洛克威爾自動化 (ROK) 2003 Q3 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's call is being recorded. Later in the call we will open 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 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, operator. Good morning everyone. Welcome to Rockwell Automation's quarterly conference call. I am Tom Mullany, Vice President and Treasurer and on the line with me today is our Chief Financial Officer, Mike 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 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 third 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.

Third quarter net income was $128 million, or 67 cents per share. This includes a tax benefit of $69 million, with 36 cents per share for the settlement of a federal research and experimentation credit refund claim. Excluding this tax benefit, net income was $59 million, or 31 cents per share. Last year's third quarter income of 90 million or 47 cents per share, also included the following items: A tax benefit of $30 million or 16 cents per share from the resolution of certain tax matters for the period 1995 to 1999, a tax benefit of $4 million or two cents per share for the reduction in the fiscal 2002 effective tax rate from 27 to 24 percent, and income of $5 million which was $4 million after tax or 2 cents a share from a favorable settlement of intellectual property matters.

Excluding these items, last year's comparable income was $52 million or 27 cents per share. Revenues in the quarter were $1 billion $33 million, up 4% over the last year's third quarter revenues of 995 million. Now looking at the third quarter results for each of our business segments, Control Systems revenues were $824 million, up about 5 percent over last year's third quarter sales of 788 million. Excluding currency translation, sales were essentially flat with last year. Controlled systems U.S. sales in the third quarter were down about 5% from last year's third quarter. Now, excluding translation, Control Systems international shipments were up 7% versus last year. The breakdown by region is as follows: Shipments were up 14% in Canada. They were flat in Europe, up 9% in Asia Pacific, and up 21% in Latin America.

Now, looking at these same numbers on a GAAP basis, which includes the effective currency translation, the breakdown is as follows. Sales were up 27% in Canada, up 23% in Europe, up 15% in Asia Pacific, and up 1% in Latin America. Our integrated logics architecture business increased by about 22 % over last year, while our process solutions business, which is within our GMS business, grew about 20 % over last year. Controlled systems third quarter operating earnings were $103 million, up 13% from the 91 million reported in last year's third quarter, primarily due to the continuing benefit of cost reduction actions. Return on sales was 12.5 % for the quarter, compared to the return of 11.5% last year.

Now looking at power systems. Power systems revenues were $180 million, up 1% from last year's third quarter sales of 178 million. Electrical or motor sales were down 2%, while mechanical sales were up 4%. Power systems had operating earnings of $15 million in the current quarter, compared to $15 million last year. Return on sales was 8.3% in the quarter, versus 8.4% last year. FirstPoint contact had third quarter revenues of $29 million, flat with last year's third quarter. Operating earnings were break even compared to last year's third quarter earnings of $1 million.

Now, some other items to note for the quarter. General corporate net expense was $17 million, compared to $9 million last year. Corporate net this quarter includes $2 million related to the bankruptcy of a sub-tenant in a leased facility. Last year's corporate net also included income of $5 million related to the settlement of an intellectual property matter. Interest expense for the quarter was $11 million, compared to $17 million last year. This is as a result of the retirement of the $150 million 6.8% notes that matured in April, some lower short-term borrowings and the benefit of an interest rate swap. The effective tax rate for the quarter excluding the $69 million tax benefit was 30%. Diluted average shares with 189.8 million for the quarter and outstanding shares at June 30th were 184.8 million.

Now looking at the results of nine months year-to-date, revenues for the nine months were $3 billion, $3.046 billion, compared to 2.892 billion last year. An increase of 5% over the first nine months last year. Segment operating earnings were $321 million, compared to 281 million last year. An increase of 14% over last year's first nine months. Net income for the first nine months was 219 million, or $1.15 per share. Excluding the tax benefit this quarter year-to-date net income was 150 million, or 79 cents per share. Last year's income from continuing operations before accounting change was $177 million, or 94 cents per share. For comparison purposes, excluding a number of special items last year, net income for the first nine months was $121 million, or 64 cents per share.

Now, let's look at the preliminary balance sheet information. Cash was $126 million, down $170 million from last quarter. Debt, both long and short-term, is reported as $779 million, down $143 million from last quarter. Our debt to total cap ratio is 31%. As noted in our press release, we retired the $150 million, 6.8% bonds that matured on April 15th, using cash and commercial paper borrowings. Shareowner's equity was $1.700 billion at the end of June, which is up 67 million from last quarter. Book value per share was $9.20 at the end of June, up from $8.81 at the end of March. And finally, free cash flow was $48 million for the quarter and $207 million for the first nine months, compared to 224 million for the first nine months last year.

And again, as noted in our press release, on June 13th we made a voluntary contribution of $50 million to our primary U.S. qualified pension plan trust. That concludes the summary for 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. Good morning. Let me give you a little bit more color about exactly what happened during the quarter and then we'll move obviously to the expectations for the rest of the year. First and foremost, I'm happy to report that the company again solidly outperformed our markets this past quarter, both from an industry standpoint and a region of the world standpoint. Frankly, this quarter, that was more important than ever, as you've seen market conditions for the quarter, especially in the early and mid part of the quarter, were frankly a little bit weaker than we had expected them to be. And, let me give you some color on that. Obviously, as you're all well aware, economic indicators did turn down starting in March. Specifically, those indicators that have traditionally been relatively coincident with our business, and I'm obviously talking about the PMI, The Purchasing Manager's index published by the ISM, The Fed's Industrial Production Gauge and certain others.

Our business did start out typically weak in April. April, as many of you who followed the company for a while know, is generally our weakest month of the year for a variety of reasons. And May was a little bit better than April but basically on track and through those two months of the quarter, we were basically on track with our expectation. Again, our expectation was that Q3 over Q2 on a currency adjusted basis would be about flat sequentially. The business did come back at the end of June, frankly the middle and end of June. It did come back a little bit later than we had expected it to come back, based on prior experience. And for that reason the quarter did come in just a little bit below, at the top line. A little bit below our expectation as you've seen on a reported basis revenues were about flat. But on -- pardon me, on a currency-adjusted basis, they were down about 1%. So a little bit less than expectations, though not materially so. And that obviously delivered the results that we produced, that we reported this morning.

In this environment, we are really pleased with the company's performance. As Tom detailed and as you've seen, turning to control systems first, basically flat sales on a currency-adjusted basis. And on that flat performance dropped it up 13% on margins, 100 basis points ahead of the third quarter last year. It goes without saying, we are continuing to see the benefit of the continuing cost reduction actions that control systems has been taking on a regular basis throughout the year. Same in power systems, relatively consistent story as Tom detailed both sales and profit at power systems relatively flat, with the third quarter of last year. Couple of things to note in power systems. Mechanical business up just a little bit versus last year and motors down just a little bit. Each of them just about 1% up and down respectively.

We had a little bit of a mix issue within the motors business this year. The operating performance continues to be very good, plant performance and whatnot. But we had a little bit of a mix issue in that the mix in motors was a little bit skewed towards the smaller horsepower standard product type of motor and away from the higher margin custom configured motor product lines. For that reason obviously that dragged profit down a little bit, but the cost reduction actions in power systems continuing terrific performance on those actions, frankly more than made up for that and profits were about flat quarter over quarter. So again continuing very good performance at power systems, margins up in the 8.5% range, we're very pleased.

FirstPoint contact, just to touch on it very quickly, another breakeven quarter. Market conditions there obviously continued to be very difficult. I would note in FirstPoint contact that we had our largest orders quarter since 1999 in that business. FirstPoint contact booked $50 million worth of business in the quarter. And those are too early to tell whether that signaled any kind of recovery in this particular part of the telecommunications market, it will obviously help that business at the top line over the next couple quarters. There's some hopeful signs there. Bottom line, again, for the company, as a whole, the results were very gratifying, EPS up 15% versus last year on flat organic sales. And I would note as well that we continue to be on track with the expectations that we've had since the beginning of our fiscal year, just to remind you. Sales year-to-date up about 5%, excluding currency translation up about 2%, that's year-to-date, versus last year-to-date. Margin's 100 basis points higher and EPS up 23% year-to-date. So again, tracking still very well with the expectations we've had since we first laid them out last fall.

Turning to the top line a little bit, just to give you a little bit more color on what went on during the quarter. Again, as Tom detailed, about flat out on the currency-adjusted basis, but importantly some continuing very good performance in the businesses in which we've been centering our investment over the last couple of years. Tom talked about logics and process. Importantly as well, we notched some really, really terrific wins during the quarter, and let me detail a couple of them for you just to give you a sense of the breadth of the business and the areas in which we've really been putting some points on the board. We talked to you last quarter about the power train business, to remind you, we booked an important new order for a so-called foreign transplant manufacturer, that's building a green field automotive plant in the Southeastern United States. Just to remind you again, the importance of the power train business is it's one which Rockwell Automation has not historically been very strong.

On the power train side of the automotive plant, motion control versus the discrete control in the body and assembly side is the dominant control architecture. Obviously power train side means machining engines and transmissions and similar type of manufacturing operations. Down in that same plant, in the Southeastern United States, we booked an important follow on order, frankly, in GMS, a couple million dollars follow on order that is a terrific validation of the GMS strategy that we've been developing. The order was for MES integration, and what that is when we go in and help customers integrate their manufacturing systems up to their business systems. So, it was a terrific order. It's right in the heart of what we're trying to do in GMS and importantly it was a follow on order, and that we sold the product first in that plant, and then wrapped value-added services around them. Frankly the GMS sales cycle can go exactly in the opposite way as well, when we can obviously lead with the value-added services and have and then sell product into the same plant.

Just to note another important power train win during the quarter. This one for frankly a big automotive three manufacturer who is doing retooling for a new product. Importantly here this again validates our new strengths in the motion control area. It's a win we took versus the absolute market leaders in that area. And so we really are convinced now and the marketplace has responded that we are a market leader now in the motion control area. As obviously the success of our motion logics, part of our integrated logics architecture has pushed us along in that important marketplace.

Let me talk about a couple others here, some markets of interest, and again in which we've been investing heavily. Biotech, this is obviously our process logics, part of our integrated logics architecture that's the dominant player here. We took a really important win here again versus the entrenched market leaders in the batch process space. This is for our Greenfield plant being built in the continent of United States.

I would note here a couple of, those who have been following us here for a couple of years, know that a couple years ago we basically had no position in the batch process area, there is very little position. And now as dictated obviously by customers giving us orders and also importantly by the third party market analysts who cover this industry, we're firmly in the top two batch process suppliers worldwide. Again we took this win versus all the traditional competitors, an important win here, and we see a lot of good activity coming down the pipe in the batch process area.

Let me mention just before I move on a couple up and coming markets for us that, while they've been growing historically, very strongly they've traditionally been smaller markets for us. They're now reaching a size that frankly they can be meaningful and have been meaningful for us and we see good activity going forward.

Let me just mention a couple of them. First, water and waste water. Principally an area in which we sell our power products, things like drives, motor control centers, electromechanical products. This is obviously an important market in developing regions of the world and we see a lot of opportunities here around the world over the next couple of quarters and in the next year or two.

Similarly, the marine market, not one that we've talked about historically about, but this is principally supplying control and power products and services, importantly, to the U.S. Navy and allied Navy's around the world. We have very high shares in this area. It's a very good business with good margins for us and we see terrific opportunities coming down the pipe.

Just quickly talking, turning to the non-U.S. regions of the world, Tom detailed the results so I won't go into it, but I would say we still like the results. We are extremely good given conditions around the world. Europe being flat, excluding currency translation, despite continuing very difficult training conditions in Europe. And continued terrific performance in Latin America, and particularly Asia. Inside of Asia, China in particular, where our business grew 30% this quarter over the same quarter last year. So bottom line, again, importantly we feel like we continue to solve the outperform markets around the world.

Lastly, in the U.S., market shares as reported very succinctly by NEMA, continue to climb here this past quarter. Turning to the balance sheet and cash flow, Tom really went through most of the data so I won't elaborate. I'll just point out that the company's financial profile continues to be extremely strong.

As Tom said we did repay our bonds at their maturity. Debt to cap now at 31 percent and net debt to cap at a little over 25%. Tom talked about the free cash flow, 48 million for the quarter and almost 100 million excluding the voluntary contribution to the U.S. Pension Trust. Year-to-date about $260 million, just shy of that prior to the pension contribution represents about 8.5% of sales and 170% of net income. So continuing very strong cash flow conversion. And importantly, the strong cash flow here is produced not only by the restrained capital spending that you can see, but by extremely good progress on working capital intensity and productivity.

As you know, it's an area that the management team has been really focused on the last year or two and the results continue to be very good, both inventory productivity and receivables days outstanding, for example, both improved 10% versus the same time at last year.

In addition to the strong cash flow production that we continue to turn in, we feel like we continue to use that cash flow in a very balanced way. And let me just go through the use of cash flow year-to-date. Again, taking that $260 million, 257, to be specific, year-to-date before the pension contribution, obviously 50 million did indeed go into the pension trust. About 25 million between went for some of the small couple of acquisitions that we've made so far this year that we talked to you about. And then the remaining $180 million was returned to our shareowners. About evenly split. It's about $185 million, about evenly split between common stock dividends and share repurchase.

So bottom line, even at the current earnings levels, we continue to produce cash sufficient, obviously not only to invest in the business but to give what we feel are very good returns, current returns to share owners and obviously to address the pension issue. Before we talk about guidance for the year, let me again just note the tax credit. Tom talked about it. It came in at 69 million, which was just a little bit above their expectations. We did record the benefit of it this quarter, as you know. Net due to the fact that we now have a firm agreement with the IRS on this.

Just to remind you, we talked about this last quarter, only a small portion of this cash actually comes to us in a relatively near term. Most of this gets put to the side, obviously continues to earn interest. But it gets put to the side pending the IRS's normal audit of the current audit cycle. They're currently working on fiscal years 1998 to 2001. And that normal audit should be done at the end of the 18 to 24 months time. So, obviously at the end of that period that cash with the tended interest, accrued interest comes to us. Or obviously it gets net against any tax liability that we would have at that time. But it goes without saying it's a nice way to start the audit cycle.

Okay. Turning very quickly to our expectations for the balance of our fiscal year. As we've said now, but business conditions in the third quarter were a little bit weaker than we had expected but frankly not materially so. And due to the excellent performance both top and bottom line, our results did come in about consistent with, to a little bit above the expectations that we had going into the quarter. As you know, economic data have turned up over the last 30 to 45 days. Not only general data, but obviously those indices that are more specific to us. You've seen, for example, the new orders component of the PMI has now been above 50 for the last couple of months. The factory component of the Fed's industrial production gauge has looked pretty good the last couple of months, and you saw the Philadelphia fed manufacturing index, that came out a couple weeks ago, that looked okay.

As I said, our business did strengthen towards the middle and end of June, and quite frankly July has continued quite strong. Generally, after the end of the quarter, we would start a new month relatively weak. And July in particular, July and August, along with April, are traditionally our weaker months, obviously July and August for seasonal reasons. However, July has continued very strong as June ended, and we haven't seen a dip yet as is customary at the beginning of a new quarter. Commensurate with that, we have seen a very nice increase in customer quoting and related activity over the last 30 to 45 days.

As you've remembered hearing us talk, since the end of the recession now, about a year and a half ago, quoting activity has been quite high. It just hasn't translated into enough signed purchase orders. That high level of quoting activity has increased even further over the last 30 to 45 days as reported by both our distributors and our people out in the field. And in some certain pockets, we are now even beginning to see some of these orders that have been on the shelf or potential orders that have been on the shelf now for the last year, year and a half, beginning to be let. Certain markets like oil and gas, cement aggregates some of the other natural resource based markets. We are seeing some of that so-called project activity beginning to be let here.

Given all this data, both internally and externally, we're confident at this point that the slight decrease in trading conditions that we saw Q3 over Q2 has not continued and won't continue. And frankly we even see some hopeful signs now that perhaps we are looking at a slight upturn here over the next couple of months. But only time will tell. Therefore, until we can verify that some of these data points are indeed a trend, we believe it's prudent to plan for a flattish quarter again sequentially here, Q4 over Q3, and to leave our expectations for fiscal year 2003 unchanged at $1.10 a share, obviously excluding the tax benefit.

And with that, Tom, I will turn it back to you. Maybe we can take some questions.

Thank you, Mike. Operator, can we now open the lines up for questions? I would ask everybody to try to keep their questions to one or two related issues, so we don't occupy the entire time.

Thank you, gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question, please firmly press the "star" key followed by the digit "1" on your touch-tone telephone. We will come to you in the order that you signal and if you find that your question has been asked and answered before you can ask us and you would like to remove yourself from the question roster, please firmly press the "star" key followed by the digit "2". Also, if you are on a speakerphone, please make sure that your mute button is disengaged, so that your signal can reach our equipment. Again, if you would like to ask a question press the "star" key followed by the digit "1".

And for our first question we go to Mark Koznarek with Midwest Research.

Good morning, Mike, Tom. Question for you on the top line, in particular logics, you said it was up 22%. But last quarter it was up 40%. And can you talk about whether there's anything unusual going on or is there some excitement petering out of that product.

Pardon me. Excuse my allergies. Mark. Good question. It's obviously one that we focus a lot on. We look at the logics numbers at a very low level of detail, market by market, region by region and all of that. And you're right, 40/20. We feel like the underlying growth rate there is still around 30%. Obviously as we've continued to say, as logics becomes a bigger piece of the total control architecture obviously versus the more traditional PLC 5 and other products that growth rate will start to trend down a little bit. But we still feel like that, that hasn't happened yet. It's just an anomaly, this quarter. Given the size of the business, a couple million dollars any quarter, Mark, can make the difference between a couple percentage points of growth. So, an answer to your question, no and no change out there in logics.

Right and then related would be margins for the controls business, which I thought was pretty impressive sequentially. Because if you back out the currency gain, the currency capture on revenue you see that, at least by my numbers that sales were down 15 million versus the second quarter. But your income was up 10 million. And so, that looks like a great improvement. Is there unusual mix there or is that something that you guys think you can keep bringing down to the bottom line?

Good question, nothing unusual at all Mark, and but the answer to your second part of your question is kind of. What I mean by that is the cost reduction actions that we've taken throughout the year, as you remember us saying, we're doing them every quarter. And it's just something that's become a part of the way we manage the business. That having been said, as you remember back when we were talking about the first quarter, fiscal quarter this year, we did do a disproportionate amount of it in the early parts of this year, just because frankly as you remember at the time we were concerned about the prospects for general economic growth this year. So Q3 over Q2, you did see an incremental amount of those cost reductions fall to the bottom line. And Q4 over Q3 it won't be, and going forward, it won't have that same kind of effect.

You mean it won't increase but it will maintain itself at this current level?

You got it.

Great. And one final thing, the mix between U.S. and international and revenue is what in this quarter?

Let us get that for you, Mark. It's been running about 60/40. And I would be surprised if it were more than a digit or two off of that. Let us get back for you. And we'll -

That's close enough.

Yeah.

Thank you.

For our next question we go to Dan Khoshaba with Deutsche Banc.

Hi good morning guys.

Hi Dan.

The examples of some of the new pieces of business that you won were, sounded pretty much like they were Greenfield projects or the retooling of machine lines, which is pretty exciting. Are you starting to see more interest in those types of projects versus just your normal replacement type business?

Yes, I mean, Dan, that's a 64-dollar question. And as I alluded at the end of my comments about expectations, we are and grudgingly I guess I'd underline here, trying not to sound too gloomy. And it's not at all. We are seeing some areas where over the last year or two it's really been just replacement or MRO type business. Now, to go back to your question, and a couple of the Greenfield areas that we mentioned like biotech and even the retooling of some of the automotive stuff based on new products that those manufacturers are bringing out. We had seen some of that in the last couple quarters. That business has been there and it hasn't been any great guns, but it has been there. And that's continued a little bit. But we are seeing a little bit more of it, the so-called project business, is the way we at least talk about it internally here. Incrementally this quarter. And prospectively over the last couple of quarters. But you're right, these couple wins that I talked about are nice Greenfield, especially the biotech order and the automotive, foreign manufacturer automotive plant down in the southern part of this country.

Correct me if I'm wrong, but there seem to be two advantages at least I can think of to those types of projects. One would be that they're probably larger, just in aggregate, absolute dollars, than simply replacing an Allen Bradley control somewhere, in terms of revenue. But I guess secondly they also incorporate a fair amount of service and engineering type of revenue opportunity. Is that correct?

You're correct on both of those. In the service and engineering, particularly, for example, Dan you are right on, for example, I talked about the information integration project that we took down at the automotive transplant plant down south. That business, in particular, is looking quite good over the next couple of quarters where we're seeing a lot more activity there. And most importantly and obviously it's good business for us. It's highly value-added service. And most importantly though I gave you an example in the automotive world, most of the strength in that particular business is coming in some of our strongest markets, consumer beverage, food, and so we feel real good about that business going forward.

Well, good job. Thanks, guys.

Thank you.

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

Yeah, actually the first question is, you talked about July being very strong. What does 'very mean'? 15, 20? 50?

No,no. Bob, it's very strong given our expectations for the first month in the quarter. As you know, normally, you know, we finish a quarter on a high note. And then new incoming order intake drops at the beginning of a new quarter. That's just the way our business flows. You've heard Don talk about that before. In July, to date, as of yesterday, business has continued not quite at the end of June's trends, but only a little bit below. And that is significantly, I think is an appropriate word. Significantly above where a normal first month in a quarter starts. So again whether that denotes a trend or not, we don't know, but so far through the month it looks pretty good.

Another thing, Mike, the companies have been giving a little bit of heads up on pension headwind for next year. You mentioned that you put some money in the plan so forth and so on, discount rate's down. I understand it's early, but would you have any comments about essential headwind in '04 on pension.

Sure Bob. Absolutely. Let me talk about what the cash component and earnings component. I don't know if your question addressed both but I'll address both. But obviously we haven't finalized any of these data yet; we're grinding through the actuarial calculations. From a cash funding standpoint as we said when we talked about this issue before, we are not required to make, we weren't in '03 and we're not required to make a cash contribution in '04. Though all other things being equal as you said discount rate is down, who knows whether that's a temporary thing or not, they're up, even since the end of our quarter here, June quarter, they're up ten-year note 40, 50 basis points, maybe 35, 45 basis points. We'll probably put in our plan for next year to make around the same kind of cash contribution, just to continue to chip away at it.

What you don't want to do, it goes without saying, is I - don't want to say over-fund because we're a long way from there right now, but a lot can change with 100 basis points of discount rate here. So we want to be pretty measured about it. So cash side, I think you can expect us to at least build into our plan for '04 to put in about the same amount. On the earnings side, absolutely, discount rate is down. Just to remind you, our discount rate was 7% for fiscal 2003 and we haven't finalized the numbers yet but rates, Moody's AA bond index, for example, is down in that point of time over a hundred basis points and so, you can probably figure out where we're heading there. And so, expense will be up in '04 just like it was up in '03.

What's it up in '03 -

It was up about 15 million bucks, Bob '03 over '02.

That appeared just a ballpark place to guess for '04 or '03?

It's probably, that kind of increment again is probably not a bad guess. But just like we did in '03. We'll build that in you're plans and deal with it. It's not something that we feel like we can't deal with at all.

OK I'll pass at this time. Thanks Mike.

For our next question we'll go to Michael Regan with Credit Suisse First Boston.

Thanks, good morning. Hey Mike, margins seemed a little weaker in control systems in the first quarter after you adjust for currency, they seem right in line in the good progress that you've been making, and now much stronger in this fiscal third quarter. I meant fiscal second quarter. Much stronger than the fiscal third quarter. Despite sort of lower currency impact overall. So, given that logics only grew kind of 20 versus 40, is that a positive mix shift from the sense that the other sort of core legacy products with much higher margins are sort of not doing worse relative to logics maybe did a little better. Is that part of the mix shift that we saw in the quarter?

No, Mike as we said in answer to a prior question standard margins were dead on flat. It really is just a cost reduction actions here that we started on the first quarter, did some more in the second quarter. As you remember, they were net negative in Q1. They were a little bit of a net negative in Q2 as we did some more. We did some more Q3, but the accruing benefit of obviously the earlier actions just overtook the cost here, and went to the bottom line. And so, no mix shift, absolutely not. And just to restate it again, on logics you've really got to be careful. I don't want to say it's a lot of small numbers, if the logics is a meaningful business, but on a quarterly basis, a point or two or three of growth is just not a ton. You know the current annual run rate of that business. So --

Right but the margin structure for that business, versus the core PLC business.

Actually, gross margins on Logics versus PLC right now are absolutely equal. There's no difference at all. They're within 100 basis points but fundamentally equal.

Same on operating margins?

Yes.

Okay. Thank you.

Sure.

Next we go to Nicole Parent with Banc of America.

Good morning, Mike.

Hi, Nicole.

Could you comment a little bit. You alluded at the end of your comments that oil and gas seem to be strengthening in July. Could you give us some color on some of the other end markets like consumer mining, pulp and paper and metal?

Sure. Absolutely. Let me talk about the end markets, Nicole, during the quarter, versus the prior quarter, and then I'll talk about perspective, I think was at the root of your question. As I said, as we said, we're basically flat on a currency-adjusted basis versus last year. And all of the markets, save a couple, which I'll talk about right now, were basically flat year-over-year. Oil and gas was one that was up significantly, double digits, probably about 20% above last year.

As you know, that's not a huge market for us. But it's a decent market for us. We make good money. Most of our activity in that market is -- well, its in two places, on the upstream side. It's in places like offshore oil rigs, is our main business on the upstream side, principally again power products. And then we have a terrific business on the downstream side, principally pipelines, but again not a big market for us.

All the other markets were generally flat for the quarter, Food and beverage may be up, a point or two probably closer to two points up. And then automotive versus last year was down a little bit, a couple of percent down versus last year globally. Other than that, just not a lot of movement up or down. Oh, one other I would note here is pharmaceutical and biotech, which is maybe up seven to 10 percent versus last year.

Perspectively, Nicole, we don't see a lot of change in any what I just said. We think oil and gas will continue to be pretty good, some good offshore business and pipeline business there. A little bit of strength in some of the mining, cement and aggregates business, continuing strength in pharmaceutical and biotech. Food and beverage up maybe a smidge, sequentially, a point or two, automotive flattish, so really not a lot of change.

And I guess in the comments in the press release, the softness in the U.S., I think you've talked about what you've seen demand coming back in July. Has there been any change in European demand at all as we move into July?

No, there has not. The European countries, frankly, finished June a little stronger than we would have suspected. And through July, as you know, you get some anomalies in Europe, in late June and early July. At least we traditionally have in terms of some advanced ordering before people shut off the lights for a long summer vacation. Although, as you know, Europe has started to do less and less of that and do more and more business like the rest of the world.

But Germany has continued weak but okay. Italy has continued pretty darn good, frankly. The UK has got some hopeful signs for us, frankly. Spain has continued very good. So not a lot of change.

Okay. And then I guess lastly, you mentioned a lot of nice wins in the quarter. Is there any way to put a dollar value on the orders and kind of a time frame; it looks like a lot of them are longer term?

Yes. Number one, as you know a big order for us is a couple million-dollar order and I wouldn't spike out an order in a context like this unless it was a several, several, several million dollar order. Most of the ones I talked about, let's see - will be over the next couple of quarters, the information integration one, clearly over the next couple of quarters. The motion logics one over the next maybe three or four quarters, the biotech plant, that's a brand new plant being built so that's probably over a little bit longer period of time, three, four, five quarters. None of them hit, Nicole, squarely in Q4. But it's a nice wellhead of business building.

Any thoughts on color as you look into '04 or when we should expect to get some guidance or clarity?

I think you'll see our normal cycle again this year, Nicole. As we go through our bottoms up planning, frankly starting right around this time of year and do our planning at the product line, country by country, in spades. Throughout August and September. And then brief our board in early November and then obviously externally give you guys our expectations at that same time. And we'll follow our same process this year. It's just too early to tell at this point.

Great. Thanks. It was a good quarter.

Thank you.

We go next to John Inch With Merrill Lynch.

Thank you. Good morning.

Hi John.

Is this quarter, your fourth fiscal quarter, if this was sort of more of a normalized economy your sequential flat guidance in terms of the EPS, how would that normally compare? How would the fourth quarter normally play out?

Yes. Good question. Our fourth quarter is normally, not materially, but normally just a little bit weaker than Q3 and frankly that's only because, as I said a couple times, two of the three months happen to be July and August. And it's just, to call it seasonal isn't using that word specifically correctly, but it's just a normal seasonal thing. So, in a normal economy, hard to tell what a normal economy means anymore. But in a normal economy, fiscal Q4 would be just a little bit slower than fiscal Q3.

Okay, to that point, Mike, September, is it more than half the quarter? I'm just trying to infer sort of how we think we should think of the trend lines by your comments in July.

Yes. I would say in a normal quote, unquote normal time, John, September could be half of the quarter, yeah. Maybe not quite -- pardon me. Let me correct that. Maybe 45 percent is probably closer to it.

Okay. My other question is just, you guys talked a little while about this increased quote activity. And again we're obviously not in normal times. But traditionally what's been the lag when you've perhaps isolated on a customer-by-customer basis or within a segment group, between the elevated quote activity and ultimately there being a translation into order?

Again, a normal time, it used to be relatively short, John, a quarter or two, where we'd see the -- you know you could really tell whether a request for quote from a customer was simply for information purposes, where we've had a lot of suspicion a year ago, five quarters, six quarters, even three or four quarters ago, a lot of it was just RFI, not RFQ kind of stuff, versus something that a customer, that he or she was really going to act on. And so, the answer to your request in a nutshell is a quarter or two. Now, again we'll see a quarter or two from now whether this was normal times or not. I'm not trying to be cagey here but that's where we are right now.

I understand Mike. How would you characterize the activity? You get the sense that customers are just shopping around, shopping for information, or are there serious buyers just waiting for the green light to push the button?

Incrementally at the margin we feel like, John, it's a little bit more of the pushing the button versus the information. But, if we had more conviction in that, obviously, that would translate into obviously our expectations near term.

Just one last question here. You guys talked about some great orders, some nice order wins. Were there any customer losses in the quarter or any bids that you just didn't emerge in the front seat?

No, as of right now, the important areas that we track -- I mean the answer is yes. There have got to be some out there that we didn't take. Unfortunately we can't take everything. But in terms of the big important industries and the important customers and the important orders that we track, John, no, they've either been delayed or we took them off the street.

Great. Thank you.

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

Mike, just a follow-up on the ((quota)) activity. Is there anything in the size or project orientation within that ((quota)) activity that gives you any insight going forward?

No, Rick, a good question, and we delved into that. It is a mishmash of stuff. It - and frankly I would say a lot of it, because the very large projects we've always had very good visibility on and the very large projects by their nature tend to be things that customers, I don't want to say have to do, but almost have to do. Tooling up for a new product or the consumer guys, beverage, new packaging, things like that.

Biotech is an industry where people are putting capital to work because of the growth prospects. So those we've always had good visibility and people have been doing them just because people have been at that level investing in their businesses. I would say I think an answer to your question, some of the increase here has been more of the, not the flow of goods or MRO type of business but just kind of the bread and butter projects that are more discretionary than the larger things. Again, that's what gives us some hope here that people are starting to get back to business here a little bit.

Okay, and then secondarily, when you went through the regional growth, I presume that the first number you gave was local currency. So in Canada we're up 14%. In Asia we're up 9%. In those specific regions, was it end- market driven or hardware driven? I'm just curious what's driving those.

I'll answer those two specifically. Yeah, Tom did give and we can do it supplementaly. I think we have it on the web. From the web site as well both side currency-adjusted and GAAP as reported. But I'll answer those two in particular. Canada, as you know the economy has been pretty good. Our business there -- we have a terrific business in Canada, just a super business.

Frankly if you can believe it even higher market shares in Canada than we enjoy in the U.S. Business there runs the gamut of projects, a lot of it is natural resource based as you would suspect. Some of it is automotive as well and some of it is just good consumer business, and so, that really had just been market growth there and market share. Asia has been just good end-market growth. Developing regions, developing businesses I talked about, a lot of infrastructure stuff, water and wastewater and other infrastructure related projects. As I said, we had another good quarter in China.

I don't want to say unaffected by SARS, but relatively unaffected by SARS. We feel that we kind of -- anything we missed in April and May we kind of caught up in June. Maybe a little bit of a lag that will slop over into the fourth quarter. But just good market growth there and continued good market penetration. We've been investing in Asia, and we think frankly with good returns.

Has the dollar helped us competitively or?

That's a great question and we spend a lot of time trying to -- it's impossible, obviously, to tangibly determine the answer to that question, so you end up doing it regrettably more anecdotally than anything else. We don't think yet in spades in North America. But we do believe that here over the next couple of quarters, assuming that dollar stays in the kind of Euro range that the Euro dollar relationship stays in the low 110 to the mid 110s where it is today. I don't know where it's today, 112, 113, something like that, that we could see some benefit from it. But I can't point to any tangible benefit we've seen yet.

Okay. Thanks. Very good.

Okay, Rick.

Our next question we go to Jeff Sprague with Smith Barney.

Thanks. Good morning, everyone.

Hi Jeff.

Most of the business-related questions have been asked. Let me kind of hit some numbers and house cleaning type things if I could.

Absolutely.

The language you used in the press on the swap sounds like maybe there was a gain. Is that kind of a FIN 46 mark-to-market or something like that?

No. Absolutely not. It's just a continued benefit of the swap. We swapped that $350 million O8 issue in October. And it's just every quarter we've continued to enjoy as reset, as Tom said, we had a little bit of incremental benefit this quarter, as LIBOR rates, as LIBOR rates came down a little bit. But no, no fancy accounting there, if that's what you're asking about.

Okay. And on the bankruptcy of the tenant, is that, that seems like kind of an oddity. Is that a customer also or does it just happens to be a facility that you're in and you're stuck on the hook for something?

You got it. It is an oddity. It's not a customer. It's an old facility of ours. We are -- we lease it obviously. We sublet it. We're out of it. We've been out of it completely for a couple of years. We sublet it to, actually to an UK company that went bust during the quarter. While they are still in there we renegotiated the lease with them. It's at a lower rate and it goes out there through 0 - I don't know - '09 or something like that. The way the accounting works obviously for it is you got to recognize the full impact of the lower lease rate, pardon me, today. So that was just kind of marking that whole remaining whatever it is, six, seven years of lease payments down to the renegotiated rate, added up to two million bucks, I'm sorry to say.

And on currency, was there any impact on the bottom line?

Yes, a little bit this quarter. Couple of million dollars, there was an impact on the bottom line.

And you hit the cash tax question a little bit when you were elaborating on the settlements, but can you give us any color then on kind of the near-term look for cash tax? I think the cash tax rate was in the mid to high teens for '02.

Yes. We had some anomalies there, as you know that the total effective tax rate, effective tax rate, I think you're talking true cash net of deferreds, the book income statement side, effective tax rate, was in the mid 20s for last year. I think it was 24% we came in at. This year we've been booking to an expected full year rate of 30. And net of the obviously the REJ transaction as we said in the release and the R and E claim, we're still looking at 30 for this year. And cash tax rates will be around there, maybe a little bit below with some ((defferrds)) but generally around, I think you can assume cash tax rates will approximate the book tax rate.

Okay. Just couple other little housecleaning items. Acquisitions, I guess, were slightly additive on the top line, can you give us any comment?

Yes. Very slightly this quarter. You know the activity this year-to-date hasn't been quite as high as it was last year. So it's a couple million dollars but it's a rounding error at this point this year.

One last one, on China. You look at the growth of 30%. Can you in any way characterize that as kind of, I don't know, organic growth, your feet on the street growing business versus kind of, I don't know, you know, organic growth, you know, your feed on the street growing business versus kind of pull through from the global accounts?

Good question. And I can't, I wouldn't even -- we can get that to you, Jeff. I wouldn't even try to guess because I'd be making it up as I sit here. But we can try to get that for you.

Thanks a lot.

Our next question would go to Quinten Nufer with Lazard Freres.

Hi gentlemen. Everything has been asked except for one other question I have and that is what do you expect the cap ex to be for the full year now?

Yeah. As you know we've had a budget for the year of a minimum of 125 and we're tracking well below that. I would say at this point that's probably a good expectation, trending towards probably the maximum that will come at, in at this year in the 125 kind of range. At this point for it to be much above that, I think is unrealistic.

Okay. Thank you.

We go next to Dacks Blasis (ph) with Gates Capital Management (ph).

I have a related question in the cap ex question. You know you are running at $25 million, how long is that sustainable for or if you bump it up a little in the fourth quarter, how long is that level sustainable for? And also what were the total amount of share purchases in the quarter from a number of shares perspective?

Okay, Tom will get the number of shares. Dacks, on the cap ex, as we've said before, what we call maintenance, and maintenance includes not only obviously maintaining the plant and equipment but things like environmental, compliance spending, runs in the 80-ish million dollars on an annual basis, maybe a little bit less than that at this point, maybe 75 to 80. And, so in terms of continuity of spending at this kind of rate, at the 100 million dollars annually rate, and it won't be as low as 100. We generally spend -- our spending trends towards the latter half in the latter quarter of our fiscal year.

We could, if we had to, continue to spend at this rate for some period of time. We're starting to see some opportunities here to put some capital to work. And so I think as long as we can show ourselves decent returns on that invested capital, we will start obviously to spend a little bit above the rate that we have been historically but in a pretty cautious manner. But answer to your question, if we had to we could spend at this rate for some time.

On the shares it's about 1.3 million shares purchased in the quarter.

Okay. And also can you illustrate exclusive of dividends what the use of free cash flow would be and if you're seeing anything on the acquisition side?

Exclusive of dividend, you mean after dividends?

Yeah, like what say 124 million of dividends for the year, then free cash flow after that, what would be the priority for that and what are you seeing as far as the acquisition environment?

As, I'll say one more quarter I've regrettably said at the last couple of quarters, the acquisition pipeline at this point is not as full as we would like it to be. And it's a lot less full than it was 12 months ago. And we don't know why that is. We continue to be interested in making that the kind of good, small to medium sized niche acquisitions that we've been making that have been great catalysts in certain areas of our business. You have seen generally M&A activity start to increase here at least in the public company sphere, and that usually is indicative of what's going to happen in the smaller and private company market.

Now that I think people have a little bit more confidence in their businesses. If they were intending to consider selling them at first place. But we would like to continue to make small and medium sized measured acquisitions. Other than that obviously investing in the businesses is critical for us, and we'll continue, as I said, to invest. Obviously this is above free cash flow, but invest in capital as it makes sense.

And then (inaudible) maybe where you're heading is return to capital to shareowners, we continue to think that the repurchase program is in a measured and balanced way, is a good use of cash to counter the dissolution from the exercise of options first and foremost. And, to give the shareowners, the opportunity to take advantage of that, if they choose to, so we would continue to do that going forward.

Thanks.

Next we go to Martin Seitzy (ph) with Neuberger Berman (ph).

I guess a couple of things since those questions have been asked, just to clarify. With the cashing in of the bonds and the swap, is 11 million per quarter a good number for interest expense looking ahead?

Yeah, I think, Martin, in the 11 to 12 is a good, assuming that short-term rates stay as they are. Obviously that will impact the swaps significantly, if the short end of the curve were to hedge back up. But for the foreseeable future, 11 to 12 is a good number.

Okay. Just as a reminder, what's the mix of fixed and floating rate now?

Well from a terms standpoint, it's all fixed right now. As you know, during the middle of the month, we will go into the commercial paper markets, just to finance mid month liquidity needs, but generally we pay it off all at the end of every month and certainly all at the end of every quarter, almost every month we've paid it off.

But as a practical matter.

As a practical matter after the swap it's about, it's 60/40. 55/45 we're aiming for somewhere between 50/50 and 60/40 and we are there right now.

That would be 60% fixed.

Correct. I think it's more like 55/45 right now.

The other question that I had is given recent tax law changes, are you considering changing the mix of how you're going to reward shareholders?

Yeah, Martin, that's a great question and we've done a lot of thinking about it. As of right now, no, you take a look at our dividend and we look at it very carefully not only as it relates to our particular levels of growth and capital intensity and whatnot, but versus what other companies in and around our states are paying. And we're still, we think on the, I don't want to say on the richer side, but probably richer side of the average share, with a payout a little bit above 60% on this year's earnings and the yield and the high two's and so we think, for the foreseeable future, the dividend is where it is. And we want to grow back into a more normal payout of earnings.

Now, normal obviously is a rearward looking definition and to the extent that other companies do increase there as attendant to the tax law changes, we'll be mindful of that. But for the foreseeable future, the next year or two, I wouldn't expect to see our dividend change.

Okay, thank you.

Okay and Operator, I think we have time for one more question.

That final question will come from Steve Sirrell (ph) with Cunning Asset Management (ph).

Yes, I was wondering since you did lower your cash balance to some refinance or to pay off that debt issue in April. Any plans to tap the capital markets, given still fairly low interest rates?

Yeah and that's a great question as well. Tom and I talked about that a lot especially, when the ten-year rate was down approximating 3%, we could have obviously issued paper almost through 4% ten-year paper and Tom is our crack treasurer, along with our crack IR guy would have loved to have been able to issue paper on that rate. If we thought we had a use for that cash, we would do it in a nano-second. We could still be with ten-year, in the four, what, 10 to 15 year range we could look at 5-ish percent ten-paper for this company. But to just tap the markets today and put the money on the balance sheet doesn't make much sense.

I know that some people do have the philosophy that you take it when you can get it kind of thing. While I think there's some logic to that, we just don't have those kind of major expected uses for cash over the next couple of quarters to year or so. And so the long winded answer to your question is we don't have any plans right now.

Okay. One other question. Are any of your customers indicating the recent tax law changes might be increasing their plans for spending or changing the timing to more, sooner rather than later?

Boy, the answer is we don't have any hard evidence that they're doing that. I haven't heard it myself. I'll have to go out and ask the people out in our field. It's a good question. I can't give you an answer to it.

Thank you.

Okay.

And that concludes the question and answer phase of our call. At this time, I'll turn it back to Mr. Mullany for any closing comments.

Well, I just want to thank everyone for joining us today. I also wanted to put out one reminder. We are hosting an investor conference in Cleveland, in September, September 9th and 10th, and if you haven't received an invitation, please give my office a call. Nancy will certainly send you out the due information. I do again want to thank you for joining us on the call today and that will conclude our conference call.

Ladies and gentlemen, that does conclude today's Rockwell Automation quarterly conference call. We do appreciate your participation and you may disconnect at this time.