Earnings Call: Q4 2012

Aug 2, 2012

Summary

FY12 delivered record sales, earnings and segment margins, with strong cash generation. FY13 guidance calls for modest EPS growth as higher pension expense offsets much of the expected operating improvement, amid uncertain global markets.

Good morning, ladies and gentlemen. Welcome to the fourth quarter and fiscal year 2012 Parker-Hannifin Corporation earnings conference call. My name is Chris, and I will be your conference moderator for today. Presently, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. At that time, you may press star followed by one to pose a question or a comment. If you experience any difficulties on the line, please press star followed by zero and an audio coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the conference over to your presenter for today, Ms. Pamela Huggins, Vice President and Treasurer. Ma'am, you may proceed. Thanks, Chris. Good morning, everyone. It's Pam Huggins speaking, just as Chris just mentioned. I'd like to welcome you to Parker-Hannifin's fourth quarter and full year 2012 earnings release teleconference. Joining me today is Chairman, Chief Executive Officer, and President, Don Washkewicz, and Executive Vice President and Chief Financial Officer, Jon Marten. For those of you who wish to do so, you can follow today's presentation with PowerPoint slides that have been presented on Parker's website at www.phstock.com. For those of you not on the line, the slides will remain posted on the company's investor information website at the same website one year after today's call. At this time, reference slide number 2 in the slide deck, which is the safe harbor disclosure statement addressing forward-looking statements. Again, just to remind you, if you haven't already done so, please take note of this statement in its entirety. 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 are posted on Parker's website, again, at phstock.com. To cover the agenda today, slide 4, the call will be in four parts. First, Don Washkewicz, Chairman, Chief Executive Officer, and President, will provide highlights for the quarter and for the full year. Second, I'll provide a review, including key performance measures of the fourth quarter and full year fiscal year 2012, concluding with the guidance for next year's fiscal year 2013. The third part of the call will consist of our standard Q&A session, and for the fourth part of the call today, Don will close with some final comments. At this time, I'll turn it over to Don and ask that you refer to slide number 5, titled Fourth Quarter and Full Year Fiscal Year 2012 Highlights. Thanks, Pam, and welcome to everyone on the call. We're certainly very pleased to report our results following a strong fourth quarter and another record year for the company. I'll start off by taking a moment to point out some of the highlights and some of the records for the quarter. Then I'm going to follow up and talk a little bit about the full year. First of all, the fourth quarter sales were a record at $3.4 billion. We're really pleased with the level of activity there that we were able to bring in in the quarter. Net income for the quarter was $302 million or $1.96 per share on a diluted basis. We're certainly pleased with that, and that was ahead of the Street consensus expectations. The margins were strong, 15.5%. That also will go down in the record books as a record for the fourth quarter. Cash flow is strong. We generated over a half a billion dollars in operating cash flow in the quarter. I can remember years when we didn't generate a half billion, so this is pretty exciting for the company. Those are some of the quarter highlights. For the year then, we closed out the fiscal year for Parker with a number of records as well. That includes the record sales of $13.1 billion. That was up 6.5%. I might want to point out that most all of that was organic growth in a very tough economic environment out there. Total segment operating margin, which is really a highlight for the year, was a record exceeding 15%, and that was the first time in our history. For those of you that have been tracking us for a number of years, you'll remember 10 years ago when we launched the Win Strategy, we talked about hitting that 15% target. We're popping the champagne corks here a little bit. In the background, if you hear some corks popping, that's what it's all about. You may recall that as we went through this last 10-year period, we consistently improved margins year on year, even in some pretty ugly periods where we had two major recessions for the company. In that 10-year period, we dealt with two major recessions. We drove the margins up to what we see now as a record, first time in the history of the company at 15%. I know what everyone's thinking, that, well, this must be it. Now that you're at 15, only direction to go is down. I would just point out one thing, and that is, if you look at our North American industrial margins, we hit 17.6%. We certainly don't think that it's the end of the road. I think there's more room on the top line and certainly on the operating margin line to continue to move these to higher levels. We can talk more about that later in the Q&A session. Net income for the year was a record as well at 745, and that increased 17% from last year. We added $1.08 in earnings per share, and that was on a 6.5% sales increase, so we're very pleased with that performance as well. Operating cash flow for the year was $1.5 billion, or 11.6% of sales. I might point out, too, I am not sure some of you may be tracking this as well, but our free cash flow was greater than net income now for the tenth year in a row. That again, includes some very, very difficult recessionary periods. When you can say that we have increased cash flow greater than net income for 10 years in a row, we have got to be doing something right back here. We used the cash flow during the year to increase the dividends per share payout by 23%. We repurchased over 6 million shares of stock for a total investment of just under half a billion dollars. We made acquisitions, which added $141 million in annualized sales. Overall, we are in an extremely strong position for fiscal 2013, and I would like to certainly congratulate our global team for their performance and the strong execution of the Win Strategy again in fiscal 2012. Just a couple of comments on next year. Despite more economic uncertainty on the horizon, we have initiated our guidance, as you have seen, in a range from $7.10 to $7.90 per share, and that is $7.50 at the midpoint. That would represent, at the midpoint, another record year in the coming year as well. I think most of you now have seen, if you read the release, that these estimates include an expected increase in pension expense of about $0.35 per diluted share, as a lower discount rate was required for accounting purposes, and that reflected current market conditions for interest rates. That was something that we had to subtract from our forecast because that pension expense is a reality. We will talk more about that, I am sure, in the Q&A as well. At this point, I am going to turn it over to Pam for a more detailed review. Thanks, Don. Please reference slide number six, and I will begin by addressing earnings per share for the quarter. Fully diluted earnings per share for the quarter came in at $1.96, just as Don said, exceeding the midpoint of the guidance and the mean of the street expectations. This is an increase of $0.17 or 9% versus the $1.79 from the same quarter a year ago. For the full year, fiscal year 2012 earnings came in at $7.45, and this compares to $6.37 for fiscal year 2011. This is the $1.08 that Don referenced as well, or 17% increase. Now moving to the next slide number seven. Just laying out the components of the $0.17 increase in earnings per share on the segment basis for the fourth quarter, the $1.79 to the $1.96. The puts and takes are as follows: segment operating income added $0.12. This is the result of increased performance in Industrial North America, Aerospace, and Climate & Industrial Controls. For the most part, Industrial North America, the strength that we saw there was mostly offset by Industrial International weakness. Below segment operating income or what we refer to as below the line items, earnings per share were impacted favorably by $0.08. This was mainly due to the other line item. This is the result of favorable currency. This currency, just not to be confused with translational, is more on the transactional side. Higher taxes impacted earnings per share by $0.16, mainly due to a higher proportion of sales domestically this year with a higher tax rate and the favorable resolution of prior year tax filings in fiscal year 2011. Non-controlling interest and less shares outstanding impacted earnings per share favorably by $0.01 and $0.12, respectively. Moving to slide number 8. Looking at the top line and looking at the total year revenues for the year increased 6.5% to $13.1 billion from $12.3 billion last year. Sales increased across all segments of the business except Climate & Industrial Controls. The impact to sales as a result of acquisitions was a little less than 1%, and currency was a deduction to sales of approximately 1%. So really basically offsetting one another, therefore, organic growth was 6.7%, again, as Don mentioned. While foreign currency had less than 1% negative impact on the total year, you can see that the fourth quarter alone, the negative impact was more than 4 points. In spite of currency headwinds, segment operating margins for the year increased 40 basis points from 14.8% to 15.2%, an all-time record for the company. For the fourth quarter alone, the margin was 15.5%, which is a fourth quarter record for the company. Please note that acquisition expenses and integration charges are included in these numbers, even though the amounts haven't been carved out. Parker incurred $0.05 in restructuring charges in the year. Now moving to slide number 9 and focusing on segments commencing with the Industrial North America, and again, focusing just on the full year. North American reported revenues increased 12% in the year. After adjusting for acquisitions, which added 1% to revenues in the year, and currency, which was relatively minor again, organic or core revenues increased 11%. You can see that operating income increased from $746 million to $895 million, a 20% increase over the prior year. So really good performance in that particular segment. Operating margins of 17.8%, an all-time record, increased 130 basis points over fiscal year 2011 of 16.5%, an all-time record. Also of note, that fourth quarter was a very good quarter with strong margin of 18.6% and is also an all-time record for the company. So 18.6% is very good for that segment. Moving to the international segment, and once again, focusing on the year. Reported revenues increased 2.4% for the year. Currency was a deduction to revenues in the year of 1.6%, mainly due to the weakness of the EUR. Acquisitions added a half of a percent. So after you adjust for the acquisitions and the currency, organic revenues increased 3.5% for the year. Operating margins decreased 70 basis points to 14.6% from 15.3%, and that is mainly due to the foreign currency impact that we have been talking about. As you can see in the fourth quarter, this segment incurred nine points of unfavorable currency translation. What you cannot see from this slide, but also present, is the Asia Pacific investments being made in that region and softness in Latin America markets, particularly Brazil. Moving to slide number 11 and focusing on the Aerospace segment. Aerospace reported and organic revenues were the same, more than 9% in the year as acquisitions and currencies had a minimal impact. In this segment, margins increased 90 basis points for the year to 13.8% from 12.9% last year. As you well know, this includes non-recurring engineering charges of almost 10%. Moving to Climate & Industrial Controls. Again, focusing on the year. Total reported and organic revenues decreased 2% for the year. Acquisitions and currency had minimal impact. Operating margins as a percent of sales were 8.7% for the year versus 7.7% last year, a 100 basis point improvement. This is really the story in Climate & Industrial Controls. Much better operating performance with a little less sales. Moving to slide 13, orders for the quarter. Just to remind you, these numbers represent a trailing 3-month average, and they are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions and currency except for Aerospace, and Aerospace is reported using a 12-month rolling average. As you can see from this slide, total orders declined 1% for the June quarter just ending, reflecting tougher comparisons and the softness seen in Europe, which resides in the Industrial International segment. North American orders for the quarter just ended increased 4%. Industrial International orders decreased 9% for the quarter. Aerospace orders increased 7% for the quarter, and Climate & Industrial Controls segment orders increased 1%. Moving to the balance sheet. Slide number 14. As usual, Parker's balance sheet remains very solid. Cash on the balance sheet at year-end was over $838 million and zero commercial paper was outstanding. DSI, or day sales in inventory, remained at 55 days in fiscal year 2012. However, that 55 days includes inventory in connection with the acquisitions that closed. If you look at inventory as a percent of sales, it hit an all-time record of 10.7%, and without the acquisitions, 10.4%. Accounts receivable in terms of DSO closed at 48 days, consistent with last year, but again, in spite of rising sales. Parker continues to make progress on the weighted average days payable outstanding, increasing two days over the prior year to 54. Moving to slide 15. Most notable on this page is that the company generated cash flow from operations of more than $1.5 billion, or 11.6% of sales. The major components of the uses of that $1.5 billion is as follows: $696 million we returned to the shareholders via share repurchases of $455 million and dividend payments of $241 million. We utilized $304 million in connection with acquisitions and $219 million, or 1.6% of revenues, utilized in connection with capital expenditures. Net of these uses that I just mentioned, we also had negative FX impact of $150 million, and we increased cash during the year of $181 million. On slide 16, you can see that we have the capacity to grow the business through acquisitions and organically. The debt-to-total cap ratio is 26.1%, and on a net basis, 15.4%. Moving to the guidance, which I'm sure you're all very interested in. Slides 17 through 19 actually detail the guidance. On slide 17, the guidance for revenues and operating margins by segment has been provided. I'm not going to read through these numbers here on the call, but they've been detailed out there for your convenience. Moving to slide 18, the guidance has been provided in total for the items below segment operating income, and that is $489 million at the midpoint. The amount is higher than the prior year due to higher pension costs that we talked about, and Don also talked about the requirement to lower the discount rate in computing the pension liabilities. That's what's affecting that number. Slide 19, summarizing the guidance on a diluted earnings per share basis. As you can see from this slide, for fiscal year 2013, the earnings per share is projected to be in the range of $7.10-$7.90, and that represents a $0.05 increase at the midpoint versus fiscal year 2012 EPS. But for your convenience, for the first time, we've included a waterfall chart on this slide reconciling the fiscal year 2012 actual earnings per share to the fiscal year 2013 guidance earnings per share using the midpoint of the guidance. As you can see on the left, we have the actual earnings per share for fiscal year 2012 of $7.45. And on the far right, we have the guidance earnings per share at the midpoint for 2013 of $7.50. If you do the walk between the $7.45 and the $7.50, from the left to the right, you can see that segment operating income adds $0.45 to earnings per share for fiscal year 2013, less shares outstanding as a result of share repurchase adds $0.03. Increased pension, however, is a deduction of $0.35. Tax is a deduction of $0.14, and corporate G&A adds $0.06. The real story here is that pension expense is offsetting most of the segment operating income improvement. Please be reminded that this higher pension expense is a result of the requirement to use a lower discount rate in valuing pension liabilities. As you know, yields have been deteriorating and further declined in the last quarter. Since our plan is on a fiscal year basis, the adoption of a lower discount rate is required. Also remember that the forecast excludes any acquisitions that may be made in fiscal year 2013. And to help you even further, the guidance at the midpoint assumes the following: increased revenue year-over-year of 4%, segment operating margins of 15.3%, and we talked about the expenses below segment operating income, the $489 million with a band of ±2.7%. The tax rate is projected at 28%. The guidance includes $0.05-$0.10 of restructuring. And just a couple of other salient points with respect to the guidance. Sales in the first half, second half are divided 46%, 54%. Segment operating income first half, second half divided 45%, 55%. Then, of course, the earnings per share first half to second half is 43%, 57% due to the pension expense that's been included in the other line below segment operating income. Also, just as a reminder, first quarter EPS will be lower than the fourth quarter, just ended, due to lower sales in the first quarter, and as you know, this follows the natural cycle of the business. There will also be less commercial aftermarket and Aerospace, and there will be higher other expense, not only due to pension expense, but due to stock option expense. As you recall, every year in the first quarter, we have higher stock option expense than we do in the other three quarters. Then, of course, we have the vacations in Europe that we have to deal with. So when you get past the first quarter and you get to the second quarter, as you know, the second quarter usually is not as good as the first quarter. Again, that follows the natural cycle of our business. Plus, we have all the holidays in the second quarter that ends up influencing those numbers. So I think we have walked through guidance fairly well today for you, and we will move into the question and answer session at this time. Chris, are you with us? Thank you. Ladies and gentlemen, at this time, if you wish to pose a question or a comment, please press star followed by one. I repeat, to pose a question or a comment, please press star followed by one. Questions will be taken in the order received. Pause for a moment to compile a list. That first question comes from the line of Nathan Jones from Stifel Nicolaus & Company. Good morning, Don, Jon, Pam. Good morning, Nathan. Good morning. Can you talk about I'm thinking about the incremental margins going forward. As you generally get to the peak of a cycle or as revenue growth starts to flatten out, you obviously see deteriorating incremental margins, and you got down into the mid-teens at the top of the last cycle, about 22% this year. How are you thinking about your ability to keep those incremental margins higher than they were during the last cycle? Well, Nathan, Jon here. Our guidance by our math shows us in the high teens right now for the incremental margins. Normally, at this stage, given the macro environment and what we're seeing in terms of our top-line growth, we're feeling really good about our incremental margins in the high teens. One point to really try to focus on here is that we're seeing international growth basically in our guidance at zero. With us being at a 4% growth rate, our incremental margins at 18, if you go back and you look at history, has been very good record. One other point to make to you, Don just talked about, and Pam did too, that in FY 2012, for the very first time in the history of the company, we hit an operating income level of 15.2. We've been striving for that 15.2 for 10 years. Now, our guidance for next year indicates, as Pam said, a 15.3 number here. We are looking to really drive incremental margins through making those bottom line numbers. I think that given the very tough macro environment, we are all very proud of what we have actually been able to accomplish here. If I could just ask a question about Industrial International midpoint of guidance areas for flat revenue year-to-year. Can you kind of break that down a little bit more by geography, what you are expecting out of Europe versus other parts of the world? Yeah. Just in terms of the international look, just to start out here, and Pam will give us some detail here. We have got right now, on the top line, a 0% growth. We are kind of, as Don indicated, stabilizing in all of our international markets. Don indicated that back in April, and that is certainly what we are seeing right now throughout the quarter and through the last four months. But when you look at the geographies internationally, we get a different picture here. Pam, why don't you give us some color on that? Well, Nathan, I think, just to drill in a little bit and to back up for a moment, but to talk about the guidance and what's going to happen. Obviously, we've seen some softness in Europe in the latter part of this year. As we head into the next year, we're going to continue to see that in the first half. Okay? But we really are projecting some growth in the second half. When you really look at that by region, Latin America is starting to show some improvement here at the end. But Latin America is a very small part of the business for Parker overall. So the growth is really going to come from Europe as well as Asia in the second half. Asia is probably going to be a little higher than Europe, but as you well know, Europe makes up the majority of the Industrial International segment. So, yeah, we have growth forecast in the second half for both of those regions. Okay. Just on the increased pension expense, is that going to require you to make a cash contribution to the pension fund? What's the funding level at the moment? No, that's a very good question, Nathan. Pension, we have always been on a funding level above 80%. As you well know, there are some restrictions that take place if you're not above 80%, and we have always had a goal to be above that, and we still are above that. But we will take the opportunity, probably to increase the contribution in fiscal year 2013. If you go back, 2011, we made a contribution, 2013, we did not. So we will probably make a contribution in line with what we've made in the past. Okay, thanks very much. Uh-huh. Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc. You may proceed. Hey, good morning. Just on the revenue ranges, can you give us a sense, either in total or within the segments, how you're thinking about organic growth? If we adjust for the acquisitions you've announced and FX headwinds, I guess FX particularly within Industrial International. Yeah. And you're speaking about guidance, right, Jeff? Yeah. Well, as you can see at the midpoint, we're really forecasting about a 4% revenue growth. However, acquisitions account for about 2%, almost 2.5% of acquisitions. And then, of course, we have the FX headwinds that we have to deal with, which is almost 1.5%. So organic growth really for FY 2013, it's projected to be around 3%. Okay, perfect. And then, Don, you mentioned last quarter, buyback and certainly having the capacity to be pretty active. It looks like in the fourth quarter, you did about $125 million. How are you thinking about buyback, relative to the comments you made last quarter? Well, last quarter, as you may recall, we had the authority to buy back basically as much as we wanted shares. And based on the price level that it was at, we did take advantage of that. And as you said, we did $123 million in the quarter. The other thing we did that you may not be aware of, or I'm not sure we announced it last quarter or not, but we did raise the 10b5-1 from $20 million a quarter to $50 million a quarter. So we're doing $200 million a year on the 10b5-1, where we were $80 million in the past. So that's a change that we did make. So for the total year, we did $455, roughly, million. The year before, FY 2011, we did $693 million. I think that it would be safe to say we are going to do more, especially with the depressed share price that we have now. There was a period of time here that we were in a blackout, you probably are aware, in the blackout that we had, so we could not do share repurchase in the quarter, or we would have done a lot more. I think I've explained this in the past, that we look at Parker's stock like we do any other investment. We do a discounted cash flow, and we start at full value being $105 and then down to wherever the current market price is as being the other extreme. When we see the prices where they're at today, we're very anxious to do more share repurchase, and it certainly fits our DCF model to do that. You can expect more next year. I definitely think we have the capacity to do quite a bit more, and this would be a good year to do it because you can see that we had a hit from the pension, which is going to push us in the opposite direction. If we had that hit in this year, we would offset all that with share repurchase because our share repurchase impact in 2012 was about $0.46. We would offset the $0.35. I think that, depending on where the share price is going forward, I think we hopefully will be able to offset that this year. That would be my intent. On the dividends, just to go along, as far as capital allocation, since we're on that topic. On the dividends, we've got a 56-year record now on increasing every year. You can expect that we'll increase dividends on a year-to-year basis going forward in the foreseeable future, and that means probably forever, hopefully. We raised them 122% in the last five years. I think this last year, we were somewhere around 23% or thereabouts as far as the dividend increase. You can expect to see that increase next year. Capital expenditures are around 2.5%. I think if you're modeling something, do something in the 2.5% range, I think you're going to be safe. That's not to say we're not looking at acquisitions. We did last 12 months, we did about $408 million in sales volume and acquisitions in the last 12 months total. We anticipate that we'll do more. We have more that we're looking at. Again, we don't forecast any of that. We don't put any additional ones other than the ones that are already announced and closed into our numbers. But we have enough capacity here. We're in very good shape as far as what our capacity is to do more acquisitions, to do more share repurchase, pay an increased dividend going forward. I hope that answers some of that. That's kind of where my head's at, and I think that's probably what you're going to see roll out here going forward. And just to be clear, the guidance doesn't reflect any buyback, or it reflects that 200 million 10b5? No, there's zero buyback reflected in the guidance. Okay, thanks. Thanks, Jeff. Next question comes from the line of Alex Plant with Clear Harbor. You may proceed. Excuse me. Thank you. Pam, going back to the guidance for next year. You gave us the assumptions on what your sales would be and your margins and so on, but you have not given us your assumptions about the different economies in the world and what they're going to be doing, whether or not you're assuming any kind of a recession in the U.S. or not. Could you just go over that? What's built into that so we can get an idea of how to compare your guidance with our own assumptions? Maybe I could make a couple of comments on some of the markets and the regions and what have you, Alex. First of all, as you can see, we're expecting a better second half than the first half. We've heard, and again, some of this is based on just feedback we're getting from the various regions and our people in the various regions. We think that the comments that you've been hearing about China probably helping support their economy there because they've drifted back down in a 7% growth rate. I think they're going to try to move that up. We're seeing some very early signs of that in China, and I think that being a big part of that Asian economy, I think we're going to see probably not a whole lot in this first half, but we're thinking in the second half, probably see a little bit of improvement in that region of the world. Likewise, you've heard a lot recently about Euro support. That hopefully, I don't think anything will happen short-term. It's in disarray over there, obviously, with all the different countries having different issues as far as their debt levels and what have you. But I think Europe is right at the bottom now. Any improvement there probably would be coming later in our calendar year, heading into the second half as well. I just think that there's going to be a little bit of a paralysis here until the elections are over. I think depending on the results of the elections, I think that could bode well for the second half as well. If you look at the PMIs, and I was looking at those yesterday, most of those now are below 50. That doesn't mean we're in recession necessarily, but it means that the global markets are slowing. I think the global PMI now is around 49, just under 49. You're still growing until you get down to about 42 by definition of that metric. So we're still okay there. U.S. is right around 50, 49 and change. Eurozone is flat around 45, so you can see that they're in the worst shape of all the regions for us. China, I think, dropped just a little bit on the PMI down to about 48. You're assuming that we muddle through here and don't go over the fiscal cliff? Yeah, that's what kind of we're looking at. Yeah, we're looking at no disaster between now and the end of the calendar year. That would be our first half with a little bit of a pickup in the second half going into the second half of our fiscal. That's kind of what we're looking at. If you looked at the numbers that we just posted, and we posted Industrial International at down 9% on the order trend, the order numbers. That down 9% reflects Europe down 15%, but it also reflects Latin America up 7% and Asia up 1%. As you can see, there's a little bit of sign here, especially in Latin America. Now, that's not a huge region for us, but it's still a positive sign, and Asia being +1% on a 3/12 comparison, the last 3 months orders compared to last year to same 3. That would be a little glimmer of hope that trend hopefully will continue going forward as well. Okay. Thank you. Alex, one other thing is our backlog's up 1.5%. That helps us see through this first half of our fiscal year as well. I can come back later. Maybe we can talk a little, if there's questions on some of the markets that we see that are stronger or weaker, we can talk a little bit more about those as well. Okay. A couple of quick ones. First, the pension expense comes in what quarter? It comes across all four quarters, Alex. All right. You can pretty much evenly divide it Okay between the four quarters. Good. Finally, the incremental margin in the North American Industrial in the fourth quarter was 37.8%. Right. What was the reason for that price increase? Efficiency gains? Just what was it? Mix? Whatever. Alex, Jon here. In the fourth quarter, the real answer in Industrial North America is again, just all-time records in almost every metric that you can see. There's no one answer there. There's not one incident. It is across the board. It is with all of our markets. It's with all of our product groupings. And, it has just been remarkable to see the progress that we've seen there, and we're really looking forward to a great FY 2013 with those same mix of businesses, given the cost structure that we've been working so hard to get to by this time. So we feel very, very good about how that's working, and the good news there is not one answer. Okay. Thank you. Thanks, Alex. Our next question comes from the line of Jamie Cook with Credit Suisse. You may proceed. Morning. Good morning, Jamie. Hi. Two questions. One on the guidance, specifically with regards to North America. I guess I'm surprised by the top-line forecast of 5%-9%, given the order trends. I think most of the acquisitions that you've done were more focused on the international side. I do not believe you have help there. So what gives you confidence, or what are the assumptions behind the 5%-9% and what do you assume for price versus volume? My follow-up question, Don, you did somewhat answer the question on the share repurchase, but I guess I'm surprised it was so low, just given the commentary last quarter about going to the board and increasing the authorization. So why not something more meaningful or does this signal that perhaps capital allocation is going in another direction? How are you thinking about larger deals in that respect? Thanks, and I will get back in queue. Yeah. I don't want you to leave thinking that, Jamie Cook. We did as much as we could do in the quarter. I would've done a lot more if I could. I was blacked out for a big part of the quarter, and we are limited. Keep in mind that I don't control how much I can buy back from the standpoint that we're limited based on the trading volume. We can't exceed a certain share buyback based on the current average trading volume. I'm very limited there. I did as much as I could based on our criteria and the blackout period and the trading volume dynamic. I had the ability to buy back obviously more, if those conditions were more favorable for us. But we did what we could. Don't read any more into that. I would've liked to have done three times that much if I could have. What gives us confidence in the North America? Right now, if you look at the order trends, the 3/12 is running around 105, which is positive, North America positive. This is on the industrial side, not counting the Aerospace, which is still positive. And the 12/12, which is last 12 months orders over the previous 12, is running about 109. When we look at the forecast, we're looking really at these order trends and projecting those out into the future. We still see a very strong picture in North America, both on the industrial side and on the Aerospace part of that equation. Of course, there are certain market segments that are weaker than others, but by and large, that gives us some confidence that we're going to continue forward. Some of the strong segments, distribution. Distribution's running on a 12/12, 116%. Last 12 months over the previous 12. So distribution, and you know on the industrial side is half of our activity, very strong. The 3/12, which is the last 3 months over the previous year, 3 is at 107. So that's going to be pulling the apple cart, so to speak, up the hill quite nicely. The other strong segment is process. They're running very strong on both the 3/12 and 12/12. Agriculture is a very strong segment. 3/12 running 120%. The near-term activity level there is good. Commercial Aerospace OEM and defense Aerospace OEM, we anticipate to both be strong. We think the construction equipment and heavy-duty truck will remain at a high level. We don't anticipate a big growth there, but we think they're going to remain pretty much at the levels that they are. I mentioned farm and ag, I mentioned oil and gas, I believe, and distribution. On the downside, of course, the big negative for us is the semicon, which has been really in the tank. Looking at Aerospace, I don't know if I mentioned Aerospace. Aerospace, the 3/12 is running 108%, 12/12, 107. So those are kind of the indicators that we look at on those order trends and projecting into the future. With also the understanding that in an election year, I don't think you're going to see a major change one direction or the other until we're through this election, and then we'll have to see where we go from there. Don, just to ask the question slightly differently in North America, and I know you went away from doing this, but it is just helpful given the macro uncertainty, was there any unusual activity when you look at how the you give us orders for the quarter, but how the months sort of played out and what you are looking at in July because I am wondering if things were stable throughout the 3 months or got worse or, and sort of what you are seeing in July that gives you, I guess, confidence behind the outlook. Jamie, I think what we have seen here in July gives us confidence in our forecast. We are still seeing throughout the Q4 and including July, with our order rates preliminary data with July, of course, sitting here on the second day of the month. We are seeing continued stabilization and continued patterns that we have seen throughout the last 6 months. Certainly March through June were stable, and we are seeing that same level of activity here in the month of July. Okay. Thanks. Jamie, I do not know if you are the one that asked about the pricing and all that. Yeah, I did. Okay. Maybe I can address that real quick. I think everybody understands on the call that we look at two metrics here, and we measure this for the entire company. One's the purchase price index, and our goal there is to be less than one, so we're buying at a lower price than we were in a previous period. The sell price index, which would indicate we want that greater than one, so that it would indicate we're selling at a higher price than we did in the prior period. I can just tell you that the difference between those two right now, which we do track very closely for the company, is slightly positive. Not tremendously positive, but slightly positive, which basically says that we are recapturing our cost plus the margin on any cost input increases that we've incurred. Looking at specifics, most of the input costs are slightly one way or the other. Like for instance, steel would be slightly down. Aluminum is trending slightly down on a raw material input basis. Some of the higher tech polymers that we deal with, actually, the prices are maintaining at a pretty strong level, pretty high level, I should say. We think they'll probably remain high. There's some supply problems in a couple areas in particular. All other ones on the polymer side are relatively flat, not going up or down. We saw just recently a little trend up on copper and brass. It had been dropping, but it's made a reversal on it. We saw a little bit of an increase there. You know the oil price is 85. That's kind of flat. Nickel, which would be basically an input cost in some of our higher tech products is flat right now. So overall, we think we're going to stay ahead of it. Any cost changes, input changes like we have in the last 10 years since we've launched these strategic initiatives, we're pretty much right on top of this, and we'll make sure that we recoup the input cost plus the margins so that we don't detract from our overall margin for the business. Okay, thanks. I will get back in queue. Thanks, Jamie. Our next question comes from the line of Rob McCarthy with Robert W. Baird. You may proceed. Hello, this is Mick Dobre in for Rob McCarthy. Good morning. Good morning. I guess my first question, I am sort of going back to the Industrial International guidance and trying to put some pieces together here because the orders obviously have continued to weaken from the prior quarter, down 9%, yet your guidance is calling at the midpoint for flat year-over-year revenue. FX headwinds are still there, and I do realize that acquisitions are part of the equation here. Can you maybe provide a little bit of color about how you are thinking in FX versus the acquisition contribution for the segment, and also what your thoughts are for overall organic growth first half versus second half, baked into the midpoint of this guidance? Okay. This is Pam speaking. Let me address that a little bit for you. Don talked about the acquisitions that we have made, and when you really look at the component breakdown of those acquisitions and where they lie within the segments, the majority or the largest part really does lie within the international segment. So there is a nice component for the year coming from acquisitions. Of course, you do have some currency headwind. However, just to remind everybody how we look at currency is we take the rate at the end of June. We do not try to forecast what currency is going to do throughout the next year. Just as a natural fallout, the currency becomes less at the end of fiscal year 2013 than it was fiscal year 2012 when you compare the June year-end rate to the prior year. That plays into it a little bit. So you are right. International orders are down 9%. So when you look at the first half of the year, you do see that international kind of follows that pattern to some degree, and then it does pick up in the second half. But you do have to remember that acquisitions do play a part in that first half, second half as well. Okay, I see. Then just as a follow-up here, can you comment a little bit on a cost side here? If I am right about the guidance, it seems to imply a slight increase to operating income on flat revenue. With all the acquisitions coming in and everything else, I am wondering, how are you thinking about the cost base? You are talking about just Industrial International? Yes. Yeah. If I recall correctly, we have flat sales FY 2012 to 2013, but there was some deterioration in earnings. Okay, now just looking at FY 2013 playing out on an organic basis, like I say, it is fairly negative in the first half, I would say in line with the orders that you are seeing. Then we show improvement in the second half, which is what I talked about earlier. So, I think when you are looking at the incrementals on the Industrial International, you have to make sure that you take that currency into consideration. Okay, but I guess the guidance itself does not bake in some sort of action on a cost side in Industrial International at this point. There are always cost improvements baked into the guidance. We always forecast a little bit for productivity improvements every year. Okay, thank you for taking my questions. Our next question comes from the line of Josh Pokrzywinski with MKM Partners. You may proceed. Hi, good morning, guys. Hi, Josh. Just to follow up on the last question about the, I guess, the cadence in Industrial International. Maybe this is putting too fine a point on it, but how should we think of Europe versus Asia versus Latin America in that second half acceleration? Is a lot of it being better China growth or easier comps in Europe? Maybe even just qualitatively help us understand kind of the big moving pieces. Okay. Yeah, Josh, Jon here. I think that, first of all, looking at the international industrial business, as we pointed out, we were down in orders here in Q4, double digits for Europe. Dawn commented on that earlier. As we go throughout the year, as we see at a low level, stabilizing revenues at this point, we will see an ever-increasing rate starting here in our Q3, which would be in January. That's how we show that the guidance is set here for the second half. The biggest point to make about our international business is our business in Asia, specifically in China. We are seeing positive indications of order trends in China. Asia never really went down. China did go down specifically in Q4 slightly. We see, and we are getting word of improvements as the year goes on. Given the macro situation here right now, we fully understand the risks that are built into the second half of our model here for FY 2013. But what outweighs all of those risks is the incredible demand that is really truly there, the underlying demand that is truly there, that is going to ultimately be pulled through all of our businesses in Asia and really be able to also help ignite demand further for us in Europe in the second half also. So that's without going country by country with you. That's the big picture as to how we're looking at it. We're sitting flat at a low level in the first half and gradual growth in the second half, and that's how our guidance internationally is put together. We understand, as Dawn mentioned, the issue with the soft landing in Asia. We understand very well the debt crisis in Europe. But we sit here and we look at our data and we look at our trends and we do a bottoms-up review with all of our people around the world. We match all of that data that we get from a bottoms-up review with the industrial production metrics that we see globally around the world. Then we try to give the best guidance that we can. That's how it shakes out for us this year. I think we did a pretty good job this time last year coming up for FY 2012, and we feel confident about these numbers here for FY 2013 as well as we did this time last year. I'm hoping that helps, Josh. Understood. No, that's very helpful. Just a follow-up on some of the other moving pieces. Just want to make sure I'm understanding this right. About a $0.15, roughly back of the envelope impact from FX. Then you said restructuring was going to be a nickel to $0.10. One other thing you didn't touch on, which I think held back fiscal 2012 was some outsized investment, particularly in Asia. Am I remembering that right? How should we think of that trending fiscal 2013 versus fiscal 2012? Well, I think, first of all, the estimates that you just made are about right here in terms of restructuring and FX. I'm there with you. What's happening in Asia with us, and I think I might be able to answer your question, but if I don't, please ask again. What's happening in Asia is this: We've got the top line that is stabilizing here for us and ever-growing into the second half. Of course, everybody understands in all of Asia, not just China, but all of Asia, the underlying demand that is there. Also what's happening in Asia, and we've talked about this before in prior conferences with us, is that we have put in a cost structure that is giving us incremental fixed costs there as we build out, and we have prepared for the future. Our overall margins, looking backwards in FY 2012 as compared to maybe FY 2010 or 2011, are down slightly. Part of that due to the reduction in the pace of the increase in sales is really kind of driven by those incremental fixed cost base as we build out and prepare for the long term and prepare for the incredible growth that we've seen and we will be seeing as time goes on. That's the one item, big picture, that has impacted us in Asia and impacting our margins. Now, as we obviously start to grow at ever-increasing rates in Asia, as FY 2013 proceeds, we will be driving incremental MROS, marginal return on sales, that it will get us back to the levels that we were seeing in FY 2010, FY 2011 range. Okay. Just so I'm clear, that is, you're reaching the point now where you're getting leverage off of that fixed cost investment. There's not an incremental drag into 2013. Yes. I wish I had said it that clearly. All right. I appreciate it. Thanks, guys. Thanks, Josh. Our next question comes from the line of Ann Duignan with J.P. Morgan. You may proceed. Hi, guys. Good morning. Good morning, Anne. Can we take a step back to two comments that you made? You said that Latin America, I think you said, was up 7%. Just curious where you are seeing the strength there. Is it any specific market or any specific country? Then a little bit more detail on this early signs of beginnings of a re-acceleration in China. What specifically are you seeing or hearing? Just curious. Well, Anne, this is Don. I would just kind of maybe read off a few of the areas in Latin America that would be posting positive trends. Machine tools would be one. General industrial, semicon, interesting enough, semicon up in telecom. Off-highway construction, heavy trucks, lawn and turf, and industrial trucks, material handling type equipment. Those would be the ones that we would show as positives in Latin America region specifically. There is a like a number that would be not positive, but those would be the positive ones. Then the other part of the question. And mostly in Brazil. Yeah. What was the other part of the- That was it. That was it? Yeah. No, the other part was China early signs. What specific signs or what gives you some hope that China is re-accelerating? Well, I think just what we've heard. First of all, the order trend is still positive here for us. That would be the one thing. Then just kind of the feedback that we're getting from our team in China, that the government is kind of relaxing, or stimulating, I should say, not relaxing, but trying to stimulate a little bit more activity there. I don't think it's going to go back up to 10% or 12%, but I think it'll go north of 7%. Just the feedback that we're getting that the government is planning to get the economy moving at a little higher pace. Okay. Then just as a follow-up on the share repurchase program, I'm just kind of curious, wouldn't you have known what the restrictions were and how many shares you could buy back per day and the blackout periods? Wouldn't you have known that at the beginning of the quarter or before last quarter's conference call? Sure. We knew all that. Absolutely. The- We bought back, we didn't know what the daily activity rate was going to be, but we knew that we were limited to 25%. And we knew where the current price of the stock was, at least at the call, relative to what you might call our range or our target range, and where that was relative to our DCF models. We knew all that, and we bought back, like I said, as much as I could, given the blackout and the limitations we had from those other factors. No, absolutely, we knew all that that I've just described. It was theoretically impossible that you were ever going to achieve the 14 million? Well, yeah. Go ahead, Jon. I think, Anne, the one point here that perhaps you're getting to is that, no, theoretically, we could have bought back all of that. But if you recall, the day of that call, our stock price moved dramatically. We had a price in mind that we bought was our trigger point, and we did not reach that trigger point until later in the quarter. This is all based on the analysis that we do, as Don talked about, in the DCF. That's how we do our analysis. It was a much different picture the morning of the call last quarter versus the ensuing few weeks. Okay. That might have been because Don told us how much he was going to spend and how many shares he could buy back. Well, that's not going away. I have the support of the board. We indicated that we bought back, in the last two years, maybe $1.2 billion. We do have the intent to buy back more, and I know I have the support of the board to continue on. I wouldn't read any more into it than that. I think that you are hearing me on the call saying that share buyback is going to be a major emphasis this year, and we're going to continue on doing what we've been doing in the last couple of years here, for sure. Okay, in the interest of time. Thank you. I will take my other questions offline. Thanks. Thanks, Anne. Our next question comes from the line of Stephen Volkmann with Jefferies & Company. You may proceed. Good morning, guys. Good morning. I think most of it's been answered, but Don, I just thought I might take you up on your initial comments where you said that there was probably some more opportunity with margins over some period of time, and that you would expand upon that during the Q&A if necessary. I'd love to hear that. Oh, I'm not sure when we really talked about that. Yeah. I think it's funny because we talk about it here and I'm just preparing for the call. We oftentimes get the question that, we're kind of peaked out and all that. I get that question every year. Over the last 10 years, I guess, been around here long enough, I guess you start hearing things over and over again. Every year we're kind of peaked out, and the next year we're going to be down, but we peak. We set a new record and we peaked out. A couple of things that I just want to point out to people, and to all those that are on the call is, first of all, and I mentioned this earlier, specifically with respect to North America margins, that North American margins aren't at 15%, that are at 17%-plus. The implication there is that we should be able to do the same everywhere around the world, as far as margins as we're doing in North America. We haven't stopped as far as the margin growth that we've seen over time. I don't anticipate stopping. There'll be some theoretical limit at some point in time. I don't know what that number will be. Here's just a couple of my thoughts. On these acquisitions, for those that have been tracking us long enough, the one thing that we've done is we've done 100 and some acquisitions since I've been around. In that period of time, we increased our margins to over 15%. The way we did that is by executing on the Win Strategy, and we executed on the strategic initiatives there, the procurement, the pricing, the lean, and we delivered about 600 basis points improvement in every one of those acquisitions in aggregate that we've done over that period of time. That was in a period of time when everybody said acquisitions were a failed strategy, it doesn't work and all that kind of thing, and we improved our margins, integrated 100 and some acquisitions. Going forward, when we look at the acquisitions we're doing today, one thing that's going to help improve margins going forward is we're going to expect that same 2 plus 2 plus 2 or 600 basis points improvement in operating performance. Okay, so that's one positive thing going forward. The other thing, if you look at what happened this year, we had one big horse on the front of the cart, pulling the whole cart along. Well, actually, we had a big horse and a small horse. We had Industrial North America, and we had Aerospace. Everybody else was sitting on the cart. They were pulling Europe along, Asia, and Latin America. Just keep in mind that as these other economies come back, our margins have been depressed in these other regions. As these other regions come back, you're going to see margin expansion in our business. So those are a few major things that are going to happen going forward. Housing starts, as you know, and you've seen the impact the housing starts have on our CIC group, and we've reorganized, we've restructured, we've done all that. You can start seeing the margins starting to improve in our Climate & Industrial Controls group. You would expect that to continue as housing starts pick up. I just saw some news in the paper the other day that looks like there's a little glimmer of hope there on the housing recovery. Now, if we can get some people back to work, that would help, too. Maybe somebody could afford to buy a house. But, as housing starts to recover, our margins will improve and specifically in the CIC group. But also actually across the board because housing starts drives a lot of activity, construction and what have you. We're doing more system solutions than we've ever done in the history of the company. We've continued to do that. Of course, Aerospace is in the lead in most respects as far as systems. We know that systems is a higher value activity for the company and drives higher margins. That is going to continue going forward. Even on the Industrial side, there's a lot more activity on systems on the Industrial side. We talked about Winovation. For those that have tracked the company, we're at about 3% of sales now coming through the pipeline of new to the industry or new to the world type products. We want to get that number to 4% as that additional incremental comes through. That's additional margin business. Of course, if you have something new to the world, that's going to bring with it some higher margins as you introduce those products. You heard a little bit about globalization. That's going to drive margins higher as well, and we've always done very well in our global emerging markets. As we grow in those markets, we're going to drive margins higher and higher as we absorb, as we talked a little bit about earlier, the additional overhead that we're placing into those regions. The other thing is, you know that the amount of money we're spending in Aerospace, on non-recurring engineering, we've got major programs. We've picked up about $20 billion worth of new wins over the last several years. As we bleed that NRE off, Aerospace margins will go up. As you've seen a little indication in this coming year, I think we finished last year at 13.8%. You see a little improvement in this coming year. As more of those new programs are completed, that non-recurring engineering is going to help us expand those Aerospace margins. For those that have tracked us for a long time, you'll remember that Aerospace peaked a number of years back when we were not doing much in the way of new product development. There was a soft period around 18%. So you can see that there's plenty of room to move Aerospace margins higher as these projects complete. We talk about ParkerStores. You know how strong our aftermarket program is here. We started with no stores back in the late '80s. By the late '90s, we were at 500 stores. We're going to be at 2,000 stores this year. We're adding a store somewhere in the world almost every day, and those stores are just making our aftermarket program stronger and stronger and stronger, and we're going to eventually have thousands. We're going to hit 2,000 now. We'll go and add additional units every year. We have been adding those, and those are at higher margins, okay? Those aftermarket margins are higher margins for the company. So that's going to help us expand our margins going forward. We've launched here in the last several years a design assemble test activity, or a strategy, I should say, not activity, a strategy for the company, whereby we've come to the conclusion that we should be manufacturing critical items and everything else we probably should basically have other people manufacturing. That gives us less cyclicality in our business, less gyrations going through the business cycle, and yet maintains the propriety of our highly intellectual part of our business, intellectual property, still maintains that within the company. As we continue to do more design assemble test, design assemble test, and less cutting chips for what we might consider just the routine type products, not the critical ones, that's going to help mute cyclicality, improve margins overall throughout the business cycle. I could go on and on, but I think we're kind of running out of time. When you say that we've peaked out, I just get flashbacks to some of these few things that are going on out there that are just going to do nothing but expand margins going forward. Okay, I think at this time, due to time, we are going to have to move to closing comments. Don, you have just a few closing comments and Yeah, thanks, Pam. I want to just go ahead and thank everyone that took the time to join us on the call today. I think we had some good dialogue here. As always, I want to take this opportunity to also thank our employees for their continued commitment and for delivering the outstanding performance that we did this year. We had a record year of performance on top of a record year last year. It is just a string of records for the company, and it does not happen without a strong team, and the team is really doing a great job executing on the Win Strategy and achieving those record results. We are certainly very proud of their accomplishments. They have also led the transformation of Parker into what I describe or talk about as being the premier diversified industrial company that we are today and among the best-performing companies in our peer group, and I think anyone on the call could certainly look at virtually any metric and put us up against the top companies in our peer group, and we are going to look very favorable by that comparison. So, very excited about the year. We are going to have another, hopefully, record year this coming year. I want to thank everybody for participating on the call and certainly for your continued interest in the company. Pam will be around, as always, after the call to take any questions. With that, I will just say goodbye, and have a great day. Thank you very much. Ladies and gentlemen, I conclude today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.