派克漢尼汾 (PH) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2011 Parker Hannifin earnings conference call. My name is Keith and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Pam Huggins, Vice President and Treasurer of Parker Hannifin. Please proceed, ma'am.

Thanks, Keith. Good morning, everyone. I would like to welcome you to Parker Hannifin's fourth quarter and fiscal year 2011 earnings release teleconference.

Joining me today is Chairman, Chief Executive Officer and President, Don Washkewicz, and Executive Vice President and Chief Financial Officer, Jon Marten. For those of you who wish to do so, you may follow today's presentation with the PowerPoint slides that have been presented on Parker's website at www.phstock.com. For those of you not online, the slides will remain posted on the Company's investor information website at www.phstock.com one year after today's call.

At this time, reference slide number 2 in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements. If you haven't already done so, please take note of this statement in its entirety.

Moving to slide number 3, this slide, as required, indicates that in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers and are posted on Parker's website at phstock.com.

To cover the agenda for today on slide number 4, the call will be in four parts. First, Don Washkewicz, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I will provide a review including key performance measures of the fourth quarter, and full year 2011, concluding with the fiscal year 2012 guidance. The third part of the call will consist of the standard Q&A session. And, for the fourth part of the call today, Don will close with some final comments.

At this time, I will turn it over to Don and ask that you refer to slide number 5, titled "4th Quarter and Total Year Fiscal Year 2011 Highlights."

Thanks, Pam. And welcome to everyone on the call.

I was just reading an old report here before I came into this meeting. It was kind of a wrap-up from last quarter and it seems like it continues on. It was a nice report that was done by Nigel Cole, and it was titled, "Cruel and Unusual Punishment." And as I was reflecting on our share price over the last few months, it seems like it just continues on. But anyway, let no good deed go unpunished.

To start the call then, I just would like to take a moment to point out some of the highlights of the year. First, I want to take this opportunity to commend our entire global team for delivering the record performance they did in fiscal 2011. We just had a -- just a spectacular year. We achieved numerous records in FY 2011, and we will cover some of those today. We're not going to get into all the records, but we will cover some of the highlights of those records as I go forward with this report.

Sales were an all-time record of $12.3 billion representing almost a 24% increase from last year, and it surpassed our pre-recession peak of $12.1 billion in fiscal 2008. We're able to achieve strong profitability levels as total segment operating margin reached an all-time record at just under 15% for the year. And for those that have been following us for an extended period of time, you will know that our Win Strategy goal was to hit 15% operating margins, and we're right there at that goal now. It has taken us a few years to get there, but here we are. So, we're accomplishing what we set out to do.

Net income was also an all-time record as we crossed the $1 billion mark for the first time at $1.1 billion. And that gave us one of the highest -- I think the highest ROS net margin, ROS numbers in our history at 8.6%. So pretty remarkable results there.

That represented of course a record diluted earnings per share of $6.37, which was 87% increase from last year. And this was by the way at the high end of our most recently provided guidance and matched the Street consensus out there. And I might just reflect a little bit further and just say that if you remember, we finished fiscal 2008, which was our record year before the recession. And we now have exceeded that sales number just marginally at about $200 million more in sales. And on those additional sales, we delivered $0.84 more earnings per share, or 15% more earnings per share on $200 million in sales. I think that is pretty remarkable when you look at the kind of hard work and effort that has gone into building this Company by the team worldwide; just a remarkable accomplishment.

Just a couple of comments on the quarter, sales were an all-time record at $3.4 billion, and that was up 22% compared to prior-year quarter. And the majority of that by the way was organic growth. Orders remained robust. We published those numbers for you. It increased 15% compared with the fourth quarter last year. Net income was an all-time quarterly record at just under $300 million, and increased 32% compared to last year's fourth quarter. So the quarter was extremely strong for us.

And diluted earnings per share were an all-time further record at $1.79 for the quarter and in line with Street consensus again. So really, a remarkable accomplishment there. And of course, I mentioned for the year, that our operating margins were 14.8%, and likewise they were for the quarter as well, about 14.8%, just under that 15% target that we set out to achieve. So, we have a very strong financial position. Operating cash flow for the year was $1.2 billion, or 9.5% of sales. And that enabled us to increase our dividend, which we did three times this past fiscal year.

We also repurchased 8 million shares of Parker stock, valued at almost $700 million, with almost all of that completed in this fourth quarter. Overall, we're in an extremely strong position. Our cash position is strong yet, and we have a great credit situation as well here at the Company. We've initiated fiscal 2012 guidance for earnings from operations in the range of $6.70 to $7.50 per diluted share. And of course, that would represent another record earnings level for the Company, moving up from $6.37.

So with that, I'm going to turn it over to Pam who will get into a little bit more detail.

Thanks, Don.

Please reference slide number 6 at this time and I will begin by addressing earnings per share for the quarter. I will go through the formal presentation here, a little duplication on what Don said, to some extent. Fully diluted earnings per share for the fourth quarter came in at $1.79. This is an increase of $0.44, or 33%, versus the $1.35 from the same quarter a year ago. On a full-year basis, fully diluted earnings per share came in at $6.37 and this compares to $3.40 for fiscal year 2010, an increase of $2.97, or 87%. The fourth quarter earnings per share of $1.79 and the full-year earnings per share of $6.37, while at the high end of the range of our guidance, earnings were impacted in the fourth quarter by higher charges related to litigation, incentive compensation, and asset write-offs.

Moving to slide number 7, and laying out the components of the $0.44 increase in earnings per share on a segment basis for the fourth quarter, from $1.79 to the $1.35, in 2010, the puts and takes are as follows. Segment operating income added $0.54 to earnings per share for the fourth quarter, as a result of higher sales, and conversion strength. And while all segments contributed to the increased earnings per share, the majority was derived from the Industrial segment. Below segment operating income, or what we refer to as below the line items, impacted earnings per share unfavorably by $0.12, and this was mainly due to other, as the result of currency, and asset write-offs.

Moving to slide number 8, on a segment basis, laying out the components of the $2.97 increase in fiscal year 2011 earnings per share, from $3.40, to $6.37, again the puts and takes are as follows. Segment Operating Income added $3.08 to earnings per share for fiscal year 2011 versus 2010, due to higher sales. And again, obviously due to our ability to convert those sales to profits.

Sales and operating income increased across all segments of the business. Sales for the year of $12.3 billion exceeded sales of the prior peak in fiscal year 2008. Below segment operating income again, or what we refer to as below the line items, impacted earnings per share unfavorably by $0.10. And again, this $0.10 was mainly due to other, and this was the result of higher pension costs for the year.

A lower tax rate added $0.09 to earnings as a result of a settlement with the IRS, surrounding a previous litigation issue. And shares outstanding increased year-over-year due to the impact of the stock price on the outstanding stock options impacting earnings per share by $0.07.

Moving to slide number 9, looking at the top line, revenues for the year increased almost 24% to $12.3 billion, from $10 billion last year. And again, as I said earlier, these revenues are higher than the prior peak in fiscal year 2008. Sales increased across all segments of the business. The impact of sales as a result of acquisitions was less than 1%, and currency was in addition to sales of 2% in the year. After excluding the impact of currency and acquisitions on sales, the total year organic growth was 21%. Segment operating margins for the year increased 340 basis points, from 11.4%, to 14.8%, an all-time record for the Company.

So moving to slide 10 and focusing on segments, commencing with Industrial North America. North America reported a revenue increase of 25% in the year. Acquisitions and currency each added a little less than 1% to revenues in the year. So adjusting for the currency and acquisitions, organic or core revenues increased 23%. Operating income increased from $487 million to $746 million. That's a 53% increase over the prior year. And the margins of 16.5% increased 310 basis points over fiscal year 2010, of 13.4%.

So moving to the International segment, organic revenues increased 24% in the year, and currency was in addition to revenues in the year of 4%. Acquisitions had minimal impact. So all of this resulted in an increase in reported revenues for the year of 29%. And in that segment, operating margins increased 500 basis points, to 15.3%, from 10.3% for fiscal year 2010.

So moving to slide number 12 now, and addressing the Aerospace segment. Aerospace fiscal year 2011 reported end organic revenues increased 10%, as acquisitions had minimal impact and currency had no impact at all. Margins increased 100 basis points for the year, to 12.9%, from 11.9% last year.

Moving to the last segment, Climate and Industrial Control. Year-over-year total reported revenues increased 22% for the year. Acquisitions increased revenue 1.5% and currency added 1.6%. So base revenue has increased in that segment 19%. And again, margins increased 110 basis points, moving to 7.7%, from 6.6% last year.

So moving to orders for the quarter, slide 14 details orders by segment. These numbers as you know represent a trailing three-month average and are reported as a percentage increase of absolute dollars year-over-year. And they exclude acquisitions and currencies except for Aerospace. Aerospace is reported using a 12-month rolling average.

So as reported in the press releases this morning, and as you can see on this slide, orders are up 15% for the June quarter just ended. This compares to 24% last quarter, and 35% a year ago. Please note that the sequential decrease in order rate improvement is due to tougher comparables.

North American orders for the quarter just ended increased 11% year-over-year, and this compares to 20% last quarter, and 46% a year ago. Industrial International orders increased 18% year-over-year, and orders were up 22% last quarter, and 46% a year ago. Aerospace orders are up 27% for the quarter and this compares to a positive 44% last quarter, and a minus 3% a year ago. And then in the Climate and Industrial Controls segment, orders are up 1% for the quarter, 14% last quarter, and 35% a year ago. And again, just to reiterate, the sequential decline is due to tougher comparables as order strength remains robust.

Moving to the balance sheet, Parker's balance sheet remains solid. Cash on the balance sheet at year-end was over $650 million. And Parker had zero commercial paper outstanding.

Day sales and inventory decreased to 55 days from 58 days a year ago, which is tough to do in a robust market. Accounts receivable in terms of day sales outstanding closed at 48 days, and this is consistent with last year in spite of rising sales. So Parker continues to make progress on weighted average days payable outstanding as well, increasing LIFO by four days for the year.

Moving to slide 16, most notable on this page is that the Company generated cash flow of 16.6% in the fourth quarter, after adjusting for the $200 million pension contribution. For the year, net cash provided from operating activities for the year was $1.2 billion, representing 9.5% of revenue. If you exclude the $400 million in pension contributions for the year, cash provided from operating activities was 12.7% of sales. The major components of the uses of this $1.2 billion in operating cash flow, $900 million was returned to the shareholders by share repurchases of almost $700 million, and dividend payments of over $200 million. $60 million was used in connection with acquisitions. And $200 million -- a little over $200 million, 1.7% of revenues, used in connection with capital expenditure purchases. And net of these uses, cash increased $82 million in the year.

You can see on slide 17, the debt-to-total cap ratio is 24.7%. And that's down from 25.3% last quarter.

So now moving to the 2012 guidance, which is shown on slides 18 through 20. And on slide 18, the guidance for revenues and operating margin by segment has been provided. I won't go through each of those numbers. And on slide 19, guidance has been provided in total for the items below segment operating income. So you can see what that is as well.

Slide 20 summarizes the guidance on a diluted earnings per share basis. And as you can see from this slide, and in line with what Don said, the guidance for fiscal year 2012 for earnings per share is projected to be $6.70 to $7.50. And this represents a $0.73 increase at the midpoint from the fiscal year 2011 earnings per share. Please remember that this forecast excludes any acquisitions that may be made in the year.

The fiscal year 2012 increased guidance versus fiscal year 2011 is due to increased segment operating income, with an earnings per share impact of $0.85. Increased expenses below the line, with an earnings per share impact of $0.07. A higher tax rate, and an earnings per share impact of -- with an earnings per share impact of $0.27. And this guidance assumes the following at the midpoint. Increased revenue year-over-year, 7.6%, and segment operating margins of 15.1%.

Expenses below segment operating income including corporate administration, interest and other at the midpoint of $425 million. And we've put a band around that of plus or minus 4%. The projected full-year tax rate is 28%.

And just a couple of points, with respect to guidance. Sales for the first half, versus the second half will be divided 47%/53%. And earnings per share first half to second half is divided 45%/55%. Realignment costs for the year are projected at $0.13.

And also, first quarter earnings per share will be lower than the quarter just ended. And that's due to lower sales, which is normal in a typical cycle. Higher non-recurring expenses in Aerospace, higher other expense due to stock options, and higher taxes offset by favorable interest in share counts as a result of share repurchases.

So at this time, if everybody is ready, we will open to our standard question-and-answer session.

(Operator Instructions)

Robert McCarthy.

Good morning, everybody. Don, I'm struck in the quarter by the fact that in three of your four segments, International, Aerospace, and Climate and Industrial Control, the top line was at or above your forecast for the quarter, but margin in each case came in at the low end, or even below your expectations. So can you talk about what happened in those three segments that kept their performance from achieving your forecast for the quarter?

Well, what we are really forecasting, Rob, is you know, we don't forecast quarters. First of all we forecast the year and we give you an update quarterly on that year forecast. But let me just talk a little bit about the quarter and try to be responsive to your question. The fourth quarter, the MROSs were 19%. And if you take FX out of that, out of those numbers, we're closer to 29% just for starters. There were some one-off items in the quarter, as there are in every quarter, but especially in the fourth quarter, when you're trying to true everything up.

There was some litigation expense, some incentive compensation changes from what we anticipated. We finished of course as you can see stronger than what we were predicting. And well, it was within the range that we were predicting, but we're up at the high end of that range, so that impacted us a little bit there. Some minor things in the way of asset write-offs and things such as that. In the -- specifically in the CIC group, I can just comment there that we had some restructure carry-over into the quarter and that really pushed down their MROS for that group, but that's a one-quarter phenomena, and that will be turned around going into this next fiscal year.

The only other one maybe I will comment on would be Aerospace, and the amount of NRE, non-recurring engineering, that they've been incurring, has been as you know fairly high. Even though the percent is coming down a little bit, you know, from year to year, it's still a pretty high number, and that compressed them a little bit down to the 15% MROS number, but those would be some of the things that I would just highlight for the quarter. Again, I don't want to focus too much on the quarter. I would rather focus on the year. And keep in mind that the fourth quarter, we have all kind of -- all types of one-off type things happening, and we could spend all day. I just looked at a sheet of about 100 different items going both directions. So those would be some of the key ones, though, Rob, that I would point out.

Is there any way that we could, even on a net basis, all in, for all of these different items, put some kind of numbers to it?

I can give you some EPS impacts. Okay?

That would be great.

Yes, so bear with me just a second here. The litigation charges were $0.04. Incentive compensation was $0.03, and asset write-offs, $0.03.

And Pam, can you tell us what realignment and restructuring expenses were in the quarter?

I can. For the fourth quarter, realignment was $0.02, and this compares to $0.03 for the same quarter in '10. For the whole fiscal year, realignment was $0.06, and this compares to $0.19 last year.

Okay. I will get back in line. Thank you.

Okay. Thank you.

Ann Duignan, JPMorgan.

Hi, guys. Good morning. I guess Don, maybe you could take a step back and kind of reconcile with us the difference between your orders by segment versus your outlook for revenue growth. Particularly, I'm looking at things like Industrial International, and Aerospace. I'm struggling a little bit with the revenue.

Well, I think, Ann, if you look at the range. Again, this is the reason why I don't give you a point, a data point per se. If you look at the range that we're giving you for next year, I think that will cover all of the potential changes that might occur with respect to the order trend. The higher order trend reflecting higher in the range, if you will, that we've given you. If that doesn't materialize, then we're still covered by the balance of the range. So I think that is the way I would characterize that. That I think the other thing you know obviously is that in Aerospace, the order trend doesn't directly correlate with anything near term. More so, you know, on an annual, like a 12-month to 18-month kind of, or two-year basis.

Yes, Ann, let me just give you a little numbers around this. I think it might help you in your thought process here. But North America, the orders were up 11%. And if you look at the first half, for North America, they're up 8%. And I think if you look historic, you will see that there is always a little bit of a lag. If you look at International, the orders are up 18%, and the first half, we're looking at 16%. And that is at the midpoint. So I think that it's pretty much in line with what we're seeing in terms of orders.

Yes, but just the Aerospace one that really jumped out with the 12-month moving average. You would think you would have some visibility, plus 27% in orders, and 3% to 6% revenue growth?

Yes, and that's a good point. And we've done some research on that as well. And when you look at the Aerospace, typically, they will come out to only about one-third of orders. As you look out, if you look at the orders and then you look at sales, historically it is about a third. And I think that, and Jon you can talk about this more, but there is a little bit -- Aerospace growth is actually a little higher than what you're seeing, because we had some adjustments last year. And it is pretty typical that we have some things that move around as you well know with some of the OEMs. So when you look at that growth for Aerospace, it's a little bit higher than what you're seeing.

Ann, this is Don. One other comment on the Aerospace. Keep in mind that the military is anticipated to be down next year as well from where we are right now. So that impacts that as well. Go ahead, Jon.

The only other point that I would add tothen, Ann, would be then for Aerospace. Those numbers that we're reporting here for orders are exactly where we're at as of June 30, but when we actually look at the Aerospace growth forecast for FY '12, we're really doing a bottoms up analysis, program by program, division by division. And what this indicates to us is exactly what you're pointing out, is that there's quite a few long lead cycle business of course, and this long lead cycle business is really booking orders now, that we're getting from our customers for FY '13, FY '14 time period. So, that's really what we're seeing.

Okay. That's helpful to understand that because a lot of other companies only put into orders what is deliverable in the next 12 months. So, that is very helpful. Just a real quick one then. On your EPS guidance, 45%, 55%, I mean that's justpretty meager incrementals in the first half. Can you talk about what some of the headwinds might be? Is it just tough comps because Q1 last year was so strong? And if you could just give us some color there, that would be great and then I then will get back in line. Thanks.

I will start off and somebody might want to add on. But, here's what really is happening, and this is from a big picture viewpoint, Ann. But last year, if you look, when we came into the year, we were operating at a fairly low level, in terms of the sales volume. And so we have continued to ramp up, in terms of sales, to a much, much higher level. So when you're comparing this year, the first half to the first half, to the second half, really we hadn't aligned expenses with the demand yet. So that's really what you're seeing. I could sit here and talk about stock compensation, I could talk about different things like that. But really from a macro perspective, it's that the robust demand, now our expenses are aligned with the $13.2 billion revenue number, whereas first quarter a year ago, it was much, much, much lower.

And Ann, one other thing is, this is Don. Again, MROS for next year is around 20%, based on the numbers we're giving you. And if you take the FX out of that, it's close to 30%. So just keep that in mind as well.

And this is Jon, Ann. Just a couple additional points here. We've also got restructuring built in to the first half of FY '12 at a greater rate than we had in the first half of last year, and, or this past year. And then if you really look at the data, from a big picture standpoint, Aerospace is also impacting that, because their NRE expenses here. And their first half, is also high year-over-year at a much higher rate than they are in the second half year-over-year.

Okay. Thank you. I will get back in line.

Thanks, Ann.

David Raso, ISI Group.

Hi, David. David?

Your line is open.

Yes, thank you. It was not that long ago you used to give us monthly orders and given we're already a full month into the quarter and just given some of the concerns out there in the economy, would you mind sharing with us how the orders have trended so far this quarter?

Well, I think David we're still going to continue with our pattern of not giving out specific month by month data, because we feel like that the month by month information could lead you to draw conclusions here that would not be as meaningful as really taking a look at quarterly data. So we feel good about sharing with you, with our quarterly data. I will say that the month of July is not meaningfully different than the quarter. And so if it was, I would report that to you right now, but it's not.

I was just picking up on Pam made sure to say the order growth rate decline was simply due to comps. I was trying to get a feel for how the quarter is progressing on a growth rate.

Yes, and to just add to that, David, if you look at our orders, April, May, and June, they -- the progression was positive each month.

When it comes to the mix of businesses you're seeing the order book represent, and also your ability to get any July 1 price increases through, can you help with that as well?

Say that again, David.

The mix that you're seeing in orders, are we seeing maybe some OE slowdown, with a little lean toward after-market, or are we seeing continued strength from your big OE customers on their ordering? I am just trying to get a feel for the nuances we really see between your distributors and your OE business that potentially some inflection points around the economy.

I would have to say that just looking at the different markets, we've got a lot of very strong markets yet. I'll just maybe mention a few of them for you. And as far as price, maybe I'll back up and answer your first question about pricing. Right now, if we look at our self price index and we've talked about what that means, and our purchase price index, we're favorable on that right now. So we basically recovered the cost inputs, at least from a raw materials standpoint, and the margin. And as -- I think that's important that everybody on the call understand that, too, is that when you look at our gross margin, you compare our gross margin here, it has not shown any deterioration as a result of input costs going crazy for us.

So we have been very successful there on the pricing side. One of the reasons why you could be successful on the pricing is if you've got the capacity to deliver. And this ramp-up, I have to say that we've kept very high service levels around the world, and we've benefited from that. Because we've been able to deliver when the customers needed it and others haven't. And it got to a point where in many cases, a few cents here or there on a per unit cost isn't as important as whether I can get the product or not and ship my products. So we've been very successful there. Yes, we think that we will continue to recover those kind of input cost increase forward as we have in the past.

I think this is just a continuation of the kind of work we've been doing with the Win Strategy and the strategic pricing and the strategic procurement initiative in the Company. So I feel very good about that. On some of the markets that you had talked about or you're asking about, I'd just maybe highlight a few of the stronger segments that we see. Now, there is a whole long list where I can give you strong segments, but I'll give you some of the stronger ones.

Construction equipment, very strong on the OEM side. Power gen, machine tools, mining, industrial trucks and material handling, marine and forestry. I mean if you were to say what are the real strong segments, those would be them, but I have a whole long list, including heavy duty truck, farm and AG, commercial aerospace. I can go right on down the list here. I don't want to mention all of these, but it would be easier to tell you what isn't as strong and I really only have one in that category and that's telecom. It's interesting. And there are a couple of flat segments, which would be cars and light trucks and commercial air conditioning.

But for the rest of the segments really are strong. And maybe getting back to the first question on pricing again, maybe I could expand on that a little bit too, and talk a little bit about the cost input. And from a raw material standpoint, what has happened there is this past year, I'm just going to read down a couple of numbers for you; copper up 46%. And copper continues to increase, you know, on a month by month basis, but it is up 46%. Aluminum up 22%; steel, 21%; nickel, 19%; and oil, 26%, just to name a few of these. What we see right now is that they still are increasing -- not across the board here, but many of these are increasing, but at a much decreased rate. So we see them more or less plateauing here.

So the demand for price increases going forward I think is going to be less. Or a necessity, I should say, not demand, a necessity, is going to be less than it has been in the past as a result of the moderation in some of these raw materials. There will still be certain ones that will be higher than others that will need more attention. So we've basically been recovering our costs and the margins. Those are some of the markets. I can go into more detail on our cyclicals, which I think might be helpful for those on the call to hear. Just take maybe a minute here, and just kind of walk through some things.

We look at of course the 3/12 pressure curves and the 12/12 for the various regions around the world and for our major market segments. And we won't go through all of those but I will just highlight some of what we're seeing. And again, the 3/12 is the precursor to what happens in the 12/12. The it's the last three months' order trend over the prior year to same three months, compared to the last 12, on a 12/12, compared to the prior 12 months' order trend. So it's that ratio that we're talking about.

So Industrial North America, strong 3/12. Okay, strong 3/12. You can read the newspapers, you say well, where there's a disconnect here. I'm telling you what we're seeing. Strong 3/12 and a strong 12/12 on Industrial North America. Europe, strong 3/12 curve, pressure curve, strong 12/12. Asia, a little bit moderating on the 3/12 but it is above the 100% line, so we're not in any dangerous territory there. And it is extremely strong 12/12. Both are above 100%. Latin America is flat on the 3/12.

So if you look at one region, it is a small region for us, but nevertheless a region, it is flattish and the 12/12 was actually declining somewhat. So if you said there was a soft spot globally, it would be right now Latin America. People don't think about Parker when it comes to distribution. I think of course those on the call know now that that's a very important part of our business and very critical to us long term. And I just have to say that we have some extremely strong numbers coming in from distribution that represents half of our total business, if you will. And we're looking at 3/12s and 12/12s that are extremely, extremely strong. So we are very, very happy about that. I think that is the -- you know, if you focus too much on OEM, you're going to miss the distribution and after-market and I just want to point that out to you.

Heavy duty truck, I think everyone knows is very strong on both the 3/12 and 12. Extremely strong pressure curves in both of those and of course we play in both of those, in heavy duty truck market. I mentioned construction before, extremely strong. Refrigeration is a soft spot, declining on the 3/12 and the 12/12 is flattening. So, nothing great to talk about on the refrigeration side of our business. The process side of the business, we're seeing an accelerating 3/12 and also a real strong 12/12. Both above, well above 100%.

Aerospace's 3/12 is in a slight decline. And I think that's the impact of the military part of that business. Still had the strong 12/12, which is above 100%, comfortably above 100%. And the 3/12 is hovering above 100%. So, that's the reason for the go-forward forecast of about -- the more moderate 4% to 5% of organic growth that we've shown you. Agriculture, strong, very strong 3/12, very strong 12/12, so we're participating in that as well.

And so those would be just some. And just one comment on the ISM. We get a lot of people get into these situations where they look at some of these metrics and it is a big knee jerk reaction, jumping one way or the other, and flip-flopping around. The way we look at this ISM. Yes, it's an indicator; no question about it. Of course it dropped down from 55 to 50. I've seen this thing go up from one number, drop down five, next month it's up five, and in the meantime everybody went through all kind of gyrations trying to figure out what's happening in the markets and how bad things are going to get, and so forth.

And keep in mind that with the ISM above 42, you're still in a growth mode. It is just a slower growth mode. So, we use 50 kind of as a bar. But really if you go below 50, you're still growing. It's just at a much slower rate. So North American's at 50, almost 51. It was down from 55. I don't get all concerned about that. I'm looking at my order trends.

That's more meaningful to me than these ISM numbers. These are interviews with purchasing people. A lot of subjective things in there, qualitative; nothing really all that quantitative that I'm familiar with with these surveys. So the Euro zone, PMI is 50.4%. It was 52% in June. So it is pretty close to what it is. But the interesting thing there is all of the major countries are showing strength for Parker.

Of course Germany is a major, major country as far as activity over there. It's one of the strongest. The UK, Switzerland, France, Sweden and Italy, and so forth are all strong for us as well. So everything really across the board there in Europe. And it's tending to lag the US coming back out of this recession, and that's fine. That's kind of more of a traditional trend, when it comes to recovery in Europe. China, the PMI is right at 49%. It was down a little bit from the prior month; it was at 50%.

So they're still forecasted to have a GDP of almost 10% in calendar two. I think it was 9.5% in calendar two and it was forecasted to be greater than 9% in FY '11. So again, we're investing in China to support that growth over there. And I think that growth is going to go on for many, many years to come. So, and then I think many of you may have seen the cap good survey, which moved up from 64.7 and 64.9. Not a major move, but it's the highest level since September of 2006. So those are just some of the things that we would point out with respect to markets. Market segments, as you can see with very few exceptions, things are not looking all that bad for us at this point in time. I know that's a long answer for you, David.

It sounds like after all that, macro could prove that guidance wrong. But it sounds like you're thinking the year starts with double-digit growth the first quarter or two, which implies the guidance is expecting back half to be low single digits. And I know it is a 12-month outlook, so I'm not --.

I think it is just a reflection in the back half. And your numbers are correct, that the back half is just our visibility into the back half of the year. We're being mindful of all of the macro indicators that are coming out, and we feel, have obviously a lot more confidence in the first half. We have confidence in the second half numbers. But as the year goes on, we are going to continue to update everybody on the sales and how they relate to the order rates, and the macro picture. And so we will just keep updating everybody, but we do feel good about our mid-single digit growth rates here for the second half.

Thank you very much. I appreciate it.

Thank you, David.

Alex Blanton, Clear Harbor Asset Management.

Good morning, Alex.

Hi, good morning. David just asked a question I was going to ask, so I'll go on to something else. Let me just ask a question that was asked earlier about the monthly orders in a different way. The ISM number that you just mentioned, do you see any indication of that decline of five points in your orders currently?

No, I think what we said, Alex, this is Don, is that through that quarter, through the fourth quarter, actually our order trends were going up through that whole quarter.

Going up.

So again, you have to -- and I was asking our people. I said I want to see this actual questionnaire that these people use when they do this, this ISM index, because I'm a little bit -- I like to get to the facts. It's just some kind of a quantitative thing that I'm -- you get three points for this response, two points for that and whatever. Or is this some kind of a knee jerk or seat of the pants type response. So we're gathering a little bit more of that. But my sense right now is that it's an indicator. It's just -- it's not an exact science. It's just kind of a gut feel, a gut check with however many people that they survey.

And so yes, maybe over the long term, looking out over the long term, you might get a better read on general direction, but one month doesn't make a trend in this ISM. Believe me. I've seen this thing jump around from one month to the next. And it depends on what time of year you're at and so on and so forth. Are you placing a lot of orders, where if I just came back from a planned shutdown, I'm placing a lot of orders. Okay, what does that mean? Well, I don't know what it means. You just came back from shutdown. Maybe that's what it means, you're backed up. I don't know. So having said that, I hope I'm answering your question a little bit. But, did you have a follow-on to that?

Yes, I did. What was your working capital to sales ratio?

Working capital to sales.

Year-end, you usually publish a chart on that or a table.

We probably could. I don't know that we publish a chart on working capital.

Maybe it was inventory to sale.

Inventory to sales is down to about, it was $0.105 per dollar of sales. Isn't that about right?

That's about right.

It is about $0.105 per dollar of sales. Our goal is $0.10. We've done extremely well there. Our working capital --

Despite the sales increase, you reduced the inventory to sales ratio.

Exactly, that's the goal. That's what lean does for you is to drive inventory down, drive customer service up. And we've been whittling that number down over time and I don't have the exact number in front of me but as I recall, it was around $0.105 per dollar sale. And also, the rest of the working capital receivables and payables have done extremely well in both of those areas as well. I just can't recite a number for you, Alex. But I can say that I know our payables, days payables are in excess of our days receivables. So at least that is a positive trend there.

Now, finally, your stock currently is down $5.41.

Yes. Yes.

And it is sitting at 10 times the top end of your earnings estimate range for this year. 10 times. What do you think of that?

Well, what I think, I have to say this that there is a junkyard in town here that is selling for better than -- I'm just kidding you a little bit. But it is almost the way I feel anymore. The reason that I made the biggest acquisition in the history of the Company this last month, was because this Company is so cheap, it is pathetic. I mean we bought $700 million worth of shares in one of the best companies in the S&P 500 on the -- in the market, which is good old Parker Hannifin with spectacular performance. We bought $700 million, 8 million shares and I tell you what, the way things are looking, if it continues to go down, I'm buying more. That's my message.

You also increased your dividend three times.

We did. 42% this year. Not too shabby. Like I opened this call, with not understanding what is going on out there frankly. After every quarter when we achieve record results, and increased guidance, we lose $5. It is getting -- it wears on you after a while. But, it will correct itself.

We're just going to do the best we can here. We managed what we can manage. We can't manage the Street or what happens in the financial community any more than what we're doing right now. So we're just going to do the best we can here and continue to grow this company.

Okay. Thank you.

Thank you, Alex.

Henry Kirn, UBS.

Good morning, everyone.

Hi, Henry.

Would you mind talking about how much organic growth is baked into the sales guidance and is there a way to directionally parse that between underlying inmarket growth, your share gains and the pricing you're looking for?

Okay, Henry, this is Jon. Overall, our organic growth for next year is in the mid-single digit range. It is in the 5% to 7% range for next year. And again, our total growth for next year being at 7.6%. So therefore, the lion share of that 7.6% is really the organic growth.

Now, the pricing question that you asked, it's very difficult for us, to give you a number there. Of course, we're going to be watching all of the commodities that Don just alluded to earlier in his comments, between the copper, basic steel, oil, and a few of the other basic commodities. That helps drive our pricing strategy going forward here. We have to recover those increases and those basic commodities going forward. But it is really hard for us to really kind of give you a number. And we really in fact don't really plan for that. We plan at the margin level, given the cost structure that we have, and we try to adjust accordingly at every single division in the Company, and every single region of the Company.

Just a couple more. This is Don. Just a couple more comments about the forecast, because maybe some of you are new out there. We purposefully, when we go into a fiscal year, we budget tight. And we do that for a good reason. We don't want all the operations spending as if we're running at the top end of our guidance or anything like that. We can always adjust budgets as we go through the year and we get more confidence as far as order trends and so forth. But when we start off a fiscal year, we don't look at any blue sky forecasts around here.

We don't accept any blue sky forecasts. So we want them to budget tight. We don't just want them to open the flood gates bringing a lot of staff in, a lot of overhead, and then missing our numbers. And that's just not the way we do things around here. And I think for those of you who have tracked us a while and followed us, I think you would acknowledge that. As we have said in the past, we will update you every quarter, and we have. And, as we get more clarity on what is ahead, we will certainly give that to you.

If you look at just calendar, the calendar year now that we are in, we are -- we will show growth, if you look at the last two quarters of this fiscal year and our next two quarters, which would be the calendar year that we're in right now. Our growth is 17%. If you look at our peers, I think you will find an average around 13% or 14%. So the indication is there that we're doing pretty damn good relative to everybody else out there. Especially in this tough group of peers that we compare ourselves to. So that's a little bit of background on how we budget, why we budget, an how we go about doing things around here, just so you get a sense of that.

That's helpful. And then the last question, Don, you talked about repurchases. Could you touch on how you view that versus M&A as we head into fiscal '12?

Yes, I think -- let me just say this on M&A. All of our groups are actively looking for opportunities out there. We're certainly evaluating a number of candidates. We've got plenty of capacity. Even after repurchasing $700 million, we still have $600 million and some on the balance sheet in cash. We've got our short-term credit lines. We have got $1 billion there.

We have got plenty of long-term opportunity if we needed it. So, I think we can do as much as we want with respect to share buyback as well acquisitions, and a combination of the two. We're certainly looking for those companies with strategic synergistic fit to Parker. We have some that were in the close. You never know if you going to get anything until you actually get it, until you finally sign on the dotted line. But, we're down the road a ways on some and not quite as far on others. I would have to say, though, and we've acquired a few companies this year, about $70 million worth of businesses this year. I would have to say this, though.

With as cheap as this Company is selling, when we're looking at -- if I can buy this kind of a Company, called Parker Hannifin and I can pay less than eight times, well, actually now, the way the price is going, I'm paying six times maybe, forward-looking EBITDA multiples, there is nothing I am looking at out there, even broken companies, I got to pay 9 to 10 times, you know, EBITDA. There is nothing I can buy as cheap as this Company. It is absolutely flabbergast -- I'm flabbergasted as to the kind of evaluations that we have going on around here. Somebody is missing the boat. I'm not sure who. But if it continues down this path, I will tell you what, I'm buying Parker Hannifin and I will pass on the acquisitions, because this is the best deal in town.

That's helpful. Thanks a lot.

Terry Darling, Goldman Sachs.

Thanks. Just a couple of clarifications. Pam, I think you indicated in response to Ann's question, 8% revenue growth first half for North America Industrial. Did I hear that correctly? Because then I thought I heard you say double digits to David, but maybe you're talking about International there. I just wanted to clarify.

No, you're right. For fiscal year '12, it is around 8% and 16% for International.

Okay. And it was my impression previously that you didn't -- that the Company did not put FX into the sales guidance. And is that changed? Or am I just wrong on that? Because I'm trying to tie in Don's comment about MROS at 30% ex-FX, relative to that perspective.

What we do, Terry, just to be clear on this, is we don't try to forecast, okay, what currency is going to do. I mean I don't think any of us know that. So we take the exchange rate at the end of the year, and we compare that to the exchange rate in the prior year, for all the different currencies. And that is how we come up with our currency projections. So any change from the end of June isn't reflected.

Okay. So that is -- what does that imply then, you know, in these numbers, a point or two?

Yes, 2%.

2%. Okay. And two points gets you 1,000 basis points on incrementals. That's the way that math works?

Right.

Okay. And then Don, can you talk a little bit about how you're thinking about CapEx for next year, given some of the uncertainties on growth? Are you moving forward, you know, aggressively there, or are you trying to play it cautious from the get-go and see how the year goes?

No, actually, we had a -- going through our planning, our budgeting and process and so forth, we have a big demand for CapEx this year. Actually in our budgets, came in very, very strong. And when I say that, very strong, all relative speaking. I mean over 3% for us is very strong. And in the past, over 5% would have been very strong. But over 3% is very strong. So we are budgeting higher levels for CapEx.

We have some of these programs that we're working on for the higher growing regions that we just can't postpone, because some of these construction projects take time to materialize. We don't want to miss a market opportunity. So for instance, in Asia, in particular, we want to do some more investment there, localize some more manufacturing, and continue to grow and keep pace with the activity levels in that region. So, no, we're not shying away. We are trying to support the groups, our operating groups, the best we can, with their CapEx request. But they are at a higher level than they have been in the past. There is no question about it. We will be spending more on CapEx as a percentage, but still not ridiculous from historical standpoints, to what we've done in the past.

Okay, and just coming back finally to the M&A discussion. Don, I think you in the past have talked about trying to acquire in the 4% to 5% of revenues range, annually, and this fiscal year, as you said, you were well below that. Is the 4% to 5% goal still there? Do you think that the -- and maybe you could talk about why you think you missed the mark this year. Is it just discipline on valuation? Is it something else in your process that you think you need to address?

No, I think we have the entire organization that is kind of focused on it. The goal for us is really 10% growth, nominal, 12% as we -- as kind of a stretch goal for us, as we -- this is over the cycle, okay? Kind of on an average. And as we ramp up our innovation initiatives, and we're doing that as we speak, we think we can get to 12% annual growth over the cycle, over a period of time. Yes, you're going to have ups and downs throughout that period of time like we've seen here with the recession, but over time we want to be averaging that.

So in any particular year, like we had this last year, it was a lean year. We did maybe $70 million in acquisitions. We would like to have done more, we had certainly the wherewithal to do more. We're just not out there just to buy for the sake of buying. We don't want to get bigger. We want to get better.

So we're being very cautious about what we buy and the prices that we pay. And frankly, like I said earlier, and I don't want to belabor this point, but our best buy right now is Parker, when I look at kind of what I've been faced with. But that doesn't mean we're going to shy away from acquisitions. I can do both. I can repurchase shares. I can pay dividends. I can acquire companies. We're blessed with a very high cash flow in this Company, so I'm confident that, yes, some years we're going to do better than others.

I've had years around here, as you've seen in the past where we have acquired $1 billion worth of businesses, and others where we haven't acquired much of anything. So it is really on the average that I am really more focused. Over time, I think we can average in that 5% range. I still feel confident with that. It is just not going to -- it might come a little bit more lumpy than it has in the past.

I will pass it on. Thank you.

Sure.

Eli Lustgarten, Longbow Securities.

Hi, Eli.

Good afternoon. Good morning. Can you hear me?

Yes, we can hear you.

Just a follow-up on the guidance. Last year when we went through this very conservative guidance, you forecasted really the first half of the year pretty strongly, and then you basically extrapolated the second half of the year at relatively flat if I remember correctly, just adjusted for workdays. And then you wound up having to dramatically increase. Did you do something similar to this than that, because your second half guidance like I said looks like a very low number? It looks like you almost just extrapolated the workdays because of no visibilities. Is that a fair statement of what you've done?

Well, I think what I would say to that, Eli, is we're following the same process and procedure that we've always followed.

So at this point, you are working with effectively no visibility in the first part of calendar 2012.

I think it gets back to what Jon said. We feel pretty comfortable for the first six months and once you get out beyond that, it gets a little more difficult. So, I think our view is that we will update you every quarter. And we do the best that we can at this point in time, and then every quarter, we will give you an update.

And can we for a moment focus on the Industrial International? The margins there were somewhat disappointing in the fourth quarter, versus the rest of the year. I mean the year came in at 15.3% and the quarter was like 14.7%. Is that just a negative currency effect, or is that sort of -- can you give us some guidance of what caused the margin, weakening I guess, that probably most of us expected in the quarter?

Eli, to start off on that, you know those charges that we talked about, we had some higher charges in the fourth quarter. Most of those really related to International, and that's what you're seeing. We talked about the litigation charges, the asset write-offs, that type of thing. Those for the most part were in that International segment.

But they weren't below the line, they were in -- because again, when we look at the corporate and then allocating all those charges, those were much higher. I thought most of them would be there. So some portion of it ran up into that segment and that's what held it down?

Right, so we were a little disappointed that those higher charges came through in that fourth quarter in International as well.

Is there any way for you to quantify how much was charged into the quarter from charges?

I did give the EPS impact.

You gave us $0.04, $0.03, $0.03 for the three charges.

That's right. That's all I have is the EPS impact right now.

My question is, how much of that $0.10 was charged to International versus below the line is really what I'm trying to get at.

The majority of it.

Okay. And your guidance and profitability is basically at the bottom end flat with what we saw this year at up. Is that at all strictly a function of the volume there? Is there any other -- with cost price being neutral, is that just strictly a volume phenomena that you're forecasting for us or anything else?

Could you state that question again? I'm not sure that we follow you.

Your operating margin forecast by segment, at the low end, is flat with what you reported basically for the year.

Okay.

Except for CIC. And you know, it goes up a little bit. Is that just strictly because you basically have volumes relatively weak at the lower end? Is that strictly a volume, the difference in margin change is strictly a volume number?

Eli, this is Jon. That is a big part of it. But also another very big part of it as Don said at the beginning of the call, we are at record level of operating margins. And, so we're in new territory for ourselves. As we go forward, and we think about the kind of margins that we can get going forward, we're not going to see us being able to get the same margin expansion that we were getting when we were coming out of the recovery that started two years ago. And now that we're into the third year of -- is it a recovery or is it now into the new normal going forward? So we are reluctant to really forecast record margins in the second half, vis-a-vis what we've been able to do in the past year.

However, having said that, for the full year, our operating margins at the -- are at the 15.1% range. We finished in FY '11, at 14.8%. So we don't want to go in terms of giving guidance much higher than that, in the out periods here. We need to get closer to that, to those out periods. We certainly have the capability of doing much better in terms of margins where we are right now, but we don't have the experience and really seeing how we perform, given the lower growth that we're projecting right now.

All right. Thank you.

Eli, just to remind you, too, we do have more restructuring in this year than we had last year.

Did you quantify how much more structuring this year?

Yes, we had $0.13 this year, whereas last year, the whole year, we only had $0.06.

All right. Thank you very much.

Eli, one last -- this is Don. Just one last comment about next year. Even though we don't have, you know, a lot of visibility at this point into the calendar, the next calendar year, I think we all recognize that it is an election year, and I would bet money that no one in Washington wants to, at least in the White House, wants to see something bad happen in the economy. So my guess is it is going to be a good year for business. That's just my opinion.

Thank you.

Mark Koznarek, Cleveland Research.

Hi, Mark.

Hi, good morning. We've kind of covered a lot of ground, and I just wanted to ask about the Aerospace outlook. If you could dissect that into the -- what you're thinking about, for the component pieces; commercial OEM, commercial after-market, military, and contrast that with what we had for fiscal '11 actual, please.

Sure. You're talking about orders, Mark?

I'm talking about the revenue outlook.

Okay, let me just tell you that when you look at OEM, it was up about 10%. Commercial MRO, 17%. And then military MRO was relatively flat. However, moving forward right now, the military MRO orders are much stronger than we had anticipated. So when you look at the backlog, it is much higher, military orders, in the backlog, than what you would think, looking at the sales numbers from last year. So when we go into this year, we're expecting military or defense OEM to be down. We're expecting all other segments to be up.

And what were those segments during fiscal '11?

That is what I just gave you. That was the sales revenue year-over-year by segment.

Oh, that 10% for commercial OE -- MRO up 17%, that was all fiscal '11?

That's correct.

Okay. Very good. Thanks.

You're welcome.

Jeff Hammond, KeyBanc Capital Markets.

Hi, good morning, guys.

Hi, Jeff.

I'm just trying to understand a little bit better, the impact of currency on the incrementals because I think you said your guidance is 20% stated, but 30% ex-FX.

Right.

So what is the underlying margin on the translated, on FX translation? Essentially zero or --

Well, Jeff, we don't really disclose that. I mean we have never really talked about that in the past. I don't think I want to talk about that, but I think what I can tell you is we just went back and we took that underlying profitability on that currency, and we adjusted the current year as well as the prior year. And that's how we came up with that number.

Okay. And just on the comment about margin expectations and Jon and I appreciate you're in new territory, but I mean are you still running the business for incremental margins in that 30% range?

Well, we absolutely are. I mean that 30% range is a deeply imbedded part of the culture of the Company. We still look at it that way. We still -- when we make decisions, in terms of new business going forward, or renewing old business going forward. We think about with that incremental business is giving us in terms of marginal returns. So, it is a very important part of our business going forward. And it is an important part of the way that we judge businesses going forward.

But not to belabor the point here, but 15%, we feel like that we're in -- delivering a lot of shareholder value. We've got, you know -- we've always felt like that we had four points of EVA at a 15% ROS for the Company. And we don't want to turn away business that is very profitable, but not exactly incremental to the current margins that we have right now. So all of our businesses are out, and judging their new business in terms of the 30% MROS, but as Don talked about last quarter, we are not going to see those exact same incrementals throughout the entire business cycle every quarter, quarter after quarter. Although we can see that going forward in different periods depending on the mix of how our businesses are growing.

And can you just give us ending share count and what share count you're using within the guidance?

Sure. For the guidance, we start out at around 159.3, and then gradually work up to 160. And we ended fiscal year 2011 with around 164.8. So with that, I think we will end the call, if that's okay, with you Jeff, if you're done.

Yes. All set. Thanks.

Thank you very much. And for those of you on line, I just want to thank you for your participation, and I just want to turn it over to Don who just has a few closing comments. Thank you.

Well, thanks to everyone that is on the call. And then I just wanted to once again to take this opportunity to thank our employees for their continued commitment to serve the customer and for the record performance we posted this fiscal year, and the record performance that we're anticipating for next fiscal year. So they're focused on the Win Strategy. We've talked about that, over the last 10 years. And by the way, this is our 10th anniversary of the Win Strategy.

So it has taken a while to get here, but we finally arrived and are achieving some of the goals that we set out for us over that period of time. And it has really transformed the Company into what I would call a premiere high performance company. So once again, I want to thank you for your participation, and your continued interest in Parker. Pam is going to be around for the balance of the day and feel free to give her a call if there is anything that you want to discuss further with respect to the Company and our performance. Okay, thank you, and have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Everyone, have a great day.