Earnings Call: Q2 2015

Jan 27, 2015

Summary

Record Q2 results featured 42% adjusted EPS growth and 4% orders growth, despite significant currency pressure. FY15 adjusted EPS guidance rose to $7.90–$8.30, with adjusted segment margin forecast at 15.6%–15.9%.

Good day, ladies and gentlemen, and welcome to the second quarter 2015 Parker-Hannifin Corporation earnings conference call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. To pose a question at any time, please key star 1 on your touchtone telephone. If at any time during the call you require assistance, please key star followed by 0, and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Ms. Robin Davenport, Vice President, Corporate Finance. Please proceed. Thank you, Katina. Good morning, everyone, and welcome to Parker-Hannifin's second quarter fiscal year 2015 earnings release teleconference. Joining me today on the call is Chairman Don Washkewicz, our newly elected Chief Executive Officer, Tom Williams, and Executive Vice President and Chief Financial Officer, Jon Marten. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at www.phstock.com for 1 year following today's call. On slide 2, you will 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 posted on Parker's website at www.phstock.com. Moving to slide 3, our call agenda is outlined. We will start with Chairman Don Washkewicz as he provides highlights for the second quarter. Secondly, Parker's newly elected Chief Executive Officer, Tom Williams, will make some introductory comments. Following Tom's comments, I will provide a review of the company's second quarter performance, together with the revised guidance for fiscal year 2015. Following our prepared comments, we will open the call for Q&A session. Finally, Don will conclude today's call with some closing comments. At this time, I will turn it over to Don and ask that you refer to slide number 4. Thanks, Robin, and welcome to everyone on the call. We certainly appreciate your participation today, especially in light of the fact that you are digging out of a massive snowstorm, especially those up in the Northeast and Boston in particular. We appreciate your participating today. I will take a few minutes to talk about the quarter before I introduce Tom Williams, our new CEO, to make some additional remarks. First, a few comments on our second quarter. We had a record second quarter. Earnings per share exceeded our expectations and has led to a solid first half and continuing positive trends for the company. While we are facing challenges in certain regions and end markets, especially with respect to currency headwinds, we continue to execute well in what is a moderately positive economic environment. As you can see by the numbers, the benefits of our timely global restructuring executed in the past 18 months are helping to offset weaknesses in some of the regions and market segments, and we will get into that a little bit later. Having said that, we are confident in our ability to achieve another year of record results as outlined in the company's guidance for the year. Here are some second quarter highlights. Sales were up 1% for the quarter as strong organic growth of 4% was partially offset by significant currency headwinds. You can see that the impact of currency was very dramatic, greater than I have ever seen in the past in this position. Order rates remained positive at 4% with growth in every segment. This is the sixth consecutive quarter of positive order growth, so we are very excited about that trend as well. Segment operating margin was 13.7% or 14% as adjusted. We are very pleased with these margins, considering that the December quarter, as we have talked about in the past, is historically our weakest quarter for margins. We remain on course to deliver on our target to exceed 15% segment operating margin in fiscal year 2015. This will be, by the way, the second year in the company's history where we did deliver a 15% operating margins. The last time was in fiscal year 2012. Earnings per share increased 8% to $1.80, and on an adjusted basis, earnings increased 41% to $1.84 per share, both of which were second quarter records. Cash flow is 8.9% of sales, just shy of 9%. We expect fiscal 2015 to be our 14th consecutive fiscal year where cash flows exceed 10% of sales, and we are very pleased with that record performance as well. In addition, this is also expected to be our 14th consecutive fiscal year where free cash flow is greater than net income. Our capital allocation priorities remain the same as they have been in the past, with our top priority to maintain our dividend increases. Excuse me. As you know, our dividends have been raised for 58 consecutive years. We have increased the dividend 31% this year. We announced that last quarter. We have raised dividends 150% in the last five years. You can see that the priority that we have put on dividends is significant. We have also been active in our share repurchase program following our October announcement of a new authorization for the purchase of $2 billion to $3 billion in shares over two years. During the second quarter, as we have announced, we repurchased $817 million worth of Parker shares, and we are going to give you a little update. As of today, we have now purchased a total of $1.2 billion in Parker shares since the October announcement. That is effective as of today. As always, we will continue to look for strategic acquisitions to help achieve our growth goals going forward. Regarding the guidance, following a strong first half of the year, we have increased our guidance. Adjusted guidance has been increased to a range of $7.90 to $8.30 per share and excludes $0.20 of restructuring expenses. I want to take this opportunity now to introduce Tom Williams to all of you. Tom will lead our future earnings calls. I want to congratulate Tom, who we recently announced will become our new Chief Executive Officer effective February 1st. Tom has been highly successful in his previous role as Executive Vice President and Operating Officer for the company. He brings significant experience from across Parker's businesses, having had leadership responsibility at one time for all of our product groups in all except one of our regions during the past eight years. I would also like at this time to congratulate Lee Banks, who has been promoted to President and Chief Operating Officer. Lee, too, has had broad exposure to our businesses, groups, and regions as an Operating Officer for eight years, and at some point had responsibility for all but one of our product groups and one region for the company. Over the past 10 years, both Tom and Lee have benefited from an on-purpose management development and succession process here at the company. We are very fortunate to have the depth of talent and extensive knowledge of our company, our markets, and our customers that Tom and Lee bring. They both will be part of a newly created office of the Chief Executive that will also include our Chief Financial Officer, Jon Marten. Tom and Lee have also been elected to serve on our board. I have worked closely with Tom and Lee over many years now, and I am very confident in the strong executive leadership team that will succeed me. They have the ability and the drive to move Parker to higher levels of success and performance going forward. As Chairman, I am looking forward to a smooth transition to the new leadership. I will now hand the call over to Tom for a few comments. Thank you, Don, and thank you to everyone for joining on the call today. I am honored and excited to be the new CEO of Parker. I would like to take this moment on behalf of all the Parker employees to thank Don for his great leadership as CEO and President of our company. His vision and his passion have completely transformed Parker and yielded significant improvements in our results over the years. I really like our new leadership structure. As most of you know, Lee Banks and I have worked closely together as the two Operating Officers for the company. I look forward to continuing to work side by side with Lee as each of us take on our new roles as CEO and President and COO, respectively. In addition, we are fortunate to have a talented and deep leadership team that do a great job executing the Win Strategy. My near-term goals are, first, to continue with the performance improvements that are underway and deliver on our financial commitments for this fiscal year. Second, to execute our current capital allocation strategy of increasing annual dividends, investments for organic and acquisition growth, and share buybacks. The Win Strategy will continue as the business system and overarching strategy for the company. However, with new corporate leaders, it is an opportune time to refresh the Win Strategy. Over the next several months, we will be listening and assessing as we formulate more detailed long-term plans for our company. Our goal is to take the Win Strategy and the company's performance to the next level. Don's leadership and the Win Strategy have positioned Parker well for future growth, and it is now my job to build upon the success and reinforce our position as the leader in motion control technologies. I'll now hand things back over to Robin to provide a closer look at the results. Thank you, Tom. At this time, I'll begin to address the earnings per share for the quarter and ask that you refer to slide 6. Adjusted fully diluted earnings per share for the second quarter were $1.84 versus $1.30 for the same quarter a year ago. This equates to an increase of $0.54 or 42%. This excludes restructuring, which originally planned at $0.08, was $0.04 in the second quarter and compares to $0.06 for the same quarter last year. On slide 7, you'll find the significant components of the walk from adjusted earnings per share of $1.30 for the second quarter in 2014 to $1.84 for the second quarter of this year. Notably, the key elements that contributed to the increase were segment operating income of $0.21, reflecting improved performance across all of our segments, a reduced tax rate for the quarter that contributed $0.18, driven largely by the passage of the US Tax Extenders bill, which afforded the company increased foreign tax credit and R&D tax credit. Significantly lower other for the period contributed $0.15, which included lower stock-based compensation expense and a number of favorable one-time items, and the impact of fewer shares outstanding that equated to $0.04, offset slightly by increased interest expense of $0.03. Moving to slide 8, total company organic sales in the first quarter increased more than 4% over the same quarter last year. There was minimal contribution to sales in the quarter from acquisitions, and currency impact was considerably larger than planned, which reduced reported sales by $108 million or 3.5% in the quarter. As shown on the bottom of this slide, total company segment operating margins for the second quarter, adjusted for restructuring costs in the quarter, were 14% versus 12.7% for the same quarter last year. Restructuring costs in the quarter were $9 million versus $13 million last year. The higher adjusted segment operating income this quarter of $439 million versus $393 million last year was an 11.7% improvement, is due to higher volume and a favorable mix in North America and Aerospace, lower development costs in Aerospace, and improvements resulting from the restructuring actions taken in Europe. Moving to slide 9, focusing on the business segments. We'll commence with the Diversified Industrial North America segment. For the second quarter, North American organic sales increased 5.2% to $1.4 billion from $1.3 billion last year. There was little impact from acquisitions and a modestly negative impact from currency in the quarter. Adjusted operating income for the second quarter increased to $227 million from $201 million, or a 12.9% increase, driven mainly by higher volume and favorable mix. Continuing to slide 10, organic sales for the quarter in the Industrial International segment was flat. While acquisitions made minimal contributions, currency was a significant reduction to sales of 7.5%. Adjusting for restructuring costs, operating margins for the second quarter increased to 12.3% from 11.5% as a result of savings associated with the realignment actions taken last year. As compared to our previous Q2 guide of 13.5% for the quarter, nearly all of this difference is attributed to negative currency. Moving to slide 11 for Aerospace Systems. Organic revenues increased slightly more than 11% for the quarter. With no impact from acquisitions, currency posted modest 0.4% reduction. The sales growth for the period was driven by higher commercial OEM and military aftermarket business. Operating margins for the quarter increased 310 basis points from 8.9% to 12%, due to higher-margin OEM business and aftermarket sales volume. On slide 12, we will detail the orders changes by segment. As a reminder, Parker orders represent a trailing average and are reported as a percentage increase of absolute dollars year-over-year and exclude 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. The total orders were a positive 4% for the quarter, and Diversified Industrial North American orders for the quarter just ended increased 4%. Diversified Industrial International orders increased 1% for the quarter, and Aerospace orders increased 9% for the quarter. On slide 13, we report cash flow from operations, which year to date was $538 million, or 8.4% of sales. The significant items impacting cash in the second quarter were as follows: $910 million was returned to shareholders through share repurchases of $817 million in the quarter and dividend payments of $93 million. $1.5 billion was added to cash following the company's long-term bond issuance in November. Proceeds from the bond issuance were used to fully repay commercial paper outstanding in the amount of $702 million. Moving to slide 14, the revised guidance for our full year, fiscal year 2015, is shown. Guidance is being provided on an adjusted basis to align with last quarter. Sales growth for the full year is adjusted for the GE joint venture that commenced at the beginning of the second quarter in fiscal year 2014, and segment operating margins and earnings per share exclude restructuring charges. Beginning with sales, total adjusted sales are expected to remain flat at the midpoint, with a range of negative 1% to positive 1% as compared to the prior year. This is lower than previous guidance provided at the end of last quarter due to the negative impact from currency, mainly the strengthening of the dollar versus the EUR throughout the quarter. Given the precipitous strengthening of the dollar, we have calculated the impact of currency to spot rates as of January 19, 2015, and we have held those rates steady as we estimate the resulting year-over-year impact for the upcoming third and fourth quarters of fiscal year 2015. Adjusted organic growth at the midpoint is 3.3%, and there is minimal impact from acquisition carryover. Currency in the guidance is a deduction to sales of 3.4%, which is nearly all related to Industrial International. For total Parker, adjusted segment operating margins are forecasted to be between 15.6% and 15.9%. This compares to 14.4% realized for FY 2014 on an adjusted basis. The guidance for below-the-line items, which includes corporate admin, interest, and other, is $455 million for the year at the midpoint. This is lower than the previous guidance due to the second quarter's favorable results, which included reduced stock-based compensation expense and one-time adjustments. The full-year tax rate is projected at 27%, which is also a reduction from prior guidance of 29%. The average number of fully diluted shares outstanding used in the full-year guidance is 145.8 million shares. On the topic of share repurchase, the sizable repurchase activity during the quarter was consistent with our announcement in October. As Don mentioned, we estimate that share repurchase spend associated with the announced program will total $1.2 billion through the end of January, at which time the company plans to revert to the established 10b5-1 spend of $50 million per quarter. To date, this represents 60% of the low end of the announced repurchase program, and we anticipate that the balance of the commitment for repurchase will be spread over the remaining 20 months. For the full year, revised guidance on an adjusted EPS basis is increased to $7.90-$8.30 range, which is $8.10 at the midpoint. This guidance excludes restructuring expenses of approximately $43 million to be incurred in FY 2015, which is a reduction from the previously guided $50 million in spend. The effect of this restructuring on EPS is approximately $0.20 for the full year, which is estimated to be $0.08 in the third quarter and $0.04 in the fourth quarter. Despite the reduced projected restructuring expense, previously guided savings of $23 million remain unchanged. On slide 15, you will find a reconciliation of the major components of our revised 2015 adjusted EPS guidance to $8.10 at the midpoint from the prior guidance of $7.75. Key contributions to the increase include $0.28 from fewer shares outstanding, $0.24 from the reduced tax rate, and $0.24 from favorable reduced other expense. In turn, these are offset by a $0.25 reduction in segment operating income, factored largely by the impact of currency headwinds in the Industrial International segment, and $0.16 from higher interest expense associated with the recent long-term debt issuance. Let me summarize with a few key metrics with respect to guidance. Sales are divided 49%, or $6.4 billion in the first half, 51%, or $6.8 billion in the second half. Segment operating income is divided first half 47%, second half 53%. EPS first half, second half is 46%, 54%, or $3.73 in the first half and $4.37 in the second half at the midpoint, and these numbers exclude restructuring. Third quarter EPS is projected to be $1.94 at the midpoint, and this number has been adjusted for $0.08 of restructuring costs forecasted for the third quarter. Please remember that the forecast excludes any acquisitions and divestitures that may be made going forward in FY 2015. For consistency, we ask that you exclude restructuring expenses from your published estimates. Katina, at this time, we will open the call for questions and answers. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Please press star one to begin. So that everyone has an opportunity to ask their questions, please limit yourself to one question and one follow-up. You may reenter the queue after your initial question has been asked. Your first question comes from the line of Jamie Cook representing Credit Suisse. Please proceed. It is actually Ben Xiao on for Jamie. Good morning, Ben. And congrats, Tom and Lee. Thank you, Ben. My first question is, can you just speak to order trends by month during the quarter as well as January, if you could, in North America, Europe, and Asia? Was it pretty consistent throughout or were there any specific months that were stronger or weaker than expectations? This is Jon Marten, Ben. I think for the quarter for our Q2, the order trends came in as we expected. We had a very good October. We had a pretty good November and then a very good December. The trends in the quarter were not deeply changing from month to month. But we did have a very good December. That's what led to our guidance that we ended up providing here for the balance of the year. Okay. On the operating margin guidance, it looks like it's mainly currency that's impacting international. But I guess for North America, the implied incrementals for the back half of the year are a bit lower than the first half. Are there any specific drivers behind that? No, those are really the incrementals for North America. You are right. First of all, you are absolutely right on international. It is almost all currency driving that change in the margins. For North America, there are certain types of R&D, certain types of investments. This is consistent with what our guidance was at the end of last quarter. There is not one particular item altogether. There is a series of different items built into the guidance for the second half that is impacting slightly the incrementals for North America, which are at all-time high Q2 returns. All right, thank you. I will get back in queue. Your next question comes from the line of Nathan Jones representing Stifel. Please proceed. Good morning, Nathan. Good morning, Don, Tom, Jon, Robin. Congratulations, Don, on a very long and profitable for your investors career, and congratulations on the new jobs, both Tom and Lee. The international growth has obviously been taken down primarily due to currency. Is there an organic part of that reduced guidance there, or is it entirely currency? Almost all of it is currency. We are seeing some organic weakness in China in the construction business going forward, and that's impacting the numbers a little bit. Also internationally, in oil and gas, that's impacting the numbers a little bit. But that's less than 20% of the guidance going forward here. It's more than 80% of the reduction there, Nathan, is currency. Okay. Nathan, it's Tom. Just to add on to that, we've seen from some of the construction OEMs that they're actually shutting down the whole month of January all the way to Chinese New Year. So that's what's impacting some of those numbers. That's helpful. Thanks. On the corporate expense, which obviously includes interest, which is going up from your previous guidance, it's still gone down $15 million overall. Can you talk about what's on the good side of that ledger? Well, going forward on that is our latest analysis of all the lines in the income statement going for the next six months. When we put them all together, Nathan, it is really primarily stock-based compensation. There is also some charges that we take at corporate that we will not need to take, that has to do with some really technical accounting work in terms of LIFO. That is it in a nutshell. There is not one significant thing other than the stock-based compensation. Okay. Then just on the Diversified Industrial North America revenue growth rate, you took 50 basis points out of that at the midpoint. Is that primarily related to the oil and gas business in North America, or is there anything else impacting that? No, I think, overall, Don has not gone through the markets yet. But if we had to give one answer to it would be our viewpoint on the weaker oil and gas, going forward, and that is built into our second half. It is not a pronounced number at this point. We are watching it very closely. But that would be the major driver, Nathan. All right. Thanks very much. I will get back in queue. Thank you, Nathan. Your next question comes from the line of Andrew Obin, representing Bank of America. Please proceed. Good morning, Andrew. Yes. Good morning. Just a question on buyback. Should we assume that the rest of the buyback in the next 20 months will be completed, you will do it, and then you will tell us the way you do it beyond $50 million a quarter? Is that what we should be thinking? That's correct. Yes. Can you guys just comment on the impact of oil on Parker's numbers? First, maybe talk about the negatives. I know we have a lot of questions from investors as to what exactly your oil exposure is. There's a lot of debate there, and if you could walk us through that. The positive impact. How long do you think until we see the positive impact on spares in the Aerospace business? Thank you. Okay, Andrew. Just to start with oil and gas, then I'll get to the Aerospace later. In big picture, our FY most recent 12 months' oil and gas exposure is about $800 million. That's about 6% of our sales. Half of that is OEM, half of that is aftermarket. It is also almost half in North America and about 35% in Europe, and the balance around the world. We feel really good about the diversity of our oil and gas exposure. Half of it being in the aftermarket gives us less variability that we think that we'll see there going forward. We've made great strides in our oil and gas exposure, bringing new technology, new innovation, new products to markets that have not seen our technology before. That's what's helped us really more than double our oil and gas exposure over the last five years. We're making inroads in that market because of the productivity and the savings that we're bringing to our customers. Now, of course, going forward, we're keeping a close eye on how that market is going to trend. Right now, today, anecdotally, of course, we're hearing some comments from our customers. It is not going to impact our Q3, and that's what's built into our guidance dramatically. We don't think that it's going to really have a dramatic impact in our Q4 either. We do feel like that, given our exposure, given our diversity, and given the different types of upstream and downstream exposure that we have to oil and gas, that we won't be hurt as badly as you might think that we would, given the $800 million in sales in the past 12 months. So we feel that we are going to keep everybody updated each quarter going forward. We know that we'll have an impact, but how big that will be is impossible to say right now. We're just going to continue to update you as the quarters go on. That's the big picture on oil and gas. On the Aerospace Systems spares, I think that in our guidance going forward, we have a modest increase in our spares projected for the second half. There is no doubt that as time goes on, that spares and repairs as a percentage of our Aerospace Systems business will increase. When that inflection point is as to when it starts to ramp up dramatically is a question of debate right now. It's certainly not in our FY 2015. When we pull together FY 2016 and we start really making our way through the OEM super cycle that we're in right now, we'll be able to really have a better estimate as many of the new aircraft start to order spares as they get more hours on them. So, I think it's clearly a tailwind for us going forward. Terrific. Thank you very much. Thank you, Andrew. Your next question comes from the line of John Inch representing Deutsche Bank. Please proceed. Oh, thank you. Good morning, everyone. Can I just ask about the Diversified Industrial International margin update to guidance? I think, Robin, you said that the downshift was due to FX, but why would that impact margins? Doesn't FX convert at sort of the average margins so that it should sort of provide a read-through at a constant basis? Or are your European margins higher in terms of where you're seeing the weakness, or what. I'm not sure I really follow it. Well, our FX, you're right, it does convert at our average margin. We're reducing our sales forecast going forward. We are seeing in our international business, John, some additional headwinds when it comes to reaching the sales goals that we thought that we would get, and so we're not getting the absolute margins that we're looking for. But it is true that our margins are, and our updated guidance are slightly down. Okay. John, the drag is what you called out, sort of the stoppage of construction. I'm assuming there's a mix issue then with respect to where you're seeing disruption on your margins. Is that fair? Yes. It would be in Europe. We have a very healthy oil and gas business in Europe, and so that would be part of it. It also would be internationally in China with the additional issues that we are calling out here in the construction end markets there, too. Why is your tax rate going down 2 points? That seems like an awful lot. If international's a little weaker, doesn't international have lower tax rates? Why would the tax rate be going down 2 points? Well, in our original guidance, there's two things that are really driving that. One's the legislation that was passed in December, and we've gotten a significant research and development one-time credit. We're also building in our tax rate the impact of the balance of the legislation and the US Tax Extenders bill that was passed. But also, we updated our guidance in terms of what our international income will be vis-a-vis our total income for the year. When we did that, it is counterintuitive, but when we did do that, we did end up showing a larger percentage of our international income in our tax rate, therefore, driving down the overall tax rate for the company. I guess I could take that offline, but is there any soundbite? How does that work? How do your international numbers go down, but I'm not sure I'm following how that. It has to do with the mix of the income by country internationally. Okay. I can explain that to you in more detail if you would like. No, no, that's fine. Great. Thank you, and thanks. Congratulations to Tom and Lee. Appreciate it. And to Don. Thank you, John. Your next question comes from the line of Joe Ritchie representing Goldman Sachs. Please proceed. Yes. Thank you. Good morning, everyone. Good morning. My first question is really on the Aerospace segment. It looks like you had really good organic growth this quarter, good margin expansion. As you look into the back half of the year, you are still expecting a pretty significant improvement on the margin. If you could just provide some color on what is going to drive that improvement. Is R&D as a percentage of sales still expected to be 9%? Are there mix issues that are going to benefit that in the second half? Yeah, we are seeing that R&D as a percent of sales is going to still be right around the 9% level here. So that would be our update for you today, Joe. I think that it is going to be additional volume through the second half that is going to drive margins further. It is also going to be a slightly better mix for us in the commercial MRO and business here vis-a-vis our OEM business going forward here, too, which will be driving incremental margins for us. Okay. Then I guess following up maybe on Nathan's question from earlier, is it typical to see Chinese construction OEMs basically shut down spending this early ahead of the Chinese New Year? Joe, this is Tom. No, that is definitely very unusual. Maybe they might extend it a week, but to extend it for that period of time is definitely unusual. That's one of the impacts we included in the international segment for the second half of the year. Okay. All right. Then maybe if I could sneak in one last one on the buyback. If you could just kind of walk through your funding assumptions for the buyback. How much of the buyback or what percentage of the buyback can you fund through going out into the CP market versus Versus free cash flow versus term debt. That would be helpful. Thank you. Yeah, Joe, our intent is to have our CP market, our CP balance at zero by June 30. We are going to be funding our additional incremental stock buybacks through operating cash flow. Okay. The debt that you called out at the end of last year? Well, the debt that we called out at the end of last year was used to pay down, as Robin explained, the CP. Okay that we had outstanding. Okay, great. Thanks, guys. Okay. Thank you, Joe. Your next question comes from the line of Jeff Hammond, representing KeyBanc Capital Markets. Please proceed. Hi. Good morning, guys. Congrats to Tom and Lee, and also to Don. Good morning, Jeff. Hey, just a couple housekeeping items on the buyback. Can you give us ending diluted share count for the quarter, and what your average price you paid for the $1.2 billion or so that you bought? Yeah. The average price that we paid for the $1.2 billion was $126.5. Okay. The ending share count at the end of the quarter was 148.7. Okay. Then maybe you can just address the M&A pipeline and if any of this market choppiness is likely to bring back any of these larger deals you had looked at. Yeah, Jeff, this is Tom. I would characterize the pipeline as kind of skinny right now, not as deep as we'd like to have. Valuations continue to be high. However, our strategy is still to grow via acquisitions, and we've got a history of being a great acquirer and gaining a lot of synergies as we do that, so we will continue to do that. We do want to beef up that pipeline. That'll be one of the things that Lee and I focus on, is to increase that pipeline. I don't see here during the share buyback period us doing a very large deal. I think we're going to focus on kind of our bread-and-butter acquisitions, the normal size you've seen us do historically. Maybe after that, if it made sense, if the right property came along, we'd look at it. I think we'll focus on our space and sizes you've seen us do in the past. Hey, John, just back to the share count. Yeah. I think you had 148.2 for the average for the quarter. I would expect that the ending would have come in lower than that given the buyback activity. Well, I thought that you asked for the period ending number there, Jeff, so I would have to get back to you on the average for the quarter. I can tell you this, the average for the year that is included in our guidance is 145.8. Okay, great. I will follow up offline. Okay. Your next question comes from the line of Josh Pokrzywinski, representing Buckingham Research. Please proceed. Hi, good morning all again. Congratulations to Don, Tom, Robin, and Lee. Just first question here, I guess a lot of focus on the oil and gas business. Maybe we can look at that from the other side in terms of price cost. Clearly, commodities have come in across the board. You guys technically have pretty good pricing power through distribution. Is that something you factored into your guidance or something we should expect to see in this fiscal year? Josh, it's Tom. As far as materials and price, maybe just step back for a second and talk about how we normally look at this. We always look at sell price index, or SPI, and we look at purchase price index, what we're paying coming in, and the goal is always to have that be slightly positive, which is what we have factored into the guidance. When I look at materials, it's kind of a mixed bag. We've got aluminum and zinc that are slightly plus. I'm giving you prices versus prior year. On the negative side, meaning prices going down, castings, copper, but remember, copper is typically indexed for a lot of our OEMs, and it flows through on pricing and material when that happens. Nickel is soft, and then bar stock is flat. It's kind of a mixed bag, but what's in the guidance is a slightly positive help with PPI versus SPI. Gotcha. Then just to follow up on the buyback, have you guys been able to tighten the range on total purchase over the next 20 months? Are we still sticking with that billion-dollar wide range at this point? Josh, it's Tom again. The range is really going to be predicated by what other capital opportunities are out there, primarily acquisitions. So, we're committed to the minimum side for sure, the $2 billion. If we saw acquisitions that we liked, we'd stay at the low end of that, at the $2 billion. If there wasn't a lot of activity that we could action, you'll see us towards the top. Got you. So there is a commitment, though, to spend $3 billion in some way, shape, or form? That's right. Got you. Thanks. Thank you, Josh. Your next question comes from the line of Sara Magers, representing Wells Fargo Securities. Please proceed. Good morning. This is Sara on for Andy Casey. I realize that you've talked a little bit about the components of the higher other income, but could you give a little bit more color as to the lower stock comp expense and the favorable one-time items, and within Q2 and then within the guidance, and if possible, the split for Q3 and Q4 in the second half? Well, we see the split in Q3 and Q4 to be just about 50/50. The stock comp expense being down as we update our guidance, there is a lot of variables involved, but in general, it has to do with our relative profitability, our relative profitability to our past, our relative profitability in accordance with our proxy peers, and it also has to do with how we are trending long-term, over a 3 and a 4-year time period. We are constantly updating those updates in accordance with the plan determinations. As we do that, it is just incumbent upon us to keep the guidance updated. That line in our income statement can be quite variable over time. So we are just trying to give you the best information that we have today. Great. Thank you very much. Thank you, Sara. Your next question comes from the line of Jeff Sprague, representing Vertical Research Partners. Please proceed. Everyone. I was wondering if you could just address restructuring. A small change, but with the challenging world, a little surprised you dialed it back a little bit. Would that reflect that you're getting more bang for the buck, or there's savings coming through at a faster rate? Maybe you could just elaborate there. Yeah, Jeff, I think the really key message there is that our European restructuring program is just about complete. The dialing back of the restructuring program has more to do with projects that we had underway outside of Europe that were dialed in for our fourth quarter. We didn't really have much savings built, any savings built into our FY 2015 that were going to impact FY 2016. Those projects are moved out of our guidance and may or may not be in our FY 2016 guidance. We have not made that final determination yet, but we'll update you then. Right. I was just wondering on, maybe this gets to talking about some of the key verticals, but Motion Systems looks like it was relatively weak versus other parts of the portfolio. Could you address what's going on there in the big bucket, ag, off-highway, other key drivers? Yeah, I'll start on the technology platforms, and I'll let Don go through all the markets. First, on the Motion Systems, and really the Flow and Process Control, they're the two technology platforms that were soft. If you look at all the platforms, they had the most exposure to some of the soft end markets, farm and ag, construction, and mining. So those are why those two are down. But then what the technology platform show you is the power of the portfolio here. Engineered Materials and Filtration and Aerospace were positive offsetting that because of their exposure to automotive, telecom. Of course, anything related to aerospace has been positive. Truck, marine, and even with early signs in oil and gas, oil and gas is still positive year-over-year for us. Motion and Flow and Process Control, they were soft because of those ag, construction, mining. But I'll let Don go through the typical market review. Jeff, would you like a little color on the PMIs and some of the trends, order trends from that perspective? Yeah, I've probably got our hands on the PMIs pretty well, but any vertical market color would be helpful, yeah. Okay. Maybe I'll start with the regions. If we look at Industrial North America, the way I would describe it would be moderately steady growth there. 312 order trends, north of 100 at about 104, 1212 running about 105. So Industrial North America, pretty consistent with what we've been talking about as far as our order activity here. It's been moderate, steady growth, and it's been positive. Europe is flat, 312, 100 to 101. In that range, pretty flat, 1212 running about 100, which means there's virtually no growth in Europe currently. So that's what's happening there. By the way, that does not include the headwind from the currency. This is just the underlying growth of the region. Slower growth in Asia, 312 running about 102, 1212 still at 107, so we would expect the 1212 to trend down slightly over the next several months, and we'll be updating that as we go forward. Declining growth in Latin America. We've talked about that before. Latin America is one of the toughest regions out there right now. We have a smaller position there, but it's still a tougher region. 312 running about 90%. I want to just comment a little bit on some of the key markets in the same fashion that I have in the past. The one thing that I do want to point out, and that we tend to overlook in many cases, is our distribution channel. That is one of the strongest segments we have of all segments. That represents half of our industrial business. 312 trend and distribution alone is running about 110%, which is extremely strong. 1212 is running about 110. So here's a segment of our business that's just going full blast and doing extremely well. So I would say that segment is very strong. The other very strong segment out there right now is heavy-duty truck. Three twelve cyclical pressure curves running about 112, twelve twelve running about 110. So very comparable to our distribution. Those are the two strongest market segments for us right now, doing extremely well. We see early recovery in our numbers in the construction, interestingly enough. Three twelve on the construction side, off-highway, running about 110. Twelve twelve is still closer to 100, but that would bode well. It seems like early days in a construction recovery that we're witnessing right now, and that would be positive going forward. I'm not talking about Asia so much now when I'm talking about that, because what Tom said is still true in Asia. There's somewhat of a slowdown there. This would be more reflective of what's happening in North America. Another segment would be semi-con market segment. That's pretty much flat. Three twelve and twelve twelve running about 100. I think everyone knows that ag is weakening. Three twelve there is running around 90%, twelve twelve running about 90. So that probably has not hit bottom yet. Hopefully, that would happen within the near term. So that's a little bit of headwind going against us. Aerospace, of course, is strong. Twelve twelve running around 110% there as well. So that's doing well. So those would be some of the pressure curves. These would be the order trend curves now, and then I'll just give you some sequential activity in the different markets as I've done in the past. Markets that are trending sequentially very strong for us would be all the Aerospace Systems, both the commercial and defense side, with the exception of the defense OEM. So defense aftermarket, commercial OEM, and aftermarket being very positive sequentially. I mentioned distribution being very strong. Cars and light trucks, forestry, telecom, marine are all positive sequentially. Heavy-duty trucks, I mentioned before, extremely strong right now. Industrial trucks and material handling, positive as well, along with residential air conditioning. The list of segments that are sequentially going down or negative is relatively short. We've got Aerospace Systems defense OEM business, farm and ag, which I just mentioned earlier. Machine tools, general industrial, life sciences, and mining would be on the negative side. And then, kind of flat right now, but with the comments that I made earlier still in effect, flat being off-highway construction. Again, keep in mind that North America is looking a little bit positive in the early going here, and Asia being more negative in construction. The other flat segments for us would be semi-con, lawn and turf, power gen, and then commercial refrigeration, commercial air conditioning, and industrial refrigeration. Hopefully that was helpful to give you a little bit more color on some of the segments and some of the regions out there as to what's happening. But I think the takeaway is that, yes, there are some headwinds that we have, but the nice thing is, as Parker is so broad-based in so many different market segments, there's some nice tailwinds as well that are offsetting some of the headwinds that we're seeing. Thank you, and congrats to all. Thank you. Thank you, Jeff. With no further questions at this time, I would now like to turn the call back to Ms. Robin Davenport for closing remarks. Thank you, Katina. This concludes our Q&A session, and at this time I'd like to turn the call over to Don for his closing comments. Okay, thank you. Just a few closing comments. First of all, I want to again thank everyone on the call for joining us this morning, especially in the tough environment that you have out there for those up in the Northeast, of course. I also want to thank you. I heard a lot of congratulations on the phone, and I just want to thank you for those congrats, both for Tom and Lee and myself in our new assignments. I have certainly enjoyed participating on our quarterly calls over the past 15 years. Fortunately for Parker and our shareholders, they have been some of the best years in the company's history. With Tom and Lee now at the helm, I'm totally confident that they will continue the momentum we have established and improve upon the successes we have had. I am pleased to end on a positive note, as we anticipate that fiscal 2015 will be a record year, and that we will exceed our much sought-after goal of 15% segment operating margin over the cycle. As always, I will take this opportunity to thank our employees, our global employees, our global workforce, for their continued commitment and success, not only today but during all of the years that I have led Parker. Our global team has done an amazing job executing the Win Strategy and delivering positive results year-over-year. My best wishes and thanks to all of you in the financial community for your support of Parker. I look forward to continuing to serve our shareholders, along with my fellow directors and our new management team, as chairman of the board. Of course, if you have any additional questions, Robin and Todd will be around for the balance of the day. With that, I just want to once again thank you, and have a great day. Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.