Rockwell Automation, Inc. (ROK) Q2 2009 Earnings Report, Transcript and Summary

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today’s conference call is being recorded. Later in the call, we will open up the line for questions. (Operator Instructions). At this time, I would like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, please go ahead.

Thanks Becky. Good morning and thank you to all of you for joining us on Rockwell Automation's second quarter fiscal 2009 earnings release conference call. Our results were released this morning and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. A webcast of the audio portion of this call and all the charts that we referenced during the call are available at that website. The webcast will be available for replay and materials from this call will be accessible for the next 30 days. With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our Senior Vice President and CFO. Our agenda includes opening remarks by Keith followed by’s review of the quarter and discussion of 2009 guidance. There will of course be time at the end of the call to take your questions and we will try to get as many of you as possible. Please limit yourself to one or two questions. We expect the call today to take about one hour. As is always the case on these calls, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may different materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that I’ll turn the call over to Keith.

Thank Rondi and good morning to everyone, who joined us on today’s call. Let me start by making a few comments on our results this quarter and spend more time talking about the balance of the year. On our first-quarter earnings call in early February, we said that 2009 would be a challenging year for Rockwell Automation. At the time, key economic indicators and projections were weakening, and we were seeing a significant decline in customer demand that started in November. As of results, we significantly lowered our revenue outlook for the year. We told you that that we expected a steep sequential decline in Q2, primarily in our product business revenues. Our result in the second quarter confirmed that we are on the right track. We are in the midst of a serious global recession and our revenues in Q2 declined even more than we expected; particularly in Architecture & Software but, generally in all of our product businesses. Overall sales declined 25% in the quarter compared to last year that included a 7% decline due to currency, so organic sales were down 18% year-over-year. Segment operating margins were down dramatically primarily due to steep decline in sales volume. These are difficult results in a very difficult market condition. However, I’m pleased with the progress we’ve made on our efforts to reduce costs. We expect to exceed our cost takeout target of $240 million for fiscal year ‘09. During the quarter, we implemented additional headcount reductions. We instituted unpaid time off to further reduce payroll costs and we suspended the 401(k) match for U.S. employees. In addition to other cost reduction actions. I also told you last quarter that we would work to identify an additional $50 to $100 million of cost reductions for fiscal year ‘10 beyond the $240 million target for fiscal year 2009. We have made progress on that as well. Ted will provide more details on both efforts in his remarks. I have just a couple of additional comments on the quarter. I’m pleased with the good progress on cash flow this quarter. Working capital improved and in particular in inventories has been appropriately managed down consistent with declining sales levels. We acquired two engineering firms in the second quarter that enhanced our global domain expertise and demonstrate our commitment to our long-term diversification strategy. Xi'An Hengsheng surged the power and heavy process industries in fast growing regions of Middle and Western China. Rutter Hinz based in Western Canada provides critical expertise in oil and gas and other industry applications and I want to recognize our employees for staying focused on our business priorities in this challenging environment. Despite making personal sacrifices, they have executed well and have not waivered in their dedication to our customers. Now let me shift gears and discuss our outlook for the balance of 2009. There is still a great deal of uncertainty. There are some signs that both macro indicators and customer activity is beginning to stabilize. We believe its too early to declare that the market has bottomed but we do believe that the steepest sequential declines are behind us. Our outlook for the second half of the year, calls for sales to be at or somewhat below Q2 run rate. This outlook is based on our normal quarterly review processes. Including our review with our sales organization, channel partners and customers in every region. We evaluated backlog and frontlog order trends and plant shut down. Our backlog is down sequentially 7% versus Q1 ’09. Overall frontlog is flat but we did see an increase in project delays and a modest increase in cancellations. None of our major global accounts have improved their outlook for capital spending in 2009, most of the key economic indicators including GDP, industrial production rates, capacity utilization and PMI, continue to be at historically low levels. But appear to have stabilized somewhat during Q2. Accordingly, we are now planning for an organic revenue decline between 16 and 18% in fiscal 2009. That compares to our previous guidance of an organic revenue decline of 12 to 17%. Our expectation for currency impact is unchanged. We expect currency to negatively impact full year revenue by 7%. Based on this revenue outlook, a less favorable revenues mix and the increased savings related to cost reduction actions, we are revising our fiscal 2009 projected earnings to a range of $1.40 to $1.70 per share, excluding the impact of additional restructuring costs in the second half of the year. Let me wrap up with a few comments. I remain very confident in Rockwell Automation’s future. We continue to invest in technology leadership, and particularly our new next generation of integrated architecture. We continue to penetrate process industries, one of the best success stories of our diversification strategy. We continue to grow our footprint in emerging markets. We are taking advantage of these difficult market conditions, at a time to make further inroads with OEM’s and we will benefit when their machine build volumes return. We are continuing to adjust our cost structure and we expect strong earnings leverage when we emerge from this downturn. We have great employees and partners, who have proven they can deliver results in good and poor market conditions. And one other thing before I turn it over to Ted. I continue to believe that our strong balance sheet and liquidity position provide us with the financial flexibility needed to manage through this economic cycle without compromising our long-term strategy. So in spite of the difficult business environment, we will balance near term financial performance with protecting our intellectual capital and core technology investments. I am confident in our ability to execute through the downturn we are well positioned to outperform the market in these challenging times and we will be even more competitive when markets do recover. Now let me turn it over to Ted.

Thanks, Keith. And good morning to all on the call. As Rondi mentioned, we posted charts to our website and my comments will reference those charts. So on chart one, Q1 results summary, starting at the top of the slide, revenue in the quarter was $1.058 billion, down 25% from Q2 last year. The effects of currency translation contributed 7 points to the decline. Segment operating earnings were $86 million, down from $240 million in Q2 last year. Segment earnings in Q2 included approximately $20 million of restructuring charges associated with our ongoing cost reduction efforts. Approximately $15 million of the restructuring charges was related to cost reductions that contributed to our targeted fiscal year '09 cost take-out. We believe we will exceed our fiscal year '09 targeted $240 million and I'll tell you more about that when we get to full year guidance. The balance of the restructuring charge is about $5 million, was incurred to get us started on the next $50 million to $100 million of cost reduction that we talked about last quarter. We have initiated several actions, which are anticipated to save approximately $20 million per year beginning in fiscal year '10. We're making progress in our cost reduction efforts are ongoing. For this quarter, purchase accounting expense, general corporate net expense, and interest expense were each about $2 million lower than last year. The effective tax rate in the quarter was 26.7% that compares to 28.5% in Q2 last year. For the first six months of this year, the effective rate was 19.9%. The effective rate for the first six months of last year was 28.5%. EPS from continuing operations was $0.29 that included $0.02 of income from special items. Special items was $4 million of pretax income, related to the reversal of restructuring accruals established in prior years. Average diluted shares outstanding were 142.1 million in the quarter down from 148.7 million shares last year. Consistent with our comments last quarter regarding our plans for cash management, we repurchased no shares in Q2 this year. Moving to chart two, Q1 results for Rockwell Automation, as I mentioned on the prior chart sales for Q1 declined 25% year-over-year with currency accounting for 7 point of that decline. Sequentially, sales declined by 11%. On the right hand of this chart, you can see that segment earnings declined significantly, both year-over-year and sequentially. The earnings decline is primarily due to the significant decline in revenue. But segment earnings were also lower due to the $20 million of restructuring charges incurred in the quarter, and due to mix offset in part by cost reductions. As I’ll show you on the next slide product sales and particularly Architecture & Software sales continued to decline in Q2, at a more rapid rate than our lower margin solutions business. We believe the decline in product sales included a more pronounced effect of destocking in our channel in Q2 compared to Q1. Also, it’s worth noting that cost reductions in the quarter benefited from the adjustment of incentive compensation accruals. Segment operating margin contracted by 9 points year-over-year to 8.1%, although it’s not displayed on this chart, our return on invested capital was 18.7% down from 26% last year. That’s a 12 months rolling calculation and the decrease is primarily due to reduced earnings. Turning to chart three, this chart covers the Q2 results of the Architecture & Software segment. Sales for Q2 were down 34% year-over-year, down 28% excluding the effects of currency translation. Sequentially sales were down 22%. Operating margins declined to 8.4% compared to 23.4% in Q2 last year. The decline is principally due to the very sharp organic sales decline in this high margin business, partially offset by the net effect of restructuring charges and cost reduction. Chart four, covers Control Products & Solutions and this segment sales decreased 18% in total, 10% excluding currency effects, sales decreased 3% sequentially. On an organic basis, sales of the solutions businesses within Control Products & Solutions grew by about 1% compared to Q2 last year. With the product portion of this segment down consistent with the organic sales decline in Architecture & Software. Earnings were down significantly from Q2 last year and down somewhat sequentially. Segment operating margin contracted year-over-year by 4.4 points to 8%. The decline due to a combination of volume and mix, again partially offset by the net effect of restructuring charges and cost reductions. Moving to the next chart, chart number five provides a geographic breakdown of our sales in the quarter. The center column displays the overall growth rates by region including currency impact. The far right column shows the regional growth rates excluding currency. And comparing the two, you can see the continuing significant impact currency is having on year-over-year comparisons. And the regions outside the U.S. I’ll focus my comments on the far right column which is basically organic growth. The U.S. was our weakest region in this quarter with sales down 24% compared to last year. Canadian sales were down 21% with continued weakness in the Eastern part of the country. EMEA sales were down 16% compared to Q2 last year and Asia-Pacific sales were down 9% year-over-year, with particular weakness in Japan, Korea, and Taiwan, which tend to be more export-dependent. Emerging Asia sales were about flat compared to last year with China up about 4% but offset by small declines in India and Southeast Asia. In North America, EMEA and Asia-Pacific, there was a similar vertical story. There was weakness across all vertical categories, but transportation was the worst performing vertical both auto and tire. And consumer was the best performing, but still a decline compared to the prior year. Latin America was the one region that delivered year-over-year sales growth at 12% for the quarter. Resource-based industries were the strongest but sales in the quarter also benefited from the timing of holidays compared to last year. In Latin America, we have seen order trends beginning to slow, so we do not expect to sustain year-on-year growth going forward. I'll move to chart six, free cash flow. We made very good progress this quarter on cash flow and conversion. Free cash flow for the quarter was $152 million, that's a conversion in the quarter of about 375%. Working capital reductions contributed $89 million toward that. We made very good progress on inventory in the quarter. We reversed the increases that occurred in Q1 and achieved a substantial additional reduction. Capital expenditures were $18 million in the quarter and $46 million year-to-date. Last year, through six months, capital spending was $60 million, so we're down almost 25%. We also received a refund of $32 million in the quarter related to a contractual tax matter. Before I move on to talk about guidance, just a couple comments on our balance sheet. The balance sheet remains an important strength as Keith mentioned. Debt-to-capital at the end of Q2 was 38% and net debt-to-capital was 22%. Also at the end of Q2 we had cash and equivalents of $520 million and short-term debt of about $75 million, down somewhat from last quarter. Our first maturities of long-term debt are in 2017. And during the quarter we replaced our $600 million credit facility that was expiring in October of 2009 with two new facilities, a three-year and a 364-day that totaled $535 million. We intend to continue to tightly manage cash and our balance sheet consistent with these uncertain market conditions. So now on chart seven, our revised guidance for the full year fiscal year '09. As Keith mentioned, we now expect full year sales excluding currency effects to decline between 16% and 18%. Consistent with our previous guidance, we continue to expect currency to cause a further decline of about 7%. Compared to our previous fiscal year '09 cost target of $240 million, we now expect reduced costs in fiscal year '09 by about $280 million. This additional cost reduction will help to offset the lower sales and less favorable mix. Given the revised sales range and taking into account the expected cost reductions, we expect segment operating margins for the full year to be in the range of 9 to 11%. We expect EPS in the range of $1.40 to $1.70. Consistent with our previous guidance, this range includes the $25 million of pay as you go charges that we told you about in our guidance both in November and last quarter. That $25 million covers the restructuring costs for the actions already taken through the end of Q2. But also consistent with our guidance last quarter, this range does not include any charges related to future restructuring actions. We are continuing to work toward the previously identified $50 to $100 million of savings for fiscal ‘10. As I mentioned, we have already initiated actions to realize $20 million of those savings, beginning in fiscal ‘10. Given projects, we are currently working on, the savings target remaining and the likely time required to complete the planning and to finalize further actions, we expect to incur about $25 million of additional restructuring charges in the balance of fiscal year ‘09, some of that beginning in Q3. Regarding cash flow, we expect free cash flow conversion to be about 110% for the full year. And with that I’ll turn this back over to Rondi to begin Q&A.

Great. Thanks Ted. Becky, we are ready to open the line for questions.

(Operator instructions). And your first question comes from the line of Bob Cornell of Barclays Capital. Please proceed. Robert Cornell – Barclays Capital: Hey, guys.

Good morning, Bob. Robert Cornell – Barclays Capital: Yeah, I wondered if you just expand on the comment I guess Keith you made first about the second half sales being below the second quarter run rate, maybe you could flush out sort of what you’re seeing there, maybe you said there was potentially below, maybe just expand on that point, please?

Sure, Bob. Basically, the fact that we still believe there’s some downside potential in the economy that we believe the second half could be a little bit weaker than we’re currently seeing. And certainly the other dimension of that is as we talked earlier in the year, we believe our Solutions business will weaken as the year plays out. And so we think as we go further into the fourth quarter, we’ll see that get a little weaker than we’ve seen in the first half of the year. So it’s really about hunting for the bottom of the economy and it’s just too unpredictable at this point in time for us to be able to feel certain that we’re there and so it’s a little bit of a belief that while we’re seeing the worst behind us, we probably still have a little bit more to go down before we start flattening out and begin whenever the recovery occurs. Robert Cornell – Barclays Capital: Yeah, just a question on the cost. I mean, the unabsorbed factory overhead would have been reflected in inventory, but shipped in the June quarter, Ted, is that right? Help me with that.

Yes, we’re a FIFO company, as I think you pointed out in some of your recent notes and we had a large inventory reduction in Q2. The primary absorption effect of that will be felt in Q3. Robert Cornell – Barclays Capital: Do you have a magnitude of that what we should expect?

I mean, call it roughly $10 million. Robert Cornell – Barclays Capital: Okay. Thanks. I’ve lots of questions but I’ll pass for the time.

Okay, Bob.

And your next question comes from the line of Nigel Coe of Deutsche Bank. Please proceed. Nicole Dibotto – Deutsche Bank: Hi, this is Nicole Dibotto is asking questions on Nigel’s behalf. The first one for you. We were surprised to see North America weaker than EMEA in this quarter. Does that represent broad market growth rates and is that expected to continue going forward? And then also, how are channel inventory burns trending in North America and Europe?

Well, I think the U.S. went into a deeper recession faster than Europe did, and that’s why you saw the differences. I think Europe, quite frankly, is catching up, but the U.S. was deeper and certainly a part of that was led mainly because the financial crisis hit here first in a bigger way and then in addition to that, the spillover and the dramatic impacts in particular in the automotive industry, created bigger headwinds as well. So not a surprise that the U.S. was a tougher market than EMEA, at least in the second quarter, and certainly given the disproportionate amount of market share that we have in the U.S. versus EMEA, that part of the regions that you saw the dramatic reduction in our revenue and in particular in A&S revenue this quarter, because likewise, our largest market shares in A&S would be in North America. With respect to the destocking in the channel, that was a more significant impact for us in quarter two than quarter one and I would say it was a bigger issue in the U.S., simply because the majority of our sales go through distribution in the U.S. and in Europe we run a different model. We have some countries that are distributor related but we also have direct sales and other third-party system integrators that we work through to a much larger degree than occurs in the U.S. So Europe would have a less of an impact of distributor destocking than the U.S. Nicole Dibotto – Deutsche Bank: Okay. Thank you. And then one more, if I may. What will be the incremental impact of the GM auto related summer shutdowns?

Well, it probably won’t be much incremental because there wasn’t much in the second quarter, so because if you remember they had very long, extended shutdowns into January, which they normally didn’t have. So most of January was a shutdown and certainly some of the plants even came back up slower after the shutdowns. So I don’t think we’ll see a significant impact on what they’re talking about for the summertime frame. Historically, summer had a shutdown anyway for retooling and model changeovers. Obviously, this is much longer but the bigger impact will be exactly how does Chrysler and GM come back as entities and as companies, which I think is being played out over the next month or two. That will have a bigger determination as what happens in the summer and fall timeframe than the plant shutdowns. Nicole Dibotto – Deutsche Bank: Great. Thank you.

And your next question comes from the line of Mark Koznarek of Cleveland Research. Please proceed. Mark Koznarek – Cleveland Research: Hi, good morning.

Good morning, Mark. Mark Koznarek – Cleveland Research: Maybe a bit of a longer-term question. I have often thought about the two major competitive advantages of Rockwell being the technology and then the customer-facing assets being the second part of that, your own internal organization and then the strength of the distributors. And the question I have is that we are hearing from channel participants that that ladder organization, sales and marketing, is being cut back pretty substantially and in prior downturns that part of the business has been pretty insulated and it kind of suggests that you think that this downturn is going to be a lot more protracted, perhaps, than you might have 90 or 180 days ago. And I’m just wondering if you can comment on your outlook for the degree and how long this downturn might last, based on your prior experiences and how you think the Company might emerge from it, looking different than it does today.

Well, certainly I have no idea how long the downturn is going to last, so our decisions are not made with any insights on the duration at this point in time. Quite frankly, we’re focused on 2009 and obviously we’re going to be monitoring and watching what’s going on, but as far as we enable to determine how long this is going to last, we don’t have that insight, quite frankly. With respect to the changes that you’ve talked about in the sales organization, those changes are not being made based upon a belief in the duration of a downturn. What we are doing in our sales organization and what you’re probably hearing about is probably mainly in the U.S. because, we are taking different approaches to the different regions, based upon the environment, but also the evolution of our selling model. And that is what’s happening in the U.S. and North America and certainly what we’re doing is we’re now using the downturn as an opportunity to accelerate the sales model change that we had actually started probably a couple of years ago now. And certainly what we’re now doing is getting to an end state and preserving the majority, the vast majority of the quota-carry and resources and what we’re reducing is some of the management heads by increasing span of control. We’re organized now around customer type, instead of by our product delineations, if you will. And we believe that the new organization with fewer layers will be more effective in calling on customers and managing those customers’ relationships. So what we’re really doing, Mark, is protecting the customer-facing resources and aligning those resources directly with the type of customer, so that we can be more efficient and more effective and when I talk about the types of customers, I think you can think of it broadly as end users and OEMs. And those really have different buying behaviors and needs and so we’re aligning around customers, which I think reinforces just how you started your conversation that is one of the strengths of Rockwell Automation, the ability to be focused on customers, to develop deep customer relationships. Everything we’re doing is to only make greater leverage of those relationships and to create a much tighter link directly between the account sales person and the customer and to be able to do that in a way that creates more long-term value for each one of those customer types that I mentioned. Mark Koznarek – Cleveland Research: Okay. That is actually very valuable. I appreciate that. As a probably unrelated follow-up, would you just be able to comment on the trends within some of the subcategories that you frequently mentioned, which is logix, process, some of the other underneath?

Yes. I will. With respect to our Logix business, Logix really performed pretty much like the business. In general, Logix declined at 18% for the quarter and that was probably a pretty universal decline around the business, around the world, I mean, pretty consistent performance in Logix geographically. It’s also consistent with the expectations that we had for Logix and the expectation that we would see negative growth in Logix for the year. So not inconsistent, but obviously that’s part of the reason behind the A&S performance. With respect to Process, Process continues to have very solid performance, even though it’s a darn tough environment. And our Process business grew 4% in the quarter and certainly the Solutions business, the Solutions aspect of process grew at an even faster rate than that 4%. So we continue to be able to take share and to compete very effectively against the traditional DCS suppliers. We’ve continued and have accelerated some of our legacy DCS conversion capabilities and that is working well, particularly in these tough environments. Customers are looking for a way to maintain their installed base, but provide them a path to the future without having it to be a major upfront cost for a complete tear-out. So legacy DCS were also growing, obviously in the oil and gas industry. ICS Triplex continues to perform very well in the oil and gas sector and our Plant PAx Process system continues to make inroads and add customers that traditionally were not Rockwell Automation PLC discrete users. So we’re very pleased with Process. Obviously, the growth is slowing. No question about it. But still, a growth sector for us and continues to be our greatest long-term growth opportunity. Mark Koznarek – Cleveland Research: Great. Thank you for the color.

You’re welcome, Mark.

And your next question comes from the line of John Inch of Merrill Lynch. Please proceed. John Inch – Merrill Lynch: Thank you. Good morning.

Good morning, John. John Inch – Merrill Lynch: Good morning, guys. Hi, so Keith, these stabilizing trends that you’re talking about. I’m assuming these are proportionately tied to North America. Is that why, you still expect growth sequentially to get worse? And are you looking at things internally or are you just looking at some of the anecdotal evidence that you’re seeing on the macro level, housing, et cetera? Can you just maybe flush this out a little bit more for us?

Yes. Actually, it’s both dimensions of that, John, and if you look at the macro level, certainly, if you look at the sentiment indicators, look at PMI and you look at PMI globally and if you look at the last couple of months, there has been a slight uptick and I would say the decline has stopped. They’re still not at good levels. I mean, don’t get me wrong. There’s nothing to be proud of in the 30s and low 40s. But at a minimum, they’ve stabilized and in most cases, they’ve turned slightly upward. And certainly we believe that, that portends a positive movement sometime in the future. It’s hard to predict exactly, but I think that’s one of a good sentiment indicator. If you look at the industrial production and GDPs, and if you look at that around the world, most of those, the forecasts are still coming down but the rate of decline is slowing or flattening from either a month or a quarter previous picture of them. So from a macro standpoint, those are the ones that we look at. If you look at internally; internally it’s really about what’s happening with quotations, with the backlog and frontlog pictures that we capture from the different sales organizations, conversations with customers and channel partners, and basically most of that is coming back telling us that they’re pretty well set with what’s happening today and they don’t see significant continued degradation in the short to intermediate term. So it’s all of those dimensions, John, that are telling us that we’re getting close to the bottom and hopefully that’s something we’ll be seeing in the next quarter or two. And so that is why we said we believe the second half will be at or slightly below our current run rate. John Inch – Merrill Lynch: Would you expect international process kind of weaken, Europe, I mean how well, Europe is myriad in recession. Would you expect international to get worse and the U.S. to get better or are you expecting everything kind of to stabilize at these levels?

I think Europe still gets a little worse going forward. I think the U.S. will stabilize. I think Asia will be next. I think, we’ll see improvement in China. China’s stimulus is working. And they went earlier. They talked about it in the November-December timeframe, as you remember we had a very, very weak Q1. The Chinese economy was probably the weakest in Q1 and I think we’ll see India after the elections pickup a little and certainly the magnitude of the decline that we’ve seen in Japan, Korea and Taiwan, we don’t think that’s sustainable for the full year. So and we’ll probably see a little softening in Latin America from where we are right at the moment. So I guess that’s how I would characterize the different regions, John. John Inch – Merrill Lynch: Yeah, that’s helpful. Keith, I think your CapEx expenditures were down about 25%?

Yes. John Inch – Merrill Lynch: If you look at other industrials, they’re down - of that order of magnitude up to, I’ve seen even down 50%. Historically, Rockwell’s revenues have been sort of juxtaposed or tied to industrial capital expenditures, so in theory, right, even if you have an economic improvement, there’s a wild kind of a lag for that capacity to begin to cause for companies to reinvest in a variety of different products, possibly including automation. I’m curious, what portion of your revenue mix though, would you tie to sort of being more coincident with economic activity versus kind of more traditionally has to wait for the lag impact of capital expenditures to begin to rebound. Kind of it’s almost - what’s a short cycle versus long cycle as you kind of think about Rockwell’s revenues?

Well, if you look at short, in that definition for Rockwell Automation, I would say our short cycle would be basically MRO business. And that’s certainly we believe is depressed now and it’s depressed because of how two dimensions as to why we believe it’s depressed. One is the economy is slowing down and people are not running their lines, running the machines or running as many of their machines as they needed to. The second one, it’s such dramatic that they’re also trying to conserve cash. And that means they’re limiting all their expenditures and because they don’t have to spend, because they don’t need it immediately, they’re not spending it. And so we believe that the MRO, while it’s depressed now, it will improve as production levels improve and that will probably be the shortest term, shortest cycle part of our business. As you know, John, we have a lot of short cycle in general, but I would say that dimension, as opposed to small projects, as opposed to other what I would call plant investments that normally come out of plant operating budgets, would be the first. The second would be the plant investments and then the third would be true Company CapEx spending as far as how they would play out, and then obviously the longest term cycle business for us, it’s our Solutions businesses, and those are still enjoying year-over-year growth. John Inch – Merrill Lynch: And then just how big is MRO this year and then for Ted, could you give us the breakdown in terms of your restructuring spend between the A&S and the CP&S businesses? Thank you.

Okay. MRO tends to be around 25% to a third of our business. And Ted …

John, the restructuring cost in the quarter was split roughly equally between the two segments. John Inch – Merrill Lynch: Roughly equally. Okay. And maybe just one final one. I don’t understand why aren’t you including the extra call at $0.15 of restructuring in the guidance? I mean it’s a little confusing like you’re sort of reversing prior restructuring accruals and then you’ve included restructuring but now you’re excluding it. Is there some rationale for that? Or I’m just trying to understand.

Basically we were just trying to remain consistent with the way we had provided guidance in the last quarter but also give you the estimate of what those charges might be in the balance of the year, so that we were very transparent. John Inch – Merrill Lynch: Okay. I appreciate it. Thank you guys.

You bet, John.

And your next question comes from the line of Richard Eastman of Robert Baird. Please proceed. Richard Eastman – Robert W. Baird: Can I just wanted to circle back for a second to the CP&S business? We talked about the second half being lower than the first half, primarily because the Solutions business is expected to begin to taper off. Can you give us a sense of how the backlog looked in Solutions at the end of the second quarter versus how we started the quarter?

Yes. Basically, our Solutions backlog was still higher than the way it started the quarter. I’m sorry. I was going to say our backlog is higher than Q2 of last year in the Solutions business, but it did come down actually right around 3% sequentially. So under 5% sequential decline but the backlog is still higher than quarter two a year ago. Richard Eastman – Robert W. Baird: So like order of magnitude as we get into the second half, can the CP&S business be down? If it’s trailing the A&S business, can it be down 20% or something along the year-over-year? Is that the order of magnitude? In other words, follow the A&S business down? Might get too granular but I’m just curious if it lags by six months or nine months?

I think the second half we’re talking about 10% in the Solutions business. Richard Eastman – Robert W. Baird: Decline. Okay.

And - go ahead, Ted.

Rick, I was going to say the CP&S business really can’t get that negative. Remember, 60% of it is Solutions, right? Richard Eastman – Robert W. Baird: Yeah.

So it can’t turn that negative that quickly. Richard Eastman – Robert W. Baird: Okay, so that’s fair with the backlog that’s fine. And then also, you were watching pricing fairly closely through the first quarter and out of the first quarter. How was that looking, just as a general statement?

Yeah. I think in general, we would say pricing is flat. We talked a lot in the first quarter as to how we improved our pricing processes but it is a more difficult pricing environment and so flat, we feel that is pretty good given what’s going on out there. Richard Eastman – Robert W. Baird: Okay. Very good. Thank you.

You bet.

And your next question comes from the line of Mark Douglass of Longbow Research. Please proceed. Mark Douglass – Longbow Research: Good morning, everyone.

Good morning. Mark Douglass – Longbow Research: Hi. I’d like to talk a little bit more about architecture in A&S. Can you explain a little bit more, it was quite a severe contraction in margins and obviously the volumes were much lower? Is it really primarily due to the volume decline? Or I guess you also said restructuring was split between the two and then what are you thinking about the margins for A&S going forward throughout this year?

The decline in the margins of A&S was directly related to the volume declines in that business and then obviously you mentioned the other one and that is there were some restructuring charges. So, strictly volume led and I think what the A&S revenue decline tells you is the severity of the global recession and the fact that the steepest decline has been in the U.S. I think that speaks directly to the A&S performance and is something that we believe will continue at these levels for the remainder of the year. There might have been a little bit of volume there, based upon the channel destocking, but that’s still a small number compared to the impact of the overall decline. So, I think those are the couple of dimensions that led to the significant margin decline, and we expect the margin performance to remain at or slightly better than what we had in this quarter because some of our cost actions will be impacted going forward. Mark Douglass – Longbow Research: All right. So, assuming there is a stabilization here and the cost actions are fully in effect and there could be a slight pickup as the year progresses?

There is that stabilization, yes, and that’s quite frankly, we believe there will be some and that’s how we’re approaching it. So we would expect that for the fourth quarter, we’ll probably be a little better in the last half of the second half than in the first half. Mark Douglass – Longbow Research: Okay. Thank you. And then the two acquisitions you made, are they both been in the CP&S and then?

Yes, they’re both in our solutions business of CP&S, that’s correct. Mark Douglass – Longbow Research: And then have you discussed with what kind of annualized sales you might expect from those two?

No, we have not talked about that but basically it’s in the ten’s of millions. Mark Douglass – Longbow Research: Okay. Thank you.

This is Rondi Rohr-Dralle. We’ll take one last caller.

And your final question comes from the line of Jessica Mullin of FTN Equity Capital. Please proceed. Jessica Mullin – FTN Equity Capital: Good morning Keith.

Good morning, Jessica. Jessica Mullin – FTN Equity Capital: Are you expecting stability and demand based on an upward delta in capacity utilization? Or do you think it needs to reach some absolute level?

I don’t think we’re looking at stabilization due because of capacity utilization. That’s a number that certainly where it’s currently at tells us that there’s a lot of excess capacity, which is why we’re seeing the slowdown in MRO sales, in addition to what we would just call the normal capital expenditure-driven sales. So, I think what we’re looking for is a flattening of the capacity utilization and in particular you need to parse capital, you need capacity utilization a little bit because there’s some large sectors in there that really don’t reflect upon manufacturing. And so you need to look at some of the sub elements and not the total macro number to look at how it will work for Rockwell Automation, but we do expect to see capacity utilization stabilizing and certainly that will allow us to be able to address more of our short cycle MRO business and we’re counting on some of that over the second half of the year and that does fit into those macro economics beginning to stabilize. Jessica Mullin – FTN Equity Capital: All right. Thank you.

You’re welcome. Thank you.

Okay. I think we’re ready to wrap up the call today. So this will conclude today’s call. Thank you to all of you for joining us.

That concludes today’s conference call. At this time you may disconnect. Thank you.