Emerson Electric Co. (EMR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Emerson's Investor Conference Call. [Operator Instructions] This conference is being recorded today, November 6, 2012. Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Patrick Fitzgerald, Director of Investor Relations at Emerson. Go ahead, sir

Thank you, Jill. I'm joined today by David Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's fourth quarter and fiscal year 2012 results. A conference call slide presentation will accompany my comments and is available on Emerson's website at emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next 3 months. I will start with highlights of the quarter as shown on Page 2 of the conference call slide presentation. Fourth quarter sales increased 2% to $6.7 billion, with underlying sales growing 5%. Robust growth in Process Management was driven by energy investments and recovery of sales deferred from the Thailand flooding, in which we have now fully recovered. Record gross profit margin of 41% in the quarter expanded 140 basis points from the prior year and operating profit margin of 20.4% increased 130 basis points. Earnings per share of $0.39 reflects the impact of a $0.72 goodwill impairment charge related to businesses impacted by telecommunications and information technology industry weakness. Excluding the impairment charge, earnings per share of $1.11 increased 7% from prior year. Yesterday, Emerson's Board of Directors increased the first quarter 2013 dividend by 3%. After down sales and margin in the first half of 2012, our business has executed well to deliver a strong second half amid a weakening global economy. Next slide, P&L summary. Again, net sales grew 2% and underlying sales increased 5%. Recovery of sales deferred by Thailand flooding helped drive strong volume leverage and 130 basis points of operating profit margin expansion. Net earnings of $282 million includes the $528 million after-tax goodwill impairment charge, which was $592 million before tax. We repurchased 5.6 million shares in the quarter for $269 million. Reported EPS declined 61% and excluding the impairment, increased 7%. Next slide, underlying sales by geography. In the fourth quarter, underlying sales in the U.S. grew 2%; Europe was flat; Asia increased 8%, with China flat; Latin America grew 18%; Canada grew 10%; and the Middle East/Africa grew 19%. Total underlying sales increased 5%. Currency translation deducted 3% for net sales growth of 2%. Full year 2012 underlying sales grew 3%. Currency translation deducted 2% for net sales growth of 1%. Moving to Slide 5, profitability detail. Gross profit margin of 41% expanded 140 basis points, driven by volume leverage, mix and cost containment benefits. As already mentioned, the operating profit margin of 20.4% improved 130 basis points. The goodwill impairment of $592 million and $31 million in currency transaction losses with the primary items bridging to pretax earnings of $593 million. Reported tax rate of 49% reflects the low deductibility of the impairment charge. Excluding this, the rate was approximately 30%. Next slide, cash flow. Fourth quarter operating cash flow increased 4% and capital expenditures declined slightly resulting in free cash flow growth of 6%, with strong conversion from earnings. Working capital as a percent of sales increased from the prior year at higher receivables related to higher end-of-year sales offset solid inventory performance. Moving to Slide 7, business segment detail. Business segment margin improved 140 basis points, reflecting strong volume leverage and cost containment benefits. Changes in corporate expense were primarily driven by the impairment and higher stock compensation compared to prior year. Reported pretax earnings margin declined from the impairment. Excluding this, pretax margin expanded 100 basis points. Next slide, Process Management. Process Management net sales grew 18% and underlying sales grew 21%. By region, the U.S. was up 16%, Asia up 21%, Europe up 11%, Latin America up 46% and Middle East/Africa up 42%. Strong conversion of backlog from the Thailand flooding supply chain disruption helped sales, along with robust investment in the oil and gas, chemical and power industries. Segment margin of 24.3% expanded 200 basis points, primarily driven by volume leverage and cost reduction benefits. Full year 2012 underlying sales were up 15% for Process Management with margin at record levels. Continued end market strength is expected to support solid momentum into 2013. Next slide, Industrial Automation. Industrial Automation net sales declined 6% with underlying sales down 2%. By geography, the U.S. and Asia were flat; Europe was down 5%; Latin America, up 3%; and Middle East/Africa down 20%. End markets were mixed across the segment, with the power generating alternators and industrial motors business, weakest. Underlying sales grew modestly in the fluid automation, electrical distribution and mechanical power transmission businesses. Segment margin of 17.5% expanded 280 basis points, benefiting primarily from cost containment programs and lower restructuring expense. Profitability was strong resulting from a well-positioned cost structure and favorable mix. In the near term, the European fiscal crisis will remain challenged for industrial automation. Next slide, Network Power. Net sales declined 4% and underlying sales decreased 3%, with the U.S. down 7%, Asia up 5%, Europe down 9%, Latin America down 4% and Middle East/Africa down 14%. Global telecom and information technology weakness persisted, resulting in a double-digit sales decline in the embedded computing and power business. Data center end markets were mixed among geographies, but challenging overall, especially in Europe. Segment margin of 11.6% declined 190 basis points due to volume de-leverage and other cost increases, but improved sequentially 130 basis points. As mentioned in this morning's press release, the embedded computing and power business continues to face unique market and technology challenges. We have decided to pursue strategic alternatives, including a potential sale of this business. Next slide, Climate Technologies. Climate Technologies net sales decreased 4% and underlying sales declined 3%. By region, the U.S. was down 4%; Asia, down 7%; Europe, down 1%; Latin America, up 6%; and Middle East/Africa, up 17%. U.S. residential/commercial and refrigeration markets were weak, especially in the transportation refrigeration market. Asia reflected mixed trends across markets and businesses with China down 7% and Europe remains soft. Segment margin of 18.5% expanded 150 basis points despite the sales decrease on a well-positioned cost structure and favorable mix. Global end markets remained stable, but soft, a trend expected to continue into the first half of 2013. Moving to Slide 12, commercial and residential solutions. Commercial and residential solutions net sales were unchanged, with underlying sales up 5% as the Knaack business divestiture deducted 4% and currency translation deducted 1%. By region, the U.S. was up 2%; Asia, up 17%; Europe, flat; Latin America, up 11%; and Middle East/Africa up 35%. The commercial storage and food waste disposal business has reported strong growth as U.S. construction and renovation demand remained steady. Segment margin of 21.9% increased 130 basis points, benefiting primarily from cost containment programs. We expect North America residential end markets to continue to improve into 2013, resulting in good sales growth at solid profitability for the commercial and residential solutions segment. Next slide, fiscal 2012 highlights. As previously mentioned, full year net sales grew 1% and underlying sales increased 3%, with emerging markets increasing to 36% of total sales. Record gross profit and operating profit margin reflects continued innovation, portfolio management and cost repositioning efforts. Reported EPS of $2.67 reflects the $0.72 goodwill impairment charge. Excluding this charge, EPS of $3.39 grew 3%. We also completed the 56th consecutive year of dividend increases, with 16% growth in 2012. After a challenging first half of 2012, we finished the year with strong execution and solid operational momentum moving into 2013. Moving to Slide 14, the 2013 outlook. Global economic growth continues to trend downward, but still moderately positive. The pace of growth is unusually weak for this stage of recovery cycle and uncertainty in the U.S., China and Europe is resulting in cautious business investment. At present, there is no obvious catalyst for economic growth acceleration. Based on current global economic conditions, the 2013 outlook is as follows: Reported and underlying sales growth of 0% to 5%; EBIT margin, 10 to 20 basis points of improvement; earnings per share growth, mid- to high-single digits from a base of $3.39 in 2012; we expect the majority of sales and earnings growth to occur in the first half of the year. And with that, I will now turn it over to David Farr.

Thank you very much. Thank you there, Pat. First, I want to thank everybody for joining us today, and we appreciate your interest and your support of Emerson. Secondly, I also want to congratulate Frank Dellaquila. The board today promoted Frank to EVP and CFO, expanded his title, given an EVP title, and so he's now going up a notch, and his compensation will be adjusted downward accordingly. So...

Thank you, Dave.

You're always welcome for that. And then most importantly -- by far, most importantly, I want to thank the entire global organization for delivering extremely strong second half of our fiscal year after the unique and enormous shock that we took in our supply chain for many of our businesses coming from the Thailand floods. As you all know, the first half of this year was down in sales, earnings, margins. And we rallied the folks around the world. The organization fought back and recovered nicely with a very strong second half, and I want to toast and thank all of the individuals on this company who made that happen, especially led by Frank and Ed Monser and the business leaders because without their effort, we would not have made that second half happen, and I appreciate that. And it gets us into great position relative to the year where we face right now in 2013 with, again, a lot of uncertainty, and I'll talk little bit about that. Unfortunately, this year in 2012, the underlying volumes of the company, due to the weakening economies as the year progressed, were significantly lower than we thought originally. We ended up the year a little bit over 2.5% underlying sales growth, stronger second half because of the floods impact, but overall, it's basically down 4 points from what we thought we were going to see and we presented in February of 2012. So a much weaker economy impacted us, and then we had the floods, and it really had a challenging situation for the whole company. As I look at the fourth calendar quarter, there's a lot of uncertainty out there between the whole fiscal cliff here in the United States; the European situation and the continued impact of that recession and slowdown and, I would say, stagnation in Europe; the Japanese situation, which is clearly uncertain and also weakening; and then a little bit uncertainty relative to China and what their next-generation leaders are going to do relative to their global investments and also investments to stimulate their economy. As we look at our current order pace, it's a little weaker. Our backlog is still very positive. We are clearly looking at an uncertain and challenging business times for the next 6 months, and we are going to plan accordingly. As we look at our current make-up of the year, given the very weak first half last year because of the Thailand flood, we expect, again, this year to be a first half, second half, with 70% to 80% of our earnings per share, I'll say it again, 70% to 80% of our earnings per share in the first half of this year and obviously the remaining part in the second half. It will be very difficult at this point in time to say what's going to happen in the fourth quarter given the fact that people are being very cautious, and I'm also a bit concerned that people will shut down early in the month of December on -- based on inventories or weak demand. And so I'm very nervous about the fourth calendar quarter. We still see continued growth in 2013, pretty much in line to what we see this year -- we saw this year. We do not see a global recession at this point in time. We're looking as we talked about 1% to 5% underlying sales growth with a good mid-point about exactly what we did this year. Around that 2.5%, 2.6% level is a good midpoint. We are seeing a current forecast level and pace of gross fixed investment weaker in 2013 on a fiscal year basis than we saw in 2012. We clearly have the uncertainty with the fiscal cliff and that one bothers us right now relative to what's going on. Even if they do resolve the fiscal cliff, and I have no idea how they're going to do that, I personally believe the spending in the U.S. will be negatively impacted, both at the government level and then also the consumer level if they go about raising taxes. So our plan right now is a slight margin improvement, EPS in the mid to single high -- single digits with strong leverage, and particularly coming from process business and the recovery in residential and commercial solutions business. We will give more detailed segment information at our February meeting, not today. I gave you more than I normally would give you in a fiscal year guidance, but that's where we sit at this point in time. On the positive headwinds and tailwinds we see right now, the big headwind for us right now is pension. With the discount rate at 4%, unbelievably low for U.S. discount for pension, we will have a negative P&L impact of $65 million on our pension. We are in good shape with the pension. But clearly, with the low discount rates, we have to fund additional monies and we have to expense that and also put the cash in. But the cash funding will be about the same level we did last year, around $150 million, just the pension expense will be higher. Restructuring, we're in good shape. We have gone through 2 very, very big years. In 2013, we're looking at restructuring in the $70 million to $80 million level, down from the current 2012 and then also down from the 2011 expenditures. We do have the new, what we call the performance share, or the 4-year program, which we have -- every so often, we have an overlap year and this -- and 2013 will be an overlap year. The Compensation Committee and the board awarded the performance share awards, which are a 4-year program. They awarded those and there will be about $120 million impact on the year as we have an overlap -- the overlap year. It's clearly depending upon the stock price. And if the stock price goes up, that number obviously goes up. But that's good for everybody, as long as the stock price goes up. But net-net, we are looking at a year pretty much like we just faced without the catastrophes, where underlying sales growth, low-single digits, some good leverage, good cash flow, strategic investments and running in an environment where right now, that everyone is concerned about where the economic growth is going to come from. Fundamentally, I believe the United States has to lead the world out of this recession, this global downturn, and we do have the capabilities in North America and Mexico, U.S. and in the United States to lead this economy out for the world. But until that happens, we will stay, and I would say, in a very sluggish economic environment at this point in time. So with that, I would like to turn the floor over to questions and open the line to ask questions of either Pat, Frank or myself. Thank you.

[Operator Instructions] Our first question comes from the line of Steven Winoker from Sanford Bernstein.

Steve, before you ask the question, I do -- Frank Dellaquila just pointed out something, so I do need to clarify it very quickly, 70% to 80% of our EPS increase, not of the total EPS, but 70% to 80% of our EPS increase for next year will be happening in the first half. Thank you, Frank, not the -- increased. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Yes, I know. It's the growth.

Yes. I just want to -- if Frank pointed that out, and I misspoke, and thank God, I'm not on the live TV somewhere around the world, or something like that.

Right.

Okay, Steve, what's your question? Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: So the first one, just again on the guidance, the pension and the stock-based comp, if I put them together, feel like 4% to 5% impact on growth, EPS growth for next year. And if that's true, then at the high end of your guidance, just talk about mid-single digits, 5% top line, high single-digit, 9% bottom line, plus I'd add back the pension stock base, and now I'm talking about low to mid-teens EPS growth off of that 5%, if I x out the pension and stock base. How should I -- how are you getting that much leverage, or how are you thinking about that much leverage in the business?

Well, first of all, let's clarify what I consider high to mid. I would consider 7% a high, mid-single digit EPS growth. And if I grow -- if we grow underlying sales at 5%, we will get more than 2/10 leverage. It's pretty simple. So I know you guys have a tendency to run, you're sort of like people in my family, say you, "Go ahead and spend," and you just run right up to the top number to the credit card, so you just ran right up to 9%. And so what I classify high-single digit may be a little bit different than your definition. So your credit line is stopping, let's say, at maybe 7.5%, okay? Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay, Dave. I promise not to spend it before you deliver it, how's that?

You got it. Thank you very much. I just want to make sure you understand that credit card balance there. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Second, maybe a higher-level question on the portfolio. I mean, given your comments on embedded and so seeing that exit and given the M&A environment, right, how do you see the portfolio changing and transforming over, say, the next 12 months as opposed to longer-term or 12 to 18? What is...

At this point in time, our focus will, obviously, clearly find the right partnership and proper way to exit the embedded power computing, we'll do this as you know we have -- we'll do this in an orderly process. We want to protect that business and also to maximize the value for our shareholders. It will take us throughout most of this year to do that. And then relative to the acquisition front right now, we're looking primarily at small, again, small bolt-on type acquisitions, nothing significant. We're planning, as we review with the board today, basically around that $500 million level again. So there's not going to be anything structurally changing at this point in time. The folks in Network Power Systems are very much focused on integrating and getting that business back on track. The process guys have their hands full with underlying growth. Our Climate Technologies folks really have their hands full right now relative to sorting through how that market's going to recover in some time in 2013. So very much focused on status quo, nothing significant from the acquisition front at this point in time. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: And could I just follow that up on the data center, with the board review, when you talk about the difference between embedded computing power versus data centers, even though we're in a weak data center time frame right now, what were some of the major -- you talked about strategic and market differences when you talk about those very different segments.

We'll talk about that in February. That's a little bit more than what I'd discussed in a phone call like that. I mean, there's a lot going on in the data world right -- data center world right now with the, obviously, with the new hyper-scales and the -- hyper-scaled data centers and also with the -- basically what's going on in the telecommunication data center infrastructure and stuff like that, that's something we'll get into in February where we can throw some information out there and give you that. But I think in the short term, the data center marketplace will be still quite -- I think it will be challenged because there's not a lot of growth going on out there and there's a lot of fundamental change happening in the marketplace. So we're looking at, I think, over the next 6 months probably a challenging data center environment.

And our next question comes from the line of Eli Lustgarten with Longbow Securities.

What do you -- what was the underlying growth of process in the fourth quarter if you x out the catch-up from the Thailand? I mean, where -- what kind of comparison are we looking at this point?

I mean, what was the total underlying sales growth?

It was up 21%.

21%. I think it's going to be high-double digit. And you’re probably talking -- I mean, we're trying to track that, Eli, to be honest. It's sort of like catching sand that's falling in the air. But it's clear, and I would say, you're probably taking about $100 million or $100 million out, $120 million off that, so you're talking about high-double digits. So we had extremely strong underlying sales growth even x that business and all that.

So we're looking at a double-digit capability for 2013 on the basis of that?

I think that -- I talked about this before. Right now the backlog of the order pace says that we should be able to do that. We -- I'm always concerned about projects being slow. We have not seen that yet. Our order pace, our backlog demand, everything are still very strong even through this month here. However, I think there's a point of some uncertainty in, let's say, that something does happen to the U.S. economy and does take a dramatic dropoff, then you could see some of that slowdown, which we don't see right now. But I think that the pace of business, the backlog would say, "Yes, you could do north of 10% again." I am, right now, are -- probably would say more cautiously that in my base forecast, which would be that mid -- that 2.5% underlying growth rate, we could probably do more like 7%, 7%, 8%.

And with the strategic alternative for Network Power, the focus has to be how are you going to replace -- anything you sell these days, unfortunately, is dilutive.

Right.

So do you intend to be buying back shares throughout the year to offset the dilution of that, or wait until it happen, or do you hope you can make enough acquisitions to offset it? How do you plan to offset the dilution of that...

We intend, at this point in time, our current plan with the cash flow generation, is to buy -- we're planning around $800 million of shares, share buyback. We will start within a couple of days here after we file our reports and we have -- clearly, this marketplace will go back out. We stopped about -- at the end of the fiscal year because there's impairment charge. We did not to want go out during the time period that we knew that we had an impairment charge. So we will go back out here in the coming days to start buying. But our target is to buy around 800 million shares this year which will clearly offset any dilution we have from this business. And depending on if we have more cash and the market says that, we'll actually buy more. But right now, that's what we're looking at, Eli.

And we'll get the details of how much creep we have from these incentive program overlap or so how much you'll be reissuing in tax rate change and any of that will change at all?

Yes, I mean the tax rate number, I'll give you exact -- I mean, right now we plan last year a 32%. We did a little bit better than that as the year closes out. Right now I would assume we're around that 32% again. From the share count, there's very few new shares going out. The share from the new performance share program, we have to earn it to get them. So right now, our share count will drop based on buying 800 million shares back. So our share count drop this year. Frank, how many shares have dropped?

At about 20 million.

About 20 million? So our shares will dropped this year on average, and I will expect our shares to drop again next year on average depending on obviously what the stock price is. But our share count has been dropping year by year as we buy the stock back. We are not a big issuer of stock. We obviously have employee stock programs, but we're not a big issuer of stock.

And our next question is from the line of Scott Davis with Barclays.

Dave, have you seen any evidence of any kind of backlash in China from the Huawei comments, the Congress made about not wanting to buy Chinese telecom equipment. I mean, is there anything that puts your business at risk over there and just general backlash?

No, we have not seen any backlash. We have extremely good relationships in China. The Congress comments on Huawei, obviously, were quite strong and, obviously, from an All-American corporate perspective. But we have not seen any big issue there. They know that, that was not us talking, that's the Congress talking. It's a little bit different situation. So our relationship in China is very good. I think that the key issue for us right now is there's new leaderships coming on board as we've talked about where are the investment dollars going to come, and I think there's a degree of freedom they have of investing that money is less than they had historically. So we are looking for, in our case this year, we're probably looking to 5% to 10% type of growth this year in our China businesses after a weak 2012. And it's not uncommon for us to come back, and we see some of those marketplaces already starting to come back, some stability there already.

Okay, that's helpful. Second, just on Industrial Automation. You had a nice improvement in the margins. It wasn't really clear in the prepared remarks how much you can really attribute to favorable mix versus cost. And if it's cost, how much of it is structural cost? I mean, I guess another way of asking the question is, is this business taking a step-up in kind of structural margins because of some cost actions you've taken or is this more temporary?

We've taken, as you know, up to the very end, we've had a lot of restructuring in our high-cost structure, both here in the U.S. and also in Western Europe in the Industrial Automation business. So here, the majority of the margin improvement is a structural change, and that we should see a good margin next year. We've had a huge step-up here this year, we also had the Byrd Amendment monies that helped us a little bit. So they have to overcome that, which I think was around 40-some-odd million dollars, $43 million. But I would expect them to have a slight margin improvement again next year. And they're not going to see much growth from that business in the next 2 or 3 quarters. But they have structurally improved the operating performance of that company to back where it has been historically. So I think you're going to see pretty good margin from them, though, the marketplace, because they're very strong in Europe and, obviously, some of the other markets have weakened a little bit, so I expect these guys is going to be fighting for volume all year long. But they have their costs in great shape right now.

And our next question comes from the line of Deane Dray with Citi Research.

Dave, I just want to make sure you did vote today?

Yes, I actually voted, yes. I guarantee I voted. I voted a couple of weeks ago. It was actually a couple of times. Well, yes, I can't do that, but I did vote, I voted a couple of weeks ago. My son was home for his fall break and I took them down there. I voted absentee and he voted because he's out of school. I know I can be at the board meeting, there's no way I can get down there this late so I did already.

All right, good to hear. Now I was hoping you could expand the comment on climate, pretty mixed results across all the end markets or more likely, more negative across all the markets. But then the outlook on the commercial and resi side as you're expecting resi to improve, so how do you get resi improving without a better look at resi HVAC?

That is the issue. We firmly believe that there will be an improvement in residential spending in North America in 2013, ignoring any economic shock or a huge dropoff in the U.S. economy. The issue for us right now is gaining stability within the China market which we're starting to see from that business, which is important, which we haven't seen. I do not see any recovery in Europe at this point in time in our Climate Technology. On the transport side, which has been the most recent deterioration in the business space from a global transportation, both in trucking and then in also container, that marketplace is in downward cycle and that probably will go for another 6 to 12 months. So at this point in time, we would expect the industry to stay very tight, be very lean, and then come the typical recovery period which will be more March, April time period, I'm anticipating that the housing market continues to solidify and we'll start seeing some recovery in our Climate Technology business in the second half of the year. In the first 6 months, it will still be a challenge for these guys and they've got their cost in line and there's not going to be any growth. It's just a very tough marketplace all around the world. That's how we look at it right now.

And is there any comments regarding the impact of the storm, both negative and part of the rebuild?

From our own underlying business, there's obviously very, very minor impacts. Obviously, we have businesses up there day-to-day. We obviously have our service organization in there right now working with the key customers. Would there be any -- you're not going to see any significant impact both in sales and profitability, both positives or negatives. I would say net-net, in the next 3, 4 months, it will be positive. And then long term, obviously, as we rebuild, that will be helpful. But we have short-term things that will be positive for us. But it's an ordinary course of the business. So it's a net positive for us at this point in time.

But you can't quantify that from there?

No, I can't because it's hard to say. It's not something you can quantify. It's sort of like quantified back in the 2008 stimulus number. I mean, that was a waste of effort by everybody.

And our next question is from the line of Shannon O'Callaghan with Nomura.

Hey, Dave, so the 41% gross margin, obviously a big number. I mean, you have some favorability in process going on in the quarter. I mean, how do you view the sustainability of that type of gross margin?

I mean, what I would say right now is that based on the current mix of businesses, based on where our cost structure's sitting right now and the current price cost structure we see, we're probably anticipating another 50 basis points improvement in GP margin in 2013, based on everything I see right now, how we finished. I mean, the 41% is based on a very high volume and a catch up and a good leverage point. But I see right now the run rate, my gut tells me, as I finish that year out and we wrap up '13, we're going to be looking around a 40.5% GP margin next year.

Okay. And then on restructuring, I mean, you did $119 million this year in an elevated year, you're already seeing some good payback from prior restructuring. What do you think your year-over-year benefits going to be in '13 from the actions you've taken this year?

I mean, I don't quantify that, but from the standpoint of if you look at the businesses, both in the Industrial Automation and then also Network Power systems, you're going to continue to see -- have better margin from that restructuring. So we'll be getting a good payback this year. I mean, my gut tells me that we will spend $70 million or $80 million and we'll get a little bit more back than that in savings based on what we spent last year. We won't -- you spend a $70 million to $80 million this year, you get a little bit back, but we're going to get a good carryover from what we spent last year. So we should be well north of that $70 million to $80 million in benefits and that's obviously part of where I'm getting my GP margin improvement. That's why I made that statement to you. I see at least 50 basis points of GP margin improvement going into this year.

And our next question comes from the line of Jeff Sprague. [Technical Difficulties]

So just thinking about the comment about there's no obvious catalysts and we need leadership in the U.S. I mean, not to kind of get on a soapbox here or anything, but you're kind of in a defensive crouch, a lot of companies are kind of in a defensive crouch. I mean, how dramatically do you think actually things could change if there's a favorable outcome in the election and how quickly could it change? And is it right to characterize you and corporate America kind of in a defensive crouch?

Yes, we're definitely in a defensive crouch. We have -- as you know, I refer to it not a defensive crouch, I'm talking about the reins. You hear me talking about pulling the reins. So we've got the reins way back. What we're going to need, not only do we need -- well, obviously, within the next 24 hours and hopefully sooner than later, get clarity on the election and who's going to be the next President of the United States, this great country. What we then need is, okay, we need the leaders of this country to get together and sort out how are we going to fix the long-term fiscal structure of our government. We can't afford what we're doing right now and we have to fix that. The leaders need to see that. And I think -- so there will be either a great -- depending on what party you're involved with, a great amount of excitement and then there will be -- or there will be a great "ugh." However, the big issue for all of us is what are we going to do in Washington relative to not only the issue relative to this nightmare fiscal cliff that's been set up by the inability of the Congress and the President to deal with this issue. But we also have to lay out what is the next 20-year or 15-, 20-year program to recover this country from a fiscal standpoint, get the spending back on track, get the income back on track and to encourage long-term investments. So you're going to see business CEOs will say, okay, we now know who the President is, okay now, what are you going to do in Washington? And then based on that, I think, if you had -- if we see a very positive pro-growth, pro-U.S investment environment, you would see sometime in the second half of 2013, starting to see things flow. People will not get carried away and start to say, hey, I'm going to go out and spend, up my spending by 20% because of this. You will see some impact in the second half of 2013 which would tee up, I think, a much stronger 2014, 2015. And that's -- Jeff, that's how I feel right now and I don't see any -- okay, Dave, spend 20% more next year because of election results tonight or 20% less. I don't see any impact. However, what I want to see is resolution to getting this country back on a sound fiscal spending income track, period. And that's what CEOs want.

Got it, that's helpful. Just back to Network Power, so you actually exited at a pretty good margin rate. I mean, should we -- so is the restructuring going on there, there's some seasonality. And do you think about building on this Q4 rate or do we step down and build our way up going forward? How do we think about that?

Well, we -- from the standpoint of Network Power, historically, the first quarter margins are -- I mean, we've obviously got some margins going the right way. But first quarter margin, we will go back a little bit. We are not going to go back to a level that we saw last year in that first quarter. So I'm looking, Frank showed me the numbers right now. So we should see a continued improvement in the first quarter, depending on the rate of restructuring, but we should see continued improvement in the profitability of this business as we go -- the whole Network Power segment into this first quarter, second quarter. We saw sequential improvement in the third, we saw a sequential improvement in the fourth. Yes, it was down versus prior year, but they have their cost structure in place. And we've seen a reasonable stability relative to the order pace. So I feel that we're going to see continued improvements throughout the year and then we'll end up the year at a better profit margin for this business than obviously we finished this year. Again, moving back up towards -- well, I'm trying to get the whole Network Power. I mean, we want to go back up into that above 10% range. So hopefully, we'll get it up to that 11%, 12% top of the range. That is what we see right now.

And the write-off was solely on amortizing goodwill, there's no amortizing intangibles that went away as part of the write-off?

No. I mean, I always wish they only wrote off the intangibles, but unfortunately, when they go through and revalue the business, they do everything both intangibles and also the goodwill. So there won't be any change in that intangibles delta. Frank, was there any change?

It's a goodwill write-off, Jeff.

Only goodwill?

Yes. It's one of those things.

And just finally, we can do the math, but I should take quite literally the notion that an $8 million share repurchase can offset the dilution...

No, $800 million, $800 million.

I'm sorry, that's what I meant, $800 million can set off the dilution from offsetting out embedded power?

Easily.

And our next question comes from the line of Brian Langenberg with Langenberg & Company. Brian K. Langenberg - Langenberg & Company, LLC: Just a couple of things. First, Network Power, can you talk a little bit about whether mix helped you or hurt you? Understanding it dealt a lot to do with restructuring. Second of all, can you talk about the benefit or what have you, of price cost in climate in the quarter? Then the third question, I noticed that quarter-over-quarter, receivables were up almost $400 million, sales were up a little bit over $200 million, just walk us through the puts and takes in the working capital, please?

Okay. The first one is the mix did not help us and Network Power in this quarter. The climate -- what I call the Precision Cooling business, really didn't -- I don't -- did not have a good quarter so therefore, that's a good margin business. That did hurt us. The mix overall, when I look at the Network Power, would not be a good sign. So we overcame bad mix and through the restructuring and the efforts there, we did get an improvement in profitability. So that was a negative for us. Relative to price costs and climate, at this point in time, the price costs was slightly green for us in our fourth fiscal quarter or the third calendar quarter. It will continue to be slightly green in this quarter coming up and then we're going through negotiations and most likely, that will go back into a neutral type of mode at that point in time. But right now, with the material decline and that material inflation and the price increases we have in place, we were slightly green. And so it helped us a little bit but it wasn't huge, let's put it that way, slightly green. And the third question, you asked, oh yes, receivables. Okay, that is an issue. We had -- a couple of things happened to us as we had a very strong last basically 40 days of shipments as we made this quarter, as we geared up to make this quarter. So we had a lot of sales shipped out in the last couple of weeks in particular that we're collecting those receivables now and the quarter end of this year, on Sunday, that are cut off for collections for us or the banks, it was basically Friday. So we had a lot of shipments going out as we drove to make -- drive that backlog down and make the quarter and the sales. I mean, obviously, everything aboveboard, nothing illegal just from the standpoint of that's how the quarter unfolded. And that caused us -- our receivables to explode and you'll see it, we will have a good first quarter cash flow and that receivable numbers to start winding back down. There's nothing extraordinary, we did not -- from a bad debt standpoint or any income, we're in good shape. We've analyzed the heck out of it. We have nominal bad debt to this company. I mean, we're talking nominal. And so we're in pretty good shape, but we did have a huge surge in receivables as you pointed out. Inventory receivables were in good shape.

And our next question comes from the line of Richard Kwas with Wells Fargo Securities.

Mix for process, how are you thinking about that for '13? You had a pretty good year in '12. I know there was some disruption but how are you thinking about MRO versus solutions, et cetera?

Right now, with a record backlog and starting the year with very strong North American investments in oil and gas, and we have still pretty good mix. So I would expect we're sitting at record levels of profitability. I would expect that we would still be able to get a slight improvement based on the current pace of business and based on the current mix. So I feel -- as I said, I think it was Eli asking the question about it. If you just look at the raw numbers, you could say we should be able to do 10-plus percent in process growth next year. So I have -- in my base plan of that, basically midpoint of that 2.5% to 2.6%, I'm talking about underlying sales growth. I think that process could have a slowdown in some pushouts, so I'm looking more in that 7% to 8%. But right now, the mix is really good for us, and obviously, the technology mix and MROs, I mean, that helps our margins, as you could tell, both from the GP and OP levels.

Right. Okay. And then a question for Frank on the stock comp. So when you look back to fiscal '10, you had a big increase in corporate and other and then that was the last year we had the incentive comp. If the stock price stays where it is today, what's kind of the bogey in terms of the year-over-year increase on the incentive comp?

$120 million.

I think about $110 million, $120 million.

$110 million, $120 million, okay.

It depends if the stock play stays right here, but we're hoping stock gets up to $75 and then that number will be a lot larger.

And our next question comes from the line of Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: So just trying to reconcile all the moving parts here. This year, you guys did, I guess, 3% to 5% EPS growth on about 3% underlying. You said this is going to be somewhat of a similar year. You've got the stock comp, you've got the pension, I guess, offset by a little bit lower restructuring. So I guess, what kind of -- despite those headwinds, what kind of gets you back to a similar year this year even to the high end is a combination of volume and then I guess restructuring saves in the business? I'm just curious as to if you did 3% EPS this year on 3% underlying, why at 3% underlying are you going to do better than 3% EPS this year?

A couple of things. One, we would not have -- there was a lot of cost and disruption in that business this year, as we try to recover it and try to recover from that standpoint of the Thailand floods. Secondly, as I look at it right now, the mix that we'll see, we see our growth coming next year again from process, but also from our residential, commercial-residential business which is also a pretty good profitability market. And I also look at just from the mix standpoint, I see a reasonable level of margin improvement this year. And I thought, as we get higher volumes, I think we'll go towards that high single-digit. And the middle, I think, we'll do little bit better from a leverage standpoint, so I feel at that 2.5%, we'll do a little bit better than we did this year and that's where it comes from, Steve. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. So when you say mid to high single-digits, you're talking something like 4% to 7% is that how we should think about it?

Yes. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. On the...

Maybe 7.4%. I'm going to get that credit card, I can't remember who asked that, I might take that credit card out to $7,400, but it's definitely not going to be $10,000 credit line there. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Right. And then on the EPS growth, just to make sure we're calibrated here, there's a lot of moving parts in the first quarter, but you said 70% to 80% of the EPS growth, which I guess implies about 10% growth in the first half and I would assume the first quarter is obviously the strongest given the comp you have, but I guess is that kind of a linear step down 1Q to 2Q? Or is 1Q like 20%?

We're saying 78% of the -- obviously, the delta increase next year. And so it will be in the first half. Now the issue really boils down to -- as I said in my commentary, I'm very nervous about the fourth calendar quarter. I still believe -- I believe the 70%, 80%, I'm very nervous and that's why I've not given any guidance like on a quarterly basis because I'm a little bit nervous that we have a significant customer base that could really slow down in the month of December on us. And because the uncertainty out there, and especially if we get into the discussion, post election, about this whole -- the fiscal cliff and the restructuring and of what's going to happen in the U.S. government and this thing gets into a logjam and also when you start seeing that they're going to let this thing happen, you're going to -- I think that will create a lot of even more uncertainty from the company standpoint and the customer standpoint, and it could really slow down that month of December. So I'm a little bit nervous about giving what I would call EPS estimates for the quarter because of that. I would agree with you, the first quarter, if you look at it just from a pure economic standpoint, I would say that would be -- my biggest increase would be that first quarter because it was the shock last year, but I'm also very nervous about the uncertainty around this fourth calendar quarter. So I feel good that we will have 70% to 80%. It's hard for me to say that I'm going to have more in the first and less in the second, that I tell you. So I mean, I know I'm not helping you much, but I'm just telling you, I'd be very careful there. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And then just one more question on the order rates. They bounced around, it sounds like you had a lot of book and ship in the September quarter because the order rates were -- I mean, reasonably negative on a 3-year trailing basis. How was kind of October playing out so far?

I've not seen October, but what you did see in September -- September, we reduced our backlog. You're going to see our backlog drop significantly in the month of September, in the fourth quarter. So we had built a backlog, as you know, all year long, and the whole issue was to get that backlog down. I still believe, as the total company, we ended up the year with a little bit higher backlog but we significantly reduced it. Frank, how much we reduced the backlog roughly?

A couple of hundred million, think about $200 million.

A couple of hundred million. Let's say, right now, Steve, I don't have it exactly but let's say $200 million of place orders, that's how much we reduced that backlog. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Over the year?

No, on the fourth quarter.

From Q3 to Q4.

So I just assume around $200 million that we reduced in the quarter of the backlog. So a lot of that improvement came from not from the current orders, but the backlog.

And our next question comes from the line of Julian Mitchell with Crédit Suisse. Julian Mitchell - Crédit Suisse AG, Research Division: Yes, the first question was really on the margin progression. I mean, you talked about 10 to 20 basis points of operating margin growth in fiscal '13. You grew about 20 bps in fiscal '12 with a similar revenue growth rate. It sounds like the gross margin should be up 50 bps. It sounds like mix should be good in '13 from process and some of the construction-facing businesses. So what is it that sort of dampens that drop-through on the EBIT margin line aside from just the pension and stock comp issues or is it really just those 2 things?

Those are the 2 issues right there. Those are the 2 big issues at this point in time, Julian. And this -- as we get above that 2.5% to 3%, we will have pretty good leverage. And obviously, I think, the net margin would be a little bit -- that margin delta will be a bit higher there, I mean, as to moving parts going on at this point in time but right now, I think we're looking at a little bit better progression relative to growth from the standpoint we're not looking at the disruption and that we're looking going into the year with our cost structure in very good shape right now. We have a reasonable backlog. And so I think operating right now is pretty good. I'm more concerned about the external shock going on the global economy more than anything else at this point in time and how that will impact us for a month or 2 as things get sorted out. That's why I'm being a little cautious there. Julian Mitchell - Crédit Suisse AG, Research Division: Got it. And then just on the restructuring side of things, I mean, you said that '13 will be a bit lower run rate than '11 and '12. But if you're very worried about the top line, why wouldn't you keep going at an aggressive restructuring?

Because I think, as I laid out the restructuring, we needed to get accomplished and what we think we can get accomplished with next year, $70 million, $75 million is the right number for us and I would say that, that -- right now, the look at -- what we see going forward in the next couple of years, that probably is going to be the range we're at right now as we manage. I don't have anything that forces me to accelerate that even higher. We've had 2 very big years of restructuring. Actually 2.5 very big years of restructuring. And so now, I'm in the mode of trying to stabilize this and say, okay, let's get a payback for my shareholders in that restructuring. Julian Mitchell - Crédit Suisse AG, Research Division: Got it. So then just a very quick follow-up, Network Power, the sort of the decremental margin was pretty big in Q4, and you called out some cost increases as a reason for that, I just wanted to check what those were?

I don't have that off the top of my head.

I mean, it's nothing in particular, it's just kind of typical business inflation that occurs, nothing out of the ordinary.

And our next question comes from the line of Mike Wood with Macquarie.

This is Adam in for Mike. You talked about looking for 5% to 10% growth in China businesses in next year. Can you talk about what that growth was in fiscal '12 and sort of which businesses will be driving that growth?

Negative. It was negative, minus 4%. We gave that number out today, it was minus 4%.

And could you talk about which businesses you expect to be strongest next year?

I would expect the process business to be stronger next year based on the record level of bookings that we had in China in the second half of fiscal '12. I expect to see a recovery in our Climate Technology business which was hit pretty hard last year. I expect to see whether some of the investment areas I'm seeing right now will impact our Network Power China business, so I expect to see a reasonable recovery there. And I don't expect to see much recovery in Industrial Automation at this point in time, so that's where I see it at this point.

And we have John back with Deutsche Bank.

Dave, you made a comment about you haven't seen projects slowing in process. I wanted to ask you because x process, you have seen project deferrals, I think, bigger projects amongst oil and gas types of activities. So if you're not really seeing those, it suggests you're taking share or maybe there's something about the process industry that's perhaps different than flow and other aspects of that. Could you talk to that a bit, like the sustainability of your oil and gas piece in process? What are you thinking right now?

Right now, based on the current order pace and the current backlog we see and the execution, right now, our oil and gas business should see another very good year. As you know, I don't look at it from a 12-month period or 1 quarter share gain, but I think as you look back at the last 2 years where we've had 15-plus percent growth in sales and a good marketplace, but I think that you're going to see that we did pretty well. We held our own and maybe did a little bit better than average. So I feel good about the position right now. I feel extremely good about the technology. I feel good about our record levels and investments we're making there. So we are obviously -- everyone's getting in the zone and we're in the zone on right now. And sometimes, you fall out of the zone, but we're in the zone, let's put it that way.

That makes sense. Dave, if you haven't seen October in a lot of detail, I'm just curious, given kind of what's transpired in the economy, there was some slowing significantly amongst other companies in September, why do you still think that there is no U.S. recession coming or pending in 2013? What's your gut tell you?

My gut tells me that they will come up with some level of, what I'd say, compromise on the immediate fiscal cliff that will cause the U.S. economy to be slower or stays at a slow pace in 2013, but not go into recession. I mean, we're real close to a stall speed right now where as you well know, we're growing somewhere between 1% and 2%. That in U.S. economy is basically a stall speed. Yes, it's stepped down and I think that if I look at my order pace in North America, probably in total, yes, I would say that we probably had another weak month in October, but I don't have those numbers yet. I just don't -- I won't get them for another 4 or 5 days here. But my gut tells me right now that they will take some action to mitigate the dramatic dropoff going into fiscal cliff. However, if they don't, then you're going to have a dramatic pullback in the reins even more relative to spending and that will create a deeper hole. So I don't think we're in a recession right now. I just think we're in a very, what I would say, low growth, 1% to 2% type of growth period at this point in time.

And the things do deteriorate, what's sort of your thought process with respect to what buttons or levers you might like to pull? For example, would you want to be more aggressive in M&A or share repurchase? And I'm sure there's -- I'm thinking of the context of prior recessions and your own experience as CEO of the company and so forth.

I think from the standpoint of -- I don't know if -- in the short term, would you be more aggressive if we went into a recession? I mean, obviously, that would have a knock-on effect to the companies, maybe you would have a better chance of making some of those acquisitions happen. That would be more of a second half '13, early '14 type of impact. If we went into a downturn and obviously the marketplace got hit pretty hard and we generate strong cash, clearly, we could obviously ramp up that share repurchase. We would then fundamentally cut back what I would call it even more of our discretionary spending, which we right now, based on say, 2% to 3% top underlying growth rate, you're starting to build in to drive that, so you can always go after that. But that's why we're going to keep things extremely tight here in the near term because of the uncertainty relative to what's going to happen here as Congress gets back working after the election. That's where we are. I need to wrap it up here. I need to go to another meeting. And so again, I want to thank everybody for listening today. Thanks for your support and thanks for really sticking with us as the year went on. I know it was not a normal year with the first half, second half, but the operations guys did execute very well and we finished the year at record levels of profitability and record levels of earning. Unfortunately, we had a little impairment issue relative to the business, the one business. But as we talked about, we will deal with that issue as we go forward here in 2013. And again, I want to thank all the executives out there running Emerson for making this year happen. Bye.