Ladies and gentlemen, thank you for standing by, and welcome to the Parker-Hannifin Corporation's Fiscal 2021 Second Quarter Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Todd Leombruno, Chief Financial Officer. Thank you. Please go ahead, sir.
Thank you, Gigi, and welcome everyone to our earnings release webcast. This is Todd Leombruno, Chief Financial Officer, and joining me today are our Chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer, Lee Banks. Today's commentary and the slide presentation will be accessible as an on-demand webcast on our investor information website, located at phstock.com, and will remain available for one year. If you move to slide two, you'll see the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com. If you move to slide three, you'll see our agenda. We'll begin with Chairman and Chief Executive Officer, Tom Williams, providing some strategic comments and highlights from our second quarter.
Following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increase to guidance for the remainder of our fiscal year FY 2021. Tom will then provide a few summary comments, and we'll open the call to questions from Tom, Lee, or myself. With that, Tom, I'll hand it off to you.
Thank you, Todd. Good morning, everybody. Thanks for your participation today. Before I move to slide four, I wanted to make a few opening comments. Calendar 2020 was an extremely difficult year, to say the least, for all of us, both professionally and personally, and I hope all of you are staying safe. Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis. We've rallied around our purpose in the Win Strategy, and we've showed that Parker is an exceptional performer, even in the most difficult of environments. I'd like to take this opportunity at the beginning here to thank our global team for this great performance. You're going to see evidence of that over the next couple of slides.
If you go to slide four, one of our key competitive advantages is our breadth of motion control technologies. We're now up to two-thirds of our revenue. You heard me talk about this historically. It was 60%, but now up to two-thirds of our revenue comes from customers who buy from four or more of these technologies. It's these interconnected technologies that enable us to create even more value for our customers and create that distinct competitive advantage versus our competitors. If you move to slide five, we just had outstanding performance in the quarter. I'm going to run you through some of the highlights. Top quartile safety performance, we had a 23% reduction in recordable incidents. This now makes 75% reduction over the last five years, which has been phenomenal. Sales decline was 2.5% year-over-year.
You can see it was a little over 6% from an organic standpoint. This was significantly better than our guidance and about a +50% improvement from where we were on Q1. Q2 was a record net income at $447 million. EBITDA margin was a little over 23% as reported, or 20.8% adjusted. You can see the significant improvement versus prior at 230 basis points. Year to date cash flow from operations was a record at 20.4% of sales. The table at the bottom there has got segment operating margin both as reported and adjusted basis. I'd call your attention to the adjusted row. 20.4% segment operating margin adjusted, and again, a giant increase versus prior +250 basis points. There's a lot of numbers on this page. We have a lot of companies to track.
The easy way to remember this is just the quarter we put up three 20s, and we happen to highlight them in gold, greater than 20% EBITDA margin, CFOA margin, and segment operating margin. We're pretty proud of that, and those are all great results during a pandemic. Just fantastic job by the whole team. If you go to slide six, we're going to talk about cash flow. Big cash flow quarter. Paid down $767 million of debt in a quarter. If you look at the last 14 months, it's $2.8 billion of debt. This is a little over half of the acquisition debt that we took on with LORD and Exotic, so just great progress there. You see the ratios in the middle of the page there.
Of significance, if we go back a year ago, we were 4.0 and now we're at 2.7 on a gross debt to EBITDA basis. We've now reinstated, effective in this quarter, Q3, our 10b5-1 share repurchase program. I'll move to the next slide, which is our transformation of the company. Hopefully, just the last two slides are indicative of how the company has transformed. I'd like to give a little more color and context as to what we're doing. If you move to slide eight, this is our strategy summary on a page, and it's flanked on the left side with why we win, which you've heard me talk about this in the past. This is a list of our competitive advantages, and I've highlighted those.
I'm not going to talk about them necessarily today, but they're historical success factors that will continue on into the future. I want to focus most of the time for my next couple slides on where we're going, and I've got a slide on each one of these bullets. The output of really this historical success factors and where we're going is that we want to be a top quartile company, and we want to stand out in a crowd, and we think we're doing that. If you go to slide nine, the Win Strategy, and this is 3.0. This is our business system, and pound for pound, this has been the most impactful change we've made to date to the Win Strategy, and it's going to be Win 3.0 and our purpose statement. They're going to be the powerhouse behind our future performance. Go to 10.
You can see in our purpose statement, "Enabling engineering breakthroughs that lead to a better tomorrow." This is a statement that everybody has really rallied around and found very inspirational within the company. It has enabled everyone to connect their efforts to this higher calling, this higher purpose in life, and really, it helps answer the question: how can we help through our customers create a better tomorrow? I think given what's going on with the coronavirus and the vaccine, slide 11 is probably a great highlight of our purpose in action and just how essential we are to the vaccine value chain. The way to read this slide, if you go left to right and go in a clockwise fashion, we'll start in the upper left-hand corner. We're in a development and production phase of these vaccines: mixing, purification, filtration, and dispensing.
You got to get the product moved around, so we are in sterile transport containers, specially designed. All of our motion control technologies are in both air and ground transportation to move the product around the world. You need to be able to store it locally, and that requires low-temperature refrigeration, so our refrigeration technologies are at play there. When you administer to the patient, again, you need on-premise refrigeration. Stoppers and syringe seals as part of our engineered materials offering. We're very proud to be part of this value chain, and through our customers, helping to create a better tomorrow than all of us, as I start this call, are striving for as we try to exit the pandemic and deliver billions of vaccines to people around the world over the next quarters and years.
If you move to slide 12, my last slide for my opening comments, I want to focus on our strategy to grow fast in the market. Our proxy for the market is global industrial production growth, which is GIPI, that acronym. On the left-hand side, it's a series of portfolio things that you've seen us make. Transforming the portfolio of the company, buying three great companies, $3 billion of acquired revenue, that were all accretive on growth, cash, and margins. A matter of fact, as an example, LORD grew mid-single digits last quarter, while the rest of the company, total company, grew minus six. On the right-hand side is a list of organic growth strategies. What's interesting about this list, with the exception of international distribution, these are all new with Win Strategy 3.0. I'm going to make a quick comment on each one.
Strategic positioning is really our effort to focus on stronger divisional strategies. We have a cadence with every division. We do three a month, and these are extremely productive conversations with our general managers to how they're going to position their division to win versus the competition. Second bullet there on innovation, we made two big changes. One is a metric, PVI, which is Product Vitality Index. It's a measure of new products as a percent of sales, looking at a five-year period for new products. New Product Blueprinting, which is that NPB acronym there, is really a change to our ideation process to create better ideas coming into the innovation funnel. The output of what we're trying to do here is that we want our PVI context percent of sales to grow by 600 basis points over the next five years.
A more innovative portfolio, better chances to grow, better margins, et cetera. Simplify Design. I've talked a lot about that. It's a speed initiative. It's a cost initiative. It's a customer experience initiative. It's a recognition that 70% of your costs are tied up in how you design a product. Simplify Design is all about focusing on design excellence. When you put together design excellence with operational excellence, it's a dynamite pairing. International distribution is going to continue from the success we've had with 2.0. Digital leadership is really a four-pronged attack: digital customer experience, digital products, digital operations, and digital productivity. Digital productivity is where we have a concerted effort on artificial intelligence and data analytics. Lastly, a new incentive plan.
Our annual cash incentive plan, our acronym ACIP, that's going to focus our divisions and the whole company on driving growth, cash, and earnings. It's this combination, and it's this combination that's helped us perform better on the top line, organically, in particular in the current downturn, and it will be our catapult to growing fast in the market as we go forward. With that, I'm going to hand it back to Todd with more details for the quarter.
Thanks, Tom. I'd like to direct everyone to slide 14. I'll just begin summarizing our strong second-quarter results. This slide displays as reported and adjusted earnings per share for the second quarter. I'll focus on adjusted earnings per share. We generated $3.44 this quarter. That compares to $2.98 last year. If you look at the breakdown of the adjustments for the FY 2021 as reported numbers, it netted to $0.03 this quarter. That is made up in the following buckets: business realignment expenses of $0.14, integration cost to achieve of $0.02, and acquisition-related amortization expense of $0.62. As we communicated last quarter, we are adjusting out the gain on the sale of land that amounted to $0.77. All in, the net tax impact of all of those adjustments is $0.02.
Last year, our second quarter earnings per share were adjusted by $1.41, the details of which are included in the reconciliation tables for non-GAAP financial measures. If you move to slide 15, this is just the walk from the $2.98 to the $3.44 for the quarter. Despite organic sales declining 6% and total sales declining 2.5%, adjusted segment operating income increased by $70 million or $0.11. That equated to $0.42 per share. Very strong operating beat for the quarter. Decremental margins on a year-over-year basis are favorable, demonstrating the excellent operational execution, robust cost containment by our team members, really in every segment, in every region. If you continue on the slide, we had a slight headwind from higher corporate G&A, just $0.02, that was a result of market-based adjustments to investment tied to deferred comp.
As Tom mentioned, our strong cash flow allowed us to pay off a significant portion of debt on a year-over-year basis. That reduced our interest expense. That equated to $0.12 for the quarter. If you look at the remaining items, other expense was just $0.01, slightly higher. We had a higher effective tax rate that impacted us by $0.03. Finally, slightly higher diluted shares resulted in a $0.02 impact, and that's how we get to the $3.44. If you move to slide 16, this is savings from our cost out actions, and I know there's been a lot of questions on this just from some of the early reports.
Just a reminder, these represent savings recognized in the year as a result of our discretionary actions in response to the pandemic and volume declines, plus the savings we realized from our permanent realignment actions taken in FY 2020 and also in FY 2021. If you look at this, our second quarter discretionary savings exceeded our forecast, and now amount to $190 million on a year-to-date basis. We are now forecasting for the full- year that discretionary total will increase to $225 million, or an increase of $50 million. The majority of that increase was recognized in the second quarter and roughly amounts to $35 million above our forecast. Just a reminder, as demand continues to increase and our teams pivot to support growth, we expect these discretionary savings to be lower in the second half. Permanent actions remain on track.
There is no changes to what we have communicated previously. Our full-year forecast will generate savings of $250 million, that will be $210 million incremental, we believe that this will help us generate the strong incremental margins that we have in our guide for the second half. If we move to slide 17, this is just a walk of the total results for the company, sales, and segment operating margin. As Tom mentioned, organic sales did decline by 6.1% this year. The decline was partially offset by the contributions from acquisitions, that was 2.6%, and currency impact of 1%. Again, despite these lower sales, total adjusted segment operating margins improved to 20.4% versus 17.9% last year.
This 250 basis point improvement reflects all the positive impacts from our Win Strategy initiatives, the hard work and dedication to cost containment and productivity improvements, as well as savings from those realignment activities I just spoke of, and really performance of the recent acquisitions. Strong execution really across the entire company to get these results. If we jump into the segments, if you go to slide 18, looking at Diversified Industrial North America, sales there declined by 5.9%. Acquisitions were a plus of 3.1%, and currency only slightly negatively impacted sales. Again, even with these lower sales, our operating margin for the second quarter on an adjusted basis increased sizably to 21.3%. Last year it was 18.2%.
Again, another impressive 310 basis points improvement focused on our long-term initiatives around Win Strategy, along with the productivity improvements, diligent cost containment actions, and really some increased synergies we're seeing out of the LORD acquisition. If we go to the next slide 19 for Diversified Industrial International. Organic sales for the quarter increased by 3.1%, acquisitions added 3.2%, and currency accounted for 3.5%. Again, strong operating performance here. For the quarter, we reached 20.3% of sales versus 16% in the prior year. Again, same story, Win Strategy initiatives, strong synergy growth, and really our teams around the world rallying together in light of the pandemic. If we go to slide 20 and talk about Aerospace Systems segment, and again, what we'll see here is a decline of 20.9% for the quarter. Acquisitions helped us by 0.4%, and again, a small currency impact of 0.1%.
Really, declines in the commercial businesses, both in the OEM and end markets were the main impact. These were partially offset by higher sales in both military OEM and military aftermarket sales. Operating margins for the second quarter was 18% versus last year's 20.2%. This resulted in a decremental margin of 28.8%, which is in line with our expectations and really the result of all the previous actions we've taken to realign the aerospace business to current market conditions, along with strong cost controls and really helping to offset the pandemic-imposed mix that we're seeing from the commercial and military businesses. Slide 21 is just some highlights on cash flow. Tom already mentioned this, our operating cash flow activities increased 64% year-over-year to a record of $1.35 billion of cash. This is an impressive 20.4% of sales.
Our global teams are really focused on this, very disciplined in managing our working capital across the world, and we're really focused on delivering strong cash flow generation. You look at free cash flow year-to-date, we now move to 19%. That's an increase of 78% versus prior year, and our cash flow conversion is now 164% versus 130% last year. Just strong cash flow performance from the team. Very impressive results. We want to just focus on orders real quick, moving to slide 22, our orders came in at flat this year, or this quarter, I should say. That was really driven by +1 in our Diversified Industrial North America businesses, +10 in our Diversified Industrial International businesses, and -18 on a 12-month basis in Aerospace Systems.
All in, we came in flat, and that's the first time in seven quarters, I believe, that the numbers have been not negative. If we move to slide 23 and the guidance, obviously, we have a pretty large guidance increase. We are now providing this on an as-reported and an adjusted basis. Based on the strong performance we just spoke of in the first half, all the current indicators that we see right now, we've increased our total outlook for sales to a year-over-year increase of 1.7% at the midpoint. This includes the forecasted organic decline of 3.4%, offset by increases from acquisitions of 2.9% and currency of 2.2%. Again, just a reminder, we've calculated the impact of currency to spot rates based on the quarter ending December 30th, and we've held those rates steady as we look to the second half of our fiscal year.
In respect to margins, for adjusted operating margins by segment, at the midpoint, we are now forecasting to increase margins 150 basis points year-over-year. That range is expected to be 20.2%-20.4% for the full- year. If you note for items below segment operating income, there is a fairly significant difference between the as-reported estimate of $388 and the adjusted forecast of $487. The difference is that land sale that we spoke about, that's $101 million pre-tax, $76 million after tax. That was recognized as other income in Q2. Since that's an unusual one-time item, we have adjusted that from our results. Full-year effective tax rate, no change. We still expect that to be 23%.
For the full- year, the guidance range for earnings per share on an as-reported basis is now $11.90- $12.40 or $12.15 at the midpoint. On an adjusted per share basis, the guidance range is now $13.65- $14.15 or $13.90 at the midpoint. Adjustments to the as-reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the year, associated with savings projected from those actions to be $50 million in the current year, and acquisition integration costs to achieve $50 million of expense. Synergy savings for the LORD acquisition are now projected to reach $100 million. That is an increase of $20 million from our prior stated numbers of $80 million, and that is included in our guidance. Exotic synergies remain expected to be $2 million for the full- year.
Just a reminder, acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year. Some assumptions that we have baked into the guidance here. At the midpoint, our sales are divided 48% first half, 52% second half, and both adjusted segment operating income and Adjusted EPS is split 47% first half, 53% second half. For the third quarter of FY 2021, we are forecasting adjusted earnings per share to be $3.54 at the midpoint, and that excludes $0.57 or $97 million of acquisition-related amortization expense, the business realignment expense, and integration costs to achieve for the quarter. If you move to slide 24, this is really just the walk from our previous guide to our revised guide. We had guided at $12 per share last quarter. Based on the strong second-quarter performance, we exceeded our estimates by $1.06.
We've mentioned this, but the improving demand environment, along with the strong operational performance, some additional extended discretionary savings, the permanent restructuring savings, and increased LORD synergies, we feel confident in raising our forecasted margins, which add $0.85 of segment operating income over the next two quarters for the remainder of the fiscal year. The majority of this increase is based on operational performance. This calculates to an estimated incremental margin of 41% for the second half. Then some other minor adjustments to the below segment operating income lines are a negative impact of $0.01, and that's a net of interest expense and income tax. That's how we get to the $13.90. That is approximately a 16% increase from our prior guide. If I can direct you to slide 25, I'll turn it back over to Tom for some comments.
Thank you, Todd. Just want to wrap things up with these great results don't happen by accident. They're driven by a highly engaged global team. Our focus on safety, high-performance teams, lean, and kaizen is driving an ownership culture within the company, and it's resulting in top quartile engagement as well as top quartile results. We talked about the portfolio. It's a big competitive advantage of ours, its interconnectivity.
The transformation on the three acquisitions, and the fact that they're outgrowing and generating more cash and margin than legacy Parker. Our performance over this cycle, if I would just reflect on the last five years. Just use round numbers. Our margins are up 500 basis points in a five-year period of time that was not necessarily the easiest five-year period of time for industrial companies. Our Win Strategy 3.0 in particular, and the purpose statement are going to be the powerhouse behind exerting our performance into the future. Again, my thanks to everybody for all their hard work and the great results. Gigi, I'm going to hand it back to you for start the Q&A.
As a reminder to ask the question, you need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joe Ritchie from Goldman Sachs. Your line is now open.
Thanks. Good morning, everybody, and congratulations on a fantastic quarter.
Thanks, Joe.
Maybe just kind of just starting off. Tom, obviously, it seems like things are kind of coming off the bottom here. You're starting to see some improvement in the order trends in your industrial businesses, both domestically and internationally. Can you maybe just walk us through exactly what you saw, what you're currently seeing, and what you saw kind of transpire as the quarter went on?
Sure. On the orders, Joe, we saw if you look at total Parker from -12 to 0, North America from -11 to +1, International from -4 to +10. Aerospace got improved from -25 to -18. Pretty much North America, International improved throughout the whole quarter. From our view, it looks like Aerospace is finally bottom. The International piece in particular, if you look at that +10, that was EMEA at +7, Asia +13, Latin America +27. Pretty strong rebound across all of the particular regions internationally. When I look at some of the higher-level sub-segments of the major buckets outside of Aerospace, Distribution got better. It was -14 the prior quarter, -6 this quarter. Industrial things are stationary. Went from -7 to +1.5.
Mobile saw the biggest improvement from -13 to +2.5 . We saw all the sub-segments improve nicely, with the largest recovery being at mobile. We look at our end markets in the four phases of growth. We have roughly about 30% of our end markets are in accelerating growth, and about 2/3 are in decelerating decline. We continue to move all the various end markets into either bottoming out and decelerating decline is starting to turn or accelerating growth. Maybe I'll pause, Joe, I don't know if you want me to go through all the end markets, but that's the color we saw. In distribution, we saw an end to destocking, which was encouraging. Our distributors are, I would say, cautiously optimistic. They are being careful. There is some uncertainty, obviously, the next six months.
What we're seeing from distribution is selective restocking, in particular, focusing on those longer lead time type of products, so they can get ahead of demand and position themselves to take share, which we're happy to help them with that. In general, what we're seeing from distribution in some cases with some of the OEMs is placing a little larger stock orders with scheduled releases over the next several quarters, which are all indicators of people, I think, trying to plan as they view things are turning and starting to get ahead of things.
Yeah, that's super helpful and great to hear, Tom. Could I just ask one follow-up question and really just focusing on the sustainability of margin improvement going forward? Clearly, you've got a lot of long-term actions within the Win Strategy that are going to help. I really want to focus on the temporary cost actions that are benefiting FY 2021, the roughly $225 million. How should we think about that beyond 2021? Is that going to be a headwind beyond this year, or are there other actions that you can take to mitigate some of those expenses coming back?
Yeah, Joe, this is Todd. I'll take that one. Some of these things are volume-related , so as volume continues to come back, we expect some of those costs to come back into the business. Really, what we saw in the second quarter was a lot of productivity improvements. This has been based on our focus on kaizen for a long time. Many elements of our Win Strategy initiatives have helped drive that.
There's been strict cost containment by our teams, really, around the globe. What did surprise us a little bit was lower travel and lower discretionary expenses. That's why we increased the discretionary expenses for the remainder of the year, just based on the current situation that we see in the world right now. We do see that returning. Nowhere will it go back to the levels that we've seen in the past, but we do see it going up from where we're at now.
Got it. Thank you both.
Thank you. Our next question comes from the line of Nicole DeBlase from Deutsche Bank. Your line is now open.
Yeah, thanks. Good morning, guys.
Good morning, Nicole.
Can we start with just looking at the 3Q outlook? What's baked in at the midpoint with respect to organic growth? If there's any big change or divergence in the incremental margins you're expecting in 3Q relative to 4Q.
Yeah, Nicole, this is Tom. If I take the top line and maybe to help with the guide for the full year. We reduced the guide on decline on organic from -7.5% to -3.5%. I think what's probably of most interest to analysts and shareholders is what do we think the second half is going to be. The second half, our assumptions as a guide is North America and international, both in that kind of that 6%-7% positive organic growth, and Aerospace at around -11% for the second half. When we look at Q3, I'm going to focus on the top line. I'll come back to the decrementals and incrementals. Q3, we're going to see a slight improvement in the industrial portion of the company, about 100 basis points, as there's still some uncertainty.
Those orders I referred to earlier on have scheduled releases that are going out multiple quarters. We see aerospace about the same as we had in Q2. When we get to Q4, we've got North America in that upper teens, international around +10%, and aerospace getting to flat. That puts total Parker in Q4 in the low teens for Q4. Again, industrials for the second half in that +6%- 7% range and aerospace at -11%. When we think about the margin side of things, Q3 margins are going to be slightly less than Q2, and that's mainly from the reasons that Todd was describing. We're going to have less discretionary savings in Q2 than we had in Q3. Q3 is going to be around $25 million, Q2 was $65 million. You got $40 million less of discretionary savings going into Q3.
We'll still have a favorable MROS. If people aren't familiar with what that term is, that's basically you have less sales and you got more earnings. You can't really calculate an incremental, it's favorable. When we get to Q4, we've got approximate 30% MROS. I would just make that comment for Q4 and really for the first half of FY 2022, that the incremental MROSs are going to be a tough comp for us. The plus 30%, this is against, remember, Q4 prior period. We had the gargantuan discretionary cost outs, all the big wage reductions at that time.
If you were to make it like for like and take out discretionary actions from both periods, this would be a greater than 60% incremental. The business is performing at a very high level. You'll see margins get a little better into Q4. That'll be our highest margin quarter. If you just look at for the second half, we go from 20.1%, that's the first half total company, to 20.7% in the second half. Continued improvement, and we're not going to stop there. Obviously, our goal is to keep driving this as we go into FY 2022.
Got it. Thanks, Tom. That's super helpful. Maybe just as a follow-up, can you just talk about any impact you're seeing to production supply chain with respect to COVID and the level of confidence you have as a result in ramping, as this recovery does take place?
Nicole, it's Tom again. When we look at COVID and its impact, we're mirroring case rates in the local communities that we're at. We've done a great job of, I would say, almost exclusively our cases originate from outside of work. We've tried to take the position, we want people to be safe at home and safe at work, but we'd like them to be the safest possible they could be when they're at work. We're not immune to absenteeism-type things as it relates to this, but it's not been a material impact to us. We've been able to keep up with demand, keep up with our lead times. If you look at us historically, obviously, the pandemic is a unique phenomena. When we hit periods of increased demand, we out-service our competitors. It's something we've proven time in and time out.
I would look for us to have the opportunity to take share because our lead times and our customer experience will be better than our competitors. I feel very good. On the supply chain side, we purposely laid out a strategy years ago to be local for local. We make, buy, sell in the region for the region. That supply chain strategy and that operational strategy allows us to be very flexible based on what's happening, to not have all of our eggs in one basket in one particular region, not to be overly exposed on trade tariffs and those type of things. We feel very good about where we are in supply chain.
Thanks, Tom. I'll pass it on.
Thanks, Nicole.
Thank you. Our next question comes from the line of Scott Davis from Melius Research. Your line is now open.
Hi. Good morning, guys.
Good morning, Scott.
I don't say this very often, but congrats on a great, not just couple quarters, but man, great last two or three years has been just phenomenal. Impressive. Anyways, I want to talk a little bit about M&A because you've been so successful in that front, which is perhaps not something folks would have expected out of Parker in the old days. You're going to be down to 2.5 turns of debt, as you said this year. Are you ready to reload on the M&A front? Do you have an interesting backlog at all that you want to talk about?
Yeah, Scott, first of all, this is Tom. Thank you for your comment and the recognition of progress. It doesn't go unnoticed, and we do appreciate that. On the M&A side, what's been interesting and we're really happy about the cash flow and the ability to pay down debt is clearly ahead of schedule. We're going to be in a position come into this fiscal year where all of our serviceable debt, the term loans and the CP that we took out for these acquisitions will be all paid off. Our next corporate bond is not due till September of 2022, and it's a nominal amount of $300 million. We are going to be in a position with a much stronger balance sheet to look at capital deployment across all the veins. Now, in particular, you talked about M&A.
The lesson learned for us historically is to never stop working the M&A pipeline. We're continuing to build those relationships. We are building those relationships across a couple of big themes. We want to be the consolidated choice within our space. We think we are the best. We're the leader in the space. We think we're the best home, which means we'd like to be looking at anything within our space. In particular, though, if we only had a certain amount of money and all eight of the technologies I referred to earlier on were all on the table, we'd like to focus on filtration, engineered materials, instrumentation, and Aerospace. You've seen us focus on those to date. I would tell you, we like the entire portfolio, and what we've been working on is what you saw us do with the last three deals.
Buy companies that within either very quickly or within a reasonable period of time with synergies, can outgrow, can outpace margins, can outpace cash flow for the base business. That's what we did, that's going to be the flavor you're going to see as we go forward. If we don't find the right properties, we think we're a great investment, we're going to invest in Parker and buy our shares.
Makes sense, Tom. Can you talk a little bit about how, when you do a deal, how do you integrate? How do you bring Win into an asset? Do you come in with all the tools? Do you come in with lean first, or is it case by case? Is there a playbook? I don't think I've ever heard you guys talk about that. I'm just curious.
It's a good question. Obviously, there's lessons learned that we've learned over the years on how to organize the project management office, what you're going to do on day one, and there's really two big kinds of veins that you're looking at. You're looking at all the integration tasks, those basic tasks of putting the business together, then your synergy tasks. We've learned to make sure you've got a dedicated integration team, and you put the best and brightest people in those various leadership positions, put a great integration manager. The key thing to remember is we're buying great companies, and they're bringing good things to us, and we're trying to bring good things to them as we become one team. It's the concept of one plus one equals three.
We're going to take the best of the acquisition and the best of Parker, and obviously, we work to Win Strategy. We do give some latitude within the respective acquisitions to how they want to implement the Win Strategy. It's not an option that you're going to implement it, but we give them latitude as to how they want to phase it in, because obviously, certain parts might be more applicable faster for the respective acquisitions. We have a real robust cadence as far as review, and frankly, I think we've gotten pretty good at this, and something we want to keep doing.
Helpful. I'll pass it on. Thank you, and good luck for the rest of the year, guys.
Thanks, Scott. Appreciate the comments.
Thank you. Our next question comes from the line of Andrew Obin from Bank of America. Your line is now open.
Yes. Can you hear me?
Yes. We can hear you, Andrew. How are you?
Yeah. Great quarter. Great free cash flow conversion as well.
Thank you.
Just a couple of questions from me. The first one, you sort of talked about your dealers still being cautious. If you look at our channel checks, if you look what other publicly traded hydraulics companies or the ones that are still hydraulics companies sort of talk about what they are seeing in the channel, they just sound a bit more optimistic relative to what you guys are saying, and sort of our channel checks, I think a bit more optimistic on outlook as well. Just trying to understand, is it Parker-based conservatism, or are your dealers more conservative, your channel just knows something that we just don't see across the industry?
Well, you're probably referring to one of our neighbors, and they would be much more heavy mobile than stationary and distribution.
Yep.
We are not a hydraulics company. We're a diversified industrial company, so that's a big difference.
I'm also talking about a smaller competitor down in Florida, I guess.
Oh, okay. Well, our distributors still feel good, but part of what they're doing is placing orders, making schedule releases over the next couple of quarters. We still think that if I look at going into Q3, that we're going to go from a -6 to getting to probably flat on North America and EMEA. We'll be probably in that upper teens when you look at Asia Pacific. When you get to Q4, we'll be very strong on North America and EMEA, probably around that +10. China has a tough comp in that Q4, because if you remember, that's when they rebounded from the pandemic. They're probably going to be flat on distribution. Our distributors still feel very good. When we look at distribution for the whole second half, it'll end up being a nice positive.
Got you. Second question for you. Sort of talked about China. I think we've been sort of talking about hydraulics competition emerging out of China for the past 20 years. It does seem that we finally are at a point where you are sort of seeing Chinese competitors. Particularly, the fact that China is leading recovery this time around. How do you see competition in China from the local competitors this time around, and then in this upturn, how different is that? Also, some of them are talking about getting into industrial applications now, even though probably you have a bigger moat there. Just how do you think about Chinese competition coming out of this downturn and in the next cycle? Thank you.
Andrew, it's Tom again. That's been a question really for a while now, and I really don't see it much different coming out of this than it was when we went into it. Just as a reflection, China for us grew about 10% last quarter. We did quite well in China. Asia Pacific overall grew about 7%. The way we win in China is we're in China with the same or better cost structure because we have a nice density of plants in China and a very robust supply chain in China. We have the breadth of our technology. When we go to compete, and again, that's a distinguishing characteristic that we have around the world. We're not just competing as the Chinese fitting company or Chinese hose company.
We can put the whole portfolio of technologies together, that discussion with a customer, they can't beat us when we're having a discussion around cost of ownership or the weight of the product, reliability, the ease of assembly, all those kinds of things that you can do when you're a multi-technology. Obviously, these multi-technologies are interconnected. They're not disparate technologies. They're interconnected technologies that create a big value proposition for customers. We can beat them on cost because we're there. We're the same cost structure, better, and we have a better basket to solve more problems for customers.
Thank you very much.
Thanks, Andrew. Take care.
Thank you. Our next question comes from the line of David Raso from Evercore ISI. Your line is now open.
Hi, my question's on Aerospace, but if you could clarify first. Were you saying the fourth quarter, the fiscal fourth quarter, Aerospace organic sales flat? Just want to make sure I heard that correctly.
Yeah, David, this is Tom. Flat to prior year.
I'm not asking for a FY 2021 guidance, but can you take us through your thoughts on how you see the cadence of the aerospace recovery? Obviously, that may color also how you think about M&A in the space as well. I'm trying to tie those two together and give us a little label and if you're already at flat in calendar 2Q, fiscal 4Q, how are you thinking of the slope from there?
Yeah, David, it's Tom again. We like this space. This is all of our motion control technologies going into things that fly. We're going to things that fly, things that are stationary, things that have wheels under them. The way we look at aerospace is that we have it sized to win in the current climate. The current climate is finding bottom, and it's going to be a slow turn coming back up. My view over the next several years is it's going to gradually show improvement. Now, what is that pace of improvement? I think it's going to mirror the pace of vaccine deliveries and the comfort that travelers feel. I think you'll see personal travel come back much more aggressively. Business travel will come back, but will probably plateau at a certain level based on just the efficiencies of digital tools.
We're positioned to win right now with the kind of op margins in this current climate, and it's only going to get better going forward. With respect to M&A, I actually think this is a good time to look at M&A in the aerospace arena, depending on the right property and the right pricing, obviously. I think the future is bright. Now it's a long-cycle business, so it will turn slower than an industrial turn would be. Again, if you position to win now and you're going to have a gradual upturn, it speaks to nice incrementals and nice positive year-over-year changes for you over the next several years.
Yeah, I'm just trying to balance the dance that doesn't go on with the stock, right? The traditional crowd that looks at the ISM and says, "Hey, this is fantastic right now. How much better can it get?" While the compounder crowd looks at your cash flow, the de-leveraging, and say, "Look, we can definitely move the ball forward here. This is not just an old ISM play."
The timing of the M&A, I think it's important to balance those two crowds. Not to get inside your M&A department here, but when you listed those four categories, can you just give us some sense of, if you had your druthers, identical kind of assets when you think of where your position, your size, the competitive landscape, and then obviously how you view the cycle playing out. Of those, would you prioritize them at all between filtration, engineered materials, filtration, and Aerospace?
I probably won't prioritize, not to disappoint you on being vague in the answer, we like all those properties. I want to come back to the very first thing, and this is what I always remind the board and I'll remind shareholders, we want to be the consolidator of choice within our space. Those eight motion control technologies that I believe was on slide four, is the space we play in. We have a big advantage that we're not disparate pieces of businesses. With now two-thirds of this revenue coming from people that buy from all these technologies for four or more, we like all those technologies.
I think the thing you're going to see us look for is, and the theme that you've seen with the last three deals, is within a period of time, depending on the synergies, they're going to be growth accretive, margin accretive, and cash accretive. That's a different strategy, I think, for the company. Our tendency, we would prefer to buy things that are not ultra small. If you just look at the histogram of the targets, it's more in the mid-size category just because of the lay of the land. There's fewer of these really super large targets that you can look at. We will look at them, obviously. When I say mid-size, what's changed for us versus the past is our mid-size is now bigger.
A mid-size target for us would be, envision, an Exotic Metals Forming Division-like deal, which historically would've been the largest deal in the history of the company, before LORD and CLARCOR. Our appetite is there. If I could go back, David, to the comment you made about the ISM, which I thought was a thoughtful comment. The power of this portfolio, besides being interconnected, is that the cycles somewhat balance each other. Yes, we will see some near-term , and we'll see how long near-term turns out to be on the Diversified Industrial portion of the company. It's going to have much more robust macro conditions. Following that, the Aerospace Systems business is going to start to be healing. I think sequentially, those time periods are going to be complementary to each other.
The other part is that this five-year period that I envision going forward is going to be, I think, much easier for industrial companies in the last five-year period. Because we went through two industrial recessions and a pandemic. I'm knocking on wood here. I guess it's possible to have that happen again, but the odds are low that it would repeat. I think it's a much better time, and we have enough self-help for all those people that I'd like to encourage. We are no longer a short-cycle bet. We are a bet over the cycle, and we have all kinds of room. Win Strategy 3.0 just started, and those FY 2023 targets are not an endpoint. They're a mile marker we're going to blow past.
I appreciate the comments. Thank you, Tom.
Thanks, David.
Thank you. Our next question comes from the line of Mig Dobre from Baird. Your line is now open.
Thank you. Good morning. Maybe just to kind of pick up on this topic here. Tom, you've spent a better part of last year sort of showcasing how the business is performing different than it has in prior downturns, right? I'm curious to get your perspective as to how this next upturn might be different than what we have seen historically.
I think it's always hard to predict one cycle versus the other. I think you'll continue to see us perform very well in converting on the incremental side. Just, I would caution people, incrementals for Q4 this year and for the first half of next year are going to be tough comps. We're going to try to flatten the field when we give you the results so that you'll be able to see the real incrementals of the company. I think you would expect to see us north of 40 in the first couple of quarters, and then we glide down into the 30s. We're going to be at that stairstep slide that I've showed for the last couple of quarters. Our intention is to keep raising the ceiling and raising the floor.
This next ceiling, this next cycle, our expectation is going to be higher than the last ceiling. We're doing it right now. This isn't even really a necessarily good period right now, and we're breaking records on margins. I'm bullish because there's a lot of positive factors. You just look at interest rates and what's happening with global industrial production forecasts. In my view, a pent-up need for CapEx, given that there's been two industrial recessions in the last number of years, an aerospace cycle that will follow the industrial cycle, so you got the benefit of those not being right on top of each other. Just a tremendous amount of self-help. A lot of what you've seen that's propelled these margins to date is prior period restructuring and Win Strategy 2.0.
Win Strategy 3.0, I'm not just being biased because I'm a part author of it, is better than 2.0, hands down. You've only seen about a year of that in play. 3.0 has tremendous legs. We have still a portfolio of self-help. The big thing is that we're back in the capital deployment game. It'll be a steady diet of dividends, share repurchases, and acquisitions. Obviously, that formula, we're going to raise, I can assure all the shareholders listening, there will be a Q4 increase to the dividend. We're not going to break our track record. Then we'll continue to do what we've always done, is look at the acquisitions versus share repurchase and try to make the best decision on behalf of shareholders for what is the best long-term return for them.
I appreciate that. I guess perhaps you're going to want to punt on this, you're pretty close to your stated fiscal 2023 target. At what point do we expect an update to this? I'm also curious as to how you're thinking about free cash flow margin here. Even taking out the working capital benefit that you had year to date, free cash flow margin is quite impressive. How sustainable do you think this is, especially as perhaps we need to see a little more working capital coming back into the business? Thank you.
Mig, I'll start on the 2023 targets, and then I'm going to let Todd take the free cash flow one. You're right, I am going to punt. Hopefully you recognize we've not hesitated to change these. We've gone from, I'm just going to use the segment operating margin. We've gone from 15%- 17%- 19% to now 21%. We've not hesitated to update it. We just want to prove for several quarters that we're close or at it. Once we do that, we'll be prepared to give you a better vision of that. I'll let Todd talk about free cash flow.
Yeah, Mig, you're right. Our cash flow has been really impressive, and like I said, it's really the work of our global team really focusing very quickly on working capital management. We know there's going to be some pressure on working capital as growth returns to the business, so we're well aware of that. As Tom said, we've basically had a step change here. Our margins are a different profile than they used to be, and that obviously feeds the free cash flow. We think historically we're going to be better than we've been historically, and we're positive on that going forward.
Great. Thank you.
Thanks, Mig.
Thank you. Our next question comes from the line of Nigel Coe from Wolfe Research. Your line is now open.
Thanks. Good morning, everyone, and great job. You make it look easy, but I know it's not, so well done. We're pretty deep into the Q&A here. We haven't had the end market roll down, so it'd be remiss not to do that. Just one clarification, the lag on distributive orders versus OE, sorry, versus OE. A little bit surprised with that. Is that normal at this point in the cycle as we turn back up, or is this a quirk of this pandemic?
Nigel, it's Tom. It's very normal. Mobile tends to lead, which it's doing now, and then industrial, and then followed by distribution. Remember that distribution, while we'll service some small to medium-sized OEMs, is primarily the aftermarket. That tends to lag a hair after you see a sharp return, which is what you're seeing with some of the other end markets. I will spin you through the end markets quickly, and I'm going to break it into the buckets like I've historically done. I'm starting with the positive end markets. The greater than 10%, this is for the total company, was semiconductor, life science, power generation, agriculture, refrigeration, aerospace, military OEM, and aerospace military MRO. On the positive high single digits was automotive. Positive low single digits was construction and heavy-duty truck. On the declining markets, I've got four buckets.
Low single-digit decline was telecom and tires. High single-digit decline was lawn and turf, material handling, mining, mills and foundries, and distribution. Distribution's not a market, but we put it in there. The 10-20 range was rail, marine, and forestry, and the greater than 20 was machine tools, oil and gas, Aerospace Commercial OEM, and Aerospace Commercial MRO.
Great. Thanks, Tom. That's wonderful. Then, just on the margins between International and North America, we now have very close convergence between these margins. Is that really a function of their recovery profile mix, perhaps, or are we in a situation now where these margins going forward are going to be very comparable?
Nigel, we've worked at this for many years to get those margins comparable, and I really give credit to our international team. They've made great progress. We're not where we want to be. We still have plans to move it forward, but we see those margins. There's no reason why those margins can't be similar.
Great. Thanks, Tom.
Gigi, I think we have time for maybe one more question.
Thank you. Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is now open.
Hi. Good morning, guys.
Good morning, Josh.
Just following up on David Raso's question from earlier just on PMI peaks. I guess, is there anything in the business today, Tom, that you're seeing that would say that the PMI is maybe not indicative of where the business and your customers are in recovery? Maybe things don't feel quite as far along as they normally would with a 60 PMI. Whether it's inventory levels, which we sort of talked about, or just the types of end market leadership, anything that would make you feel like maybe this has kind of some longer legs to it than you would normally see at this point?
Josh, it's Tom. I still think that you'll see relatively the similar correlation if you were to plot our orders historically against PMIs is anywhere from a three to six month lag. I think the pandemic has the potential to maybe influence that a little bit, and we'll just have to see as that plays through. I would just characterize, I feel better about these next several years than I do about what happened the last six years, at least in my time leading the company. I just think about we went through a natural resource recession, we went through the most current recession, and we had the pandemic. I think there is a need for industrial and infrastructure-type activities. I think aerospace will return longer term. I just think there's a better, potentially more stable macro environment the next couple of years.
Got it. That's helpful, and I agree with that. I guess just kind of related to that, all the while bringing up the segment operating margins within striking distance of your target, even with Aero still on its back. At what point does gross margin become a limiter, and you need to find yourself mixing higher on that front? Because the distance between the two is narrower than we see in most of our coverage. At what point does that mean more differentiated growth or M&A mix, like with what you had with LORD Exotic? Just any observation you would make on what it takes to get to the steps beyond.
Josh. Again, it's Tom. One clarification. Our gross margin might look different than you compare to other companies because we embed a fair amount of SG&A into our cost of goods sold. Our gross margin has some of that in there, versus other people might be booking their SG&A in different categories. Your question is stepping higher levels, really, can margins continue to grow higher? Absolutely they can. If you look at what I was referring to earlier on about early days of Win Strategy 3.0 and all the initiatives we have underneath there, I feel very good about our potential there and just very strong legs and what the future can hold. You put that in place with maybe a little better macro environment, is you can have a little more volume-induced leverage.
Then we're coming into a period of time where we have a stronger balance sheet, so we can put that to work as well. What I've told people before, maybe I'll close on this. If you like what's happened in the last six years in the environment we had with basically no macro help, the next several years are going to be fantastic.
That's great. I appreciate it.
Thanks, Josh. Thanks, Tom. All right, everyone. This concludes the Q&A portion of our earnings call. We appreciate all your comments, and as always, thank you for your interest in Parker. Robin and Jeff are going to be available throughout the day if anyone needs any follow-ups. We thank you again, and everyone, stay safe. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.