Earnings Call: Q4 2013

Aug 6, 2013

Summary

FY2013 revenue declined 1% and diluted EPS fell 16% amid soft markets and lower volume. FY2014 EPS guidance is $7.35–$8.15, including a GE Aviation JV gain, while restructuring aims to restore 15% segment margins by FY2015.

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Parker-Hannifin Corporation earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero, 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. Pamela Huggins, Vice President and Treasurer. Please proceed, ma'am. Thanks, Shaquana. Good morning, everyone. It's Pam Huggins here, just as Shaquana mentioned. I'd like to welcome you to Parker-Hannifin's fourth quarter and fiscal year 2013 earnings release teleconference. Joining me today is Chairman, CEO, and President, Don Washkewicz, and Executive Vice President and Chief Financial Officer, Jon Marten. For those of you who wish to do so, you may follow today's presentation with PowerPoint slides that have been presented on Parker's website at www.phstock.com. For those of you not online, the slides will remain posted on the company's investor information website one year after today's call. At this time, please reference slide number 2 in the slide deck, which is the safe harbor disclosure statement addressing forward-looking statements. Please take note of this statement in its entirety, if you haven't already done so. Now moving to slide number 3. This slide, as required, indicates that in cases where non-GAAP numbers have been used, they've been reconciled to the appropriate GAAP numbers, and they're posted on Parker's website as well. Slide number 4. The agenda for today consists of four parts as usual. Don Washkewicz, Chairman, CEO, and President, will provide highlights for the quarter and year. Second, I'll provide a review including key performance measures for the fourth quarter and year, concluding with the 2014 guidance. The third part of the call will consist of the standard Q&A session. For the fourth part of the call, Don will close with some final comments. At this time, I'm going to turn it over to Don and ask that you refer to slide number 5, titled Highlights Fiscal Year 2013. Thanks, Pam, and welcome to everyone on the call. We certainly appreciate your participation today. I'll make a few brief comments, and then Pam is going to return for a more detailed review of the results. First of all, I'd like to start by talking a little bit about the full year. Our performance for fiscal 2013 largely reflected soft global economic conditions, particularly outside the U.S. Sales were $13 billion. They were positively impacted by a 3% contribution from acquisitions, but largely offset by a 3% decline organically, which includes the divestiture of our automotive business, which was -1%. So we had a +3% contribution from acquisitions, offset by 2% organically and then 1% divestiture, or 3% total, which kind of offset the 3% increase from acquisitions. Then we had a -1% currency on top of that. For that, the net for the whole year then was down 1%. I hope that's clear as to how we get to that number. What was happening basically is lower margin acquisitions were replacing higher margin organic growth throughout the year. Earnings for the year were within our guidance and were impacted primarily by lower volume and acquisition and integration-related expenses. Segment operating margins were 13.8%, which was a strong performance despite soft economic conditions. Operating cash flow before a discretionary contribution to our pension plan was $1.4 billion or 10.9% of sales. I will just make the comment that this is the 12th year now in a row that we have generated greater than 10% operating cash flow for the company. We are pretty excited about that. In fiscal 2013, we acquired eight companies totaling approximately a half a billion dollars in annualized sales, and we completed divestitures within the CIC group totaling about $155 million. As previously announced, we have reached agreement to form a 50/50 joint venture with GE Aviation to produce fuel nozzles for current and future GE Aviation commercial engine platforms. We anticipate completion of this transaction in the second quarter of fiscal 2014. In this fiscal year, we also increased our dividend payout twice for a total of 10%. Parker has now increased dividends for 57 consecutive years. We also repurchased $257 million of our own shares. We purchased $200 million under the 10b5-1 program, and $57 million were additional discretionary purchases of our shares. That is $257 million total for the year. By the way, the average price there was about $86 a share. Just switching now for a few comments about the quarter. Our sales for the fourth quarter were a record for the company. We are finally coming off the bottom with respect to order trends. You have seen those order trends. July, and I will just repeat July, not June. The June orders are what you have been looking at there. But July orders are in line with our expectation and supportive of our current guidance. They are coming in okay. Acquisitions contributed 3% to revenue growth in the quarter, offset by a 2% decline in organic sales. Net income for the quarter was $271 million, or $1.78 in fully diluted earnings per share. A number of factors impacted our fourth quarter earnings, including lower than projected volume. We had a record quarter, but we had expected higher numbers than even what we came in with. Higher acquisition and integration expenses also impacted us and then inventory reductions as well. Total segment operating margins in the fourth quarter were the highest of any quarter in fiscal 2013, at 14.5%. We are pretty happy about that. Operating margins in our CIC segment were an all-time record at 13.8%, and that group was basically benefiting from all of the restructuring that we have done over the last couple of years. A nice record for the CIC group. Operating cash flow was very strong in the quarter at $472 million, or 13.8% of sales. A very strong number for us. Looking out to next fiscal year, we are anticipating a modest growth year as a result of the global macroeconomic conditions, and have provided guidance of $7.35-$8.15 in diluted earnings per share. These estimates for fiscal 2014 compared with 2013 include an expected gain of approximately $1.50 from the joint venture with GE Aviation and higher operating expenses of approximately $100 million due to possible restructuring activities. I will just stop for a moment there and just explain what we are doing there so that is clear to everybody. Our goal, as we have stated over the last 12 or 13 years now, as we launched the WIN strategy back at the early 2000s, was to get the performance of the company up to 15% operating margin levels. We did that, and we wanted to do that over the cycle. We just did not want to hit it one time and then fall off. We wanted to average 15% over a cycle. In order to do that, or by doing that, we would achieve top quartile performance against our peers. That has been our objective and our goal ever since. We have been marching toward that. We hit 15.2% last year. We hit 13.8% this year because of all the factors that we talked about earlier. We decided this was the appropriate time to make a major restructuring. This will be a bigger restructuring than we have done in any one year in the company's history. We have done $50 million before. We have done $40 million. We have never done a year where we did $100 million in restructuring in the company. We are doing this to ensure that we hit 15% by 2015. That is our tagline internally here is we want 15% by fiscal 2015. That is a year from now. All this restructuring that we are taking on right now, the $100 million is going to happen this year. We hope to get through all of it this year, fiscal 2014. That is the reason why it is impacting our numbers, with the payoff being about a year from now, starting in fiscal 2015, when we are targeting 15%. I hope everybody can appreciate what that is going to entail. It is going to be a lot of work and hard work and effort on everyone's part here, but that is the rationale for it. I think the timing is right because we are looking at soft markets anyway. This is a good time to get it done and get our business right-sized for the business that we have facing us going forward. Just wanted to make that comment. We can talk more about that in the Q&A if you would like. Also, to provide greater visibility to the underlying businesses in our diversified industrial segment, we are also going to start providing some supplemental sales information in September for three new global technology platforms. One platform is going to be called Motion Systems, another platform will be Flow and Process Control, and then the third platform will be Filtration and Engineered Materials. I think that will give us a lot more transparency for the company for people that are not that familiar with us looking from the outside in, and we can discuss that a little bit further in the Q&A as well. Right now I am going to turn it back over to Pam, and she is going to give you a little bit more detail for the quarter. Thanks, Don. I will ask that you reference slide number seven, and I will begin by addressing earnings per share for the quarter. Fully diluted earnings per share came in at $1.78 for the fourth quarter. Again, this is the highest quarter of the fiscal year and an increase of 6% sequentially versus the third quarter. Of course, $1.78 is less than last year, $0.18. We did $1.96 last year. For the full year, fully diluted earnings per share came in at $6.26. Again, $1.19 or 16% lower than last year's fully diluted earnings per share of $7.45. Moving to slide number eight and just laying out the significant components of the $0.18 decrease in earnings per share for the fourth quarter-over-quarter. The majority of the $0.18, as you can see on here, or the $0.14, it is the result of decreased segment operating income, and this is mainly due to decreased volume in North America. I noticed that most of you did pick that up in your reports this morning. It is also due to acquisition-related expenses and then, of course, inventory reductions that Don talked about, both in North America and international. Other expense was higher by $0.06 as a result of higher pension expense. We took the liberty to net some of these numbers here. EPS was favorably impacted by $0.02 as a result of reduced shares outstanding, obviously in connection with the share repurchases. Then we netted below-the-line items, corporate G&A interest and taxes, as they offset one another. Moving to slide number nine, sales. Again, $6.26 versus the $7.45. We have laid out the components of the decrease here for you of the $1.19. Again, as you can see, $1 of the $0.19 really related to segment operating income. This was mostly due to a decrease in base volume in Industrial International and North America. Again, acquisition integration and related expenses. In this segment, in International, there was also some currency impact. Then of course, the inventory reductions as well. Other expense increased $0.30 due to increased pension expense. Again, we took the liberty to net a little bit here. If you hear a little bit of a different number by a penny or two, don't be concerned. Then the decreases were partially offset by a favorable impact from share repurchases of 12. Again, we netted the below-the-line items. Moving to slide number 10. Looking at the top line, reported revenues for the quarter, they increased 1% to $3.43 billion, and that is slightly ahead of last year as a result of acquisitions. That added 3% to revenue growth, partially offset by an organic decline of 2%. For the full year, reported revenues of $13 billion. They were down 1%. This was really due to currency if you net the acquisition growth of 3% and the organic decline of 3%. Segment operating margins for the quarter decreased 100 basis points versus last year. On a sequential basis, margins increased 50 basis points from the third quarter. Again, as we already said, the margins are the highest of any quarter this year. For the full year, segment operating margins were down 140 basis points. The reason for this is all the things that I mentioned earlier. And just to give you a little idea as far as restructuring charges, $0.02 were incurred in the quarter, and on a year-to-date basis, $0.06. Moving to slide number 11 and focusing on segments, I will commence with Industrial North America. North American organic revenues decreased 6%. Acquisitions added 3% to revenues, while currency was relatively minor. As such, reported revenues decreased 3%, ending the year at $1.3 billion, fairly consistent with the prior year at $1.34 billion. Operating income decreased 10%, $225 million versus $249 million. Again, this was due to decreased volume, acquisition-related charges, and inventory reductions. For the full year, reported revenue was flat. Acquisition growth of 4% offset the organic revenue decline of 4%. Operating income decreased to $845 million from $895 million. Again, due to the same reasons that I just mentioned: decreased volume, acquisition integration, and related charges in inventory. The result in operating margin for the year decreased 110 basis points to 16.7% from 17.8%. Continuing with the Industrial segment, moving to International. Slide number 12. For the quarter, acquisitions added 5% to revenues. This was partially offset by a negative currency impact of 1% and a decline in base revenues of 1%, resulting in a 3% increase in reported revenues. Good to see International turning around here. Operating margin decreased to $156 million from $164 million. Again, due to the same mentions. You will see a theme throughout these comments due to the same reasons that I mentioned earlier. For the year, reported revenues declined 3% due to currency. Acquisitions added 5%, but this was offset by a decline in base revenues of the same magnitude. Operating margin declined to $584 million from $733 million for the year. Again, I will not mention the same reasons that I have mentioned earlier. As I said, there is a theme running through these comments. Moving to slide number 13, the Aerospace segment. Aerospace fourth quarter 2013 reported and organic revenues increased 9.5%. Of course, there were no acquisitions or currency impact on that segment. Operating margin increased to $86 million from $85 million versus the same quarter. This is with an additional $10 million in development expenses in the year. Development expenses were 9.8% of sales for the quarter. So below the target of 10% that we have been talking about. Moving to the CIC segment. It is kind of sad, the last time that I will be talking about this segment. Prior to commencing with the numbers, I am sure that you saw the press release last week announcing the consolidation of CIC into the Industrial segment. Attached to the press release, a table was provided that restated historical numbers for Industrial North America and Industrial International for 2 full years, fiscal year 2012, fiscal year 2011, and 3 quarters of fiscal year 2013. We have revised the table to include the fourth quarter just ended, and it is in the appendix of this slide deck, obviously for your convenience. Now back to the results for CIC. Slide number 14 indicates that for the quarter, core and reported revenues were down 16%. Just as a reminder, there was a divestiture of the automotive air conditioning business, which took place in this segment. The prior year number hasn't been restated for this divestiture. Had the restatement occurred, revenues would have decreased 3%. With less revenue, segment operating margin as a percent of sales increased to 13.8% from 11.7% a year ago. Way to go out, CIC. For the year, revenues were down 14%, again for the same reason, and margins increased to 9.9% from 8.7% last year. Excluding the divestiture, revenues would've been down 4%. Now let's move to orders on slide number 15. I'm sure you've seen these numbers, but just as a reminder, these numbers represent a trailing three-month average and are reported as a percentage increase of absolute dollars year-over-year. These exclude acquisitions and currency, except for Aerospace. Aerospace is reported using a 12-month rolling average. As you can see from this slide, orders were flat for the June quarter just ended, reflecting improvement sequentially across the segments. North American orders for the quarter just ended decreased 5%. International increased 3%. Europe became positive in the quarter, while Asia is still negative year-over-year. Aerospace orders increased 3% for the quarter using the 12-month rolling, and in C&IC, orders were flat. Orders coming off the bottom with slight improvement over the last quarter. As we know, one month doesn't make a trend. Moving to the balance sheet. The balance sheet remains strong. In the quarter, $472 million in cash was generated from operating activities. This allowed us to reduce the total debt by $194 million, due to a pay-down of commercial paper. Cash on hand increased to $104 million in the quarter. DSI, or days sales in inventory, came in at 62 days for the quarter versus 67 last quarter. This is the nice improvement in inventory that we've been talking about throughout these comments. The decrease in the quarter represents a reduction of almost $90 million. Inventory levels for the year at 10.6% of sales are a record for the company. Accounts receivable in terms of the DSO closed at 49, in line with last quarter, and we continue to make improvement on the weighted average days payable outstanding. June came in at 56 versus March at 54. The cash flow statement, the $472 million in cash that we generated, 13.8% of sales. After increasing the cash on hand by $108 million, cash was used for the following: $194 million, again, to retire commercial paper that I just talked about, $118 million returned to the shareholders via share repurchase and dividend payments, and then of course $52 million or 2% of sales utilized in connection with capital expenditures. Now slide 18 through 21. Those three slides are— I guess four slides represent the guidance. On Slide 18, the guidance for revenues and operating margins by segment have been provided. I'm not going to read through this information on the call, but the detail has been provided there for your convenience. Just as a reminder, these numbers include the JV that Don talked about and the restructuring that Don mentioned as well. Slide number 19. This slide lays out the guidance assumptions as follows. The full year guidance assumes increased revenue year-over-year of 2%, comprised of 2% organic growth. There is also 1% growth as a result of acquisition carryover from last year, but this is offset by 1% reduction in sales in connection with the joint venture in CIC. Segment operating margins, 13.4%-14%, and then guidance has been provided in total for the items below segment operating income, what we refer to as below the line items. That is forecasted to be $120 million at the midpoint. What you need to remember is that this $120 million includes a gain of $360 million in the second quarter as a result of the joint venture with GE Aviation. That was announced in a press release in November. So excluding this gain, the total for the below the line items is $480 million at the midpoint. The tax rate for the year is projected to be 30.8% due to the JV gain, which is taxed at 37%, and the JV gain is included in the second quarter. So the tax rate, I know this is a little confusing, the tax rate excluding the gain is 29%. So we will answer any questions that you have with respect to that if there was anything that is confusing you after having gone through these slides. The number of outstanding shares used in the guidance is 151.6 million. So moving to slide number 20. This slide summarizes the guidance on a diluted earnings per share basis, and using the assumptions that I just explained and as documented at the bottom of slide 19, the guidance is $7.35-$8.15. That is $7.75 at the midpoint. The slide also details the walk where the major components from actual fiscal year 2013 to the guidance of $7.75 at the midpoint. As you know, I saw it in all your reports, so I know you picked up on it. The full year guidance includes $1.50 earnings per share in the second quarter related to the GE Aviation joint venture, $0.44 as a result of additional segment operating income. It is offset by a net restructuring of $0.32. So $98 million-$100 million in restructuring, net of $30 million savings. Then, of course, we had $0.12 from higher tax rate. The press release called out $0.30 for restructuring. Obviously, we just used a rounded number. We used $0.32 in the guidance. Just a couple of salient points with respect to the guidance. First half, second half is 48/52. Segment operating income first half, second half is 45% in the first half, 55% in the second half. Then EPS first half, second half is 53%/47%. The midpoint of the guidance for the first quarter is $1.40. Please remember that the forecast excludes any further acquisitions, divestitures that may be made in fiscal year 2014. So there is a lot there. So we are anxious to get to Q&A. So at this time, please open it up to Q&A, Shaquana. Yes, ma'am. Ladies and gentlemen, if you wish to pose 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. Your first question comes from the line of Steve Volkmann representing Jefferies. Please proceed. Hi, good morning. Good morning, Steve. I am wondering if we can touch a little bit, the cash flow continues to be very strong and the balance sheet also very strong. Don, you talked in the past couple, three quarters about stepping up the share repurchase, but obviously we haven't really seen that, and I don't think there's any share repurchase in your guidance. I guess I'm wondering if you can just address, is there enough in the pipeline acquisition-wise that you feel like you want to hold off on this? Is the price not attractive, or is there some potential for some share repurchase to sort of be additive to all this guidance for 2014? Good question, Steve. I think our priority as far as the capital allocations, first of all, would be the dividends. Now you've seen what we've been able to do with the dividends this past year, and we'll continue to work on that. We want to get to about a 30% payout on the dividends moving up from 25%. So that will continue to be a focus for us. As far as the acquisitions and the share repurchase, our interest right now is in acquisitions. Basically, the interest is strong now for acquisitions because of the soft global economy that we're faced with. So I think the organic growth for the near term here, as you can see, it's going to be subdued. So what we would like to do is to spend that money on acquisitions as opposed to a share repurchase. However, if we're going to continue to do at least $200 million in share repurchases to the 10b5-1, that's kind of a steady state number for us going forward. However, if acquisitions don't materialize for the extended period of time, we will definitely consider doing more share repurchase, no question about it. I don't want to leave a lot of money on the balance sheet and not putting it to good use. So we will do one or the other, or both, for sure. But we also want to hit the dividends. We'll continue to work on the dividends. Then I think we're in pretty good shape on the pensions right now after having what we did last year for the pension. So I don't think we're going to have to allocate much more to the pensions at this point in time. Does that help you, Steve? It does, but I'm wondering if I can just push you a little bit. You did about $500 million, I think, in acquisition revenue. Right In 2013. Is 2014 going to be up meaningfully from that? We would like to have at least that much. We're targeting 4%-5% for acquisitions, so we'd like to have at least that much. We can handle more if we find the right properties and at the right prices. But one of the challenges that you have any time when you go into an environment like this, especially with acquisitions from a practical standpoint is, as sales, the global world outlook as far as growth is subdued, of course, that has a major impact on your discounted cash flow valuations. So there's always this realization, has to be a meeting of the minds, if you will, between this buyer and the seller as to what reality is going forward. So there's that challenge that you always have with acquisitions. We will put in what we think is a prudent growth rate. They'll figure that, of course, the growth rate's going to be much higher, then you have to kind of come to terms with that. So that's one of the challenges you have in an environment like this, especially when there's very little growth. That depends on where the growth is at as well. For instance, in some of the regions around the world, I'm not sure that you can put much of a growth rate in at all into a model based on what we know right now. So that's where the challenge comes in with acquisitions. I hope you follow what I'm saying there. That's not to say we can't do them, and we're going to continue to look. We're looking at some right now. We'll continue to focus on it, and I'm hopeful that we can meet our target at least 4%-5% and more. We've got plenty of capacity to do more if we find the right properties. Great. That's helpful. Then just quickly clarifying your 15% target for 2015. I think what you're saying is you think you can do that kind of even in this very slow growth environment that we're all enjoying. Exactly. I'll put that in quotes. Yes. I just want to make sure that's on a segment basis, is how you're thinking about that? That's correct. That's on a segment basis. You're right. We are not anticipating or projecting anything special happening to get us to the 15% other than the restructuring. Now, if we go into a major recession, all bets are off. But at least if we maintain this kind of activity level, we feel comfortable we can get to 15% in 2015 for the entire company. That's our goal. That'll put us nicely into the top quartile of our peers, and that's where we want to be. That's where we were last year. This year, we fell down a little bit, but we'll be back. We'll be back in next year. We're taking some pretty definitive action here to get back to where we were. Great. Thanks so much. I'll pass it on. Thanks, Steve. Your next question comes from the line of Jeff Hammond, representing KeyBanc Capital Markets. Please proceed. Good morning, Jeff. Hey, good morning. Just a few questions on restructuring. One, can you walk through the cadence of the spend? Maybe just clarify, it looks like most of it's coming in the Industrial International segment. Then finally, what is the savings versus the $100 million spend, kind of annualized savings all in when it's all said and done? Let me start off, and then I'll let Jon and Pam finish. When you look at the actual restructuring, the majority of it's going to happen internationally. There is some happening in North America, but the majority will happen outside of North America throughout the year. That's basically where it's going to happen. I think if you look at the segment data that we've provided you as far as the operating margin data, I think you'll be able to tell pretty quickly as to where it might happen in international markets and other segments of our business, and I'll turn it over to Jon and Pam. Yeah, Jeff, just to give you some additional context there. In the press release, we talked about the $100 million in restructuring, and that's the gross number. We are expecting to get off of that, $30 million in savings. If you take that $100 million in gross expenses for restructuring, take out the $30 million in the savings, add that back, that's how we get to the $0.32 that is on Pam's reconciliation. That breaks down first half, $0.21, and the last half, $0.11. That's the net impact here of the restructuring here that we've got built into the guidance for FY 2014. As Don said, the majority outside North America, but this includes all segments, all regions, all together here. As we report back to you through FY 2014, we'll be able to detail that for you in more detail at that point. Okay, just a consideration, as you go forward and report, maybe if you can spike out this JV noise as well as the restructuring noise, I think it'd be a big help in the presentation and reported results. Will do. I appreciate that, Jeff. We will do that, Jeff. Thanks a lot. Yep. Thank you. Your next question comes from the line of Mig Dobre, representing Robert W. Baird. Please proceed. Good morning, everyone. Good morning. I guess, first question from me, maybe a little more color on what you're seeing in various end markets and how orders have sort of progressed through the quarter. I remember on the last call, you sort of mentioned that April progressed quite well. So I guess I'm kind of wondering what changed. Well, I can tell you what the different markets are looking like for us to kind of give you an idea as to what is looking good or what's not looking quite as good right now. It might help you with what our order trends are seeing. First of all, the worst two segments for us as far as market segments are construction and process markets, okay? Construction pretty much globally is down, and I think that is probably the major decline that we've seen in the last quarter or quarters, if you will. Some of the more positive segments are commercial aerospace, both on the OEM side and the aftermarket side. Our distribution is still positive. Not as strong as it was, but still positive. Farm and ag is a real strong segment for us. Cars and light trucks shouldn't be a surprise, that's been doing pretty well. Semiconductor is turning around. It's actually improving now a little bit. Forestry, industrial trucks, and industrial refrigeration are all positive. That would be some of the markets that we're tracking positive. On the downside, in addition to the process and the construction market that I mentioned, oil and gas is softening. Then the military markets, both on the defense side, defense OEM and defense aftermarket are both negative as far as order trends for us. Then the rest of them would be flat. The rest of them would include things like machine tools, general industrial power gen, and commercial air conditioning and commercial refrigeration. The other thing I just might point out is just what's happening on the PMI, because we kind of track along with that to some extent in these various markets. If you look at the PMI and globally, there's been a slight increase. It's just north of 50% now, so there's been a slight improvement in the PMI or the ISM index, if you will. The U.S. took a big turn up in July. It was tracking pretty flat through June, and it went from like 50, a little over 50, almost 51 to 55. That made a big turn up in July. The Eurozone broke through 50. However, a lot of that came from the, well, outside of the Eurozone would be the U.K. U.K. was very strong. They had a very strong PMI index. Germany just crossed over into 50%, crossed over 50. They were actually below 50%. You can see there's some positive movement here in some of the PMIs in the different areas. The one or two areas that really have impacted us in a negative way, and it's tracking pretty well with the PMI as well, is China. China's down to 47 now on the PMI, and that's tracking down from 51 and then 48, now 47, starting back in March. That's not a good direction to be heading. Then likewise, Brazil is down under 50 as well. They're down to 48. They started at almost 52, and they're moving backwards down to 48. When you look at the PMI, there's a couple of kind of weak sisters in there as well. I think North America, slight positive. Europe, a positive trend, at least in this early going, which that's good because they've been down in recession for quite some time there. We'd like to see that come back around. Asia being not so good right now, and Latin America kind of flat. That's a little color on some of the markets and some of the regions as we see it here. Sure. That was helpful. If I may, the follow-up here is on Aerospace. Maybe you can give us a little update for how you're expecting R&D expenses as a percent of sales to progress given the noise surrounding this JV. If I remember correctly, you expect it to exit at about 8% of total sales by the end of FY 2014. Is that still the case? Yeah. Right now, Mig, our guidance is just right around 9%. We were hoping to get it down to 8%. We're going to be striving for is very hard to get there, but our guidance indicates 9%, and that's after the impact of the JV, which will reduce sales as reported once this JV is closed in FY 2014 by about 100 mil. Great. Thank you. Okay. Thank you. Your next question comes from the line of Andy Casey representing Wells Fargo Securities. Please proceed. Thanks. Good morning, everybody. Good morning, Andy. Just a quick question, I guess, on the quarter, the Industrial International margin performance. Could you give us the puts and takes in there? I would imagine a lot of the restructuring, the $0.02 that you called out is included. I am just wondering if acquisitions were additive at all or if they were just neutral. I think, Andy, for the Industrial International for Q4, acquisitions are a slight add. They are not, of course, nearly as much of an additional incremental earnings there that we would get from our classic organic business that we have been experiencing there in the Industrial International area. If you look at the results, although we were down quarter-over-quarter by 100 basis points, it was our best quarter of the year in Industrial International. And we do see, as Pam indicated, and Don indicated, the Eurozone starting to stabilize and maybe bounce up from the bottom that has been formed and an inflection point being incurred there. Asia, as Pam indicated, which is the other major significant portion of that segment, is still down, and the order trends are still down, and we are projecting that to move back up later in the year. That did not move up as quickly as we hoped during Q4 and as we indicated here in some of our earlier commentary here at the end of January and the end of April. Okay. Thank you for that, Jon. And then on the guidance midpoint that you provided, Pam, for the first quarter, it seems like that is a normal kind of sequential decline with seasonality. Is the restructuring that you called out, I believe it was $0.21 for the first half, is that primarily weighted to the second quarter? Yeah. There's about $0.07 in the first quarter, so 21 minus the seven is what's in the second quarter. Don't forget, in the first quarter, we also have much higher stock compensation expense that falls in that other category. Yeah, I think besides those things, then it's the volume. Okay. Thank you very much. Thank you. Your next question comes on the line of Alex Lansing representing ClearHarbor Asset Management. Please proceed. Thank you. Good morning, Alex. Good morning. Could I ask about the fourth quarter guidance? I think you said $1.40. I mean, first quarter. Yes. September quarter, you said $1.40 toward the end of your remarks. That would be versus $1.57 last year. Could you bridge that gap briefly? I don't think you've done that. No. I think, Alex, not to just reiterate what I said, but if you look at 2013 versus the first, we always have a lower quarter from the fourth to the first, but I know you are looking at first quarter a year ago. Year ago. Yeah. We do have a little bit of lower volume. We have higher stock compensation expense, and then we have restructuring expenses that are flowing through there, and those are the bulk of the differences. Okay. What is the restructuring part? Do you know? Restructuring is about $0.07 in the first quarter. Okay. Thank you. Secondly, the inventory reduction you mentioned, is that company inventory? Yes. That is company inventory. Okay. So you're down to what as a percent of sales now in inventory? Yeah. We're at 10.6% of sales, which is a record for us. Record low, right? Right. That contributes to the high cash flow. What did that cost you in terms of absorption? Do you know? What did that cost us? Yes. In terms of under-absorption of burden when you reduce inventory. Alex, Jon here. We did calculations that unabsorbed overhead that is related to the inventory reduction is about $0.08 in the quarter in Q4. $0.08 in the fourth quarter. Yeah. That is almost a $90 million reduction in our inventory in the quarter. Yeah. Quarter-over-quarter, right? Yeah, that was from the end of Q3 to the end of Q4. Yes. Okay. So that was $0.08 of the shortfall, all right? Yes. Finally, when you look ahead at next year, the second half of this fiscal year, and all of calendar 2014, really, to what extent are you expecting Europe to recover? Because you've mentioned the beginnings of what could be a substantial improvement that would help you, but I really don't see that in your guidance. Your guidance at the mid-range, if you subtract the gain, is flat. Overall flat. Well- There's no pension cost that's coming out of it. So it really, if you subtract that, is zero. Well, let me just recap for you what our guidance shows here as we look at the regions around the world. We're looking at all-in, a 2% increase built into our guidance in the top line for FY 2014. Right. That 2%. Yeah, right. That 2%, Alex, includes about a 2% projection for us for Europe and about a 3% projection for us in Asia. The balance of it is aerospace is going to come in flat because of the impact of the joint venture. The balance of that is in North America, which is about almost 3. That is how our guidance breaks down here by region for FY 2014 top line, including the impact of that reduction of the aerospace sales due to the joint venture. All right. Well, it just makes things a little. I wanted to get the details, because overall it did not seem like much of a recovery. Okay, listen, I will get off then. Let someone else get on. Thanks. Okay. Thanks, Alex. Your next question comes from the line of Nathan Jones representing Stifel. Please proceed. Good morning, Don, Jon, Pam. Good morning, Nathan. If I could just go back to the restructuring actions. You said that you intend to save $30 million in fiscal 2014, correct? Yes. At the full run rate, what is that annualized savings? What will that annualized savings be in 2015? $80 million is our best estimate. $80 million. Okay. It looks like a lot of that is intended to be in Industrial International. We have been looking at negative order comps in Industrial International, other than this most recent quarter, for a year. Can you talk about why this decision to restructure those businesses was not taken earlier? Well, Nathan, I think the conclusion that we came to is, just like Don alluded to earlier, we are in the point of the cycle, as we understand it right now, that we knew that given the growth prospects in some of the regions that we are going to be doing the restructuring in, and let me just emphasize that they will be in all regions and all segments that we will be doing restructuring in FY 2014, that we have always had the policy that pursuant to the WIN strategy that we put in place 12 years ago, that Don talked about earlier, that we would want to have a cost structure that would allow us to get to 15%. Given the organizational structure that we have right now, given as we look at our cost structure here in FY 2014, as we were doing the deep planning for FY 2014 and really realizing the results that were going to give us the 13.8 ROS in FY 2013 versus the 15.2 in FY 2012, as we started pulling all that together here during our planning cycle, we knew that there were certain regions and certain buildings and certain facilities and certain businesses that needed to be restructured. We always restructure. We have always restructured throughout the history of the company. But this was such a big number as we were pulling the planning. We knew that we had to call it out in the press release. Of course, when we look back, and we take a look at the mix of the volume, you always are able to take a look at the cost structure and really take a look at our results vis-a-vis our peers. We do that, we do that consistently. We were able to get to 15.2 in FY 2012, coming up off a big low, but during the entire business cycle, we knew for us to maintain 15 going forward, that we could and we should restructure, and we should do it in FY 2014. That was our thinking. Thanks. That's helpful. If I could just get one in on Industrial North America. Don, you were talking about the PMI numbers earlier, and historically, where the PMI's been for the last 12 months would've had you with order growth in the 0%-5% range, and you've been down in the high negative single digits. Can you talk about the impact of OEM customer destocking, and now that that's over, why your guidance isn't higher for revenue growth in Industrial North America? I think that when you look at Industrial North America, I read off those segments to you that were tracking positive. I think that there was, and we know that there was some destocking going on because we've been paying attention to the press releases from some of our customers as well. Also what we do is we track the 312 and 1212 cyclicals on these various market segments based on our order trends. I would say we're just now getting to probably the bottom of the destocking cycle. If I can look at, for instance, in the construction end of the business, our 312 cyclical is flattening out, but well below 100%. It's been flattened out for several months. But the 1212 continues to trend down, but it looks like it's probably going to be coming in for a landing here shortly. I think that we haven't totally seen the end of the destocking, but it's going to be in the near term here. I think that probably the biggest impact is going to be in the construction market segment for us. GDP is looking like about 1.7%. That's nothing to write home about. I think they started higher than that. The production index is about 0.1%. GDP for the quarter, I think, started well over 2%, but they keep adjusting it down. I'm not sure, frankly, what is the real growth out there other than what I can tell from my own cyclical trends and order trends that I'm looking at here. We're just being cautious at this point. We're just saying, "Hey, we're not going to assume anything. I'm not going to set up these budgets for this company based on some blue sky forecast and then have a real fiasco to explain down the road. We're going to set tight budgets and plan accordingly, and if something happens better than that, then we're all going to be happy about what we did. Hopefully, that gives you a little bit of color on it. Thanks, Don, and thanks for the color, guys. I'll pass it on. Thanks, Nathan Jones. Your next question comes from the line of Jamie Cook representing Credit Suisse. Please proceed. Hi. Good morning. As you went through sort of this restructuring effort and you thought about what you could do in a flat environment, are there any businesses that you look at that you're just sort of saying, okay, even with this restructuring, they just don't generate optimal returns? In that regard, are there any incremental businesses that you think could be up for divestiture in 2014? The second question is with regards to the acquisitions that you talked about, Don. I think you said you hoped they'd contribute about 4%-5%. Can you just talk about the size of those? Are they bigger ones or compiled of a bunch of small ones? Then my last question, can you just talk about what you're assuming this year for pension and then material costs? Thanks. Wow. That was a long list, Jamie. Sorry. No, that was okay. That covered about all the rest of the topics. I don't know. Well, let me just make- They're quick answers. No, those are all good questions. On the size of the acquisition, it really doesn't matter to us. We typically have been more successful in the up to $200 million kind of range acquisitions or a quarter of a billion, whatever. We've had some bigger than that, and we've had a lot smaller than that, of course. We are looking at some larger potential ones. We don't have anything that's imminent, where we're going to be able to say we're going to bring this home this year, but we're always in touch with some little bit larger ones. By and large, the preponderance of the acquisitions are in that relatively smaller scale, like a quarter of a billion and less in size. I would expect that to be the case going forward. If we happen to land one of the bigger ones, that would be great, too. That'd be on top of what we're doing. We could handle more as well. We could certainly handle a bigger one if we wanted to. Then on the divestiture side, as you just went through this restructuring exercise. Jamie, Jon here. Just on the divestitures. For every 10 acquisitions that we do, we do one divestiture. We don't do them, as you know very well, very often. There may be a business or two, nothing really material in FY 2014 that we would divest, but that's not nearly the amount of energy that we're spending in on the acquisition front as Don would talk about. So that's our thinking on the Divestitures. In terms of the pension, we are showing about a $0.17 tailwind built into our numbers for FY 2014, and that is largely being offset by certain compensation and benefit offsets to that here. That is not going to be a real big tailwind for us, and certainly nowhere near the magnitude of the headwind that we took coming in from FY 2012 into FY 2013. In terms of the material costs, I think we are really not seeing a tremendous amount of change in the input versus the pricing structure here for us. Don, perhaps if you want to please go ahead and make a few additional comments about that. Yeah, the raw materials, Jamie, actually compared to where we were last time, actually have come down a little bit. Some of them have. Some are flat. Some of the inputs, give you some for instances here, castings and steel and zinc die-cast parts, and frankly, oil, those would be some of the categories that have been flat. Natural gas is down, nickel is down. Nickel would be in some of our stainless and higher alloy products is down. Aluminum is down and copper is down. Some of the input raw materials are down. Steel is relatively flat. That would be a big input for us. It has got a little bit of a mixed bag, but the general trend, I think, is softening. I think the copper being down is probably directly related to the fact that China has stopped growing and the construction has kind of flat lined over there, at least for the time being. Because they were consuming most of the copper on the planet, I think, going back a year ago. That is kind of what we see there. We are recouping any kind of increases we are seeing. We are having success there because we track that across the company with our producer price or purchase price index rather, and that is tracking positive for us as far as being less than one, the pricing we are paying now relative to what we were paying. The sell price index is tracking good for us as well. Everything there is holding up fine as far as recouping any cost that we are incurring, input cost and recouping the cost plus the margin. Okay, great. I'll get back to you. Thank you. I think at this time, we'll take one more question, please. Your next question comes from the line of David Raso, representing ISI Group. Please proceed. Hi, good morning. For the fiscal 2015 commentary on the margins, just thinking through how you think about base revenue growth and acquisitions, it appears the fiscal 2015 EPS number would be roughly $8. I just wanted to see if maybe you would bless that as the framework you're thinking about. Secondarily, the new global technology platforms, if you can just help us size them to at least put a framework around sizing those three platforms within Diversified. David here, Jon. First on the FY 2015, $8 per share number, I have to tell you that we have been spending so much time worrying about FY 2014 that we have not really focused on the FY 2015 EPS number very much. I don't think that you're going to be too far off, but there are so many different variables that are going to be involved in getting that. We feel very confident that we're going to have our cost structure in line by then, and it's going to be a matter of what happens with the growth rates. If growth rates accelerate past what our guidance indicates, then certainly we've got the capability as a company to do $2 per share per quarter. It doesn't sound outrageous, but I have to tell you, I don't want to endorse that number here on this call at this point. I hope you understand. No, I can understand. I guess the idea is more organic growth gets better incremental margins. My $8 was just doing more of a 2, 3 kind of organic the next two years. Yeah. Obviously, you get more on the incrementals from, at least typically, from organic than acquisitions. Very much so. That is the factor. Very much so. Our upside leverage given where we are right now and given the restructuring that we do, is going to be just as good as it is ever been for the company, I think, going forward. We feel very confident in that. Okay. The new global technology platforms? Do you want to answer that? Do you want to Yeah. Let me just say, first of all, David, in September, we are going to be coming out with a fact book. Communications has spent a lot of time in the last couple of months putting this together. So it's going to give you a lot of information relative to those global platforms that you don't have today. The other thing that we will be doing at the same time is we're going to release historical information for you on a quarterly basis, just as we have done for CIC. So you will have all that information at your disposal in September. David, just maybe give you a bit I'm not saying you're not going to tell, but Maybe what I can do is I can give you a little logic for what we're doing, okay? Maybe that'll help you a little bit. The Motion Systems piece basically is going to include the three technologies that we have in the company that produce motion, and those are the automation technology, our electro-hydraulics or electric actuation, if you will, hydraulic actuation, and then as well as pneumatics. So it's going to include all those tri-technologies. So it would be a combination of what you would consider in the past being our hydraulic group and our automation groups. Okay? Those would be combined in the Motion System. So that's the way you create movement or motion, is through utilizing those technologies. The Flow and Process Control piece is a combination now of our instrumentation, what was prior our instrumentation group, or is our instrumentation group, our fluid connectors group, and then also now embedded in there is going to be our refrigeration and air conditioning process control, and that's going to be part of the instrumentation group. Those are the pieces that will be in Flow and Process Control. And the rationale there is they're all similar type products, but address different or differing markets, if you will. But keep in mind that all of these products really work together as a system when we go out and present them to a customer. We're breaking them down in these pieces because they make some logical sense from a technology platform standpoint. In front of the customer, we piece parts and pieces together from all of these platforms, to generate the system activity that we have at the customer level. The Filtration and Engineered Materials segment is basically going to include the filtration group as we've known it in the past and the seal group. And the seal group has really morphed into something way beyond what you would consider just seal technology. All of these, both in the Filtration and the Engineered Materials, the filtration group and the seal group, they all have to do with material technology. Either they're media, material media for filter applications or seals. And certainly, there's other material technology involved in our seal group, like EMI shielding and things like that. So the technologies are very similar. They all have to do with material technology and sophisticated materials, and that's the reason why they fell under Filtration and the Engineered Materials group. And then, of course, the last one you already know, and that's Aerospace Systems. And those would be the kind of the four technology platforms that we would have, three industrial and one aerospace. Are there any changes operationally how you're running the company related to these changes, or is it simply the presentation of your results? Well, David, in the press release that we did on the CIC consolidation, very clearly, there is a set of management that is not going to be managing that CIC group. That management has gone on to other assignments within the company, within those three technology platforms. That is operationally a very big change. We had traditionally eight groups. Now we have seven. The management of those technology platforms has been put together here in ways that we will really be able to use synergies in working closer together in ways that we haven't been before. But we will still have our seven traditional group presidents managing those platforms. But because of the reasons Don just articulated here, they go together very well, I think, looking at the outside in at the company, and that's what we're trying to do, is just provide more transparency. David, what is going to happen when you get that fact book, you're going to get sales breakdown in these areas, okay, these new platforms. Then we're trying to give you just kind of a rule of thumb, and it may not come out exactly this, but I think it's probably going to be pretty close to this. Because I know the next thing everybody's going to want to know is what's the margin by all these segments, and then more and more information along those lines. But I think what we'll be able to tell you is that from an operating margin standpoint, that every segment that we have in that industrial breakout, those three industrial segments will be within 100 basis points as far as operating margin from the corporate average. That might help you to kind of get a feel that these are all pretty high-performing pieces of the company, and they're fairly close with respect to their ability to generate operating margin. No, that's great. Thank you very much. Thank you, David. At this time, we'll close the conference call with just a few final comments from Don. Thank you for your participation. We truly appreciate it. Okay, great. I just want to once again thank everyone on the call for joining us this morning. As always, I want to take the opportunity to thank our employees for their continued commitment and for the success that we've had as a business. Our global team continues to do a great job executing the WIN strategy and delivering positive results for the company. The tone for our new fiscal year is to be, and as I mentioned earlier, is to be cautiously optimistic. If our orders continue their current trend, we could have a record year in fiscal 2014. In any event, our restructuring will put us on a path to consistently deliver 15% starting in fiscal 2015. If you have any additional questions, Pam Huggins will be around the rest of the day. I'll just say goodbye and have a great day. Thank you for your participation in today's conference. This concludes the presentation. You may