Rockwell Automation, Inc. (ROK) Q4 2012 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.

Thank you, DeLou. Good morning, and thanks, everyone, for joining us for Rockwell Automation's Fourth Quarter Fiscal 2012 Earnings Release Conference Call. With me today 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 fourth quarter and the full year and some commentary on our outlook. Then Ted will review the results for the quarter and our guidance for fiscal 2013. He will also spend some time today going through the components of pension expense, our new definition of segment operating earnings and our new non-GAAP measure of adjusted earnings per share. We'll take questions at the end of Ted's remarks. Our results today 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. In addition, our supplemental financial data document is available on our website, and it includes reconciliations to our new non-GAAP EPS and segment earnings by quarter for 2008 through 2012. A webcast of this call is accessible at that website and will be available for replay for the next 30 days. We appreciate you starting your week with us today. We've got a lot to cover, so the call may go a little bit longer than an hour. Before we get started, 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. 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 detailed in all of our SEC filings. So with that, I'll hand the call over to Keith.

Thanks, Rondi. Good morning, everyone. Let me start by saying to anyone affected by last week's hurricane and its aftermath that I appreciate your efforts to join our call today. I hope you were able to stay out of harm's way. I'll start with highlights for the quarter and the full year, so please turn to Page 4 in the slide deck. I was pleased with 5% organic growth, especially given the tough comparison to last year's very strong fourth quarter. Growth rates continued to moderate due to the difficult economic environment, but once again, we had organic growth in all regions. Emerging markets grew 11% in the quarter with particular strength in Central and Eastern Europe and Africa. Most of the growth this quarter came from our solutions businesses as our product businesses were essentially flat compared to last year. Process had another great quarter with 18% growth. In the quarter, we initiated restructuring actions with corresponding charges of about $13 million. We're calling this out because the charges are considerably higher than a normal run rate for pay-as-you-go actions. These restructuring actions provide us with some headroom to rebalance investments in 2013. Earnings per share were $1.38, about $0.01 lower than last year. Restructuring charges reduced EPS by about $0.07. Cash flow in the quarter was strong, and we repurchased another 1.4 million shares. So overall, a good end to a very solid year. I'll make a few comments on the full year before I move to our outlook. We entered 2012 in the midst of global economic uncertainty, and that is still the prevailing environment. The prospects of a fiscal cliff in the U.S., the ongoing sovereign debt crisis in Europe and the slowdown in key emerging markets all weighed on economic growth this year. Despite that, we delivered organic growth of 6% for the full year and ended the year with record sales of up over $6.2 billion. Canada had very strong growth of 20%, reflecting continued strength in the resource-based industries. Mexico also grew 20%, and industrial activity there remained strong. But our European region was the real standout with 6% organic growth in the face of a recession. I was encouraged that we grew in both developed and emerging EMEA, and I want to our acknowledge the EMEA leadership team who executed very well within difficult market conditions. It's not on the chart, but Process sales grew 20% for the full year, and we continue to win both batch and continuous process applications. I was pleased that we were able to expand segment operating margin a full point while continuing to invest for growth. Continued strong cash flow and a healthy balance sheet enabled us to increase the dividend for the third consecutive year and repurchase 3.7 million shares. We're proud of our track record of returning cash to share owners. We delivered solid results in a challenging environment this year. I want to thank our employees for their dedication in making this year possible and our customers, suppliers and partners for their continued support throughout the year. So let me give you our thoughts about fiscal 2013. Growth rates moderated considerably as we moved through fiscal '12, and our current underlying demand trends are pretty flat. We saw an increase in project delays in Q4 and ended the year with a lower solutions backlog than a year ago. So there's not a lot of positive momentum as we enter the new year. Each region has its own story, but the global economic recovery seems to have run out of steam at the moment. We continue to believe this is a pause in the recovery and not an inflection point, which is consistent with what we are hearing from our sales organization, our channel partners and customers. The forecast that we monitor for GDP and industrial production call for growth next year. But consistent with those forecasts and given current conditions and our lower backlog, we don't expect to see much growth until the second half of 2013. It's possible that the current global economic sluggishness is creating some pent-up demand for manufacturing investment. If that is true, a couple of positive macroeconomic signals could give customers confidence to accelerate their spending. We're counting on market conditions improving early enough to have a positive impact on the second half of our fiscal 2013. We're excited about and counting on new products to help us grow next year, even in sluggish market conditions. From a regional perspective, we expect the U.S. to stay on a low growth track, and we don't think Europe gets any worse. Asia Pacific and Latin America should have higher growth rates next year, driven primarily by improvements in China and Brazil. With all of that said, we expect total sales growth of 2% to 6% next year. Ted will provide more detail around sales and earnings guidance in his remarks. Although we can't control the economy, we know how to remain flexible and adjust to the underlying economic environment as appropriate. In the end, with our great technology, talented and dedicated employees, loyal partners, robust installed base and share gain opportunities, we're well positioned to continue to outperform the market. Before I wrap up, I want to assure you that Automation affair -- Automation Fair events this week will continue as planned. Downtown Philadelphia, the convention center and hotels sustained minimal or no damage. We feel extremely fortunate that Automation Fair, its supporting events and our investor conference will proceed as scheduled. But the people in businesses affected by Hurricane Sandy do remain in our thoughts. For those of you who haven't been to an Automation Fair, we expect to host thousands of customers and partners from all over the world. It is a great opportunity for us to showcase our capabilities, provide technical training and facilitate best practice sharing among our customers. At the investor conference on Thursday, you'll hear from John McDermott, the leader of our global sales and marketing team, and from one of our major global customers. Then we will take you on a hosted tour of the show floor. After lunch, we will hold a webcast where you will learn more about our strategy and progress from me and Ted. Frank Kulaszewicz, the Head of our Architecture & Software segment, and Blake Moret, the Head of our Control Products & Solutions segment, will provide a deeper dive into 2 of our best growth opportunities, process and OEMs. We are really pleased that so many of you are taking advantage of this opportunity to learn more about us, and we look forward to seeing you there. 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 2013. Ted?

Thanks, Keith, and good morning, everybody. A lot to cover this morning, and I'll start with the fourth quarter results summary on Page 5. Sales in the quarter were $1,664,000,000. That's an increase of 1% compared to Q4 last year. Organic sales growth was 5%, and the year-over-year impact of currency translation reduced sales in the quarter by approximately 4 points. Segment operating earnings were $295 million, down 1% compared to last year. As Keith mentioned, we incurred restructuring charges of approximately $13 million in the quarter. General corporate net expense was $20.6 million compared to $22.2 million a year ago. The effect of tax rate in the quarter was 23.4%. That's 2.2 points higher than fourth quarter last year. Diluted earnings per share were $1.38, down $0.01 compared to Q4 last year. The restructuring charges reduced earnings per share by about $0.07 cents. Average diluted shares outstanding in the quarter was 141.5 million. In Q4, we repurchased 1.4 million shares at a cost of approximately $96 million. For the full year, we repurchased a total of 3.7 million shares at a cost of $265 million. On the earnings call in July, we projected to repurchase about 3 million shares for the full year, so we were more aggressive than that in the quarter. Turning to Page 6. Fourth quarter results were up for automation total. On the left side of this slide, you can see that sales increased only slightly from last year. That's the currency effect offsetting the 5% organic growth. You might remember that Q4 fiscal '11 was a particularly strong quarter, especially in our solutions and services businesses, and sales in the fourth quarter this year were up 7% sequentially. Moving to earnings on the right side of the chart. Segment operating margin in Q4 was 17.7%, down a bit from 18% in Q4 last year. Lots of puts and takes on margin in the quarter, but the $13 million in restructuring charges reduced operating margin by about 80 basis points. So margin would have been about 18.5% without those charges, and I think that would've been pretty much as expected. Although it's not displayed on the chart, our trailing fourth quarter return on invested capital was 30.3%, about the same as last quarter. Moving on to Page 7. This slide displays the Q4 results of the Architecture & Software segment. Architecture & Software sales were $671 million in the quarter, down about 2% year-over-year. Organic growth of 3% was more than offset by a currency translation impact that reduced sales by 5 points. Sequentially, Architecture & Software sales increased 1%. Operating margin for the quarter was 24.8%, down 1.2 points from Q4 last year. About 1/2 of the restructuring charges were incurred in this segment. Excluding those charges, margins were down about 20 basis points compared to last year. The next slide, Page 8, covers our Control Products & Solutions segment. Control Products & Solutions sales in Q4 were $993 million. That's up 2% from a year ago. Currency translation reduced sales by 4 points, so organic growth was 6%. Sales in the product portion of CP&S in Q4 were down a little year-over-year, but sales for the solutions and service businesses were up 12%, a pretty strong performance, and as I mentioned earlier, against the difficult year-ago comparison for the solutions and services businesses. However, orders for solutions and services were weak in the quarter. The book-to-bill was only 0.8. It's typical for the solutions and services book-to-bill to be below one in our fourth quarter, but 0.8 is lower than normal. As Keith mentioned, we saw an increasing number of projects being delayed in Q4, particularly larger projects, and that was pretty much the case in all regions. Our backlog in the solutions and services businesses is down approximately 7% compared to this time last year. Moving to the right side of the slide. Segment operating earnings increased 7% year-over-year, and operating margin expanded by 0.6 to 13%. Control Products & Solutions also incurred about 1/2 of the restructuring charges, which reduced margins in the quarter by about 0.6 points. That offset some of the benefit of higher volume. Page 9 provides a geographic breakdown of our sales in the quarter. I'll focus my comments on the far right column that displays the year-over-year growth excluding currency effects. As we discussed on the last earnings call, growth rates have clearly moderated from earlier in the year. Despite that, as Keith mentioned, we realized organic growth in every region in Q4. Canada has been consistently strong this year with 18% organic growth this quarter. EMEA organic growth was 7%, better than we expected coming into the quarter. We're continuing to benefit from our success with OEM customers and saw particularly strong growth in the emerging countries in this region. Asia Pacific was up only 2% compared to fourth quarter last year. There was very mixed performance across the countries in the region. China was up 11% year-over-year. India was about flat to Q4 last year, and Australia was down significantly. Latin America was up 8% compared to Q4 last year, and that was with Brazil down about 4%. There was continued strong growth in the balance of the Latin American region and, particularly, in Mexico. I'll turn now to Page 10, free cash flow. Free cash flow for the quarter was $347 million. The conversion on net income was 178%. Year-to-date, free cash flow was $598 million. That represents conversion on net income of 81%. And if you exclude the discretionary pension contribution that we made in the first quarter, conversion for the full year would've been 105%. So that's the fourth quarter. I'll turn now to Page 11 for a summary of the full year results for fiscal '12. Sales reached $6,259,000,000 for the full year, up 4%. Organic growth was 6%. Currency translation reduced sales by about 3 points, and acquisitions added a little less than 1 point. Segment operating margin for the full year was 18.1%, up 1 full point from last year. Diluted EPS from continuing operations was $5.13, up 7% compared to last year, and I think Keith already mentioned that this represents another year of record sales and EPS for the company. Since we already covered cash flow, I'll move to Slide 12, which describes the new approach we're taking to the way we deal with pension expense and some of our earnings measures. Significant declines in interest rates over the past several years have caused an extraordinary increase in our pension expense. We consider a large portion of that pension expense increase to be unrelated to our underlying operating performance. Because of this, beginning in fiscal '13, we've decided to introduce new non-GAAP measures that exclude nonoperating pension cost from our income from continuing operations and corresponding EPS, and we are also changing our definition of segment operating earnings to exclude the nonoperating pension class. As shown on the right side of the slide, we're defining nonoperating pension costs to include defined benefit plan interest cost, expected return on plan assets, amortization of actuarial gains and losses and the impacts of any planned curtailments or settlements. We consider service costs related to active employees to be operating pension costs. We believe that the nonoperating components of pension costs are more related to financial market factors and that excluding them presents an earnings picture more reflective of our underlying operating performance and also allows for more relevant historical comparisons. Let's turn to Slide 13. This next slide provides a sense of the extent to which the nonoperating pension costs have impacted our results over time and why we think it's important to provide better visibility of that impact. The 3 columns to the left display the operating and nonoperating components of pension expense for fiscal 2008 and 2012, along with our projection of pension expense for fiscal 2013. The far right column, which is labeled 2013 better than, worse than 2008, shows the difference in the components of pension expense between those 2 years. In the 5-year period, total GAAP pension expense increased by $140 million. You can see that total at the bottom of the column. That total GAAP pension expense increase represents more than a 2-point negative impact on operating margins in 2013 compared to 2008. The nonoperating component of that pension expense increase is $104 million or almost 75% of the increase. We think it's important for investors to understand the impact of the nonoperating pension expense. The second column from the right side of the slide shows the difference between the components of pension expense for 2012 compared to 2013. For 2013, we're projecting a $64 million increase in the total GAAP pension expense. The nonoperating portion of that increase is $44 million or about 70% of the increase. It's important to note that even with this change, there's still a $20 million increase in the operating pension cost in 2013. The operating pension cost will continue to be included in our segment operating earnings. The next slide, Slide 14, provides a walk from our fiscal 2012 GAAP results to the new non-GAAP measures so that we can provide investors with a consistent comparison against our fiscal '13 guidance. Focusing on the middle column, which displays the adjustments, I'll start with segment operating earnings, which would have been $32.5 million higher in fiscal '12 under the new definition of segment operating earnings. General corporate net expense would've been $2.7 million lower, so total income before taxes would've been $35.2 million higher. After tax, that yields an earnings per share add back of $0.16. So adjusted earnings per share for fiscal '12 would've been $5.29 compared to $5.13 as reported. Segment operating margin increases by 0.5 point under the new definition of segment operating earnings to 18.6%, and the effective tax rate also increases by about 40 basis points. As Rondi mentioned at the beginning of the call, reconciliations of earnings per share and segment operating earnings annually and by quarter back to 2008 are available in the supplemental data book that's posted to our external website. So now let me turn to Slide 15, and we can discuss guidance for fiscal year '13. Regarding the top line, Keith provided a good deal of color on our views of the economic and market environment we're expecting in 2013. I'll repeat just a couple of key points: growth rates moderated throughout fiscal '12, our current underlying demand trends are pretty flat and there's not much positive momentum as we enter the new year. The global economic recovery seems to have run out of steam, but we still think this is a pause, not an inflection point. We expect to see improved market conditions in 2013, but we don't expect to see any significant improvement until the latter part of the year. Given that context, we expect fiscal 2013 sales to be in the range of $6.35 billion to $6.65 billion. That's 1% to 5% organic growth. We expect currency and acquisitions to each add about 0.5 point of growth. So that's the makeup of the 2% to 6% growth that Keith highlighted. We expect segment operating margin to be about 18.7%. That compares to the restated fiscal '12 segment operating margin of 18.6%. Think of the 18.7% as the midpoint of guidance, so maybe a little bit higher or lower across the sales range. Not a significant margin improvement year-over-year, but at the midpoint, we're at a relatively modest 3% organic growth. And even with our new definition of segment operating earnings, we're absorbing a $20 million increase in pension expense. As Keith noted, our guidance for adjusted EPS is $5.35 to $5.75, and that compares to EPS of $5.29 for fiscal '12 on an adjusted basis. We expect free cash flow conversion on adjusted net income of about 100% in fiscal '13. And then maybe a couple of other items that aren't shown here: we expect general corporate net expense to be approximately $83 million, about equal to fiscal '12; we expect an effective tax rate in fiscal '13 of about 26%; and we expect the average share count next year to be between 139 million and 140 million shares. And with that, I'll turn it over to Rondi, and we can begin the Q&A session

Okay, great. Thanks, Ted. [Operator Instructions] So, operator, why don't we go ahead and take our first question.

And it's from the line of Scott Davis of Barclays.

I know visibility isn't all that great. But when you think about 2013 guidance, I mean, how did -- what are your customers telling you as far as kind of the mix between CapEx-related, project-related things and the regular daily flow of products that are more driven by capacity utilization? Is there -- are you thinking in terms of CapEx being flattish next year or actually down?

Well, it's a little early to get a read on the CapEx because most people are calendar year, and we really hear that more in our second quarter. But I would say from -- anecdotally, at least, from the commentary we're hearing, we don't expect that it will be an increase from where we're currently seeing it. And the question will be, I think, how do some of these other factors play out over the next couple of months, particularly the fiscal cliff and elections in the U.S. and the debt and the euro crisis potential that remains in Europe. So I think those are the factors that we need to get some, I'll just say, better clarity and certainty around to be able to understand what is going on. Also, some of our customers, at this point, I think, are taking a little bit of a wait-and-see attitude. But I think that's more around, I'll just say, the OpEx type of projects than the larger capital investments that typically require higher level of approvals.

Okay, helpful. And just as a follow-up, just wanted to talk about cash reinvestment. Not really much in -- I mean, you bought 3.7 million shares. It's respectable, but you're still sitting on a fair amount of cash and have balance sheet space. Can you just talk us through what the plans are in the next 12 months?

Yes. Sure, Scott. First, I think we're pretty pleased with our track record of returning cash to share owners. And over the past 3 years, we've returned about $1.3 billion in dividend and share repurchase and, at the same time, made some pretty sizable contributions to the U.S. pension trust. We've increased the dividend by over 60% in the last 3 years, so we're reasonably pleased with that track record. We had that large pension contribution this year, which held down our repurchases a bit. But next year, we would expect repurchases to be in the range of $400 million, so significantly higher than the $265 million we spent this year. And depending on share pricing or if we're in a range that's close to where we have been recently, that ought to be in the range of 5 million to 5.5 million shares.

The next question is from the line of Steve Tusa of JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: We're obviously in this kind of a follow-your-nose type of environment. It's a -- there's not a ton of visibility. I know you guys don't like to give quarterly guidance. But I guess, just kind of looking at the better sales this quarter, the backlog and the weak book-to-bill at solutions, there's a lot of kind of things that are moving around, some positive and some negative. Last year, you guys had a pretty tough 4Q to 1Q, where you were down, I guess, around 10% sequentially, given some project timing headwinds. I mean, is that the same type of sequential decline we should expect heading into the first quarter here? And again, it's kind of an unusual environment because you said it's going to ramp in the back half. So I'm just -- I want to make sure that I'm kind of calibrated on the model when it comes to this stuff.

Yes, I think that's a fair characterization. It's a similar situation we found ourselves in last year. We need to rebuild our solutions backlog. That's going to take some period of time. And certainly, we, typically, historically see, even independent of the backlog, a reduction in our Q4. We typically see a softer Q1 in our solutions business already. So I think those -- that combination of traditional reduction, plus the accelerated amount of backlog that we burned off and the weaker orders portend a softer first half of the year in our solutions business. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Right. And so that down 11 sequentially would be kind of flattish organically year-over-year. Ted, is that right?

Yes, I would expect. If you think about the 3% growth for the full year organically, I would expect the first half to be flat to up a little bit maybe and then better growth in the second half. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And then one follow-up on that, I guess you're talking about a pause. You're talking about kind of a little bit more confidence that things are -- will maybe come back. And can you maybe talk about the run rate of conversations or, I guess, you talk about a front log or RFPs, RFQs, things like that, has that softened dramatically, call it, relative to 6 months ago? I mean, how is the kind of pool of addressable business, outside of the obviously ongoing MRO stuff, but the pool of addressable targets trended over the last 6 months? And how -- if it's gotten weaker, how much weaker has it gotten?

We have not seen any real change in the front log or the, I'll just say, quoting activities over the last 6 months. It's been pretty flat, so we haven't seen it going up. But we haven't seen much of a change in that dimension of activity. Where the real change has been in the last 6 months has been in Q3. We talked about project delays, and the majority of that was in the front log areas. And then in Q4, that picked up even a little more. So I would say the activity remains constant, or relatively constant. But the decision making is taking longer to close orders than it had in the first half of our fiscal '12. So I would say that's where the change has occurred as opposed to, I'll just say, engineering fee projects and quotations. And I think I'd characterize it that way. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And is that similar to the kind of the infamous air pocket comment that you guys made, I guess, in '04, '05, remember that point? I mean, how different does it feel relative to that or maybe the same? And then that's my last question.

You have a good memory. That goes quite a bit back. But I just think every period is unique in its own way, and I think to characterizes it back to that point in time, I believe the -- over the economic environment is very different today. So I think it's more just a -- the uncertainty is creating less than confidence in the -- in their outlook, and therefore, they're just delaying decisions and waiting to see how a few things unfold before they make commitments. And it's just -- we're just in a period that, that has to play out, and ultimately, it'll go one way or the other. But at this point, we're just seeing the uncertainty as the -- is the overriding, I'll just say, behavior.

Next question is from the line of Julian Mitchell from Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: The first question was really on the color by end markets. What are you seeing in things like automotive versus broader consumer versus, I guess, heavy industry? How has that changed in the past couple of months? And which industries are you seeing the biggest shifts in projects, in terms of sign-off delays and so forth?

Well, I guess a couple of things. Where we see the strongest activities continues to be in automotive and oil and gas, and that would be pretty much on a global basis. If you look at heavy industries and you take oil and gas out of there, I would say, currently, where we're seeing the greatest slowdown in buying at this point would be mining, is probably the toughest area at this point in time. Some of that is driven by labor situations, such as you have in South Africa. Some of it is demand from China and India impacting Australia, and some of it is just the environmental issues associated with some of the large new mines, particularly in Latin America. So it's probably created a slowing of investments, and I think that's the area that we see it the most. With respect to consumer, I think we still see -- consumer isn't one that has high peaks and high -- and low valleys, so I think it's stayed pretty well flat. But there's no question that the global investment in consumer products is more in -- is being slanted more to the emerging markets than it is to, I'll just say, the U.S. and Western Europe. Julian Mitchell - Crédit Suisse AG, Research Division: Okay. And then a follow-up just on the segment margin guidance of a slight increase in fiscal '13. Yes, you talked about what the operating pension cost effect is, and there's some volume leverage in that as well. But how about sort 2 or 3 other things, in particular, mix or the delta of savings versus restructuring charges and kind of input cost versus price, how are you assuming those move around inside that margin guidance?

Yes. So let me start and, hopefully, I'll hit all the points you just made. We would expect a small favorable impact from mix because across -- if you think about our guidance range, I'd say across -- of sales growth, across that range, we would expect product growth to be maybe 1 point higher than the company average and solutions and services to be about 1 point lower, so a little bit of favorable mix impact. On price, material cost, I would say we expect a small positive contribution. We'd expect price to be less than 1 point, similar to what we're seeing in 2012. And I would say we expect some modest material cost increases, purely on the commodity side, if anything, neutral to maybe slightly favorable. We talked about, obviously, the pension headwind. Was there one other item you had there, Julian? Julian Mitchell - Crédit Suisse AG, Research Division: Yes, sure. It was just on kind of the net of savings versus restructuring charges.

Yes, great question. Right now, our intention is not to take those savings from the restructuring actions in Q4 to the bottom line, but rather, to use those to kind of rebalance our investments as we go into 2013. Now as we proceed into 2013, if market conditions turn out to be worse than we were expecting, we may not redeploy all of that.

The next question is from Steven Winoker of Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: First question on Logix. Can you just provide some color around what Logix was doing in the quarter? And any more pressure competitively in terms of traction there, given the fact that customers are, as you mentioned, putting off decision making at this point?

Sure. Logix -- organic growth for Logix in the quarter was 6% year-over-year, and for the full year, it was 8% growth. So we're happy with the performance of Logix in the year. I think our ability to continue to expand the platform, in particular, with a number of -- actually, 3 new midrange platforms, gives us optimism. And that's why my comments about we're pleased with our new products, but we're also counting on those new products to drive growth in this next fiscal year. So I don't believe delays or customer -- lack of customer certainty has impacted disproportionately anything associated with our Logix business, and I think we are better positioned, going into '13, with these new platforms than we were coming into '12. So I think it's an area that can help us across-the-board, both in process, as well as our OEM initiatives. And whether that be in emerging markets or mature economies, we think it -- the broadening of the portfolio bodes well for us going forward. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Are those the best growth -- when you -- you mentioned best growth opportunities in the release and a couple times on this call. Is that what you're talking about?

Yes. And to Ted's point, part of the redeployment of resources with the headroom we created from our restructuring actions are to do just that, to focus on our core platforms and to support the commercial initiatives, particularly the emerging markets. So we do see that as a -- as one of the better opportunities, and process in OEMs remain right up there as far as where we think we have the greatest long-term growth potential. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: And second question, you mentioned EMEA -- or EMEA was up 7% in the quarter, organically. Where was that? What'd Western Europe do? And I mean, are you assuming you can keep that up for 2013, and how?

Well, I think it was interesting, Europe, because it was a combination of good growth in a lot of the emerging Europe, which would be, for us, Central and Eastern Europe, including Russia and then the Middle East and South Africa. So that was significant growth, double-digit growth in the quarter. I think Western Europe was more mixed. We had some very good success in a couple of countries and, in particular, good success in the U.K., good success in some of the northern countries. And really, the greatest weakness for us was in Italy and mainly because of the financial issues there that's impacting both the end users in Italy, as well as the machine builders. So I would say in Western Europe, Italy was the weakest performer for us. As far as being able to keep it up next year, we believe that Europe will be at the -- below the company average, and I think it really depends upon how does the financial and the debt crisis there and the euro crisis unfold. As we said, we're not expecting it to deteriorate from here. But we're not counting on a lot of growth from the mature economies, and we think we'll see above-average growth in the emerging.

The next question is from the line of John Inch, Deutsche Bank.

Just would like to understand the organic growth guide a little bit more, Ted and Keith. So if you look at volumes and the normal seasonal pattern today, and based on all the puts and takes that you've described, does the midpoint of your guide assume that in fiscal '13, business conditions, all else equal, are relatively static? Or are you assuming, as I think, Keith, you mentioned, some second half improvement? Or is the second half improvement really a function of getting to the 5% within the range?

No, John. I would say even at midpoint, we would expect first half to be relatively flat to current conditions, maybe slightly better. But then most of the growth has to come in the second half.

So some companies have gotten into trouble though by forecasting macroeconomic improvement. And I'm just curious, is this a -- I realize you have some visibility with respect to backlogs. Obviously, you're discussing a lot with your customers. Is this a little bit of an inventory build, or is it process? Or I mean, what would give you the confidence at this juncture to assume that in your June quarter, you're going to start to see a pickup, or is it sort of aspirational? Or just a little more color would be helpful.

I would not call it aspirational. But I think we've been pretty consistent saying we don't believe we have visibility that goes out more than 6 months, especially from an order and backlog point of view. I think what we're looking at is conversations we're having with our sales organization, our channel, our customers. We're looking at the macroeconomic projections that are put out there by people like Global Insight. I would say, generally, what we're seeing in those macroeconomic projections, and I think this is also true of IMF, is that there's expected growth next year, but generally weighted toward the latter half. We're also hopeful that once we get past the elections and the fiscal cliff, that hopefully, that will reduce some of the uncertainty we have in North America right now. So we think that's consistent with the notion of whatever's going to happen in our fiscal 2013, it is more likely to be positive in the second half.

The only thing that I would add to that, John, is quite frankly, that's why we have a range. And if you go at the low end of that range, we're not assuming anything in the second half. And if you go to the high end of the range, it kind of fits what Ted just talked about. So I think that range allows all of you to make your best estimate of how you see it playing out from your window. But certainly, we see the potential to operate across that range, and I think the dynamic that Ted talked about is what moves it from the low end to the high end.

So that -- no, that clarifies it. That's quite helpful. Let me ask you then, Ted. At the midpoint, right, of your EPS assumption, you're assuming $5.55 versus $5.29 x the pension nonoperating costs. Now I realize you've got this extra -- you've got the service cost increasing by about $0.10 and $0.11. That's still giving you a -- it's sort of a still kind of an anemic, if you will, variable contribution. I think I'm just going back to the 18.7, right, versus 18.6. I realized if you x the 20 million, it's about 30 basis points. But what kind of variable profit conversion are you assuming? And shouldn't this -- the lower solution, shouldn't that actually be helping your mix a little bit more? Like why is there not a little bit more volume leverage?

Yes. Well, there's -- so at the midpoint, conversion is a little bit over 20%. And if you add it back, the pension expense increase, conversion would be close to 30%. And we think with 3% organic growth being at the low end of kind of what we normally talk about of that normal range in the upside, call it, 30% to 40%, we think that's pretty good performance.

Okay. So your midpoint is assuming the low end of your historical range of a 30% to 40%. That's the way to think about it.

Without the pension expense increase.

Right. No, I understand. And the reason for that is just because overall uncertainty, you're just being conservative or what?

Well, I don't think so. I mean, I think it's simply that the lower that organic growth number is, we just don't get as much volume leverage.

That's fair. Lastly, China. I think China was up 5% last quarter, up 11% this quarter. Keith, what are you seeing in China? Like what are you sort of seeing on a sequential basis whether you're on brownfield, people telling you -- because companies are, for all intents and purposes, saying it's a flat, but some have actually called out perhaps a degree of improvement.

I think we're seeing mixed at this point, John. China, we have not seen any impact, or I should say, meaningful impact yet of the stimulus, particularly in some of the infrastructure projects. We do expect a little bit of help of that in fiscal '13. But they still have challenges with respect to liquidity, particularly for the small and midsized customers, and their exports, particularly given the impact of Europe to their export industries, continues to be a challenge. So we see China as having another tough year. But a tough year for them means it's still meaningful growth. GDP has dropped down into the 7s with the last one continuing to bring it down. They're going through a leadership change. I think this first quarter here, it'll be a little bit uncertain, and I think we'll get a little more clarity as to what that does positive or negative as we get past the Chinese New Year. So we see China as mixed at this point in time. And we're still very optimistic and bullish on China in the long term, but we have to get through the current environment.

But your guide doesn't assume China deterioration. It's assuming...

No. We think China, overall, will perform slightly higher than it did for us this year. That's our plan for next year. And we -- as you know, we had a very, very weak start in China last year. We ended much, much stronger, and we think we will be slightly ahead of the fiscal year performance.

The next question is from Jeff Sprague of Vertical Research Partners.

Can we talk pension a little bit? What's the funded status of the plan at year end?

We were underfunded by $930 million at year end, which is slightly higher underfunding than year-end last year. And so basically, the drop in the discount rate pretty much offset the favorable contribution we got, both out of asset returns and the pension contribution we made in October.

And then what do you see for pension contributions in 2013, if any?

I think in terms of discretionary contributions, we would not expect a discretionary contribution in 2013. So our normal level of pension contributions, primarily related to plans outside the U.S., is about $40 million.

And what percent of the current plan participants are current employees? And is the plan still open?

Well, the plan was closed to new participants. This is generally true for our defined benefit plans in the U.S., Canada and the U.K. They were closed to new participants in 2010, but they remain open for active participants. Offhand, I do not know the percent of employees active versus not active. I would guess it's probably about 40% active versus 60% not active. I can -- I'll check that for you and let Rondi get back to you if that's not correct.

And then just going forward, are you going to report kind of full detailed GAAP, non-GAAP, so if we want to keep track of what the GAAP numbers actually look like, we'll be able to do that?

Yes.

Next question is from Nigel Coe of Morgan Stanley.

Yes, I just wanted to dig into A&S margins a little bit. You talked about the restructuring, and that accounted for the bulk of the year-over-year decline. But then you called out Logix growth of 6%, which is, to me, that comes with decent margin. Just wondering, were there any negative mixes that offset that Logix growth?

I would say nothing significant in the quarter, and I would also say the Logix growth versus the average of A&S wasn't a significant mix boost for us. I think if you look at A&S, we've always said the margins are going to be somewhat variable quarter-to-quarter, in part because of the high underlying contribution margin potential. If you look at the full year, A&S margins were 26.5% for the full year, which was up almost 1 point from last year. I think that's representative of the underlying performance of the business.

Right. And we talked about what the 1Q seasonality within the CP&S, but A&S margins normally pick up from 4Q fiscal into 1Q fiscal. Would you expect that to reoccur this year?

Well, I think you are correct in your historical observation. Since we don't provide quarterly guidance, I don't want to comment on what I think A&S is going to be next quarter.

Okay, fair enough. And, Ted, you gave us the solutions book-to-bill. I know you're very short cycle, so the products book-to-bill is not that meaningful a metric. But do you have the number offhand?

I don't have the number offhand, but I think you're right. Because that is such short cycle, we typically don't have a big difference in book-to-bill on product

Okay. And then just switching to the pension change. You had the option to -- I guess, you considered switching to mark-to-market. You opted to go for a nonoperating metric. You just -- maybe just quickly, why did you decide not to go with the mark-to-market route? Because it seems that most of the U.S. companies are adopting that change of accounting.

Yes, I think that's a fair question. We felt that the most important thing was try and provide investors transparency into the nonoperating versus operating pension costs. We thought we could accomplish that without changing the underlying GAAP accounting. And we thought it was a positive that in choosing the method we chose, we don't have to make these large fourth quarter GAAP adjustments that are a consequence of the mark-to-market adjustment.

Right. And by the way, I appreciate all the detail you provided on the restatements. That's really helpful. And then just quickly on Logix. You set a target of $1 billion this year. Did you get there?

We were just under it this year, and we certainly are going to go over it early in our fiscal year. But the difference between organic and with currency caused us to be just slightly under. So we're pleased with where we're at. We almost got to that metric of $1 billion, and we're going to look forward to blowing through it this fiscal year.

Next question is from Winnie Clark of UBS.

Could you just talk a little bit about -- actually back to the quarter. It seems that results were better than what you would've expected going into the quarter. Can you kind of talk about how things trended? Was September better than the prior months, et cetera, throughout the quarter?

You're breaking up a little bit, so let me see if I can repeat the question and make sure we got it. You're asking [indiscernible] the sales numbers came in a little bit better than expected in the quarter and could we talk a little bit about how things trended through Q4.

Yes, that's right.

Okay, I'd be happy to do that. Well, I think most of you know that our fourth quarter is very heavily weighted to September performance. And September, once again, was our strongest month in the quarter both in orders and sales, and nothing unusual there. I would say it was our typical pattern that we have every year, given the holidays, particularly in the July-August time frame, both in Europe and more and more in the U.S., so very consistent. With respect to October, we believe what we have seen so far is consistent with the guidance we gave and with the commentary that we talked about with first half and second half and our solutions backlog reduction in Q4.

And then on Process, obviously, very strong growth this year. Being that your solutions backlog is a bit weaker and you expect some weaker mix next year, how do you think about Process next year relative to the company average growth?

Yes. We think Process will be closer to the company average growth this next year than the significant ink of above-company performance that we had this year. And you're exactly right. It's mainly driven by the softness in orders the last 2 quarters, so not the performance difference that we had this year, but still, ongoing growth and, still, the area that we believe has the greatest long-term potential for us.

And it's from the line of Shannon O'Callaghan from Nomura.

In terms of the pause amidst the uncertainty out there, I mean, is this kind of amorphous commentary you're getting back from customers in the channel? Or do you hear one thing more than the other? I mean, are people bringing up mainly fiscal clip -- cliff, mainly Europe? I mean, do you have any ability to kind of rank order what you tend to hear the most to give us a little feel for when people are going to get over this uncertainty?

Well, no. I mean, with -- and the reason I say that is with 50 -- more than 50% of our sales outside the U.S., we hear an eclectic set of feedback. And I think the U.S., the predominance is the fiscal cliff and what's going to happen with taxes and what's going to happen with my cost with all the regulation and the healthcare. So I think there is this great uncertainty in the U.S. as to can I make a long-term investment decision without knowing a little more as to what the rules of the game are going to be for some period of time. And I would think there, that is the predominant question that's on people's minds. If you go to Europe, I think it's just -- they haven't solved the fiscal sovereign debt crisis, and everyone's waiting to see will there be some definitive conclusion to that. And the emerging markets are kind of just -- I think you see a little mix there with the emerging markets that have strong exporting, wondering what's happening in the U.S. and Western Europe. And I think where the ongoing positive activity is, is in their indigenous markets and, in particular, in some of the automotive, some of the consumer product areas. That's where we see the least dependence upon what's going on in the rest of the world in those emerging markets and, really, what is the form of government stimulus that is being applied there, which, traditionally, is much more infrastructure types of projects. So it's varied, and I think each region has a unique set of concerns. And that's the backdrop that we see this pause and ongoing uncertainty and, therefore, lack of confidence to make ongoing investments.

And then just in terms of -- one follow-up on China. You said you haven't seen sort of the evidence of the stimulus yet, but you expect some in '13, I think. I mean, in terms of the pipeline of things that are on the table over there, I mean, any particular verticals or areas of investment that you think you have some visibility into benefiting from?

Well, their stimulus is heavily focused into infrastructures, so metro systems. They always -- not always. Last time, as well as this time, they're accelerating projects that would've been done later. But now, they move them up, and they have more lines going in, in parallel than they would have previously. And we still see some strength in oil and gas in China, particularly some of the offshore activities are strong and automotive is not as strong as it used to be, but it's still a healthy sector. And then as I mentioned earlier, the indigenous food and consumer industries, with their growing middle class, is an area that we still see good investment by both indigenous, as well as multinational companies.

Okay. So that concludes today's call. Thank you, all, for joining us, and we look forward to seeing many of you in Automation Fair next week. Actually, starting this week; actually, it's this week. It's been a busy month. So we'll see you later this week. Thank you.

This concludes today's conference call. At this time, you may disconnect. Thank you.