派克漢尼汾 (PH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Parker Hannifin third quarter 2008 conference call. My name is Stacey and I will be your moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like the turn the presentation over to your host for today's call, Ms. Pam Huggins, Vice President and treasurer. Please proceed, ma'am.

Thank you, Stacey. Good morning, everyone. This is Pam Huggins speaking, just as Stacey said. I would like to welcome you to Parker Hannifin's third quarter 2008 earnings release teleconference. Joining me today is Chairman, President and Chief Executive Officer, Don Washkewicz, and Executive Vice President and Chief Financial Officer, Tim Pistell. Prior to proceeding to the earnings release, please allow me to address a couple of administrative matters. First, for those of you on line you may follow along with the power point slides that have been presented, and for those of you not on line the slides will be posted on the investor relations portion of Parker's website at phstock.com.

Second, as is customary I would like to call your attention to slide number two, which is the Safe Harbor disclosure on forward-looking statements, and again ask you that -- to read this statement in its entirety if you haven't already done so. Third, moving to slide number three, this slide, as required, indicate that in cases where non-GAAP numbers have been used they have been reconciled to the appropriate GAAP numbers. Moving to the agenda on slide four, the call will be in four parts today. First, Don Washkewicz, Chairman, President and Chief Executive Officer will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the quarter, concluding with the revised outlook for fiscal year 2008. The third part of the call will consist of the standard Q&A session, and as a reminder, please ask one question at a time. You can always get back in the queue. In this manner everyone will have a chance to participate. And for the fourth part of the call today, Don will close with some final comments.

So at this time I'll turn it over to Don and ask that you refer to slide number five titled "Third Quarter Highlights."

Thank, Pam, and good morning to everyone on the call. Just a few comments and then Pam will return for a more detailed review of the third quarter. First of all I'd just like to say that I'm very pleased with the strong performance this quarter. We're certainly on track for another record year for sales and earnings at Parker. And by the way, this is our fifth year in a row now where we've posted record sales and earnings for the Company. We see enough strength for the balance of the year to significantly increase our guidance for the remainder of our calendar year, moving our guidance to $5.40 to $5.60 per share. Our record results this quarter again highlight Parker's new balance. Our industrial sales outside of North America made up over half of our revenue for the quarter and today we have a better balance in sales and margins than ever, making us less exposed to regional economic cycles.

We're very pleased with the on-going growth in Europe, Asia and Latin America, and all other regions outside of North America right now are doing very well for Parker. Our organic growth in the Industrial International segment during the quarter was about 8.4%, and again that's a very strong performance. In fact, the Industrial International sales grew for the tenth quarter in a row, so we're very pleased with that. Our operating margins in the quarter for our International business continued to exceed that from North America. As you can see, this has been a seven year work in progress for the Company. Our European team has been working very hard on this for the past seven, eight years has done an excellent job executing on our comprehensive margin improvement strategy. Our operating income in our Industrial International segment increased nearly 55% compared to the same quarter one year ago.

So overall, the results demonstrate that even with a challenging economic environment in the United States, we continue with our record performance. This is the result of the fundamental and structural changes we have made in Parker since 2000, when we launched the Win Strategy and which we will continue to make going forward. It is clear to us the Win Strategy has helped Parker make -- become more flexible and better able to react quickly so that we continue to perform during slower growth periods. All of this is being driven by our employees' continued execution of the strategy. The Win Strategy, of course all of you know, is our roadmap for operational excellence and growth at Parker and has proven effective across the economic cycle, and I think that's most evident when you look at today's results.

Lastly, just a couple of more points. Organic growth continues to be very healthy, exceeding 4% this past quarter, despite the markets in North America that are in recession. Cash flow from operations remains very strong, nearly 10% of sales. Certainly this is going to give us the ability to continue to grow the business going forward. We're leveraging our cash flow to selectively add advanced technologies to our portfolio. Recent acquisitions that I'm sure you've noticed have added about $270 million in sales and that gives us about $0.5 billion in sales through acquisitions for the fiscal year, and that's pretty much on target for the Company. We are targeting about 5% of sales. Earnings per share, lastly, are up over 25% and of course this is the main driver for our share price, so we're very pleased with that.

Just some comments on some markets. Our orders were up over 9%, as you have seen in the release, in the quarter versus a year ago, with particular strength coming from our Industrial International and Aerospace segments. Just another thing I want to point out that is our distribution remains very strong and that represents about half of our industrial business and we continue to see strength in this channel and expect to continue strength going forward. Some of our North America OEM markets continue to be in recession as expected, such as automotive, heavy duty truck, light truck, residential air conditioning, semicon, light construction. We've talked about these in the past and as you can see here, they continue to be in recession. They've been performing at this level for quite some time and so we are hopeful that once they return to more normal growth levels that we should be in a position to benefit from that at that future time.

So with that I'm going to turn this back over to Pam for some additional detail.

Thanks, Don. For more detail on the quarter, please reference slide number four and I'll begin by addressing earnings per share for the quarter. Earnings per share for quarter -- third quarter came in at $1.49. This represents a 25% increase over the $1.19 in the third quarter last year. Moving along to slide number seven, the earnings growth on a consolidated basis in the quarter versus the same quarter a year ago is the result of the following. First, revenues in the quarter increased 14%, mainly due to the Industrial International and Aerospace segments, with revenues up 32% and 8% in each respectively. Gross margins improved by nearly a percentage point over last year and selling, general and administrative expenses improved as a percent of sales, declining to 10.9% from 11.1%. Also lower outstanding shares, mainly as a result of the accelerated share repurchase program which we completed in November, contributed about $0.05 in the quarter.

These higher earnings -- as a result of these items that I just mentioned, there were some offsets. The offsets were lower CIC segment operating income, obviously due to the exposure in the North American soft markets, such as auto, heavy duty trucks and residential construction. Higher interest expense, mostly due to the result of higher debt, due to acquisitions and the share repurchase program that I just mentioned that we completed in November, as well. As you'll recall some of that was financed with commercial paper. As a percent of sales, however, compared with last year, interest expense is flat. Higher other expense as a result of income items last year that didn't repeat this year, such as gains on the sale of real estate and then higher taxes due to increased income, which is a good thing, partially offset by a lower tax rate. Just to summarize these puts and takes from the third quarter on a per share basis versus a year ago, operating income contributed $0.31, less outstanding shares contributed $0.05, and that was all offset by higher corporate, general and administrative expenses of $0.03, additional interest expense of $0.01 and higher other expense of $0.02. Netting these items you can see that the earnings were quality earnings, clearly the result of better performance in the quarter.

Moving to slide number eight, addressing sales, you can see sales for the quarter increased 14% to $3.2 billion from $2.8 billion last year. Of the 14% sales growth, 4% was organic, 4% is the result of acquisitions, and 6% is the result of currency, and obviously mainly the Euro because of our business in Europe. Moving to slide number nine, the strong growth in the quarter is the result of continued industrial end-market strength with International organic growth of 8%, and this was led by all three regions; Asia, Latin America, and Europe. So distribution continues to do well, and the Aerospace business has continued to increase their growth rate throughout the year supported by healthy orders, and that's up against tough comparisons from last year. Acquisitions continue to contribute to sales, 4% for the quarter, and that equates to $111 million for the quarter and $247 million year to date. And of course, Parker continues to make progress in emerging markets.

Moving to slide number ten, focusing on segments starting with North America, most notable on this slide is that, in spite of several soft markets, North American third quarter sales are up 4%, 2% organic. This is an improvement over last quarter's organic growth of 1%. So in spite of a challenging North American economic environment, operating income for this segment is ahead of last year. This is the result of diversifying the business, continuing to make successful acquisitions and of course execution on the Win Strategy initiative. Moving to slide number 11, continuing with the Industrial segment, moving to International, a noteworthy here is that currency is becoming a larger contributor to sales, 15% for the quarter, again due mainly to the strong Euro and the weakening of the dollar. Organic growth continues at a healthy pace, 8% for the quarter, and again tough comparisons a year ago. Acquisitions added 9% to sales in this segment, and most notable in this segment, this quarter, is that margins as a percent of sales were 16.1% versus 13.8% a year ago, a 230 basis point improvement.

So International continues to perform well across the various markets that Parker serves. The volume improvement is broad based across all of the major regions. Germany, Italy, France and the Scandinavian countries, they all continue to do well. Germany is particularly strong. I'd like to move to slide 12 and moving to the Aerospace segment. Margins as a percent of sales this quarter of 14.5% is an improvement over last quarter, but down from last year's 15.2%. This is due to increased research and development costs in connection with new program wins, mainly the 787, although there are many wins that we'll talk about later. Moving to slide 13, the Climate and Industrial Control segment. As you well know, in this segment there's softness in the North American automotive, heavy duty truck and residential air conditioning, which is affecting this this particular segment. Sales are down organically 3% for the quarter and 5% year to date. The operating margin for the quarter of 6.5% compares to 6.9% last year.

At this time I want to talk about orders a little bit, so moving to slide 14, orders for the quarter. Slide 14 details the orders by segment. Just to remind you, these numbers represent a trailing three-month average in and are reported as a percentage increase of absolute dollars year over year, excluding acquisitions and currency, except for Aerospace. Aerospace, as you know, is reporting using a 12-month average. So as you can see from the slide, orders are are up 9% for the March quarter just ended. This 9% compares to 2% a year ago, so orders continue to be strong. North American orders for the quarter are up 2%. This compares to a negative 2% the same quarter a year ago.

Industrial International orders continue to show strength at 11% this quarter and that is on top of 11% a year ago. International strength is supported by high double-digit growth in Asia, mid double-digit growth in Latin America, and Europe remains strong, teetering on double-digit growth. Aerospace continues to build backlog, with orders up 28% this quarter, and this compares to 19% last quarter and 2% a year ago. In the Climate and Industrial Control segment, order strength, as anticipated, have somewhat improved. Orders are down 1% for the quarter, which is an improvement from the -6% last quarter and -4% one year ago.

Moving to the balance sheet now, Parker's balance sheet remains solid, cash on the balance sheet at quarter end was $182 million. We had $439 million in commercial paper outstanding. Day sales and inventory remain constant with last year at 64 days, mainly due to the k acquisitions. Accounts receivable in terms of DSO is flat with last year, coming in at 50 days. And the large decrease that you're seeing in other assets and pensions and other post-retirement benefits year over year is a result of FASB 158. So moving to slide 16 at this time, I'm happy to report that operating cash flow for the quarter just ended with $390 million, another record for the Company. For the year cash flow was $864 million versus $537 million last year. That is an increase of 61%.

Of the $390 million in cash flow for the quarter, $69 million, or 2.2% of sales was used for capital expenditures, acquisitions consumed $5 million in the quarter, as the last two acquisitions, Vansco and HGR Holding closed in April. Dividends were paid in the amount of $35 million, share repurchases consumed $51 million, and the remaining $230 million was used to pay down commercial paper. On slide 17 you can see that the debt to total cap ratio is 26.1% and on a net basis, 24.1%, providing the capacity to generate premium returns for our shareholders moving forward.

On slide 18, just to address the fiscal year 2008 guidance, the guidance for fiscal year 2008 is shown on slides 18 through 20. On slide 18 the guidance for sales and operating margin by segment have been provided and on slide 19 guidance has been provided for the items below segment operating income. Slide 20 summarizes the guidance on an earnings-per-share basis from continuing operations. As you can see from the slide, the guidance for fiscal year 2008 for earnings per share is projected to be $5.40 to $5.60 versus the previous guidance of $5.15 to $5.40. Please remember that the forecast includes acquisitions made to date, but excludes in I acquisitions that may be made going forward in the remainder of the year.

So the revised guidance assumes the following; Sales growth approximating 11.5%; segment operating margins as a percent of sales in the range of 14% to 14.3%; corporate admin costs 1.5% of sales; and interest and other expense in the range of $180 million to 185 million; and a tax rate of 29%. So the EPS guidance for the year has been increased by $0.25 on the low end and $0.20 at the upper end.

So, at this time, Stacey, I would like to open the call to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Jeff Hammond with Keybanc Capital Markets. Please proceed.

Good morning, Jeff.

Hi, good morning. I was just wondering if you could -- as you look at the order trends, it seems like the comps got a little bit easier and you held the momentum, can you just talk about inflection points within any end markets that materially changed or where you are seeing, if any, deceleration in the international markets, and maybe just around that give us your view in terms of momentum moving into fiscal '09?

Okay, thanks, Jeff.

Jeff, this is Tim. I think that in terms of the international, I think Latin America right now is really, like I'd kind of say red hot almost with -- especially from the ag coming out of Brazil and we don't see any let up on that and that just seems to be getting stronger and stronger, so that's the good news. Asia-Pacific is -- has just continued to be strong across the board, fairly constant at very high levels. I think there's been a lot of concern about Europe certainly and frankly they're -- and we're watching it all closely too because everyone seemed seemed to be concerned, but for us the order rates seem to be hanging in pretty well. There is a lot of good things happen in Europe in terms of shipment to the rest of the world, especially to Asia. A lot of their strength is the fact that they have a lot of product going to Asia. And they're also -- lead the world in certain other things and I mean in win power, strong market, a lot related to the oil and gas and the exploration and the shipbuilding, et cetera, so frankly Europe has held up very, very well for us.

I think here in North America, not a lot different. I would say then going North America, going to specific markets, I think the markets that we saw in -- in soft remain soft. We thought heavy duty truck was going to increase. It looked like it was. It now seems that heavy duty truck has taken another whack based on the high fuel prices and people having to park rigs and that, and so that one may not recover as quickly as we hoped it would. The semicon seems to go on, that softness, that came on later. It stays weak. We're thinking now that that will stay soft for -- pretty much the balance of the calendar year is what we're hearing with increasing into next calendar year. I say the rest of it seems to be fairly constant. I'm not sure if that give you enough color or not.

That's good. And just maybe just a comment on momentum and as you start to think about fiscal '09?

Well, that's a -- interesting . Jeff, we're right in the throws of that. We're doing our roll up of our operating plan, our people are doing that. We don't really have a lot of that, I'll be a lot smarter come the middle of -- end of June, so I really -- I really can't give you any answer right

Okay. Thanks, guys.

All right.

Thank you, Jeff.

Your next question comes from the line of Nigel Coe with Deutsche Bank. Please proceed.

Good morning, Nigel.

Good morning, thanks and great quarter.

Thank you.

Just -- I guess just on the North American and industrial margins, you took down the guidance there for full year. I suspect that the MRO is stronger than -- your distribution is stronger than your OE right now and given that the higher margins in that channel, just wondering why margins are coming through a little bit weaker there?

Sure. Nigel, let me answer that. One of the things that happened in this quarter is, because Easter fell in this quarter we did have some under absorption in some of our plants, so that really did -- did affect the margins. The other thing, as Tim mentioned, is the semiconductor obviously is very slow, not expected to come back. We thought there might be a little bit of a bump on that. The other thing is mobile business. When you look at the proportion of our mobile versus our industrial business, a little bit of a higher proportion is mobile versus industrial in the quarter.

Okay. And then anything on the mix between hydraulics connectors, filtration?

I can tell you that the filtration aftermarket is absolutely booming. It's doing very well and I can tell you that hydraulics, North America's still doing very well but, of course, international, much, much stronger.

Okay, great.

And (inaudible) connector seems to be fairly hanging in there.

Okay, great. Thanks a lot.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder. Please proceed.

Good morning, Alex.

Good morning. I'm concerned about the degree to which the currency is affecting your international business and the overall business as a result. 6% of your sales -- six percentage points of your sales increase overall coming from currency changes and almost 15% of the industrial rest of the world. I'm concerned about the time when the currency starts going against you. That will happen eventually. What are your thoughts on that? Would there be a comparable effect on profits, for example?

Alex, Tim Pistell. We've talked -- I think you all -- you know, certainly, as long as you've followed us, but for some of the others I would say first of all, people do need to understand that we naturally hedge as best we can our businesses, and so most of what we sell in a region we make in a region, so there can be -- while there can be dramatic numbers on the revenue line that you see, which the revenue is being up $170 million roughly in the quarter on currency, the costs are all up on a proportional basis, as well. Now having said all of that, certainly net at the bottom there is a gain.

That's something clearly we can't do a whole lot about in the short term. The way we manage it in the long term, as I said, is to make sure we produce where we sell and it doesn't provide us with some opportunities to -- on the short-term basis, we can -- if Europe is strong and North America's soft, there may be a certain amount of excess capacity we have here that we can use to help out over there. But all in all you are right, it's a big number. It's grown over the course of the year. I think a little bit of our outlook in the fourth quarter we're not qui -- frankly we're not quite sure it would stay at such a robust level and we think it may come off a little bit, but if we were currency experts we would be doing that and not this. And so it's hard to answer but we just manage through it. That's what we are paid to do is to manage through it.

Well, here's what I'm really talking about here. You reported a 14% overall increase in sales of which 6% was currency and 8% was the rest, now if the currency had gone the other way you would have had a 2% sales increase.

Yes.

That's what I'm talking about. Would the earnings in that case be up just the 2%? Would you maintain your margins at least, but there certainly wouldn't -- there wouldn't be any improvement in margin so therefore you would be hurt on the earnings side the same amount as the sales side, wouldn't you?

Well, as I tried to say there certainly was -- there is a net benefit for us, one that's running positive as it is. If it goes against us and runs negative then we'll be, but it's not -- it's not as dramatic on the bottom line and as I say, again, it is our job to manage through that. So, yes, that happens, it's happened before, and it swings back and forth. So, yes, you're right, that is a phenomenon that can occur and again, we just need to manage through it and make sure that we -- we continue to deliver the earnings on a consistent basis.

Okay, thank you.

Thanks, Alex.

Your next question comes from the line of Jamie cook with Credit Suisse. Please proceed.

Good morning, Jamie.

Hi, it's actually Chase Becker in for Jamie, how are you?

(LAUGHTER) It's Chase -- it's Chase --

I think -- that's two times in a row, I think. My question is -- just circling back on North America I just want to make sure I understand this. I appreciate the comment that you gave earlier on the margin front, but if you're backing into your fourth quarter numbers here, that's implying about a -- if I am doing my math right about a 150 basis point deterioration in the fourth quarter year over year. Does that sound about right? Is there something else I'm missing other than what you were alluding to earlier in your comments?

No, no, I think you're -- you're accurate. If you look what's happening, we are -- tend to have a lower margin in the second half versus the first half and yes, you're right when you're comparing to the prior year.

Okay. And then can you provide some color on the break out on your Aerospace orders?

Sure. When you look at the 28% Aerospace orders, obviously, the preponderance of that is falling in the OEM, commercial side of the business. Aftermarket for the most part is up about 10% and the strength that you're seeing is really on the OEM commercial side. Military aftermarket is up, commercial aftermarket is up, commercial OEM is obviously the strength that you're seeing and then military on the OEM side is flat -- aftermarket, I'm sorry.

Okay, great. Thank you.

Your next comes from Mark -- from the line of Mark Koznarek with Cleveland Research. Please proceed.

Good morning, Mark.

Hi, good morning. Just a follow up to Alex's question, can you guys quantify the currency benefit here in the quarter? Do you just simply take the 170 times your international margin, which would make it around $0.10 a share or is it something less than that?

Mark, no, you can't do that because that's just down to the margin level and again, a lot of the other costs below that are over there as well and taxes, et cetera. So again it is a -- it's a much smaller number when you get down to the bottom, so you've got to do it on a real -- on a net, net, net basis.

Okay. My real question has to do with price versus cost, raw materials have certainly become troublesome again in terms of the rapid appreciation and you guys are usually pretty quick to raise prices, but there's contract terms et cetera. And so, is some of the margin revision in North America, particularly, expectation of higher raw materials that you don't think you're going to be able to capture?

Mark, this is Don. You're right. As far as the raw materials, we have seen continued escalation in raw materials; in particular copper and brass have just continued to go up and north on us. You're never 100% real time as far as passing anything on, okay, even though in many of our OEM contracts that we have, you're about close as you can be to real time because you have escalation clauses ties into those contracts on these very volatile raw materials. But even with that, there's still some push back and you have to still get in front of the customer and present your case because nobody's going to give you anything for no good reason. They want an explanation and so you have to bring the facts.

With respect to the other raw materials, I would say the rubber and plastic polymers, anything oil base related, are certainly seeing the impact, as well, and we're trying to pass those increases on as we see those. Again, it's probably no better or worse than what we've been doing over the last three or four years. We've been experiencing these escalated -- escalating raw material prices now for quite some time and I would say we're in no better or worse condition than we have been in the past by just trying to do our very best to pass these on and make sure that we don't see margin -- a margin erosion from that.

Coming back to one point that Alex Blanton made earlier, I just wanted to add one comment to that, and maybe it gets a little bit, Mark, to what you were saying earlier in this call, the first question. We -- when we do our forecasts and when we do our strategy and all, then we look at strategy and what our targets and our goals are, we target 15% operating margin as our target, irregardless of what the foreign exchange rates are. We just don't get into that. We expect the operating units to make 15% across the board in any environment. So, maybe that would help respond a little bit to what Alex was asking about too, and that's global -- that's a global target for us. I hope that answered your question on the raw materials.

Yes, thank you.

Your next question comes from the line of Dave Raso with Citigroup. Please proceed.

Good morning.

Good morning.

A quick question on the international revenue guidance, if you think about currency it's probably going add somewhat similar in the next quarter -- for this current quarter versus the quarter you just reported, and if you look at the acquisitions that you'll likely be benefiting your sales, it's essentially implying core growth to be almost flat internationally in the fiscal fourth quarter. Can you reconcile that?

Dave, yes,Tim Pistell. Let me -- a couple of things on the international front and again these last two acquisitions we did really will fall within North America essentially, the ones that began at the beginning of April. There are a couple of thing. One is, again, I think the currency that we're really talking a lot about was a big boost to revenue in the quarter. I think that a little bit of that has been tempered down in the fourth quarter. The other phenomenon is they're -- one of our more recent acquisitions, which is in the sub C business, their orders are huge and they're really lumpy, big time. They had quite a high revenue in the third quarter and right now, we're -- it looks like will be much lower on the fourth quarter in that business unit. So it's a combination of a little -- being a little cautious on the currency and the fact that we know that that unit -- now that unit, because of what is going on in oil and gas, is booked solid, I think, for the next three or four years in terms of their capacity, but it's just very lumpy in terms of sales. So I think maybe that's part of the reason that we're seeing a slight decline.

I do want to loop back a little bit on North America, seeing thee was a lot of questions on that and I think year to year you see one picture, but I'm seeing from -- the guidance we're just giving you on the fourth quarter versus the third quarter that we just are reporting this morning, in North America we're giving you more sales, we're giving you more margin and we're giving you a higher margin than you had before, so I think that -- which is implied in there. So, again, I think that -- you know, we're going through a tough times in some of these markets, but we've raised the guidance and part of that is we are saying North America will actually be a little better in the fourth than they would in the third.

Okay. Back to the international, though, (inaudible) sub C, maybe this is a little lumpy this quarter, maybe it was $50 million from that and next quarter's say even down at ten or 15, currency's going to be somewhat similar. Is there something -- the orders you said up 11% internationally, so it's not all squaring up. Are you expecting a much slower core growth international in the fourth quarter than the third quarter?

David, this is Pam. Just to get into the details, the numbers a little bit, it's really just currency. We really don't forecast the currency in there so you have to add that back.

Okay. Maybe there's something related to this. Your inventory grew faster than your sales for the first time in six years this quarter, except for one difference a year ago -- the fiscal third quarter a year ago. Is there anything I should read into that? We don't get your break out of inventory until the Q, so I don't know if it's more problematic. Is it finished goods or are you trying hoard some raw materials up front? How should I think about that?

No, David, the inventory really is currency and acquisitions, so it can't really be that.

But there were very few -- there was really no acquisitions in the quarter.

Yes, but there's always adjustments that flow through as they firm things up on the acquisitions, so really in the quarter we only grew inventory by $7 million once you extract those other items out.

And that's a sequential comment, $7 million; right?

Right, down $7 million. I'm sorry I said up, down $7 million sequentially.

So 1,470 instead, so it's still up a little bit, but okay, that's helpful. I appreciate it. Thank you.

Thank you.

Your next question comes from the line of Ann Duignan with Bear, Stearns. Please proceed.

Hi good morning, guys.

Good morning, Ann.

Can we take a look at Aerospace again just for a moment. Can you tell me if you're seeing any slow down in commercial aftermarket orders? I know you said they were up 10%, but what are the trends you're seeing there. We're seeing a lot of aircraft -- older aircraft, in particular, coming out of service, [high fuel prices for taking the profitability] because of the airlines. What are you guys seeing out there in commercial aftermarket for Aerospace?

Ann, actually we're not seeing a decrease, but I can understand the reasoning for your question. When you look at the airlines and you look at the fact that there's consolidation going on, you look at the fact that there are airlines who have gone bankrupt, yes, I can see where you're asking that question -- and they're taking parts off of planes and putting them on other planes. But quite honestly we're not seeing a decrease in our commercial aftermarket to this point.

Okay, thank you, that helps. And Don or Tim, either one, your outlook, the range of your guidance for Q4 is, as we say in Ireland, is as wide as a gate (LAUGHTER), what's the hesitancy there, what are the risks, where are the concerns as you go into Q4?

Oh, I think that the -- we're sort of touching on many of them again I guess is some of the issues where the market is going to go, where the currency are, we don't have -- again there isn't a lot of currency concerns, so I don't know with -- I don't think it's a lot different than what we've given on a -- we narrowed it from the second a little bit, I guess, so forth so I don't really know just what to say there. There's a fot of vagaries. I don't think there's a -- there is some uncertainty out there in the markets and on this currency thing and so forth, so I think that's all.

And I think, Ann -- this is Don. If you look at the range, we did come in with a very strong range, revision. We picked up at the top end of the last guidance and moved up from there, so I wouldn't read into that that we're too bearish on the balance of the year. I think we're very positive, it's just that. And I think we typically have always given you a range about like this in the past and that's worked out well for us. It's hard to hit an exact number and we're not trying to do that. But I think the key thing is to see that we have picked up on the $5.40 and went north of that and that's probably the important message to pick up there.

Okay. So there's no one region or end market that you're looking at that you see a cloud just developing that you're concerned about?

No, I think that the real question is on the North American markets just how long the ones that are down now and have been down will remain down. I think -- we'd like to at some point here we'd start seeing some movement back, especially in light of the pact that interest rates now are down at 2.25%. That's come down drastically and I think everyone realizes that that's a big mover for the economy and eventually that is going to translate into better activity here. May not be in the next quarter, but hopefully in the next six to nine months I think we should expect to see that.

Housing starts are another thing, we don't know. I think it's going to take a time for that to bleed off, but all of these segments that have been down and are down now we would expect at some point we'd see a little relief and I think going into next fiscal year hopefully we would see turnup in the semiconnector part of the business for sure. The question is on the automotive and on the light truck we're not sure about that. Heavy duty truck, of course we thought that already would have turned and it has not. So we're just going to continue doing what we're doing and trying to hold these margins as we have been and just hope for -- that at some point these lower rates are going to translate into something better down the road. But yes, I wouldn't read anything negative going into the -- to the next several months here. for sure.

Okay, thank you very much. And by the way, congratulations, Pam. Well deserved, you've got my vote.

Thank you, thank you, Ann, I do appreciate that.

Your next question comes from the line of Andy Casey with Wachovia Securities. Please proceed.

Thanks, good morning, everybody.

Hi, Andy.

I'm going to belabor something, but back on the fourth -- the implied Q4 North American margin guidance, the expected higher rate of year-over-year deterioration, what I'm coming out with 160 basis points down at the midpoint versus 40 in Q3, I just want to clarify, while sequential is up a little bit, is the year-over-year change all raw materials or is it being influenced by acquisition integration because the real -- the implied Industrial International margin does not appear to be following the same pattern. I'm just trying to make sure we incorporate everything as we look to your future.

Andy, this is Tim. I think that you -- and you've touched on something which I'm glad we're going to get to here and the fact that, again, we're looking at more sequentially frankly, of course, how we're going do it in the fourth quarter versus the third quarter we just finished. You say there's a -- if I looked year to year, maybe it's a bigger decrement and so forth. I think that certainly some of the acquisitions would come into play because the preponderance here --especially these most recent ones are here and the first quarter generally they don't come in earning at peak capacity and so I wanted to get to that because the accounting has changed and you've got to absorb a lot of cost, and I need to point out that all of that's in our numbers. I think Pam mentioned earlier the high quality of the earnings I think we've been delivering all year, and everything is in these, guys.

There is no adjustments for integration or new acquisitions, there's no adjustments for restructuring. We're not into all of that. What we give you what we report, but all of those are in there, and yes, so there is a bit of that phenomena occurring in this fourth quarter as we've added some big ones here of late and in short term may bring it down a little bit if you look year over year. Having said all of that, they are coming on board and we are giving you in total higher margins in the fourth than we just did in the third, so I think it's -- I think it's a tremendously strong performance in light of some really rough market share and a few years ago everyone was saying, well, who's early circle, who's late cycle, and Parker's an early cycle and we try to say, no, we're early, we're mid and we're late. I think this is pretty late and I think we're still delivering for you and so I'm feeling good about that coming through, as well. So, all in all, but yes, that's sort of a mixture of things, but yes, there will be a little bit of acquisitions pulling down a bit short term.

Yes, Andy I just want to point out, when you look at the margins, last year in North America we ended it at 14.7% and our current guidance at the midpoint is 14.3%, and that's at the midpoint, not counting the upper range so I think our margins are hanging in there pretty well.

Okay, thanks for that. And Don, if I may, could you talk about what you are seeing. I know you finished two relatively good-sized acquisitions toward the end of this historic quarter, but what are you seeing going forward?

Well, you know that -- what our target is, our target's 5% of sales. We've pretty much hit that now this fiscal year. I will say that we are looking at a number of -- and have been looking at quite a few different opportunities. We've passed on some opportunities in the last 12 months. Of course we've made some very nice ones just recently. We have about $1 billion worth of capacity that we can use for acquisitions and still within the framework of our debt-to-debt equity ratios that we want to maintain. So a lot -- there's quite a bit out there for us to look at. We're seriously looking at a number of them and I would expect that you would see a continued stream of acquisitions coming in in the next 12 months.

Thank you very much.

Thank you, Andy.

Your next question comes from the line of Ana Recinos with UBS. Please proceed.

Hi, Ana.

Hi, good morning. Could you just give us a little bit more color on what's going on in Latin America. You mentioned ag in Brazil and what your outlook is there for the rest of this year and if there are any other areas down there that are helping you on the international side?

Tim, again. Well, again Brazil in total is -- ag is certainly leading it but we're now seeing it on all fronts. Because of the wealth that's being created, we see a pick up in the automotive, in the truck, and the -- and the construction, as well, and it's just spreading across, which is the good news. Argentina is really looking to step up on the soybean side and that bodes well, et cetera. So I think that all in all, we're -- across the board it's pretty good. Venezuela's a little challenging these days, but outside of them everything else seems to be pretty good, down there, and as I say, it's really spread across to many other markets.

Great. And on the -- I guess on the Asia-Pacific side, too, you mentioned it was constant at high levels. Does that imply that you're seeing growth growing materially or what kind of growth rates are you seeing there on the Asia-Pacific side?

Well, I think Pam had mentioned that. Again, we're in double digits and we into mid to high double-digits over there and there's still plenty of wonderful opportunities for us there and our major customers want us there. That's the wonderful thing. Because of the breath of line that we can supply, they love Parker to show up and so it just bodes well for us.

Great. Thank you.

Thank you.

Your next question comes from the line of Eli Lustgarten with Longbow. Please proceed.

Good morning, Eli.

Nice -- as I said, we're joining the chorus of nice quarters. One clarification, in the guidance you have a 29% tax rate, which in order to get there you have to have like a 30%, 31% tax rate in the fourth quarter. Is that just -- is something happening in the fourth quarter or it's -- 29% been the guidance all year and I know you've been running around 28.5% right now.

I think it's just -- yes, the way you get there any more, there's very little long-lasting things and it's a bunch of discreate tax items and planning. Part of it, Eli, is when we do acquisitions that presents opportunities for us, so I think -- yes, think we've been giving you sort of 29%. We've been able to do a little bit better by doing -- by doing a discrete thing here or there, and so it's just going forward on the same basis.

You're not talking a bigger tax rate in the fourth quarter to get it up there?

No, no, no. No, we would expect frankly, again,just hopefully more of the same but you just never know what opportunities you're going to have.

I see. And go back to your guidance on the divisions. North America you gave us a bigger sales number, but you told that's acquisitions where the margins (inaudible), international is currency. Can you talk about the Aerospace sector because you said [you ratched up their volume] and took down the margin forecast, which I assume is because of the investments in mix, and with the implication of that going forward into 2009, because it looks like you have much stronger volume in the fourth quarter, probably they're because of 9% from 7% and the margins are down and does that continue into 2009?

Yes, let me again -- and I may have turn it back over Don a little bit on Aerospace -- but you know you saw the wins that we've had here -- huge wins on -- $2 billion on the Airbus 350, there's -- and on top of that there's three other programs which accumulate to another $1 billion. That's $3 billion of wins, tremendous for the future, but all -- going with that and now is the development and nonrecurring engineering. Over this fiscal year, this year over last fiscal year, our R&D -- Pam, our R&D and nonrecurring engineering is up over $30 million this year over the prior year. It was already up the prior year but we're up another $30 million this year. So, again, without that, the Aerospace margins -- you can do the math -- would be real close to 16%. But we're paying that price now and that's how we're getting these big wins and that secures our future for a lot of years and decades to come. Don, I don't know if you want add any to that?

Yes, I'll just mention a few of the wins that we had. I think you're familiar with the Airbus A350 and that -- the hydraulic system on that, which includes pumps, reservoirs and all related-type equipment was about $1 billion over the life of the program, so we're working very actively on that. The fuel system likewise on that contract, including all of the fuel [unerting] and measurement and management system for fuel, is about $1 billion, as well. So you're talking $2 billion in Airbus new business over the life of that program. There's been a lot of changes on the 787 that I'm not going to into, but as you know that's been pushed out again and there's a lot of reworking and reengineering and redesign and reeverything and it's needed yesterday. Everybody wants everything yesterday, which causes a major impact on our expenses, a lot of overtime, a lot of additional people brought on to try to handle that additional work, so the 787 continues to be a major R&D program for us.

The Gulfstream, what's called the G650, we won the flight control actuation systems. I'm not sure if we went public on this totally yet or not, but I -- it may have, but I'm not positive. The actuation system, rutter controls and all of that, and some auxiliary electro hydrostatic motor pumps, that was about a $390 million program. Again a lot of engineering involved in that. There's another one, which was a Mitsubishi regional jet, where we won the hydraulic system including the engine-driven pumps, a lot of sensors and related-type equipment, I think that was in the neighborhood of about $200 million in sales. The -- or potential, I should say.

The Cessna Citation Columbus 850 was another program. That was flight controls, that was about a $400 million program, a lot of engineering activity going on in that area. And then another one was the -- another one by Cessna was what is called the Sky Catcher. It's a light sport aircraft and that's primarily a wheel and brake system. Not quite as much value, but still a lot of engineering intensity on those. Those would be the major programs, quite a lot of activity. This all bodes well for the Company. In the long run, of course, the impact is on our short-term performance, which is the nature of this kind of business. You suffer a little bit now through the R&D stage and then you have a long tail as far as profits and sales going forward.

So Eli, not the pile on -- this is Pam speaking -- but typically the OEM versus MR business runs 50/50 -- 50%, 50% normal times and right now we're running about 65% OEM and that comes in at no margin.

And are we looking at increasing engineering expense in '09 versus '08 again because of these wins? I guess that's really what I'm driving at.

Again, our guys are holding up plans and so we don't know what they're going to bring in but, Eli, I don't think there's going to be a lot more. The big programs, the 350, the 787, they're already -- they're already in our shops and on board and I think at this stage -- I don't have the numbers but I don't think we're looking for another big increase.

All right. Thank you.

Thanks, Eli.

Your next question comes from the line of Daniel Dowd with Sanford Bernstein. Please proceed.

Good morning, Dan.

Good morning, good quarter. Actually I wanted to turn to a more macro issue, so -- and certainly one of the things investors in this space are worried about is what, if any impact, a U.S. recession's likely to have on companies like Parker, and as I'm thinking about your --your guidance here, as I'm looking at your updated orders for North America, if you believe that there's a relatively brief U.S. recession, it looks to me like you currently believe you're going to get through this -- a U.S. recession effectively without really feeling the effects of it the way you would have expected in your North American businesses. Have you amended your North American economic outlook or alternatively your North American industrial economic outlook?

Have we amended ours?

Yes.

No, I don't -- at this stage, no. I think we've talked specific markets. I don't think -- we don't have a department of economists. so we don't -- I can't say that we have one of those. I think we do it market by market and I think -- no, outside of the exceptions we've mentioned. Heavy truck is going to stay down for longer, semicon's going to stay down for longer, I don't think there's a lot of other big changes to the --

Dan, what we like to say here -- this is Don -- is that we're not talking about a USA recession, we're saying the USA is in recession, has been in recession for at least eight months now, and the good news is Parker is not in a recession. And as I stated earlier on the call is that we're pretty -- fairly positive here going forward is that we have six major market segments that have been in the recession. We are talking heavy duty truck off 50%. If that's not a recession in that segment I don't know what is. The housing start and the impact its had on the air conditioning side of our business is in recession. The light trucks, of course, goes hand in hand with new construction. The trades aren't buying light trucks because no one's building anything. That's in recession. The big three automotive -- and the domestic manufacturers are certainly in recession. We've seen semiconductor bouncing off the bottom here. We think that's going to last another year. That's in recession.

When you look at all of these segments that we've talked about here, I've never seen a situation like this in the past that we've done so very well with so many of our key target market segments doing so poorly. And again, it's -- we feel like the USA is in recession, has been very eight months. We've seen, especially in all of these areas, that the order trend has been down. We think we'rebottomed out in many of these. If there's more to come, I don't know what direc -- where it's going to come from. Like I said earlier, I think we're going to bounce back a little bit as a result of -- you could see our current order activity is a little bit more positive in North America. I think the interest rates are going to drive that more positive going forward. So I would say, if anything, I'm a little bit more on the bullish side, but I don't want anybody on the call thinking that we're not in a recession. We are in a -- Parker Hannifin is in a recession for sure. The USA, I should say, is in a recession.

Parker Hannifin, of course our results would indicate that we're not and again it has a lot to do with the balance of the Company that you must take notice of. We've changed the balance dramatically over the last seven years, predominantly outside of North America now and a much better balance and mix of products in markets that we serve, a much bigger company than we were seven years ago, which gives us more balance and flexibility, as well. And then of course driving all those initiative that we have been driving. And those were not one-time initiatives, those are on-going initiatives that are going to continue to drive results and performance for this Company going forward. So, we're bullish. If more is to come in North America we think we're going to hold up just fine and we'll see what happens going forward. We'll give you more color on that, of course, at the end of the fiscal year going into next.

Let me just follow up then on what Tim said earlier. He said, look, we're at late cycle and we're doing great, which obviously you are. I'm wondering actually if you imagine that all of the stimulus that has been driven into the U.S. economy really starts to have an impact maybe in Q3, maybe Q4, doesn't that imply that we actually may look back at this period and view it as mid cycle rather than late cycle?

You could be right. I think there's a lot of uncertainty. There's reasons why I can see that we're at the bottom or we hit the bottom and we can come out of this thing. I can see where, no, it can get a lot worse and boy, it's just hard to call right now, so we're trying to manage and plan accordingly. But again, I think the point is that we sell into so many different markets, so many places around the world that you name it, we sell -- pretty much sell into that market. So yes, we are early, we are mid, we are late and we're working awfully darn hard out here to eliminate the cyclicality factor here and get into a lot of the secular stories and markets that do not have those cycles to them. So I think all in all, I would say the proof's in the pudding, if you will. I think the results speak for themselves, largely. We're -- we're suffering through some of these down markets and we think we're delivering the kind of performance that the investors want to see.

And I think -- this is Don again. I think if you stay focused on the orders, the order trend would dictate that a lot of good things are happening here and there's a lot of strength, even Aerospace and the nonindustrial markets are very strong. So, we're pretty positive. We have -- we think we have a pretty good future in store here and we're prepared for whatever's to come.

All right, thank you.

Okay, Stacey, at this time we'd like to take one more question, could we, before we wrap up here?

Your final question comes from the line of Robert McCarthy with Robert W. Baird. Please proceed.

Good morning, everybody, thanks for taking another question. I had a couple of clarifications I wanted to ask about, but my question first is, I wonder if you could provide a little help on understanding or maybe reminding us because I think we may have talked about this in the past, how you manage pricing for distribution in a -- in a rising input cost environment --

Yes.

-- because they operate the catalog; right? So I guess I'm sort of interested in how you manage it in a general sense? And then can you talk specifically about when would be the next opportunity to secure a price increase in response to what's going on with costs?

Yes, thanks, Rob. Nothing really changes depending on the environment, basically speaking -- generally speaking, I should say.. And what I mean by that is, for distribution what we typically do is we review prices and we adjust prices, if needed, at one of two time periods a year, either January or July. Now, having said that, there have been cases where if we get a rapid increase in raw materials in a highly raw-material sensitive product line -- and there are some of those in the Parker offering -- that we will make mid term adjustments, okay? We would do something outside of the January or July timeframe, and we have done that in the past. But we try to -- try to stay to twice a year and the reason we do that is if you have 125 divisions, say you have -- 75 or 80 of those are industrial divisions and they're all change in prices at different times of the year it drives our distributors crazy, so what we try to do is put some sanity back and say, hey, we should try to keep this to twice a year.

The other thing that happens is, frankly, when you go into the customer and if you change prices at different divisions or different -- every other month you've got another division change its prices, the customer starts, now wait a second, you just raised the price last month. Well, yes, but that was XYZ division and now we've got another division, ABC division, that's raising. Well, wait a second. So we just decided a long time ago just to have it twice a year, so nothing new and we do that regardless of the economy. We do that in growth periods with the economy, we do that in recessions, we do that in --regardless of what's happening out there, we do those revisions and we pass those on as need be and make those adjustments.

So you've got a -- in effect you have a price increase coming for that piece of the business mid year --

Yes.

-- and the time lag between the new prices and how it affects your own results should be really short, right, a matter of days or weeks?

Yes, in that segment it's fairly short, that's right. We give a little bit of a notice and then we make the -- we do the reprinting of the list prices and so forth fairly quickly.

Yes. And then in terms of clarification I just -- I want to make absolutely sure that I got this right because I thought I heard two different things about currency in the international outlook. As I understand it your fourth quarter outlook that's incorporated in the full-year outlook for international has zero currency contribution. Is that right?

It has --

Comparing year to year, right?

We'd -- again on this we would be doing it to Parker rates and there would be -- no, there is currency in it, but there is not a big delta change in it, if you will, from the standard Parker rates. So we don't -- in other words, I guess the easy way is to say it, Rob, is we don't predict the movements from here. We're just -- we take them as they come.

Well, I understand that, but you just had a quarter with a 16% contribution or -- you're going to get a sizable contribution with high certainty or high likelihood, I'm not clear on how much of a contribution you have in your number, though.

Yes, Rob, this is Pam. We don't try to forecast the currency going forward because we don't know whether it's going to go up or down, and so we don't try to make that call. So in the sales number it's not this there.

I appreciate that, but if you're -- if you're not using current currency rates, which would imply a significant year-to-year benefit, then you are explicitly using a different assumption than is the current assumption --

That's right, that's right.

-- and you may not be trying to forecast but in effect you are.

That's right.

Okay. All right, thank you.

Okay, at this time let's end the Q&A session and turn it over to Don for some closing comments.

Okay, thanks, Pam. Just a few closing comments. We're clearly on our way to another record year at Parker, I think that's pretty clear to everybody. This quarter we produced record quarter results in sales, net income, cash flow, earnings per diluted share, so pretty much across the board any metric you might look at or compare was very positive for us. As a result of all of that activity and that performance we significantly revised our guidance for fiscal 2008 from the range that it was and I'll point that that was as low as $5.15 not long ago to $5.40, that was the original range, and we picked up on the high range of that now, which is $5.40 and have taken that up to $5.60, so that's a very significant increase in per diluted share.

I want to thank everyone that's on the call for your time and the questions that you've asked. I think the results we are achieving certainly are a direct result of executing the Win Strategy, as I indicated earlier. One of the objectives, just as a reminder, is that we are out here trying to maximize return on total capital, maintaining our top quartile position relative to our peer group, and this will remain our top -- or our primary focus for the Company. We maintain a strong organic growth rate, over 4%, even when some key markets have remained weak and if you look at that 4%, and we've been looking at other reports coming out, that's up in the top quartile, I believe, as well, from the reported numbers that we've been hearing. This 4%, of course, is in addition to our growth rate for acquisitions, which we continue to pursue and will for the coming quarters and fiscal year.

Lastly, we continue to reach new records, generating strong cash flows and increasing earnings per share. I would just like to say on behalf of the leadership team I want to also thank Parker's worldwide team of employees for their accomplishments and for connit -- continuing -- excuse me -- to profitably grow our Company quarter in and quarter out, year in and year out. Once again thank you for your participation. We appreciate your interest in Parker. Just a reminder that Pam will be around the balance of the day to take individual calls if you'd like to call in to her office. Okay, thank you very much and have a great day.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a good day.