艾默生電氣 (EMR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to Emerson's investor conference call.

During today's presentation by Emerson Management, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(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, Jo.

I am 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.

The 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 three months.

I'll start with the 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 from 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 the 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 US grew 2%, Europe was flat, Asia increased 8% with China flat, Latin America grew 18%, Canada grew 10%, and the Middle East and 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 details.]

Gross profit margin of 41% expanded 140 basis points driven by volume leverage, mix, and cost containment benefits.

As already mentioned, operating profit margin of 20.4% improved 130 basis points.

The goodwill impairment of $592 million and $31 million in currency transaction losses were 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 as 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 pre-tax earning margin declines in the impairment, excluding this pre-tax margin, expanded 100 basis points.

Next slide, Process Management.

Process Management net sales grew 18%, and underlying sales grew 21%.

By region, the US was up 16%, Asia up 21%, Europe up 11%, Latin America up 46%, and Middle East and 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 15% for Process Management, this margin at record levels.

Continued in-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 US and Asia were flat.

Europe was down 5%, Latin America up 3%, and Middle East and 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 a challenge for Industrial Automation.

Next slide, Network Power.

Net sales declined 4%, and underlying sales decreased 3% with the US down 7%, Asia up 5%, Europe down 9%, Latin America down 4%, and Middle East and 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 deleverage and other cost increases would improve 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 US was down 4%, Asia down 7%, Europe down 1%, Latin America up 6%, and Middle East and Africa up 17%.

US 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 remained 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 remain 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 US was up 2%, Asia up 17%, Europe flat, Latin America up 11%, and Middle East and Africa up 35%.

The commercial storage and food waste disposal businesses reported strong growth as US 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 and solid profitability for the commercial and residential solutions segment.

Next slide, Fiscal 2012 highlights.

As briefly 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 a recovery cycle, and uncertainty in the US, China, and Europe is resulting in cautious business investments.

At present, there is no obvious catalyst for economic growth acceleration.

Based on current global economic conditions, the 2013 outlook is as follows.

Reported underlying sales growth of zero 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.

With that, I will now turn it over to David Farr.

Thank you very much.

Thank you, 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.

His expanded talent given the EVP title.

So, he's now going up a notch, and his compensation will be adjusted downward accordingly.

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 from 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 around 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.

It gets us into great position relative to the year where we face right now in 2013 with again a lot of uncertainty, but I'll talk a little bit about that.

Unfortunately, this year in 2012, the underlying volumes of the Company due to the weakening economies as the year progress are 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 flood impact, but overall, it's basically down 4 points from what we thought we were going to see.

And, when we presented in February of 2012.

So, a much weaker economy impacted us, and then we have 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 of uncertainty relative to China and what the 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 is a little bit weaker.

Our backlog still very positive.

We are clearly looking at an uncertain and challenging business time for the next six months, and we are going to plan accordingly.

As we look at our current makeup 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 based on inventories or weak demand.

I'm very nervous about the fourth calendar quarter.

We still see continued growth in 2013, pretty much in line to what we see -- 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 midpoint about exactly what we did this year, around that 2.5%, 2.6% level.

That 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 US will be negatively impacted.

Both at the government level, and then also at the consumer level, if they go about raising taxes.

So, our plan right now is to have slight margin improvement, EPS in the mid- to single-high-digits with strong leverage, in particular coming from process business and a recovering residential and commercial solutions business.

We will give more, detail segment information in 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 tail winds we see right now -- the big headwind for us right now is pension, with the discount rate at 4%, unbelievably low for US discounts 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 two very, very big years.

In 2013, we're looking at restructuring in the $70 million to $80 million level down from current 2012, and then also down from the 2011 expenditures.

We do have the new -- what we call the performance share, or the four-year program which we have -- every so often, we have an overlap year, and 2013 will be an overlap year.

The Compensation Committee and the Board awarded the performance share awards which are a four-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're 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 -- in Mexico/US, and 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 with Sanford Bernstein.

Steve, before you ask the question -- I do -- Frank Dellaquila just pointed something out that I do need to clarify 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.

Increase.

Yes, it's the growth.

Yes, Frank pointed that out and I misspoke, and thank God I'm not on live TV somewhere around the world, or something like that you know?

Okay, Steve what's your question.

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, talk about mid-single digits, 5% top line, high single digit 9% bottom line -- plus I'd add back the pension stock base.

So now, I'm talking about low to mid-teens EPS growth off of that 5% if I ex out the pension net 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?

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'll get more than 0.2% leverage.

Pretty simple.

Okay.

I know you have a tendency to run -- you're sort of like people in my family say, oh, 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 maybe a little bit different than your definition.

So, your credit line is stopping, let's say, at maybe 7.5% okay?

Okay, Dave I promise not to spend it before you deliver it, how's that?

You got it.

Thank you very much.

Just want to make sure you understand that credit card balance there.

Second, maybe a higher level question on the portfolio.

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 then?

At this point in time, our focus will obviously clearly find the right partnership and proper way to exit the embedded and power computing.

We'll do this, as you know have -- we'll do this in an orderly process one, to protect that business, and also to maximize the value for the 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 of 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 -- the 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 technology folks really have their hands full right now relative to sorting through how that market is going to recover some time in 2013.

So, very much focused on the status quo.

Nothing significant from the acquisition front at this point in time.

Can I just follow that up on the data center.

With the Board review, when you talked about the difference between embedded computing and 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 we want to discuss in a phone call like that.

There's a lot going on in the data center world right now.

With -- obviously with the new hyper scales and the hyper scale 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 up 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.

We're looking at I think the next six months probably a challenging data center environment.

Thanks.

You're welcome, Steve.

Look forward to seeing you.

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

Go ahead.

Eli, you out there?

Yes, I'm here.

Okay.

I'm here.

What was the underlying growth of process in the fourth quarter, if you ex out the catch-up from the Thailand?

What kind of compares are we looking at at this point?

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, it's -- trying to track that, Eli, to be honest, it's sort of like catching sand that's falling in the air.

But, it's clearing, and I would say, you'd probably take about $100 million out, $120 million off that.

So, you're talking about high double-digits.

We had extremely strong underlying sales growth even ex that business -- that.

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

I've talked about this before.

Right now, the backlog, the order pace says that we should be able to do that.

I'm always concerned about projects being slowed.

We have not seen that yet.

Our order pace, our backlog demands, everything are still very strong even through this month here.

However, I think there's a point of uncertainty in, let's say, that something does happen to the US economy and does take a dramatic drop off, 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 2.5% underlying growth rate, we could probably do more like 7% or 8%.

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.

So, you intend to be buying back shares throughout the year to offset the eventual dilution of that, or wait until it happens?

Or, do you hope you can make enough acquisitions to offset?

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 playing around $800 million of shares, share buyback.

We will start within a couple days here after we file our reports, and we have it clear this marketplace will go back out.

We stopped about at the end of the fiscal year because of the impairment charge.

We did not want to 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 and 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.

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.

We'll get the details of how much creep we have from the incentive program overlap?

How much you are going to be issuing and tax rate change, and any of that will change at all?

The tax rate number -- I'll give you exact -- right now, we planned last year at 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 dropped this year -- Frank, how many shares did it drop?

Right about 20.

About 20 million.

So, our shares dropped this year on average, and I would expect our shares to drop again next year on average depending obviously on what that 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 are not a big issuer of stock.

Thank you very much.

You're welcome Eli.

All the best to you.

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

Go ahead.

Hi.

Good afternoon.

Good afternoon, Scott.

Dave, have you seen any evidence of any kind of backlash in China from the Huawei comments that Congress made about not wanting to buy Chinese Telecom equipment?

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, are quite strong and obviously from an all-America corporate perspective, but we have not seen any big issue there.

They know that that was not us talking, that's 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 this new leadership is coming on board.

As we've talked about, where are the investment dollars going to come, and I think the degree of freedoms they have of investing that money is less than they've had historically.

So, we are looking for -- in our case this year, we're probably looking for 5% to 10%-type of growth this year in our China businesses after a weak 2012.

It's not uncommon for us to come back, and we see some of those marketplaces already starting to come back.

Some stability it there already.

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's structural cost?

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 US and also in Western Europe in the Industrial Automation business.

The majority of the margin improvement is a structural change, and we should see a good margin next year.

We've had a huge step up there.

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 million-some-odd -- $43 million.

But, I would expect them to have a slight margin improvement again next year, and you are not going to see much growth in that business in the next two or three quarters.

But, they have structurally improved the operating performance of that Company back to 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 their other markets have weakened a little bit.

So, I expect these guys are going to be fighting for volume all year long, but they have their costs in great shape right now.

Okay, helpful.

Thank you, I'll pass it on.

You're welcome.

All the best to you.

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

Thank you.

Good afternoon, everyone.

Good afternoon, Dean.

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

Yes, I actually voted, yes.

I guarantee I voted.

I voted a couple weeks ago.

I thought you were going to say a couple times?

Well, I can't do that, but I did vote a couple weeks ago.

My son was home for his fall break, and I took him down there and I voted absentee.

And, he voted because he's out of school.

I knew I was going to be at the Board meeting tonight, and there was no way I could get down there this late, so I did already.

Good to hear.

Now, was hoping you could expand the comments on climate.

Pretty mixed results across all of the end markets -- or more likely more negative across all of 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?

You know, that is the issue.

We fundamentally believe that there will be an improvement in residential spending in North America in 2013, ignoring any economic shocker, huge drop-off in the US economy.

The issue for us right now is getting 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 pace from a global transportation both in trucking and then also container, that marketplace is in a downward cycle.

And, that will probably 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 would be more March/April time period -- I'm anticipating that the housing market continues to solidify, and we will start seeing some recovery in our climate technology business in the second half of the year.

In the first six months, it will be still a challenge for these guys, and they've got their costs in line.

And, there's not going to be any growth.

It's just a very tough marketplace 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 minor impact obviously we have businesses up there do the day-to-day.

We obviously have our service organization in there right now working with the key customers.

Would there be any -- you are not going to see any significant impact both in sales and profitability, both positive or negatively.

I would say net-net in the next three, four months, it will be positive.

And then, long-term obviously as they rebuild -- that will be helping us.

We have short-term things that will be positive for us, but it's in the ordinary course of 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 trying to quantify back in the 2008 stimulus number.

That was sort of a waste of effort by everybody.

Got it, thank you.

You're welcome.

Our next question is from the line of Shannon O'Callaghan of Nomura.

Go ahead.

Good afternoon.

Good afternoon, Shannon.

Dave, so the 41% gross margin, obviously a big number.

You have some favorability in process going on in the quarter.

How do you view the sustainability of that type of gross margin?

I just walked off -- to get some tea.

My cover story is I was going to go over and get some tea.

What I would say right now is that based on the current mix of businesses, based on where our cost structure is sitting right now in 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 -- 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 rates -- my gut tells me as I finish that year out, and we wrap up '13, we are going to be looking around a 40.5% GP margin next year.

Okay, and then on restructuring, you did $119 million this year in an elevated year.

You're already seeing good pay back from prior restructuring.

What do you think your year-over-year benefit is going to be in '13 from the actions you've taken this year?

I don't quantify that, but from the standpoint of you look at the businesses both in the Industrial Automation and then also Network Power Systems, you're going to continue to see a better margin from that restructuring.

So, we'll be getting a good payback this year.

My gut tells me that we'll 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.

If you spend $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, $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 because I see at least 50 basis points of GP margin improvement going into this year.

Okay, great.

That helps, thanks.

Our next question comes from the line of Jeff Sprague.

Just one moment please.

Jeff, you out there?

Just one moment.

I was having trouble with the line.

Go ahead, Jeff.

Okay, you hear me okay?

Yes, we can hear you, Jeff.

Thanks, sorry about that.

That's okay, you gave me time to get my tea.

Okay, make sure you aren't putting anything in there.

I was talking to the Board a lot these last two days, so my throat is a little stressed.

Just thinking about the comment about there's no obvious catalyst, and we need leadership in the US.

Not to kind of get on a soap box here or anything, but you're kind of in a defensive crouch.

A lot of companies are kind of in a defensive crouch.

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?

We're definitely in a defensive crouch.

As you know, I refer to it not as defensive Crouch -- I talk about the reigns -- you hear me talking about pulling the reigns.

We've got the reigns way back.

What we're going to need -- not only do we need -- we'll obviously within the next 24 hours and hopefully sooner than later, get clarity on the election.

And, who is 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 we're 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 a great sigh.

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 are 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 we see a very positive pro-growth, pro-US investment environment, you would see some time in the second half of 2013 starting to see things flow.

People will not get carried away and start saying, 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.

Jeff, that's how I see it 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.

That's what CEOs want.

Got it.

That's helpful.

Just back to Network Power.

You actually exited at a pretty good margin rate.

Should we -- there was 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, from the standpoint of Network Power, historically, the first-quarter margins are -- we will -- we've obviously got the margin going the right way.

But, first-quarter margin, we'll go back a little bit, but we are not going to go back to the level that we saw last year in that first quarter.

So, I'm looking -- Frank is showing me the numbers right now.

So, we should see a continuing improvement in the first quarter, depending on the rate of restructuring, but we should see continuing 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 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 continuing improvement 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 -- we want to get back up into that above 10% range.

So, hopefully we'll get it to that 11%, 12% top of range.

That's where I see right now.

The write-off was solely unamortizing goodwill.

There's no amortizing intangibles that went away as part of the write-off?

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.

There won't be any change in the intangible delta that -- Frank, was there any change?

No, it's a goodwill write-off, Jeff.

Goodwill.

Only goodwill.

Yes.

Okay, 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.

No, I'm sorry that's what I meant.

$800 million can set off the dilution from exiting embedded power?

Easily.

Okay, that's what I thought.

Thank you very much.

Okay, thank you.

Thank you.

Our next question comes from the line of Brian Langenberg with Langenberg and Company.

Go ahead, please.

Just a couple of things.

First, Network Power, can you talk a little bit about whether mix helped you or hurt you?

Understanding you did a lot with structuring.

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 and the working capital, please.

Thank you.

Okay, the first one is the mix did not help us in Network Power in this quarter.

The climate -- what I call the precision cooling business really 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 in climate -- at this point in time, the price cost 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 the 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 declines and that material inflation and the price increases we had in place we are slightly green.

And so, it helps 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 things happen to us is we had a very strong last, basically 40 days of shipments as we made this quarter as we geared up to make this quarter.

We had a lot of sales shipped out in the last couple weeks, in particular, that we're collecting those receivables now.

And, the quarter ended this year on Sunday, so our cutoff for collections for us for the banks is basically Friday.

So, we had a lot of shipments going out as we drove to drive that backlog down and make the quarter and the sales.

Obviously, everything aboveboard, nothing illegal.

From the standpoint of that's how the quarter unfolded, and that causes our receivables to explode.

You'll see, we will have a good first-quarter cash flow, and that receivable number should start winding back down.

There's nothing extraordinary.

We did not -- from the bad debt standpoint or any concerns that we're in good shape, we've analyzed the heck out of it.

We have nominal bad debt for this Company.

We're talking nominal.

We're in pretty good shape there though we did have a huge surge in receivables as you pointed out.

Inventory [receivables], we're in good shape.

Okay, thank you.

You're welcome.

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

Go ahead.

Hi.

Good afternoon, Dave.

How are you?

Good afternoon, Rich.

Mix for process.

How are you thinking about that for '13?

You had a pretty good year in '12.

I know there's some disruption, but how are you thinking about MRO versus solutions, et cetera?

Right now, with a record backlog starting the year, with very strong North America investments in oil and gas, and we have still pretty good mix.

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 that asked me the question about if you just look at the raw numbers, you could say we should be able to do 10%-plus in process growth next year.

So, I have in my base plan of that basically midpoint of that 2.5%, 2.6% I'm talking about underlying sales growth.

I think that process could have a slowdown and some push-outs.

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 in the MROs, that helps our margin as you could tell, both from the GP and the OP levels.

Okay, and then a question for Frank.

On the stock comp, so when you look back to fiscal 2010, you had a big increase in corporate and other, and 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.

About $110 million to $120 million.

$110 million, $120 million, okay.

Depending on if the stock price stays right here, but we're hoping the stock gets up to $75.

And then, that number will be a lot larger.

Thanks, that's all I had.

Our next question comes from the line of Steve Tusa with JPMorgan.

Go ahead, please.

Hi, good afternoon.

Good afternoon, Steve.

Just trying to reconcile all of the moving parts here.

This year, you did 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 offset by a little bit lower restructuring.

What kind of -- despite those headwinds, what gets you back to a similar year this year?

Or, 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 things.

One, we will not have -- there was a lot of cost of 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 and residential business which is also a pretty good profitability market.

I also look at just from the mix standpoint, I see a reasonable level of margin improvement this year, and so as we get higher volumes I think we'll go towards that high single-digit.

And, the middle -- I think we'll do a little better from the leverage standpoint, so I feel at that 2.5% we'll do a little bit better than we did this year.

So, when you say mid- to high single-digits, you're talking about something like 4% to 7% is how we should think about it?

Yes.

Okay.

Maybe 7.4%.

(laughter)_ I'm going to give that credit card -- I can't remember who asked that question, but I might take that credit card right up to $7,400.

But, it's definitely not going to be a $10,000 credit line there.

Right, 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, is that kind of the 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.

The issue really boils down to -- as I said in my comments -- I'm very nervous about the fourth calendar quarter.

I still 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 because the uncertainty out there.

And, especially if we get into a discussion post-election about this whole -- the fiscal cliff and the restructuring of what's going to happen in the US government.

And, this thing gets into a log jam, and all of a sudden you start seeing that they're going to let this thing happen.

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.

I'm a little bit nervous about giving what I would call EPS estimates for the quarter because I would agree with you -- the first quarter, if you look at just from a pure economic standpoint, would say that would be my biggest increase would be the 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'll have 70% to 80%.

It's hard for me to say I'll have more in that first and less in that second that I'd tell you, so I know I'm not helping you much but just telling you I'd be very careful there.

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 reasonably negative on a three-year-trailing basis.

How is October playing out so far?

I have not seen October, but you know what you did see in September -- we reduced our backlog.

You are 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 a total Company, we ended up the year with a little bit higher backlog, but we significantly reduced it.

Frank, do you know how much we reduced the backlog roughly?

$200 million.

I think about $200 million.

$200 million.

Let's say, Steve, I don't have exact, say $200 million is the place holder how much we reduced that backlog in the fourth quarter.

(multiple speakers) So, somewhere around $200 million that we reduced in the quarter the backlog.

So, a lot of that improvement came not from the current orders, but the backlog.

Okay, thanks a lot.

Okay.

All the best to you, Steve.

Thank you.

Our next question comes from the line of Julian Mitchell with Credit Suisse.

Go ahead, please.

Thanks a lot.

Yes, the first question was really on the margin progression.

You talk about 10 to 20 basis points of operating margin growth in fiscal '13.

You grew about 20 bips in fiscal '12 with a similar revenue growth rate.

It sounds like the gross margin should be up 50 bips.

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 two things?

Those are the two issues right there.

Those are the two big issues at this point in time, Julian.

As we get above that 2.5% to 3%, we will have pretty good leverage.

And, obviously, I think that then that margin would be a little bit higher -- that margin delta would be a little bit higher there.

There's some 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 of how we're looking at the disruption.

We're looking at going into the year with our cost structure in very good shape right now.

We have a reasonable backlog, and so I think that where we're operating right now is pretty good.

I'm more concerned about the external shock going on in the global economy more than anything else at this point in time and how that will impact us for a month or two as things get sorted out.

That's why I'm being a little cautious there.

Got it.

Then, just on the restructuring side of things, 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 cost and [balance]?

Because 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.

I would say that right now as I look at what we see going forward in the next couple years, that is probably 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 two very big years of restructuring -- actually, 2.5 very big years of restructuring.

So, now I'm in the mode of trying to stabilize this and say okay, let's get a payback for my shareholders on that restructuring.

Got it.

Thanks.

Just a very quick follow-up.

Network Power, the decremental margin was pretty big in Q4, and you called out some cost increases as a reason for that.

I just wanted check what those were?

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

Pat, to you?

It's nothing in particular.

It's just typical business inflation that occurs.

Nothing out of the ordinary.

Got it.

Thanks.

Take care, Julian.

Thanks.

Thank you.

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

Go ahead, please.

Hello, John.

It looks like John disconnected.

Could you re-queue, please?

John, you out there?

He's out of the queue.

Okay.

Next caller?

Our next question comes from the line of Mike Wood with Macquarie Group.

Go ahead, please.

This is Adam in for Mike.

You talked about looking for 5% to 10% growth in China businesses in next year.

Could you talk about what that growth was in fiscal '12?

And, which business will be driving that growth?

It was negative.

Minus 4%.

We gave that number out today.

It's minus 4%.

Can 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.

I don't expect to see much recovery in Industrial Automation at this point in time, so that's where I'd see at this point.

Great, thanks.

You're welcome.

We have John back.

John, you out there?

Just one moment.

With Deutsche Bank, please go ahead.

Yes.

Dave, can you hear me?

Yes, I can hear you.

But, you've been running around outside and trying to escape on us, huh?

(laughter)

No, I've got magicJack, and it doesn't really work for these phone calls.

Okay, I won't make any comment about that.

But, it's magic.

MagicJack.

(laughter) Whose fixed line you stealing off of right now, yes?

Okay, John go ahead.

Just storm survival tactics.

That's true.

I apologize.

I forgot about that.

You had an extraordinary circumstance there.

I thought maybe you tapped into your neighbor's line or something like that.

Oh, I still did that.

Process, Dave -- you made a comment about you haven't seen projects slowing in process.

I want to ask you, ex process, you have seen project deferrals -- I think bigger projects amongst oil and gas-types of activities.

So, if you are not really seeing that, it suggests you're taking share, or maybe there's something about the process industry that is 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 a 12-month period or one quarter share gain, but I think as you look back at the last two years where we've had 15%-plus growth in sales in 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.

I feel good about the position we're in 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 every once in a while you get in the zone.

And, we're in the zone 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 US recession coming or pending in 2013?

What does 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 US economy to be slower or stay at a slow pace in 2013, but not go into recession.

We're real close to a stall speed right now.

As you well know, we're growing somewhere between 1% and 2% and that's -- that in the US economy is basically a stall speed.

Yes, it's step down, and I think that if I look at my order pace in North America probably in total, 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 four or five days here.

But, my gut tells me right now that they will take some action to mitigate the dramatic drop-off of going into the fiscal cliff.

However, if they don't, then you are going to have a dramatic pullback in the range even more relative to spending 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 a growth period at this point in time.

And, if things do deteriorate, what's 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?

I'm thinking of the context of prior recessions and your own experience as CEO of the Company and so forth.

I think from a standpoint of I don't know -- in the short-term, would you be more aggressive if we went into recession?

Obviously, that would have a [knockout] effect on companies that maybe you would have a better chance of making some of the 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 generated strong cash.

Clearly, we could obviously ramp up that share repurchase.

We would then fundamentally cut back on what I'd call even more of our discretionary spending which we right now base on a, say 2%, 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 as Congress gets back working after the election.

That's where we are.

Perfect.

Thanks.

I need to wrap it up here.

I need to go to another meeting.

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 operation guys did execute very well.

We finished the year at record levels of profitability and record levels of earnings.

Unfortunately, we had a little impairment issue relative to the one business, but as we talked about we'll deal with that issue as we go forward in 2013.

Again, I want to thank all of the executives out there for making this year happen.

Bye.