洛克威爾自動化 (ROK) 2013 Q3 法說會逐字稿

Welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is been recorded. Later in the call, we will open up the lines for questions.

(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.

Good morning, everyone on the call. Thank you for joining us for Rockwell Automation's third-quarter fiscal 2013 earnings release conference call.

With me today are Keith Nosbusch, our Chairman and CEO, and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that will include highlights on the Company's performance in the third quarter and our outlook for the full year. Then, Ted will provide more detail on both of those, and we will take questions at the end of Ted's remarks. Since this is our third quarter, and we will not be commenting on our outlook beyond fiscal 2013, I'm thinking this call may only last 45 minutes, but we will see how things go, and we are certainly prepared to go the full hour if that makes sense.

Our results were released this morning, and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call is accessible at that website and will be available for replay for the next 30 days.

Before we get started, I need to remind you that our comments will include statements related to the expected future results of our Company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.

So with that, I'll hand the call over to Keith.

Thanks, Rondi.

Good morning, everyone, and thank you for joining us on the call today. I know it has been a busy earnings season for all of you so I appreciate your time today and your interest in Rockwell Automation. I hope you all are able to get and enjoy some R&R and family time during the month of August.

First portion of my remarks will cover the highlights for the quarter so please turn to page 4 in the slide deck. I'm pleased with our results this quarter both from a sales and earnings perspective. Sales grew 4% organically in the quarter. Even more importantly, we saw sequential growth in all regions and across both segments which was consistent with our expectations of better sales performance in the second half. I will try to head off a few of your questions by giving you more color by region and by verticals.

Sales growth in the US and Canada was solid with oil and gas the best performing vertical in both regions. EMEA grew 3% despite the continued recession in Western Europe. Oil and gas was strong, and mining remained week.

Sales in Asia-Pacific were down 8% year-over-year, but up 20% sequentially. China showed the largest improvement from last quarter, and sales were up 5% year-over-year. However, we are still seeing project delays with a number of projects now pushed into fiscal '14. So, whether you link it to liquidity, the decline in exports, overcapacity, or uncertainty, investment levels remain relatively weak in China. But, as I said last quarter, we remain very bullish on the long-term prospects for China.

The evolution to a more consumption-based economy will drive investment in consumer packaged goods manufacturing which is a sweet spot for us. All of the other countries in Asia-Pacific were down in the quarter with the exception of Japan. Latin America continues to be the standout region with 23% growth this quarter. Mexico and Brazil were both very strong with oil and gas, auto, and consumer being the best performing verticals.

Before I end my comments on the top line, let me share a couple of other data points that I know you're always interested in. Process sales increased 2 points this quarter. We continue to get good traction with PlantPAx, but we are being negatively impacted by project delays primarily in Asia. Excluding Asia, process was up 9% in Q3. Logix was up 3% in the quarter, a bit better than the Architecture and Software segment as a whole. So, on 4% sales growth in the quarter, we realized strong margin conversion and adjusted EPS growth of 12%.

Segment operating margin expanded both sequentially and year-over-year in Q3. Frankly, I would have liked to have spent more in the quarter. That will change in Q4, and we will increase spending in engineering and selling resources to support our best growth opportunities and build for the future. On a year-to-date basis, margin expanded 30 basis points to 19%. A good result on only 1% organic growth year-to-date.

So, onto the outlook. Across the regions, we expect market conditions to remain stable through the end of the fiscal year. Based on this outlook and with three quarters behind us, we now expect sales to be about $6.3 billion for the fiscal year which represents about 1% organic growth. Even with sales moving to the lower end of our previous range, we are raising the midpoint of adjusted EPS guidance by $0.05 and narrowing the range to $5.50 to $5.70. Ted will go into more detail on guidance.

I have a few closing remarks before handing off to Ted to go through the rest of the slides. Automation Fair is in Houston this year, and we will be holding our investor conference on Thursday, November 14. This is a great opportunity to learn about our capability as well as those of our partners. Being in Houston, there will obviously be an emphasis on oil and gas and process. So, please mark your calendars, and we hope to see a lot of you there.

I want to thank our employees and partners for great execution and their unwavering commitment to providing value to our customers. We've performed well this year in spite of the low growth environment. We will continue to improve our market position, invest for growth, and deliver superior returns to our shareholders.

Here's Ted to provide more details on the financial results for the quarter and our revised outlook for the remainder of 2013. Ted?

Thanks, Keith. Good morning, everybody.

My comments will continue to reference the slides that Rondi and Keith mentioned, and I will start on page 5, third-quarter results summary. Revenue in the quarter was $1.624 billion. That's up 4% compared to the third quarter of last year. The year-over-year impact of currency and acquisitions was negligible so sales were up 4% organically as well. Segment operating earnings in the current period were $318 million, up 9%, compared to Q3 last year. General Corporate net was $20.9 million in Q3, and that compares to $18.3 million in the same period last year.

The adjusted effective tax rate in the third quarter was 22%. That compares to an adjusted effective rate in Q3 last year of 22.6%. Through nine months, the adjusted effective rate was 24%. The adjusted effective rate was lower in the third quarter due to a discrete tax event related to the settlement of prior year's tax audits. Adjusted earnings per share was $1.54. As Keith noted, that's up 12% compared to $1.37 in the same quarter last year.

Average diluted shares outstanding in the quarter were 140.4 million. We repurchased approximately 1.2 million shares in the third quarter at a cost of about $104 million. At the end of Q3, there was approximately $619 million remaining under our $1 billion share repurchase authorization. Through the first nine months of the fiscal year, we've repurchased approximately 3.8 million shares for about $318 million. So, we continued to run slightly ahead of the rate required to hit the $400 million full-year repurchase expectation that we talked about on the previous earnings calls this year.

Turning to page 6, this is a graphical version of total Company results for the third quarter. Looking at the left side of the chart, you will see the 4% year-over-year sales increase. Sales increased sequentially by 7%. On the right side of the chart, total segment earnings are displayed. You can see the 9% year-over-year increase in segment operating earnings. Sequentially, segment operating earnings increased by 11%. Total segment operating margin in Q3 was 19.6%, a strong margin result and healthy conversion on a year-over-year basis. Operating margin increased 0.9 points compared to third quarter last year and sequentially.

In the year-over-year and sequential comparison, the margin increase is primarily due to volume leverage, but the year-over-year comparison also benefited from continued productivity performance. As we discussed last quarter, the productivity includes the savings from the restructuring actions taken in Q4 last year. We haven't fully redeployed those savings. Also, a strong contribution from cost reduction and process improvement initiatives again this quarter and continued tight controls on discretionary spending. As Keith mentioned, we intended to spend more in the third quarter, and we were unable to add headcount in some very targeted areas as fast as we had planned. While not on the chart, our trailing-four-quarter return on invested capital was 31% at the end of the third quarter.

On Page 7, this is a summary of the Q3 results of the Architecture and Software segment. Looking at the left side of this chart, sales increased year-over-year by 1% to $671 million. That's also a 1% organic increase. Sales were up 5% sequentially. Operating margin for the quarter was 28.1%. That's up 0.2 of a point compared to Q3 last year and up 1.5 points sequentially.

On the next page, page 8, this covers our Control Products and Solutions segment. Sales were $953 million, up 6% compared to Q3 last year. Again, also a 6% organic increase. Sales of the product businesses and the Solutions and services businesses were both up about 6% year-over-year. Sales in the segment increased 8% sequentially with an 11% sequential increase in the Solutions and services businesses. Book-to-bill for the Solutions and services businesses was 1.0. In Q3, we experienced a larger sequential increase in Solutions and services than was the case the past two years. Consequently, we don't expect to see as large a sequential increase in this Q4 as we experienced last year.

On the right side of this chart, operating earnings increased by 21% year-over-year on the 6% sales increase. Operating margin increased by 1.7 points year-over-year to 13.6% and increased by 0.6 points sequentially. The year-over-year margin improvement was primarily due to volume leverage and productivity.

Switching to the next page, this is a geographic breakdown of our sales in the quarter. I'm going to focus my comments on the far right column, which displays year-over-year organic growth, and I will also provide some region color on sequential growth. Basically, we experienced sequential growth in all regions and year over year growth in all regions except Asia-Pacific. The US was up 4% in Q3 both year-over-year and sequentially. Among the regions, the US has been a relatively stable market environment this year, and through nine months, the year-over-year organic growth was also 4%.

Canada was up 10% year-over-year in Q3 and up 14% sequentially. Year-to-date, Canada is up 3%. Latin America continued as the highest growth region, up 23% in Q3, with particularly strong growth in Brazil and Mexico. Latin America was up 18% sequentially, and year-to-date, Latin America is up 12%. EMEA was up 3% year-over-year in the quarter and up 2% sequentially. Through nine months, EMEA is down 1%.

Asia-Pacific was down 8% year-over-year in Q3 with growth in China and Japan more than offset by declines in the balance of the region. Asia-Pacific was up 20% sequentially, and year-to-date, Asia-Pacific is down 12%. China was up 5% year-over-year, but despite the growth in Q3, China is down 8% through nine months.

I will turn now to page 10, free cash flow. Free cash flow for the quarter was $264 million, another strong quarter. Year-to-date conversion on adjusted income is approximately 104%. And, we expect conversion now to be somewhat above 100% for the full year.

And, that takes us to the final slide, page 11, which addresses our current outlook for fiscal '13. As Keith mentioned, we're updating the guidance. Given third-quarter sales and ending backlog and with only one quarter to go in the fiscal year, we've dropped the high end of the sales guidance and narrowed the range. We now expect sales for the full year to be approximately $6.3 billion. You can think of that as plus or minus perhaps $50 million. That represents a range of organic growth for the full year of between zero and 2%, and previous guidance was zero to 3%. Compared to previous guidance, we lost about $30 million of top line for the full year due to currency changes, particularly a strengthening of the US dollar compared to currencies other than the euro.

This guidance continues to reflect higher sales in the second half of our fiscal year, primarily driven by improvement in our Solutions and services businesses. We expect segment margin for the full year to be about 19%. That's up slightly compared to 18.9% in our previous guidance. In part, that reflects the strong margin performance in Q3. The margin guidance also anticipates somewhat higher spending in Q4.

We expect adjusted EPS in the range of $5.50 to $5.70. So, once again, we've narrowed the range but also increased the midpoint by $0.05. We now expect the adjusted effective tax rate to be closer to 24% compared to 25% in our previous guidance. The lower tax rate adds about $0.03 to $0.04 to the full-year EPS guidance. We still expect to spend about $400 million on share repurchases this year. And finally, we continue to expect general Corporate net expense to be about $83 million for the full year.

And with that, I will turn it over to Rondi, and we will begin Q&A.

Great. Thanks, Ted. Before we start the Q&A, I'd ask that you limit yourself to one question and a follow-up, and then we will try to get to as many of you as possible. So, Sonya, let's take our first question.

(Operator Instructions)

The first question comes from the line of Richard Eastman, Robert W Baird. Please proceed.

Yes. Keith, could you just expand a little bit on China? We did finally see some growth in that region. You talked to project delays. I presume those delays are on the process side as opposed to more of the discrete markets. Could you just kind of characterize maybe the tone of business in process and discrete, and how that looks as we head through the fourth and into fiscal '14?

Yes. Be happy to, Rick. I think your comment is correct, and that is the majority of the delays are in project businesses. And, because process -- you sell process as projects, it is overweight in the process side, and that's one of the reasons I called out the rest of the process business and the growth that we've seen which was at 9%. China is a meaningful part, and Asia in general, is a meaningful part of our process business in the region. So, that does hurt us. On the discrete side, we did see a little bit of growth in the OEM space, particularly indigenous tire OEMs as the Chinese tire industry continues to expand to meet the -- I will just call it, the local demand. So, that was probably the best positive performer on the discrete side.

Okay. And, would you say discrete in China then, I guess it must have grown north of 5% at least in the quarter?

Yes. To get it to the 5% and to offset --.

The process weakness --.

The process/Solutions side. Discrete would have grown more, and it would have been driven by OEM and to some degree, automotive.

Very good. Thank you.

The next question comes from Nigel Coe, Morgan Stanley. Please proceed.

Thanks, good morning. Ted, I just wanted to dig into -- you called out the Solutions book-to-bill of 1.0. And, referring to the Q-over-Q uptick in Solutions in 3Q, you referenced that 4Q might not see the same seasonal uptick. But, looking back at last year, we had a 1.0 book-to-bill in 3Q '12, yet we still saw a decent uptick in 4Q '12. I'm just wondering whether the project delays we're seeing -- you referenced in China is impacting that deferral? Or, rather a smaller uptick in the [Q]? I guess what I'm saying is -- same book-to-bill as in 3Q '13 as 3Q '12. Why wouldn't we see the same uptick Q-over-Q?

Yes, I think if you looked at the last two years, the level of sequential increase we saw Q3 to Q4 in Solutions and services was in the range of high teens to 20%. And, if you went back to the years before that, those two years were kind of an unusually large sequential increase. So, when we look at the backlog and the timing of the back log that we've got at the end of Q3, we're just not expecting as large a sequential increase this Q4. Something that looks more normal compared to the years before the last two.

Okay. That's clear. And then, the cash balance over $1 billion, and I know a large part of that's overseas. The prospect of corporate tax reform is becoming lower by the day. So, I'm just wondering how you are thinking about that overseas cash balance? And, any strategies that you have to maybe repatriate those funds?

Every year, we look for ways to repatriate funds that we can do in a cost-effective manner and there is some amount that we are able to do every year. But, I would say about 90% of our current cash balance is not easily available to us in the US, and we are hoping that through corporate tax reform at some point in the future that we will get some relief from that.

So, is it just stay steady and hope for the best?

Well, look, we always have that money available for acquisitions outside the United States. We will continue to use it for that purpose.

Okay. Thanks a lot, Ted.

Thank you. The next question comes from Julian Mitchell, Credit Suisse. Please proceed.

Hi, thank you. Just had a question really on the automotive end market in particular. You had mentioned China remains very healthy there, but I was more interested in the trends you are seeing on CapEx in North America and Europe?

Well, the easy one is Europe. There is not much CapEx in Europe. I think you're starting to see the announcements of closings which is pretty much going to replay what happened in the US three-plus years ago, and as they go through that their need for capital in EMEA will be weak. However, many of the Europeans are investing outside of the region, and we would expect that part to continue.

In the US, we continue to see a high level of CapEx. Now, we haven't seen that growing, but it has stayed at a high level, and certainly Ford had a very strong performance including some of the actions in Europe. General Motors, if you take out Europe, performed reasonably well and announced new investments in Mexico. Likewise, Chrysler continues to be the star performer in the Fiat group. So, I would say the investments in the Americas continues to be strong, and we see that maybe not at quite as high a level, but certainly at a good level into the future.

Thanks. And then, within the CP&S segment, you've had very good profit margins the last six months. Is that mostly productivity? Or, is there something maybe happening in terms of the mix of the projects that you are billing? Maybe they're higher margin projects, or something like that?

Certainly, there's a couple of things there. We continue to work really hard at having successful projects. And, as all of you know, the project business -- they don't always turn out that way. But, I think the leadership team has been doing a good job of managing those projects and driving productivity, and I would say that's where the majority of the benefits have come. However, to your point there is some mix within the Solutions area, and that also probably has been outgrowing the pure engineering as evidenced by the lower growth in our process business that we talked about which is all engineered Solutions. Our motor control center business performs very well, and some of our -- not some of our -- drives business is also performing well. So, I think it is a little bit of mix, but more importantly, continued good execution and driving productivity

Julian, I think the modest growth that we have seen this year has pretty much been all on the CP&S side of our business, and so we're benefiting from a little bit of volume leverage there as well.

Great. Thank you.

Thank you. The next question comes from Steve Tusa, JPMorgan. Please proceed.

Hey, good morning.

Good morning.

I guess in the fourth quarter, your margin is down quarter-over-quarter. I guess you mentioned some of the incremental spending that you're doing. Is that -- does that establish a run rate of spending? Is that stuff that you kind of pushed forward? You're just waiting to see how the market is played out, and so you are kind of establishing a new run rate there? Or, are these one-time-type of investments?

No, our goal is to establish a new run rate. That was what we talked about when we took the restructuring in our fourth quarter last year that we wanted to create the opportunity to have some targeted investment. We certainly were careful as we went through the first half of year, and as we mentioned earlier with what we believe today anyways is a stable environment. We are trying to increase some very targeted spending in development engineering and selling resources to continue to penetrate the best opportunities that we have on a global basis. So, it would be an increase in the run rate as we exit Q4.

And, I guess from that perspective, I guess that says you're a little bit more confident -- maybe a tad bit more confident about the future. At least things aren't rolling over. How did trends kind of play out April, May, and June for you?

We are a tad bit more confident, yes. But, the third quarter is generally one for us that is really the most consistent quarter start to finish, and I would say that is what we saw happen again this quarter. Obviously, some variation, but pretty steady throughout as we go into the fourth quarter. All of you know that it is probably -- not probably -- it is our most back-end loaded quarter that we have. We always talk about a strong September, and July tends to be reasonably strong. And, so far, we believe July is going to match what our expectations are for the quarter and in our guidance. And then, August is the tough one because Europe, for sure. We also see now US vacations for a couple of weeks in there before school starts has taken on a pretty strong presence so that's why September becomes so important. Once again, it is a back-end loaded quarter, and that is certainly what we are expecting this quarter as well.

I think one of the auto guys said that they are not going to do as many shutdowns -- maybe I misread that? Are you seeing that as well? Maybe these guys producing a little more here in the normal slowdown period, or no?

I don't know that personally, but given the strong sales, that might have something to do with it.

So, that would contribute. If that is the case, that what kind of offset some of the concerns around -- go against what you're talking about as being more muted seasonality. If that is the case, right, that would help you

It might hurt a little bit because during those shutdowns is when they do a lot of the -- I will say maintenance on the existing lines, and it is when they are running out the new lines. So, I would say it probably doesn't mean a lot to us. A very slight negative just from an MRO standpoint.

Sorry, one last quick one. I know pension, you on the operating side, it is less of a dynamic. But, with rates moving the way they are, does that change -- does that free up some cash for you from a funding perspective for next year?

Well, we didn't make any -- we had no mandatory contributions this year and weren't expecting to face any mandatory contributions next year. So, I don't think it frees up any cash.

Got you. Okay. Thanks a lot.

Steve, just one last point. Your original question about margins?

Yes.

Basically, our expectation for fourth-quarter margin is to be slightly below third-quarter margin. So, not a significant difference.

Right. But, down sequentially. Okay, thanks.

You're welcome.

Thank you. The next question comes from Scott Davis, Barclays. Please proceed.

Hi. Good morning, everybody.

Good morning, Scott.

Keith, you made a comment in your prepared remarks that you said that you'd like to spend more. Can you just give us a sense on spend more and what -- is it sales? Is it distribution? Is it R&D, products? Is it a little bit of everything? Just a sense of not just that question, but also on a geographic basis. Are there areas where you feel like you still need to invest?

Well, certainly what I'm referring to is what I would call targeted investments, and we would target two very key areas for future growth, and this isn't going to be growth in Q4 or Q1 of next year. This is longer-term investments because the biggest part of it will go into product development and whether that -- and the majority of that into our A&S segment related to basically architecture, continued developments, Software, Firmware, and those types of investments for new products, new capabilities, particularly around the information space and the Controller/IO areas including visualization.

Then, the second area that we will target will be selling resources so that we can take advantage of some of the growth areas that we see playing out stronger. That will be globally, but obviously, less of it than normal in Asia just given the performance. But, we think the US, a little bit in Latin America. With the great growth they've been having, we need to make sure that we are continuing to reinforce that. And then, we do have good growth opportunities in select areas in Europe as well. Including the Middle East, and of course, what we are doing with OEMs. So, very targeted activities where we think we have the best chance of driving growth 12 to 24 months out.

Okay. That's helpful. And, just as a follow-up. When you think about the build out of the gas chain over the next -- call it, five years in the States, do you have Solutions capabilities that directly address that? I know you can sell some drives into hermetic motors, things like that into that market. But, do you have specific solution capabilities that would be of demand to those customers?

We certainly believe in the fine chemicals area we have our complete portfolio that is available in some of the first -- or, I should say more the upstream areas where you more into the perhaps bulk chemicals. There we have a very strong intelligent motor control offering as well as a process safety, and depending on the applications, the sill ratings of our Logix controllers can also be applied in the DCS end of those systems. So, we continue to have meaningful Solutions capabilities for many of the segments that will start growing if those projects are allowed to proceed, and I think that's a big if today.

Yes, understood.

Obviously, the ongoing efforts with all the pipelines that need to take that gas to the final destinations, we have a portfolio, and that's one of our strengths in the oil and gas area. So, we expect that to continue to be strong as well.

Just to clarify, Keith, you have -- in your opinion at least, you have a safety product that can compete directly with some of the guys that are known for that product? In particular, Invensys, [Tritonics] are known for that product in things like refineries?

Absolutely. We believe we are known for that product with ICSP. We have been a supplier to that space. I should say they have, and we have been since we acquired that Company. We have every bit the capability of Tritonics and Invensys except we do not do nuclear, and they do nuclear. So I want to be clear there. That's an area where we don't participate, and I would say they have probably almost -- they have a very strong position in that space. But, other than that, we can compete across the board with Invensys.

Okay. Great. Thank you.

Thank you. You're welcome.

Thank you. The next question comes from John Inch, Deutsche Bank. Please proceed.

Thank you. Good morning, everyone.

Good morning, John.

Good morning. So, just based on the trend, do expect the solutions book-to-bill to trend below one in this quarter, Keith or Ted?

John, I would say it is very typical for us. Because shipments tend to be higher in Q4, it is very typical for us to have a Solutions book-to-bill below one in Q4. Whether that will be the case or not this year, we will have to wait and see.

Okay, so that would not been usual. Is there some context you could put around the fact that we started the year so strong in Solutions book-to-bill, and then it sort of has -- whether it's normal pattern or not, it does seem to continue to trend lower. Is that because there were specific projects/region that was driving this that's being shipped, and now we are in kind of a flattish environment, and you just don't see anything else picking up? Is it a timing issue? Is there any kind of color that, Keith or Ted, you could comment on with respect to the pattern that we've seen over the last few quarters versus say historical? And, what you might have otherwise expected?

I think yes, but you've got go back a little bit longer than the last couple of quarters. If you went back to the second half -- some of this is just the lumpiness of project business. And, if you went back to the second half of last year, Q3 and Q4 were relatively weak quarters for us in terms of Solutions orders. That's why we started the year with a very weak backlog even though we had good shipments in the second half of last year. And, basically, we replenished that backlog across the first quarter so we started to catch up from an orders point of view, and our Solutions sales are going to be higher now in the second half as a consequence of that. I'd say order rates now are kind of at a more normalized level.

But, you're not being more, say, project-selective, or --? Nothing else you would call out because I wouldn't think Solutions, given the nature, would have one or two big projects driving it. That doesn't make a lot of sense.

No, it is not one or two big projects.

Certainly, in our business, it is not the mega-projects that we've booked. Although in any one quarter we could ship meaningful-size project, and that could give us a plus -- like Ted said, that's the lumpiness of this business. But, for us to have projects over $10 million, we don't have a lot of those unlike some of the other companies that report specific project wins. We think we have a much broader set of applications that we can support, and we can do that geographically in the different industries. We tend to see one or two of those large projects in any quarter create that lumpiness, and then the wild card is always the timing. When do they go out, and that can be delayed a couple weeks or a couple months although we haven't seen any uptick other than in Asia of delays in the backlog shipments. So, that hasn't been the problem either.

John, to your question about being more selective. We aren't being more selective, we are excited about the opportunity to grow our Solutions business. It is critical to our participation in process. I think what you're seeing more than anything else is just a higher level of variability quarter to quarter in the orders and Solutions than we would see on our product business.

That makes sense. Keith, how did mining do in the quarter? Latin America is continuing to be very robust. I guess some of the window into mining -- Australia and New Zealand -- just remind us again how big is mining? And, obviously what is weak is US coal mining, right? That could be still very, very weak next year. How significant is that? And, what's happening in your mining vertical?

Sure. Mining is about 8% of our sales today. With respect to coal mining, that's where we have the least participation so we do not see the impact of coal as a big impact to our business. I would take that out of the equation of the dynamics in the market. For us anyways. It is meaningful for others, but for us, it is the smallest mining piece that we have.

I would say, in general mining, is slowing. We've had some projects that we've shipped this quarter. It was part of the strong growth in Latin America was because of mining projects shipping. We are seeing a slowdown, and you mentioned, in particular, where it is occurring, Australia. Australia and Brazil, and the reason I call out those two is because they are the majors suppliers to China. With the China slowdown, that has impacted the raw materials and the resources coming from the more heavily mining-centric economies. We also see continued slowness in mining in South Africa, and that has to do a little bit with some of the labor unrest there. But, probably a little stronger because of the pricing of the precious metals.

Mexico, the mining continues to be strong. Canada, I think we are having strong sales there, but we do see that slowing as we go forward. A pretty mixed bag at this point in time with respect to mining, but we do see where the mines are going to put more emphasis on productivity as we go into the future. We think that will be real positive for us in the future as well.

If I could just ask one more. I want to go back to the question about cash on balance sheet. Ted, you give the same answer every quarter so I appreciate that your Company has a balanced perspective toward capital allocation. That said, you are sitting on $1.4 billion of cash and short-term investments. And, repatriation acts aside, assuming there isn't anything of that ilk, I just don't see why Rockwell needs to be run with that much cash and short-term investments on balance sheet. Is there not something you can do -- one-time special dividend, something like that? What are you thinking of at this point? It would be great if you could repurchase more shares, but if you don't have the cash available -- what? You can't just let it sit and grow. So, what are you thinking?

Yes. I think that is fair. The money is available to us to do acquisitions outside the United States. As you know, we haven't been spending probably more than about $100 million a year on acquisitions so unless we did something bigger that won't change that in a meaningful way. I think if -- with the passage of time, it becomes clear that we aren't going to get any kind of relief from corporate tax reform then we may have to consider some alternatives. But, I do not think that now is the appropriate time to consider that.

Got it. Thank you.

You're welcome, John.

Thank you. The next question comes from Josh Pokrzywinski, MKM Partners. Please proceed.

Hi, good morning.

Good morning, Josh.

Just a quick follow-up to a comment you made in your prepared remarks about some of the big drivers in China whether it is uncertainty, overcapacity, or lack of liquidity. Keith, if you could just kind of parse out what you're hearing most often? And, which of those is the biggest issue? In your opinion, or what your customers are telling you?

I think it depends on the industry that you are talking about, and if you look at infrastructure -- in particular, steel. It's -- I would say predominantly overcapacity, and therefore, the government is not funding additional steel infrastructure projects. If you talk about the liquidity side of the equation, we've been talking about that for probably maybe almost going on a year now, but what we have seen previously is where that was hurting more the small and mid-sized companies. I think what happened in the last couple of months with liquidity is the government has made a focused effort to deal with the shadow banks. And, more importantly, the inter-bank loan rates went up and that started to impact some of the SOE, and the local governments had to find other ways to fund their projects as opposed to being able to get it through some of the typical banks and the cost was higher. And, that's where we saw some of these added project delays. So, I would say that was the liquidity and capital structure of banks and inter-bank lending rates.

And, other than that, I think some of that OEM market has been hurt by the decline in exports as opposed to liquidity. In particular, exports to Europe have dropped dramatically, and so we see that in our OEM sector of the business. I think that's probably a bunch of color there. So, hopefully, that parsed it a little bit for you.

That's helpful. Then, just thinking high-level on the margins, you are at cycle highs now. Where from a mix perspective can things get better? And, how should we think about any of the headwinds that you are facing today, and how those come back in terms of the mix? Obviously, Europe is still getting back on its feet. We just talked about pockets of China that could be better or worse going forward. How should we think about either the cost to serve to drive growth as those recover? Or, just product mix from here?

I think, Josh, that the big factors in our margin performance are always going to be volume, and then the mix between our products and Solutions businesses. Those are always going to be the two biggest factors, and maybe to a lesser extent, given the volume level of the extent to which we are ramping our spending. So, I think as it relates to spending, we have been in a position for about the last year, and I think we will continue in this manner where we're going to try and control the spending at levels that we think are appropriate to our current volume levels.

Given volume -- talking about volume, I think right now we are expecting flat conditions for the fourth quarter -- flat market conditions basically from Q3 to Q4. At this point, we are ready to talk about next year. In terms of Solutions versus product mix, we have always said that we think our Solutions business over the long term is going to grow faster than the product business because we're going to have faster than average growth in process and faster than average growth in emerging markets. Both of those tend to drive the higher Solutions mix.

That's fair. Do you want to see the spending come back before you start vetting out some of your own investment? Or, are you willing to take a leap of faith as we get a little bit of visibility on '14?

As Keith discussed, as we said in our comments, we are going to deliberately increase spending somewhat as we go from Q3 into Q4. And, that's based on -- we intended to do that in Q3 and weren't able to bring it on as quickly as we had planned. I think it was Steve who asked about level of confidence in the recovery. I'm not sure we have a lot higher confidence of growth, but we are probably a little bit more confident that we are not going to see a decline. And so, we are willing to up the spending level a bit.

Understood. Thanks.

Thank you. The next question comes from Steven Winoker, Sanford C. Bernstein. Please proceed.

Thanks. Good morning.

Good morning, Steve.

What was product sales year-on-year within CP&S increasing?

It was up 6%, the same as the second.

Okay. So, pretty even including Solutions and services than.

Right.

Second, R&D you've been running at about 4.1%, 4.2% annually. Can you give us a sense -- given all the discussion this call on the better incrementals, margins, and your expectations going forward for spending more. Where specifically is R&D? Where have you've been running it roughly?

We've been running it roughly at that level.

And, the level of spending we are talking about increasing in Q4 won't materially change that.

Okay. Great. And then, maybe just on Europe, you said 2% up sequentially overall for EMEA though. Maybe just a little more flavor on are you seeing Europe itself getting any better? Or, is this all Middle East, Africa?

I would say the strength has been more Middle East and Africa. I think it is also fair to say that the northern countries continue to do a little bit better than the southern countries. In this quarter, Eastern Europe didn't look a lot different than Western Europe

I think what we are starting to seeing Europe is -- and I'm now talking not Middle East and Africa or Russia -- is a little more choppiness where there is not a consistent environment in any country on an ongoing basis. So, in any month, as Ted said, the northern could be strong. We have seen a couple of success stories in southern as well, but they are infrequent. So, it is just a little bit more choppy and uneven in Western Europe at the moment. To Ted's point, that's starting to now impact a little bit of Eastern Europe as that's where a lot of the linkages have been developed over the years.

Okay. Keith, could I just sneak in one strategic one, which is in light of all the share gains you've had over the years in process and Logix, and potentially some of that on the back of your competitors' underinvestments, such as Invensys. And, given the announcements that have happened or the potential combinations with Invensys, presumably that underinvestment would make way to [catch-up] investment over time. How do you see that impacting your approach, or the marketplace?

We don't think it will impact our position. We continue to add capability to our platform. We have been able to be successful in replacing Legacy installed bases. We don't see that changing because those aren't going away, and added investment in this business certainly does not create a change in the market in the short or intermediate term. It takes a number of years to get an output from that investment, and then another period of time to be able to generate the revenue from it. So, we just are going to keep focused on expanding our footprint and enhancing our sales capabilities in the process base. We are very confident in our ability to continue to grow independent of what happens in the external environment.

All right, very helpful. Thank you.

You're welcome, Steve.

Sonya, we're going to take one last caller.

Thank you. The next question comes from Jeff Sprague, Vertical Research Partners. Please proceed.

Thank you. Good morning, everyone.

Good morning, Jeff.

Sorry you went over your 45 minutes. (laughter) I will just make it quick.

It is okay. Good questions.

We've had good questions so it has been just fine.

So, you do have this offshore cash. Deals would be the most logical way to deploy it to Ted's point. I think you've made a pretty clear the big deal that's out there to be done is not of interest. Certainly sounds that way. But, what does the acquisition horizon actually look like? Do you see bolt-ons that are clearly on your horizon? And, maybe in particular, maybe circling back -- I think it was to Scott's question where you called out fine chemicals. Honing in on that would also suggest that there's other vertical areas where Software capabilities or whatever would really enhance what you are doing. So, just any color there on what we could or maybe should expect on the M&A front say the next 12 or 24 months, not tomorrow necessarily.

Yes. Certainly just to reinforce what Ted said, and that is we are trying to focus the majority of our M&A work outside the US simply because we think that's where the best long-term growth opportunities are. Certainly, that would be the preferred path forward. I would say we continue to expand the search that we have going on, and we believe that we will be able to generate additional acquisitions. And, to your point, bolt-on acquisitions as some of these companies mature, particularly in the emerging markets where we are watching very carefully, the smaller start-up companies that have competence and have capabilities as they continue to mature and develop. So that's one of the reasons we want to be careful with the utilization of that cash so that we have the opportunity to make those acquisitions as we go forward.

The areas that we are looking at really haven't changed. It is where do we have technology gaps. Where can we get domain expertise, and I would say in the recent past, domain expertise, particularly outside the US, has been a very fertile area for us. We would expect that to continue. Services, as we continue to expand our portfolio and capabilities there, would be another important area for us to look at. And then, the point that you made with respect to Software. We believe Software is a continuous area to look at, and we have made a number of Software acquisitions over the last decade. We certainly believe that that is an area that we can continue to add pieces to the portfolio that we have in the future.

Great. Thank you very much. You're welcome, Jeff. Thank you.

Thank you. I would now like to hand the call over to Rondi for closing remarks.

Okay, not too many closing remarks other than just thanks to all of you for joining us today. I will be available on the phone for any follow-up calls that you might have. Thanks a lot.

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