派克漢尼汾 (PH) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the fourth-quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Ms. Huggins, you may begin your conference.

Good morning, everyone. It is Pam Huggins speaking. I'd like to welcome you to Parker Hannifin's fourth-quarter and fiscal year-end 2006 earnings release teleconference. Joining me today is Chairman and Chief Executive Officer Don Washkewicz and Executive Vice President and Chief Financial Officer Tim Pistell.

Before proceeding to the earnings release, please allow me just to take care of a couple of administrative matters. As you know is customary, I would like to call your attention to the second slide -- this is the slide on the disclosure on forward-looking statements -- and ask that if you haven't read this already, would you please do so.

Moving to the third slide, this is a slide on non-GAAP financial measures. We have some numbers in the presentation today that are on a non-GAAP basis. We have done that so that you can look at the numbers from period to period on a comparable basis. Where this applies, we have reconciled the non-GAAP numbers to the GAAP numbers.

For those of you that are online, you may follow along with the slides that have been presented. And for those not online, the slides will be posted on the IR portion of Parker's website at phstock.com.

Moving to the agenda, which is slide number 4, the agenda today is in four parts. First of all, Don Washkewicz, the Chief Executive Officer, will provide highlights for the quarter and the year. I will come back on and then do a detailed review, including some key performance measures, of course for the quarter and the year, and then concluding with the outlook for fiscal year 2007.

The third part of the call will be our standard Q&A session. And again, I ask that you limit your questions to one at a time. This way, everyone will have a chance to participate. And for the fourth part of the call today, Don Washkewicz will wrap up with some closing comments.

At this time, I'd like to turn it over to Don and ask that you reference slide number 5.

Thank you, Pam, and I'd just like to say good morning to everyone on the call. Just a few comments that I would like to make before Pam returns for a more detailed discussion and a review of the year -- first of all, as you would obviously agree that we are very pleased with both of our fourth-quarter and our fiscal year results. I want to thank all of our employees worldwide who worked so hard this year to deliver our record performance, and especially in a pretty tough year. It was a challenging year, a lot of demand -- our customers were very demanding, and we really delivered on the customer service end. And that is really what made it happen this year. So really, really appreciate their efforts.

Some of the key highlights I would just like to make for you, bring forward, is first of all, we set a new sales record for the quarter at 2.7 billion. And you can see that that is at a run rate of about a $10 billion pace. And then we also set a record for the year at 9.4 billion, which is an all-time high as well.

Top-line growth for the quarter was 20% and 16% for the year, far exceeding our 10% goal. As you know, we have had this goal in place now for roughly 20 years now, and we have come very close to hitting our 10% goal over that timeframe. I will highlight a little bit more for you on that a little bit later.

A little bit on organic growth for the quarter -- was about 10%, which is a very, very nice level for us, and 8% for the year. That's our second year of over 8% organic growth. And of course, what we're doing internally here is we are doing everything we possibly can to move that to higher levels through our Winnovation efforts and executing on the Win Strategy, where we think we're going to take organic growth to higher levels as we go forward. So that's an ongoing effort on our part.

Just a comment on acquisitions -- this set another record as well. We brought on $1 billion in additional revenues this year, and that is a corporate record. We acquired 13 companies, all fitting very nicely our motion and control charter, and of course, now we are working on integrating those into the Parker family.

One other comment on operating margins -- our segment operating margins increased, as you will see, from 12.5% last year to 13.4% this year. That does include the effect of all the acquisitions we made. And that does, or is, I should say, an all-time record in the history of the Company. So we are very excited about that, and I think, again, it just goes to show you that the results that we are getting from the ongoing effort on our Win Strategy.

North American segment operating margin reached our goal of 15% for the year. Aerospace margins were very close to the 15%. And the international margins at 12.2%, roughly, is now well into double digits. And that hasn't happened for quite a while.

Record cash flow in fiscal '06 was almost $1 billion; we were at about 955 million. And that is in excess of 10% of sales. And we are very excited about that. That is on top of a very, very strong year last year in cash flow.

And then on return on invested capital, we are ranking right near the top quartile of our peer group, and that is where we want to be and continue to be going forward.

Just a couple of comments on the markets -- I know everyone is interested in what's happening out in the markets -- we see, for the most part, when you look at our OEM markets, they remain strong. The exceptions would be the ongoing exceptions that we've mentioned in the past with the automotive, and then ag, especially, in Latin America. Those would be kind of weak segments for us, and those have been ongoing issues over the last several quarters.

But I would say for the most part, the balance of our OEM markets remain strong. And then keep in mind, too, that half of our industrial business comes through distribution. And our distribution also remains strong, and the outlook is positive there as well.

If you look regionally in the Company, we're pleased with what we see -- North America, Europe and Asia, ongoing strength in all those regions going forward. So we see a very positive future in the near term in those regions. And I just want to just qualify, maybe, that by just saying that we do have about a two months' visibility on the industrial backlog and about a one-year visibility on aerospace backlog. So we need to qualify our projections on that basis.

With that -- so that's a little recap on the markets, and with that, then, I'll turn it back over to Pam, and she can get into some more of the details.

Thanks, Don. Going to start off with slide number 6 here, which is the earnings per share for the fourth quarter and total year. So I'm going to walk you through these numbers, hopefully quickly. But starting with the top row of the chart start, beginning with columns one and two, you can see that earnings per share on a GAAP basis for the quarter came in at $1.59. This compares to $1.34 in the fourth quarter last year.

However, included in that $1.59 is a $0.04 gain, and that is a result of the settlement of the Astron business. As you recall, it is the metal building business divestiture that we made in the first quarter of this year. So if you adjust $1.59 for the $0.04 for the gain on the sale of Astron, you can see that for the quarter, we are at $1.55. And this is comparable to an above-the-mean estimate of $1.49 that just posted yesterday.

Also included in the $1.55 is an expense of $0.03 related to FAS 123R or equity-based compensation. As you recall, this was the first year that we expensed equity-based compensation. So if you add that $0.03 back to the $1.55, you can see that we had an adjusted EPS of $1.58.

Moving to column two, the $1.34 from last year includes $0.04 of income from discontinued operations, again as a result of the divestiture of Astron. And if you deduct this $0.04, you can see that, comparable to the $1.55 is $1.30. So this is a 22% improvement for the quarter year over year and on a comparable basis.

Moving to the total-year results, column three and four, you can see that fully diluted earnings per share increased to $5.57 this year, up from $5.02 per share reported a year ago.

Fully diluted earnings per share for the current fiscal year includes the following -- a gain of $0.29 from discontinued operations from the sale of Astron; a loss of $0.08 per share from the divestiture of the Thermoplastics division -- and just to remind you, we talked about this last quarter, but the $0.08 loss from Thermoplastics is included in other expense for segment reporting; also, an expense of $0.18 for share related to FAS 123R. If you'll recall, at the beginning of the year, we said that FAS 123R would be between $0.15 and $0.20. So it did come in at $0.18, what we had projected.

So if you adjust for these items, earnings from continuing operations on an adjusted basis is $5.54, and this compares to the $4.43 for fiscal 2005, which is a 25% improvement. The $4.43 is derived, again, just by taking the $5.02 less the $0.59 from discontinued operations. Again, that is Astron, as well as the Wynn Specialty Chemical operation that we divested.

So just to remind you of where we were last quarter, we gave guidance with and without Thermoplastics. So if you add the Thermoplastics loss to the earnings per share from continuing operations for the year of $5.28, this provides an adjusted earnings per share of $5.36. And this is equivalent to and exceeding the [annual mean] of $5.29 that was just reported yesterday on the First Call report.

So the earnings per share increase over guidance was the result of clearly quality earnings -- a gain of $0.22 from segment operating income, a $0.02 gain from lower interest and a $0.01 gain as a result of, obviously, the shares outstanding. Now, this was partially offset by other expense to the tune of $0.16, which also includes $0.08 from that Thermoplastics loss. And that was due to a combination of LIFO and currency.

So this earnings growth on a consolidated reporting basis in the quarter versus the same quarter a year ago is the result of increased volume, a 10 basis point improvement in the gross margin, which was led by a 40% increase in operating income in the industrial and international segment. So obviously, it proves that the Win Strategy is still producing results.

Also, the aerospace mix contributed to the strong earnings. Commercial MRO continues to improve, and then lower selling, general and administrative expenses and interest as a percent of sales. Now, although that was higher in absolute dollars, it was lower as a percent of sales. And that is on a consolidated reporting basis.

So these higher earnings were partially offset by higher taxes as a result of the increased earnings and the tax rate increasing to 29 from 27%. And this is due to the delay of the approval in Congress of the R&D tax credit. And also, we talked about this before on the call, and I'm sure it will come up again, is the Aerospace product development costs.

So now moving to sales on slide 8, looking at the top line, sales for the quarter were up 20% over the same quarter a year ago, increasing to 2.6 billion from 2.2 billion. And of this 20% sales growth, 10% was organic growth, 9% came from acquisitions and then 1% from currency, mainly the euro.

So the Win Strategy had set a goal for Parker to grow 5% from acquisitions and 5% organically. So of course, we're happy again to report we are meeting our goals to grow the Company year in and year out with 8% organic growth for the total year.

Just as importantly, we experienced positive core sales growth in the quarter, and this was across all of our business segments and across all of our main geographic regions.

The strong double-digit sales growth, moving to slide 9, in the quarter is partly the result of continued industrial end market strength with strong global network of distributors that Don mentioned; strength at the OEM level in mobile and general industrial end markets; of course, continued progress in emerging markets; and then, as we have mentioned before, the continued strength of the Seasonal Energy Efficiency Ratings, also known as SEER 13; continued strength in the commercial side of the Aerospace business; and of course, due to acquisitions -- for example, an acquisition of 70% of the shares of Kuroda in the quarter was completed, with annual revenues totaling approximately 50 million.

Moving to slide 10 at this time, moving to segment reporting and income from operations, I will start with the Industrial segment, specifically North America. Core sales increased 8% in the quarter. Acquisitions added another 6%, resulting in a total sales growth of 14%. Operating income, 29% higher for the quarter versus the same quarter a year ago. And as you can see, margins increased to 15.4% from 13.6%, surpassing the 15% goal.

On slide number 11, moving to the Industrial segment, international, core sales increased 8% for the quarter in that segment. Acquisitions added another 17%. And foreign exchange, mainly the euro, added another 4%, resulting in a total increased in sales of 29%. And you will note that currency did switch on us from third quarter to fourth quarter this year, and we can talk about that a little more.

Operating income for the quarter is 39% higher than last year, and operating margins increased from 11.8 to 12.8% in the quarter, and on a year-to-date basis, to 12.2 from 11.1. This is a 110 basis point improvement in this particular segment. So we are quite pleased with the international results.

Moving to the Aerospace segment, operating income for the quarter is 18% higher on a 15% increase in sales, and this increase in operating income on a year-over-year basis is the result of higher volume, specifically commercial OEMs. The increase in operating income is in spite of the macro shift to commercial OEM business, which you know carries a lower margin, and as I said before, new program win development costs. The Aerospace margins of 15.2% are slightly above expectations and the annual guidance previously issued, and this is due to higher commercial MRO business.

Operating margins increased to 15.2% from 14.8% in the quarter. And on a year-to-date basis, margins increased to 14.7 from 14.6, for the reasons that I just mentioned.

Moving to slide 13, in the Climate and Industrial Controls segment, sales increased 30% in the quarter and operating income increased 29% versus the same quarter a year ago. Margins decreased 0.1% for the quarter and for the year to 8.4% from 9.4%, due to the move to a lower-cost region, which we cited in previous calls.

Of the 30% increase in sales for the quarter, 12% came from acquisitions, 17% organically and 1% from FX. The increase in core sales, as you know, is mostly due to the SEER 13. And as you remember, we closed Herl and the Kenmore acquisitions in the first and second quarter, bringing Parker a larger proportion of higher-growth refrigeration business. So for the year, sales are up 24% and operating income up 11%.

So now I'll move to Parker's orders rates. Orders are stated as a percentage increase over the prior period. As you know, it is without acquisitions and without currency. As you can see in North America, order growth was 7% in June. This is on top of a 5% growth rate a year ago and 24% two years ago. So this illustrates that order growth remains at a very high level.

Industrial international order growth in June was 8% on top of 7% and 21% two years ago. And again, as you can see, orders remained at a very high level. The strength in the Industrial segment is the result of general industrial and mobile markets, including mining, oil and gas, power generation, heavy-duty trucks, process, semiconductor markets.

Aerospace continues to be strong on both the commercial OEM and MRO side. Orders were up 15%, which is on top of 7% growth a year ago and 15% the year before that. And remember that Aerospace, due to the volatility from month to month, is reported on a 12-month rolling basis.

In the Climate and Industrial Controls segment, order strength continues to be seen, largely as a result of SEER 13, which I mentioned earlier. Orders grew 30% in this segment. Of course, prior to that, orders where negative. So orders through Parker distribution channels continue to be strong. And as you know, Parker serves some 1200 markets, which helps mitigate any volatility in specific sectors.

At this time, I'll move to the balance sheet and just talk about some highlights. Our balance sheet, obviously, remains very strong. Cash on hand at quarter end was 172 million and we had no commercial paper outstanding.

Inventory in terms of DSI is down five days to 60 from 65 last year. Accounts receivable in terms of DSO is up four days; however, this is mainly due to the timing of some acquisitions. Capital expenditures for the year came in at 2.1% of sales. And shareholders' equity for the first time surpassed the $4 billion mark.

So slide 16, you can see, and Don mentioned this, record cash flows, 955 million in the year. Of that 955 million, we used 198 million for CapEx and we consumed another 836 million for acquisitions. So as a result, our debt increased by 161 million. However, you can see on slide 17 that our debt to total cap ratio is now 21.1%, down from 22.5% a year ago.

So at this time, I'll move to our fiscal year guidance. Strong orders indicate favorable market demand. So as such, high-single-digit sales growth is expected for the year. Margins are expected to further improve in 2007, delivering a record earnings and cash flow performance for the year.

Moving to slide 18, I will get into the actual percentage increase on sales, and this is the percentage increase expected for 2007 versus 2006. So Industrial North America sales are projected to increase 4.6 to 5.4%. Industrial international sales are projected to increase 17.7 to 18.6. Aerospace sales will continue to increase 5.9 to 6.6%. And Climate and Industrial Controls sales will increase 5.3 to 6.2%. So that will result in the high-single-digit sales growth that I just talked about.

On the margin line, starting with North America, margins are projected to be in the range of 14.8% to 15.6% -- obviously expecting an increase over this year; rest of the world Industrial margins projected to be in the range of 11.9 to 12.7%; Aerospace margins projected to increase 14.3 to 15.2%; and then Climate and Industrial Controls margins are projected to increase 10.3 to 11.2%.

Moving to slide 19, this details the guidance below segment operating income, or what we term below-the-line items. Corporate and administrative expenses are expected to increase 4 to 6%. Interest expense will be down 7 to 10%. Other expense will be down 1 to 4%. The tax rate for 2007 is projected to be 30%; that is up from 29% this year.

And in total, moving to slide 20, the guidance for next year is expected to be $5.80 to $6.30 per diluted share. And remember, this guidance is after the expense related to equity-based compensation.

To provide just a little more clarity for you, the sales and earnings breakdown first half/second half -- we think that the first half in terms of sales will be about 48% of sales, with the second half being 52%. We think earnings will be a little more heavily weighted towards the back end, with about 44% in the first half and 56% in the second half.

So at this time, I guess we'll open it up to Q&A.

(OPERATOR INSTRUCTIONS). Alex Blanton, Ingalls & Snyder.

I would like to just comment on the 8% organic growth and ask you a question about that. This is the second year in a row I think you have said that you have had 8%, and that is more than double the current rate of growth of GDP.

So it seems to me that it indicates you are gaining market share in your served markets. And that could be coming about because of your faster delivery and ability to meet the production requirements of your customers without delays. Would you say that's true? And to what degree are you gaining share, what this 8% organic growth would seem to indicate?

Alex, this is Don. I'll just comment briefly on what I think is what's responsible for the growth. And I think in this last few-year period here, where we have been through the recovery phase, or going through recovery, we have been working hard internally here to really lean out the Company. And in leaning out the Company, we have been getting much, much better as far as customer service. We were pretty good before, but I will tell you, we are at a much different level today.

And as we organize around serving the customer with the smaller production cells in our factories that can deliver smaller quantities faster, our service levels go up, and the customers reward us for that.

The second thing that has happened in the last two years, which was a result of the strategic procurement effort that we had going on where we signed a lot of long-term agreements with our suppliers, and what happened was, as our customers demanded more product from us and faster and so forth, and the supply was becoming constrained, we were able to get as much as we wanted of all the materials that we wanted. So I think that had a major effect as well.

More recently, what we are doing is, internally, started about a year and a half, two years ago now, is really moving to increase our efforts in this whole area of innovation. And we call it Winnovation, tied in with the Win Strategy -- it's been on the Win Strategy, but we've really taken it to a new level here.

The results of all of that effort will be obvious as time goes on. But I would say we are being more responsive to the customer. We are doing more systems solutions for the customer. He is rewarding us with more volume. We are doing a lot better job as far as customer service, getting quality parts there on time. And that is all fundamental. It sounds easy, but it is not easy to do on a company our size and with the scale of product and markets that we serve.

So I would say those are the reasons why we are doing as well as we are. And we love the numbers, and we hope that we can continue growing organically at the rate we are.

By the way, Pam passed over this quickly, but 2.1% of sales for CapEx is down from about 5% normally. So haven't you saved about -- almost $300 million here to use for other purposes?

Absolutely. That, again, is a result of the Win Strategy, Alex. And the efforts that we have put into really redefining the manufacturing floor, the amount of capital we need to support the business, and we haven't shied away from investing in the business, but what we are finding as we lean the operations out, we are getting a lot more productive capacity out of the assets that we have in place, which is requiring us to add less going forward.

So we are still budgeting around 3 to 3.5%. We have been budgeting that for the last couple of years here. We just haven't been spending it because we haven't needed it. So that is what's really driving that, though, is our entire lean effort throughout the entire Company.

Very quickly, the guiding -- 580 to 630 -- does that include option expense? It's all in?

That is correct, yes.

Yes.

Alex, it is Tim. I want to follow on a little bit to Don. Although on the CapEx, the expenditures are up a little bit, but they are still only a little over 2%, what you are not seeing which we see is the authorizations that are approved. And we definitely are announcing increased requests of some spending here. So you will see that CapEx come up, as Don indicated, more to the 3% range, I think, next year, or slightly above. But there's a lag between the authorization and when we actually pay for it.

Ann Duignan, Bear, Stearns.

Don, just building on the last question, the comments you just made, organic growth of 8% for the full year and 10% in Q4 -- I guess, why the conservative outlook for growth as you look into 2007?

Ann, I think what we are -- we are looking for growth, obviously, next year. What I have to come back to is that the year is 12 months. And we've got two months' worth of orders on the Industrial side and about a year on the Aerospace side. And so we just take our best look at it at this point in time, and obviously, we have an opportunity to update you and change that as the year goes on if we see more opportunity to do that going forward.

But I think the forecast is fine where it's at. I think when you look back over the last few years as to how we've done on the forecasts we've done, we have done, overall, pretty good, especially on the earnings per share guidance and so forth. And so this is not an exact science, by any stretch. But I think we are looking at a very good year this coming year, though.

Don, what kind of macro assumptions have you baked into the outlook? What would it take from a macro environment for you to be at the low end of your expectations, and what would have to happen out there in a macro environment for you to hit the high end? Could you just give me a sense of what you are seeing out there -- what are you thinking in terms of the big picture?

Well, we don't even really look at it in that way. The way we come up with our numbers is basically a bottoms-up approach where we start with the 115 operating divisions we have in the Company, and they are looking at every one of the specific end markets they serve. It is tough for us to do that at corporate, because we have 1200 markets that we are serving out there. So we do that at the lowest level we possibly can in the Company.

And then what we do is aggregate all of those numbers, and that is the number that we go forward on. If we think there's some adjustments needed to be made, we make those at corporate. But by and large, that's how it happens. So to answer your question, it's really the composite of 115 individual divisions worldwide.

And just real quick, Pam or somebody, what are your pension costs or pension contribution expectations for '07?

Ann, this is Tim Pistell. Interestingly, we actually -- this year just concluded, pension, actually, was an additional hit for us. It cost us about $0.10 more this year over last year. Our best estimate at this stage is that we will get that back next year, okay? So we will get about a 10% pickup next year on pensions. We've tried to remain fairly conservative on our assumptions here. We are not being very overly aggressive there. But as I say, we are looking for a 10% pickup.

Let me make sure I understood that, Tim. You are saying -- did you say $0.10 or 10%?

$0.10. We lost $0.10 of EPS in '06 over '05 because we had to step up the expense. And it appears that in '07 compared to '06, we will get that $0.10 back. We will gain $0.10 a share.

And that should show up in the corporate line item, corporate admin, or does that get distributed amongst the business?

It gets distributed -- some gets to the [innis] and some of it gets carried to corporate -- Pam?

It's that other category, below-segment income. A portion of it is in there, and then a portion of it is in segment operating income. But the biggest portion actually is in the other category.

And it's included in your guidance, the $0.10?

That is right.

Correct. It is all baked in. The service cost is in the segments. The fluctuations and the valuations we do at corporate.

Jeff Hammond, KeyBanc Capital Markets.

Just a question on the Industrial international guidance, and I guess maybe for all of them, can you just give us a sense of what the organic growth rates are inherent within there, and any FX assumptions?

Yes, I can give you do the organic, if you want, for the segments, Jeff. And let me say on currency, we don't ever build a lot in currency. As you might know, in the spring, we set what we call Parker rates. We run all our forecasts out at these Parker rates. They basically are taken right out of the Wall Street Journal on the 1st of March. And so we don't try to predict the currency fluctuations. But the organic growth rates for the segment, you are looking for '07?

Yes.

So in North American Industrial, it was 4 to 5%. In rest of world Industrial, it was 3 to 4%. Aerospace should be right around 5%. And we're only looking for about 1% in Climate, because of the kind of the strong second half they had this year.

And then Climate, it looks like you've got substantial margin improvement there. I guess you've had a couple of quarters previous to this one where the margins were a little bit lower than you wanted them to be. What is your confidence level that things are improving there operationally? Maybe just touch on the component shortage as well.

Yes, this is Tim again. I will try to do that, Jeff. We really are trying to remake that group. I think you know that strategically we have been talking about this. They used to have a very heavy dependence on automotive air conditioning components. And of course, that's a tough market to be in.

So we have been trying to diversify that group and actually go more after either stationary air conditioning, you know, the commercial residential air, but more importantly, the refrigeration, where we think we really can do some good things there by bringing a total package, and it's less cyclical, and it's just a different situation.

So what you saw over the course of the year is, first of all, of course, you did see a softening in the automotive side -- didn't help. We also did some acquisitions strategic for us on the refrigeration side. But they came in with lower margins and we had to integrate them and so forth. Now in the second half of the year, they were blessed by SEER 13 and got a surge in business, and they are starting to bring that thing around.

So long answer to your question, but we're very confident. We've got an improvement in margin. We think that with the strategies we have laid out that you'll see a steady improvement to those margins. But we are having to shift the weighting of those different markets within that group. Does that answer your question?

Yes, that is helpful.

David Raso, Citigroup.

A quick question on the margin guidance, and it really kind of dovetails into the sales guidance. The pricing assumption baked in there -- you're seeing organic North America, 4 to 5. The margins you have as a range of being down a little bit to up 60 bips year over year. Can you give us a little color on pricing, which obviously is baked into your sales guidance, and also pricing versus your cost assumptions?

David, I guess I'm -- did you say you are coming up with segment margin being down year over year?

Well, if my numbers are correct, you just did, what, 15% '06 North American margins, and your guidance is 14.8 to 15.6.

Right.

Am I correct in that? So essentially, you're saying down a little to up 60 bips, with core growth up 4 to 5. Can you just square that up? Is there some cost pressure we are not appreciating, or what is the pricing assumption?

Well, the North American Industrial, the margins close the year at 15%. Okay?

David, just to answer your question, no. I don't think I can really provide any clarity to you on that. You know, there's just some forecast balancing going on there.

But I think that -- to be able to come back -- the margins that North American Industrial did is 15.0. I mean, it hit 15.4 in the quarter, but they did 15.0 for the year. And I think on the guidance that we gave for the year, there's an improvement in that margin.

He's just looking at the low end of it, though.

Well, I'm saying 14.8 to 15.6, right? So either it's down 20 bips for the range or being up 60 bips?

Yes, David, it gets back to what I said. I mean, there's a range that we gave you. That's just a little bit of forecast balancing going on there. We haven't included anything that you are referencing.

It is the same story with international, down 30 bips or up 50 bips. I'm just trying -- basically, it sounds like you are getting pricing.

Right.

Is there something we are missing? Your distributors aren't saying that you've backed away at all from any July 1 increases. Cost pressures obviously are a wildcard. But mix-wise, even, internationally, most of your businesses go direct. There's less independent distribution.

But in North America, at a minimum, you would think your distribution business will be the stronger of the two if the economy is slowing, just giving their less volatile channels. And that is, if anything, a higher margins than your OEM business. So mix would suggest not down; pricing feedback is not down; core growth, up.

David, it is Pam Huggins speaking. I would suggest that maybe you look at it a little bit differently and look at it in terms of marginal return on sales. If you look at it in terms of marginal return on sales and exclude the acquisitions, then I think you get a better picture of what we are trying to do here.

I mean, the business is coming in -- in North America, you have a lot of little businesses that don't yet anniversary that will flow in. And I come up with about 1.5% of sales growth next year from acquisitions. You had domnick and Filtran and [SSC] and so forth. So the core growth number I come up with, you are implying, is 3 to 5. Unless those acquisitions are coming in with very poor margins, that just is not fully squaring.

Actually, without the acquisitions, the marginal return on sales is right in the 25% range that we talk about.

David, this is Tim. I think there's two things we are wrestling with here. One, if your question, first of all, is how are we doing on pricing versus cost increases?

That's the only thing I can come up with as to why your margin would go down with core growth and better mix.

First of all, I would to say, let me just clear the air here. With the ranges we gave and the midpoint of those ranges, we give ranges because we aren't that good to know exactly the number, but we are giving ranges. And I think the midpoint of the ranges we are giving are improvements over what we just did to finish the year.

So the bottom line -- we are looking for improvements. Now, we are feeling very, very pleased, and we have worked -- a lot of people are working very hard -- and I know you are aware of this because you have done a lot of research on it -- of getting pricing increases -- make sure they are caught up with cost increases. And I think that Parker has done a tremendous job all the way through the organization of doing that.

And you have not heard, and we have said this before in the last two years, you're not hearing us today trying to explain away some misses or some issues, because we are unable to do that. I think the strategic pricing, coupled with the strategic procurement, builds that into the system. So that is the good news.

We are looking for incremental improvement on the margins. And that will be -- keep doing more of the same out of the Win Strategy. So don't want to give you the wrong impression that we are concerned about backsliding. We are not concerned at all.

I appreciate the color. Thank you.

Robert LaGaipa, CIBC World Markets.

I just wanted to circle back to the same question just in terms of the raw material impact. Can you just give us a sense of what the impact was in the quarter across your segments? Because obviously, I mean, in North America, for example, your sales were flat to slightly up. The margin was flat to slightly down. And in your international, I'm sure there's the impact, obviously, from acquisitions, but the sales, obviously, sequentially were up fairly significantly, 7%, plus the margins were roughly flat.

Could you maybe break out or give us some sense of, at least in the quarter, what the impact was from raw material cost pressures? Because obviously, across a number of different metals and commodities, they accelerated fairly substantially in the quarter. Can you give us some sense of how much that might have impacted things, and just maybe a lag in terms of some of these price increases, and how much was actually the margin impacted by some of the acquisitions that you have done? You have mentioned over this last year $1 billion, some of which have been more recently -- what kind of impact that might have had on the margin?

Let me start with the last part first, because I will probably forget it by the time I try to get back to the first part. But the last part, I believe the impact of the acquisitions -- and again, we made 13 of those, about $1 billion in revenue -- was about 0.4% or 400 basis points. So instead of 13.4, we would have been 13.8. But that's kind of the impact of the acquisitions. That was the easier part of the question that you asked.

The tougher part, Robert, comes in the fact that -- why it's hard to answer that with any specificity -- the problem is that we've got 600,000 line items and 400,000 customers, and they are going up and down all over throughout this entire organization. And there is no way for us to capture every -- the impact of every individual line item increase at every customer and so forth. We would be drive ourselves crazy trying to do that.

But just in general, I think we can tell you that we do monitor the increases in general, in general terms, and to make sure that we are recovering the cost increases we are seeing. And I can tell you that we are maintaining parity, at least parity there. So we are trying to capture, wherever possible, the cost increases that we are seeing.

With respect to raw materials and what's happening today, I would just paraphrase it in general by saying they are increasing at a decreasing rate. So the high increases -- the high rate of increases that we have seen in the past seem to be tempered somewhat now. And so I think, hopefully, this coming year, we are going to see less pressure on us as a result of raw materials. And I think that will be good for everyone -- customers, the economy and so forth.

So that's maybe not answering exactly the way you want to hear it. But that's kind of the way we look at it here.

No, that is helpful. The other question is just with regard to aerospace, I know a competitor of yours recently talked about, at least relative to their expectations, the commercial aftermarket business being slightly weaker than what they expected. I know you mentioned that it has been an area of strength.

Looking at the forecast, the 5.9 to 6.6% in terms of growth for fiscal 2007, that would imply on average a lower rate of sales than what you did in the fourth quarter -- the almost $420 million. How should we look at those dynamics, the MRO versus the OEM business, moving into next year? As far as I understand, there shouldn't be any significant seasonality within that business. How can we reconcile those numbers?

Bob, it is Pam Huggins. Let me try and answer those for you. Basically, what is happening in the Aerospace sector, a couple of years, if you go back, we had some really high orders on the military side. And that has been working its way down over the last couple of years. So you know we have about 50% of our business commercial and 50% military.

We see the commercial side of the business continuing to be very strong, OEM and on the MRO side continually trending up. It is the military side of our business that is off. So if you consider the commercial side's going up and the military side's coming down as a result of those orders that have been decreasing the last two years, helicopter-type orders, then that is what is causing the 5%.

Terrific. Last question if I could -- this one's just for Don -- when you think about the balance sheet, obviously you are well below your limits or your desired limits in terms of total debt to capital, at the 21%. Can you maybe just talk a little bit more about your pipeline of acquisitions -- the areas that you are looking at, your desire, at least in the near to intermediate term, to really aggressively pursue acquisitions? Can you maybe just give us a sense of the landscape as you see it?

Yes, Robert, we are always looking at acquisitions. No question. I think the one question I got back a year and a half ago was why aren't you giving us a big share buyback here, in one of the analyst meetings I was in. And they were pretty irate about the fact that I wasn't doing $0.5 billion in share buybacks. I said, well, if you could see what I was looking at, you might think I was doing the right thing, but I can't show you what I am looking at. So now you see what I was looking at. We did $1 billion worth of revenue deals this past year.

So, just to answer your question, yes, we are always looking at opportunities, very active there in all of our various groups, okay, and worldwide. Of course, you know that we have been focused on Asia. We have done a number of those in Asia. We've done some in Japan recently. We've had acquisitions in North America and Europe. So we have really touched on virtually every region to build our portfolio around the world and strengthen our franchise, if you will.

So yes, there's a lot -- we are looking at a lot. I can't tell you how much is going to get to the finish line. We don't forecast the acquisitions per se on these numbers. And that should be key for you as well. So anything that we do in acquisitions will be additive to what we have given you.

Would you say the size would be any larger than what you've done in the past? Or are you still looking kind of in the small- to medium-sized type deals?

Yes, I think the majority of what we've done, I think, would be obviously in the same range -- the majority of what we would intend to do would be kind of in the same range of what we have done in the past. There aren't too many in our space that would be multi-billion-dollar acquisitions to begin with. So you're less than 1 billion, and more of what we have been doing is 100 million, 200 million, whatever.

Mark Koznarek, Cleveland Research.

Just a couple of cleanup questions. We have sort of addressed the big ones. The outlook for the corporate admin, that does not include pension, right, which is reducing. So why is that expected to be up this coming year?

I think that the pure corporate admin, we will get -- there is a bit of the pension that goes in there. The other -- it is going to be constant, we think, Mark, as a percentage of sales. But because the sales are up, it implies an increase there. We normally are driving that down further.

I will have to tell you that in the R&D effort, we have talked about this Winnovation, and I think you have met Craig Maxwell, our VP of Technology, there -- we have dramatically increase his budget to fund some of the new product innovations. And his budget has literally doubled from fiscal '05 to fiscal '07. So there is a pretty big chunk of increased spending for that built in there. But otherwise, we are keeping it relatively constant as a percentage of sales.

Then if I could ask a clarification on that statement that Don made a moment ago about the impact of acquisitions in fiscal 2006 had a 40 basis point impact on margin -- is that to mean that 40 basis points is the difference between those acquired revenues, if they were earning at a corporate average margin, versus what they actually were earning?

Yes, I think you can assume that, Mark.

What's Parker's guidelines for getting acquisitions in the aggregate up to a corporate average level?

You mean what do we look for when we are reviewing an acquisition candidate? Is that what you are saying -- the financial performance from that?

Well, I guess specifically the question would be when would you expect that 40 basis points to drop to zero?

Well, I will tell you how we do look at it. I mean, everyone who brings in a candidate has to bring in a forecast model. And that goes out very detailed in five years, and then to a lesser detail for another five years.

Essentially, we are looking at properties that are below our desired operating margins. Clearly, we want to see them get there ASAP. We like to say that we expect in five years that -- now, we measure people on this RONA, how they do on RONA. So it is the returns versus the assets employed. And we are looking for them to get to the RONA line, hit the corporate target, in five years' time. So that would be the expectations there.

Now, in terms of accretion/dilution, that is a much lower hurdle. You can do a lot of deals that will be accretive from day one. But if they don't get to the RONA line around here, then they are not generating positive EVA, and so that is how we -- we use that RONA line to be our metric also to positive EVA, covering the weighted average cost of capital.

Mark, one comment that I would like to make, and I have said this before -- I should repeat this, and especially now, since we've done $1 billion worth of acquisitions this year in revenue. And that is that if I were running at 15% operating returns as a company and I bought -- all of my acquisitions had 15% operating returns, my operating return for the Company would be less than 15.

And you'd say, well, why is that? Well, keep in mind, and this is the reason why I say that, you have to look at both sides of the equation. You've got to look at the operating earnings side and you've got to look at the balance sheet side. And what is happening here is that we are writing off intangibles, okay? It's not cash outlay. And that is the reason why I always say, look at the cash flow at the same time you're looking at the margins.

And when you look at our cash flows and you see 955 billion, you know, we get pretty excited around here, because we know, in fact, the right things are happening internally. But if you only look at the margins and you compare margins from this year to last year to the previous year, you miss the other half of the story, and that is that the cash flows is really what's driving the business.

And we are going to have -- in the short term, we are going to have some writeoffs of these intangibles that's going to hit the margins, but it is not a cash outlay. It is just an accounting transaction. And over time, that is going to fade away and the margins are going to come back.

So always keep that in mind, I think, for everybody on the call when you look at Parker in this acquisitive mode. Acquisitions are good for us. They are not bad, even though they might, in the short term, drop the margin a little debt. Overall, we've had record acquisitions, and they are really driving these cash flows to much, much higher levels and record levels.

Well, back to that specific question about the margin dilution for the year, would that be expected to be at zero for fiscal '07 for the tranche of acquisitions that were done last year?

The acquisitions that are coming in from last year we don't think will have a significant effect on the margins. Again, a lot of them were in the year. We do have a carryover -- we don't see that as a large impact on the year, Mark.

So what we are seeing is that if -- and this, I'm sure, won't be the case -- but if Parker did no more acquisitions, you would get an earnings pickup, not only from your base revenue growth, but also from acquisition margin improvement.

Correct. Absolutely.

Barry Bannister, Stifel Nicolaus.

Typically around this part of the cycle, CapEx at Parker ramps up a little bit. If I look at the CapEx percent of depreciation in '05/'06, it was 59 and 71%. If you are talking just under 3% in fiscal '07, it would be about one-time depreciation. It would also be an increase of about $100 million year over year. Last -- you're looking at slide 16 -- your operating cash rose about 90 million.

So when you do you your internal budgeting, yes, you're still growing the operating cash flow, but do you start to see a plateau at this point in the free cash flow of the enterprise?

Barry, I think, again, as I said, there's a disconnect between when we authorize capital expenditures and then when they actually get paid. I can tell you that we authorized this year, this fiscal year, we authorized closer to 300 million, even though you only see 200 million of them getting paid, okay? Because there is always a lag between getting the equipment in and getting approved and then paying for it.

So there definitely we're telling you there definitely has been an increase of requests from our people, with the surge of business, to -- not a big thing; we're not looking at a lot of land and building -- so that is going to occur, and we are seeing that occur. So we do think that we will get closer to a balance.

Now, as you know in doing your history there, Parker actually at this time in the expansion would be spending 4.5 and 5% of sales -- much, much higher than we see in the near future. We just don't see getting back to those levels. That was a certain other way to run the business, and we are no longer running the business that way.

And then the follow-up question has to do with pricing. The outright price increases, whether through distribution or directly to the OEM's, is one thing, but another form of pricing is to actually retain or capture any productivity increases without giving them back. Could you compare and contrast the size of what fiscal '06 productivity gains retained were versus outright price increases within the umbrella of your Win Strategy?

That would be a real difficult thing to do. I think that our key metric on productivity, Barry, is we picked one that was very visible to the entire world, and that is the sales per employee. And I think -- I'm not even sure if that has been finalized for the year, but that will be in there, and it will be published.

So we are tracking that in productivity increase versus everything else. And again, I would say that, frankly, I can't give you a straight connection here, but our productivity increases have been pretty nice over the last couple of years. So I think we definitely, in terms of improving the margin, raising the level of performance around here, absolutely -- the increased productivity, along with everything else, is helping us raise the margins.

Not to diminish the great achievements on the factory floor -- you guys have certainly done great -- but it just seems to me that a lot of the Win Strategy has been pricing, either actual price increases or retaining productivity. How would you fight me back on that?

I think that is totally wrong. What we have done on the pricing side is try to recover our costs increases from raw material, basically. That is what we have done there. The whole lean initiative, Barry, is what is driving the rest of the margin, incremental margin improvement that you are seeing in the results, is really coming from the lean initiative that we've got going throughout this entire corporation, not only on the factory floor, now, but we are taking it to what we call lean enterprise. We will talk more about that down the road.

But we've got this initiative now going through all the offices throughout the world, as well as the factory floor. And so when you talk about what is driving the improvement in the margins, it is certainly that, and it is certainly the fact that we are able to serve the customer at what we think is a higher level of service than some of one of our competitors have done in the past. So all of that has led to higher volumes and better margins for us going forward.

But it's more -- and of course, the strategic pricing is important. We certainly want to recover our cost increase. But that is not what is driving all the change around here, for sure.

Did you ever give the absolute price increase for the year? I don't recall.

No, we did, and I think I mentioned that. We had 600,000 line items. It is all over the map. I would say if you're somewhere between 1.5 and 2% or somewhere in that range, that might be the impact of pricing for the year.

In excess of costs or just total?

Just total -- total average.

Barry, you have some guys who -- I'm saying generic "guys," people -- who were pounding through increases left and right on brass and copper and phenomenal increases, but it was only to match what was going on in the market. We have other units who very much are in cost-down situations, because that's the reality of those markets. And so it is very difficult for us to sit up here and say, yes, the weighted overall average for Parker is thus and such. We have to look at kind of unit by unit.

David Bleustein, UBS.

Just a couple of quick ones, because I know it is late. Taiyo, if I am pronouncing it correctly --

You are.

That should add a little -- it was not consolidated last year, will be consolidated this year?

Yes, David, I worked on that. This is Tim. Exactly right -- we had a minority interest, and in June, we finally very amicably took -- bought a person out, which put us into a majority position of around 60%. Therefore, we now will have to report that, everything -- and there will be an elimination of minority interest below the line, if you will.

But all we did, all we accomplished, by the end of June was to put the balance sheet on there. There was no P&L impact whatsoever. We will get that going forward. So the annual run rate right now is around $208 million a year in revenue. We will pick all of that up. We will pick everything up down through operating margin. And then of course, below that, we will eliminate the minority interest. So that is how you will see that coming through. Actually, that is the same as you will see in Kuroda, too, which we did shortly before.

And the operating margin for that business is roughly--?

It is in the high single digits right now.

Terrific. So if I model out, based on what I know of your acquisition platform, your acquisitions to date, it looks like about 0.5 billion worth of carryover revenues from fiscal '06 acquisitions benefiting '07 -- 0.5 billion -- is that number in the ballpark?

More like 400, David.

Terrific. Thanks a bunch.

Jamie Cook, Credit Suisse.

My first question, just a clarification -- your guidance includes FAS 123, but is there any change in the EPS impact, '07 versus '06?

No, nothing material on the 123.

My next question, when you spoke -- I thought you said in terms of international, you expected organic growth in the 3 to 4% range. I guess that seemed low to me, given what we are hearing about Europe, that there could be a recovery there. So I'm just wondering if you could just comment geographically what you are seeing by the different major markets -- any weaknesses or acceleration in strength?

Well, I would say that, breaking it down, Europe, we do see growth, but it's very modest right now. They are being very cautious, I would say -- nice little increases, nothing dramatic. Asia, great -- Asia is still strong. Latin America is still problematic. And I hope that is the one that we mostly are proved wrong on. They are really in the doldrums here with the ag. We keep thinking -- we know it has bounced along the bottom. We keep thinking it is going to pop up again. It hasn't yet. So we do not have much of a recovery in ag in Latin America. So when you mix those together, that is what you come up with.

But you are not anticipating a recovery in your '07 forecast for Europe?

In Europe? No. Very modest -- frankly, very modest year-over-year increases.

Thanks a lot. Nice quarter.

Joel Tiss, Lehman Brothers.

Almost everything has been covered. Just one last one -- can you talk a little bit about some of the trends you're seeing in your mobile hydraulics business, and if there's sort of any weakness there, and just what you are seeing? Thanks.

Joel, I would say that trends overall have been very, very positive. I've just been hearing a lot of good things from our team. We have organized, as you may be aware, or may not be aware, several of our groups now -- we've organized the sales organization, integrated it as a more focused team effort, if you will, going after the mobile hydraulics business.

And as a result of doing that, we've been able to put together some very creative and innovative systems solutions for the customers. And the customers are rewarding us for that innovation in the systems solutions.

So I see, just generally speaking, very positive outlook for the mobile part of our business. And the way we have structured it internally from a sales and marketing standpoint has been very, very beneficial to us. And I think it's going to really help drive that business going forward to some new heights, new levels. So I think the forecast is very positive.

Eli Lustgarten, Longbow Securities.

A couple of clarification questions, because most of them have been covered. One, what's your assumption for shares outstanding for fiscal 2007? You know, share creep -- I know you are not talking about buying a lot of stock, even though the balance sheet keeps getting better, despite your billion dollars of acquisitions, so you can afford to buy some, but --

Eli, I think that you can just look back historically at the last couple of years. And it is pretty much trending the same way.

So you will have 1 million, 1.5 million shares creep or something like that year over year?

Well, Eli, this is Tim, and we are working with the Board on this. Interesting phenomenon this year, because Parker -- let me just give you some overview numbers that might be useful for everybody. Parker this year repurchased about 750,000 shares. Now, that is a normal year for us on options, okay, and benefit plan.

The problem is the stock hit an all-time high, as we know, this spring. And that created a lot of people exercising. So about 1.350 million were exercised in the year, so about twice the normal run rate. And we also had 300,000 shares that came out of the trust and went into the ESOP. So we fell behind. On a normal year, we would have kept up with it. But because of that, we -- now, we look at this and we said, we have a commitment here to work hard and offset and prevent that creep. We always, every Board meeting, we talk to the Board about both share repurchase and dividend hikes. So we are aware of that. And it was a bit of an extraordinary year, but one we need to keep an eye on.

Let me just follow up on the back of David's question, because I calculated a 500 million carryover also in acquisitions. And that is mathematically based on your forecasts, you know, the 400 million, [again,] rest of world, and I assume that includes most of the minority interest that you picked up. It becomes the majority that you have to consolidate, and you get more from Industrial Controls and a little bit in Aerospace, according to your forecast. So now you have another 15 million one that you are about to close, I believe. You corrected the 400 million, but it almost has to be 500 million or something -- numbers don't add.

It is somewhere between 400 and 500. And I would say -- yes, I guess you could round up to 500. I was rounding down to 400. But you can round up to 500. So yes, it is in the mid 400s.

And it's those acquisitions, that is why the margin in rest of the world Industrial will go down versus the second-half run rate?

Well again, keep in mind, in this forecast, with the rollover of these acquisitions, I want to make this very clear again -- we have forecast -- if you take the midpoint of the ranges, we are forecasting better margins in all the segments. So we are not forecasting margins to go down in any segment, okay?

Now, the other thing to keep in mind is, and I think we have touched on this, this is a tremendous year -- this deep into the expansion, with all of these acquisitions, our marginal return on sales, a key metric for us, on the base business was 30%. That, we think, is really outstanding this deep in the expansion, to deliver a 30% MROS, excluding acquisition.

Going into next year, in the plan, we are also looking at a contribution of probably around 25%. We are not looking at 30, because we think we are way too deep in the expansion to maybe expect 30. We would like 30, we will work for 30, but we've got about 25 built into the plan on the organic businesses.

So very key metric. We are very focused on -- if you don't do that, you will not increase your margins over time. Clearly, we are increasing our margins, driving towards 15, and that's a big part of it, is holding people at 30%.

What I was referring to is you had the 12.8 rest of the world in the fourth quarter; I think it's the same number in the third quarter, and your guidance at 11.9 to 12.7. So there is a different run rate for the year assumed versus what you have been showing in the rest of the world for the second half of the year.

Yes. Well, the first two quarters are always usually much weaker, as they are all on holiday right now.

Chris Kotowicz, A.G. Edwards.

I guess I have a bookkeeping or basic questions and then a big-picture follow-up. The tax rate that you mentioned of 30%, I am going assume that is without any benefit of a tax credit change for R&D?

Exactly right. Chris, you look at our tax rate in '05 and then now '06, and what we are forecasting for '07, all has to do with the R&D credits, the fluctuation there, okay? So we had a big catch-up in '05, drove it way down. We this year -- we had it and then we lost it. Right now, we can't put it into the forecast because the good old Congress hasn't passed it.

So do you think that's about a 2 point benefit if it does go through?

I think it is a 1% benefit.

And then on the big picture, Don, are there any areas in fiscal '07, as you look at the world today -- and I know you talked about the geographical break -- but from an end market perspective, are there any areas where you see potential weakness, perhaps some concerns as we're heading into your next fiscal year?

In other words, no major areas other than what we have seen already being soft, which would be automotive, and of course the ag down in Latin America. These are smaller pieces. And then of course, there's a few percent of our total Company that is tied to heavy-duty truck. And we know that in the second half, at least the second half of our fiscal year, there has been projection of that market being down -- could be up to 50%. So that is all in our forecast.

But I would say outside of those areas, for what we can see right now, I would say there isn't anything else that is of a major concern for us. The good news that what we do see from a macro, kind of a macro picture, is I guess just the sense we're getting out of the Fed that, again, I don't know what they are going to do tomorrow, but just my sense is from reading all the articles that have been written lately is that they are slowing down the pace of these increases, which I think is going to be good for us as well.

We are at 5 plus a little bit, maybe 5.25 on a discount rate. And if that maintains where it is right now, I think that will be good for the economy. And so I don't see that as a negative going forward, as long as we maintain some control over the pace of the increases there.

At this time, I think we would like to conclude the Q&A session, and we would like to wrap up the call with a few closing comments from Don.

Just because it is the end of our fiscal year, I just want to make a few additional comments. And first of all, I wanted to thank everyone that has been on the call. I think the questions have been very good. I hope that we were able to give you some good, clear answers to those questions. So I thought it was a very good call.

The results, again, just going back to what we said earlier, the results that we are achieving today are a direct result of what we started almost six years ago now, over five years ago now, since the launch of the Win Strategy. Absolutely it is tied to executing on every one of those initiatives that we have in the Win Strategy. And that is an ongoing effort we are going to continue on. As I've said in the past, we are going to continue this forever. So it is fundamental to running the business.

Our goal is return on invested capital. You can see where we are at there. We want to maintain a position near that top quartile of our peers. And we are there. The acquisitions, I just wanted to reiterate, it's been a big year for acquisitions for the Company. And we are on target. I think the units have done a great job serving the existing customer, at the same time that they are bring on a lot of these acquisitions and getting them integrated. So we are getting better and better along those lines as well.

Just a couple of metrics, maybe, to remember -- 50 years of increased dividend -- this was a record for us this year. It's a half-century mark for Parker of increasing dividends. So this is our 50-year mark.

And then, as we look at our sales records that we have been achieving, we, again, said that our goal is 10%. Our 20-year compound growth rate now is 9.3. That has been moving up gradually. And our five-year compound growth rate, and I think last year was in the 8s, but because as we continue to grow 16% double-digit rates of growth here, we are dragging that average up. So we're getting back to close to our 10% target over the cycle type growth rates, at least over that 20-year period. So we are very pleased with that.

And of course, we've talked about the organic growth being very strong. I want to again just reiterate, the cash flow -- keep an eye on the cash flow, because when you amortize intangibles, the offset to that is an increase in cash flow that you are not going to be seeing if you just focus on operating returns alone. So please do that. Earnings per share, of course, is up 20%. So those are kind of some of the key metrics.

But we are very excited about the year. We are excited about the prospects for next year. I just want to once again thank everyone that participated in the call. We certainly appreciate all your interest in Parker. And if there is any further clarification you need on anything, Pam Huggins will be around the balance of the day.

And lastly, I just wanted to thank, once again, our employees, for those that are listening in, I thank our employees and our distributors for a great job over this fiscal year. So again, Pam will be available for any further follow-up.

Thank you very much, and thank you for participating today.

Thank you. This concludes today's fourth-quarter 2006 earnings release conference call. You may now disconnect.