Good day, ladies and gentlemen, welcome to the Q2 2018 Parker-Hannifin Corp earnings conference call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If you require operator assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's conference is being recorded. I would like to introduce for this conference call, Ms. Cathy Suever. You may begin, ma'am.
Thank you, Kevin. Good morning, welcome to Parker-Hannifin's second quarter fiscal year 2018 earnings release teleconference. Joining me today are Chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer, Lee Banks. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at phstock.com for one year following today's call. On slide number two, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are also posted on Parker's website at phstock.com. Today's agenda appears on slide number three. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the second quarter.
Following Tom's comments, I'll provide a review of the company's second quarter performance, together with the guidance for the full year fiscal 2018. Tom will provide a few summary comments and will open the call for a question and answer session. Please refer now to slide number four as Tom will get us started with the highlights.
Thank you, Cathy, good morning, everybody. Thank you for joining the call and, of course, your interest in Parker. Let me just make a few general comments, I'll get into the quarter specifically. A top focus of the company continues to be safety and the engagement of our people. These are obviously interconnected. As we improve safety for all of our team members and we have higher levels of engagement across the company, we're going to continue to drive higher and higher operating improvements. When you look at orders for the quarter, very strong momentum across a wide range of markets and geographies. Very excited about that. Organic growth was very strong, much faster than industrial production growth, this is our fourth quarter in a row that we exceeded industrial production growth.
The Win Strategy initiatives, when you look at the improvements in growth and operating margins, continue to evolve, and we really feel we've got a bright future ahead of us. If you look at the progress the last three years, remarkable progress, but I would just characterize that we're still early days of implementing the new Win Strategy. My thanks to everybody around the world, all the Parker team members, for all your hard work and your efforts. I'm looking forward to a bright future. Let's get into the quarter. It was a solid quarter and really a great first half of the fiscal year. I'll go through a couple of key stats. Safety performance, 22% reduction from recordable injuries, which is very nice. Sales was an all-time record for the second quarter, up 26%. Organic growth was approximately 10% increase, significantly outpacing industrial production growth.
Order entry rates increased 13%, making the highest order entry rates that we've seen since Q4 of FY 2011. A couple of comments on margins, because it's difficult to look at margins year-over-year, because prior period did not have CLARCOR in it. This period has CLARCOR in it. When you look at adjusted segment operating margins, they continue to improve. We came in at 14.9%. If you were to add back the incremental depreciation and amortization from the CLARCOR acquisition, you'd add 90 basis points back to that number. It comes into 15.8% segment operating margins, really the true underlying operating margins of the company. That represents 110 basis point improvement versus prior year. Another way of looking at it is you look at EBITDA margins for the quarter, came in at 16.3%.
Again, 110 basis point improvement if you also adjust out for the divestiture gain that we had in last year's second quarter. When you look at adjusted EPS, it increased 26%, again, excluding the divestiture gain that we had last year. The new tax legislation was a $225 million net one-time negative adjustment, and Cathy will go through that in more detail in her comments. When you look at cash and capital deployment, our goal is to be great generators and deployers of cash. You've heard me talk about that before. It's really an overarching theme of the company, and we remain on track to deliver a significant cash flow over the next several years. When you look at the new U.S. tax reform, clearly in the quarter, it was a negative one-time adjustment. However, many long-term positives for us.
First, it creates a more competitive environment, really levels the playing field with our foreign competitors. This creates a nice share gain opportunity for us. It's going to encourage our customers' investment decisions because the way CapEx is treated in the new tax law, it's clearly going to encourage CapEx, and in turn, will drive through more Parker content as part of that. Then there's greater flexibility and mobility moving cash around the world, which is a big advantage for shareholders. When we think about deployment priorities, they really remain the same. However, we have greater flexibility, obviously. First on the list is continuing our history of increasing annual dividends paid. Maybe to help clarify why that is so important to us, obviously, our long-standing record is important. We don't want to break that.
It really speaks to our ability over the cycle to consistently generate cash, which emphasizes why we are such a great long-term investment for shareholders. Our target on dividends is 30% of net income over a rolling five-year period of time. Obviously, as our net income grows, which it will, our dividends will grow in corresponding fashion. Second priority is CapEx for organic growth, the most efficient way to deploy capital back on behalf of our shareholders. That'll be at the top of the list. The beauty of our business model and our cash flow generation, when you take those first two priorities and you complete them, we have roughly half of our cash still available to deploy. Here in the near term, we're going to reduce leverage with the CLARCOR deal. We're also going to continue our 10B5-1 share repurchases.
As the debt reduces, we're going to reevaluate acquisitions and discretionary share repurchases with the goal always being that we're going to deploy capital in the best long-term fashion that we can on behalf of our shareholders. I would just remind people that we utilized overseas cash to help fund CLARCOR, so we put most of that overseas cash to work already. I want to talk about the outlook, and let me maybe just start with some headlines of the new guidance when I look at it from a full year. Now, safety, it's hard for me to predict a full year there, but injury is down 22%. Obviously, want to continue that trend. Sales up 17% versus prior year. Adjusted EPS up 21% again versus prior. Adjusted EBITDA margins forecasted to be 17.6% for the full year versus 16.3% last year.
That's 130 basis points improvement, again, excluding the divestiture gain that we had last year. Now, specifically regarding EPS, we're increasing EPS, adjusted EPS, by $0.45 at the midpoint. Our new range is $9.65 to $10.05. Reflects the reduction in the U.S. federal tax rate, our year-to-date results. Regarding realignment and CLARCOR cost to achieve, they're going to be at the same levels that we previously anticipated. Now going forward, we're going to continue to drive the Win Strategy, and I'm going to just make a couple comments about each of the goals here briefly. Engage people is still our first goal. It's all about creating that ownership culture.
I would remind people that being an owner, people think differently when they think and act like an owner, and it creates a level of intimacy and accountability with your respective area of responsibility that drives results. I would characterize our engagement process across the company as being the water that's going to lift performance up for the whole company. Second goal is premier customer experience, and we're moving from a service mindset to an experience mindset, and we're doing that by rolling out a new metric, likelihood to recommend, and that's now fully deployed, and we're getting great customer feedback from that. It's going to give us tremendous opportunities to improve. Remember, the whole purpose behind a great experience is it leads to share gain, leads to faster growth.
Third goal is profitable growth, we have a number of initiatives, which I won't go through here, all around driving growth faster than the market. In financial performance, it's what I would call affectionately the Big Four strategic initiatives. It's Simplification, Lean Enterprise, Strategic Supply Chain, and Value Pricing. We see tremendous upside, really, in all four of those categories. We're really looking forward to seeing everybody for our Investor Relations Day on March 7th. Let me just give you a quick commercial on what the high-level agenda is going to be. We're going to give you a progress report on the new Win Strategy. We're going to give you an update on our five-year targets. We'll give you a much more detailed review of the CLARCOR synergies. Let me just characterize that the integration's going very well.
Very happy with what's happening there, we'll give you more color on that on IR Day. We're going to give you presentations from three of our six operating groups, Aerospace, Engineered Materials, and Filtration. First time we've given that level of transparency and detail, I think you will enjoy that. We'll look forward to sharing that with you. In sum, we're looking forward to a record year and continuous improvement with the Win Strategy. With that, I'm going to hand it back to Cathy for more details on the quarter.
Okay. Thanks, Tom. I'll now refer you to slide number five and begin by addressing earnings per share for the quarter. Adjusted earnings per share for the second quarter were $2.15 compared to $1.91 for the same quarter a year ago. When comparing to second quarter fiscal 2017 results, please recall that last year included a $45 million or $0.21 per share gain on the sale of a product line, which was not adjusted out. Excluding this product line gain, adjusted earnings per share increased 26% from the same quarter last year. The respective adjustments for both years are as follows. Fiscal year 2018 second quarter operating income adjustments include business realignment expenses of $0.07 and CLARCOR cost to achieve of $0.07. This compares to $0.04 for business realignment expenses in the second quarter of fiscal year 2017.
Other expense in fiscal year 2018 has been adjusted to exclude a net gain of $0.05, which includes a gain from the sale of assets offset by the write-down of an investment. Prior year other expense was adjusted for $0.09 of acquisition-related expenses. Last but not least, fiscal year second quarter 2018 has been adjusted for the net one-time impact from U.S. tax reform of $225 million or $1.65. I'll discuss this adjustment in more detail on slide 13. If you move now to slide number six, you'll find the significant components of the walk from adjusted earnings per share of $1.91 for the second quarter of fiscal 2017 to $2.15 for the second quarter of this year.
The most significant increase came from higher adjusted segment operating income of $0.62 attributable to earnings on meaningful organic growth, income from acquisitions, and increased margins as a result of our new Win Strategy initiatives. I'd like to point out that this $0.62 improvement is net of incremental depreciation and amortization expense of $0.16 taken on with the CLARCOR acquisition. A lower effective income tax rate equated to a year-over-year increase in earnings per share of $0.07. Adjusted earnings per share was reduced by $0.31 on the other expense line, primarily due to the non-recurring $0.21 per share gain from the sale of a product line included in the prior year. Higher interest expense was an $0.11 drag, together with slightly higher corporate G&A and share count, equating to a $0.03 per share reduction.
Moving to slide seven, you'll find total Parker sales and segment operating margin for the second quarter. Total company organic sales in the second quarter increased year-over-year by 9.5%. There was a 13.3% contribution to sales in the quarter from acquisitions, while currency positively impacted the quarter by 3.4%. Total segment operating margin, on an adjusted basis, improved to 14.9% versus 14.7% for the same quarter last year. I'd like to remind you that the fiscal 2018 operating margins include incremental depreciation and amortization from the CLARCOR acquisition. Without this incremental expense, margins would have improved 110 basis points. This margin improvement reflects the benefits of higher volume, combined with the positive impacts from our Win Strategy initiatives. Moving to slide number eight, I'll discuss the business segments, starting with Diversified Industrial North America. For the second quarter, North American organic sales increased by 12.7% as compared to last year.
Acquisitions contributed 26.3% to sales, while currency also positively impacted the quarter. Operating margin for the second quarter, on an adjusted basis, was 15.1% of sales versus 16.6% in the prior year. Current year includes 160 basis points of CLARCOR-related incremental depreciation and amortization expense. Without this, margins improved 110 basis points. I'll continue with the Diversified Industrial International segment on slide number nine. Organic sales for the second quarter in the Industrial International segment increased by 10.7%. Acquisitions positively impacted sales by 6%, while currency positively impacted the quarter by 8.1%. Operating margin for the second quarter on an adjusted basis was 14.2% of sales versus 13.1% in the prior year. This includes 40 basis points of CLARCOR-related incremental depreciation and amortization expense. I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues increased 0.8% for the second quarter.
Strength in both commercial and military aftermarket more than offset weakness in OEM activity during the quarter. Operating margin for the second quarter, adjusted for realignment costs, was 16% of sales versus 13.5% in the prior year, reflecting the impact of a favorable aftermarket sales mix and lower development costs during the quarter. Moving to slide 11, we show the details of order rates by segment. As a reminder, Parker orders represent a trailing average and are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions, divestitures, and currency. The Diversified Industrial segments report on a three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders continue to be strong, improving to a positive 13% for the quarter end.
This year-over-year improvement is made up of 15% from Diversified Industrial North America orders, 13% from Diversified Industrial International orders, and 8% from Aerospace Systems orders. On slide 12, we report cash flow from operating activities. Year-to-date cash flow from operating activities was $460 million, or 6.8% of sales, compared to 7.5% of sales for the same period last year, or 11.5% last year, adjusted for a $220 million discretionary pension contribution. The significant capital allocations year-to-date have been $176 million for the payment of shareholder dividends, $145 million or 2.2% of sales for capital expenditures, and $100 million for the company's 10B5-1 repurchases of common shares. On slide 13, I'll now take a moment to discuss the impact of U.S. tax reform.
In the second quarter, we incurred a net $225 million charge that includes a $287 million one-time charge for the deemed repatriation of non-U.S. earnings, offset by a favorable $62 million adjustment to our net deferred tax liabilities to the new 21% federal rate. I need to mention that these one-time adjustments are our best estimates at this time. However, the amounts may change as we continue to analyze the impact of tax reform. Due to our June 30 fiscal year, our statutory U.S. tax rate for fiscal year 2018 is blended at a 35% rate for the first half of the year and a 21% rate for the second half of the year, which results in a 28% full-year U.S. statutory rate. This reduced rate will have a favorable impact on cash for fiscal year 2018.
As for the long-term implications, the U.S. tax reform will result not only in increased net income, but we can benefit from improved mobility of our non-U.S. cash. The payments of the deemed repatriation charge will commence in fiscal year 2019. There will be a use of cash over eight years, with significant balloon payments in the last three years. Based on our initial analysis, we expect our long-term effective tax rate to be approximately 23% beginning in fiscal year 2019. Fiscal year 2018 is still a blended rate. The full year earnings guidance for fiscal year 2018 is outlined on slide number 14. Guidance is being provided on both an as reported and adjusted basis. Total sales increases are expected to be in the range of 15.3%-18.9% as compared to the prior year.
Anticipated full year organic growth at the midpoint is 6.5%, which is 100 basis points higher than our previous guidance. Acquisitions in the guidance are expected to positively impact sales by 8.1%, and currency is expected to have a positive 2.5% impact on sales. We've calculated the impact of currency to spot rates as of the quarter ended December 31, 2017. We've held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year 2018. For total Parker, as reported segment operating margins are forecasted to be between 15.3% and 15.7%, while adjusted segment operating margins are forecasted to be between 16.1% and 16.5%. Full year tax rate is now projected to be 25%, down from our previous guidance of 28%.
For the full year, the guidance range on an as reported earnings per share basis is now $7.38-$7.78, or $7.58 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $9.65-$10.05, or $9.85 at the midpoint. In addition to the full year net loss of $5 million resulting from the combined gain on sale and write-down of assets, and the net provisional tax charge of $225 million, this guidance on an adjusted basis excludes business realignment expenses of approximately $58 million for the full year FY 2018. Savings from business realignment initiatives are projected to be $25 million. In addition, guidance on an adjusted basis excludes $52 million of CLARCOR cost to achieve expenses. CLARCOR synergy savings are estimated to be $58 million in FY 2018.
We continue to remain on pace to realize the forecasted $140 million run rate synergy savings for CLARCOR by FY 2020. Savings from all business realignment and CLARCOR cost to achieve, as well as anticipated full year favorable effects from U.S. tax reform, are fully reflected in both the as reported and the adjusted guidance ranges. We ask that you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year-over-year comparison. Some additional key assumptions for full year FY 2018 guidance at the midpoint are: sales are divided 48% first half, 52% second half. Adjusted segment operating income is divided 45% first half, 55% second half. Adjusted earnings per share, first half, second half is divided 45%, 55%.
Third quarter FY 2018 adjusted earnings per share is projected to be $2.59 at the midpoint, this excludes $0.08 of projected business realignment expenses and $0.09 of projected CLARCOR cost to achieve. Slide 15, you will find a reconciliation of the major components of FY 2018 adjusted earnings per share guidance of $9.85 per share at the midpoint compared to the prior guidance of $9.40 per share. Increases include $0.14 from higher segment operating income, $0.41 from a lower effective tax rate, and $0.01 from lower projected corporate G&A. Offsetting these increases is an $0.08 per share decrease from higher forecasted interest and other expense, and $0.03 per share from increased fully diluted share count. Please remember that the forecast excludes any acquisitions or divestitures that might close during the remainder of FY 2018. This concludes my prepared comments.
Tom, I will turn the call back to you for your summary comments.
Thank you, Cathy. We're pleased with the strong first half of the year that we've had. The combination of our sales growth, the lower cost structure that we've built, the integration of CLARCOR and execution of the new Win Strategy, that combination is projecting for us to have the best fiscal year that we've ever had in the history of the company, with an all-time sales record. My thanks to everybody around the world, the Parker team, for all your hard work and efforts into creating that. At this point, let me hand it back to Kevin, who will start the Q&A part of the call.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. We also ask that you limit yourself to one question and one follow-up in the interest of time. Our first question comes from Joe Ritchie with Goldman Sachs.
Thanks. Good morning, everyone.
Morning, Joe.
Maybe let's just touch on the North American margins for a second. Clearly, it's going to be the pretty big focal point today. You guys have talked a little bit about the impact from CLARCOR and the dilutive impact that's having to your margins, but did that number change at all on a quarter-by-quarter basis? The margins were down a little bit more this quarter than they were in the prior quarter. My follow-on there is, can we maybe just talk a little bit more about the other potential puts and takes to margins, and what impacted them this quarter?
Okay, Joe, this is Tom. Maybe to help everybody, I'm going to run through the margins and give you back the incremental D&A, depreciation and amortization, that we have from the CLARCOR deal. Cathy did that, I'm going to summarize it again just so you have it. North America, if you add that back 160 basis points of incremental depreciation and amortization, North America's operating margin for the quarter would've been 16.7%. Internationally, you add back 40 basis points, International's margins would've been 14.6%. Aerospace, obviously not impacted, 16.0%. Total Parker, you add back 90 basis points for 15.8%. When you look at it all in, North America still was higher by 10 basis points versus prior year.
There are some challenges that we faced in the quarter and face a little bit when you just look at the mix of order entry and sales that we have. We're tickled pink with the sales growth, the mobile part of that sales growth is growing at a faster clip than industrial and distribution. We got mobile growth at approximately 20% for the quarter, industrial high single digits, and distribution in the low teens. That mix is clearly putting a little bit of margin headwind for us. We had a number of plant closures. When you look at our restructuring dollars are not always equal level of complexity. If you close down a headquarters, like when we closed down Franklin, it's a little more straightforward. That's the headquarters for CLARCOR, those of you who aren't familiar with that.
It's a little more straightforward as far as how you incur those costs. We are right now in the heat of the restructuring for CLARCOR, in particular, around the manufacturing footprint consolidations. To give you some color on that, plant closures last year, 23 plant closures for the total company. This year, 39. That level of plant closures, and there's inefficiencies that you're impacted by really on both ends of that equation. Plant A that's getting closed down obviously has some impact when you announce it. Things don't work quite as well after you've announced a plant closure. Plant B, as it's coming up to speed, the inefficiencies, the yields, line rates, et cetera, just take a little bit of time to come up.
We've incurred all that and the margin still grew 10 basis points, again, making it apples to apples with depreciation and amortization. That gives you some color as to some of the dynamics that we're feeling from a margin standpoint.
That's helpful, Tom. I guess maybe the follow on there is this quarter the trough that we should expect from an inefficiency perspective, from the plant closure perspective, or is this something that could potentially be a headwind to North America margins for the next couple quarters?
Well, it's in our guide, North America margins for the full year at 17.2% for the full year, which is pretty nice performance with all this. Yes, because we're right now in the throes of this, we experienced it this quarter, probably going to see it for the next two quarters. Remember, this is a three-year synergy plan that we're laying out. The bulk of the heavy lifting from a footprint standpoint is this last quarter we just experienced, and really the next six months. Even with all that, we've got margins at very nice levels. EBITDA, which is a nice way to look at it, because it takes out the depreciation and amortization, growing to 17.6% versus 16.3% last year.
I guess I would just remind everybody, when we announced the deal December 1st of 2016, not that I remember that date intimately, that was an important date for the history of the company. We announced that we would tackle a 300 basis point EBITDA margin improvement. At that time when we made the announcement, we were sitting at 14.7% EBITDA margin. We have almost accomplished that 290 basis points. Remember we told you 300 basis points was a five-year look for the combined company. We've done it basically in two years almost. I'm very proud of what we've done from a margin standpoint. We have a few of those challenges that I just mentioned, but we're putting up some pretty nice numbers in really the heat of the CLARCOR synergy plan.
That's helpful. If I could maybe sneak in one more just on, again, just the kind of end of the calendar year. We've been hearing from some of our companies that because organic growth surprised to the upside, and clearly, the growth in North America was extremely strong, that there were higher rebates as well to distributors that flushed out in the fourth quarter, at least the calendar fourth quarter. Did you guys experience any of that, just given 50% of your business sells through distribution?
This is Lee. We did have great sales during the quarter, and order entry continues to accelerate, there's nothing meaningful regarding rebates or anything that's factored into what you've seen.
Okay, got it. Thanks, guys. I'll get back in queue.
Thanks, Joe.
Our next question comes from Ann Duignan in with JPMorgan.
Hi, good morning.
Good morning, Ann.
Clearly my question has been answered, it would've been on the North American margin, the color was helpful at least. Maybe switching gears a little bit to aerospace, can you talk about your mix of business today and where you see that going? If I recall, you were pretty strong in the 747, pretty strong in the A380, programs that might be ending. Also very strong with Embraer and whether your relationship with Embraer would change, if Boeing were to acquire Embraer. Just a little bit of background on the aerospace business, please.
Ann, I'll start out. In the quarter, we had an unusually strong mix of aftermarket, both commercial and military, and that came with higher margins since our aftermarket typically has higher margins, but it was also a very favorable mix of aftermarket. It was a little unusual in the quarter. However, in the third quarter, we see our strongest aftermarket activity. Third quarter should be a similar mix, but it's not necessarily a full year mix that we would normally see. We have platforms that are slowing down. Wide body, we see a lot of slowness in the market, but keep in mind that we're very diverse in our portfolio, and there are also new programs coming on. As some of them are shutting down or slowing down, we're also seeing growth in the A350 and in platforms like the Global 5000.
I think our portfolio mix helps balance the impact that you're describing, and you won't see a significant impact.
You're suggesting that fiscal Q3 should be strong margins and then taper off. Is that what I should read in the near term?
Q3 tends to be our strongest quarter for aftermarket. It's when the OEs, the large airlines, are typically having the planes brought in for repair. Three will be good, yes.
Okay. I'll leave it there and get back in queue. Thank you.
All right. Thanks, Ann.
Our next question comes from Joel Tiss with BMO.
Hey, guys. How's it going?
Hi, Joel.
I'll just glue both of my questions together. I just wonder if, maybe Tom or whoever, if you could talk a little bit about, it seems like the order strength is a lot higher than what you were hinting at earlier in the year for your second half. I think your implied order growth was pretty close to flat, and I just wondered why more of that. Is there anything happening that would undercut your confidence on the sustainability of that? Then second, if Lee could just run around the world and give us some of the highlights of the different businesses. Thank you.
Okay, Joel, I'll start off. This is Tom, and I'll hand it to Lee in a second here. On the order entry, I think in our sales forecast, we revised our guidance basically up 100 basis points on organic, from 5.5% to 6.5%. Kept acquisitions, kept currency, same assumptions. The new guide up 100 basis points. In the second half, in particular, we raised it from the previous guide was 3.7% to 5.0%. That's what we're forecasting for the second half of the year. I would just remind everybody, we don't feel anything weakening from a macro standpoint, and Lee will cover that momentarily. We feel good about the macro markets and all that. Our sales numbers were based on the comps that we have versus the prior year. Last year, second half of FY 2017 was a +6% organic growth.
Our +5% forecast is building on top of a +6%. That's just the comparable math that makes the numbers. We feel good about the macro conditions. I'll let Lee take you through the world.
Joel, it's Lee. I'm not going to comment on Aerospace. I think Cathy did a great job on that. I would just say industrially, as we look through all our end markets, it's really hard to find any significant markets to not continue to show positive year-over-year order entry growth during the quarter. Some of these markets fell a long ways, especially when it comes to natural resource end markets. They continued to show growth during the quarter. We saw strong growth in construction equipment, mining, oil and gas, which is mostly land-based, almost all land-based, frankly. Other markets like semiconductor, microelectronics, heavy duty truck, and distribution was strong. On land-based oil and gas, if I think about the Americas, the amount of active rigs continues to expand.
I think what's really positive is we are starting to see quote activity, with some customers that we haven't seen much in the past. They're doing more than just refurbishing what's in the field. We also saw a great continued rebound from our distributor partners around the world. In almost every region, double-digit order entry, which is really nice. They continue to be very optimistic. The only notable market that we've seen contraction in, and it's been significant, has been large frame power gen. That's gotten a lot of press, and it's real. That's had a negative impact. Just commenting on the regions, I won't take you through all the markets, North America, I continue to be very encouraged by all the increasing end market activity. It just seems that it's somewhat firing on all cylinders.
I think there's some worry about maybe in-plant automotive activity, but we haven't seen much dampening on that yet. We're keeping an eye on that. Throughout EMEA, continued strong order entry growth. I think this will be the second year we're forecasting organic growth, which there was a long trough there, we didn't see that. In Asia, Japan, Korea, China continue all to be very strong. Southeast Asia is really good, I'm encouraged by what's happening there. Just lastly, on Latin America, it seems that there's some good positive momentum in Brazil despite all the politics. We're hopeful that continues to turn around. I would just say, we're really happy with what's happening in the end markets, both domestically and internationally. I think in some cases, we're pretty early stages because of how far some of those industries had fallen.
That's really super. Thank you.
Thank you.
Thanks.
Our next question comes from John Inch with Deutsche Bank.
Thank you. Good morning, everyone.
Good morning, John.
Cathy, hi. The tax rate was a little lower in the second quarter. I don't think you talked about it. What was that about?
Sure. Let me just reiterate, for the year, we expect it to be 25%. We're at a 28% blended rate for U.S. Federal. In December, we adjusted everything to that new blended rate. As part of that, you do a catch-up of what you had booked provisionally in the first quarter, and you catch up the year for the six months to your assumed effective rate for the full year. You get a little bit of a double benefit in December from the lower tax rate for the year.
Okay. I'm just trying to understand. Tax reform, though, is a calendarized impact. You're saying this is actually a function of tax reform. Is that what you're saying?
Yeah. Correct. It was effective January 1, for us, it becomes half effective. What they require us to do is take the number of days that we would be at a 35% rate and the number of days we'd be at a 21% rate. That comes to a 28% effective rate for our full fiscal year.
Okay. That makes more sense. I got it. Thank you.
Okay.
What about the mix of orders, Tom? You talked about stronger OE, right? You talked about the ramp down, I guess, in terms of the plants, the stronger OE is sort of biasing margins a little bit to the downside. Is that embedded in the mix of orders that you're seeing, we would expect that kind of OE mix to still prevail over the coming quarters?
Yeah, John, it's Tom. Yes, it would. That's what's factored into our guidance. Part of why we left margins the same as our prior guide, because of that. Over time, that's going to start to stabilize. Those things, the high spike in mobile activity is going to start to stabilize at a lower number. I think this imbalance, I guess I would call it, of order entry being shifted a little bit more to mobile, will become more in check, as we go throughout the next several quarters.
Right. Mobile is clearly accelerating, and I think you could make that claim globally. What's happening with respect to distribution then? At the high single digit, I think you called out that run rate. Is that actually accelerating at a lesser cadence, or is it sort of steady?
I would characterize it, I'm going to let Lee chime in, because I think he had-- Distribution's in the low teens, is where it's at. I would characterize it as stable. High levels of growth, stable, and it'll glide down into something in the mid-single digits, in the second half, mainly just because of comps to prior year.
CLARCOR also, I think we took your guide from what, $0.20 to $0.33. Was that all tax, or is the business actually getting better?
I'm sorry. I didn't quite understand what you're asking, John.
The EPS accretion from CLARCOR. I calculated, it looks like it's about $0.33 for FY 2018, and I thought you had said it was going to be about $0.20. Maybe that's not true. I'm just wondering, are you expecting CLARCOR accretion benefits to improve from what you had last said, I think last year, right?
John, we're still at about a $0.20 accretion for CLARCOR for FY 2018.
For FY 2018.
Yeah.
Last, I guess I wanted to ask Tom just a strategic question. Is there an opportunity to maybe migrate, if you look at sort of the distribution of your customers, maybe some of your smaller ones at the tail? Is there an opportunity to migrate those in your OE bucket more to the distribution side to perhaps free up some of your own overhead and other operating costs? You know what I mean? To try and drive further Parker-Hannifin productivity over time?
Yeah. Clearly, John, you hit the nail on the head. What you're referring to is really part of our simplification program. The element in particular that you talked about was the revenue complexity side of things, that 80/20 look at all of our revenue and our products. Clearly, when we look at that tail, that's one of the areas we're looking at, is can we move some of that product to distribution? Distributors do a better job of servicing the customers in that regard. Could we look at self-service there? Can we look at alternative part numbers that might be higher running part numbers that run through the plant? There's a variety of tools that we're looking at. Yes, you nailed one of the things we're looking at.
I'm assuming, where are you at in terms of beginning to implement that? Is this still very preliminary, or have you actually already started? Obviously, you've done a great job with respect to the margin expansion that you called out, we're all trying to think about the next level, and we can obviously compare Parker versus ITW or other companies with higher margins. The thought process is really around just various levers you may be able to pull over time to help drive your overall profitability higher from here.
Yeah, we see more opportunity, obviously, that's something we'll go into more detail at IR day. When I think about simplification, lean, strategic supply chain, value pricing, all those things underneath the financial performance initiatives, I would characterize them as all having lots of upside. The revenue complexity piece that we just were talking about, the first inning, clearly the first inning. Lots of upside there.
Got it. Thanks much. Appreciate it.
Okay, thanks, John.
Our next question comes from Andrew Obin with Bank of America Merrill Lynch.
Yes, good morning still, I guess.
Good morning, Andrew.
Yes, it's been a long day. Just a question, international margins. Just seems in your outlook, you're actually modeling them now a little bit lower than before, and I was wondering if that's the impact of mobile mix, and what else is going on there, if the dynamic there is similar to what you guys are seeing in North America.
Andrew, it's Tom. It would be the mobile mix, because most of our heavy plant closures are in North America, a little bit in Europe, but North America's feeling more of the plant closures. The international piece, we changed the guide by 10 bps. It's mainly the mobile mix.
Just a question in terms of dealing with higher volumes, and maybe it's just sort of a three-pronged question. Just focus on distributors. Do they need to change their behavior? Do we have enough capacity? Finally, working capital impact, just because volumes are going up a lot faster than you guys thought.
Andrew, it's Lee. I think if I understood your question, is do we have to do anything different to handle the increase.
That's exactly right, yeah. Working capital requirements. Exactly.
No, I'd say from a working capital requirement standpoint, obviously, when you have a huge influx in business, it taps receivables for a period of time. I would say the biggest working capital requirements we've had throughout the quarter, really the first half of the year, have been with all these plant closures. There's been a conscious build of inventory in some areas, so we don't impact the customers. I would say with revenue with our OEM customers, there's nothing that we do differently. Some of these customers, we categorize our products, high runners running through the shop, and distribution would follow many times, too, in the same category. There'd be nothing different. It's just the level of activity would heighten up with the value streams running at capacity, not at capacity, but running a lot higher demand than they've run in the past.
Good problems to have. Thanks a lot.
Thanks.
Thanks, Andrew Obin.
Our next question comes from Jamie Cook with Credit Suisse.
Hi, good morning. I guess two questions. One, in the quarter, I guess as you look at the remainder of the year, are there any different assumptions around price cost or your ability to get price in the market? Can you just talk about how that's going? My second question, sorry, back to North America Industrial. Tom, I appreciate the comments you made about CLARCOR and closing more plants and stuff like that, and that'll impact margins or incrementals over the next two quarters. As we shift to fiscal year 2019 with most of that done, can we start to think about North America achieving above more normalized incremental margins? Given where we'd be in the cycle, could you get above average incremental margins versus your longer-term target? Thanks.
Jamie, it's Tom. I'll start with your last question and let Lee talk about price cost. Yes, once we get through a lot of this heavy lifting, we would expect things to normalize. The other part that's going to help is once we anniversary CLARCOR and we can look at the total company apples to apples, it's going to be a lot easier. Our Q4 is the first time when we get apples to apples, and even with all the plant closures in that, which will still be happening in Q4, we see that getting to the 30% MROS type of levels. Yes, the short answer is you'll see us get back to normal type of marginals. I'll let Lee talk about-
So thir-
Go ahead, Jamie.
Sorry. No, just to clarify. 30%, or given where you are in the cycle and with some of the restructuring, could we theoretically do better than that? Because 30%, I would assume, is more your normalized, but given the restructuring and you're still early in the cycle, I would think, because it would still be the back half of calendar year 2018. You know what I mean? That we could do better than that.
Well, the number I gave you, 30% in Q4, is with all that noise and-
Okay
all the plant closures, with the mobile mix not necessarily helping us. I think to the underlying marginals at a pretty high level.
Okay, that's helpful. Thank you, Tom.
Jamie, on price cost, I would tell you that there clearly is inflation on the horizon. You can see materials indexes. We've seen it in copper, we've seen it et cetera. We've been through these cycles before. I would say at this point in time, from a price cost standpoint at a corporate level, we're good. We're definitely taking actions to stay ahead of this as we go forward.
Okay, that's helpful. Thanks. I'll get back in queue.
Thank you.
Thanks, Jamie.
Our next question comes from Nathan Jones with Stifel.
Morning, everyone.
Morning, Nathan.
I'm going to beat the North American margin horse one more time. Tom, you talked about the facility closures, up from 20 to 23 to 39 this year. Is it possible for you to quantify the impact of the disruption that that's had, the need to build inventory, that kind of stuff? Are you going to be back down to, I don't know, 23 in 2019? Will you be done through this? What's the kind of step down in the facility closures that you're looking at for 2019?
For 2019, obviously, we haven't worked all that, clearly the bulk of the CLARCOR activity will be through. There might be some residual things that we're doing, plant closures on CLARCOR in 2019. We haven't obviously looked at the rest of the business at that point. Clearly, this is a spike in plant closures with them. We have a real strict policy on how we count for making adjustments. We only count adjustments that you can put clear plant closure costs on, severance and those kind of things. We don't try to add up manufacturing inefficiencies and production rates and yields and all that kind of things. To be honest with you, I'd be just giving you a number that would be off the seat of my pants and wouldn't be a good factual number.
I think anybody that's closed a plant knows exactly what I'm talking about. You feel it on the sending plant, and you feel it on the receiving plant. It's real, and typically any plant closure, even a well-laid-out plant closure, feels that for 3 to 6 months. We're in the middle of that now. We fully expected that. This is the biggest acquisition we've ever done with the largest synergies we've ever done, and we feel very good about it. You're kind of right now in the heat of the battle. The supply chain savings, SG&A, logistics, those are more straightforward. If I was to characterize, it's like the slope of a treadmill. Those are at a lower slope.
When you close a lot of factories, it's a higher slope of the treadmill, and I would just commend the teams that I know is listening to this. Closing these number of factories and what we've done from a margin standpoint and taking care of customers is really terrific work that the team's doing.
Okay, my follow-up is on one of your prepared comments where you said you thought that the change in the tax bill would open up share gain opportunities for you and drive customer CapEx. Can you maybe talk a little bit more about where you see those share gain opportunities? I know it's very early on the customer CapEx side, but maybe what your expectations are on that front?
Nathan, it's Tom again. The CapEx is just a general comment. If you encourage people with the kind of tax laws with the immediate expensing for tax purposes of CapEx for the next five years, that has to be somewhat additive to the current macro environment. I take a current very favorable macro environment, add that encouragement there, and I think it bodes well for CapEx in general. How it all plays through and exactly what areas, that's yet to be determined. We feel good about that. As far as the gaining share, the point there is we have a number of foreign competitors, which I won't highlight, which have had a distinct advantage forever. Now that we have a level playing field, I like our chances.
I like our chances going toe-to-toe with them with a level playing field, I'll bet on us any day of the week. That's all I was referring to share gain, is that we don't have one arm behind our back anymore, let the better person win the order.
Okay, fair enough. Thanks very much.
Thanks, Nathan.
Our next question comes from Jeff Sprague with Vertical Research.
Thank you. Good morning.
Good morning, Jeff.
Hey, a lot of talk, obviously, about integration and plant closures, CLARCOR-related. I wonder now if you just step back and look at the Parker footprint. You've also done a lot of restructuring here over the last several years. Now we're hitting a pretty big business inflection. How do you feel about the footprint right now, actually adequacy of the footprint, and what's the trajectory of your own CapEx looking like the next year or two?
Jeff, it's Tom. I think our CapEx will continue to be about 2% of sales. We've been running in a 1.7%-2% range, I would see it at that level, and I'll expand a little bit more upon that at IR day, kind of more of a strategic thought on that. As far as the restructuring going forward, let me just make one comment to kind of calibrate people as to what we've done with the restructuring the company. I'll start with prefacing this that there's a lot more that we can do. Anyhow, we're going to circle for the first time in the history of the company, hopefully with this guidance crossing $14 billion. It makes you go back and look, okay, what was the last all-time high of the company, and how many people did we have?
The last all-time high was $13.2 billion in FY 2012, and we had 59,000 team members. With this guidance, we're basically at round numbers going to be $1 billion higher than that, and we're going to have 2,500 fewer people than we had at that peak. An extra $1 billion of revenue, 2,500 fewer people. Clearly speaks to what we've been doing as far as the efficiencies and the structure of the company. I would just reiterate, like I said at the beginning, that we still see opportunities to continue to improve that, and it's those big four that I referenced, simplification, lean supply chain and value pricing as margin enhancements. I doubt that we would continue to be at $110 million clip on restructuring. I think it's going to stabilize at some level. I don't think it'll be back.
If you looked at us historically, before the new Win Strategy, we might have been in that $20 million-$30 million type of range of restructuring, I would see us being a little bit higher than that, because I think there's still opportunities for us to continue to simplify the structure of the company, make it faster on behalf of our customers, we're going to continue to work that.
Just briefly on M&A, obviously you're in a de-leveraging and digesting mode here still primarily, do you see bolt-ons coming into your view anywhere in the portfolio and maybe in filtration in particular?
Yeah. M&A is obviously something that we stay engaged. Again, Jeff, as Tom, we stay engaged with this all the time because the relationship building is important to do whether you're in a position to deploy capital towards that or not. We have that. We have the strategic candidates that we'd like to add to the portfolio and how it fits and complements our strategy, and we're working that every day, every week. As we start to glide down, like I mentioned earlier, our debt position, we'll clearly look at that. If I was to characterize our portfolio strategy, first, we want to be consolidator of choice. If it's in our space, we'd like to be at bat. Doesn't mean we'll swing, but we'd like to be at bat to take a look.
All things being equal, we'd like to invest more in filtration, engineered materials, aerospace, and instrumentation part of the portfolio for a lot of strategic reasons, margins, resilience through a cycle, growth capabilities, and those type of things. That would be a little bit of color behind the M&A strategy.
Thank you very much.
Thanks, Jeff.
Our next question comes from Jeff Hammond with KeyBanc.
Hey. Good morning.
Hi, Jeff.
You talked about some of the disruption, but can you speak to how you're thinking about CLARCOR cost synergy savings second half versus first half?
Yeah. We're going to have $58 million of savings that we enjoy this year in fiscal 2018. About 35% of that went in the first half, We expect 65% of that in the second half.
Okay, great. Then just, Tom, you mentioned the debt pay down. What's the updated timing where you start to transition away from debt reduction?
Well, there's no formal timeline. A lot of it is contingent upon opportunities that present themselves as we're looking at that. We'd like to get closer to a 2x EBITDA multiple. We started off at 3.5x when we first did the deal, and currently at 2.9. We're making good progress, and we want to continue to demonstrate that. Then when we think we're in a better position from a debt standpoint, We'll start to look again.
Jeff, I'll add onto that. We do have some term debt of $450 million due in the fourth quarter of 2018 and $100 million due in the first quarter of 2019. You can count on that term debt being liquidated.
Okay, thanks.
Okay, I think we have time for one more question, please.
Our next question comes from Josh Pokrzywinski with Wolfe Research.
Hi, good morning. Thanks for fitting me in.
Morning, Josh.
Just to maybe come full circle on all the North America margin questions. I know that there are usually some corporate true-ups that happen in the second quarter, I think seasonally always the case. Did those look any different than normal? I know we've beaten this to death at this point.
Yeah. Josh, let me point out that the majority of the impact from the true-ups from incentive comps hits down below the line when you're looking at segments. It's down in corporate G&A. We did have adjustments, but not anything unusual compared to other years in this quarter. I don't think that that was a driver of what you're looking at, and it's not a margin impact.
Got you. Just on the tax rate, I guess all that implies the second half that's still above the 25%, just given how you had a lower first half. How should we think about the go forward, more of an annualized or fiscal 2019, however you want to think about it, rate? Is it still just 26.5%, or are you really at 25% once we get through all the initial phase-ins?
Yeah. Let me step through. For fiscal 2018, we're at a statutory U.S. rate of 28%. Blend that with our international rates, that gets us to about, with all the other discretes that have come through so far, we're estimating a 25% rate for this year. Starting in fiscal 2019, we'll be at a true 21% statutory rate for U.S., that will lower our rate. We anticipate our ongoing rate starting in 2019 and forward to be closer to 23%.
Got you. That's a helpful color. Appreciate that.
Okay. You're welcome. All right. Thanks, Josh. All right. This concludes our Q&A and our earnings call. Thank you for joining us today. Robin and Ryan will be available throughout the day to take your calls should you have further questions. Thanks, everybody. Have a good day.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a wonderful day.