Rockwell Automation, Inc. (ROK) Q4 2013 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, Tuwanda. Good morning. Thanks, everyone, who's joined us for this call this morning. This is our fourth quarter fiscal 2013 earnings release conference call. With me today, as always, are Keith Nosbusch, our Chairman and CEO; and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that includes highlights on the company's performance in the fourth quarter and the full year, and he'll provide some context around our sales outlook for fiscal '14. Then Ted will provide more details on the results, as well as our sales and adjusted earnings per share guidance. As always, we'll take questions at the end of Ted's remarks. We expect the call to take about an hour today. Our results were released this morning, and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call is accessible at that website and will be available for replay for the next 30 days. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are, therefore, forward-looking statements. 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 hand the call over to Keith.

Thanks, Rondi, and good morning, everyone. Thank you for joining us on the call today. I'll start with highlights of the quarter and the full year, so please turn to Page 4 in the slide deck. We have a strong end to the year with both sales and earnings coming in at the high end of July guidance. Organic growth of 3% in the quarter was driven by strong growth of over 6% in our product businesses, which drove us to the high end of our sales guidance. As expected, we had a small decline in solutions and services in the quarter due to the tough comparison to the fourth quarter of last year. Even with that, Control Products & Solutions reached their first $1 billion sales quarter, and I'd like to congratulate them on achieving this milestone. Profitability was very strong in the quarter with adjusted earnings per share growth of 14%. That's a very good result on only 3% sales growth. Ted will provide more details on the quarter, so I'll move on to the full year. As we entered fiscal '13, growth rates have been declining, project delays were increasing and our solutions backlog was relatively low. We characterized the recovery as being in a pause and indicated that we didn't expect to see much growth until the second half of the fiscal year. That is the way the year played out. Sales in the first half were flat, but improved to 3.5% growth in the second half. From a regional perspective, Latin America had an outstanding year of 12% sales growth with the highest growth in Mexico and Brazil. We're focusing on the right opportunities there, and I want to acknowledge the regional team for hitting it out of the park this year. The U.S. had very solid growth with 4% growth. Oil and gas was the best performing vertical. The EMEA region had flat sales this year, but we continued to outperform the market, especially with OEMs. It feels like Western Europe has stabilized. Asia Pacific had a challenging year with sales declines in all countries, except for Japan. India was very weak, and we aren't sure if we've seen the bottom yet. However, we did see some positive signs in Asia Pacific as we exited the year. China sales were down 5% for the year, but there was growth in the second half. In total, this region had the strongest sequential sales growth in both Q3 and Q4 and ended the year with backlog 15% higher than a year ago. It's not on the chart, but our process sales were flat this year compared to 20% growth last year. We knew 2013 would be somewhat of a struggle given the hole we had in the solutions backlog entering the year. Solutions and services is 60% of what we measure as our process business, and the projects tend to be larger so there can be lumpiness to the sales patterns. While we're not satisfied with flat process sales, we think we've held our own in tough market conditions and expect significantly better growth in fiscal '14. We continue to be very bullish on our process opportunities. To further expand our process capabilities, we recently announced our intention to acquire vMonitor, a global technology leader for wireless solutions in the oil and gas industry. vMonitor offers innovative monitoring and control solutions for wellhead and upstream applications to help customers make more informed decisions and improve production. With differentiated solutions and a strong presence in the Middle East, vMonitor is really in the sweet spot of our acquisition strategy. We expect the acquisition to close within the next month. Let me just wrap up on the year before I move on to the outlook. Fiscal '13 was another year of record sales and earnings for the company. I was pleased that in a low-growth environment, we were able to expand segment operating margin almost 1 point while continuing to invest for growth. I am proud of our ability to effectively execute in all market conditions. Our strong track record of returning cash to share owners continued in fiscal 2013. We paid out $679 million in dividends and share repurchases. As you probably saw, we raised the dividend yesterday, which is the second increase in the past 7 months. We have doubled our dividend per share in the last 4 years, and during the same timeframe, we have returned $2 billion of cash to share owners. I want to thank our employees, suppliers and partners for their dedication and relentless customer focus throughout the year that enabled this performance. So let me give you our thoughts about fiscal 2014. From a macroeconomic perspective, forecasts with GDP and industrial production are about the same as they were a quarter ago and they continue to call for higher growth rates in 2014. Almost all of the PMIs are higher than they were a quarter ago, so that's encouraging. From a company perspective, a stable front-log, second half fiscal '13 growth rates and a higher solutions backlog entering the year all caused us to expect higher year-over-year growth in fiscal '14 than we saw last year. By region, we expect the U.S. to have about the same growth rates as 2013 and Europe to be a little better than last year. We expect Asia Pacific to return to growth next year, but growth in Latin America will likely moderate, coming off of very strong year. With all that said, we expect total company organic sales growth of 2% to 6% next year. Ted will provide more detail around sales and earnings guidance in his remarks. Automation remains a great market, and we have the right strategy to capitalize on growth opportunities and gain share. Our strong operating performance and healthy balance sheet enable us to continue to invest in differentiation, particularly in innovative technology and domain expertise. We're confident that our focus on intellectual capital will continue to fuel attractive returns for our share owners. Before I hand it to Ted, I'd like to give you a little preview of Automation Fair. For those of you who haven't been to an Automation Fair, we expect to host over 8,000 customers and partners from all over the world. It's a great opportunity for us to showcase our capabilities, provide technical training and facilitate best practice sharing among our customers. It's taking place in Houston this year and will have an emphasis on oil and gas, probably the best vertical out there right now. If you're coming to Houston next Thursday, you'll hear from John McDermott, the leader of our Global Sales and Marketing team; Terry Gebert, the Head of our Global Systems & Solutions business; and from one of our major oil and gas customers. Then we'll take you on a hosted tour of the show floor. After lunch, we'll hold a webcast where you will learn more about our strategy and progress from me, Ted and Frank Kulaszewicz and Blake Moret, the heads of our 2 segments. I was recently at Cisco's World Forum, where we introduced some concepts about the relevance of the Internet of Things to the industrial environment. We're anxious to share more of our thinking on that topic with you next week. Rondi tells me that the attendance will be very good. So we're pleased that so many of you are taking advantage of this opportunity, and we look forward to seeing you there. So now, I'll turn it over to Ted to provide more details on the financial results with the quarter and our outlook for fiscal '14. Ted?

Thanks, Keith, and good morning, everyone. I'll be starting with the fourth quarter results summary on Page 5. Sales in the quarter were $1,716,000,000, an increase of 3% compared to Q4 last year. Organic sales growth was also 3%. Segment operating earnings were $358 million, an increase of 18% compared to the fourth quarter last year. We had a couple of large unusual items impact both segment earnings and general corporate net expense in the quarter. I'll provide more detail on segment earnings on the next slide. General corporate net was $39.7 million in Q4 compared to $19.9 million a year ago. That's obviously much higher than our normal run rate, and it's about $14 million higher than the guidance we discussed in July. General corporate net expense this quarter included a $12 million charge related to legacy environmental matters. That [indiscernible] accounts for most of that difference. The adjusted effective tax rate in the quarter was 23.7%, down slightly from 23.9% in fourth quarter last year. Adjusted earnings per share were $1.62, up $0.20 or 14% compared to last year. Average diluted shares outstanding in the quarter were 140.5 million. During Q4, we repurchased 854,000 shares at a cost of approximately $84 million. For the full year, we repurchased a total of 4.7 million shares at a cost of $402 million. Turning to Page 6, the fourth quarter results Rockwell Automation total. On the left side of this slide, you can see we experienced a steady sales progression through the year, culminating with a relatively strong fourth quarter with 3% year-over-year growth. The sequential growth was 6%. As Keith mentioned, sales came in at the high end of our July guidance with particularly strong growth in our product businesses. Moving to the earnings on the right side of the chart. Segment operating margin in Q4 was 20.9% compared to 18.2% in Q4 last year. Segment earnings in Q4 included $15 million of income related to legal settlements. This was the unusual item I referred to earlier. Results also included $14 million of restructuring charges. We're taking the restructuring actions to create some room to redeploy investments to what we consider our best growth opportunities as we enter the new year. The restructuring charges this quarter are about the same as the charges we took a year ago, so not a causal item for the quarter and the year-over-year margin results. However, the income from the legal settlements accounted for about 1 full point of the overall 2.7-point margin increase. The balance of the increase reflects the leverage on higher sales, continued strong productivity across both segments and favorable mix related to the strong product sales growth in the quarter. Our trailing 4-quarter return on invested capital was 31.4%. I'm going to move on to Slide 7, which displays the Q4 results of the Architecture & Software segment. Architecture & Software sales were $714 million in the fourth quarter, up 6% year-over-year. Organic growth was also 6%. This was, by far, the highest growth quarter of the year for Architecture & Software. Logix sales were up 10% year-over-year. That's the relationship we'd expect with Logix growing faster than the average of the segment. Architecture & Software sales also increased 6% sequentially. On the right side of the slide, you'll note the very strong increase in operating earnings to $218 million. Operating margin for the quarter was 30.5%, up 5.3 points from Q4 last year. That's an unusually high margin. The legal settlements that I mentioned fell entirely within the Architecture & Software segment and contributed about 2 percentage points to the operating margin in the quarter. If you back that out, A&S margin in Q4 was a little higher than the margin in Q3. About $6 million of the restructuring charges fell in the segment. I'm going to move to Slide 8 now, which covers the Control Products & Solutions segment. Control Products & Solutions sales in Q4 were just over $1 billion and up 1% from a year ago. Organic growth was 1% and sequential growth was 5%. As Keith mentioned, this is the first $1-billion quarter for CP&S. Sales in the product portion of the segment in Q4 were up 6%, similar to the Architecture & Software segment, and sales for the solutions and service businesses were down 2%. You might recall a very strong sales performance in solutions and services in Q4 last year, so, as Keith mentioned, that difficult comparison. The book to bill for our solutions and services businesses was 0.9, pretty typical for the fourth quarter and significantly better than Q4 last year. Our ending backlog in solutions was 9% higher than at the end of last year. Moving to the right side of the slide. Segment operating earnings increased 5% year-over-year, and operating margin expanded by 5/10 of 1 point to 14%. Control Products & Solutions incurred $8 million of the restructuring charges. Page 9 provides a geographic breakdown of our sales in the fourth quarter and for the full year. Since Keith already provided some color on the full year, I'll focus my comments on the fourth quarter and on the column which indicates the percent change in organic sales. In the fourth quarter, we continue to see a healthy market environment in the U.S. with 5% growth. Canada was down a bit in the quarter, but primarily due to the solutions and services business and that's related to the strong Q4 last year. EMEA delivered 4% growth. We consider that a very good result, given continued sluggish market conditions in that region. Asia Pacific continued to be the region experiencing the most difficult market conditions. We were down 6% year-over-year in Q4, with about 1% growth in China. India continues to be very weak. Latin America continued as our highest-growth region with 11% growth for the quarter, once again, led by Brazil and Mexico. Turning to Page 10, free cash flow. Free cash flow for the quarter was $301 million. The conversion on adjusted income was 132%. For the full year, free cash flow was just over $900 million. That represents conversion on adjusted income of 112%, so above our 100% target. The quarter and the full year were both very strong results. I'll turn now to Page 11 for a summary of the full year results for fiscal '13. Sales reached $6,352,000,000 for the full year, up 1.5%. Organic growth was 1.7%. The net effect of currency translation and acquisitions was negligible. Segment operating margins for the full year was 19.5%, up 0.9 points from last year. Q4 margin was very strong, and we ended the full year better than we expected. Adjusted EPS was $5.71, up 8% compared to last year. And I think Keith already mentioned that this represents another year of record sales and EPS for the company. That takes us to '14 guidance. We're expecting fiscal 2014 sales to be approximately $6.6 billion, plus or minus about 2%. That's an organic growth range of 2% to 6%. I'll reinforce a few of the things Keith talked about regarding the top line outlook. We experienced better growth rates in the second half of 2013. That's creating some momentum for us as we enter the fiscal year '14. We also have a stronger solutions and services backlog to start the new year, and we're expecting somewhat better macro conditions with higher rates of growth and GDP and industrial production in every region 2014 compared to 2013. We don't see any significant headwinds in sales, but the risk in our outlook is primarily tied to the macro conditions and maybe more specifically to our emerging markets. I think that's the way to think about the low end of the guidance range. We expect currency and acquisitions to approximately offset one another in 2014. We expect segment operating margin to be about 20%. That would be about a 1.5 point increase compared to fiscal '13 with margin conversion in the range of 30% to 35%. We expect the full year tax rate to be about 26%, an increase of about 2 points compared to last year. Our guidance for adjusted EPS is $5.95 to $6.35, and we expect free cash flow conversion on adjusted income of about 100%. A couple of other items not shown here. General corporate net expense should be approximately $85 million, so back to more normal levels. And we expect average diluted shares outstanding to be 100 -- about 139 million for the full year. With that, I have one more slide, Slide 13, which provides a walk from fiscal '13, fiscal '14 adjusted EPS at the midpoint of guidance. And that's intended to identify some of the larger pluses and minuses and help you position them on the P&L. I'll start with operating pension expense. Interest rates are higher this year, and that's creating a tailwind in operating pension expense. Operating pension expense will be about $14 million lower compared to fiscal '13. That adds about $0.06 to EPS. On the other hand, we expect less income from legal settlements in 2014. The net year-over-year impact will reduce EPS by $0.05. Next is the impact of general corporate net expense being back to more normal levels. That adds about $0.07 to EPS. The 2-point increase in tax rate will cost us about $0.17 and reduced share count should increase EPS by about $0.07. That leaves the bar with label core, which, excluding these other items, reflects an earnings conversion in that range of 30% to 35%. With that, I'll turn it over to Rondi, and we can begin the Q&A.

Okay, great. Thanks, Ted. [Operator Instructions] So operator, we're ready to take our first question.

[Operator Instructions] Your first question comes from the line of Scott Davis with Barclays.

I wanted to dig into oil and gas a little bit. I mean, I think most of the companies out there are fairly bullish on 2014 and even 2015, 2016 in oil and gas. But can you help us understand the timing of the backlog there? And I guess what I'm really asking is that is there some risk that 2014 is not as good of a year as expected at projects and such get pushed back to 2015? And then [indiscernible] little bit of an air pocket in the near term?

Well, Scott, as you know, the project business always has a potential to be changed based upon the dynamics that are going on in the market. But at this point in time, we have no reason to believe that will be the case. We see a good flow of projects and that we expect those to continue to progress, whether they're in the front-log or the backlog. We're not seeing any change in cancellations or push-outs, particularly no push-outs or, even worse, cancellations at this time. So we would expect to see that pickup in the solutions business that we talked about in '14 compared to the weak year we had in '13.

China was one of those -- as a follow-up, China was one of those weird regions this year. We walked into it a year ago, feeling pretty good about pent-up demand in automation and rising labor rates and such driving another spend cycle there, but it really didn't pull through. And you came in at the end of the year with at least -- the last couple of quarters of positive. What -- can you give us some color on what your guys there are saying and -- as it relates to 2014? And are we -- is there enough visibility in your front-log? Do you really think that China's going to have a realistic or meaningful full turn in 2014? Or -- what are your customers telling you? I guess that's my question, too.

Sure. Well, certainly, we definitely expect a better year in 2014 in China than we had in 2013. And really, that's based upon the fact that we were able to grow our backlog in the second half of the year and ended up with a backlog higher than what we started the last fiscal year in. And we would expect China to basically grow mid-single digits in fiscal year '14, which is a meaningful turnaround, given the performance we've had. And I think we see it in a couple of areas. We would expect OEM performance to be stronger in the last -- than it was last year. And then also, we continue to see the consumer industries growing in China. And some growth in, I would say, oil and gas in that country as well. So overall, we are expecting continued improvement. I think the indicators got better as we went through the year. Certainly the PMI got back over 50%, barely, but over 50%, and industrial production up -- picked up as we went through the year as well. So we're expecting improved performance.

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

Just a question on investment spending as what you spent this quarter and then how we are you looking about next year. I know last quarter, you talked about there's going to be a pickup in spending, but it doesn't seem like that's going to have a dramatic impact on incrementals. But, Ted, could you just provide some color on that as your expectations for the year?

Yes. So I think maybe I'd start with saying, we said we're going to ramp some spending in Q4, we did. Our spending increased about $15 million. Some of that's kind of a normal Q3 to Q4, but some of it was the spending ramp we talked about. I think our thinking on spending for next year is that spending will be in line with the anticipated growth. So we would expect to ramp spending as the year plays out and pretty much proportionate to what we're expecting in growth next year.

Okay. And then in terms of the outlook, it would seem to me that the first half of the year, within this 2% to 6%, should see higher growth than in the second half. I mean, obviously, that depends on how the macro plays out through the year. But given the comparables, is that the right way to think about it?

Well, I think, clearly, we're going to have some easier comps in the first half than the second half. But in terms of macro conditions, we're also expecting improvement to kind of accelerate as we progress through next year. So I'm not sure we know exactly how to think of the year playing out next year.

And I think, also, we typically have a seasonal decline, Q1 to Q4. So.

Q4 to Q1.

I'm sorry, going from Q4 to Q1. So I guess Ted's comment is exactly right, we're not exactly sure how to calendarize the year at this point.

Your next question comes from the line of John Inch with Deutsche Bank.

Just to drill in a little bit on the restructuring. When people think restructuring, they think of facility realignment and so forth. I'm presuming that's not what you're doing. You're hiring people. Maybe could you give us, either Ted or Keith, a little more color in terms of the nature of your investment spending? Where you're actually spending it? You gave us the segmentation. I'm just wondering where exactly are you spending it.

Yes, yes. Well, you're right. The restructuring is not around facility restructuring, for us anyways. Where we're -- what we wanted to do with the restructuring was to be able to redeploy spending into what I would call better opportunities. And the spending is really coming in, in 2 major areas. The first one would be in development, both in our Integrated Architecture and our Intelligent Motor Control platforms and then, secondly, in sales resources, where we see the best growth opportunities in the global regions that we have. And we really wanted to rebalance what we had from a location standpoint and from a, what, geography standpoint and into the areas from a technical standpoint, where we saw the best growth. So development engineering and customer-facing sales resources is where those investments are going and, quite frankly, where we expect the majority of the investments next year as we both annualized what we did in '13 and increase the investments in '14.

Keith, how much of those investment spending are your targeting for Asia? And the reason I'm asking, I'm here with a lot of folks in China, and there definitely seem to be pretty significant automation trend tailwinds, yet your growth, I realize, because of the economy here, has been slow. Really, it's sort of -- it gets to the question of Rockwell's heritage as a U.S.-centric company and how you've sort of created a much more critical mass. My question really is do you feel that as the next cycle progresses, you have the critical mass in Asia, or do you really need to be sort of dialing up this in some other manner, perhaps through an acquisition or something else? And if you could actually just talk a little bit about process in Asia as well, because there definitely seems to be some pretty good trends in terms of customer demand for those types of verticals.

Sure. Well, first off, we continue to believe that Asia is going to be a meaningful growth opportunity for us in the future, and so we're making investments in Asia in 2 specific areas. One, we have development and R&D capabilities in the region, and certainly, we have and will continue to increase, particularly, our software investments in the region and in China as time goes on. And in fact, we are doing that this year. And secondly, as we have talked before, while we believe the growth in China and in Asia will be strong, we have to continue to build our market-access model there and develop a greater maturity, in particular distributors and build system integrators for our channel development. So we still -- and that's not dollars investment by Rockwell, but that's investment in helping them understand how to take automation to the marketplace. So building out the channel, both distributors and system integrators, is very important for continued growth. With respect to the growth in process, we certainly believe in the Asia region, one of the greatest growth opportunities is oil and gas. It continues to be very strong throughout that region. Obviously, one of the drivers behind that is their economies are growing, and the only way you grow economies is with energy. And they need energy, and they're -- and in fact, China just surpassed the U.S. as the biggest importer of Middle East oil. So there is a lot of expansion that's required for them to absorb the growing middle class and be able to expand those opportunities for the middle class. So the resource industries, as well as consumer products, is a very big focus for us, and we think both of those are great opportunities in China, as well as the other emerging markets in the region.

That make sense. And just last, are you expecting auto in your verticals to expand next year as part of the 2% to 6% or just hold steady? It's obviously still very strong globally. I'm just curious how this plays out in terms of your contribution.

Yes. Well, you've kind of answered it for me there, John. And we expect it to remain at high levels, but not be a growth part of our 2% to 6%. It'll be up slightly. But basically, it's at a high level, and we see that being sustained. And our goal is to continue to expand our footprint into more applications in the auto industry, particularly the powertrain side, which we think opens up additional market for us.

Your next question comes from the line of Steven Winoker with Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Could you repeat on how the verticals finished off -- ended through the quarter? And what's kind of implied, in addition to auto that you just mentioned, in your guidance for next year?

Sure. And just so you know, Steve, you're breaking up a little. I got the question, so hopefully, you'll be able to hear my answer. The -- let's start with the vertical performance in our fourth quarter. And certainly, oil and gas was the strongest with the strong oil prices. We see the continuing investments in the U.S., Canada and the Middle East. Asia and China investment continues to look good but India is weak. Food and beverage was the second-best vertical for us in the quarter. It was also up for the full year. Home and personal care and life sciences had lower growth in Q4. Auto was down a little, which is a typical seasonal pattern for the auto industry. Tire was down in Q4 compared to really strong investments into 2012, but we did see some improvement as the year progressed. Mining was down in Q4, and certainly, the soft commodity prices are impacting that. Metals remains very weak. And in the fourth quarter, we saw a little bump-up in spending in pulp and paper, particularly in the U.S., where there's an aging infrastructure that has to be built, refurbished. And so retrofits was really the growth there, but that was very focused on the U.S. If we go to the -- what are we thinking in the guidance, we think oil and gas, food and beverage, life sciences and home and personal care should have the highest growth. Auto, tire, water waste, water will grow in about the company average, and mining and metals will be flat or down in 2014. So that's our overview of the different verticals of both in Q4 and in our guidance. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: That's helpful. And how was price versus cost in the quarter? And what are you expecting for 2014?

Yes. So let's start with the quarter first. I would say price this year has come in at about 1 point, and that was pretty evenly spread across all 4 quarters. Input costs have actually been a little bit favorable for us this year on the materials side, and that continued into Q4. Don't forget we still have to make up for wage and benefit inflation, but the materials part of it has been a little bit favorable. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: And 2014?

Yes. So then in next year, we're expecting, once again, to do about 1 point of price, maybe a little bit less than that. And then I think on the input cost side, we are not expecting any significant change in input costs as we move into next year. We do expect to have normal wage and benefit inflation.

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

Keith, can you provide a little more color on this acceleration products? I mean, pretty meaningful acceleration here from 1% up to 6%. A couple of questions on that. I mean one, was it kind of a surge late in the quarter? Do you have a big September? Obviously, that's a big month in the quarter. And then was there -- when you look at it kind of sequentially, was there any particular area that stands out in terms of making that leap from 1% to 6%?

Well, I think, normally -- we had a normal Q4, which means it generally get stronger as the quarter plays out, and I think we saw stronger performance in September in the product side. That was a little up compared to the earlier quarters. I think from a product standpoint, the highlight -- I think we had 2 very strong platforms that performed for us in the quarter. Logix was up 10%, and so that's obviously drove up the A&S product piece. We also had good performance in our motion products, and we think that was -- motion and safety products, which we believe were part of the success that we're having at OEMs. And then in our CP&S product area, in our standard drives business, they have a new platform, the PowerFlex 520's family, and that continues to have a great reception as a new product. So I think those were the major impact factors for the quarter. But on the -- just the last comment I'd make is we saw product growth throughout the region, so it wasn't just isolated in one area. So it was pretty broad based, which is -- which we also thought was a good sign for the quarter and going forward.

And then just maybe on process in terms of having confidence and a better outlook for process in '14. I know you've had this dynamic where process x Asia has been growing a lot better than process overall. I mean, is that kind of the story of things getting better in '14, or is there a broader improvement in process that's giving you that confidence?

Well, I think the biggest confidence is just in the fact that the backlog is up, and we definitely dug a big hole last year with our over-performance in Q4 and a weakness in orders in the second half of fiscal '12. So we did not have that. And matter of fact, the backlog grew as we exited the year. And so I think just the fundamentals of the business have us feel better than we did, certainly going into the year. And we also think with introduction of PlantPAx 3.0, that, that is another additional capability that we bring to the market, and it's going to add functionality and capability that is very appropriate for those industries. And the continued build-out of our capability and competencies in our sales channels, in our sales organization and with some of our distributors, we think that we are expecting to have a better growth in process next year. And certainly, right now, that expectation is to mid to high single digits for the year, and that is certainly something that we think, at this point, is achievable.

okay, that's great. See you in Houston.

Looking forward to it. See you there. And it's a great process industry area, so you'll see a lot of focus on oil and gas.

Your next question comes from the line of Josh Pokrzywinski with MKM Partners.

Can you guys talk a little bit about the cadence through the quarter and how you feel about how visibility has changed over the past 3 months, either through front log or the amount of detail customers are willing to share with you? It does seem like versus where you guys started out the quarter, things firmed up a lot, maybe in September and I guess based on what other companies are seeing in the October as well. So just trying to get a feel here for how the last 3 or 4 months have progressed.

Josh, I think I would say we were pretty strong across the quarter, but it was a typical Q4 where things accelerated as we moved through the quarter. And our Q4, especially on the solutions and service side, tend to be pretty September-heavy. So it's typical in that regard. I think around visibility, I would say I don't think that has changed in any significant way over the last 3 or last 6 months. The market environment seems stable and maybe stable to modestly improving in North America. But we aren't hearing anything significantly different from our channel in regard to growth expectations. I think it would be fair to say we're not hearing anything significantly different from customers at this point. As -- and most of our customers are calendar-year customers, so as we get closer to December and January, we're likely to start to hear more about their expectations for capital spending in the New Year.

Okay, that's helpful, Ted. And then just one follow-up. On the U.S., can you give us a flavor for maybe the project type, greenfield versus brownfield, small projects versus big? Just trying to calibrate what types of spending are firming up.

Yes. I think in the quarter, we certainly felt that it was more small projects, which would tend you to look at upgrades, modernization and replacement of existing equipment. And I think that was pretty much the characterization that we got from our sales organization as we went through our quarterly review process. And then outside of that, the projects -- as I mentioned, we saw little bit of project improvement in pulp and paper in the U.S. and then, obviously, the continued strength of oil and gas, which is becoming much broader. I mean, it's throughout Texas, the Dakotas, Pennsylvania, Ohio, Colorado. So that, I think, has continued to create other opportunities in those regions for support and supply of equipment and services to that core investment that's required for oil and gas, in particular, drilling in those cases, the production side. So we see that as the other dimension of strength.

Your next question comes from the line of Jamie Sullivan with RBC Capital.

A question on margins. So it looks like this year, you're expecting to hit around 20%. That's typically been the cap that you've talked about historically, but the cycle continues to kind of push along with modest growth. You've also done some things on the cost side with restructuring. I guess how should we think about that over the medium to longer term? Are you -- can you now get margins above 20%? Are you still thinking that you'll reinvest anything above 20% back into the business?

I guess the first thing I would say is I'm not sure we've ever set a hard cap on we would allow in terms of margins. But you're right, at 20%, we're probably a little bit above the prior peak margins we had, which I think came in 2008. Clearly, I think the thing that's going to guide -- that's going to cause margins to go up, most importantly, is what happens with our volume. And we pretty consistently said that if we can see organic growth in the range of, let's say, 5% to 7%, we would expect to drive conversion margins in kind of the 30% to 35% range, and that implies that there is room for continued margin expansion. I think the key issue there is what we see in top line growth and how the balance of this cycle plays out. That said, we do want to make sure that we are investing sufficiently to preserve our technological differentiation and to ensure that we're taking advantage of the growth opportunities. A couple of years ago, we would have said particularly in emerging markets. Now I think it's in emerging markets and some of the new growth opportunities we're seeing in North America. So yes, you're right. I mean, we're going to get that balance of investment versus margin performance right. But with high conversion -- reasonable conversion margins and reasonable organic growth rates, there is some room for margin expansion.

Okay. And then -- I'm sorry, go ahead.

As you know, the challenge for us is always aligning the spending with the revenue. And as an organic growth company, we have to invest before we see the revenue. And certainly, in the second half of last year and as we're going forward here, we do expect to increase those investments. But it's very hard to get the total alignment between when we're investing and when we see the top line improvements. So we're going to keep working that. But Ted's comments were exactly right. We do need to continue to make sure we're investing appropriately in the technology and innovation and domain expertise that's required of a technology company.

And then just a quick follow-on, maybe you could just run through the major end markets, kind of how they finished or -- in fiscal '13, the exposure there, how big was mining, oil and gas, auto, tire, consumer. If you wouldn't mind just running through that real quickly.

Yes. I don't think we saw any, I would say, fundamental change in the makeup of the business between those verticals. Oil and gas probably grew a little. That's greater than 10% at this point in time. And at this point, transportation is around 15% and pretty consistent that it has -- to what it's been. I would say the switch has probably been within the process industries, where oil and gas has gone up a little, mining has gone down a little and pulp and paper and metals have stayed relatively flat at a lower level than historical. And I think that's really been probably the only dynamic in the overall mix change across the verticals.

Okay. This is Rondi back. And Jamie was the last caller in our question queue. So we're going to wrap up the call today. Thank you to all of you for joining us. Sleep well for those of you who called in from China. Thanks for joining us, and we look forward to seeing many of you at Automation Fair next week in Houston. So thank you.

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