those regions in the last 60 to 90 days slowing down just a little bit. Back in North America, our inventories and our distributor channels remained absolutely flat the past quarter. They've been flat since they hit a bottom about six quarters ago. We've seen no building of stock in the channel and inventory remains quite thin. Obviously that helps convince us that once demand -- end market demand picks up here a little bit, we will see it quickly and meaningfully.

Lastly, I want to just stress, that we continue to see performance here above the performance in the underlying markets, driven by market share gains. Gains both in traditional markets, which we've long-served and gains due to new products services in markets we have not traditionally been the leader in. And obviously gratifying for the team here and they will continue to, obviously, keep our heads down, despite the environment. Turning quickly to power systems, as Tom detailed, just one in the team down there had a terrific quarter. Sales above flat with last year.

Power systems, I would note, also, out performing its markets, gaining important share, both in the dodge mechanical channels and with some very important major motor Power systems, I would note, also, out performing its markets, gaining important share, both in the dodge mechanical channels and with some very important major motor OEM accounts. accounts. You've seen profit up nicely from the comparable period to last year, due to continued productivity in cost reduction actions by the team down there and frankly, as you've seen, we had a quarter this quarter in power systems that was skewed more toward the mechanical business, obviously higher margin than the electrical or motor business. Quickly across the rest of the company, a very good performance, corporate expense continues to trend below last year as Tom detailed and as he noted, interest expense also down. We had no commercial paper issued during the second quarter.

Company's financial condition, as I said, remains very strong, cash flow, if you had a chance to look at the cash flow statement, came in at $70 million for the quarter, that's versus net income of $49 million, so, again, good performance. Receivables and inventories continue to be below September 30th levels. That obviously is meaningful as sales have grown significantly since then. As many of you know, working Capital Management has been a big focus for the management team here over the last couple of years and obviously it's paying real dividends.

Cap Ex did accelerate in the second quarter as we expected although we're continuing to trend a little bit below last year and as Tom noted, we've continued to purchase stock at a pretty good clip through the quarter and made two modest-sized but strategically really key acquisitions during the quarter that you see in our press releases on both the wide Mueller business here in North America, it's a German company we've had a relationship with for some time that really furthers our IEC industrial controls product business. And the underwave business, which is a great fit with our GMS business, some great capability in that business. Tom noted we repaid our debt issue at maturity last week, basically funded out of cash. We borrowed a little bit of commercial paper, just to fund mid-month peak borrowing levels, but will be down and out at the end of the month. And therefore, all other things being equal at the end of this quarter, our debt to cap would be down in the low 30% versus the mid-30s where we've been for the last couple of years. Before leaving the balance sheet and related items, I want to note quickly the action that Standard and Poors took last week or the week before, Tom, I guess last week.

As many of you saw, we were one of a group of companies that they analyzed as it relates to pension obligations and they did move the outlook on the company from stable to negative. They didn't put us in credit watch, obviously didn't downgrade us like they did with many other companies on the list. As many of you know, we are a notch above -- with S&P, a notch above Moody's as it relates to our senior debt rating. We're a straight-A at Standard and Poors and an a-3 at Moody's. The pension issue is one we've given enormous attention to, obviously well before the S&P action.

This past winter, we completed an exhaustive study with our actuaries on the pension issue. For the purposes of the analysis, we used very, very conservative, if not worst case assumptions, as it relates to things like actual rates of return on the pension assets and discount rates on the liability. I hesitate always to say worse case in this kind of environment because one never knows, but we used a very, very conservative assumptions about future performance over the next couple of years and interest rates. And the results of this analysis told us that even under the current levels of free cash flow, assuming for analytic purposes that free cash flow didn't grow, we can easily and comfortablely make required pension payments during the next five years, even assuming we continue our modest share repurchase program and modest acquisition activity.

Now, obviously, if we found a large acquisition, we'd have to, number one, curtail somewhat our share repurchase program and it was a very large acquisition, we'd have to find a creative way to do that. There's nothing remotely close to that in the pipeline now. Under the activity we're seeing now, we can easily defeat any kind of pension liability we have here going forward, under any reasonable assumptions.

On this year, we're not required to make a pension contribution in fiscal '03, but given the strong cash flow to date and other factors, we're considering making one. If we did make it, it would be during the third quarter, the quarter we're current find ourselves and we continue to think that something like a maximum of $50 million would be a good number. So, we will make the decision over the next 60 days or so. Bottom line, obviously pensions are an issue for every company like us that have matured benefit programs, but it's one that we understand well, number one, and number two, one with which we can comfortably deal.

Lastly, the outlook for the rest of the year, as you've seen in the press release. Conditions in our markets have been relatively stable over the last couple of quarters as we've been talking to you since Q4. We've been out there as we are all the time, obviously, talking with our sales force, with our distributors and other channel partners and frankly, most importantly, with our customers. And at this point, given everything we see and obviously all the economic data out there, with see nothing for a meaningful change in current conditions, either up or down in the near-term. We're watching markets in Europe and Latin America very carefully. Our best estimate is for a continuation of these trends for the balance of the year and in this kind of environment, we remain confident that we can deliver the $1.10 we've been committing to you since the beginning of the fiscal year.

Tom, with that, I think I'll close it out and I guess we can take some questions.

Okay, operator, we'd like q-and-a.

Thank you, gentlemen. Our question and answer session will are conducted electronically. To ask a question, press the star key followed by the digit 1 on your touch-tone phone. We will come to you in the order that you signal.

If your question has already been asked and answered, please press the star key followed by the digit 2 to remove yourself from the queue. If you're on a speaker phone, be sure your mute button is disengage gauged so your signal can reach our equipment.

And for our first question, we go to Dan with Deutsche Banc.

Hi, good morning, guys.

Hi, Dan.

You said you thought your inventories at the distribution level were basically flat sequentially. How would you describe the level of customer inquiries in the quarter?

Dan, it's high, it's been high, especially in the: Let me take a giant step back, the areas of the business where we can track your question is a good one, customer inquirery, proposal requests, however you want to term it are in our project businesses. It doesn't constitute a big part of the company, but a meaningful chunk.

In those parts of the businesses, frankly, quoting activity on our part in response to actual requests by customers has been quite high now for a couple of quarters. Dan, it remains high. It hasn't increased or decreased measurabley. So, in normal -- in a normal kind of market environment, we would say, gee, this level of inquiry is -- is a signal that things are pretty darn good. The only caveat I would make is this condition has existed for a couple of quarters. People are inquiring, just not signing enough purchase orders.

So, the demand or the pent-up demand or whatever you want to call it, perhaps; there, but they're just waiting for the right -- I don't know what you want to call it, economic conditions or signs to pull the trigger, I guess?

You got it.

Absolutely.

We get all the way from -- and a lot of these jobs -- frankly this is true across our company. In power systems, control systems and in FirstPoint contact, as well. We get literally all the way down, we've negotiated the contract and gotten all the way down and it goes to whoever in the customer base has a delegation to sign away and that's where it gets stuck. So, activity is high to your point, inventory in the channel is absolutely flat.

We -- we can track most of that inventory electronically. We're connected electronically to most of our distributors and by this -- by the end of this fiscal year, it will be to the great majority. I'm talking about the control -- the Allen Bradley channel now. So, we can see day-to-day, literally, what they have on the shelves. So, it's good data.

Okay. Last question, very quickly, you said that in the -- in the additional business development party of release that you did open up a facility in Shanghai?

Yes.

To produce what seemed like accessory-type products, buttons and switches, et cetera. When will this plant be, you know, up and running, fully operational? And is the reason for this plant to lower cost or is it to be closer to the growth in the market? What's the -- what's the strategy behind this facility?

Great question.

First question is it will be up and at least provisionly up, operational stt sometime in the next couple of quarters. Number two, what this is, Dan, I think we said it in the release, yeah, we did. It is an IEC push boton line. That's the international or Europe standard. These are products we adhere to for produced at a plant in Italy. Obviously, due to the differential in cost structures and most importantly, I will get to this in a minute, cost of sourced product, input products. We've moved it to China. So, that kind of answers, I think your last question.

The principal purpose, first purpose of this, was to lower manufactured costs to be globally -- continue to be globally competitive on an international scale of this product. It's not so much the labor content. You've heard us say before, especially in products like these, the labor input in terms of the cost of sales in these kinds of products are low for us, well under 10% of the cost input and frankly in many products like these, under 5%. It was our ability to source quality and low-cost parts in China. Along, obviously, with the labor savings that drove us to do it. Going forward, we will be designing next generations over there and then obviously the next phase of at least this product is -- goes without saying exploiting the local market.

Great, thank you.

Sure, Dan.

For our next question, we go to Mark Koznarek with Midwest Research.

Hi, Mike, Tom, how are you?

Good.

How are you? Pretty good. A question this automotive award, I wonder if you can embellish it a little bit more in -- and specifically what I'm looking for is dimension the increase in the opportunity heretofore about the body shop, you might have gotten "X" rates to improve it to 1.5 x or 3 x or 4 x?

It doesn't double the size, not 2 x, but pretty close. It's bigger than 1.5. I do not want to get more precise because I don't know specifically.

Okay. And then kind of associated with that, because it's now, you know, a reference project for you, the presumeabley you want to hit the cover off the ball and use that as a vehicle to capture more of these awards, should we be concerned about lower margin on this initial award as it rolls through the P&L?

No, one of the nice things about an award like this, if you will, although we deal directly with the customer when we bid it and all those things, we will see most of the sales here, again, in the future, it will deliver over quarters and quarters and quarters, go right through distribution.

So, where our margins, as you know, are generally pretty good. So, obviously we help our distributors help us get orders like this by being willing to negotiate off of our book or list prices. But if where you're heading is did we take a loss leader or something like that? The answer is no.

Not really that, I'm more concerned about -- because it's, you know, a first implemenation of a, you know, somewhat new technology you --

I see, Mark.

Are you going to put a lot of engineering resources.

I understand your question, I'm sorry. No, this is not a -- it's technology we've used before. Motion is installed. Motion logics is installed in a variety of place. So, there is really no technology risk here. Is was just notable in that was t was the first time in a major Greenfield automotive plant that we were able to really take that -- take the whole house.

Okay, and then the final lash on this horse that I'm whipping --

Whip away!

If you could just kind of characterize the pipeline in terms of other opportunities for programs like this over the next 12 to 18 months and compare it to the prior 12 to 18. Is it more or less the same? Or are there more opportunities out there?

I would say, Mark, it's more or less the same.

As you know, obviously it's -- I'd like to stress it fell a whole lot when business fell off now exactly two years ago. But -- but automotive for us over the last couple quarters to almost a year has been an underscoring of the word, relative underperformer. So, I'd say relatively consistent. There are a couple out there, we're pursuing them all and are confident on all of them.

Thank you, Mike.

Sure, Mark.

For our next question, we go to Richard Eastman with Robert W. Baird.

Yeah, just a couple of things. One quick follow-up on the automotive award. Was the IBM relationship important there? Did it come into play?

Rick, I don't know. I don't believe so.

Okay.

But I don't know.

Okay. important there? Did it come into play?

Rick, I don't know. I don't believe so.

Okay.

But I don't know.

And then what was the FX impact on the even margin of control?

Basically awash. As we've talked about before, maybe not in a whole context here, we have a policy of forward hedging with -- just with standard forward contracts. Our profit exposure there. The only profit exposure that we would have as it relates to currency translation is the fact that most of the products that we sell in Europe, just to get very specific about Europe, are manufactured here and then sold to our European operation. If we manufactured it all in Europe, there'd be no need even to hedge.

So, given the fact that most, not all, but most of it is manufactured in the U.S. and sold in Europe, we -- we lock in those rates 12 months in advance. Obviously it helped us when things were going the other way two years from now. This year, had we been naked, if you will, our profit would have been a little bit better, but the profit impact was basically awash, we don't hedge fully because of the way the accounting standard, FAS 133 works, you don't want to push it to the limit. You want an effective hedge program. But we hedge it pretty well.

Okay.

Okay.

How large -- or what's the annual run rate of the process solutions business right now?

Boy, it's -- it's under $100 million run rate right now, but getting pretty close to $100 million. It, on a current basis, it's about -- it's getting closer to $80 million, about $70 million.

Okay.

Okay.

And then just one last question, within the controls business, can you give us a sense of what the -- what the acquisition contribution was in the quarter?

From a sales standpoint?

Yes.

Sure. For profit, while I'm getting it for you, was relatively negligible. Sales quarter-over-quarter was about, yeah, about $10 million, Tom? About 1%, $12 million.

Okay. Okay. Very good. Thank you.

Okay, Rick.

For our next question, we go to Bob Cornell with Lehman Brothers.

Good morning, guys.

Hi, Bob.

A couple of questions, first of all, you know, with regard to the -- to the ramp in some of the logic stuff, I mean -- and the process solutions, too, I mean how much of that is not necessarily logics, but how much of the pull-through are you experiencing from Honeywell and their older plant scape, you know, product and now that they're new experon launch has a fair amount of Rockwell content. Are you seeing that at all in the big-number ramps?

No, we're not. And obviously you're correct, Bob, our hardware, our technology is embedded in experon and the older plant scape stuff but we really are not seeing, as you know, we've gone off in -- and developed our own technology here in processed logics and pro pack is our own acquisition. The Honeywell relationship continues to be an important one for us. It will be changing over time. Who knows how it will be changing but I wouldn't -- I wouldn't say it's a determinement in the growth we're seeing in the -- in the processed business generally.

Yeah. A follow-up, Mike, you know, you mentioned, I think, that on this auto contract that a lot of these sales were generally through distribution, you know, and -- and, you know, so, I'm wondering, you know, how are you building up your -- your direct sales, you know, feed on the Street account base here --

Great question, great question.

Sort of flush out which vertical markets you're looking at, how many feet on the Street do you have? How many Marquee accounts you're looking at? That type of thing.

Great question.

I will start with automotive and make a couple of comments. We have a group of people within our sales organization which we call industry sales that, are train killers, if you will. These are the guys who are the specialists in the applications and more -- most importantly have the relationship with the customers and are out around the world keeping tires, Keith Nosbusch, when we were really building up getting logics into the marketplace, Keith created a very focused group of high-level executives, run by one of our most experienced guys, to run our global automotive business. It was really -- we always obviously had a focus in automotive given the importance of the end market for us, it but it was an upgraded focus in terms of directly calling on senior level executives within the customer base around the world. These guys have done a tremendous job and have really pulled through a lot of the success we're seeing here.

In other markets, pharmaceutical is a good example. Food and beverage is a good example. Semiconductor is a good example. Water waste water. The markets you suspect we're diverting this type. In markets where we see growth. And we've got people out there. The real point of these people, Bob, and you're aware of the way we configure our sales force, we have lots of people out there geographically, these people's jobs are to leverage our sales for us, not to replace them, but to help the local sales people who have the relationships either with the channel, other channel partners like systems integrators or what not, it's to help leverage them. It's been a very, very successful effort.

You know, you said how many people we've got in the function now versus a year ago, can you give us an idea -- of how much more traction you got there?

It's in the couple dozens, Bob, it's not hundreds, it's in the couple dozens.

Okay, thanks, Mike.

You bet.

We go next to John Baliotti with UBS Warburg.

Hey, Mike, I wondered if back to the contract, the whole plant contract win that you had, I don't think you covered this piece of it, but could you give us a sense of how you won this, you know, sort of what you -- what you got across to the customer that I know you guys have talked about and ARC has talked about a return in capital to the customer and try to work through that with them and get them to, you know, use that as their guide post, but was that significant here or how did this contract come about?

John that, was significant, but the most significant piece of it is the integration costs or lack thereof. When you use logics throughout the plant. Not only in -- in terms of the start-up times, though, it is a quicker time to market terms of getting the system up and running. It's lower cost and easier programming because it's all consistent, less engineering time, less ongoing maintenance.

So, it's -- you know, I know it's a buzz word you hear all the time, but it's the total cost of ownership lifetime arguement we made to the customer that prevailed. Including, the first thing I should always say because it's the truth is, you know, the technological superiority is obviously just the ticket to entry here. If you can't prove to the customer your technology is as good as the next guy's, you know, you're out from day one, but at the end of the day, it's lowering -- lowering a customer's costs and getting them to market faster.

Okay. So, I mean, given the fact that Cap Ex spending still seems to be low for a lot of end markets, this is probably a nice surprise for you? At this point in the cycle.

I'm not sure -- well, let me say, we had known this was coming for some time because a project of this magnitude, they had put out for bid or at least started talking with potential suppliers some time ago.

Uh-huh.

Was it a surprise that we won the whole thing? Our sales guys were confident as they always are --

I meant more the timing of it given where -- the visibility in the economy, not the fact that you actually won it --

John, no, I'll tell you, these transplants are very serious about -- and you've seen what they're doing to the market shares of the U.S. manufacturing OEMs, they are going to continue to invest here. They see a high return and high growth in that investment. So, I'm not sure I'd characterize the timing as a surprise. We've seen it coming for some time.

And you mentioned something on the distribution side that the inventories still seem to be low. I don't know if you ever got anymore color on December. I know it's a couple of months ago, but was there any more color on what happened there, given that it was such a strong month and just -- maybe some people thought maybe distribution was picking up some inventory, but it doesn't sound like that was the case?

It absolutely did not, John. The water level was a little higher there than we expected it to be.

Right.

And really, you know, like I said, the inventories in the channel remained high. Our inventories, as you've seen, have remained relatively constant, down just a smidge.

Right.

So it's not in either of those. The answer is no, we don't have any more color.

Okay, Thanks. .

Okay, John.

Next we go to Michael Regan with Credit Suisse First Boston.

Hi, Tom and Mike. Control systems revenues, you know, continue to be much better than I expected and I think you've laid out in great detail why that is. But margins are coming in a little lower. Than I would have anticipated given the strong volume. Can you address, you know, where that is relative to mix and -- and as control logics grows in importance and continues to grow as quickly as it does, is that a big negative mix impact?

Good questions, Michael --

Wait a second, everyone else had great questions, mine was only good?

Michael, you got a good.

Damn!

I love it! I'm going to take No. 2 first, if that's okay.

Control logics, as Don said over and over again, dollars, sales per -- per unit lower than the OPLC-5, but gross margin now is -- exactly equal to this is the first quarter where it's been exactly equal to the PLC business. So, to the extent that the dollars are the same, margins should not be impacted. We have to sell a little bit more CLX, pardon me, control of logics, to -- to -- from a unit basis to equate to a PLC-5 sale.

And to answer your first question, they're pretty much, Michael, in line with where we're heading and expecting. Obviously, the currency impact this quarter dilutes the nominateor in the margin calculation, if you go through adding that back and taking into account even the acquisitions, it's right in the range that we expect control systems to show from a conversion of incremental sales to profits. Power systems was a little bit on the -- on the positive side of the normal range we see this quarter, but controls really right in the range we would expect.

Okay, and to follow up, you know, I may be sort of out of touch with your overall guidance, I apologize if I am, it feels like revenues are coming in closer to the top end of what you expected, which earlier in the year, I thought Don had suggested would lead to the higher end of the guided range, which was, you know, up in the 120 area --

No, sorry, Michael... Let me comment on that. The range that was equated to the $1.10 was 2.5 to 4% from the beginning of the year and we are at the high end of that range. Now, what we did say is that if things got a little bit better than that, we could get to the $1.20. If you look at the year to date results and if you were to, for what it's worth, back out the impact of currency translation and back out the impact of the acquisitions, which obviously we didn't plan at the beginning of the year, we're up 3%, six months over six months.

Gotcha.

That's exactly, actually, 3.0%. We're right in the middle of that range.

Okay. That does it.

Okay, Mike. Thanks. Great questions! [ Laughter ]

Again, if you would like to ask a question, please firmly press the star key followed by the digit 1. Next we go to Barry Haimes with Asset Management.

Good morning.

Good morning, Barry.

I know it's early kays since the kind of end of the War in Iraq, but I wonder if you could just give us any color if you've seen any difference in behavior, you know, in the couple weeks post-war, either more on crews coming in or some of those things that, you know are just sort of waiting on the shelf where the guys just called back aid sand okay, we're ready to go now. Can you freshen up the quote, we're ready to move? Or have you not seen anything since the war?

I wish we could say yes, the answer is no. We have not seen any change in behavior. As we said a couple of weeks ago, when we presented it at the Deutsche Banc conference, we didn't see a downturn either when war became, you know, certain or imminent or when, you know, bombs started to be dropped. We didn't see a downturn, we watch our daily order rates by business, by region, literally daily and we did not see, we kept looking for a drop and frankly expecting a drop. We didn't see one, but we haven't seen, now, since things look like at least the worst part may be over, we haven't seen any -- any large jobs that were on the shelf come off the shelf nor have we see kind of a general pickup in the activity trends that we've been seeing over the last 60 to 90 days.

Thanks a lot.

Okay.

We go next to Nicole Parent with Banc of America Securities.

Good morning, guys.

Hi, Nicole.

I guess just to follow up Michael Regan's question, Mike, is it reasonable to expect in terms of operating profitability, I guess, could you comment where you are with cost reduction efforts, relative to mix? I mean it sounds like we're tracking on plan, but should we think of the existing run rate that we've seen, I would say the trend is probably a little bit better in the second quarter than it was in the first?

Yes, Nicole.

In terms of sequential revenue and OP growth; that a reasonable way to think it things for the rest of the year relative to your cost reduction forecast?

Yes, yes, the second quarter was accelerated a little bit and we will continue, Nicole, to accelerate through the third and fourth quarters. I was about to say particularly in control systems, but in all businesses because power systems did also take out a bunch of costs at the beginning of the quarter. They did it on a, you know, Don likes to use the term, it's an excellent one, pay as you go basis, they're able to deliver on their commitments and still take the actions necessary to lower the water line.

So, you should see, you will see that continue to impact positively in Q3 over Q2 and then again in Q4. And that, Nicole, is one of the reasons why -- in the current environment, assuming things don't go up or down, why we're pretty confident on the $1.10.

Great, thanks. And I guess one follow you, you may have said and it and I may have missed it. With the logics business growing 10%, what's the splilt now between the old plcs and new soft logic stuff you had?

I did not say it but it's a good question. In the old quarter, 75% PLC, 25% logics.

And the 40% is the total of both of those or the soft logic?

Just the logics piece.

Okay. Thank you.

Okay, Nicole.

We go next to David with T. Rowe Price.

I apologize if I missed this, but could you talk about the service growth and what that was in the quarter?

No problem, David, I think Tom did say it, but was 12% for total GMS.

Okay. And the only other question I had was on the corporate expense. Is that -- it's been tracking a little below last year for the first two quarters of this year, is it likely to sort of continue at the $14 million run rate?

We, David, it has been tracking below, we believe we're confident it will ton track below last year. We generally, just because of the spending patterns, frankly in some of the nonstaff expenses that are housed within the corporate net line it generally builds sequentially throughout the year, so, I could see it increasing a couple of million dollars from the current rate in the third and fourth quarters, it will continue to be below last year.

Thank you.

Okay, David.

Next to Zach with Gates Capital Management.

Yeah, Mike I wondered, I didn't understand something, you had $296 million of cash at the end of the quarter. Why would you need dip into your commercial paper to repay the $150 million of 6.8% notes?

Good question, Zach, of that, about $300 million, about half of that is overseas and funds our international operations. Therefore, while we're always working to bring cash home, we brought a mess of it home last year. Consider that off limits for doing something like this. It truly funds our international operations.

On the rest of it, what our cash flow patterns here in the U.S. are very predictable. Principally because of the way that control systems invoices and gets paid by the Allen Bradley channel. And due to that, we can predict with almost pinpoint accuracy our cash flow needs, our -- our liquidity during the -- during a month. That liquidity reaches its higher low depending -- I would call it low, in the middle of the month because we just invoiced the AB channel and they don't pay us until the 25th of the month. Sometimes we have to dip into CP just to fund that monthly need and then as all paid off by the end of the month, which it will be.

Right.

So, so what -- what -- what portion of the -- if 50% is overseas and you can't repay it all at any given moment, what is available for -- what portion of that would be available for say acquisition or you know, after this repayment? How much of that -- how much of your cash would be available for acquisition or some other --

That's a fair question. I would say think about it this way, 300, 150 overseas, about -- the -- the U.S. cash, if you will, the additional 150, we basically use that to retire the bonds. So, in terms of liquidity in the system right now, we're, you know, either -- you know, plus a little bit or about flat in terms of -- of cash in the system. So, any meaningful acquisition -- we'll continue to be able to just out of available cash flow after dividends and share repurchase, to be able to make the kind of acquisitions that we've been making here on a quarterly basis, but anything more meaningfully than the kind of spending you've seen, we'd have to go up and relever the company a little bit. We will be relevering from a much lower leveraging ratio than we've been at for a couple of years.

Understood. And you said there are no -- no major acquisitions in the pipeline, can you talk about your pipeline over all?

It's -- it's thinner, I'm sorry to say, than it's been -- I was going to say at least for the last couple of years, certainly over the last year, it's pretty thin right now. I -- you know, we just talked about this the other day internally. I'm not sure it's indicative of any meaningful trend. We've just prosecuted it, the couple that were in the funnel, some we completed as you saw, some we decided not to do and at this point, there is just not a lot out there, although we're looking at things all the time.

Okay. And then one quick last question, on your working capital -- on your working capital, you've done a great job in the first two quarters of not increasing at any meaningful capacity at your EBITDA is increasing year-over-year. Is the third and the fourth quarter, will you see any -- any, you know, big changes in working capital? Or will you continue to see it moderate as far as the net level?

Zach, consistent with the guidance we've given, again, sales staying relatively flat, you ought to see it -- expect for us to be able to keep it at these current levels. I hope that -- I'd like to say that we'll see it going up because business is going to increase more than we had planned. But consistent with the guidance we put out there, it ought to stay within these kinds of levels.

Great, thanks a lot.

Okay.

And ladies and gentlemen, due to time constraints, our last question will be a follow-up from Mark Koznarek with Midwest Research.

Thanks for taking this other one. I've just got some green eye shade kind of details, Mike and Tom. The tax rate goes back to 30% for the rest of the year or stays at the average of 27?

30% for the rest of the year.

Okay. And then if you make that $50 million pension contribution, what kind of impact is that have on the P&L because your-then pension expense would go down.

That's -- Mark, that's -- that's absolutely right. Our pension expense would go down. The way it works, it would not go down until the beginning of the next fiscal year. So, the way FAS 87 actually works is we use a June 30 valuation date for our pension liabilities and to project -- and to -- to calculate the income on the pension asset and that does not begin to accrue until the beginning of the new fiscal year.

Okay, what would that Delta be?

Whatever we put into the plan times the estimated rate of return that we use of 8.5%. Unless we change that 8.5% next year. So, if it -- you know, do the math, about $4 million.

Okay. And then finally --

I'd like to to --

The mix in the power side of the business; that -- would that be skewed, considered skewed more to mechanical right now or is that pretty normal that we could count on margins sort of more or less at this level going forward?

Yeah, let me -- and I'll answer that in a second. Let me follow-up on my answer to your last question. The only other thing note is obviously the $50 million we put in there would be $50 million we wouldn't have doing something else like earning interest on cash now, interest rates, obviously, on cash investments aren't particularly high right now, so, obviously the impact wouldn't be great, but it's not free money, if you will.

Yeah, sure.

The answer to your question is an excellent one, and the quarter was skewed towards dodge or mechanical rotor this quarter. That did drive the margin to a higher rate than it would normally be this quarter. Not markedly higher, but, you know, maybe 100, 150 basis points higher than it would are been in a more normal mix.

Thanks, Mike.

Sure, Mark.

And ladies and gentlemen, that clues the question and answer phase of our call. Now back over to Mr. Tom Mullany for any closing comments.

Thank you, operator. I just want to thank everyone for joining us today. I appreciate your attendance. Thanks very much.

Thank you. Ladies and gentlemen, that concludes today's conference call. At this time, you may disconnect and we do appreciate your participation.