洛克威爾自動化 (ROK) 2010 Q4 法說會逐字稿

Thank you for holding, and welcome to the Rockwell Automation's quarterly conference call.

(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.

Thanks, Katie. Good morning, everyone. Thanks for joining us for Rockwell Automation's fourth quarter fiscal 2010 earnings release conference call. 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. Additionally, a webcast of this call is accessible at that website and will be available for replay for the next 30 days.

With me today are Keith Nosbusch, our Chairman and CEO, and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that will include his reflections on the Company's performance in the fourth quarter and the full fiscal year, some context around our outlook for fiscal 2011 and a preview of our investor conference on December 8. Then Ted will provide more details around the fourth quarter results and our guidance for fiscal 2010.

As Katie said, we'll take questions at the end of Ted's remarks, and we want to get to as many of you as possible, so please limit yourself to one question and a follow-up. We expect the call today to take about an hour.

As is always the case on these calls, I need to remind you that our comments will include statements related to the expected future results of the Company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So, with that, I'll turn the call over to Keith.

Thanks, Rondi. Good morning everyone, and thank you for joining us on the call today. I appreciate your time and interest in Rockwell Automation. Our results in the fourth quarter are a clear indication that the global industrial recovery has continued. We capped the year with another quarter of strong revenue growth in all regions. I was particularly pleased to see very strong year-over-year growth again this quarter in China and India, and strong sequential growth in Latin America and Europe.

Logix grew 36% in the quarter and earnings grew dramatically from a year ago. For the full year, we grew revenue 12% and doubled earnings per share compared to fiscal 2009. Operating margin improved by 5 points, a great result in the light of the compensation cost headwinds and growth investments we made in the second half of the year.

Again, this year we generated strong free cash flow. We used that to fund organic growth, increase the dividend by 21%, resume share repurchase and make a significant discretionary US pension contribution. The performance this year is evidence that we are executing well as the recovery progresses, and I want to thank our employees, customers and partners for their support throughout the year. I am very proud of the people of Rockwell Automation and our culture of integrity, corporate responsibility and inclusion.

This year Rockwell Automation was added to the Dow Jones sustainability index and again recognized by Ethisphere as one of the world's most ethical companies. I spent a good deal of my time traveling outside the United States this year, particularly in emerging markets. And what I saw further solidified my confidence that our growth and performance strategy is working. The investments that we made in the last cycle are paying off, and we are gaining traction in our expanded growth opportunities.

Let me share with you a few examples. A global nutraceutical manufacturer standardized on Rockwell for its highly sophisticated greenfield site in China. They are using our products and solutions not just for process control, but also for regulatory compliance and to improve energy efficiency and reduce waste. We won our first order in India for primary pharmaceutical manufacturing, historically a stronghold of traditional DCS providers, demonstrating the power of our best-in-class integrated automation and information solutions.

China grew over 30% this year and, in total, emerging markets now represent over 20% of total Rockwell sales. Sales in Germany and Italy grew over 15%, an indication of the success of our OEM strategy. We also continue to make demonstrable progress in technology differentiation. We introduced new functionality in Logix in the areas of processing speeds, memory, safety and communications, all of which expand the capabilities and scalability of this platform to serve the demands of our traditional discrete, OEM and process customers.

We released our next generation of plant PAx, which adds new features such as high availability, device integration and asset management to an already robust process automation system. We introduced the Micro 800, a component controller line with an innovative software tool set that complements our current portfolio of component offerings for simpler standalone machine applications. This product line is tangible evidence that we are seeing a return on the investments we have made in expanding our Asian design presence.

We had early success with our new 750 series of drives that improved ease of use and expand our power range in intelligent motor controlled products that are critical to our customers' energy management strategies and plant wide optimization goals. All of these product introductions were made possible because we continued to invest in technology during the downturn.

I want to thank the board of directors for their encouragement and support of this strategy. All in all, fiscal 2010 was a very good year. The industrial recovery turned out to be much more robust than we were expecting at this time last year, and we delivered strong operating performance.

So, let's shift gears and talk about 2011. We are generally optimistic that recovery will continue in fiscal 2011. Unemployment is high and consumer confidence remains low in mature markets. Yet, we continue to see strength on the industrial side of the economy, and we are starting to see signs of improvement in larger capital project activity. The timing of the larger project spending and the pace of the recovery remains somewhat uncertain. We expect our year-over-year growth rates to moderate from here, but that is compared to very high year-over-year growth rates in the second half of fiscal 2010.

I am sure we made the right decision to get an early jump on the growth investments we made in 2010. We have never been better positioned to outperform the market in 2011 and beyond as the up-cycle plays out. For fiscal 2011, we are projecting revenue growth of 8% to 12%, excluding currency, plus 1% growth from currency translation. Based on this revenue outlook, we are providing fiscal 2011 earnings per share guidance of $3.80 to $4.20.

Increased exposure to mid and late cycle markets should help us as the recovery continues. Our strong balance sheet positions us to fund organic growth, make catalytic acquisitions and return capital to shareholders. Our strategy is to capitalize on expanded growth opportunities and technology differentiation. We remain committed to innovation, deepening our domain expertise and thought leadership, all key ingredients for helping our customers achieve their productivity and sustainability goals.

Last week we held Automation Fair in Orlando, and it was a rousing success. We hosted almost 8,000 customers, distributors and partners from all over the world, an increase of 30% from last year. It was a great opportunity for us to showcase our offerings, provide technical training and facilitate sharing of best practices among our customers. The event is always a great way to kick off a new year.

And let me once again thank all of our employees. They made this outstanding year possible. Their commitment to and passion for our customers' success is our competitive advantage, and they are now focused on driving our success in fiscal 2011.

Before I wrap up, I would like to personally invite you to attend our investor conference in Florida on December 8. You will have the opportunity to hear more about our expanded growth opportunities and differentiation from Steve Eisenbrown, the head of our Architecture and Software segment, Bob Ruff, the head of our Control Products and Solutions segment, and John McDermott, the leader of our Global Sales and Marketing team. Sujeet Chand, our Chief Technology Officer will also be on hand to add his insights. We look forward to seeing you there. So with that, I will turn it over to Ted to provide more details on the financial results for the quarter and our outlook for 2011. Ted?

Thanks, Keith and good morning, everyone. As Rondi noted, we posted charts to our website, and my comments will reference those charts. So, starting with the full year results on chart number one. Sales for the full year ended at $4.857 billion, a 12% increase compared to fiscal year '09. Currency contributed 2 points to the increase, so excluding currency sales increased 10%. Segment operating margin for the year was 14.8%. That's a 4.9 point increase compared to fiscal year '09. Earnings conversion for the full year was 55%, an exceptional result.

There were an unusual number of large puts and takes in margin performance this year. We benefited from the volume leverage on the substantial year-over-year sales increase, and that came with a favorable product versus solutions business mix. We also benefited from the fiscal year '09 cost reduction actions and significantly lower restructuring costs in fiscal year 2010. But our earnings conversion had to overcome some significant headwinds, especially with respect to compensation related items. In fiscal '10, we reversed the pay cuts that had been implemented in fiscal year '09.

Similarly, we restored the 401(k) Company contribution in the US. We implemented a global pay increase, and we moved from a year of below average incentive compensation expense in fiscal year '09 to a year of above average expense across our entire employee base, and we experienced a significant year-over-year increase in pension expense in fiscal year '10.

Beyond the compensation related items, starting in Q3, we began to significantly increase spending to support growth. We spent the incremental $50 million in the second half of fiscal '10 that we talked about in the previous two earnings calls. On the whole, we're very pleased with the fiscal '10 earnings performance. We delivered superior conversion and were able to accelerate the right type of growth investments in the latter half of the year to ensure that we take advantage of what we believe will be a continuing recovery.

Diluted EPS from continuing operations for the full year was $3.05. Free cash flow for the year was $411 million. That's after a discretionary $150 million pretax pension contribution to our US pension trust in the fourth quarter. Cash flow conversion for the full year was 93% of net income, including the pension contribution and 124% excluding the contribution. ROIC improved every quarter this year, and we ended the year at 22.8%.

I'll move on now to chart two, the Q4 results summary for Rockwell Automation. Sales in Q4 were $1.357 billion, 26% higher than Q4 last year. Currency reduced growth by 1 point in the quarter. Segment operating earnings were $205 million, up from $80 million last year. General corporate net expense was $27 million in Q4 this year, $4 million lower than Q4 last year. Last year in Q4, we made a significantly larger contribution to our charitable trust. The effective tax rate in the quarter was a little under 17%. Q4 last year was somewhat unusual in that we had a small tax benefit. We ended the full year fiscal '10 with an effective tax rate of 19.1%, which was at the low end of our guidance range.

For the quarter, diluted EPS from continuing operations was $0.91 compared to $0.20 a year ago. Average diluted shares outstanding in Q4 was 143.4 million, roughly equal to last year. During Q4, we repurchased approximately 500,000 shares at a cost of about $27 million. For the full fiscal year, we repurchased approximately 2.2 million shares at a cost of about $120 million. At the end of fiscal '10, we had $501 million remaining on our existing repurchase authorization.

Moving to chart three, Q4 results summary. On the left side of the chart, you'll see our sales performance over the course of fiscal '10, a steady upward trend throughout the year. As I mentioned on the prior chart, sales for Q4 increased 26% year-over-year, with currency reducing growth by about 1 point. Sales increased 7% sequentially.

The right side of the chart displays segment operating earnings. Our segment operating earnings in Q4 increased by 158% year-over-year. Segment operating margin was 15.1%. That's a 7.7 point improvement compared to 7.4% in Q4 last year. Similar to the full year operating margins, the year-over-year comparison for Q4 benefited from volume leverage and the absence of restructuring charges, partially offset by increased compensation costs and growth spending. The year-over-year margin improvement was most significant in the Architecture and Software segment.

That's a good segue to chart four which summarizes the Q4 results of our Architecture and Software segment. Sales increased year-over-year by 36% in the quarter, currency reduced growth by about 2 points in this segment. Architecture and Software sales were up 4.4% sequentially. Segment earnings were $128 million, up $37 million from Q4 fiscal year '09. Operating margin in Q4 this year was 22.3% compared to 8.7% last year.

Turning to the next page, chart five covers Control Products and Solutions. Sales were $781 million, up 20% year-over-year. Currency reduced growth by about 1 point. Sequential growth was 9% for this segment. Within Control Products and Solutions, the products and solutions businesses each improved sequentially with somewhat stronger sequential growth in solutions. In solutions, this was a typical seasonal pattern. Segment operating margins were $77 million in Q4, up from $43 million in Q4 last year. Segment operating margin was 9.8% compared to 6.6% in Q4 last year.

Moving to the next chart, chart six provides a geographic breakdown of our sales in Q4. Keith already discussed a few highlights, I'll note a few others. Focusing on the far right column which shows the regional growth rates excluding currency effects, the US, EMEA and Asia-Pacific all ended the year with their strongest year-over-year quarterly growth rates. Asia-Pacific performance was primarily based on emerging Asia, and the rebound in Latin America has continued.

I'll move now to chart seven, free cash flow. Q4 was another strong cash generation quarter and a good ending to a great full year cash flow performance. Free cash flow for the quarter was $19 million, that was after the pension contribution that I mentioned earlier. Excluding the discretionary contribution, cash flow conversion in the quarter was about 117%.

Just a couple comments on our balance sheet. We ended the year on a very strong financial position. At year end, cash and equivalents totaled $813 million, that's up from $644 million last year. We had no short-term debt outstanding at year end, and we have no maturities on long-term debt until 2017. Debt to capital at the end of Q4 was 38%, and net debt to capital was 6%. The funded status in our pension plans was worse by about $100 million at the end of fiscal '10 compared to the end of fiscal '09, primarily due to lower discount rates. The discretionary contribution to our US plan helped to mitigate this impact. And as Keith noted, based on our financial position and confidence in our ability to generate cash throughout the cycle, we increased the dividend by 21%, beginning with the dividend that we paid this past September.

Now, on chart eight we'll move on to fiscal year '11, and I'll start with some anticipated headwinds and tailwinds. Compared to last year, this list is somewhat less complicated. Related to sales, to achieve our fiscal year 2011 growth objectives, we will have to overcome the withdrawal of stimulus spending, particularly in China, with increased sales to industrial customers. On the other hand, the growth that we experienced as we progressed through last year reflected in our run rates in the second half of fiscal '10 create some considerable tailwind for us and some good momentum as we enter fiscal year '11. We anticipate a few earnings headwinds.

As I mentioned previously, in the second half of fiscal '10 we began to ramp up investment spending to support growth. That was the $50 million that I referred to in the second half. Related to that, there will be an annualization headwind in fiscal '11, approximately $70 million. We will also face about $11 million higher expense in fiscal '11 related to the combination of pension and other retiree related costs. We expect a higher effective tax rate in fiscal '11, something in the range of 20% to 22%, compared to 19% in fiscal '10.

Earnings tailwinds will include volume leverage on higher sales and a reset of incentive compensation expense. We were above average in incentive compensation expense in fiscal year '10. We expect to be back to more average levels in fiscal year '11, and we expect this tailwind to be about [$50] million.

So now moving to chart nine and our 2011 guidance. We expect sales to be in the range of $5.3 billion to $5.5 billion. Excluding currency effects, that represents an increase of between 8% and 12%. We expect currency to add about 1 point to the top line in fiscal '11. We expect segment operating margin for the full year to be in the range of 16% to 17%. We expect diluted EPS in the range of $3.80 to $4.20. Based on this earnings guidance, we expect to see continued improvement in ROIC next year.

I mentioned our expectation regarding tax rate of 20% to 22%. The other item maybe worth commenting on is general corporate net. There we expect expense to be lower in fiscal '11 than last year with the full year fiscal '11 at about $86 million. And finally, we expect free cash flow conversion of approximately 100%. With that, I'll turn it back over to Rondi and we'll start the Q&A.

Great, thanks Ted. Okay Katie, let's open the line for questions.

(Operator Instructions)

Your first question will come from the line of Mark Douglass from Longbow Research. Please proceed.

Good morning, everyone.

Good morning, Mark.

Good quarter. First question, looking at the '11 guidance and taking the midpoint, I come up with an incremental margin of about 32%. Can you go through, Ted, some of the puts and takes? You talked about typically being in the 35% to 40% range. Is this a lot due to investment spending pick-up plus pensions, or could you talk about that a little bit? Can you get to the 35% to 40% next year?

Well, I think if you asked us what we believe the range is, I believe we're saying it's 30% to 40% for the year and at the midpoint, we would expect it to be around 35%.

Okay. I have to double check my calculations then. If we look at -- at IMTS, you mentioned a new alliance with Fanuc. Can you provide some details as to your reasoning, strategic importance there, maybe what is it that they're getting with Rockwell they didn't get with GE, and what you see going forward?

Sure. Well, basically, what we want to work with Fanuc on is to be able to provide a complete solution to our customers, particularly those in the powertrain side of automotive, which requires a mixture of what would be the more traditional PLC/discrete control and individual C&C machines that are now being used in those production lines.

And Rockwell Automation no longer is in the CNC business, so we think the combination of Rockwell Automation and Fanuc, who is the global leader in CNC control, that we'll be able with a better integration between our two platforms, we'll be able to offer a very competitive solution to our customers in that space and have a -- be more competitive in the powertrain side of automotive. And so that was the rationale behind it, and we believe our customers will react positively to having two leaders working together to create a more seamless solution and easier integration, higher productivity in their facilities than if they were working with our two Companies separately.

Thanks. Can that expand past powertrain?

Yes. The specific relationship is with CNC applications, and those aren't just in powertrain at all, but that's also in other discrete industries. It's in the aerospace industry and really is with machine tools in general. But the greatest integration for us will be in automotive, then off-road vehicles would have the same type of applications. And then as I mentioned, the aerospace industry also has a high concentration of machine tools that are part of a production line as opposed to pure standalone machine tools that you find in many other discrete industries.

Thank you.

You're welcome. Thank you.

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

Hi, good morning.

Good morning, Rich.

Ted, quick question on Control Products and Solutions. Margins a little bit below 10% in the quarter. Usually you see a sequential uptick from fiscal Q3 to Q4. Anything there that got pushed out or any type of impact to the margin there that maybe affected the quarter?

I wouldn't say anything unusual in the quarter. I think, first, we always have significantly higher solutions mix in Control Products and Solutions in Q4, which actually tends to be a little bit of negative impact on the margin Q3 to Q4. Plus, we mentioned last quarter that we would be incrementing some of our growth spending, so that's also hitting in the quarter and bringing margin down a little bit sequentially. But other than that, nothing unusual.

Okay. And then Keith, on electrical components, anything -- there was a -- there's been an issue across a number of industries in terms of securing electronic components. You noted it earlier in the year. Are you seeing any relief on that front, or is that still an issue for you?

Well, I guess the answer is kind of a yes and no. I would say it is not an issue currently because we have adjusted our production schedules, and our supply chain people have done an outstanding job in getting the parts, and we've been able to react to the extended lead times.

So, the issue today is the lead times are still much longer, half a year lead times in some of these electrical components, and so that's forcing us to carry a little more safety stock, a little more inventory. But the availability issues that we had early in the second quarter and third quarter have subsided, and we have now baked in those longer lead times into our production schedules. And as I said, our supply chain people have really done a good job of working the supply chain and the vendors to put us in a good position to be able to meet our customer commitments.

Okay. And then a quick last question, on the guidance for 2011, is that baking in any sort of input cost headwinds for next year, or is that going to be -- you think that's going to be neutral?

Well, we believe that input costs plus our price increase will create a neutral scenario for that.

Okay, great. Thank you so much.

You're welcome. Thank you.

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

Hi, thanks. My first question was on your Process Automation business. Roughly, how big was that in revenue terms in the fiscal year just finished? And I guess what kind of expectations do you have for its top line growth in 2011? In terms of the growth rate relative to your overall 8% to 12% ex-currency guidance.

Well, the Process Business is around $700 million, and that is up year-over-year. As far as our outlook for next year, we would expect that to grow slightly above the average, so slightly above the 8% to 12% is where we would expect process to be. Mainly driven by the fact that we're growing the solutions content at a faster rate than the product content next year, and solutions is certainly heavily focused into the process space. So, we believe that will be above the Company average.

Okay, thanks. And in terms of the emerging markets, you mentioned that you're quite pleased with the progress that you've made in the last year in particular. How do you feel about your progress in terms of penetrating the locally based OEMs and process customers rather than the local operations of global firms?

Well, actually, our business is predominant local manufacturing and local customers all over the world in emerging markets. And when I say predominant, we're talking three-quarters to 80% of our business is with indigenous manufacturers. And the OEM program that we have has been very successful, both in China, in India, Latin America, and that's an area that was a very strong positive and a contributor to our growth this year.

With respect to process, process is an area, depending on the industry, where we have a very good advantage by a lot of greenfield applications, and I mentioned a couple of those as measures of our success because there really is no installed base in those greenfield plants. So, we start on an even footing with the traditional DCS suppliers and then based upon the industry, the applications, we can have a very strong competitive position with our plant-wide control model versus a DCS only solution.

So, we think we're winning our fair share of process plants and as I said, some of those are with indigenous process companies. So, all in all, we're very pleased with our performance in the emerging markets this past year and have a positive outlook for our success next year as well.

Thanks. And then the last one from me, please, just on the safety business, something you've talked about quite a bit in the past 18 months. What's the size of that exiting 2010, and again, I guess are you expecting above average growth in that segment as well in '11?

Well, we don't -- our success in safety is split in a couple of areas. When we talk about it, the two areas that we talk the most about are machine safety, and that had 35% growth this past year. And a lot of that was driven based upon some of your earlier questions on OEMs. There's a real natural fit for our safety portfolio with our OEM initiative, and that's been a real plus.

The other part of safety is process safety, and there the leading applications are in oil and gas and certainly, that has not been as strong this year as the OEM growth. But we're starting to make in-roads at a number of new accounts in process safety, particularly in the emerging markets. And that's an area that we're also expecting to be part of the reason why we will have above Company average growth in our solutions business, because many times, process safety is delivered as a solution.

Great. Thanks.

Your next question comes from the line of John Inch from Merrill Lynch. Please proceed.

Thanks. Good morning, everyone.

Good morning, John.

Good morning. Keith, could you give us a little bit more color on some of the larger project activities that you're beginning to see? And as a kind of corollary to that, you remember the infamous air pocket. I'm just wondering about possible sort of lumpiness as it pertains to growth in solutions and the advent of some of these larger projects which obviously lead to future product sales. But just the risks of some sort of a timing mismatch given sort of the trajectory of the base, which is obviously growing very strongly. Hopefully you follow what I'm trying to ask, but I'm just wondering kind of your thoughts as we now get into sequential recovery and how this may play out on a kind of quarter-over-quarter basis.

Well, I think you hit upon a very good point, and that is the lumpiness of our solutions businesses. And in particular, the larger capital spending can be very lumpy, and I think that's always one of the risk factors for us, do they get pushed out? While we do have good visibility one to two quarters out, it becomes a lot less known after that. So, I would say that is one of the risk factors in our guidance for next year.

We do need to have an increase in the larger project business to hit that revenue range that we've identified and to have that be shipped, we need to see that in our first two quarters and certainly, that also aligns with the air pocket second quarter of a number of years ago. So, while we're certainly not believing that's in the cards, we do need to see continued order increases throughout the year and have that be shippable product for the high end of our -- for the range that we've given for our revenue and earnings guidance.

So, that one is a little bit of the risk factor in our guidance, and what we have seen is really a continued level of normal project activity in the emerging markets, particularly Asia-Pacific and Latin America. We haven't seen a significant improvement in large project orders in North America or Western Europe in Q4 but as we said we have seen some encouraging signs that we believe will be reflected in improved orders in the next couple of quarters. And the quotation activity has increased, the front log in our solutions business is increasing.

In the US, we saw fewer large projects being pushed out. In certain segments of our OEM business, they are focused on large project work, and we believe that we will see some of that project work materializing, particularly in the Home and Personal Care product areas and a number of our global accounts have projected capital spending increases in 2011.

Now, for most of our global accounts and most of our customers, 2011 means starting January 1. So once again, back to your connection to the air pocket scenario. That would be when we would see it if they have changed the tone or the reality of their investment plans for next year. And at this point, we feel pretty solid about what they're communicating, but we still have a couple of more months before that will play out. So a long-winded answer, John, so hopefully that covered it.

No, I think it did, Keith. Ultimately, you guys are very conservative, so I have to believe you're seeing at least a degree of movement to have provided this kind of guidance. Can I ask you, the release of plant PAx 2.0 and the Micro 800, I think these are scheduled for early in calendar '11. What sort of incremental opportunity -- is there a way to quantify the potential incremental opportunity from both products? Obviously, one in process and the other in sort of lower end Asia-Pac PLC opportunities. They just seem to be very important product releases. I'm just curious how you're baking in expectations in 2011 and beyond for those product launches.

Sure. And I think the plant PAx 2.0 is just a continuation of what we've been talking about, which is continued ability to address more of the process space. So this is now continuing to push up the percentage of that available market that we can serve. And we talked about that previously, to where we want to be to where we're to the 80% to 90%, and we think that we're now getting very close to that upper limit with the release of 2.0.

So, it really is just a continuation of the evolution of our process strategy, and the market is consistent with the market size of that space that we have given before. And it's one of the reasons we talk about being able to grow faster than the market and take share. So, it's all baked into that strategy that we have for process control and the process industry. With respect to the Micro 800, that, to your point, is very focused on the standalone machine market, and that's a market where historically we have not participated as strongly as we have in the Logix family, which would be in the mid and high end of the market.

So, we believe this is what's required to continue growing at the rates that we talk about in emerging markets, particularly Asian emerging markets. And there we talked about the need to grow at 20% in the emerging Asia markets and we think, once again, that the introduction of Micro 800, which was designed in our Asian design and development area for that market, just continues to put us in a good position to compete and be very competitive against, in particular, the Japanese competition and some of the European competition that has very Asian-centric products. So, I think it's just continuation of what we've been talking about to grow our served market and to be able to develop a very component-centric model for that region.

Last, Keith. What are your thoughts toward capital allocation? You've ramped up the spending, you still have de minimus net debt. You have, in theory, a lot of fire power to do other deals or step up share repurchase or the like. What are your thoughts heading into 2011 on that front?

Well, basically, our allocation is consistent with what we've talked about in the past, where our first priority is internal investment or in organic growth. Then we want to do bolt-on acquisitions and I would like to say that you'll see -- obviously, we had no acquisitions in FY '10. So we believe we will make acquisitions. We've had a much stronger pipeline.

Some of them haven't come through for various reasons, but we do expect acquisitions to play a more important role and utilization of our cash in 2011 than it did in 2010. And hopefully, we will have an above average year and -- but once again, that's going to be the types of acquisitions that we've had previously and those that allow us to do more for our customer and fill technology and/or domain expertise gaps.

And then remaining operating cash flow, our philosophy is that we return that to shareholders, whether it be dividends, share repurchase. But obviously, the other dimension that's still out there at this point is we would also look at an alternative to make a pension contribution, once we see how the rates are going to play out over fiscal '11 and how we're doing with cash versus acquisitions and internal investments. There's a possibility that we would make another voluntary contribution. But those are things that we want to see how it evolves through the year. But that's the way we think about our capital allocation.

Yes. No, that's very helpful. Keith, just lastly, are there any potential deals that were the home run that ICS Triplex has turned out to be?

Well, I guess that's to be determined. We obviously are looking for those technology gap-fillers and to your point, we are very pleased with the acquisition of ICS Triplex, and we continue to look for those types of technology gap-fillers and certainly, that's high on our list.

Thank you.

Your next question --

You're welcome. Thank you, John.

Your next question comes from the line of Mark Koznarek from Cleveland Research.

Hi. Good morning.

Good morning, Mark.

Just to start with, could you clarify what that headwind is on the incentive compensation? I didn't hear the number.

The headwind next year is about $50 million.

Five, zero.

I'm sorry, Mark, and that's a tailwind. Are you asking about '11 or '10?

I'm asking about '11. I'm sorry.

Yes, the incentive compensation is a tailwind in '11 and it's about $50 million, five, zero.

Yes, okay. Sorry. I'm facing the wrong direction with my wind direction here. Then the key question I had, well, two of them, one is with regard to the outlook of core growth, 8% to 12%, is the only difference between that your -- the pace of the project activity coming in or effectively, is there some -- a broad range of macro outcomes that you're considering over the course of the year? Basically, are you just picking kind of a global GDP rate and then the range is just around the project business? Yes or no, or is it more complex than that?

Well, it's more complex. We look at a number of dimensions. Certainly, GDP is only one. Industrial production is very important, and the industrial production factors will impact much more than just our solutions business, as evidenced by what happened in 2009 and 2010. So, industrial production is key. That will trigger MRO and small plant projects.

I think GDP growth and -- certainly impacts the ongoing investments, and then you've got the split between mature and emerging markets and the different dynamics in each one of those. So, that's the areas that we look at and try to get a read on that within countries, within regions and then build up the overall growth rate. But it's a lot more complex than simply, will large projects build out over the year?

So, large projects would be less of a potential impact than your 4% range of the guidance. So, the project activity that's sort of the part that's maybe a little bit more under your control is perhaps half of the guidance range? Would that be a rough cut edit?

I think that's probably a little bit over-scientific. What I would say is that, that range reflects some different potential scenarios around the macro environment, primarily related to industrial production levels that Keith just talked about, and within that there is an impact on both the Product and the Solutions business as a consequence of those differences in the macro scenario.

Yes, okay. So they're kind of related, so it's hard to separate the two.

It's very hard, because a significant amount of our Product business does flow into our channel partners, SIs and SPs who are doing projects. So, it's not just -- the Rockwell Automation Solutions business is not the only piece of our Solutions business. We feed our product portfolio into third party solution providers, and we do that differently around the globe. So, that's another dimension to Ted's comments. So, it is inter-related, and they do impact one another.

Okay, thanks. And then the other question I had on the -- actually Services and Solutions, could you clarify what growth that part of the business saw in the quarter and for the full year, and then what the expectation is for that large piece for next year? Would that be in line or would it be higher or lower?

Yes. For the full year, Solutions was down about 6% year-over-year, with kind of an interesting pattern. We were significantly down in the first half and then above fiscal year '09 in the second half of the year. And that was basically, we started to see orders coming back early in '10, and that bridged us into better performance in the second half. In the quarter, Solutions was up about 11%, 10% to 11%. And for next year, we would expect against that average for the Company of 8% to 12%, we would expect Solutions to be maybe 1 to 2 points better than that. And the product to be maybe 1 point below that.

Okay. So, that helps to explain some of the incremental margin, why that's a bit lower in the outlook.

Yes, we would expect some negative mix impact next year as a consequence of higher growth rates in solutions.

Okay, got it. Thanks very much.

You're welcome.

Katie, I think we've got time for one more question. One more caller.

Sure, and your final question comes from the line of Darren Yip from Barclays Capital.

Good morning, guys.

Good morning, Darren.

In your prepared remarks, you talked about momentum heading into 2011. Can you talk about how the progression of business played out through the quarter in terms of your verticals and then maybe how things looked in October?

Darren, I think our comment about momentum was kind of less about how things played out across the fourth quarter than it was about how our sales and order performance tracked across the four quarters of fiscal '10. And we saw pretty good sequential growth across each of the quarters, so we're on a reasonably upward trend as we enter fiscal year '11.

Okay. Maybe just comment on how the verticals performed in more generally speaking.

It's hard to talk about the verticals within a quarter, but I can characterize vertical performance in the quarter as opposed to start of the quarter versus end of the quarter. We're not that good.

But to tell you how we saw the quarter, we certainly continue to see strength in the auto and tire industry. Water and waste water, continued strength globally. A significant part of that is helped by stimulus with CPG, consumer products. We're starting to see continued -- I should say continued strength in food and beverage, and growing confidence in home and personal care.

Oil and gas is starting to show improvements, especially in Latin America, and we expect that strength to continue through FY '11. Metals is getting a little stronger, driven mainly because of the strength in the automotive sector globally. That's putting more demand for that. And we would see life sciences as pretty stable sequentially, and we're not seeing that as a high growth vertical in fiscal '11. But that's a little bit of a summary of what's going on in the verticals as we went through the quarter and as we start into fiscal year '11.

That's helpful. And then you touched upon the outlook for process in 2011, and then you commented on the Micro 800 launch. But maybe you can provide some guidance to how you think project -- CompactLogix is going to perform next year and then maybe how it's trended in the quarter as well.

Absolutely. We expect CompactLogix to be the faster growing piece of our Logix business, and we believe that for two reasons. One, we continue to create more platforms within that family, which allows us to hit more price points. And it also allows us to grow our -- in our OEM space, and we've talked a lot about how positive our growth was in OEMs, and a lot of that is driven by success of CompactLogix.

So a good way to think of CompactLogix is to link it to our OEM business, and how that's performing will be a good -- would be a good indicator. And as I said, we continue to bring out more platforms within that range. And the addition of integrated safety with motion, that was an introduction this past year in CompactLogix is another one of the scalability features and a unique capability that only Rockwell Automation has. So, we see CompactLogix continuing to grow and to grow above the average that Logix grows.

Got it. And then lastly, I'm not sure if I missed it, but could you tell us how the legacy business performed?

No, you didn't miss it. You're the first one that asked the question. The legacy business, they were up over 20% in Q4, and that's once again continued strength in MRO and the small project business. And as we have said previously, over the business cycle we would expect to return and get into that range of 10% decline across the cycle. But obviously, the recovery and the impact that it had on MRO, that's why we're seeing significant growth in our legacy PLC businesses and legacy Processor business this past year. But that will moderate going forward and will go back negative as we move more to a natural evolution of that portfolio.

Got it. Thank you very much.

You're welcome. Thank you.

At this time, I would like to now turn the call back over to management for closing remarks.

Okay, Katie, thanks. This is Rondi. Well, that concludes today's call. I think before we hang up here, we would just like to encourage and invite everyone to come to our investor conference on December 8 in Florida. If any of you don't have that invitation, just let us know, give us a call and we'll make sure that you get that information. We would really appreciate it if you can join us for that. I think it will be very informative. So, thanks for joining us on today's call, and that's it. We can disconnect.

That concludes today's conference call. At this time, you may disconnect. Have a wonderful day.