Rockwell Automation, Inc. (ROK) Q3 2011 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. [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.

Okay, thanks, Mary. Good morning, everyone. Thank you for joining us for Rockwell Automation's Third Quarter Fiscal 2011 Earnings Release Conference Call. Our results were released this morning, and a 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. Additionally, webcast of this call is accessible at that website and will be available for replay for the next 30 days. With me today, as always, are Keith Nosbusch, our Chairman and CEO; and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that will include highlights on the company's performance in the third quarter and our updated outlook for the fiscal year. Then, Ted will provide more details around the third quarter results and our revised guidance for fiscal 2011. And then of course we'll take questions at the end of Ted's remarks. We expect the call today to take about an hour. And as always is the case on these calls, I need to remind you that our comments will include statements related to the expected future results of the company and are therefore, forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and a detailed in all of our SEC filings. So with that, I'll hand the call over -- Okay, thank you. I'm turning the call over to Keith then.

Thanks, Rondi. Good morning, everyone, and thank you for joining us on the call today. I appreciate your time and interest in Rockwell Automation. Please turn to Page 4, which captures the key messages from the quarter. I'll touch on these during my remarks. I am very pleased with the record results in the third quarter. Sales of over $1.5 billion, earnings per share from continuing operations of $1.22 and after-tax return on invested capital of 29.3% are all new quarterly highs for the company. Strong organic growth of almost 14% and the diversity of that sales growth across regions and verticals indicate that we are capitalizing on our growth opportunities. Architecture & Software had an outstanding quarter with LOGIX growth of over 25% excluding the impact of currency. Operating margin continued to improve in the quarter and year-to-date margin is up over 2 percentage points compared to a year ago. Here again, A&S was a standout, with the highest quarterly operating margin since the third quarter of fiscal 2007. Control Products & Solutions margins dipped compared to Q2, primarily because of lower organic volume and acquisitions. Plus keep in mind that Solutions margins tend to fluctuate more quarter-to-quarter. On a year-to-date basis, we are pleased that the margin in this segment has expanded almost 2 percentage points. Cash flow was strong again this quarter in spite of the additional layer of inventory that we added to protect our customers after the Japan crisis. Fortunately, at this point, we don't see any significant risk to our supply chain due to Japan. I think Japan has managed very well through the crisis. Before I comment on the outlook, let me give you some other highlights in the quarter. India was a star in emerging Asia with 27% organic growth. China was at mid-teens growth, which was in line with our expectations given the very strong Q3 from last year. We are gaining traction in emerging Europe in Q3. We had a significant $3 million water waste water win in Turkey. I'm pleased with the progress we are making in Process. Our Process business had its best quarter of the year with 18% year-over-year sales growth and 9% sequential growth, both on a currency neutral basis. Globally, we are seeing more and larger legacy DCS conversion opportunities, and we continue to invest in our process domain expertise for selling, Application Engineering and technical support. Success with OEM customers continues to contribute to the above market growth we have seen in EMEA. And we closed 2 acquisitions in the quarter announced at 21% dividend increase and stepped up our share repurchases. Our results in the third quarter kept us on track for an outstanding year for the company and for our shareowners. We have had excellent performance through the first 3 quarters of the year by capitalizing on the strength of the industrial recovery and executing our growth and performance strategy. We are now 9 quarters into the recovery and market growth rates are moderating just as we would expect at this stage. Given our strong year-to-date results and an increased tailwind from currency, we are increasing our full year sales outlook to approximately $5.9 billion, about half of the increase compared to the prior guidance is from currency and acquisitions, but the other half from additional organic volume. Based on the sales outlook, we are raising our fiscal 2011 earnings per share guidance for $4.55 to $4.65. And we'll go through the puts and takes in more detail. But at the midpoint, this represents more than a 50% increase in the earnings per share compared to 2010 and record earnings per share from continuing operations. Before I close, I'd like to welcome the employees of Lektronix to Rockwell Automation. Lektronix is our newly acquired Repair and Maintenance Service business based in the U.K. but with operations around the world. They serve a broad range of both discrete and process industries, and have expertise in most industrial automation products - not just ours. We are excited to have them onboard, and we know they will help us expand our service to customers around the world. And once again, I want to take the opportunity to thank the people and partners of Rockwell Automation. Their dedication and expertise support the business and productivity needs of our customers and enable us to sustain our long tradition of innovation and deliver superior financial performance. So with that, I will turn it over to Ted to provide more details on the financial results for the quarter. And our outlook for the remainder of fiscal 2011. Ted?

Thanks, Keith, and good morning, everybody. I'll start with Q3 results summary on Page 5. Sales in the quarter were $1,516,000,000 up 20% compared to Q3 last year. The year-over-year impact of currency translation increased sales in the quarter by approximately 6 points, that's a considerably larger currency impact than recent quarters. Segment operating earnings were $263 million, an increase of 33% compared to Q3 last year. General Corporate net expense was $22.3 million compared to $23.1 million a year ago. The effective tax rate in the quarter was 19.2%. We benefited in the quarter from some discrete items that lowered the rate by about 2 points. Diluted earnings per share from continuing operations was $1.22, an increase of 47% from $0.83 in Q3 last year. There was also a small benefit from discontinued operations in Q3 related to various legacy legal and tax matters. Diluted earnings per share including that benefit was $0.01 higher at $1.23. Average diluted shares outstanding in the quarter was 145.9 million. As Keith mentioned, we stepped up share repurchases in Q3. We repurchased approximately 1.35 million shares in Q3 at a cost of about $114 million. Year-to-date through June, we've repurchased a total of 2.7 million shares. Turning to Page 6, the Q3 results Rockwell Automation total. So on the left side of this slide, you can see the trend in sales. As I noted, sales were up 20% year-over-year in the quarter and also up 4%, sequentially. Moving to earnings on the right side of the slide. We've seen steady improvement over the past year, segment operating margins has continued to expand and improve by 1.8 points year-over-year to 17.4%. Operating margin improved sequentially by 7/10 of a point. The year-over-year improvement in operating margin reflects volume leverage, partially offset by increased spending to support growth. And as Keith noted, we saw particularly strong margin performance in the Architecture & Software segment in the quarter. The year-over-year incremental margin was about 26%, so better than our Q2 result. The effects of currency and acquisitions reduced incremental margin by about 5 points in the quarter. On a relative basis, these effects had a significantly more negative impact on the Control Products & Solutions segment. And also some continued impact in Q3 from the unfavorable material costs that we talked about last quarter, but that was pretty much what we expected it to be coming into the quarter. Although it's not displayed on the chart, our trailing 4 quarter return on invested capital was 29.3%. That's up from 17.7% in Q3 last year and another record for return on invested capital. Moving now to Page 7. This slide summarizes the Q3 results of the Architecture & Software segment. This segment reported a really outstanding quarter with regards to both sales and margin performance. On the left side of the slide, year-over-year sales growth in the segment was 21% in the third quarter, that included about 6 points of growth due to currency translation. Sequential growth was 8%. We've continue to see particularly good performance in this segment in the EMEA region, reflecting in part continued success with OEM customers. Operating margin for the quarter was 26.1%, up 3.5 points compared to last year. That's due primarily to a strong volume leverage, partly offset by increased spending. The next slide, Page 8, covers our Control Products & Solutions segment. Sales in Q3 were $843 million, up 18% compared to last year with about 5 points of the increased due to currency translation and about 1 point from acquisition. On a year-over-year basis, sales for the products portion of Control Products & Solutions segment were up at about the same rate as the Architecture & Software segment with the solutions and services business increasing by 16%. For the segment, as a whole, you can see here on the left side of the slide all in, sales were basically flat sequentially, but excluding currency translation, sales declined by about 2%. Moving to the right side of the slide, segment operating earnings increased 20% year-over-year with a small improvement in operating margin. In Control Products & Solutions, volume leverage was just about offset by increased spending and somewhat lower margins in the solutions businesses. Solutions business margins tend to be somewhat more variable quarter to quarter. Also as I previously mentioned, currency effects had a somewhat more negative impact on margins in this segment this quarter. The Control Products & Solutions segments has fundamentally higher margins today than where we were at the beginning of the recovery in the last cycle. Year-to-date in this segment, operating margin is up 1.8 points, and we expect margin to expand as the recovery continues. On Page 9, this provides a geographic breakdown of our sales in the quarter. I'll focus my comments on the far right column, which excludes currency effects. Very good growth across the regions, another particularly strong quarter in the EMEA region with 21% growth. That was about 19% growth excluding the impact of acquisitions. Latin America had another strong quarter with 21% growth. Asia-Pacific came in at 14%, and the U.S. and Canada at about 10%. Emerging markets continue to grow above the company average. I'll turn now to Page 10, free cash flow. Free cash flow for the quarter was $194 million, which represents conversion on net income of 108%, that's a very good result. Year-to-date, free cash flow is at $424 million, that's a conversion of about 86%. We now feel it's likely that we will make a discretionary U.S. pension contribution in the fourth quarter, and that will put cash conversion for the full year more in the range of 75% to 85%. And that brings us to the final slide, which addresses our current outlook for fiscal '11. As Keith mentioned, we're increasing sales and earnings guidance. We've increased full year sales to approximately $5.9 billion. That's $150 million increase compared to the previous guidance midpoint. About half of that increase is due to currency and acquisitions and the balance reflects a somewhat higher organic growth in both the third and fourth quarter. For the full year, that represents growth of approximately 18%, excluding currency effects, previous guidance range was 15% to 17%. Based on currency rates experienced in Q3, for the full year, we now expect currency to contribute a little over 3 points to growth. We've increased that by about 1 point from our previous guidance. We continue to expect segment margin to be about 17%. Our fiscal 2011 guidance for diluted earnings per share from continuing operations is now $4.55 to $4.65. Compared to the previous guidance, we raised EPS by $0.10 at the midpoint and with only one quarter remaining in this fiscal year, we've narrowed the range from $0.20 to $0.10. Basically compared to the prior guidance, midpoint to midpoint, we're getting a positive contribution from volume and a somewhat lower tax rate that was partially offset by less favorable mix and increased performance-based compensation expense due to the higher sales and earnings. A couple of other items related to the full year guidance, we expect the full-year tax rate of 19% to 20%, lower by 1 point compared to the previous guidance and we continue to expect general corporate net expense of about $80 million for the full year. With that, I'll turn it back to Rondi, and we'll get to Q&A.

Great. Thanks, Ted. Before I turn this over to the operator to start the Q&A, I would just like to remind everyone that we do want to get as many of you as possible. So if you could please limit yourself to one question and a quick follow-up. Then if you have a question on another topic, you can get back in the queue and we'll try to get you again but just a way to try to get as many of you as possible. So we'd appreciate your cooperation on that. And with that, Mary, let's open it up for our first question.

[Operator Instructions] And our first question comes from the line of Julian Mitchell from Crédit Suisse.

I guess I had a question on your -- particularly your China and U.S. businesses. The China growth was midteens of a tough comp. Do you expect that to be sustained in September in the balance of this calendar year? Or are you seeing any sort of reduction in customer CapEx plans because of the tightening. And Secondly in the U.S., organic sales growth moderated to about 11%. How do you see that going forward, obviously one of your peers yesterday talked about the steep deceleration in U.S. demand. I just wondered if you'd seen any change in ordering patterns in the U.S. or China or any region in the last sort of couple of months.

With respect to China, we are coming up -- where we are coming up to some very strong previous performance. So we still expect our year-over-year performance in China to be a little over 20%, which is what we planned for at the start of the year and we still believe that will be where it ends up. With respect to the U.S., we continue to do our normal quarterly analysis of our customers, our channel partners, our sales organization and we believe our outlook for the remainder of this fiscal year will be able to enable us to deliver the guidance that we provided. So we feel pretty good about our outlook at this point in the process. The only caveat and reminder I'll put it on that is this quarter, we have -- August is a very weak month and certainly, a preponderance of our revenue for the quarter close in September and that means it's 6 weeks away and we'll hopefully see how that plays out. With respect to once again the China and U.S., both China and the U.S. had sequential growth in the quarter. So the moderation is on a year-over-year performance as we go forward based upon where we are in a recovery, for sure, in the U.S. and just based upon a very significant growth in China in our fourth quarter of last year.

Okay. And then just on the incremental margins. I think your gross margins were flat year-on-year in Q3, haven't been down slightly year-on-year in December and in March. Do you expect that to be up slightly year-on-year in the September quarter? And I guess, overall, on operating incrementals, are you still expecting that to run in the 30s when you're thinking about the medium term?

I would rather talk about operating margin and gross margin and maybe easiest answer to your question, I think, would be right now, we would expect to see maybe slightly higher incremental margin in Q4 than we saw in Q3.

Your next question comes from the line of Richard Eastman, Robert W. Baird. Richard Eastman - Robert W. Baird & Co. Incorporated: Just have 2 questions, one for Keith, Keith you had mentioned maybe as a line in your initial comments that you are seeing more and larger DCSI conversion opportunities -- or DCS conversion opportunities. Could you just maybe by industry or is there some -- let's call it maybe early adopters from an industry perspective, where would those opportunities be?

It's not really an industry specific application with respect to the legacy, it's more upon 2 dynamics. One is the age of the installed equipment and the second is, is it still supported by the DCS supplier and in most cases, these are 10- to 20-year old systems that no longer are supportable from the original supplier for whatever reasons, and we're seeing the opportunity to give our plant-wide optimization value proposition to these customers and they understand the benefit of that. And when they're making their next transition in a technology, they're looking for long-term sustainable support and value, and we think the plant-wide optimization story plays particularly well to them. Richard Eastman - Robert W. Baird & Co. Incorporated: I see. Okay. And then just a second question, what was the book to bill in the solutions side of the business?

It was about 1 to 1 for the quarter -- I'm sorry, 1.1. Richard Eastman - Robert W. Baird & Co. Incorporated: 1.01 or 1.1?

1.1 to 1.

Your next question comes from the line of Rich Kwas from Wells Fargo Securities.

Keith, could you talk about the front log activity, what you're seeing there? I know over the last couple of quarters, you've seen some signs in the developed markets that things have been picking up. Obviously, it was mentioned with one of the competitors yesterday talking about some weakness. Could you give us an update there and what you're seeing overall?

Yes, the overall front log remains positive for us, and it grew 8% from the prior quarter. And if we go around the world so to speak, we see in North America, we had continued growth in both the Product and Solutions front log. In EMEA, the stronger growth was in the Solutions area, in particular some oil and gas opportunities there. In Asia-Pacific, front log was increasing both Products and Solutions. And in Latin America, likewise it was increasing for both Products and Solutions. So that is a volatile measure, but we do think that it's an indicator, I guess, at a minimum of the sentiment for forward-looking projects. And as always, the timing is what's the tough part to call. So we like the activity and our goal is to translate as much of that front log into orders and then into shipments as we progress through fiscal '12.

Okay, and then just a follow-up for Ted on the Solutions segment in terms of the margin. Last quarter, you had booked a $20-plus-million project into the first or into the fiscal second quarter. Was there anything unique in the quarter in terms of something that got booked or anything else. I think there's some M&A cost there in that segment, but anything else that we should be aware of in terms of what affected the margin?

I don't think I would say anything unique. I would say the Solutions business margins tend to be a little bit more variable because every quarter, you've got a somewhat different mix of projects across different types of solutions applications. So the variability comes just because of that mix.

Your next question comes from the line of Jeffrey Sprague, Vertical Research.

Just a couple of things, and I apologize I missed the first 5 or 10 minutes. You were particularly worried about Japan supply chain previously looking out of maybe there was something lurking in the shadows that hadn't perked up yet. Do you feel you're clear of that or is there any particular issue that you're still worried about?

No, we believe that we will now not see any significant risk due to the supply chain in Japan. We did put in a little more inventory as we talked about last quarter. We believe that has helped but also we have worked very hard with our suppliers and quite frankly, the response of the Japanese companies has been tremendous in their efforts to recover quite frankly. So right now, other than the fact that we had put in more inventory, we believe over the next quarter to two, we will not see any meaningful impact from the Japan crisis. Hopefully, we're really down to a handful of components that were really on top of now, and it seems to be getting better each month. So we are encouraged at this point, Jeff.

Right. And could you elaborate a little bit more on price costs. I think you're just in your early stages of going out with price but what the reception is in the marketplace to that, how long do you think it takes to actually get it in place and whether or not you're seeing any relief anyway?

Well, I guess let me talk about the cost side first. I would say the inflationary pressures on material and transportation costs in Q3 were up the same as we experienced in Q2 with some puts and takes across different commodity categories. Compared to our expectations coming into the year, our price cost dynamic is still unfavorable, and we're still unfavorable in Q3. We have implemented some price increases in our Solutions businesses. We implemented, basically right now we're implementing a price increase in the Products businesses. So we would expect maybe to see that begin to improve as we move to Q4 and then more improvement as we enter in the Q12 -- I'm sorry, in the fiscal '12.

Just given the quick turn nature of your business, do you think that we should expect if it's successful that it does show up quickly? Or is there kind of pre-commitments and project work and things like that, that drag it out?

I would say more of the latter than the former. I mean a lot of our business is at negotiated price levels. Those agreements roll typically on an annual basis and spread throughout the year. So when we implement a list price change, it doesn't hit all of the businesses equally at the same time.

Your next question comes from the line of John Inch from the Bank of America Merrill Lynch.

Maybe, Keith, how would you characterize the Process business today based on -- I don't know if there's really a front log activity book or whatever but I know there's been some product introductions, the growth rate sounds like they're better, which characterize the business as actually positioned to accelerate. I mean, obviously, oil and gas industry is pretty robust right now, maybe just a little more color on that business and how you see the progression.

Well, certainly, we're pleased with the progression because basically what our strategy and plan has been is to continue to build capabilities in the platform and continue to build, I'll call it, capabilities of our organization to deliver -- to one, sell, deliver and support our process application. So it's an ongoing evolution for us, and we're pleased with the talent that we've been able to bring in to the company. We've been very pleased with the developments of our sales organization and competence in this area and our channel partners, whether it be system integrators or our distributors, both of those are very critical to continuing to build what we would call the ecosystem to be able to support the process industries. And that part has gone well, but it's never ended either. So we keep building that, the technology, every release of a new logic platform generally has something in it that is a better -- that helps the process application and some more than others but certainly when we released PlantPAx 2.0, that was a very significant improvement in our capability. The other area in process that we are working very hard on it is with the process skid OEMs, and that's another way that Rockwell Automation can differentiate the fact that we know how to interface with OEM. Just a big part of our machine -- our discrete business has been historically and as all of you know, we've been focusing on OEMs the last couple of years and process skids is just one of the 6 segments that we go after. But it is very important from the overall plant-wide optimization strategy that we are implementing. So the ability to address more application, more industry continues to help us, continues to help us grow at the rates we're growing. And as I mentioned earlier, that process grew above the company average for the first time this year.

Well, that's where I was driving, Keith, I mean really the setup should almost be for sustained faster process growth in the coming quarters. Is there any reason why that would not be the case? I mean, I think your company is misperceived by a lot of folks, it's somehow, it's early cycle. I mean maybe some of your MRO businesses is early cycle but it strikes me that the business Process is distinctly cycle and I'm really just trying to understand. All else equal, this business should be really beginning to gain momentum not somehow have peaked out already. Is that not a fair statement?

That is a fair statement with the only caveat of what's going to go on in the economy and what is this cycle. And certainly, the process should be a more mid- to late-cycle player. That's why we're doing it to just your point, we're trying to balance our portfolio to have a balance between early, mid- and a better balance between early, mid- and late cycle and Process was an area that we expected to push a little more into that late cycle -- mid- to late cycle business. So we really want to focus on that. It's also a big part of emerging markets. As you know, John, it's part of the building an infrastructure, building a resource-based industry, which is many of the exports for ability to grow up an economy early in emerging markets. And obviously, later, it goes to consumer, which is the other dimension of our strategy for emerging markets. But for those reasons, we do see this as an important balance to our strong MRO and early cycle discrete businesses and that's combined with our intelligent motor control. We think and our process safety capabilities with the acquisition of ICST, certainly we think should help us later in the economic cycles than we were historically.

So Keith, can I just ask a follow-up, I mean, your stocks up over 20% from its high, let's presume that these momentum folks are out of your stock today. You've got a pretty good set up with Process, your other businesses and frankly you've been able to pull, what appears to have been able to pull forward an awful lot of spending this cycle that gives you a pretty good playbook in the set up. You're sitting on an over capitalized balance sheet. It looks like you're beginning to buy more stocks, why wouldn't you aggressively buy more stock today opportunistically as a dynamic based on what's happened in the stock market and with respect to your share price, specifically?

Well, we do believe that opportunistic buying is part of the way that we do our cash deployment strategy. I think we've demonstrated that in our third quarter. And certainly, we will continue to look at that as we go into the fourth quarter and obviously, we're trying to balance the cash deployment. You heard Ted earlier talk about that we probably will make a discretionary contribution to our pension. That's an offset to buying back stock. Obviously acquisitions, we've completed 2 this quarter. That's another alternative. And then as all of you well know, it's a question of where the cash is as well. And certainly we have a significant portion of ours that is outside the U.S. There's a lot of moving parts of there, John, that we're trying to balance between them all but I would say absolutely, we are an opportunistic purchaser of our stock and we think it's a great time at the moment.

And John, I would add. Look, we stepped up in Q3, you know that we have never previously expressed our intentions around the current quarter and I don't think that, that's an appropriate thing to do now.

So I agree. I did see that and I vote to put the pension on the back burner and buy more shares.

Your next question comes from the line of Mark Douglas, Longbow Research.

So you said the Logix organic sales were over 25%, what were the other products like and then does it mean they're below the 14% organic corporate or can you go into more details on how the other products fared?

Well I think the one that's always is the balancing comment with respect to our Logix is what happens in the legacy processor businesses and when we link those together, I think that's a purer number for you. So let me do that. The legacy sales were down 12% and process, which is back to more traditional decline in the legacy business. We talk about 10% being the ongoing decline of that business, and total processes sales were up 19% for the quarter. So slightly above, not slightly, about 5 points above the organic growth. So I think our Products business -- if you look at it, our Products businesses in general were above organic growth and our Solutions was below organic growth and I think that's the way to look at it. There was no significant product deviation, and I think it was more of the mix between Products and Solutions that got us to the 14% as opposed to this Product was way negative and this one was way positive.

Okay, that's helpful. And then continuing on kind of that thing looking at Control Products & Solutions, I think a lot of us probably expected to pick up sequentially, organically, was conversion to sales was there pullback in the conversion rate, and the people pulled off on taking delivery of the solutions -- or their projects get put on hold, can you -- nervousness of customers can you give a little bit more insight as to the dynamics there?

I wouldn't say there was any -- we haven't see any change in the dynamics of customers delivery acceptance on projects Q2 to Q3. I would remind you and I think that Julian mentioned this, I think it was Julian, we did have this very large project shipment in Q2 in the Solutions business, and so we were expecting some declines in Solutions going from Q2 to Q3. Sales were about flat down a little bit organically but I wouldn't say there's nothing -- there's no fundamental change in what we're seeing in terms of underlying customer demand in that segment.

You have a question from the line of Steve Tusa, JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: I joined the call a bit late. On China, can you just tell us maybe what's going on there and then what would you expect for growth there in the fourth quarter?

Sure. China continues to grow for us. We had a growth there that I mentioned earlier of mid teens. We still expect China for the year to grow above 20%. We are coming across some various drawn growth quarters. So we'll see continued declines from our first couple of quarters where we were 40% and 30-plus percent. So I think we're getting into more of that average 20% growth over a year that we've been outlining as what our goal is for China. And the only other comment I'd make there is the lumpiness of our Solutions business there and maybe mass a little bit of a stronger performance in our product portfolio, which was higher than the overall average.

But I think, Keith, another way of expressing this is we're expecting sequential growth in China in Q4 but a continued moderation of the year-over-year growth rates. C. Stephen Tusa - JP Morgan Chase & Co: So did that go below double-digit?

My guess is it will be close. C. Stephen Tusa - JP Morgan Chase & Co: Okay. And then when you look at the incremental, could you talk about it, improving a little bit here in the fourth quarter. So will that be in kind of the 30% to 40% range?

I think it will be at the lower end of that range. C. Stephen Tusa - JP Morgan Chase & Co: Okay. And then we own kind of dynamics around the segments, right? I mean, A&S still pretty strong and Control Products, is below the low end of that range?

Yes, and I mean that's just -- A&S has fundamentally higher operating leverage.

This is Mark Koznarek. I haven't been announced, but I'm ready with the question. Just there's a lot that we've covered already so there's just some odds and ends, you called out some additional growth related to spending in CP&S, is that of the magnitude of say last year where we had this $100 million kind of a onetime step up, are we talking about a big block of additional R&D or is this sort of normal expansion in line with the current revenue growth and revenue outlook?

You know, Mark, my intention was not to call on anything specific to CP&S. I mean we have headwind year-over-year in the margins that's related to increase spending and part of that is related to the ramp we did in spending and talked about in the latter half of last year. So that affects both segments given the lower operating leverage and control pricing solutions, it has somewhat of a larger effect on conversion margin in that segment but that increase in spending affects both segments and actually, in Q3, the impact of that spending is actually a little bit less than what it was earlier in the year because we're starting lap, some of those larger increases we made in the second half of last year.

Right. Yes, I have thought that you had lapped that year ago thing. So I got his impression that you're calling this out as another round of spending but apparently that's not the case.

No, that is not the case. And I would also remind you we haven't fully lapped that ramp in spending last year because some if it also occurred in Q4.

I see. Okay. Next, when we look at -- there is some comments on front log and the improvement there, can you give a little bit of insight into the industries that are participating, is it across-the-board improvement or some areas that were previously dormant starting to move forward more aggressively and vice versa, other things starting to slow?

Well, I don't think we're seeing things starting to slow. Obviously, the highest growth has been in Transportation and we certainly don't expect that to continue to grow, but we expect that to continue to exist at the higher levels going forward. With respect to what's picking up at this point in time, we believe that the greatest opportunity as far as in the front log, really is around of the oil and gas and mining. Those tend to be the areas now that we're seeing additional pickup and previously, it was really what was going on in transportation, as well as some of the OEM business associated with packaging in particular. So I think some of the -- as we talked about the earlier set of question with respect from John Inch, with respect to Process and some of the later cycle businesses, I think we are seeing more quotation activity in some of those areas and hopefully commodity prices stay at the level they are at. Those quotes we'll be able to translate into future orders and shipments.

Okay, so those categories are going to be more process intensive. You're more successful in moving forward your process initiatives into these categories, oil and gas and mining. Just a follow on, does that imply that the average margins of those businesses will be a bit lower because they're more solutions intensive and perhaps less process or product intensive?

Well, I think that is always the case with respect to process industries because the business model in the process industry is the automation supplier provides the solution. So I don't think it's any different than what we have in process in general. So I don't see that as a significant change. But you are right in process, we will be more of a solution provider and that means that the project margin will be lower than when we just sell products and some other integrator provides the solution.

Okay and then a quick one for Ted, the lower tax rate, is that simply the result of a discrete item or have you done something structural where as leading to better tax rate expectation for 2012 and beyond?

I'm not going to try not to provide guidance for 2012 on the tax rate at this point. I would say the lower tax rate as it relates to our previous guidance is due to discrete items that occurred primarily in Q3.

Your next question comes from the line of Shannon O'Callaghan from Nomura.

Keith, can you just provide a little more color on the solution mix issue in the quarter, the lower margin mix? I mean what are we talking about here in terms of types of projects and how often do you see that happening? And do you have -- do you have the visibility now when you're talking about better incrementals in 4Q? I mean do you have visibility into a better mix in the books as you look into the next few quarters or is this a particularly negative mix this quarter?

Well, Let me -- I think there are really 2 different questions there. So let me answer the first one, which is -- provide a little more color on the solutions mix issue. In our Solutions businesses, we have some longer cycle solution businesses and some shorter cycle solutions businesses. On the longer cycle, it is kind of our turnkey systems integration work and at the shorter cycle, it's things like motor control centers. But when I talk about and medium-voltage drive systems. So when I talk about the mix across the Solutions businesses, I'm talking about kind of those 3 categories and the margins tend to be somewhat different in each category. So what happens in a particular quarter in margins has a lot to do with what the mix across those Solutions businesses looks like. It's not so much an industry application issue, it's not so much a regional issue, it's just a -- we've got some different types of Solutions businesses. Your question about Q4 expectations, I would say at the company level, our expectation in Q4 is for somewhat less favorable mix because we are expecting our typical increase in Solutions volume in Q4. So we think we're going to have higher Solutions growth and Product growth sequentially but somewhat less favorable mix. I do expect that within the Solutions businesses, we'll be back to a little bit better mix than we saw in Q3.

Okay. So the mix within Solutions is getting better so you're still expecting better incrementals within CP&S next segment -- next quarter?

I would expect better incrementals in CP&S, but also better incrementals in total.

So both segments get better?

I don't want to comment on A&S at this point. But I think it will be better and I think we'll be better in total.

All right. Let me just ask on the OEM, you have a big motion driver last quarter, it sounds like it's still running well. I mean what was that up this quarter and how were you able to overcome the negative mix you had last quarter?

Well, what I would say as we talked last quarter, we have kind of have extraordinary quarter for Motion Control growth year-over-year. This quarter, the Motion Control growth was much more in line with the Architecture & Software segment average, so we didn't have that same unfavorable mix impact. That was the question about Logix growth being above average this quarter.

Right. Okay, that makes sense. Last one for me is just can you give a little more color on what you're seeing in terms of the auto market in terms of their spending behavior on automation equipment as distinct from actual production rates and what you saw this quarter and what you're expecting?

Yes, auto as I mentioned earlier, Transportation was one of the better performing verticals for us throughout the year and has been a big part of the recovery increases for us. But obviously, that's based upon where they were 2 years ago. So but we think -- the one thing we are seeing is that the CapEx outlook is very positive in the automotive industry and if you go across in particular the U.S. companies, Ford, their CapEx is up over 30% year-over-year and they expect it to continue to be strong. GM is up even higher than that. So we are seeing a continued investment in new platforms, new projects and as you commented, that is a little different than just production rates. Production rates really drive more of our MRO installed base but the projects which we see continued strong, they were -- the front log of those projects in auto were up slightly in the year, in the quarter, but they remain at a very high level. So I think we're seeing about the capacity at this point that, that industry can spend at, and we expect those projects to flow through the system as we go through FY '12.

You have a question from Jason Feldman, UBS.

You mentioned some moderation of growth rates. It's typical I guess at this point in the cycle of overall, but was there any change in kind of the cadence activity during the quarter, was the latter part of the quarter given some of the macro weakening we saw and political issues come up different than the first half?

Jason, I would say we saw a pretty steady demand across the quarter. So we didn't see a lot of change from April through the end of June. And I would say, I think it would be fair to say, and we're seeing a continuation of that now through July.

And then lastly, is there any indication particularly in the process end markets of either project delays or push outs that are anything other than normal, I mean I know some projects are always delayed but anything unusual there?

No, we have not seen any change other than as you said, the normal. Some push outs, some move in but really, not a change in what has been occurring previously as part of the work that we do every quarter when we go through the analysis of what's going on in the market and certainly what was behind the fact that we decided to raise our revenue and earnings guidance for the remainder of the year.

Okay, so we're going to wrap up today's call. We want to thank everyone for joining us. Good set of questions today. And we will disconnect at this time. Thank you.

This concludes today's conference call. At this time, you may now disconnect. Thank you and have a good day.