Earnings Call: Q3 2012

Apr 24, 2012

Summary

Q3 revenue grew 5%, EPS reached a record $2.01 and segment margin hit 15.1%. FY2012 EPS guidance rose to $7.30–$7.50, while international markets remained soft and North America led growth.

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Parker-Hannifin Corporation earnings conference call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. If you require operator assistance, please press star followed by zero, and we'll be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Pamela Huggins, Vice President and Treasurer. Please proceed. Thank you, Lisa. Good morning, everyone. It's Pam speaking. As Lisa just said, I would like to welcome you to Parker-Hannifin's third quarter fiscal 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 do wish to do so, you may follow today's presentation with the 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, I would ask that you reference slide number 2 in the slide deck, which is the safe harbor disclosure statement addressing forward-looking statements. 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 have been reconciled to the appropriate GAAP numbers and are posted on Parker's website. To cover the agenda for today on slide number 4, the call will be in four parts. First, Don Washkewicz, Chairman, Chief Executive Officer, and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the third quarter, concluding with the revised 2012 guidance. The third part of the call will consist of our standard Q&A session. 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 Third Quarter Fiscal Year '12 Highlights. Thanks, Pam, and welcome to everyone on the call. To start the call, I'll just take a few moments to point out some of the highlights for the quarter. This was obviously a very strong quarter for Parker. We're really excited about it. We delivered a number of records, and I'll touch on some of those records here as we go forward. We did exceed our guidance that was given last quarter, so we're pretty excited about the results for the quarter. Sales were a third-quarter record, while net income and diluted earnings per share were all-time records for any quarter in Parker's history. Pretty remarkable performance there. Although we did have some benefits on the tax side from some prior tax filings, our results this quarter definitely reflected strong operating performance in our industrial North America segment. I'll share some of those margins with you in a few moments. Internationally, our results this quarter did slightly exceed our expectations for soft market conditions in Europe and Asia. International markets appear to have somewhat stabilized. You may recall that when we started the fiscal year, our projections were that the first half was going to be strong and the second half was going to be somewhat weak, and it's exactly how this is rolling out, exactly the way we see it now. We predicted these markets would be soft in our second half, and they were soft, and we expect them to be soft through our last quarter here, pretty much in line with our original forecast that was given at the beginning of the fiscal year. Substantially, all of our sales growth in the quarter was organic at 5.8%. Currency impacted us by 1.3% negative, and acquisitions were very minimal at 0.2%. You can see most of the growth was organic, and the majority of that came from North America and also aerospace. Looking on the order side, orders increased 2%. We did report that against tough comps, while quarter-ending backlog was up 5% compared with quarter-end backlog a year ago. So our backlog's never been stronger as well. Total company segment operating margins were a third-quarter record at 15.1%. Again, you can remember this was our target. We've been trying to get to that 15% and finish the year strong at 15%. It looks like we're heading down that path to have another record year from segment operating margins. Of course, that was driven primarily by, as I indicated earlier, industrial North America margins, and those were 17.3%. We've never achieved that before. Hopefully, there's more to come as we look forward on building on that record as well. Year to date, our operating cash flow remains strong at 10.3% of sales and exceeded $1 billion. For the quarter, operating cash was $443 million, or 13.1% of sales. I might add that this is the highest amount of operating cash in any quarter since fiscal 2008. So really doing a very good job in spite of the fact that some of the regions around the world are soft. The company still performs very strong. Our usage for cash will be to continue our dividend increase record and make accretive acquisitions similar to what we have done recently and opportunistically repurchase Parker shares. Our board recently authorized us to repurchase up to 16 million additional shares during the remainder of this fiscal year. Today, we announced another 5% increase in our dividend as we now enter our 56th consecutive fiscal year of increased annual dividend payouts. Currently, Parker's yield is approximately 2%, and there's only four or five companies that can match that record. We were also successful, as you had seen, in acquiring Snap-tite Incorporated, a strategic high-pressure connector and valve acquisition. Also, we announced today an agreement to purchase the Olaer Group based in England. Some of the acquisitions that we referenced going back earlier in the year that we were working on, you can see that a couple of those actually have come through the pipeline. So we're pretty excited about being able to accomplish that. Combined, these two acquisitions that I just mentioned add approximately $300 million in annual sales, and that would make the total for the year so far about $341 million in annual revenues added due to acquisitions. Again, these are coming later in our year, so that is going to be accretive to next year's forecast as we go on and review that with you going forward. Due to the fact that we outperformed relative to guidance in the third quarter, we have now increased our earnings range for the full fiscal year. We now expect that fiscal 2012 earnings will be in a range of $7.30 to $7.50 per diluted share. At the midpoint, that represents a 4% increase from our previous guidance, and it also anticipates an all-time record year for the company. We will be giving guidance for our next fiscal year in early August after we finish this fiscal year. That is when we will be reporting our fourth quarter results and full-year earnings. Our early projections reflect another year of growth in FY 2013. We have completed a lot of reviews here at corporate with our groups, and so far, it looks positive for next year as far as additional growth going forward. We are going to be more specific on that when we get on our fourth quarter call in August. With that, I will turn it back then over to Pam, and she will give you a little bit more detail. Thanks, Don. At this time, I would ask that you reference slide number 6, and I will begin by addressing earnings per share. Fully diluted earnings per share for the third quarter came in at $2.01, and this is an increase of $0.33 or 20% versus the $1.68 from the same quarter a year ago. The $0.33 increase in earnings per share for the third quarter year-over-year from $1.68 to $2.01 is comprised of the following: One segment operating income added $0.13, largely due to higher volume industrial North America. Lower tax rate due to a favorable resolution of prior year's tax filings impacted EPS by $0.13, and non-controlling interest favorably impacted EPS by just a penny. As a result of shares repurchased, the lower share count had a favorable EPS impact of $0.14. Higher expenses below segment operating income impacted EPS by $0.08, and I will talk about this in just a moment. Sales were higher in industrial North America and aerospace, while Climate and Industrial Controls group and international sales were down slightly. International down less than 1%, and this is in spite of the sovereign debt issues and slowing economies in Europe and Asia. Climate and Industrial Controls sales are down due to the issues that we have consistently spoken about in previous calls, but income is actually higher than last year. North America generated increased operating income year-over-year, and international and aerospace were slightly lower. International is down as a result of the slower economy in Europe, continued investment in Asia, and the impact of currency, mainly the euro, as it weakened against the dollar. The segment did better than projected, however, due to a more favorable impact from currency and less restructuring than anticipated, of course, aided by the higher volumes. Expenses below segment operating income, as I said I would speak to this, were impacted by higher other expenses of $25 million, and that is mainly due to favorable adjustments last year for insurance settlements and higher currency expense this year. The lower tax rate, again, as we said, was due to the favorable resolution of prior year's tax filings and the lower share count, obviously, as a result of the shares that we repurchased last year and this year. Now moving to slide number 8. Looking at the top line, revenues for the quarter increased 5% to $3.4 billion from $3.2 billion last year. This 5% increase in revenue is in spite of a slight decrease in international as a result of slowing economies in Asia and Europe and Climate and Industrial Controls, where the residential construction market remains soft. Climate and Industrial Controls, however, generated more income on less sales. There was minimal impact from acquisitions in the quarter. Currency reduced sales by 1%, so core sales growth was 6%. Segment operating margins for the quarter increased 30 basis points from 14.8% to 15.1%, an all-time third quarter record for the company. Now moving to slide number 9 and focusing on segments, and I will commence with North America. North American reported revenues increased 12% for the quarter. Acquisitions and currency had little impact. As such, core revenues increased 12% as well. Operating income increased from $189 million to $227 million, a 20% increase for the quarter year-over-year. Operating margins, a record third quarter increase to 17.3% from 16.1% last year. Now moving to slide number 10 and continuing with the industrial segment, moving to international. Organic revenues in this segment increased 2%. However, currency reduced revenues by 3%. Acquisitions had minimal impact in the quarter, so total revenues for the quarter decreased 1%. Again, a decrease of 1%, very good in light of what is happening in the macroeconomy. For the quarter, segment operating income decreased to $195 million from $200 million, and operating margins decreased to 15.2% from 15.5%. Again, due to the softening economies in Europe and Asia. So moving to slide number 11 now and focusing on the Aerospace segment. They reported increased revenues of 8%. Acquisitions and currency had no impact, and margins decreased for the quarter 160 basis points for the quarter to 12.1% from 13.7% last year. Again, this is due to the higher research and development expenses being incurred this year that we have spoken about on previous calls. On a year-to-date basis, Aerospace margins are 70 basis points ahead of last year, with segment operating income $28 million ahead. So moving to slide number 12, the Climate and Industrial Controls group. For the third quarter, year-over-year total reported revenues decreased 6% for the year. Again, slow markets. Some of the slow markets that they are seeing that we have talked about on previous calls. There was no acquisition impact for the quarter, and currency decreased revenues 5%. Therefore, organic revenues decreased 5%. Segment operating margins, however, as a percent of sales are going up 9.3% for the quarter versus 8.5% last year. And this is due to the continued restructuring efforts that we have spoken about, again, on previous calls. Moving to slide number 13 and referencing orders for the quarter. Slide number 13 details orders by segment. Just as a reminder, these numbers represent a trailing 3-month average and are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions and currencies except for Aerospace. Aerospace is reported using a 12-month rolling average. As you can see from the slide, orders are up 2% for the March quarter, just ended. North American orders increased 7%. Industrial international orders decreased 1%. Aerospace orders increased 4%, and this is up from last quarter. Climate and Industrial Controls orders decreased 6%, again, due to weakness in some of their markets. Moving to the balance sheet on slide 14. Parker's balance sheet remains solid. Cash on the balance sheet at year-end was over $773 million. Day sales in inventory decreased to 57 days from 63 last quarter. We are very happy with that performance. Accounts receivable in terms of DSO closed at 50 days versus 49 last year. Weighted average days payable outstanding increased to 54 days versus 51 last year. We are happy with that progress as well. Moving to slide number 15, addressing cash flow from operations. For the quarter, it is $443 million at 13.1% of sales. Very good cash flow for the quarter. The major components of the uses of that $443 million in the quarter. We returned to shareholders via share repurchase and dividend payments, $80 million. $88 million was used in connection with acquisitions as we closed the Camfil Farr and TAIYO acquisitions in the quarter. $57 million utilized for capital expenditure purchases. In addition to all of these uses of cash increased another $67 million in the quarter, largely due to commercial paper proceeds within the quarter. However, that was paid by the end of the quarter. In total, cash increased $285 million quarter to quarter. On slide 16, you can see that the debt-to-total Cap ratio is 24.3%, and on a net basis, 15.4%. Obviously, in very good standing and providing the capability to grow the company moving forward. Getting to the revised guidance for fiscal year 2012. This is shown on slides 17 through 19. On slide 17, the guidance for revenues and operating margin by segment has been provided. I am not going to go through each one of those numbers. Moving to slide 18. Guidance has been provided at the midpoint and in total for the items below segment operating income. Again, you can see the numbers moving to slide 19. It summarizes the guidance on a diluted earnings per share basis. As you can see, the revised guidance for fiscal year 2012 is projected to be $7.30-$7.50, just as Darren has already said. Please remember that the revised guidance excludes any acquisitions that will be made in the fourth quarter. To summarize the revised guidance assumptions for you, revenues increased 6.7% at the midpoint. Segment operating margins are in the range of 15.1%-15.3% for the year. Expenses below segment operating income, which includes corporate administration, interest, and other, at the midpoint are projected to be approximately $429 million. We put a band around that of plus or minus 0.7%. The projected full-year tax is 26.5% full-year tax rate. Just a couple of points with respect to guidance. Sales first half, second half are divided 48%, 52%. Earnings per share first half, second half are divided 47%, 53%. Realignment costs are minimal and projected to be 6% for the quarter. Four cents has already been incurred and the remaining projected expenses will take place in the fourth quarter. At this time, we will commence with the standard Q&A session. As a reminder, before we do that, we would like to keep this call to one hour, so please honor the request of one question at a time, and one follow-up only when clarification is needed. By adhering to this courtesy, everyone will have a chance to participate. Lisa, at this time, would you please open the call to begin the question and answer session? Yes. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Please press star one to begin. Your first question will come from the line of Jamie Cook with Credit Suisse. Please proceed. Hi, this is Andrew Buscaglia in place of Jamie Cook. I just had a quick question on, can you guys give an updated thoughts just on the pace of your recovery that you are seeing in Asia and potentially Europe? Just a little bit more color there would be great. Okay. Thank you. Nice to have you on the call. Jamie is probably on another call as I understand. Yeah, we got a few going on. Yeah. Okay. Okay. This is Jon, and just to begin, I think as Don indicated earlier, where we stand in Asia is right where we thought we were going to at the beginning of this year. Don talked about how our revenues internationally, industrial are stabilizing. That holds true for Asia as well as for Europe for us. When you really look into the guidance by segment, you'll see that we're basically sequentially up slightly from Q3 to Q4 in our comps, versus last year, our very tough comps and still showing really good results. As Don indicated, we're going to be looking at the trends for Asia, China specifically, but Asia in total, as well as Europe altogether deeply during our Q4. And we'll be updating our guidance from July 1 to June 30 of calendar year 2013 here at the beginning of August. But I think the key word for us right now is that our international sales, both in Europe, given the issues there, as well as in China, given the issues there, have stabilized, and that's what's included in our guidance here for Q4. Okay, thanks. Actually, just on this, I saw this acquisition this morning on Olaer. It looks like this company's pretty sizable with $200 million in revenue. There's not a whole lot disclosed in the press release. Could you guys talk to that a little bit more in terms of what you're expecting for accretion and how much you paid for it? Can you give any more details there? Well, I appreciate the question. I think two key points on that deal. We announced an agreement to acquire that company. We expect, and we're hoping that that deal closes on July 2, and that will be impacting our FY 2013. At this stage of our transaction, we would not be disclosing that level of detail. We have some work to do, and we want to make sure that we get our real good work done with the sellers as well as all the employees of Olaer in Q4 and get this final agreement done by July 2. That's our plan. All right. Thanks, guys. I'll step back in queue. Thank you. Your next question comes from the line of Robert McCarthy with Robert W. Baird & Company. Please proceed. Good morning, guys. This is Mircea Dobre for Rob McCarthy. Good morning. A quick clarification question when looking at your guidance. If we are taking the midpoint of the updated guidance, $7.40, and I am adjusting for the $0.13 tax benefit, then I guess according to my math, I am looking at fourth quarter guidance of about $1.80, which when I am looking at performance in the third quarter, again, adjusted for the tax benefit of $1.88, at the midpoint would suggest a step down in EPS from the third to the fourth quarter, and that is something that traditionally speaking, we have not seen generally before. I don't know what's going on here, but this is Pamela Huggins speaking, and I have the guidance sitting before me by quarter. While third quarter is a little bit below the third quarter, not to the degree that you're mentioning, one thing to remember is that in the fourth quarter, we're not baking in the impact of the third quarter tax benefit. Really the fourth quarter is stronger than the third quarter once you back out that tax benefit. Right. I thought I was doing that, but perhaps I got my math wrong. The point is, we should be seeing really a step up in operating results in the fourth quarter as well. Yeah. We do. At the midpoint, you're seeing well over $10 million, and it's higher than that in terms of the increase. You are seeing a substantial increase from third quarter to fourth quarter, and I throw out that number because I know that you guys are smart enough and are going to be able to back into it anyway. Well, hopefully. My follow-up is still on the international side, and some of the commentary there, positive, and we appreciate that. A little bit different than what we've heard from Eaton. I guess I'm wondering, what is it that you guys are seeing Europe versus Asia? Is there a difference in the way these markets are performing and perhaps mobile versus fixed exposure as well? Well, this is Jon again. I think that in Europe, we are seeing a broad-based stabilization in all end markets and all of our businesses in Europe. We feel very confident in our forecast here for our Q4 and for the balance of the year. In Asia, although, yes, we are very well aware of the mobile hydraulics issues in Asia and in China specifically. We have gone through, in detail, all of our end markets and all of our product lines there, and we are seeing a real stabilization of our revenues that are coming from that region. Yes, mobile hydraulics is down slightly, not a big number, nothing really that concerns us. And we are really happy with the way that our Asian business and our revenues from Asia have materialized here for us as we really look at Q4. Like I say, I think to give you a broader perspective long term, we will have to give you a really more detailed update in August for that. Yeah. And Rick, this is Don. You are mentioning other companies, so I am not sure exactly what they are saying. I am not watching their reports. But we are putting a lot of infrastructure into Asia. We are penetrating market in Asia. We are going to continue that along those lines. Our breadth of product line doesn't even compare to the other people that we are talking about here. We have a broad range of products, whether it goes from sealing or filtration, pretty much across the board. So there is no apples-to-apples comparison when you are talking about the two companies. Thank you. Thank you. Your next question comes from the line of Alex Blanton with Clear Harbor Asset Management. Please proceed. Hi. Good morning. Good morning. Pam, could you give us a little more details on the balance sheet ratios, specifically the ones that really measure your progress on getting leaner? I'm talking about inventory-to-sales ratio for the quarter, how that compares with the past, working capital sales ratio, and CapEx to sales, and what you expect for the year in the CapEx. Because those things have been dropping, and they're generating cash for you. Yeah, Alex, you bring up a good point. I think if you look back, that's one of the strengths of Parker-Hannifin, really, the way that they're able to manage their working capital, whether it be in an upcycle or a down cycle. When you look at our DSO versus our peer companies, we always are at the very top of that list in managing our receivables. So we're very proud of where we come out with regard to that. I don't take credit for that. There are a lot of people around the world who work every day to make sure that is taken care of. So we have people out in all of those divisions working very hard every day, making sure that we're collecting those receivables and that we don't have the kind of risk that you sometimes see out there. In terms of inventory, we're trying to get that down. We've been talking about that. In fact, we've set an all-time record this quarter. Inventory as a percent of sales is 10.9%, and it's the first time it's ever been that low. Obviously, we're smart enough to know that numbers play a part in that. Again, all of our divisions around the world working very hard to get that inventory. We said we want to be 10% of sales, and at 10.9%, we're getting pretty close to that number. So we're working very hard on that as well. We still have work to do, but happy with the results thus far. Then, of course, we have a gentleman here who works on the payable side who, very good at seeing results there. We don't quite do as well as we would like to do there, but we've made great progress. You can see the WADPO, that three-day improvement that I mentioned in my script remarks. So we are making progress there as well. So we're very happy with what we're seeing, but working hard every day to even make it better. Do you have the numbers on CapEx? Yeah, Alex, the CapEx was the other number. We are running around 1.6% right now of sales. I think that over at a longer run, we are not going to see that be 1.6, but I have been quite amazed myself as to how efficient we have been able to get as a result of rolling out lean and really driving that and some of the self-directed work team effort going on in the company and so forth. It is really gratifying to see these kind of CapEx numbers. That just frees up cash to do other things, which you are starting to see here that we are looking at. Yeah, it is a good number. Thank you. Thank you, Alex. Your next question comes from the line of Ann Duignan with JPMorgan Securities. Please proceed. Good morning. This is Ingrid. Just standing in for Ann. Hi, Ingrid. How are you? I'm fine. How are you? Real good. Good. You touched on this a little bit, but I was wondering if we could talk about the Climate & Industrial Controls. It continues to disappoint versus our expectations, and with orders down 6% in the quarter. I was wondering if you could just talk a little bit more about the fundamentals in that business and where specifically the weakness is. Well, the key there, this is Don, the housing starts is a key part of that group that's tied directly pretty much to housing starts. There's truck activity in there as well and some industrial valves activity, but primarily, the refrigeration air conditioning parts tied to a great extent to the housing market, and we know what the situation is there. I will make a note that in March, and you don't see the number in March, but in March, that group hit double-digit ROS numbers, operating ROS. It is improving as we go forward. Some of the restructuring that was done last year is starting to come through. Like I said, you're not going to see that number, but that's what it was. There was less revenues, and there was more income. The revenues were down, but the income was higher. I think we're seeing the benefits a lot of the restructuring that has going on in that group. Until such time as the housing market really starts to rebound, I think we're probably bouncing off the bottom there. Then when we start getting some uplift, I think this group will start coming back and showing some nicer numbers based on a lot of the work that they've done as far as restructuring over the past six to nine months. Okay, that's helpful. It's basically offsetting any positive that you're seeing on the truck auto side? Yes. Okay. I was just wondering if we could talk a little about acquisitions. Your pace of acquisitions have picked up in recent months. If you could talk a little bit about what your pipeline is like and what you expect to see. Should we continue to expect to see this kind of activity level? Well, we have, as we had indicated for the last year or two. Some of the ones we're talking about today, well, actually, one of them, I can tell you, I've been looking at for 35 years, so you never can predict when you're going to get something through the pipeline. It's gratifying to see where we're at. There's more in the pipeline. We're working on more, we're looking at more, and we anticipate more coming through. It's hard to predict when, because you never know what you'll run into as you're going through the negotiations. But we haven't stopped. We've got a lot of dry powder, so to speak, cash debt and cash capacity, debt capacity that we can utilize to make more acquisitions, and we intend to do that. I think just the ones we've done of late would add about 3% of sales roughly next year just themselves. I think you can see how we're building some backlog here for another good year in the coming year. But we don't anticipate stopping here. We want to continue to build on what we've started to get through the pipeline. That's great color. Thank you. Thank you, Ingrid. Your next question comes from the line of Terry Darling with Goldman Sachs. Please proceed. Thanks. Good morning, Terry. Good morning. Hey, Don, just want to clarify on the re-up on the buyback. I think the way you said it, one could have interpreted to mean that you're looking to execute 16 million share buyback by the end of fiscal 2012. Can you just clarify? Yeah. We have renewed authority from our board to buy up to 16 million shares in this fourth quarter, and that we could buy zero or we could buy 16 million or anything in between. That's strictly just for the fourth quarter. We have renewed authority for next year, but that's all separate than what we're talking about now. This specifically has to do with the fourth quarter. And with the stock, the way it's been languishing at the levels it's been, which has not been where we think it should be, we'll take some prudent action here. We're looking at our models. We use a discounted cash flow model. We have a grid that we establish, and we're kind of getting in the red zone, okay, if I can put it in those terms as to when we just don't want to see this drop any further. Yeah, so we have that capacity, and we'll utilize it wisely and opportunistically. Okay. I just wonder if that has implications for the pace of acquisitions. No, actually, this would give us the ability at $80 a share, assuming it's at 80, to acquire about $1.2 billion or somewhere thereabouts in shares. We have about with our debt capacity right now, we have another about $1.2 billion capacity, and that's not counting any additional earnings going forward that we've been generating record cash flows going. Over the past year, you look at our record cash flows. We're going to have plenty of cash to do the dividends, the share repurchase, and any acquisitions that we want to going forward. I feel pretty comfortable with all that. Okay. Then, Jon, I'm wondering if you can add a little more detail to the organic growth picture on the international industrial side. Orders in March down 1 three-month trailing average. I'm wondering if you can help us with January, February, March progression. I wonder if you could clarify. It looks to me, unless I'm missing something on acquisitions and FX, that the implied organic range for 4Q is 0% to -3%. Then, I'm wondering also if you can just talk, you should be coming up on some really easy comps in some of the international end markets like semiconductor and such. As you think to the back half of calendar 2012, how much visibility you have on an acceleration just on easy comps alone? This is Don. I just have a couple quick comments, and I'll let Jon follow up from there. Europe, for the year, I'm going to touch on Europe. I'm going to touch on Asia just separately. But Europe for the year is going to be up about 5%. Remember what we said earlier, that the second half, which our second half or third, fourth quarter was going to be weaker. Well, actually, it was down on a year-to-year basis, third quarter, about 1% in Europe. So what you're saying is true. There's been some degradation, but we anticipated that. For the fourth quarter, we're looking at down another percent, which is on target from what we had predicted, and that's from last year's fourth quarter. So that's about a 1% down from last year's fourth quarter, which was a pretty strong quarter. If you look at Asia, we're going to end up for the year about 2.5% up for the full year. The third quarter was up about a percent over last year's third quarter. Again, if you look at Europe and Asia, they kind of are offsetting in that respect. Europe was down about a percent third quarter over third quarter. Asia is up about a percent third quarter over third quarter. So you get kind of a flat, stable kind of outlook. We're looking at Asia about down 2% in the fourth quarter, which was a strong quarter last year, 2% quarter-over-quarter in Asia in total. So when we look at all of this together, and keep in mind that Latin America is coming back. That's a smaller region for us, but Latin America is starting to show some life off the bottom. We're looking at kind of a stable outlook, flattish kind of outlook going forward. I hope that helps. Jon, you can add anything that you might want to add, too. No, I would say that covers it perfectly. Terry, anything further on that? Yeah, just to be clear, Don, that's all in including FX effect, or that's just organic? Just on your 4Q commentary. That's organic. That's organic. Okay. That's organic, yeah. Very helpful. Thank you. Your next question comes from the line of David Raso with ISI Group. Please proceed. Hi, David. Hi. I'm sorry, I'm here. If you look at the full year guidance for 2012, basically you're saying the full year revenue's up 6.6% with an incremental of 20.8%. Just trying to peek a bit into next year. Going into this past year, you had a lot stronger order growth, right? Up 24%, up 15% the last two quarters of last year. This year, obviously a little slower, +2% and whatever fourth quarter gives us. But you have more acquisitions going into fiscal 2013 than you had into 2012. So trying to think through the incremental margins, how you're thinking about it, just framework going into next year based off how this year is playing out, right? The 6.6% revenues, 20.8% incrementals. How should we think about, A, maybe the margins of what you've recently acquired, because that's obviously going to impact how we should think about incrementals into next year. And structurally, any of the things that you've done to the company this year to still allow that kind of incremental next year. Because again, I'm just thinking about the revenue going into 2012 as more organic sales growth. At the moment, the revenue growth going to 2013 is more acquisitions, which usually provides lower incrementals. We're going to- So again, if you can help us on just thinking about structurally those incrementals for 2013 versus 2012. Yeah. David, I think the relevant range is still the 20%-30% incremental returns. That is with acquisitions. I think, at least the early numbers that we have looked at here is kind of falling in that range. Like I said, we are going to give you more detail and better color as we go forward, but I feel comfortable in that range going forward with the projections that we are going to be giving you is from organic as well as the acquisition growth. I think we are going to be doing fine. We are seeing obviously a pretty strong growth from aerospace, which is positive. I think we had a little negative impact of late because of their higher than expected non-recurring engineering. I think that is going to drift down a little bit. That is going to be a little bit more accretive to the MROS going forward. And irrespective of what happens in Europe and Asia, I think as long as they do not implode more than what we anticipate here, I mean, a little softening, I think we are going to be fine with those kind of marginals that I am reflecting here. That is pretty interesting, though, to think higher incrementals next year than this year, though 2013, at least the initial base case, kind of how we are starting the year, is going to be a little more acquired revenue, in a way to your comment earlier about what you have already acquired could give you 3% growth for 2013 already. Can I imply from that that the margins of the recent acquisitions are I guess I have to say north of 20%. Are those acquired revenues that high a margin? No, I wouldn't want to make those assumptions, no. Keep in mind, too, that we've been shrinking in CIC all year. We anticipate that not going to be continuing forever, either. So there's some margin impacts from other areas of the business that you got to take into consideration when you look at the end result for the year. Not to push on it, but I'm just trying to figure those incremental margins, if they're lower than 20%-30% on the acquired revenues, it obviously implies even bigger than 20%-30% on the base revenue growth. So clearly, there must be some restructuring benefits that- Yeah, there are re- modified to some degree. Yeah, there are restructuring benefits that we have seen and will continue to see. We are also going to see the continued activity in oil and gas, which has been very good for us, very strong. Again, the other thing that we see building and continuing to build strong relative to the OEM side of the business is distribution. Distribution is a real strong piece of the puzzle, and we anticipate, at least the early look at next year looks like that is going to continue strong as well. That all adds to the higher margins and higher incrementals. All right, I appreciate it. Thank you. Thanks, David. Your next question comes from the line of Eli Lustgarten with Longbow Securities. Good morning, everyone. Good morning, Eli. You can tell those of us who believe that Parker's a stronger operating company today. Thanks for hanging in there with us. Everybody else abandoned ship there. Well, no, you got a couple of good guys. All right, I know we got a few good ones on the phone. Yeah, a few good ones. Just one clarification. When you talked about $350 million of acquisition, that includes the Olaer one today that you announced? That's right. That's correct, yeah. Yeah. I want to make sure of that. Can you give us a little bit of color of what's going on in the various segments? All the questions been on Industrial International. You had a much stronger organic showing in North America than you might have suspected from 8% and 7% order patterns going on. Something actually stepped up in that business, and you're expecting it to continue actually into the fourth quarter. Can you give us some idea of what happened to give us a double-digit number as opposed to what the order pattern was showing? Well, I think, Eli, I'll start out. This is Jon, and I know Don will perhaps have some points to add. But certainly, in Q3, in the ordering patterns as well as our conversion, we saw excellent progress in our oil and gas end markets. We saw excellent progress in our construction end markets, and we saw excellent progress in distribution overall. Those markets really helped drive our results in Q3 and drive results in our Q3 to a greater extent than we thought that they would be here as we were looking at Q3 in North America at the end of Q2. I think in a nutshell, I don't want to just say that it's just that, but those would be the top markets. I think, in general, I think that a key takeaway would be that North America results for the quarter on the top line and in the orders is broad-based. It is many of the segments that we operate in all across the product lines that we have, and a real testament to some of the diversification efforts that we have been making over the last 5 years here to really help drive our North American revenues. We are very proud of that, very excited about that for the future and what that bodes for the future, too. Yep. Can we also talk a bit about aerospace? Are we going to see an acceleration of top-line growth with all these wins there? We are still running 7%, 8% plus a little more top line. Are we going to see an acceleration of this, not so much fourth quarter, but in 2013 with better profitability as the R&D comes down? Is that what is in store for us as we look forward? Well, Eli, Jon again. Just a couple of comments on that. Number 1, I do not want to say anything too definitive about FY 2013 today because we really need to study very hard the patterns. But 2 just high-level points to make. The commercial OEM business and the commercial aftermarket business in aerospace are just fantastic, and they are only going to accelerate as time goes on. What we have to balance that out is against what is happening in the defense markets at the OEM level and the defense aftermarket MRO level. That is where the really deep analysis will be made. But I think long term, as we were talking about at our Investor Day in December, long term, the prospects, the organic prospects going forward are fantastic, and we are going to have a lot more to say about the mix in aerospace here at the beginning of August. All right. Thank you. Thanks, Eli. Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Hi, good morning, guys. Good morning, Jeff. Yeah. You gave us some good color into the fourth quarter on how you are thinking about Asia and Europe. Don, you said early in the call you expect growth into fiscal 2013. As you think directionally, I know you are not prepared to give any guidance, but if you think directionally, how do we think about trajectory into fiscal 2013 as we think geographically, North America versus Europe versus Asia? Well, I am just going to give you a little bit of color on the order trends. Again, we have done this in the past. We look real closely at our 312 pressure curves and 1212, and that is a good predictor of what is coming down the road. If you look at industrial North America, just looking at our 312, this is the last three months over the previous year, the same three months, and the 1212 would be the last 12 months order trend over to the same 12. North America, both of those trends are very strong, and they are well above 100%. We are talking about 108% on a 312, 112% on a 1212. Very strong going into next year. We do not anticipate any major changes there because we already have orders in the pipeline that cover the early part of next fiscal year already. Europe is flattening out at about 100. A little bit greater than that on the 1212s running about 110, but 312 is running around 100. I can see Europe coming in for a soft landing going into next year, which is kind of what I have been saying here. Asia, likewise, is coming in at around 100. That is why we say those two regions look kind of stable to us right now, at the levels that we are looking at here right now. It is good growth in North America and kind of a stable international. Kind of stable outlook internationally. Now, if you look at some of the specific markets, heavy duty truck is strong. I think you probably tracked that as well. Construction, off-highway construction is still strong. Refrigeration, as I indicated earlier with the CIC group, is one of our weaker segments. That is below 100% on the 312 and a 1212, so that is still got a ways to go before you bounce off of the bottom and start seeing some improvement there. Semiconductor is still weak according to our pressure curves on 312 and 1212 are under 100 there, and that is what we anticipated and had been forecasting. Process markets have been pretty strong, well above 100, about 120 and growing on a 312, running about 110% on a 1212, so you can see that that is a real strong market for us. Then I mentioned aerospace before. The aerospace 312 pressure curves at about 125, so that is going to be very strong for us next year. But keep in mind the two areas I think I want you to remember are distribution and aerospace. I think those two areas, when you discount the fact that Asia and Europe are going to be whatever they are going to be. We are going to continue to grow our presence in Asia and put more assets on the ground, which we are doing. We are going to eat into the market share over there, but we will have to see how that develops. I do not think it is going to get much worse than it is now. We are not anticipating that. But the real big areas for next year, I think you are going to continue to see a real strong North American development, and then also aerospace will be another strong segment. That would be some of my input on the coming year. Just a quick one on European restructuring. Can you quantify what your total restructuring will be in this fiscal year and kind of how you think about restructuring benefits into fiscal 2013 on that basis? Well, this is Jon. I think our restructuring altogether is $0.06 for the year. We are going to have $0.02 in Q4. In Europe specifically, there has not been, as compared to the prior years, nearly as much restructuring as we have had in prior years. We feel very good about our cost structure there. It continues to improve over time. Really, we have been working with the local councils and the local governments on different programs there that really, frankly, do not require us to do a significant restructuring like we maybe had to four or five years ago. We really are very optimistic about being able to further improve our cost structure there over time and really improve our bottom line margins as we continue to grow and add synergies from all of our businesses there and our sales companies and the way that we go to market, which we feel is very unique and very special about our company. Great. Thanks. Your next question comes from the line of Nathan Jones with B. Riley. Please proceed. Hey, guys, this is Richard Hall on for Nathan Jones. Hi, Richard. How's it going? Good. Welcome. Good. Thanks. I am looking at the aerospace margins. Obviously, they were fairly weak during the quarter. You mentioned that this was because of the R&D impact, or primarily because of the R&D impact. Two quick questions here. Is there any way you can quantify what the R&D impact was in the quarter? Then second, you may have hinted to this earlier, but when we are looking over the next few quarters, should we expect to continue to see a little bit of margin pressure from the R&D, or is that going to ramp down, or how should we think about it run right here? Well, as Don talked about in his comments, this is Jon. As Don talked about in his comments, R&D is a really tough expense. Everything is incurred in that business from an R&D standpoint, and it is really tough to get the timing right. We really got some expenses into our Q3 that we had been projecting into other quarters. But really, when you think about R&D and aerospace as a percent of sales, we are still going to be right where we thought that we were going to be at the beginning of the year. Last year, in FY 2011, we were above 10%, heading towards 11% of R&D as a percent of sales. This year, we will be, FY 2012, well below 10% as a percent of sales in R&D. We anticipate that trend will continue in our out years as time goes on. A more normalized number is in the 7%-8% range. That is what we have been kind of targeting for ourselves. As Don alluded to, there is just a timing issue in Q3. Sure. Okay, great. Thank you. Thank you. Your next question comes from the line of Stephen Volkmann with Jefferies. Please proceed. Hi, good morning. It's me. Hey. Hey, there's somebody out there, huh? Most of my questions have actually been answered, but I am just wondering, Don, the tone of how we progress through the quarter in CIC. We have seen some of your larger, who I assume are your customers, talking about things getting a little bit better as we progress through the quarter and seeing some signs of life in HVAC finally. I am just wondering if you might have seen that tone of things through the quarter, or is it still too early to think about that? Well, Steve, this is Pamela Huggins speaking. Yeah, I think, what you are referencing, we are seeing, but we are not getting too excited here yet. I think if you look at the very end of the quarter, in the last month and even in the mid-month, you saw some things maybe pick up. But it is just too early for us to get too exuberant. But you are right. We are reading the same things that you are reading, and I did question our Climate and Industrial Controls group about that. Yeah, slightly. I think, Steve, we found the bottom. Hopefully, going forward, we are going to start bumping on the upside here. Year over year, we are down 6% on revenues. We have got more income than we did last year because of all the restructuring. We are down 6% on revenues. We are lean as we have ever been in that group. Believe me, we get a little volume, we will be generating some nice MROS numbers. But yeah, I think, if you hear the rest of the commentary from other companies, I think there is only one way to go from here, is up. That is the only way to go. It is just a matter of timing right now. I guess that is mildly encouraging. Since you brought it up, Don, I am going to ask the question. Can it get to the corporate average or the rest of the company margin? Is mid-teens doable in this business with reasonable volume, or is it still going to be a bit lower? Again, that would depend on just a mix of what's going on there. Certainly, we've been in the teens before. We have never been, to the best of my recollection, ever to 15 for any period of time. We might have hit 15 in a quarter. I'm not even sure we did that. I think more like 13 or somewhere thereabouts. But keep in mind, too, that that group has traditionally had a much lower asset intensity to it. As a result, we get to our return on net assets metrics at a lot lower ROS. Not to say that we want to give any group a pass. We still think that we want all these groups to be at 15% plus. As a matter of fact, virtually all the other groups have demonstrated 15% plus kind of performance here, especially as you can see now from this quarter. We've got some other things going on in that group that are going to be accretive to us going forward. There's some very significant projects going on in our Winovation program with precision cooling and things like that are higher margin businesses. These are innovative type products coming out, and we think that's going to be accretive to that business as well. If we're going to be able to hit 15, the question is, it's hard to say. I think we're going to certainly be in the teens and approaching 15. Like I said, we hit double digits in a pretty down period of time here this last quarter. It's been gradually coming up, and a lot of that's because of all the restructuring we're doing. I think we're setting the field for something good going forward in that group. Great. That's very helpful. Is it a sort of order of magnitude, a third of that would be HVAC and the rest would be mobile or? Yeah, there's about 15% of that business, which is on the industrial side, which is the fluid control. Then there's 35%, which is what we call mobile, which is made up of trucks, refrigeration and trucks, off-highway equipment, auto. Then about 50% of the business is stationary air conditioning and refrigeration. 50%. Okay, great. Thanks very much. Thank you. Your next question comes from the line of Jeff Drake with Vertical Research. Please proceed. Thank you. Good morning, everyone. Good morning, Jeff. Hey, a lot of ground been covered. Just a couple of little loose ends for me. On Aero, just to put a finer point on it, Don, you said the higher than expected non-recurring engineering. Is that put to bed? I am assuming that's a certain business jet program that maybe can remain nameless on the call. But is that totally behind you, or is there still some more work to be done there? That's a good question. I know that it was unusual for this quarter. Every now and then, we get a surprise like this. I can't promise you that we won't get another surprise going down the road. It's a timing issue as far as how these costs roll in. Our hopes are that this is a one-time event, but I can't promise you that we wouldn't, a few quarters down, have a timing situation where a lot of things hit all in one quarter, we have another event, but the trend ought to be going down. Yeah, Jeff, I think we do pretty well on an annual basis, but quarter to quarter, you may see some fluctuation. While you saw that maybe it was higher in this quarter, it's going to even out for the year. We still think it's going to be less than last year as a percent of sales. We're still intent on that goal. That's what we've been communicating, and we still feel pretty comfortable that it'll come in at that level. Great. Just finally from me, just pricing in North America. Don, can you give us a little color on what's going on in pricing dynamics and maybe contrast that to the cost side of the equation? Yeah. That's a good question. We've had a lot of things going on here on the raw material side that have been going up and down and sideways and what have you. One of the more significant things that happened was on the polymer side, there was an explosion in Europe at one of the nylon 11, nylon 12 facilities over there, which put the automotive business companies in a tizzy because a lot of it's used in fuel lines. We're not in that part of the business, but we do use nylon 11 and nylon 12 for air brake tubing on trucks and things like that. We did have alternates that we were able to utilize. We had different constructions for some of these products, and we were able to keep our customers out of trouble. I think there's going to be a ramp-up, certainly on pricing on some of the raw materials on the polymer side of the business. If you look at the metals, copper is increasing at a decreasing rate. Aluminum, for the most part, is leveling off now, at least the last numbers that I had seen. Oil was a one-year high in March. Steel had an annual all-time high, I believe it was in February. Nickel is kind of flat for the year, but pretty volatile, bounces all over the place. When you talk about pricing, where we are right now is, as you know, we measure what we call the purchase price index for all of our divisions and all of our purchases worldwide, and we aggregate that number for the entire company. We look at the sell price index through our pricing teams worldwide, and we aggregate that. The key here is to make sure that the sell price index is high enough to recover any purchase increases in cost that you've incurred and any other cost, plus the margin. I can tell you right now, we're running positive there. So we are staying on top of this, and we're recovering these raw material increases as we're incurring them in pricing. We'll continue to do that. There's price increases that are scheduled for the July timeframe. We had some that happened in the January timeframe, and that's going to continue. Again, our whole mission here is to make sure that we don't fall behind and jeopardize margins because we're not passing on increases properly. We've done a really good job of this over the last probably six, seven years since we've launched our strategic pricing initiative here in the company. Thank you. That's all for me. Thank you. At this time, I think we're going to end the Q&A session. We're past our hour. I would like to thank all of you for attending. To those people out there supporting your analysts, I want to give you a special thank you for participating in the call today and look forward to talking to you later. Before closing, I just want to turn it over to Don, who just has some comments before we close the call. Thank you. Yeah. Thanks, Pam. Just a couple of last closing comments. I want to, first of all, thank all of those on the call. I know that there was another meeting. We were not expecting that to happen. Unfortunately, it did happen with another one of our peer companies. This is going to be tough for people to try to cover both of these meetings. I think, hopefully, we gave you a little bit of color on what's happening at the company and maybe a little glimpse of what we anticipate going into next year. You can see what's happening with the acquisitions and how we're going to be managing the cash here. The dividend increase that we talked about, it's another 5% that we just announced. That's 10% for the year. We're trying to keep our shareholders that we have happy, and we've got some capacity here, certainly on the share buyback activity that we can action as we go forward. I think you have an idea as to what our plans and our strategies are going forward. I'd like to take this opportunity also, as long as we're on the call, to thank all of our employees worldwide for their continued commitment to serve our customers. They've really done a remarkable job here of late and for continuing to deliver the strong financial performance that we're seeing for the company, setting all-time records. It's really gratifying to see all the good work that's been done and the kind of results that we're achieving as a result of that. We anticipate a strong finish to fiscal '12, as we indicated. We don't see anything bad happening over the next several months here, certainly, and we're going to give you the best look at fiscal '13 in August. We think, again, that's going to be a growth year for us. I want to thank you for your participation on the call and for your continued interest in Parker. If there's any additional questions, of course, Pam will be around the rest of the day. She'll be happy to take your calls. With that, take care and have a great day. Bye-bye. Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.