洛克威爾自動化 (ROK) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to this Rockwell Automation fourth quarter earnings release conference call. Today's call is being recorded. Later in the call, we will conduct a question-and-answer session. If you have a question at that time, please press star one on your touch-tone telephone. Now for opening remarks and introductions, turn the call over to the vice president and treasurer, Mr. Tim Oliver. Please go ahead, sir.

Thank you, Eric. I'm sorry for the short delay. We were waiting to make sure everyone to get dialed in. Our results were released this morning and have been posted to our website, www.rockwellautomation.com. A webcast of the audio portion of this call and a chart that will be referenced during the call are available on that website. We'll leave those there for the next 30 days for reference. With me today are Keith Nosbusch, our Chairman and CEO, and James Gelly, our CFO. Our agenda for today includes some opening remarks by Keith, and then James will review both the quarter and our outlook for 2006. We'll leave plenty of time at the end of the call to take your questions., And again, we ask that you self-limit to two questions to allow broader participation. This call is scheduled to last about 50 minutes. As is always the case on these calls, I need to remind you that our comments today will include statements related to expected future results of the company and are therefore forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are all described in the earnings release and detailed in our SEC filings. And with that I'll turn the call to Keith.

Thanks,Tim. Good morning, everyone. Glad you could join us on the call today. Our performance in the fourth quarter was outstanding, and capped a remarkable year, a year in which we did what we said we'd, exceeded all our financial targets, with the entire team contributing, and executed against our transformational growth and productivity initiatives. Let me provide some highlights.

Revenue. A another double-digit organic growth year with very strong growth from our integrated architecture, intelligent motor control and power conversion businesses, and rapid growth in targeted, developing markets. Profitability. Earnings were up more than 40% and ROIC increased by 6 points to over 18%. The powerful financial leverage of our business model that invests in high return, growth opportunities with minimal increase to our cost structure was evident in 2005. Strong top line growth accompanied by nearly 2.5% cost productivity drove impressive conversion or incremental margins in nearly all of our businesses.

Free cash flow. We again converted 100% of our income to free cash flow, driven by continued disciplined capital expenditure, and improved working capital efficiency. And we returned more of that cash to our shareholders with a 33% higher dividend and a net reduction in our shares outstanding of nearly 3%.

Reinvestment. We vigorously reinvested in our -- extending our technology leadership and in expanding our market reach, to sustain our secular growth trend. We made significant progress in our industrial vertical initiatives, launched new features and functionality in the Logix platform, and expanded our presence in key international growth markets, with the ongoing globalization of our entire business model.

Change. We have undertaken an unprecedented amount of change in our company, and are committed to driving change just as hard in these good times. We're changing what we sell and how we sell it. We are not resting on our successes, but rather we are working feverishly to fuel 2007 and 2008 growth to perpetuate the kind of performance we expect to achieve the full potential of our businesses.

Intellectual assets. It continues to be all about people and growing our intellectual assets. We are providing world-class training to all of our employees to equip us with common tools and enable us with new skills. We are staffing our vertical teams with thought leaders in their industries to augment what is already the best industrial sales force in the world. And we are increasingly attracting and hiring exceptional people, change leaders that bring diverse experiences and skills to the organization. Looking ahead, we have laid out an ambitious plan for 2006. Solid momentum entering the year, combined with our relentless focus on productivity and cost discipline gives me confidence that 2006 will be another good year for us. 2006 will see higher expectations, an accelerated pace of change and a contagious sense of urgency. James will provide you with some of the summary financial guidance for 2006, and we will spend more time on the details when we see many of you at Automation Fair in about ten days. James?

Thanks, Keith. Good morning, everybody who phoned in. My comments will address the slides that have been posted on our website earlier this morning. Looking at the first slide which summarizes key items from the fourth quarter income statement and starting at the top. Total sales were $1,335,000,000, organic growth of 11%. That's 9% excluding the favorable effects of currency translation. Working the way down the list, segment operating earnings were up 24% to $214 million, total company year-over-year conversion on incremental revenue was about 32%. Dropping down further, you'll note that purchase accounting amortization was $2.1 million in the quarter.

Once again as you'll recall, 2005 marks the 10th and 20th anniversaries respectively of the Allen-Bradley and Reliance acquisitions, and so you're seeing the attendant runout of amortization. The current level is the run rate that you should assume going forward. General corporate net this quarter was about half of the year ago number, down $14 million. Last year's results included higher environmental remediation costs, and a $5 million contribution to our charitable trust. Looking at the income tax line, you'll note that this quarter's expense calculates to about 32%, versus our recent guidance of 32.5% for this year. So this is basically because our full-year tax rate ended up at 32.3, after all of the ins and outs that we take care of globally. As you know, this quarter's income tax provision must include a catch up covering the first three quarters of the year so it's about an additional -- less than $1 million or so. For the record the year ago tax rate included about $7 million in state tax refunds, which pushed that rate to only about 24%. Diluted EPS from continued operations were $0.69 a share, up 35% from the $0.51 a year ago. And as I'll explain shortly, both periods included roughly similar restructuring and facilities charges.

Looking at the discontinued operations line this quarter, included $2.8 million related to the resolution of a legacy tax matter. While last year's results included the gain from our sale of the FirstPoint Contact business as well as the benefits of some tax matters. And finally at the bottom of the chart, average shares outstanding in the quarter were 184.3 million shares, down 5.3 million shares from the year-ago average. During the quarter, we bought 2.1 million shares and 9.8 million for the whole year of 2005. And as Keith said, while it's not shown on the chart, return on investment capital was 19% in the quarter, up from 14% in last year's fourth quarter.

I can go to the next chart, which depicts total Rockwell results for the fast five quarters. Looking at the left, as I said sales were up 11%, 9% excluding currency. Looking at sequential growth, we were up about 6%. Which is a good strong quarter. Looking on the right, segment operating earnings grew about 24%. Margins expanded 1.7 points year-over-year to 16%. Earnings were down sequentially due to restructuring and facilities charges in our Control Systems and Power Systems reporting segments and I'm going to explain these charges in the next two charts. Let me go to the slide entitled Control Systems, fourth quarter results. Organic growth in this segment was 10.5% year-over-year, about 8% excluding currency. Sequential growth is almost 7% versus the third quarter.

International sales grew 8% organically, And as you can see in the subsequent slide, Latin America and Asia-Pacific continue to pace our growth, while Europe is yet again, weak. As the chart says in the lower left, sales of our Logix platform are up about 30%. And that's about 10% sequential growth and we finished the whole year about just above our 25% goal. We're going to come back to this important topic at our investor conference in 10 days. Looking at the right hand side of the chart, margins expanded 2.2 points year-over-year to 17.3%. Margins were down sequentially, due to about $15 million of restructuring charges, as well as the continued ramp-up in our growth initiative spending that Keith alluded to.

The restructuring charge relates to actions that we took to lower our European back office cost structure. And on the growth front, we spent about $20 million in the quarter up from about $12 million in the third quarter. So with all that, incremental conversion was about 38%, which is pretty much within the range that we've been talking about. Let me go to the slide entitled fourth quarter results for Power Systems. As you can see on the left, sales were up 12% year-over-year, and 1% sequentially. Both Dodge and Reliance continue to see favorable end markets. But the rate of growth is moderated from what we've seen earlier this year. On the right hand side of the chart, you can see that operating earnings were up slightly from the year ago period. The margin was about 10 -- 7/10 of a point. Down year-over-year. Down nearly 5 points sequentially.

Let me spend some time on this quarter's results. We included about a $5 million charge for the closure of the plant. The business also experienced short-term performance issues, principally the impact of higher raw materials costs working their way through the P&L. We anticipated margins at Power will revert to about a low teens level going forward. So all in all, strong results for the year for both Control Systems and Power Systems. Go to slide called Regional Sales, which relates to the geographic breakdown of our sales growth. As we said, a pretty good balance of domestic and international growth. We show regional growth rates adjusted to eliminate the impact of currency translation. As you can see, the U.S. and Canada were up combined about 11% year-over-year. Latin America demand remains robust with particularly good growth in Mexico and Brazil. As I said earlier, Europe remains weak down 2% versus the prior year with particular weakness in Germany and Italy somewhat offset by solid growth in the Central and Eastern Europe region. Asia-Pacific was solid up 14% year-over-year. With China and India up 23$ and 9% respectively.

The next slide looks at the cash flow, both for the quarter and for the full year. Obviously, strong cash generation in the fourth quarter and for all of fiscal 2005. Looking at the quarter, we generated $127 million of free cash flow, this included $123 million of pension plan contributions in the quarter, including $100 million in voluntary U.S. contributions. In the subsequent event department in early October, we also made an additional voluntary contribution of $450 million to our U.S. pension plan. To fund this, we issued $300 million of commercial paper and by these combined actions, $100 million in September and the $450 million in October we've effectively raised our funded status to about 88% in the pension -- in the pension plan department.

Working down the chart, as you can see, our working capital initiatives found some traction in the fourth quarter with improving discipline in all elements of working capital. So despite strong revenue growth in the quarter, working capital was a source of cash and almost break-even for the full year. We're going to continue to work hard on continuous improvement efforts over the next few years in this area. Full year capital spending was $124 million, about 82% of depreciation. This was higher than 2004, primarily due to spending on IT systems. Free cash flow conversion ended the year at almost exactly 100% of income from continuing operations.

Let me turn now to the last chart, which relates to an updated version of a chart we used last quarter. To preview our expectations for fiscal 2006. We've identified the changes from the prior version, by adding the items shown in colored font and I'll continue the aerospace metaphor and will update you on the headwinds and tailwinds that we see for 2006. On the left hand side of the chart, are the significant headwinds that we face entering 2006. Our tax rate as I've described previously, which is 32.3% in 2005, is now expected to be up another point or so to 33% to 34%. Looking at pension and retiree expenses. Last quarter alerted you to the impact of the lower discount rate on our pension expense. You'll recall we set our rate on June 30, and when we dropped a full percentage point from 6.25 to 5.25 for the coming fiscal year. This would obviously have a large impact on our 2006 expense. However, the recent $550 million in voluntary contributions to our U.S. pension plan will, obviously, mitigate the negative impact we talked about last quarter. Instead of a $50 million increase in 2006, we now project an unfavorable impact of about $30 million, still a substantial headwind,but better. In addition, in the lower left we added to this page the impact of having to expense stock options beginning in 2006, which in an expense of around $0.10 per share. Taken together, the headwinds add approximately $0.25 per share of additional expense in 2006 versus 2005, roughly $0.06 or $0.07 per quarter.

On the tailwind side, we see '06 organic growth of 7% to 9%. We believe we can sustain incremental conversion margins above 30%. And as we said last time, the 2006 plan is constructed with a higher cost productivity goal than in previous years. And broad-based execution plans have been developed across the company. Looking at the lower right, a relatively underlevered balance sheet afforded us some flexibility. We addressed the bulk of our underfunded pension liability as we discussed. Also, we've received authorization to repurchase up to 9 million shares in 2006. So in summary, as you can see at the bottom of the chart, we expect that with another year of strong execution, we will deliver EPS of $3 to $3.10 in 2006. I hope this guidance will hold you for the next ten days until our annual investor conference, when we will elaborate in much more detail. As parting shot, I do want to point out that the headwinds we face will probably make our first quarter EPS look a lot like the fourth quarter. Also as you build your model for 2006, don't forget to include a little seasonality in our fiscal second quarter. Just leave a little room in case another January air pocket. With that being said, we'd be happy to any answer questions you might have.

Eric, ready to take questions.

Thank you sir. The question-and-answer session will be conducted electronically. Anyone who would like to ask a question, please press star one on your touch-tone keypad. Take as many questions as time permits and we'll proceed in the order you signal. Again, if you have a question, please press star one. And we'll first go to Bob Cornell of Lehman Brothers.

Yeah. Looks like a good quarter to me. You know, you didn't highlight the charge in Control Systems and charge in Power as sort of unusual and reflect maybe the underlying operating margins as sort of continuing it. Is there a reason for that?

Well, Bob, no we didn't. You know in the year ago fourth quarter, there was some facilities charges and restructuring charges and the same thing obviously is the case in this fourth quarter. And I guess I would say we try to chin these as pay as you go items and not carve them out and say what it coulda, woulda, shoulda been. We just say this is what it is. And, you know, perhaps, reserving the right. if such anecessity should arise or an opportunity should arise in future periods that we would also take them in similar fashion.

Okay. I didn't get a feeling from the call yet on how the outlook for business is. What is the incoming order rate, what's the mix of orders, domestic, internationally? Are you starting to see more big project business? In line with some of the issues you are putting in place. What does that picture look like?

Bob, this is Keith. Basically it looks similar to what we talked about last quarter. Where the transition has occurred to a more power-centric mix. Particularly driven by a lot of -- a lot of investment in the raw material extraction-based industries. We continue to see more short-cycle projects. Not a lot of investment, particularly in the U.S., in greenfield or pure capacity expansion. And that -- that continues to be the behavior. Where there's -- where there's minimal appetite to invest in anticipation and willingness to to -- willingness to push out backlogs and lead times and not necessarily have -- have capacity in reserves. So I would say very similar to what we talked about last time. And encouraging from the standpoint of, perhaps, a longer duration than historically.

You know, one final question from me. I think, James, in your presentation you said that the initiative spending was $20 million in the quarter. Is that right? Did I catch that right?

Yes, you did, Bob.

Is there a summary view of this kind of initiative or incremental spend for '06? I mean, what's in your '06 guidance in that regard for initiative spend? What would you spend it on?

Bob, I think the answer is we've got to execute, get the results from the spending that we did in '05. I would say we're always looking at areas to add. But I would describe '06 as the year where we need to execute. Get the yield from the investments we've made in '05. Some of them really didn't get,-- the initiatives didn't really get fully staffed and up and running until the very end of the fiscal year of '05. So I think it really is a year of productivity and offsetting headwinds and the businesses are going to kind of provide for whatever investments need to be made. At this point, I don't anticipate another carved out set of initiative spendings for '06.

We're now viewing the investments we made this past year as just part of the ongoing operating model and will not carve them out going forward so to speak.

Your question, Bob, about where we would spend. Look, we are developing verticals. Thinking about customers in a different way and a different level. Spending money to build sales and distribution channels outside of the United States. We're looking at the main expertise and pushing the -- pushing the progress on our information -- integrated information strategy. All of the things we've talked about in the '05 spending, which was ultimately some $0.15 to $0.20 a share are present in our investments that we're making going forward. Very much more of the same.

Okay, thanks.

Thank you.

We'll go next for John Baliotti of Fulcrum Global Partners.

Good morning.

Good morning, John.

With respect to the spending, the charges you took in the quarter. I know how you're treating them as ongoing and just operational, but I would imagine there's some evaluation done as to a benefit. I mean, you must be expecting some leverage as a result of that cleaning up, getting more efficient there. Is there a nything you can talk about with respect to that?

Well, let me comment on one in particular. And then let James add to it. With respect to Europe, the leverage we're expecting to get is, we're taking -- we're taking that back office cost and we're going to convert it to customer facing resources. So, in our plan for next year, we're expecting to be able to generate higher growth in Europe than would have normally been anticipated, based on -- based upon the market environment that exists there. So, the leverage is more top-line growth. More customer intimacy, and more customer relationship building, Utilizing our core differentiated technology in the Logix platform as the spear point.

Okay. Great. And with respect to your comment on maybe more drawn out demand, it seems like the unfilled orders, if you look at the durable goods that come out every month, the unfilled orders are growing faster than shipments and faster than inventories. Are you seeing that with your customers, they've got good demand and good backlog. It's just that they're not spending in anticipation?

Absolutely that, you know, they're letting backlog slip. We're seeing that. And I would say a number of the suppliers to -- I would say the constricted industries are also limiting their expansion and so there's not a lot of -- there's not a lot of slack being put into the supply chain. They're staying very stretched. We're certainly seeing exactly what you identified there.

Okay. Great. Thanks, Keith.

You bet, John.

We'll go next to Jeff Sprague of Citigroup.

Good morning, everyone.

Good morning, Jeff.

Maybe just -- actually first on the the pension. Can you give us a sense of, you know, I guess we're looking at discount rates. You guys may have roughly bottom ticked it. If you think about, you know, where rates might be at the end of this year, vis a vis this pension contribution you made. You know, if you can give us, you know, some sense of maybe the permanency of this head wind that you're currently feeling in the pension.

Jeff, you're right. Looking back it does look like a little bit like we bottom ticked the rate. Probably roughly speaking about 50 basis points higher than it would be. If that were to be the case, that would represent 100% fully funded and you would see probably about half of the increase in the expense go away. A little bit complicated. Let's call that 20 out of the 30 would be reversed out and we would be in a fully funded status.

Okay. And then maybe just spend a little bit more time, Keith, on geography as you touched on Europe a little bit in your comment. You know, that's kind of more of you taking charge of your own destiny. Do you see any signs of a pick-up in Europe at all, one or two of your pure-type companies have noted that. And also, you know, we have a situation where Asia is actually not growing much faster than North America, which is kind of unusual if you think about the last couple of years. I mean, if you could give us a little comment on what's going on in Asia and if there is some tangible slowing?

With respect to Asia, we have not seen a slowing as of this point in time. What we are seeing, however, is a transition from -- particularly in the developing countries. We're seeing a transition from a high proportion of spending in infrastructure to a greater proportion being talked about and being outlined for consumer-based spending. The ability to address higher consumer spefndzing and hopefully seeing higher spending in the home markets to offset the -- to offset the deficit, trade deficit. In fact, -- and in fact, -- and in fact, I was surprised, I guess when I saw the U.S. reaction of not trying to -- not trying to change the deficit but encourage domestic spending. And encouragement of domestic spending in China would be a positive for us, because it would hit the markets that we do very well in, the consumer markets. The automotive markets. So that could help us there. In Korea, we're expecting to -- we're expecting to see a recovery in that market, in that country. It's been tough the last couple of years on their export industry. And some of their consumer spending has been reduced. Those are some of the problems. You talk about Europe. I think the competition -- some of their strength has been more in the commercial markets than in the industrial markets. We are not seeing a strong change or improvement in the industrial markets in Western Europe. We're seeing continued growth in Central and Eastern Europe. But it's still a small number, compared to Western Europe. And Latin America continues to motor along. We've had a very good couple of years there. And right now our expectation is that we will see continued -- continued strength in 2006. So and I guess the wild card would be the continuation of the growth in India. It's been very project-based. And the question is how do they convert into consumer spending and into some of the more traditional markets that we could do well. It's not obvious that they've made a significant change there. But with their project spending, there's some delay just for their ability to absorb the current rate and the current adoption of what they spend so far. So that's -- I guess a long-winded answer to the various regions that we see and the activity that we see in them.

Okay. Thanks a lot.

And, again, it's star one if you have a question. We'll go next for Mark Koznarek of FTN Midwest Securities.

Hi, good morning, everybody.

Good morning, Mark.

Question on the price versus cost dynamic. It seemed like you called out inflation in both of the business segments. I know you had a price increase that was effective August that hopefully we saw a little bit of that in the quarter. I'm just wondering on a full-year basis, where did we net out? Was a break-even price versus cost? Did you get hit a little? What's the outlook embedded in next year's guidance?

Mark, I would say roughly break-even. As you know, we got behind in the game at Power Systems in the first part of '05. Some pricing that caught up. I guess what I'd say is we exited the year as a dead heat. We're not as susceptible to those type of pressures in Control Systems, which is a different business. Got some price and roughly speaking if you compare that with inflation of all kinds, benefits, as well as materials, those two -- those two were closer to being offset.

But -- more on the positive side on Controls?

Well, it's a different -- it doesn't have as much of a resource input as the metals and so forth going into Power Systems. But there are some. Just a smaller proportion. You asked about '06. The way I would frame '06 I don't want to spoil the surprise for our meeting in a couple of weeks. You know, some more price realization. Productivity at or above this year's level. And then inflation we're still expecting to see and they should, you know, if we're successful, the productivity should match the inflation that we face of all kinds across the company and then we've got, you know, volume price and so forth that carries along.

Okay. So that the equation gets more positive next year, ideally?

You know, I guess it's fair to say that so far the rate of change of, energy and resource prices looks -- was pretty high in '05 year-over-year. We're hopeful we don't see the same kind of spike or increase. There's still persistent cost inflation pressures around. And, you know, that's one of the reasons why we're cranking the productivity mill broader and harder in '06.

Okay. Then one other cost-related question. I'm hearing some grumbling associated with the, you know, the retiree-related expenses within the organization. Sounds like that the programs been throttled back pretty sharply. You know, there was a mention of world-class, customer-facing organization. It sounds like, you know, you need those guys to be as engaged as possible. What's going on there? Sounds like there's some noise that I'm not used to hearing with regard to the plans.

Well, let me say first of all that for some time now, the company has managed -- let's call it benefit costs, whether it be healthcare or pension in a way that seeks to find what is competitive. There have been a whole host for some years now of changes to healthcare in the most recent period, retirement benefits. In previous period -- retiree medical. I guess what I would say like all companies, we have, by any standard, you can see the lengths to which we're going to fund the defined benefit pension plan. I would argue that, you know, the company has number one an extremely attractive set of benefits for employees. And like all companies, is working to make sure it is competitive. That's a struggle as you know if you look around at many companies.

Okay. With -- was that part of then that net reduction in that account, what was it 70 before that we were thinking about, now it's 30?

The quarter ago chart, if you look at the left hand side, it said 50. Now it reads 30.

Okay.

That cover your questions?

Yes.

Okay.Thanks a bunch.

Okay.

We'll go next for Nicole Parent of Credit Suisse First Boston.

Good morning, guys.

Hi, Nicole.

Good morning, Nicole.

I guess I was just looking -- and I could have missed it. A little bit more color on some of the vertical end markets as you see them I guess in the quarter, strengths and weaknesses and how we should be thinking about them in '06?

Sure. We didn't cover that yet. So you didn't miss them. In the quarter, really we had very strong growth in mining aggregates and cement, they were up about 25%. Food about 13, water and waste water around 11, and oil and gas 11. For the full year, certainly the strength was in the natural resource extraction-based industries, oil and gas, water wastewater, mining, ags (ph), cement, all above our average. Food and transportation grew at approximately our average. And the -- the beverage, life sciences and semiconductors probably the underperformers below -- below our average. And if you think about 2006, we do expect some moderation of growth in the heavy industries. And better performance from the beverage and life sciences. That's how we view the vertical suite going forward.

Terrific and I guess just a follow-up on productivity. You put forth a target of 4% last year at your analyst meeting. I guess when we think about the numbers that you've been able to post this year and as we look ahead, where in the productivity spectrum, whether it's strategic sourcing, the restructuring actions that you did this quarter. I guess IT systems, when you dig a little bit deeper in the productivity opportunities, where do you think there's still some more upside?

Great question. First of all, we have continued to see on the procurement, strategic sourcing front, continued gains. This is another good year. We've built that into the plan for '06. To some degree I'm talking ahead to what I'll cover in a couple of weeks.

I'm sorry.

We alluded earlier to a conversation about back office expenses in Europe.That's a perfect example. You might call it shared services, back office. I think we've got a long runway ahead of us in that area as a company. That's even before you get anywhere close to the benefits that we project from the IT systems investments, which as you know, they're really investments in straightening out business processes, making them the same everywhere. Again, I think we've got a pretty good runway ahead of us there. So it's moving from what I consider to be a strong culture in the manufacturing side. Lean manufacturing, Six Sigma, migrating where products are manufactured, and continuing looking at globalization. Two, the administrative areas. Which as you know in this company, we've got a pretty heavy SG&A layer, because we're -- it's all about people and we're all about engineering and customers. But It is about finding the back office, doing more with less, common processes, shared services and so forth. So that's really where we are as we look at '06. I think the benefits from IT and other systems things are really much further out. Although we need to start thinking about them and getting them in order. They're not the big driver in a year like '06.

Terrific. Thank you.

Thank you.

We'll go next to Scott Davis of Morgan Stanley.

Good morning, guys.

Good morning, Scott.

Good morning.

I -- on the verticals. I don't think I heard you say anything about the auto business? Is that a -- you know, obviously there's a lot of moving parts since it's a global business. Is that a headwind for you in '06 versus '05?

No, actually I made the comment about '05 that the transportation industry grew at our -- grew at our average. And certainly -- certainly we expect, you know, it was up -- it was up 10% for us this year as an industry. And we're planning for more growth in that industry in 2006.

Okay. Interesting. Is that obviously not capacity increases. But is there a big replacement market going on there? Something unusual?

No. It is capacity increases.

Oh yeah?

I think it's important to make a distinction between -- automotive is a global industry for us. And what we're seeing is a shift in spending to outside the U.S., even from the -- even from the U.S. manufacturers. And we're seeing investment in the U.S. by the offshores. It continues to be a industry that spends money to come out with new cars, new models, new platforms. And we believe that as they continue to drive their business model to a more flexible -- flexible automation where they can have greater variety across -- across their plant floors as opposed to high volume across a line, they're able to -- they're able to now create more flexibility and more agility number their automation spend and that's really where they're all focused in driving forward. And I would also say the other aspect of the automotive industry as we continue to diversify our portfolio, and this is something quite candidly we've been doing for 25 plus years. It's now only -- it's only around 10% of our total business. So, we continue to evolve. But on the other hand the automotives are great. It's a great breeding ground for new technology. We learn a lot. They're tough demanding customers. We can leverage all of that knowledge across the strength in the rest of our business and we see continued evolution in the need for technology of safety and better utilization of information. Even in the mature -- even in the mature plants that exist around the world. So, we're -- we continue to be optimistic in the automotive sector. But it continues to be less of a -- of a percentage of our total sales as time goes on.

Okay. Thanks for clarifying that. Just a clean-up item. James, I saw on your balance sheet. Your retirement benefit liability went up substantially. Is that just as a result did did the discount rate decrease and a lousy S&P or is there anything else that impacted that?

What you have is a snapshot as of the end of fiscal '05. I didn't make the big additional $450 million until October.

Okay.

And you'll see it in a couple of places. You'll see it there, you'll see shareowners' equity lower, as you see the other comprehensive income effect of the underfunding. If we're right and rates are higher and we've made the $550 million in contribution, those should all unwind as you look at the print the balance sheet in the year's time.

Okay That's what I figured. It's a rather drastic hit on your shareholder's equity, about a 10% hit.

That's right. Most of that, say 275 is the other comprehensive income running through the P&L -- er running through the shareowners' equity not the P&L. And as I said, a year from now -- other things being equal, they should reverse out as should the increase in benefits and obligation that you pointed out.

Okay. Last question, James. We've had some issues with our model in the past, working with you on the stock option dilution. If you think about -- I think you bought in about 9 million shares this year and that took out about net-five. If you think about '06 and you're buying another nine, are we looking at a similar ratio?

Yeah. I think that's about right.

Okay. Fair enough. Thanks, guys.

Thank you.

We'll go next for Chris Kotowicz of A.G. Edwards.

Good morning.

Good morning, Chris.

I guess my first question would be on should we read anything in about the acquisition pipeline, especially in the key verticals, given the size of your pension contribution recently?

First of all, let me say that after the contribution, I still have what I would call slightly below normal leverage.

A lot of dry powder.

As we said in the past, our first priority really is to make sure that we grow. These are times when you take care of the long-term. That's really what we've done to the contributions that we've made very recently. I think we have -- with our free cash flow that we're able to generate as well as our existing slightly underlevered balance sheet, I don't think you have to make any assumption changes about what we'll do in '06. We're going to be disciplined on acquisitions and we're going to continue to look at the highest shareowner return use of the free cash flow. As in '05 and '04 was all about dividends and repurchase. That's kind of a default mode and we continue to shop aggressively and globally looking at dozens of things every month. I think the main thing is the rigor of that analysis led us to be modest, if we've done any at all, extremely modest -- now that's no promise in the future. That's the current state. I don't know if Keith, you have anything.

I just would pick up on the one point James made and that is the share repurchases is -- and the fact that we made cash contributions to the pension plan, although not as much with the pension plan -- those are default opportunities. We continue to have an aggressive pipeline. We continue to want to make acquisitions to accelerate our organic growth. And that allow us to do more for our customers. And certainly the sweet spot is more in the verticals, more in the domain expertise. More in the software and services area. And we're no less bullish or aggressive or charging to make those. It's just that we are tough -- tough evaluators. And certainly the prices today are pretty high and pretty expensive. But we have an active pipeline and I would not read into the utilization of cash over the last couple of quarters as an indication that we are not interested in making acquisitions.

Do you think the pipeline is a little bit stronger this year than it's been, say, in the last 12 to 24 months?

I was going to say the rigor and the volume as we've stuck with this thing, more activity, we're looking at more things, we're more analytical. So I would say the through-put is certainly larger than it would have been a year ago.

Absolutely. Absolutely we have a much more robust pipeline process. And certainly I'm more optimistic as to what we'll be able to do over the next -- the next year compared to -- compared to the previous.

But as a parting shot today, no one has said that we need acquisitions somehow to make the growth happen. It really as Keith said, making the acquisitions to accelerate what it is we're doing for customers, what we know about certain domains or verticals. These tend not to be large industrial synergy-type acquisitions. They're certainly in my experience not that cheap. They have the advantage of not being very big. Not a Company that needs swing from vine to vine and make some acquisitions in order to make this thing work.

The key is not to distract ourselves from our growth initiatives that we feel very good about right now.

I don't think anyone is criticizing your capital allocation. Been pretty effective. Swinging back to restructuring. Should we think about -- I wasn't totally clear on the commentary about, I guess, the discretionary items. Should we think of that as the $40 million or so that you spent this year, just kind of run rate $40 million going forward? Or is there going to be some of that gets backed off?

Oh, okay. No, think about it this way. We spoold up and got to a run rate, which will now be -- if talking about growth investments that we're making?

Exactly.

Yeah, yeah. No we -- in effect through productivity have driven cost out of nonvalue-added areas, and we're reallocating it to stuff that's right closer to the customer,accelerates products,and so forth and that becomes a permanent part of our cost structure. And the yield or the payback is the call it the '07 through '09 growth. that it generates, and sustains our secular organic growth trend. So it becomes a permanent part of the cost structure as we're adding, let's call them verticals and sales and regional channel people and resources. They're going to be there hopefully forever. And they will themselves generate substantial income and revenue if we're successful. Does that help?

Yeah, I think so. Any tail on the charges at Power Systems? That you took in the quarter? Is that all in right now?

A tail meaning additional?

Meaning additional restructuring.

I don't think so.

Thanks a lot.

Eric, we have time for one more question.

And that will come from Barry Haynes of Sage Asset Management.

Hi, good morning.

Good morning.

I had a question relating to the much higher cost of energy that we've seen, really all year, but certainly since the hurricanes. Whether you're seeing anything in your inquiries, orders, etc. from customers who are looking to use some of your equipment and services to get their energy costs down. If so, which parts of your business are you seeing that in? Thanks.

Sure. There's no question that the -- that the continued -- the continued high cost of energy has sensitized our customer base to that dimension of their cost structure. It has created a lot of let's just call it interest. I don't want to say business at this point in time. But we do see renewed interest in helping our customers find ways to reduce energy costs. And the way to do that, really, is focused on where are the biggest utilizers of energy, which tends to be around the power-centric part of our portfolio. So energy-efficient motors. Variable-speed drives, and just the ability to help them understand and analyze how they utilize energy, so consulting, being able to do audits of energy utilization for our services business. All of those parts of our portfolio are now very much involved and engaged in working with our customers to find ways to have them reduce their enery costs. And I would say that has especially heightened in the United States. It's been very positive in -- particularly in China over the last 12 to 18 months as their energy appetite continues to grow and they can't bring enough -- they can't bring enough resource online fast enough. There's other parts of the world where energy conservation is also a key driving factor. So, in the long run, we view that as a positive for our power-centric businesses. And planning accordingly in our '06 -- in our '06 outlook.

Okay. Thanks very much. Appreciate it.

Thank you.

Eric, that concludes this call. Thank you for all for joining us today. For those of you who are going for see us in St. Louis, we look forward to it.

That concludes today's conference. We thank everyone for your participation. You may now disconnect