派克漢尼汾 (PH) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Parker Hannifin Corp. earnings call. My name is Carma and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). Later, we will conduct a question-and-answer session.

I would now like to turn the call over to your host for today, Ms. Pam Huggins, Vice President and Treasurer. Please proceed.

Thank you, Carma. Good morning, everyone. This is Pam speaking, just as Carma mentioned. I'd like to welcome you to Parker Hannifin's first-quarter fiscal year 2012 earnings release teleconference. Joining me today is Don Washkewicz, Chairman, Chief Executive Officer and President; and Jon Marten, Executive Vice President and Chief Financial Officer.

For those of you who wish to do so, you can follow today's presentation with the PowerPoint slides that have been presented on Parker's website at www.phstock.com. And for those of you not online, the slides will remain posted on the Company's Investor Information website, again, at www.phstock.com. And they'll remain there one year after today's call.

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

Moving to slide number three, this slide, as required, indicates that in cases where non-GAAP numbers have been used, they've been reconciled to the appropriate GAAP numbers. They're posted on Parker's website as well.

To cover the agenda for today, on slide number four, the call will be in four parts. First, Don, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the first quarter, concluding with the revised fiscal year '12 guidance. The third part of the call will consist of the standard question-and-answer session. 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 First Quarter Fiscal Year '12 Highlights.

Well, thanks, Pam, and welcome to everyone on the call. To start the call, I want to take a moment to just point out some of the highlights for the quarter. As you could see from the press release, we're off to a great start for fiscal 2012. I wanted to, first of all, just recognize our global team for delivering just another outstanding quarter performance for the Company.

So here's a few of the records that we had for the quarter. Sales were a first-quarter record, all-time record, at $3.2 billion, and that was a 14% increase over last year's quarter. And of that, almost 11% was organic growth, of that increase. Orders increased 9% compared with the first quarter last year. We were able to drive very strong profitability levels through our total operating margin from our total segment operating margin, that reached an all-time quarterly record of 16.1%. That was driven by North American industrial margins at 18.5%. So, very strong activities on the margin level in those two areas.

Our incremental marginal return on sales was 20% for the quarter. That's better than the first-half forecast that we had given you in the guidance, which was about 16%. Again, we still have a quarter to go, so that could trend down a little bit or maybe remain around 20%, but we're pretty pleased with where we started the year, as far as our incremental margins so far.

Net income was also a record quarterly record at $298 million and that increased almost 20%. Our net income margin was a record 9.2%. I think our last record was in the 8's somewhere -- 8%, somewhere between 8% and 9%. Diluted earnings per share were above guidance, and represented an all-time record of $1.91. That was 26% increase from last year's quarter. We continue to build a very strong financial position. Operating cash flow for the quarter was about $309 million or just close to 10% of sales. So, very strong cash flow generation for the Company.

Due to the depressed market conditions and price of our shares, we were active in repurchasing our own stock. We repurchased 4.4 million shares in the quarter, and that was close to $300 million worth of Parker's stock. That's on top of the $700 million approximately that we did last year, for a total of around $1 billion in the last year or so.

So, overall, we're very pleased with our strong start to the fiscal year 2012. We remain in an extremely strong position to drive record performance throughout the balance of this fiscal year.

We've increased the guidance. As you could see, we had a midpoint before, when we started the fiscal year at $7.10. We increase that to $7.55 now. And that represents a 19% increase in earnings at the midpoint and would represent another record year for the Company. So we're on a pretty good path here to set another record. Our increased guidance reflects our strong first quarter. Of course, there's a lower share count because of the repurchases in there, but also continued growth, based on our order entry trends and so forth, that we see continued growth for the full fiscal 2012.

So now I'm going to turn it back over to Pam and she's going to go into a little bit more detail for you.

Thanks, Don. As is the normal course, I'm going to go through my prepared remarks that correspond to the slides, and then we'll open it up with our Q&A session.

So at this time, if you'll please reference slide number 6, and I'll begin by addressing earnings per share for the quarter. Fully diluted earnings per share for the quarter came in at $1.91. This is an increase of $0.40 or 26% versus the $1.51 from the same quarter a year ago. And this is also an increase over the fourth quarter of $1.79, or 7%.

Moving to slide number seven, laying out the components of the $0.40 increase in earnings per share on a segment basis for the first quarter year-over-year, so reconciling the $1.51 to the $1.91, the primary puts and takes are as follows. Segment operating income added $0.37 to earnings per share for the first quarter. This is notably due to higher sales in all segments of the business, as well as conversion strength, as evidenced by the 20% marginal return on sales achieved for the quarter. Expenses below segment operating income impacted earnings per share unfavorably by $0.02. This was mainly due to corporate G&A as a result of benefits that are mark-to-market, which had an unfavorable impact offset by a favorable currency impact in other.

A higher tax rate impacted EPS by $0.04, due to less discreet items in the quarter versus the same quarter a year ago. The lower share count had a favorable EPS impact in the quarter of $0.10, as a result of the repurchase of 4.4 million shares during the first quarter of this year, combined with the 7.8 million shares repurchased through the second quarter -- from the second quarter, but through the fourth quarter of last year. So the total cost shares repurchased during the quarter was $292 million. So this gets you to the amount that Don just mentioned, the $1 billion -- $300 million this year and $700 million last year.

Approximately two-thirds of the first quarter beat versus initial guidance was due to higher segment operating income, while one-third of the beat came from items below segment operating income. This includes less shares outstanding as a result of the shares repurchased in the quarter.

Moving to slide number eight and looking at the top line revenues for the year increased 14%, to $3.2 billion, up from $2.8 billion last year. Sales increased across all segments of the business. The impact to revenues as the result of acquisitions was less than 1%. Currency was an addition to sales of 3% for the quarter. After excluding the impact of currency and acquisitions on sales, organic or core revenue growth was 10.5%, as Don mentioned. Segment operating margins for the quarter increased 60 basis points from 15.5% to 16.1%. As Don said, an all-time record for the Company.

So moving to slide nine and focusing on segments commencing with the industrial North America segment, revenues increased in this segment 13% for the quarter; acquisitions and currency had little impact, as acquisitions added a little more than 1% to revenues. Currency added less than 1%. Adjusting for these, core revenues increased 12%. Operating income increased from $189 million to $223 million. This was an 18% increase for the quarter. Operating margins for the quarter increased to 18.5% from 17.8% year-over-year.

Moving to slide number 10, continuing with the Industrial segment, moving to International -- organic revenues increased 10% in the year; currency was an addition to revenues of 7%, and this was down from what we initially projected. Acquisitions had minimal impact on revenues in the quarter, adding less than 1%, and all of this resulted in an increase in reported revenues for the year of 18%. For the quarter, segment operating income increased to $208 million from $184 million, and operating margins decreased to 16.2% from 16.8%, mainly due to the continued investment in the region.

Moving to slide number 11 and focusing on the Aerospace segment, reported revenues increased 13.9%. Due to the minor impact of acquisitions and currency, core revenues increased 13.7% for the quarter. Margins increased 280 basis points for the year to 13.8% from 10% last year. And this is mainly due to the increase in volume and a favorable mix of aftermarket to OEM.

Moving to slide number 12, the Climate Industrial Controls segment, for the first quarter, total reported revenues increased 3%. Acquisition impact was minimal for the quarter, increasing revenues less than 1%, and currency increased added 1.8% to sales. So base revenues increased 1% in that segment. Segment operating margins as a percent of sales were 8.2% for the year versus 9.2% last year. This is mainly due to a less favorable mix of their business during the quarter.

Moving to slide number 13, orders for the quarter. As you remember, these numbers represent a trailing three-month average. They're reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions and currency, except for Aerospace. Aerospace is reported using the 12-month rolling average. As you can see from this slide, orders are up 9% for the September quarter just ended. North American orders increased 16%; Industrial International orders increased 4%; Aerospace orders increased 14%; and Climate Industrial Controls orders decreased 1%, due to weakness seen in some of their markets.

Moving to the balance sheet, Parker's balance sheet remained solid. Cash on the balance sheet at year-end was over $400 million. Day sales and inventory increased to 62 days from 61 days a year ago. Accounts receivable, in terms of DSO, closed at 48 days, two days lower than the same quarter last year. Parker continues to work on weighted average days payable outstanding, increasing to 53 days versus 50 last year.

Cash flow from operations for the quarter was a little greater than $309 million at 9.6% of sales. And not seen here, but as a reminder, last year's cash flow number included a $200 million pension contribution. So the major components of the uses of the $309 million in operating cash flow in the quarter, $355 million returned to the shareholders by share repurchases, of $292 million, and dividend payments of $63 million; $87 million of cash used in connection with acquisitions; $44 million or 1.4% of revenues utilized for capital expenditure purchases; and in addition to these uses of cash, cash decreased another $56 million in the quarter, but that was mainly due to the effect of exchange rate changes on cash.

On slide 16, you can see that the debt to total cap ratio is 25.8%, and on a net basis, 20.9%.

So now moving to slide 17, the revised guidance, which I know you were all waiting for. On slide 17, the guidance for revenues and operating margin by segment has been provided. On slide 18, guidance has been provided at the mid-point and in total for the items below segment operating income. On slide 19, we've summarized the guidance on a diluted earnings per share basis. As you can see from this slide, the revised guidance for fiscal year 2012 for fully diluted earnings per share is projected to be $7.25 to $7.85; at the midpoint, $7.55. As Don said, this represents a $0.45 increase from the initial fiscal year 2012 guidance provided last quarter.

Please remember that the forecast excludes any acquisitions that may be made further in fiscal year 2012. The full-year fiscal 2012 increased guidance versus that provided last quarter at the midpoint is $0.45. To break this down for you, the increase of $0.45 is due to increased segment operating income with an EPS impact of $0.14; decreased expenses below the line with a favorable EPS impact of $0.09; and a lower share count as a result of share repurchases with a favorable EPS impact of $0.22. The increased guidance incorporates the better first quarter than initially projected, and the lower share count as a result of the shares repurchased in the quarter.

So just to summarize the revised guidance, revenues increased 7.6% at the midpoint. This is consistent with the prior guidance. However, due to currency and the better first quarter, the organic growth has increased to 7.7% from 5.4%. Segment operating margins increased to 15.4% from 15.1%; and expenses below segment operating income, which includes corporate administration, interest, and other, at the midpoint, are $406 million with a band of plus or minus 2%. Now, this is down from the $425 million provided last quarter as a result of lower other in the first half, in response to the lower first quarter, due to favorable currency, partially offset by higher corporate G&A in the first quarter, as discussed earlier.

The projected full-year tax rate is 28%. And a couple of points with respect to guidance. Sales first-half/second-half are divided 48%/52%; EPS is divided first-half/second-half 46%/54%.

I know that our analysts know this, but please be reminded that the first quarter results can't be annualized for the year. The natural cycles of business is a lower second quarter EPS versus the first quarter. This is due to less workdays in the second quarter versus the first, and seasonality kicking in with holidays and vacation. Unique to the second quarter, there will be additional R&D expense for Aerospace, and CAC markets will be challenged due to seasonality and weakness in the refrigeration and air conditioning markets.

At this time, we'll now commence with the standard Q&A session.

(Operator Instructions). Ann Duignan, JPMorgan.

It's Ann Duignan. Could you comment on the difference in end markets? When you look at your North American Industrial segment, orders up 16% versus CIC down 4%. I mean, we know CIC [is] the AC and automotive, but where are you seeing the strength in the North American Industrial segment?

Well, Ann, this is Don. I can kind of run through some of that for you.

I think the place where we see the most strength in North America is really from our North American distribution. When we look at the 312 pressure curves and the 1212 pressure curves there, they're extremely strong; one of the strongest segments for us being, of course, the huge installed base that we have out there in this aftermarket, and the fact that that distribution segment is doing extremely well. So that would be the one area of great strength for us. That's 50% of our Industrial business.

Heavy duty truck is another strong segment, running real strong on both 312 and 1212 pressure curves. Construction, very strong. Refrigeration is flat. I think we mentioned that air conditioning and refrigeration are both flat, both commercial and residential on both sides.

Semiconductor is actually going down, so -- and we said that last quarter that we anticipated that was going to happen. In fact, it is. So the 312 is declining and the 1212 pressure curves is heading for the 100% line. So that's moving in that direction. Process industries are strong on both the 312 and 1212 pressure curves. Aerospace declining on the 1212, but we don't see any issue there, no major problems there. And it's a little bit hard to measure this, because these orders come in a little lumpy. So right now, though, the 1212 is well above 100%.

The other -- I guess the only other area that I would mention would be agriculture. That's extremely strong and remaining strong, having a very positive 312 and 1212 pressure curves in both areas. So those would be some of the specific markets. Pretty broad-based, though, when you look at the strength of the specific OEM markets for us, but also the half of our business that comes from the aftermarket through distribution primarily is extremely strong as well.

Okay. And Don, the distribution business I know a lot of times you don't know who the specific end customer is once it goes through distribution. But could you talk about -- is there any particular geography or region of the country that's particularly strong on distribution? Or is that pretty broad-based too? I mean (multiple speakers) --

Ann, we look at that, and basically, I would say right now it's pretty broad-based. Oil and gas has been pretty active, so down in the Southwest, I think we've got, in particular, a lot of activity going on down there. But when you look across the United States, we see strength pretty much throughout the country. And that's really driving these strong quarter entry trends.

And then just as a quick follow-up, can you comment on Europe versus Asia?

Well, Europe is still doing fine. Asia, as you know, is trending down, and we anticipated that last quarter. But, again, when we talk about Asia going down and China in particular, we're talking about from a 12% GDP down to maybe a 9% or 10% GDP. And we'll see how long that sustains. Typically, what we've seen over there, it's been a short-lived thing, and typically, activity picks up again. But even at 9% or 10%, we're happy with those kind of numbers and we can deal with that.

Incrementals over in Asia are a little bit lower than what we'd like to see, but keep in mind that we're putting a lot of infrastructure in Asia to support future growth there. So I mean, both in India and China and elsewhere, we've got a lot of investment going on in Asia to participate in the high growth rates that we're seeing from that region.

Europe, kind of the same thing. What we see -- it's not the same thing, I shouldn't say, as far as trends -- Europe, if we look at the pressure curves in Europe, we would see strong 312s, which is indicative of what we're going to see coming up here in the future month as far as the trend that's the 1212. And the 1212 pressure curves, this would be last 12 months over the previous year, is hanging in there very strong. They're both declining slightly, which can be expected for this part in the business cycle.

But I would say right now, Europe looks very good for us. All of the major countries there, being Germany, France, the UK, Italy, are all looking good. So we're not as concerned about the smaller countries. Of course, we want to see strength across the board, but the major ones are all doing very well and remain strong for us. So that's the reason we're pretty optimistic about Europe going forward.

In spite of the fact that, of course, everybody has been reading the newspapers, and I'd just make one other comment -- if we haven't talked ourself into a double dip by now, we probably won't, because we've been talking about it for the better part of two quarters here. Europe with the Greece problem and the debt problem hanging over us, and the $14 trillion debt in the United States, if we haven't talked ourselves into it yet, I don't think it's probably going to happen anytime soon.

So having said that, that's the reason why we're bullish going forward through the balance of our fiscal year. Hopefully, that helps you, Ann.

Yes, thanks very much. I appreciate it. I'll get back in line. Thanks, Don.

Alexander Blanton, Clear Harbor.

I've got a couple of questions. The first being on the $0.22 that you said was added by share repurchase to your guidance. Does that mean that you were buying more shares than you had expected? Because if you increased the guidance based on greater share count -- greater share repurchase, that means you must be buying more than you thought you would.

We didn't include any share count -- any share repurchases in the guidance three months ago.

Okay. All right. So what you have in there now, does that include any future repurchase, or just what you did in the first quarter?

No, just what we did in the first quarter.

Okay, so you could have further share repurchase and further increases in guidance due to that?

That is right.

Okay. Secondly, the rest of world Industrial, Industrial International, incremental margin was only 12.5%. And so the margins were down slightly, as you mentioned. Could you go over the reasons for that? You already mentioned that you have restructuring or infrastructure building in Asia. But was there any restructuring? Was there a geographic change, a product mix change? What was it?

No, it's pretty much that -- if you look at Europe, Alex, we had a very strong incremental in Europe, actually well above 20%. So we were doing pretty good there.

The Asia was the big factor and it's pretty much just what I said. We've got a lot of investment going in there. And of course, the order trend has been down, so we're carrying that investment on a lower order activity and a sales activity. And just trying to -- you know, you couldn't believe all the activity going on in Asia. Just trying to get our organization -- we're hiring hundreds of engineers and all kind of technical people to try to support this level of activity there. We're doing more systems work. We're putting in a dozen facilities over there -- just a tremendous amount of activity.

If you looked behind the scenes here, you'd be surprised at how much is going on here. So it's really that incremental impact by Asia that has really impacted the International number.

Well, I like that answer. That turns a negative into a positive.

Yes. Yes, absolutely.

Finally, you mentioned the aftermarket being strong in North America. Is that because people are postponing replacements, and therefore doing more repair of old equipment? Are they building inventories out there? Or just what is it?

You know, I think it's all of the above. I think the facts are here that when you see the strong OEM activity we've got going on, okay -- I pointed out the aftermarket because it's, in particular, extremely strong. But it's so broad-based that I can't really point to any one factor that's driving that. It's just very broad-based. It's -- I think it's indicative of the fact that the order trends here in North America are still very positive. There's a lot of activity going on in spite of what you're reading in the New York Times.

And so I think that that's really what's happening is that we just have a broad base level of activity in a lot of different markets. And our distribution is really participating in that. So I can't really point to any specific area for you, Alex.

Okay, thanks very much.

David Raso, ISI Group.

My question is on the International business. We just saw the orders slow fairly notably from [18 to 4], and obviously, the revenue guidance for the full year went down roughly 300 basis points. But the full-year margin, just looking at the midpoint, went up 20 bps. So I'm just trying to connect the dots between slower growth.

We saw the first-quarter International margins actually down year-over-year, but the guidance for the full-year is still implying the rest of the year International margins are 15.6% versus only 14.9% the last three quarters of last year. So I'm just trying to square up the slower growth outlook. We already have margins down year-over-year, but the rest of the year, they're going to be up year-over-year. I'm just trying to square that math out. Thank you.

Well, David, this is Jon. I think we're seeing a couple of things here from an International standpoint. Number one, we had, as we're revising the guidance going forward, we're, of course, taking into account a very strong first quarter. So that is impacting the numbers that you're looking at here just a little bit.

Also, another major factor that we're seeing internationally that is helping our margins maintain where they have been and really growing to a certain extent is our two major initiatives here in the Company, as encompassed in the [Wind] strategy, are pricing. And what we're trying to do there in Asia and in Europe. And number two, what we're doing from a strategic procurement standpoint. And we've organized ourselves along our supply chains in each region around the world. In those organizations, especially in Asia, but also in Europe, are really starting to provide significant benefits to us.

And so that gives us the confidence looking forward here at our margins. And that's why we can make the guidance the way that we did.

Not to front-run any sensitive internal announcements you have to make, but are we looking at some slower growth potentially internationally? And taking some proactive costs out? Again, the rest of the year, to have margins up year-over-year and we're already down in the first quarters. Do you have some quantification or something to make it a little more believable? Again, I'm not sure --?

One other factor, just again, there's going to be a different answer in every single region internationally. But if you really focus at some certain specific portions of Europe, as an example, the restructuring that we took last year and the year before is really starting to pay benefits for us in this year coming up. And we're starting to see the benefits from that.

So, yes, volume, there's no doubt -- volume is changing, as indicated by our order pattern, but we are really in a point right now here where the real change at the midpoint is not as significant as it may sound you right now.

Plus, David, you have to remember that the guidance for the most part is incorporating the beat from the first quarter. And it's also incorporated in the lower share count.

I completely appreciate that -- I was just talking about the international market.

Right, but there was a beat in the International in the first quarter as well.

And then just lastly, obviously, it was nice to see the strong North America order growth acceleration. How is that working into your thought of pricing going into more traditionally a January price increase? In a sense, how much are you embracing this order acceleration with enough confidence to translate it to better pricing for January?

Well, David, this is Don. I would just say that we just raised prices in July about 2% overall. Our gross margin now is a record for the Company. You might have noticed that at 25%. What we will do is we will have an increase, but I think what we have to do is really take a serious look at our cost base, because, of course, that's going to be the driver for any pricing change in what happens in the market.

And from a cost standpoint, when we look at raw materials, of course, raw materials are starting to trend -- not all of them, but some of them, are starting to trend down. And the other raw materials, like steel and some of the rubber and plastic ingredients, and things like that, are flattening out. So there won't be as much pressure on us, certainly, as there had been in prior periods, to have a really need for a price increase to the same extent that we've had in the past.

But there will be increases going forward. Again, we will evaluate that. It will be a group by group, division-by-division, product line evaluation, using our strategic pricing teams. But I would think that the order of magnitude will be smaller only because there will be a lower -- at least at this point, unless something changes -- there's a lower -- a lot less pressure due to raw material increases, or actually, raw materials flattening out here.

Okay, great. I really appreciate it. Thank you.

Jeff Hammond, KeyBanc Capital Markets.

Just wanted to hit on capital allocation. Can you maybe talk about how you're thinking about share buyback? Maybe talk through what your new authorization is. And then just what are you seeing in the pipeline? It looks like you did $87 million in acquisitions. Was there some acquisitions in there that you didn't announce formally that were completed?

Yes, Jeff, Don here. As far as the share repurchase, we did about -- we're going to do about 80 million a year in share repurchase, and that's just to avoid dilution due to stock option exercises and so forth. So we'll do 80 million as a minimum.

We, of course, do a valuation on Parker. And we evaluate Parker along with all the other acquisition opportunities out there. And we've seen that -- we've had a great opportunity to acquire some shares at a very, very depressed price. So we're looking at that all the time, and we're going to evaluate that in light of everything else that we want to spend the money on or potentially spend money on, going forward here.

Our first priority, of course, for the Company is to maintain a strong balance sheet and we want to keep an A-rated debt. That's key for us. But from a growth standpoint, of course, we want to focus on supporting the 10% growth target for the Company, about half of that being acquisitions. We've talked about that. We'd like to do more than what we've done in the recent past. The reason why we cut the $300 million off at $300 million so far this year is because we do have some things in the pipeline that, hopefully, will be coming through. If that's the case, there's no sense in buying shares back if we're going to be doing some acquisitions. We'll need the capital for that.

So we've kind of held back a little bit here. If that doesn't materialize, I think that -- and if the stock continues to be depressed at these levels that it's at, then we'll certainly take another look and potentially do more share buyback.

CapEx -- supporting the internal growth is going to be key. You can figure it out, 2% to 3% CapEx is kind of what we've been running. I would anticipate that that will be what we're going to be doing in the future. And the last component -- well, two components, actually -- pensions -- we've trued up as far as pensions. We don't have to do anything as far as pensions this year, so we're pretty much -- we did all that last year. We got caught up so we're okay until fiscal 2013.

And then the dividends -- we're going to continue to look at that. And the key for dividends is to try to keep the yield approximately in the midpoint of our peer group. We're a little bit lower than that now. We recognize that. And we did increase dividends 42% last year. We're going to take another look going forward here, and we'll make a determination what, if anything, we want to do with the dividends.

But we want to keep it at about the median of peers. And we want to target about a 25% payout over the cycle. We're a little bit shy of that right now, but we're targeting -- we want to basically get caught up and hit about 25% over the cycle on dividend payouts. We don't want to do anything to disturb that 55-year record of dividend increases year-on-year. So, hopefully, that gives you a little overview as to where our priorities are as far as cash deployment.

Right, but I guess you've done $1 billion of buyback. And that's been maybe a little more of the bias in absence of acquisitions. What I'm hearing is maybe we're a little more focused on M&A.

Well, we have been -- Jeff, we have been focused on M&A. It's just a matter of timing as to what might come through. We did about 80-some-million-dollars in this last period, a small one in Korea. We made an acquisition -- we purchased out a joint venture, half of a joint venture that we had going on in China. So we invested about $80 million, $90 million in those two activities.

So it's not that we're not doing anything. We'd like to do more, and we do have some more coming back -- coming through the pipeline. Some are getting close to maybe being announced here, but we have to work through some issues on a couple of these and get the contracts finalized. So hopefully, we can see something coming through the balance of this fiscal. But I can tell you this, that the entire Corporation, all groups, all divisions, are actively looking and actively targeting strategic acquisitions, things that will be synergistic; acquisitions that will be synergistic to our current business.

Okay. Any one-time aberrations in the Industrial North America margin, 18.5% this quarter?

Jeff, this is John. Really, we had a really strong North America results. When you look at division by division, region by region, we'll have some upsides and downsides, but nothing that we would normally call out in a call like this. It's just a very, very strong -- very strong results.

So the guidance, which is lower than the 18.5%, reflects a more normal mix and maybe better balance between OE and distribution?

Yes, the mix is a very good term for it here. And as we go through our normal seasonality here, as Pam talked about earlier, in Q2, and we look out at Q3 and Q4, we feel good about the guidance that we gave here. And again, that would be the same pattern that we saw in terms of margins in North American Industrial, as we saw -- as last year progressed.

Yes, Jeff, and I just want to caution you sometimes -- I think if you look historically, you'll see that first quarter sometimes can be very, very strong. Not to be repeated in the second quarter going forward; if you look at the historical numbers, you'll see that.

Right. Right. Thanks, guys.

Terry Darling, Goldman Sachs.

I'm wondering if we might get a little help on the cadence of the International Industrial order trends through the quarter -- ending June up 18. I think I remember commentary that June was pretty stable with May. And I guess I'm wondering, did we go negative or just continuously decelerate through the quarter? Or was August kind of funny and you've seen a rebound back in September?

Thinking about a couple of things here in concert. One is the organic guidance going forward is above where the orders are. And second, we've heard from some of the OEMs in the truck area about some production cuts in Europe in the fourth quarter, yet you're seeing -- your view here is continued solid outlook for Europe. And I'm just trying to put all those pieces together.

Terry, this is Pam speaking. I mean, when you really get down into it and you start looking at the absolute dollars, because the comp sometimes can be a little confusing, you're exactly right. And what you're saying really hits home, because what happened is we did see some rebound throughout the quarter in September. I wouldn't say that International orders as a total are on an incline, but we feel pretty comfortable that they're hanging in there, I think, is the way that Don described it. There's a strong 312; the 1212 is hanging in there, but we did see rebound in September across the International business.

Okay. And how are you thinking about some of these production cut announcements in the context of the outlook on Europe? Is it just a one-off there or too early to tell? Or how should we think about that?

Yes, Terry, Don. Well, those are all in our numbers, okay? All of the activity, all the cuts -- everything is represented in those 312, 1212 numbers that we're talking about. So yes, we're aware of certain segments of the markets over there that are cutting back a little bit. Some of this is typical of what they've done in this last period. Because keep in mind, Europe, when you talk about December in Europe, not a whole lot goes on in Europe in December. So they don't need a whole lot of purchases in December to support the December activity.

So the second quarter for Europe is really soft as well. I don't know if some of these cuts are more typical of what we see every year or this is something above and beyond that, but based on my order trends in the 312s and 1212 in the specific markets that we track, it doesn't look like anything all that unusual to us.

Okay, that's helpful. And then on the uptick in the Aerospace revenue guidance, is that coming on the military side? Is that coming on the commercial side? In OE versus aftermarket? Could we get a little color there?

Terry, I think -- Jon again -- that, really, what you're seeing there is a uptick in the OEM volume. And that's what's really driving that change in those numbers.

Okay. And then just lastly, I think on the North America Industrial margin guidance going forward, you're actually looking for higher incrementals if we focus on the high end of the range. You've spent a lot of time over the last couple of quarters talking about price/cost challenges and labor, some labor issues going back to the FY 4Q, FY 3Q of last year. You talked about the pricing coming through in July and the guidance implies you're feeling better about that. We're seeing some of the commodities come off a little bit, but how would you characterize the view on North America Industrial incrementals accelerating from here?

Well, I think you've hit on it. I think the -- we do feel like the major portion of the headwinds on the price/cost relationship are behind us. We feel like that we're more even keeled going forward. We feel like we should get some accelerating incrementals, which is what you'll see is indicative in our guidance when you get a chance to analyze it, going forward here for Industrial North America. So right now, we're not way ahead from a price/cost, but we're not behind like we were, as we were talking about in Q2 and Q3 of last year.

Okay. Thanks very much.

Jamie Cook, Credit Suisse.

Two questions. One, with regards to the Aerospace margins and the incremental, which were pretty healthy, could you just comment on what drove the healthy incrementals and how we should think about that going forward?

And then my second question is, last quarter, I think you called out $0.13 of restructuring charges that would hit the first half, concentrated in International and CIC. Did I miss -- did we take any in the first quarter? Or -- and is that still -- is the $0.13 still implied in guidance?

Well, first of all, let me try to answer the Aerospace question first, Jamie. The margins in Q1, the increase there that you're seeing is related to the volume that we saw in the mix, that we saw -- that the volume we saw related to the MRO portion, the commercial MRO portion of the business. That commercial MRO portion of the business drove the margins that you're seeing right now.

Now to the question that you asked about, well, what can we expect from that going forward? That tends to be lumpy over time. So we're not seeing a pattern that is going to give us a step function up in that business for the balance of the year, so our guidance takes into account all the different portions of the Aerospace business, be it the OEM and commercial -- the OEM and the MRO as well as the commercial and the military portions of the business.

Now for the restructuring, we really had $0.15 last year and we're now at $0.09 right now, today. And we are continuing to focus most of our restructuring in Europe. We're still planning on that restructuring in Europe. And we've got it baked into our Q3 and Q4 going forward. So I'm hoping that that's answering your question there.

But to be clear, so we had $0.09 in the first quarter, was that -- did that all hit International? And then what --?

No, let me just clarify. What we had last -- last time we spoke about restructuring, we said that we were going to have about $0.15. Okay?

For fiscal year 2012 (multiple speakers) -- in the first half (multiple speakers) --

Yes, and in the first quarter, we had $0.06 projected. Okay? That really came in at about $0.02 for the first quarter. So we didn't do -- so we pushed that into the second, third, and fourth quarters. But overall, quite frankly, Jamie, we think that the restructuring is going to be a little bit down from the $0.15 that we gave you last time.

So how much is that helping you? And why are -- before we were going to take it on the first half, why is it taking longer to implement the restructuring?

Well, it's not that it takes longer. There's several projects going on. And sometimes, you know, you don't know exactly when you're going to get approval for those. You have to go through the work's counsels and those types of things. So we're giving you guidance based on estimates that are initially projected, hoping that it will get through work's counsel. And sometimes it just doesn't get approved timely, so then we have to push it out.

Jamie, this is Don. But I think what Pam is saying is that we're not getting help from this, okay? Extraordinary help. By the time the year is out, we're going to basically burn through about what we said we were going to do here, give or take $0.01 or $0.02. So, I mean, it's not like we're going to be way off the mark.

Okay. And it will be split sort of evenly throughout the nine months, is the way to think about it, is the best guess at this point?

Yes, we do have some pushing into second quarter from first.

So Q2 will be greater? Okay. All right. Great, thanks. I'll get back in queue.

Josh Pokrzywinski, MKM Partners.

Just wanted to dig in a little bit on rest of the world orders. I would imagine with the price increases you put out in January and then the follow-ons in July, that you're probably carrying the better part of 4 points of price year-over-year. Should that be the way we look at it? The 4 points of rest of world growth, that it's mostly price at this point?

No, I would not really draw that conclusion. We're certainly seeing volume increases and our guidance is indicative of volume increases here. I mean, after all, we are still in a GDP expansion growth, as Don indicated earlier, in Asia and most of the economies in Asia, of course. And we're seeing still very healthy growth in some of our key market segments in Europe right now. So, no, I would not say that it's all price.

Okay, but just to make sure I was clear on the earlier comment, that you had 2 points of price on average across the business for the quarter? Or just maybe a better understanding of what price is contributing to orders?

That was the July increase that we're talking about.

Right, that was just the July increase. But when we talk about price increases, we're making generic statements about the price increases that we can take, primarily in the aftermarket and the MRO portion of the business. Of course, there's a big portion of our business, is at the OEM level in our Industrial markets. And the timing for all of those price increases over time is much, much harder to predict and to bake into our guidance. But we have an idea of what we're expecting. We know how our costs are trending. We know what we need to do in order to maintain the margins that we are expecting from ourselves.

And so we set our guidelines from a pricing standpoint that way. But that global pricing increased number can't be taken across the entire pie there, so to speak. Does that help, Josh?

That does help. I appreciate that. And then, just want to focus a bit more -- I know that always the conversation around incrementals and maybe the year-over-year isn't as applicable. Thinking about the jump from the July quarter to September, almost negative incrementals, lower revenue but higher margin here.

What are the big items that we should think about as driving that? And should we be modeling the business sequentially from here? Or continue to do it year-over-year? Because obviously, September 10 to December 10, big downtick, which kind of continued through the rest of the year. Should we be focused on September 11 as the starting point? Or more year-over-year?

You know, Josh, this is Don again. Just to comment on incrementals -- we've always said that the relevant range is in the 20% to 30% range. And of course, we've been higher than 30% when we're coming out of a deep hole, like we did a year to two years ago, coming out of this recession. And digging out, we're going to have very high incrementals. That's trending down to something to what we'd consider more normal. Because as you're growing, of course, you're going to have to add infrastructure; you're going to add some additional overhead and so forth.

That brings our incrementals down in the neighborhood of 20%. And the 20% now is what we did in the first quarter. We forecasted about 16%; all things considered, we did a little bit better, but that's the 16% for the half on an incremental basis.

The only way that I would say is, going forward, you might see worse incremental if our volume shrinks because, of course, we now have that infrastructure in place. And if you've got lower volume on the same infrastructure, your incrementals are going to be lower. That's all baked into our forecast. So as we look at the second quarter -- and we've given you the indication here that, as we do every year on the second quarter -- that the second quarter is not going to be as good as the first, and it won't be as good as the third and the fourth quarter because that's just the way our business runs.

Keep in mind the incrementals will probably be suppressed slightly because of that as well, because the volume is going down. So any time you have a shrinking volume, you're going to get some compression on an incremental. If you've got an expansion going on, you're going to have a much more favorable incremental. So I hope that's helpful to you.

That is helpful. And if I can just sneak in one more here. Any chatter from your customers at all or anything you're doing internally that suggests accelerated depreciation is helping out in North America?

Well, I haven't heard anything. This is Jon. I don't know if Jon has (multiple speakers) --?

No, I would say that, in general, we don't get a lot of that feedback. We've been asking questions. And I don't think it's had a material impact on our demand.

Yes, we necessarily would not hear that, Josh, just where we fit in the food chain and where our business plays out. Not to say that it doesn't have an impact.

No, I understand. That's helpful, though. Thank you very much.

Andy Casey, Wells Fargo Securities.

A couple of clarification and one Aerospace question. Quickly, you gave us the average, but could you give us the end of quarter diluted share count?

Yes, we can give that to you -- [155.4].

Okay. Thank you. And then, in the quarter, you talked about a currency gain in other. Can you walk us through that? And then in the guidance update, did you adjust the currency assumptions?

Yes. What ends up happening there, there is some what I would call intercompany loans. Okay? Just -- there's intercompany loans as well as some structured loans as a result of tax planning. And basically, what falls out in other is just when you're basically taking those loans and putting them back to spot. Okay? Because we use a Parker rate, as you know well, throughout the Company and then we convert to spot. And that's just the spot rate that's showing up there.

So that went from a loss -- it was a loss last year to a gain in this first quarter. We did adjust the second quarter to be in line with the first quarter, leaving the third and fourth quarter pretty similar -- to what we reported last quarter, what we gave you last quarter. Does that make sense?

It does, yes. And then on Aerospace, another look at the margin. Are you now beyond some of the elevated R&D expense that you've been encountering over the last few years? Or is that still built into your expectations?

Well, for the R&D expense, we pretty much hit the number that we were expecting to hit in Q1 for R&D. So the increased margins is not as a result of underspending in R&D. Our guidance includes our R&D, as we had originally envisioned the cost structure giving us here in FY '12. The R&D, though, as a percent of the total sales, is right now estimated to be -- because it has been running about 10, a little over 10. It's now estimated to be in the 9 to 10 range.

Okay. Thank you very much.

Eli Lustgarten, Longbow Securities.

Very nice quarter. Just one clarification -- you gave us 155 for the average share count -- the actual share count. That was the number reported for the quarter. You're saying the average is the same as the actual share count?

The actual share count at the end was about 151.

Okay, because that's the number I think, Andy, we were looking for.

Yes, that was 151. And the 155.4 is the average over those three months.

Yes. A clarification -- I know the second quarter is weaker, but your implied guidance for the second quarter between 143 and 170 with a midpoint of 156 -- that's a much bigger drop-off, given the strength of this -- of the fourth quarter, particularly for OEM equipment going out. Can you -- I understand it's seasonally weaker, but what drives it down that big a drop from the first quarter? I mean, it seemed that it should be -- that the second quarter should be a lot closer to the 191 than the 150's.

Well, there are several things that are in there. Number one, we built some inventory in the first quarter that we think is going to play out in the second quarter. We also have lower revenues in the second quarter. We have some higher R&D expense that's built-in for Aerospace. We also have less maintenance, repair and overhaul, that's going to come through in Aerospace in the second quarter versus the first. And as you well know, we have the holidays and vacations. And CIC is going to be seasonally weak, picking up in the third and fourth quarter.

So you really believe it's going to drop down to the 150, 160's (multiple speakers) range?

Yes, and then also the restructuring that I talked about earlier.

What is the currency assumption for the rest of the year? Should we assume it's neutral?

Currency, as you well know, really flipped on us. We don't try to project what currency is. We take the exchange rate at the end of the year, and we compare it to the exchange rates in the prior year, and that's what we build into the forecast. So it went from a positive of over $200 million to now it's going to be relatively flat for this year. It's positive in the first quarter and then it sequentially gets negative. It plays out throughout the first -- second, third and fourth quarter. It gets more negative as it goes through the year.

And then finally, when you look at the rest of world business, I mean, the one thing we worry about is that the ISM in Europe is now basically saying zero manufacturing growth when we hit [48.5]. Are you factoring in that basically volumes can start going down in Europe as you go through the rest -- until next year, calendar year? I mean, that's what all the indicators are saying that we're going to flatten out Europe manufacturing.

Well, I think, Eli, if you look at those numbers, I think 48.5 or 49, whatever the number is, it doesn't necessarily mean that manufacturing is going to zero. I think there is a relevant range around 50 that still would indicate growth there, just much slower growth. And that certainly would capture the 49.

We don't anticipate, based on our order trends, and I don't think that that's going to hold up in the -- for the second half. I don't think those kind of rates are going to hold up. I think what we're seeing from the 312 and 1212 that it's going to be more positive than that. But again, time will tell. But again, we're looking at hard orders here that we can see at least out into the second half. And from our major countries, Germany being the strongest, and then the other ones that I mentioned earlier, I think we feel pretty confident that Europe is going to continue to grow. And they'll get this issue with Greece behind them, hopefully, in the next six months or so.

I mean, because all the indications, if I accept that, you have to be in the upper part of your range, based on the comments you're making right now. If nothing changes, that's sort of what you're indicating at this point. Is that fair?

I wouldn't say that's fair. I mean, we give a range, obviously, because I don't think anybody can be that precise, Eli. But as you well know, we kind of feel comfortable with the midpoint of our range and we wrap a range around that. And the range is wrapped around there because, obviously, in any forecast, there are risks. There are things that can happen to the downside and there are things that can happen to the upside. And that's for you to determine just as well as we can. So really, when we're looking at it, we're looking more at the midpoint of the range.

Great. Thank you very much.

Okay. At this time, we'll take one more question.

Henry Kirn, UBS.

Thanks for getting me in there. On the Asian investment, is it possible to talk a little bit about the time and costs, and the time to see the benefits from the investments?

Well, the time to see it -- we have the infrastructure -- well, we have infrastructure going in last year that we're already seeing benefits from. We've got additional, as I mentioned, probably eight or 10 facilities going in. Some of those facilities are to localize certain products that we were currently importing.

We think that we're going to get to about a $3 billion region by 2014 from maybe what we're going to do -- maybe $2 billion this year, if we hit our numbers to $3 billion in a couple of years. So we're building that infrastructure. Again, it's about 10 facilities. That would include -- primarily the facilities would be in China and in India. Okay. The expansion that we've got going on in new facilities in India and in China. So you're going to see the benefit over the next two years here as we build this business up to $3 billion for us.

And then with that, are you looking to displace the locals in the market? Or is it more market share, or market growth on the whole?

Yes, it's a combination of both. I think the fact that we're bringing in quality products that the local manufacturers are demanding and the customers are starting to demand. And if you're going to export any of that product that they're making there, they're going to have to have the quality of products that we had manufactured. So we're going to be penetrating market there. We're going to be displacing some locals, maybe acquiring some locals along the way, if that's appropriate for us -- really, a combination of all of the above.

Thank you very much. Congratulations on a good quarter.

Thanks a lot.

Thank you, Henry. At this time, I'd like to turn the call over to Don who has just a few closing comments. And as I won't have a chance afterwards, I would just like to thank all of you for participating on the call today. Thank you. Here's Don.

Yes, Pam, thanks. And just once again, I want to thank everyone on the call for joining us this morning. I think we had a pretty good dialogue and discussion about where we are today, and what's going to happen the balance of this fiscal year at least. And so, hopefully, we can continue on the path that we're going down and achieve some more records for the Company.

I also want to once again thank the employees for their continued commitment to serve our customers. It's been a challenge for us, as you're digging out of a deep hole, and with the cutbacks that we had, to be able to be respond. And I think we have done a great job responding. And it's through the hard work and effort of those employees that we're able to deliver the record performance that we have now.

And this is, by the way, the fourth quarter now. I know many of those -- our analysts, obviously, know this -- this is the fourth quarter of back-to-back record performance. And I know four quarters ago, they were thinking some of the write-ups were saying that, well, this is it; this is the peak. Well, the peak hasn't peaked yet. So we're pretty excited about the fact that we've had four quarters. We're going to go for, hopefully, four more here.

And then many of you have been around 10 years tracking us; some have not. But this is the 10th year now, if you can believe it or not, of when we launched the wind strategy 10 years ago. And we're confident that we can continue to build on the record results we have here today, as we continue to focus on the wind strategy going forward. So pretty excited about that. A lot of good things to talk about. A lot of good activity going on in the Company in a broad base of different markets and areas for us.

So, once again, I want to thank you for your participation, all the folks that are on the call, and for the questions and review of our business conditions. And if you have any other questions for Pam or for any of us, Pam will be available the rest of the day. So I want to just end with that and say goodbye, and have a great day. Thank you.