洛克威爾自動化 (ROK) 2003 Q4 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call we will open up the lines for questions. If you do have a question at that time please press the star key followed by 1. At this time I would like to turn the call over to Mr. Tom Mullany, Rockwell Automation's Vice President and Treasurer.

Thank you, Amy. Good morning everyone. Welcome to Rockwell Automation's quarterly conference call. I'm Tom Mullany, and on the call today is Don Davis, our Chairman and CEO, as well as Mike Bless, our Chief Financial Officer. Please note that our comments today will include statements related to the future of the company and our forward-looking statements as defined in the private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected as a result of various risks and uncertainties including, but not limited to, those noted in our earnings release and note detailed from time to time in our SEC filings. During this call, we will provide you with an overview of our fourth quarter and full year results for fiscal year 2003. At the end of my review, Don and Mike will make a few comments, and in the time remaining take your questions. Fourth quarter net income was $67 million, or 35 cents per share. These results include two items.

Number one, income of 2 cents per share reflected in discontinued operations from a favorable determination in legal proceedings related to Rocky Flats and a second, a charge of 2 cents per share reflected in general corporate net due to higher estimated future costs for environmental remediation at Russellville, Kentucky. Income from continuing operations was $63 million, or 33 cents per share. Last year's fourth quarter income from continuing operations was $49 million, or 26 cents per share. Revenues in the quarter were $1,058,000,000, up 4% over last year's fourth quarter revenues of $1,017,000,000. Excluding currency translation, revenues were up about 1% over last year's fourth quarter.

Now looking at the fourth quarter results for each of our business segments, control system revenues were $846 million, up 6% over last year's fourth quarter sales of $800 million. Excluding currency translation, control systems sales were up 2% over the fourth quarter last year. Control systems U.S. Sales in the fourth quarter were about flat with last year's fourth quarter. Excluding translation, international shipments were up 5% versus last year.

The breakdown for the quarter is as follows: Shipments were up 14% in Canada, up 3% in Europe, up 20% in Latin america, and down 2% in Asia Pacific. Control systems fourth quarter operating earnings were $116 million, up 36% from the $85 million reported in last year's fourth quarter. Return on sales was 13.7% for the quarter compared to the return of 10.6% in last year's fourth quarter. In power systems, power systems had revenues of $179 million down about 3% over last year's fourth quarter sales of $184 million. Power system sales were up 6% in the mechanical business and were down 11% in the electrical business.

Power systems had operating earnings of $15 million in the quarter compared to $15 million last year. Return on sales improved to 8.4% versus the 8.2% in the fourth quarter last year. First point contact had fourth quarter revenues of $33 million, about flat with the $33 million reported in last year's fourth quarter. Operating earnings of $1 million compared to break-even results in the fourth quarter last year.

Some other items to note for the quarter, general corporate net expense of $24 million included a charge of $5 million due to higher estimated future cost for the environmental remediation near the Russellville, Kentucky facility of the company's former measurement and flow control business. The charge is recorded in continuing operations since the business, which was divested in 1989, was never carried under the discontinued operations prior to divestiture. General corporate net in last year's fourth quarter was $14 million, and included $4 million of income from intellectual property settlements.

Interest expense for the quarter was $11 million compared to $16 million last year, primarily due to lower overall debt levels. Diluted average shares were $190.7 million for the quarter and outstanding shares at September 30th were $185.6 million shares. Now turning to the full year results, on a reported basis revenues of $4.1 billion were up 5% from last year's sales of $3.9 billion.

Control systems revenues were up 7%, and power systems revenues were down about 2% from last year. Now excluding currency translation, overall revenues were up 2% and control systems revenues were up 4% over last year. Segment operating earnings of $453 million were up 19% from last year's operating earnings of $381 million. Control systems earnings were up 23% while power systems earnings were up about 2%.

Our full-year income from continuing operations came in at $282 million, or $1.49 per share, compared to $226 million, or $1.20 per share in '02. Excluding the income tax benefits that we recorded in both years, income was $213 million, or $1.12 per share in 2003 compared to $178 million, or 94 cents per share in 2002. Now excluding the income tax benefits in both years our tax rate for the year was 29%, up from 24% last year. The expected tax rate for 2004 is 30%. Now let's look at the preliminary balance sheet information. Cash was $226 million, up $100 million from last quarter.

Debt, both long and short term, is reported at $773 million, down $6 million from last quarter. Our debt to total capital ratio is 32.8%. Share owners' equity was $1,587,000,000 at the end of september, which is down $113 million from last quarter. During 2003 the company recorded an increase to its minimum pension liability which resulted in a net reduction to equity of $170 million.

Book value per share was $8.55 at the end of September compared to $9.20 at the end of June. We purchased 1.3 million shares during the quarter at a cost of $33 million, and 5.6 million shares for the full year at a total cost of $128 million. And finally, free cash flow was $120 million for the quarter and $327 million for the year. That concludes the summary for the quarterly results and full-year results. Now I'd like to turn the call over to Don Davis for his comments. Don?

Good morning everybody. We're really pleased this morning to be able to report our financial performance for FY '03. We grew faster than our markets, based upon the great job of our management team and executing our cost and growth strategies. Profit conversion, margin improvement, and cash flow were just outstanding. Bottom line, profit was a little better than we expected on organic sales that were a little weaker than we had expected. I cannot stress enough how proud I am of our team here.

The management here have been through some really difficult times together during the past two-and-a-half years, and have really come together as a team focused on the performance of this business. I believe that leaders lead and nothing could be truer than what our people have done here. Our company has been fortunate to have had outstanding people for a long time, but I've got to tell you, the group here today is among the very best. They have produced exceptional, high-quality result this past year in an environment that was generally weaker than anyone had expected.

In the past you've heard me talk about a balanced approach, where on the one hand we're taking cost out of the business and on the other hand we continue and in some cases even increase investments in key areas. And we've had terrific progress on those critical initiatives, that I believe will produce profitable, above-market growth well into the future. Logix has emerged as the most successful new platform in the company's history and is hands-down the leader in the market. Due to logix we've grown our already high shares in our traditional market.

We've also grown additional share by expanding the markets we serve, particularly in motion, process, and safety. We also have an important initiative in information solutions which will further expand our market presence and while this is still a young initiative and certainly not yet proven, it has the potential to be very important in the future. Now turning to our current business outlook, our outlook is improving. We have seen a definite pickup in activity over the last two months.

Continuing a trend that started in September, business has been strong across the board in October. This is particularly notable as the first month in a quarter is generally the weakest one we have. We're watching things very closely, however, on a daily basis, but I've got to say that this one continues to feel like a true recovery, and that's based on several factors. First, we have positive readings from general economic indicators, and specifically data related to the industrial sector.

Second, our own rates of orders and shipments across all industries and regions have been improving. Third, input from our customers, distributors and partners has been generally positive. I'd say in general, everybody feels a little better.

And fourth, for the first time since the downturn, our industry specialists are all reporting an up-tick in expectations, and that's across all the industries that we track. Assuming economic predictions for '04 hold true, we feel confident that we can produce an increase in earnings per share of 20 to 30% depending upon the top line growth. Now I'd like to ask Mike to outline some of the details of that to give you a better understanding. Mike?

Thanks, Don. Good morning everybody and thanks again for being with us. Before I get to a bit more color on the quarter and the year, and as Don said, talk a bit more about current conditions and the expectations for '04, I'm going to here on the pain of repetition, or at the risk of repetition, or both, I should say, want to make sure everybody understands the way the two, I'll call them unusual items in the fourth quarter, hit us and where in the income statement they hit us. I know we did put them in the release, and Tom went through them very ably, but I've become convinced over the last couple years that good accounting sometimes isn't simple accounting and I want to make sure everybody understands the differences and where they were on the income statement.

If you go to the income statement page you'll see the $1.51, that's the GAAP bottom line net income for the company for the year. Back off the 37 cents from the R&E tax credit that we booked in the third quarter and talk to you about, that's $1.14. That $1.14 includes two items that Tom went through. The first item is -- and those two items are virtually the same in terms of size. They're a million dollars pre-tax apart. The first item which got book kept down and discontinued operations is income related to a business that now is owned by Boeing, this is the aerospace and defense business we sold seven years ago now, and it relates -- we did retain some assets and liabilities attendant to that, relates to back legal fees, we're talking ten-year-old legal fees that the government owes us, and during this quarter the statutory period during which the government was able to contest those fees, lapsed, so they now owe us those fees lock, stock, and barrel and obviously we recognize the income.

The other item which got recognized in continuing operations, as Tom said, was an increase in an environmental reserve relating to a business we sold now almost 15 years ago. And so $1.14 excluding those two items, $1.14 including those two items but again you've got a difference in where they're booked, continuing very discontinued operation. Enough of that, let's go on and talk about the quarter. As Don said we did end up on a real good upbeat note here. Sales were up excluding currency translation about 1%. As you'll remember, that's a good improvement over the third quarter where sales were off about half a percent on an organic basis. Profitability was exceptionally strong, as Don and Tom talked about. Segment margins up 270 basis points versus last year, control systems in particular increased their margins 310 basis points.

And as Tom pointed out, EPS from continuing operations for the quarter, now this is 33 cents, which comports to the $1.12, was up 27%, but the reason we do the comparison with continuing operations, of course, is that there was no discontinued operations in the fourth quarter of last year, so continuing operation diluted EPS up 27% quarter over quarter. Before I get to the full year results, to put them into context I just want to remind you, go back a year frankly to this same call last year, and remind you what we were expecting for our business in fiscal '03 near 12 months ago.

We were looking for revenue growth for the whole corporation on a currency neutral basis, of course, we do our planning on that basis up 2 to 4% in revenues, and on that we were looking for margin expansion of about 100 basis points. Those two assumptions were supposed to drive EPS of $1.05 to $1.15, and lastly, we were looking for free cash flow at least equal to net income. As you've seen, sales came in at currency neutral basis,the bottom end of the range up 2%. Just to turn to the segments and give you a bit more color as you may have seen, if you had a chance to look through the data, control systems actual reported sales were up about 7.5% but about half of that came from currency translation, so mid 3's growth from a organic standpoint.

Some great pocket to strengthen there, both the Logix and process business up 30% year-over-year, GMS as a whole up 5%, and our international results were real strong for the year. Real important due to the balance we've been trying to achieve in driving sales outside the United States. For the year on a currency neutral basis, Latin America up 24 percent, Asia up 13, and even Europe in a terrible environment over there during the year, the team over there did a super job, Europe up 3% on a currency-neutral basis. Power systems obviously a little disappointing from the business as a whole, at the top line down a little bit. The Dodge mechanical business had a very good year with sales up 3%.

Sales in motors were down 5% for the year, so disappointing. Very, very difficult conditions there but recent data trends, recent order trends in the data we're seeing out of that business have told us here over the last 60 days that that business has at least stabilized if not started uptick just a little bit. I think it's worth noting, a business we don't talk about much, that first point contact for the first quarter in almost two years had revenues equal to the same quarter in the prior year. More importantly, we saw orders in this last quarter up 25% in that business, and based on those data and what we're hearing from customers and partners in that business, we think that there's a real good rebound afoot in that market. Turning to profit for the year, as you've seen and as Tom detailed, segment margins up 130 basis points for the year versus the 100 we were looking for, control systems had just a great year, margins up 150 basis points on a profit conversion, $1 of profit for $1 of sales obviously of over 30%.

If you take out the currency translation impact, control systems converted almost 50% to the bottom line, so we continue to see in control systems the operating leverage that we've been looking for from that business. The team down there has done just an extraordinary job. Power systems also, even on slightly lower sales increased their profits just by a little bit driving margins there up 30 basis points. So all that boiled down to EPS again on a continuing operations basis, the $1.12 hear now 19% above fiscal '02 and that's excluding the tax benefit, of course, in both years. If you were to include the tax benefit in '03, and as you recall we had one in '02 as well, EPS from continuing operations up 25% year-over-year.

Turning quickly to the cash flow and the balance sheet, cash flow, free cash flow came in very strong again, $327 million dollars, that's 8% of sales, and 115% of GAAP net income. If you take out the tax credit from the denominator in that equation which I think is the right way to look at it given that we don't see the cash flow from that tax benefit until fiscal '05 when our current IRS audit is complete, if you take it out of the denominator, free cash flow over 150% of net income, frankly driven by improvements in all areas of working and fixed capital.

Balance sheet got stronger, debt to cap now down at 33% which is 400 basis points lower than it was at the end of last year, net debt to cap down at 23%, and just to put the cash flow in perspective if you've had a chance to look at the preliminary cash flow data appended to the release, you saw that we were able to reduce net debt by $90 million this year, while at the same time, obviously, paying our cash dividend about $120 million, spending a little over $25 million on acquisitions, as Tom said, we're purchasing $128 million of our own stock and making a $50 million voluntary contribution to our U.S. qualified pension plan.

I just want to note, Tom did it very well, but just make sure you all understand what happened in our pension liability, like many other companies with defined benefit plans we were required to record an increase in our minimum pension liability, relatively complex calculation under FAS 87 as many of you know, and as Tom said, this did drive a $170 million reduction in our shareowner's equity. Debt to cap would have been 31% had we not had to make that adjustment versus the 33%. Just to put that $280 million liability increase into perspective, most of it was driven by a reduction in our discount rate that we used to value that liability from 7% to 6%. 100 basis point reduction. Every 100 basis point change in our discount rate changes that liability by $225 million so most of that $280 was driven by the 1% reduction in our discount rate.

It's interesting to note that we used June 30th as our actuarial measurement date for valuing that liability and since June 30th, as you know June 30th was just at about the low point in treasury yields. Since then, yields in the ten-year are up about 80 basis points, so if we were valuing that liability again today, most of that increase in that liability we'd get back and quite frankly obviously our fund balances, our asset, has obviously performed very nicely since June as well with the uptick in the equity market, so good progress since then but what you'll see reflected on the balance sheet is that reduction in shareowners' equity.

As Tom mentioned and we mentioned before we did make a $50 million contribution in June of this past year, and our plan for '04 as we sit here today, is to make another $50 million voluntary payment in June of this year. We're not required under Erisa to make a payment this year, it would be voluntary, we think it's prudent to plan for it pending, you know, future results in the equity and fixed income market so we've got it in our plans for this year, we'll see come June. Okay, turning to the current environment, just to back step a little bit to put it into context as you'll remember, as we finished the third quarter, business did, we had a weak March and April and business did come back, I'm sorry, April and May, and business did come back in June as we were expecting, but frankly as we told you before, it came back a little bit later in the month than we would have expected based on former past experience. June is typically a very, very strong month for us. And so the results of all of that was a quarter -- third quarter that was down a little bit.

Sequentially and versus the comparable quarter in fiscal '02. As we've told you July was a relatively good month for us and August was fairly typical for that month. September started strong and frankly stayed very strong throughout the month. We had as good a finish as we did a beginning, very consistent as Don said across end markets, across our businesses and across regions of the world. October continued at September's trends. The strongest start we've had in a quarter for five quarters now and October's run rate, just to put in perspective, were up 6% versus October of last year. Just one data point but very strong across our businesses.

As Don said, based on this and all the other factors that we have talked about and that we're hearing, we are optimistic now that we are seeing some momentum building out there, and until we get any more data we're planning for, as Tom told you, planning for revenue growth for the whole corporation for '04 in the range of 4 to 6% over fiscal '03. We're looking for another 100 basis point improvement in operating margins and on that, as Don had said, looking for EPS between $1.35 and $1.45. Once again, we're looking for free cash flow at least equal to net income and before I turn it over to back to Tom, and I guess we'll go to questions, Tom, just want to make sure everybody understands as we told you last year, our first quarter is by far and away the shortest quarter of our year, just the way the calendar lays out in terms of holidays and whatnot. This year the first quarter is even shorter than it is last year.

Last year was a short first quarter. This year is even shorter. It's got one less day. And all that means is the rate of growth in EPS in Q1 obviously over Q1 of '03 will be somewhat less than the rate of growth for the whole year. And with that Don and Tom I'm through, and Tom I guess we can take questions.

Yes. Thank you Mike. Amy, we'd now like to open up the lines for questions and we'd like to get as many questions on the line as we can, so if you can keep requeuing if you go beyond two or three related questions.

Today's question and answer session will be conducted electronically. If you do have a question, please press star 1 followed on your touch-tone phone now. If you are using a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment. We will pause a moment to give everyone an opportunity to signal. We will take our first question from Dan Khoshaba with Deutsche Bank. Go ahead please

Good morning everyone.

Hi, Dan.

Did you detect any kind of discernible trends related to the increase in business activity in terms of particular sectors that might be doing well and also I'm interested in your comments about, you know, industrial demand, let's say for factory automation, versus more consumer-oriented demand, for instance, in the process industries, food and beverage. A little bit on the trends that you may have seen.

Sure, Dan. It's Mike. Obviously Tom or Don will jump in. It really is -- not trying to duck the question -- it really was broad-based. Looking through all the data, business by business and market by end market, our product lines some are more as I think you're getting at, oriented towards certain end markets, industrial consumer whatnot, it is and was and remains today really broad-based.

It's all over the place. It's -- it's some of the bread and butter businesses like consumer food and beverage and whatnot, automotive is looking okay, the process businesses are looking very good, still a little stronger than the others as they have been, but looking through the data it's pretty broad-based, even some of the markets that over the last couple of quarters and frankly couple of years have been on the weaker side, metals is up a little bit, and paper and forest products up a little bit, so at this point it really is pretty broad-based.

Okay. And just to follow up to that if I could, Mike

Sure.

Can you tell, and I don't know if you have the data on you but can you tell, for instance, in the PLC market, how much of the new demand for PLCs is going into, let's say, plans to replace existing and perhaps old or antiquated systems versus how -- well, you know the percentage that might be going into, you know, new applications, for instance new machine tools within an existing plant or new transfer lines?

Sure. Dan, this is Don. It's mostly anecdotal evidence of what's going on, but again it's -- certainly MRO seems to have kicked in, and there are new projects that we record that we know, that it's expansion, it's new product, it's upgrades, that would be measured in several million dollars.

Sure.

So we're seeing even that is pretty much across the board.

Let me take another cut at it, too, which is consistent with what Don just said. Back away from PLC for a second. Most of the increases we're seeing to date in shipments, at least, now orders we are seeing some projects come on but most of the increases we're seeing in shipments are coming from business I would characterize heavily as MRO. That having been said, Logix has a greater -- the word projects we use contents and some of our other businesses, electro mechanical, standard control and whatnot, just given that as we talked to you before, as Don has mentioned, you know, people who are doing a retrofit of a line or a new platform product of their own, that's a good opportunity to make the jump to Logix. So the tenure of the whole business I would characterize as more MRO at this point. Logix may be a bit more.

From a shipments point of view.

Okay. Good to see either way. Thanks a lot.

Thanks, Dan.

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

Hi, good morning.

Good morning, Mark.

Hey, just a clarification to start off, you said Mike, October was up 6%. Is that on a currency-adjusted basis or just as, you know, as recorded?

Thanks for catching me. Currency adjusted. It's actually not quite double, but a little under double that on an actual basis.

Okay. So that's up substantially here from the quarter trend, obviously.

Yes, it is.

Okay. That's excellent. What I wanted to ask you about, is the profit performance here in controls just comparing to the third quarter, you know, shifting from 3Q to 4Q we picked up $22 in revenue and more than half of that dropped down to the bottom line.

Right.

Wondering if you can talk about the elements of that improvement and in particular whether price was a large element of that because I'm picking up from some of your dealers that you guys had an unusual price increase in August, if you can address price in particular.

Absolutely, Mark. You are picking it up right. In fact, that's real conversion there because the currency actually Q4 over Q3 went the over way, so the conversion on a adjusted basis would look better than that. Yeah, we did put through, as our distributors, some of our distributors obviously told you our normal price increase time is a little later in the year and on a few product lines we did put through an increase in, Don, mid August, late August, sometime during August.

I would not characterize very much, if any, of the profit increase as into the price increase. When we announced the price increase, by the way, we give them 30 to 60 days warning if you will, so they got 30 to 60 days to enter orders and get shipments at the old price. That's the way we've always done business with our distributors and that's the way we always will, that's just fair ball. Mark, I'd characterize most of it by simply the continued cost activities we've been doing in that business every quarter without much fanfare. And we've gotten the cost structure to a point where we when we get a little bit of growth and the mix is in a good mix of products, a whole lot of it falls through and frankly that's all it was.

So it's more on the cost line rather than mix or price?

I would say cost and mix. We did have a good mix this quarter.

Okay. And...

Mark, I would also say it's not clear yet how much of that price increase is going to stick. As you look to the future, you know what has happened over the last two to three years, we didn't get near as much as we were looking for, or tried to get, I'll say. This one may be a little better. We just have to wait and see. It's not clear yet.

Okay. And then finally, that comment on Logix, was that for the year or for the quarter?

For the -- it was up 30% for the year.

And how about for the quarter?

For the quarter was a little bit, couple hundred basis points less than that. Orders were up over 30% for the quarter and sales were up in the mid twenties.

So around 25%

Right.

Thank you

Thanks, Mark.

Thank you and we will take our next question from Richard Eastman with Robert W. Baird.

Couple of things. Mike, could you just give us a dollar number as to where approximately Logix and also the process business ended the year?

Yeah. Absolutely, Rick. Logix is in the $200 million range and process is a little under $100 million at this point.

And as you look forward and perhaps even the current tone of business, I guess one thing that steps out at you in the press release and in the sales line for the year is that the U.S. business, you know, lagged. Are you seeing the same type of strength in September, October, in the U.S. as you've seen internationally and, you know, what gets the U.S. business moving?

Great observation. The answer to your question is yes, but let me give it some context. The U.S. business has been relatively flat through the year. You saw the -- if you've had a chance to look through the detail of the GDP data, the only component of business and equipment spending in the third calendar quarter in GDP that weren't -- that wasn't up was industrial equipment, it was down a little bit.

In our, well, calendar third fiscal fourth quarter we did see the U.S. up. It was up just a smidge versus last year, a couple of tens of basis points, but it was up on a run rate basis, pretty nicely sequentially versus the third quarter, currency independent, almost 2% Q4 over Q3, run rate, currency independent. So we did see a little bit of movement positive in the U.S. in the fourth quarter, and, yes, Rick, that has continued in the results in October.

Okay. And just to last thought, when you look out into fiscal '04 given your approximate or your EPS guidance, it would appear to me that your modeling, you know, an incremental margin somewhere in the low to mid 30s, 32 to 35%.

That's what the math says. You got it.

And that's a number that you're conservatively confident with?

I feel like a wooden mannequin here with the words in my mouth. Don, you want to? I think that's probably not a bad characterization.

Okay. Fair enough thank you.

Okay, Rick.

And our next question comes from Michael Reagan with Credit Suisse First Boston. Go ahead, please.

Thanks, good morning.

How you doing, Michael.

I should start out by at least publicly falling on the sword, Don, you guys put up a bang-up year and you said you'd do it a year ago and you did it, and I was skeptical. Good for you guys.

Thank you Michael for saying that. I got a chance to listen to your message this morning.

Oh, sure, Mullany won't pick me up, but he forwards the messages around the firm.

It was a very good message Let's go.

Hey, Mike, could you give some perspective with the U.S. not quite as strong but Europe stronger, is most of the product that you're delivering in europe, you know, manufactured and made in Europe or is there some exporting from the U.S. and is there some, you know, incremental margin from -- benefit from doing that?

Yeah, the answer to the question is, and I'll compare the two in a minute, no, Michael most of the product that we sell in Europe is manufactured here in the U.S. We do manufacture some of our IEC components in Switzerland, and we do some of our systems business for Europe in England and Germany and Switzerland -- England and Germany, but most of it, if I had to guess, Don, 80%, 70%.

Most of it is PLC business

Manufactured here in the U.S. and shipped over. Europe was stronger for the year but not very much. Year-over-year currency neutral, Europe was up three, U.S. up one-and-a-half or two. So it was stronger. Frankly the only way I'd characterize it, Mike, is in a weak environment in both places, we're just -- we are growing market share in the U.S. and we did this year, we're growing market share a little faster in Europe just because we're coming from a smaller market position.

No, I think that's it. Accurate.

Right but there is some margin benefit from pricing in euros and having your costs denominated in dollars.

Yes, there is.

Okay. That's great.

Absolutely.

Thank you.

Yeah, sure.

And we will take our next question from Robert Cornell with Lehman Brothers. Go ahead, please.

Yeah, good morning everybody.

Hi, Bob.

I reiterate, too, great quarter. Surprised me, too. You know, going back to the question that's been asked a couple of times about contribution margin, first of all, was it the PLC business or the components business that registered the most gain? I know you've said consistently it was broad-based and everything like, that but maybe be within that perspective

Bob, those two were within 100 basis points of growth in the quarter, they were within a half a point of each other in terms of growth in the quarter so it really was almost the same.

In terms of the contribution to profits, too, would they be about the same? In terms of the incremental profits, I mean.

POC would be a little bit higher, not one and a half or one and a third times as strong but a little bit stronger

You know, Bob, that's reflective of the operating leverage we've been talking about for a long time. I'm not saying it will always continue that way because it won't, but that's what we've been talking about. This business got a lot of everything in it.

I guess I'd remind you one more time, I poked at this in answer to an earlier question, as we told you going into the first quarter of last year, I think it was on this same call, given that we were nervous about the economy and the markets going into last year, we did take out a fair bit of cost across all three businesses, all year but we did a disproportionate amount of it in the first quarter of last year just to give ourselves some tailwind in what we saw were going to be some -- thought were going to be some tough markets, so, you know, you have that coming to bear as well here.

Yeah, I guess, you know, the key point many of us going to wonder about later as we put our models together, are you still above or below the sweet spot in terms of, you know, maximizing the contribution margin to sales as business recovers. I think I spoke to, you know, some of the guys at the analyst meeting, I think in the components business, you're running like 72% of capacity utilization down from like 85% couple of years ago. Are you still below the sweets point, are you going to get the a point in the next year or so where the contribution margin is greater than you saw in this quarter or are we going to see as you come up in capacity utilization the contribution margin comes down a bit?

On the last part of your question, Bob, we've got a long way to go before we would expect to see the contribution margin come down, because we're approaching effective capacity.

Well, no. Could it go up, too, Mike, is part of the question.

Bob, we're not planning on it going up because we do have to -- couple things. One is we're going to continue to invest in logics and process and the rest of the information solutions and the rest of the growth initiatives and that's an earnest investment there. Number two, we do have some more headwinds going into this year. Pension expenses is going to be up $24 million, mostly because of the increase in the -- pardon me, the decrease in the discount rate and a couple other things, so we need to take those into account, by the way this is all factored into the guidance we've given you.

For the first time in two years we have a wage increase this year, not a big one, 3% that we think our people deserve and we didn't have that last year. Fourth, we are, well we continue to reallocate as Don correctly pointed out, investment all the time. We're not going to have the same kind of first quarter reduction in the work force that we did last year, so for all those reasons I'd say, and Rick had the number pretty well calculated, that kind of number, which we did this -- in '03 as well is a good number to plan on until further notice.

One final thought. Asia dipped a little bit in the quarter, I'm sure that was some funky contract issue but maybe just comment on it.

It was. We had some big, big systems orders go -- get shipped in the fourth quarter of last year, so I wasn't -- we don't see any -- the business there is still looking very strong. Korea is coming back a little bit, really good growth in China, and Australia, which has been strong, continues strong. So I wouldn't -- we don't see any particular inference there.

Okay. Thanks.

Okey-doke.

Our next question comes from John Baliotti with Fulcrum Global Partners.

Good morning. I was just curious about, Mike -- you and Don have pointed out things about the leverage and how some things are sticking and the restructuring actions you've taken earlier, seem to be taking hold. Just wondering, could you give us some sense of where you think you are in that spending relative to last year? Relative to '02, sort of '03, '02, and where you think you're going to be in '04?

I'm sorry, John, just so we can understand your question, when you say spending --.

Just like restructuring actions or improving the leverage of the businesses. Actions you've taken already.

Let me take a stab and you tell me whether I'm being responsive to your question. The actions that we took in '03 and the spending obviously that we had to do to affect those, we've seen the incremental benefits of those, so unless we were to do more, which we don't have plans for right now, again, I'll keep saying with the caveat that we continue to move it around all the time, I wouldn't be looking for any more incremental benefit from restructuring actions at this point. Is that where you were headed?

I was thinking more in terms of incremental costs that you would have to put in to...

Oh, John. I'm sorry. I'm sorry.

I don't think there would be a lot, John.

Right.

And if there would be, it would be in the areas of our global manufacturing solutions business.

Right.

Which is done because of increased revenues. So, you know, I don't think there's going to be a lot of incremental increases. We don't have it in our plan, I can assure you.

Right.

Any incremental spending, John, that we need to do to achieve the kind of growth that we're planning for right now, mid single digits, and when I say incremental spending, meaning either direct or indirect labor to get stuff out the door, or even a customer facing kind of stuff, the cost of that has already been factored in, but to Don's point, there's no structural increases that we believe we need to do to get that kind of growth.

That's what I was getting at.

Sorry about that, John

No problem.

Thank you. Our next call comes from Nicole Parent with Bank of America Securities.

Hi Nicole.

Just one quick follow up on the tax rate in the quarter. I know that it's ticking back up in in '04 but in terms of the guidance you gave on the Q3 call, we were a little bit lower in the fourth quarter, what was the driver of that?

Yeah, for the year, remember, it wasn't 30% for a couple of reasons. Obviously the big tax benefit we don't even need to talk about because that obviously isn't factored into any of these growth rates that we're giving. For the year, though, Nicole, excluding that, it was a little bit lower than that due to the utilization of a foreign tax credit carried forward that we were able to use when we incurred the loss when we sold the stake in REJ that you may remember in the third quarter. In Q4 it should have been on an even 30%, so just the rate for the full year is going to be to become, what, about 29. The only difference between the 29 and the 30 is that FTC utilization based on the REJ loss

Great. Although it's negligible in terms of percentage of contribution to total earnings and sales you comment the first point contrat, orders trends are picking up, first quarter sales have actually been flat, could you talk a little bit about the strategic fit of the business, and I guess where I'm going, when you look at I think in September you announced you were building out some of the China offices, how does the business, I guess, remain sustainable in the U.S. and are you moving more of the business offshore?

Sure. The strategic point of view, Nicole, this thing probably, if we could find the right opportunity for a combination somewhere we'd sure take a look at it, and we, from time to time, have had discussions in the past. It's not the kind of business that if where he weren't in we'd go get in, so that are give you an answer right there. It doesn't mean that it's not a good business, doesn't mean it can't be a good business, it's just not very big and needs to be bigger.

And it's well-positioned in its industry, though. I mean, we founded the cost center business, and so we've got a long history with a lot of customers, and we continue to hang on to them. In addition, it's in a transition itself from a hardware to a software business. We've made a whole lot of progress in that regard in the last year, and it's becoming a more attractive asset.

I'll just pick up on the absolute right point Don made as it relates to your offshore question, Nicole. At this point almost 60% of the business is software versus hardware, and the real offshore movement we had, mostly moving to, to overuse a trite word, more of a knowledge kind of business. We're starting to do more and more development offshore. Frankly at this point, more India than China, control systems where as more China than India just happens to be call center kind of competencies are more in India, at least as far as we found at this point than China, but we have major effort there in both China and India offshore.

Great. Thanks. One last one, Don, could you just update us on the search for Mike's successor? Sorry. I had to ask it.

You know what, I'm glad you did, and first let me say that we have seen some terrific candidates. The people we use to do this just did a terrific job. We are right down to the last little bit of moving around here, and you can expect an announcement from us within days.

Great.

Don't apologize, Nicole. My three-year-old boy keeps asking why mommy calls daddy a lame duck.

Best of luck to you, Mike, and nice job on a good quarter, guys.

Thanks, Nicole.

Thank you and just as a reminder to the audience, it is star 1 on your phone if you would like to ask a question. We will take our next question from Tony Bows with A.G. Edwards. Go ahead, please.

Thank you. Just on the headwinds in the next year I know you said that pension was this 24 then you mentioned some other items. What's the total headwind for next year?

Oh, gosh, Tony, good question. I really did mention the two big ones. FAS 87 expense about 24, 25 -- 24 is the number in the plan, million higher than it was this past year, and as I said, two-thirds of that is simply the discount rate change. The salary increase is about up 3%, and that's not quite as big as the pension increase but a little bit lower than that. Other than that, we've done an okay job of some of the -- managing some of the other things that you might be worried about. For example, our FAS 106 expense this past year, this coming year, could -- will be a little bit below what it was in fiscal '03 because of a major plan that changed that we instituted last year in the full year effect of doing that. We only got three-quarters of a year of the effect of doing that this past year. Active medical costs up a little bit but these are rounding errors. Those two, the reason I talked about them is they're by far and away the two biggest ones.

So the total there would be something like $44 million ?

Yeah, maybe in that $45 to $50, maybe, right.

And then on your electrical business, your motors business, first are you break-even and second do you have positive cash flow from that business?

Yes, we are break-even, it turned a small profit this year, and very strong cash flow. Cash flow is not an issue in that business.

Lastly, when you look at some of your different markets, are any of those expected to outperform any of the others in 2004?

Yes, they are. The semiconductor market ought to. Our people think that it could be up as much as 20%. An area that has been pretty active lately, water and wastewater. We think will be up somewhere in the area of 25%. And then pharma is the other one that sticks out a little bit. In the area of 7 to 10%, and the rest of them drop down to GDP-type growth rates. By the way, not the 7% GDP. That we saw in the -- but, you know, in the 3 to 4 to 5% area.

Great. Thanks a lot.

Sure.

And our next question comes from Dax Vellases with Capital Management.

My question relates to capital allocation going forward and also to the motors and power systems business. Is that -- have you conceded that that is a permanently lower revenue business that you'd have to restructure some of that business to really get some incremental profit contribution? I know the cash flow is very good, but I want to know what you could eke out of that. Then I was wondering, as far as capital allocation going forward, as we're growing the business what you'd have to put back into working capital, your CapEx requirements for 2004, and any acquisitions or anything else that would require capital that would make sense for shareholders.

Sure, Dax. Thanks. On the motors business, no, we think we can get that business. Obviously we need a little bit of volume, but there's not a fundamental restructuring, if that's what you're getting at, in that business required to get it up to -- certainly the high single digits, which is at a minimum where we need to see that business. But we would need more than a year, maybe two years of kind of GDP kind of growth as Don was saying. By the way, we're using an assumption of about a 3.5% GDP as the basis for our planning for '04 for motors to get to that kind of operating margin. As you correctly pointed out it is throwing out even at it its current level a nice cash flow.

On your question for the company as a whole, working capital -- our plan for next year as basically a wash, no source or use of working capital. We actually took a little bit out in terms of a source of cash this past year. And we think we can grow the business in the mid single digits at about a break-even working capital from a source use of cash standpoint. CapEx, if you've had a chance to look at the cash flow statement, was a little under $110 million for this year.

Our plan for the coming year is for that to be up about 20%. Again, obviously that will be totally dependent on business conditions. If it were up 20%, you know, only about $90 million of that would still be MRO replacement, environmental compliance, keep the plants running kind of spending, and the rest would be ROI type growth investments. Was that it, or was there one more?

Well, I'm just -- you know, I'll look at the cash flows of this business, and on a go-forward basis a lot of the value creation from here is going to be effective utilization of that and I'm just wondering what you're seeing as far as potential acquisition candidates and also given the balance sheet and the, you know, the very healthy position of the balance sheet, with your cash position and also the fixed nature of the debt you have remaining, I was wondering how you saw allocating that cash to creating value for shareholders.

Well, as it rerates to acquisitions, we expect to continue to do the types of acquisitions we've been doing for the last three to fours year, and I think you're aware of what those are. They're in the small to medium size. The largest we've done is somewhere north of $50 million, and we've done as low as $5 million. And that's what I would call our comfort range. Every one of them increased our share of markets, and those are the kind that we like to do, and there's some out there, and we expect to do some this year.

Okay. Thanks.

Sure.

And our next question comes from Martin Sankey with Neuberger Berman. Go ahead, please.

Hello.

Hi Martin.

I'd like to go back to the motors business because -- while I think a lot of financial questions have been asked, I think the crucial question has not been, and that is, is there something going on beyond simply weak markets, because 11% decline in sales in the fourth -- in your fourth quarter contrasts pretty sharply with the results from some of your competitors. And, you know, is there something going on here beyond simple cyclical consideration in the business to produce a revenue result like that?

You know, if there is, I'm not aware of it

No, we had a pretty decent -- if you remember, power systems had a real good fourth quarter last year and the big surprise there was motors. We had some big distributor orders in '02 in the fourth quarter so it's just a bad comparison. The trends in that business for most of the year were in the range of what we concluded the year for the full year, which is down 4 or 5% in that business. And so we're not seeing any, if you're trying to get at any big customer losses or anything like that, no, we don't have anything to report.

Right, but still, you know, using Baldor as a proxy for the first three quarters of their fiscal year, which matches January through September, their sales have been flat and yours down as you say 4 or 5%.

Well, remember what he said, Martin. It's a comparison to previous quarter, last year that was particularly good. And you'd have to look at that in the whole context of that whole thing to draw any kind of conclusion.

Okay. So -- but I'm just trying to get a feel for what's going on here, and it just strikes me as something is happening in that business.

I'll repeat again, if there is I'm not aware of it. I'd tell you if I did.

Okay.

And our next question comes as a follow up from Mark Koznarek of Midwest Research. Go ahead, please.

Just a couple of loose items. I really don't want to beat up this motors things more but I was just curious about the end market, especially as you mentioned, was down 11 here in the quarter against a tough comp. But then there's further discussion that it looks like it's turning a bit positive so far in October, and is there a specific end market or two that has led that recovery?

Yes. To your question, Mark. Mining in that business which as you know is a very important market for that business, mining cement, aggregates, things like that, has turned up, and we're seeing a little bit of optimism in those end customers, whether it's coal or some of the other end markets there. And, you know, the hermetics business there which is the H-factor in that business there, is looking a little bitter. That's been just a brutal business this past year. As you know those are some of our smaller horsepower motors, obviously, lower margin as well. And so those in particular. But the mining aggregate, cement in particular, that's seen a little bit of increase since the summer.

Okay. Then finally you've got this long list at the end of the release in terms of new project captured. And a couple things on that. Number one is, the last comment is this GM standardization on ethernet IP across 60 plants and that sound like it could be sizable.

That's a big deal because that's sort of the adoption of our -- the way we do it, the whole architecture story, and it also means that we fit right into their plans and it also means that some others, if they want to fit in are going to have to do something different

That last point Don made is the real salient one. Our Logix communication standards are built on an open, obviously internet IP and some of our competitors, our largest one in particular is still more of a proprietary communications network

Is this sort of a, you know, double digit millions of dollars sort of thing that hits in '04 or is it more spread out than that?

I think you ought to look at that as probably something that's spread out over time. It's certainly is -- I'll say a verification of what we've been doing, and the fact that they designate that around the world is really an important thing.

Okay. That kind of leads into the next one, which is, some of these projects, you know, of course, we don't see all the projects you do, but some of them seem like they could be sort of initial kind of, you know, proof of concept projects, and if that is the case, are you going to allow the earnings to flow through or because of, you know, new scope requirements and uncertainties are you going to hold back reserves and, you know, kind of be cautious on that?

No, we'll report them as they occur. There is one in there that does have some future potential that really is -- falls in the category you're talking about and that's this Oshkosh truck thing. That has potential long term of being a pretty good size thing, and part of it is being funded by the government.

Let me just make sure we're clear here, Mark. I don't know if this is where you're heading. We don't do fixed price contract accounting kind of stuff. This is a customer signed up, says I'll pay you a million dollar to do this work for me in nine months, it's not, and it's just simple accounting, we ship something and record a revenue and a cost of sales. If where you're heading is contractor, or even program kind of accounting where you, you know, hold back reserves and have estimated margins and all that kind of good stuff, we just don't do business that way.

Yeah, I was kind of thinking about performance guarantees.

No, no, none of that.

All right. Great. Thanks.

Okay, sure.

And we will take a follow-up from Richard Eastman with Robert W. Baird.

Just wanted to circle back, Don, you had mentioned the new initiative in the information solutions area. Could you add any color on that? Is that a software or Logix extension or what?

It's almost all software, but it is facilitated by the whole Logix platform and made easier to do by the -- the way our architecture is constructed. To date it is a lot easier than it has been in the past. Sitting on top of that, we have a whole suite of different software applications and a general area we call Bizware, and you've heard us talk about that before. That's things like system modeling where we can simulate the flow-through of a plant to determine what they could do to improve by rearranging what the impact of, if a plant manager is called upon to accept a new order, and do it quickly, he can determine what that impact that's going to have on his output and how it affects other customers.

OEE, operational efficiency and effectiveness is a very large program that you may remember in the past falls in that same kind of category, and we have a plant for database, a number of different other modules in that Bizware area. Right now it's still in the, I'd call it the young stage, we do couple of tens of millions of dollars, but that's still pretty young, and you also may remember that we signed an agreement with IBM to work in the automotive industry to help tie the plant floors into the ERP systems, and we haven't seen anything from that yet but we expect -- things like that are really important in this business.

This is really more of an integration process given some of the modules you have into more of an MES type of solution

Exactly what it is, thank you for using that word. That's what I should have used to describe it myself.

Very good. Thank you.

Right. And our final question from a follow-up from Tony Bows with A.G. Edwards, go ahead, please.

Thanks, just on the GM announce managed, what is ethernet IP going to replace for GM?

Some of it, got this goes back a long, long way. They've had broadband networks at that level for quite some time, it even goes back to, I don't know if you remember the term map or not, but General Motors tried to establish a standard a long time ago. They put that in a lot of their plants at that time. I don't know how many. But a lot of them so there would be an example of something that that would replace.

And also, clearly this, you know, is the groundwork for MES in those plants, correct?

That is exactly right. That is exactly right. And so that's why, you know, the -- this thing I talk about it as being young but having a lot of potential. That's the reason that I believe it does, and people like General Motors, and they're not the only ones, are very interested in that subject and manufacturing execution systems, MES, and there are a lot of different application in that regard.

And lastly, why do you need IBM to help tie these plant floor systems into ERP?

Sounds like you can do that on your own. Well, we can do our part, but I think what the customer is looking for is a -- is a holistic type of approach and we are not capable of doing it just like they're not capable of doing it, at least not now, doing it on the plant floor. That's our bailiwick and they got there's and the two of them need to be brought together, and not only that, but culturally in our customers place, to see us working -- see the two companies working together is an important -- because the plant floor people want to be satisfied, and so do the information technology people. And to see the two of us working together kind of helps bridge that gap.

Thanks very much.

Mr. Mullany, at this time I'd like to turn the conference back over to you for additional and closing remarks.

I want to thank everyone for joining us today that concludes our quarterly call if you have any questions feel free to give us a call. Thank you.

And that does conclude today's conference we do appreciate your participation we you you may now disconnect.