派克漢尼汾 (PH) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Parker Hannifin Corporation earnings conference call. My name is Lisa and I'll be your operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Lisa, and good morning everyone. It's Pam speaking, just as Lisa just said. I would like to welcome you to Parker Hannifin's third-quarter fiscal year 2012 earnings release teleconference. Joining me today is Chairman, Chief Executive Officer and President, Don Washkewicz, and Executive Vice President and Chief Financial officer, Jon Marten.

For those of you who do wish to do so, you may follow today's presentation with the PowerPoint slides that have been presented on Parker's website at www.phstock.com.

For those of you not online, the slides will remain posted on the Company's investor information website one year after today's call. At this time, I would ask that you reference slide number 2 in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements. And, again, if you haven't already done so, please take note of this statement in its entirety.

Slide number 3; this slide is required. It indicates that, in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers and are posted on Parker's website.

To cover the agenda for today on slide number 4, the call will be in four parts. First, Don Washkewicz, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the third quarter, concluding with a revised 2012 guidance. The third part of the call will consist of our standard Q&A 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 5, titled third-quarter fiscal year 2012 highlights.

Thanks, Pam, and welcome to everyone on the call. To start the call I'll just take a few moments to point out some of the highlights for the quarter. This was a -- obviously, a very, very strong quarter for Parker. We're really excited about it. We delivered a number of records. And I'll touch on some of those records here as we go forward. And we did exceed our guidance that was given last quarter, so we're pretty excited about the results for the quarter.

Sales were a third-quarter record, while net income and diluted earnings per share were all-time records for any quarter in Parker's history. So, pretty remarkable performance there. Although it did have some benefits on the tax side from some prior year tax filings, our results this quarter definitely reflected strong operating performance in our Industrial North America segment. I'll share some of those margins with you in a few moments.

Internationally, our results this quarter did slightly exceed our expectations for soft market conditions in Europe and Asia. International markets appear to have somewhat stabilized. You may recall that, when we started the fiscal year, our projections were that were the first half was going to be strong and the second half was going to be somewhat weak. And it's exactly how this is rolling out; exactly the way we see it. Now we predicted these markets would be soft in our second half, and they were soft. And we expect them to be soft throughout our last quarter here, pretty much in line with our original forecast that was given at the beginning of the fiscal year.

Substantially, all of our sales growth in the quarter was organic at 5.8%. Currency -- currency, rather, impacts this by 1.3% negative. And acquisitions were very minimal, at 0.2%. So you can see, most of the growth was organic and the dominant -- the majority of that came from North America and also Aerospace.

Looking on the order side -- orders increased 2%. We did report that against tough comps, while quarter-ending backlog was up 5% compared with quarter-end backlog a year ago. So our backlog has never been stronger as well. Total Company segment operating margins were a third-quarter record, at 15.1%. Again, you can remember where this was our target. We've been trying to get to that 15% and finished the year strong at 15%; it looks like we're it heading down that path, and to have another record year from segment operating margins.

And, of course, that was driven primarily by, as I indicated earlier, Industrial North America margins, and those were 17.3%. We've never achieved that before. So hopefully there's more to come, as we look forward on building on that record, as well.

Year to date, our operating cash flow remained strong at 10.3% of sales, and exceeded $1 billion. For the quarter, operating cash was $443 million or 13.1% of sales. And I might add that this is the highest amount of operating cash in any quarter since fiscal 2008. So, really doing a very good job in spite of the fact that some of the regions around the world are soft. The Company still performs very, very strong.

Our usage for cash will be to continue our dividend increase record and make accretive acquisitions similar to what we have done recently, and opportunistically repurchase Parker shares. Our Board recently authorized us to repurchase up to 16 million additional shares during the remainder of this fiscal year.

Today we announced another 5% increase in our dividend, as we now enter our 56th consecutive fiscal year of increased annual dividend payouts. And, currently, Parker's yield is approximately 2%. And there's only four or five companies that can match that record.

We are also successful, as you have seen, in acquiring Snap-tite's Corporation and strategic high pressure connector and valve acquisition. And also we announced today an agreement to purchase the Olaer Group, based in England. So some of the acquisitions that we referenced going back earlier in the year that we are working on; you can see that a couple of those -- are actually have come through the pipeline, so we're pretty excited about being able to accomplish that.

Combined, these two acquisitions I just mentioned, at approximately $300 million in annual sales -- and that would make the total for the year so far about $341 million in annual revenues added due to acquisitions. Again, these are coming later in our year, so that's going to be accretive to next year's forecast as we go on and review that with you, going forward.

Due to the fact that we outperformed relative to guidance in the third quarter, we have now increased our earnings range for the full fiscal year. We now expect that fiscal 2012 earnings will be in the range of $7.30 to $7.50 per diluted share. At the midpoint, that represents a 4% increase from our previous guidance, and it also anticipates an all-time record year for the Company.

We'll be giving guidance for our next fiscal year in early August, after we finish this fiscal year. And that's when we'll be reporting our fourth-quarter results and full-year earnings. Our early projections reflect another year of growth in FY13. We've completed a lot of reviews here at corporate with our groups. And so far, it looks positive for next year, as far as additional growth going forward.

So we're going to be more specific on that when we get on our fourth quarter call in August.

So with that, I'll turn it back, then, over to Pam. And she'll give you a little bit more detail.

Thanks, Don. At this time, I'd ask that you reference slide number 6, and I'll begin by addressing earnings per share. Fully diluted earnings per share for the third quarter came in at $2.01. And this is an increase of $0.33 or 20% versus the $1.68 from the same quarter a year ago. The $0.33 increase in earnings per share for the third quarter year-over-year from $1.68 to $2.01 is comprised of the following -- one segment operating income added $0.13, largely due to higher volume Industrial North America; a lower tax rate, due to a favorable resolution of prior year's tax filings impacted EPS by $0.13; and noncontrolling interest favorably impacted EPS by just $0.01. And, as a result of shares repurchased, the lower share count had a favorable EPS impact of $0.14.

Higher expenses below segment operating income impacted EPS by $0.08, and I'll talk about this in just a moment. Sales were higher in Industrial North America and Aerospace, while Climate and Industrial Controls group and International sales were down slightly. International is down less than 1%, and this is in spite of the sovereign debt issues and slowing economies in Europe and Asia. Climate and Industrial Controls sales are down, due to issues that we have consistently spoken about in previous calls. But income is actually higher than last year.

North America generated increased operating income year-over-year, and International and Aerospace were slightly lower. International is down as a result of the slower economy in Europe; continued investment in Asia and the impact of currency, mainly the euro, as it weakened against the dollar. The segment did better than projected, however, due to a more favorable impact on currency and less restructuring than anticipated, of course, aided by the higher volume.

Expenses below segment operating income -- as we said, I would speak to this -- were impacted by higher other expenses of $25 million, and that's mainly due to favorable adjustments last year for insurance settlements, and higher currency interest expense this year. The lower tax rates --again, as we said -- was due to the favorable resolution of prior year's tax filings. And the lower share count, obviously, is a result of the shares that we repurchased last year and this year.

So now moving to slide number 8 -- looking at the top line, revenues for the quarter increased 5% to $3.4 billion from $3.2 billion last year. This 5% increase in revenue is in spite of the slight decrease in International as a result of slowing economies in Asia and Europe; and Climate and Industrial Controls, where the residential construction market remains soft. Climate and Industrial Controls, however, generated more income on less sales.

There was minimal impact from acquisitions in the quarter. Currency reduced sales by 1%, so quarter sales growth was 6%. Segment operating margins for the quarter increased 30 basis points, from 14.8% to 15.1%, an all-time third-quarter record for the Company.

So now, moving to slide number 9, and focusing on segments -- and I'll commence with North America. North American reported revenues increased 12% for the quarter. Acquisitions and currency had little impact, as such quarter revenues increased 12% as well. Operating income increased from $189 million to $227 million, a 20% increase for the quarter year over year. Operating margins, a record third-quarter increase to 17.3% from 16.1% last year.

So now moving to slide 10, and continuing with the Industrial segment, moving to International -- organic revenues in that segment increased 2%. However, currency reduced revenues by 3%. Acquisitions had minimal impact in the quarter. So total revenues for the quarter decreased 1%. And again, a decrease of 1%, very good in light of what's happening in the macro economy. For the quarter, segment operating income decreased to $195 million from $200 million. And operating margins decreased to 15.2% from 15.5%, and again due to the softening economies in Europe and Asia.

So moving to slide number 11 now, I'm focusing on the Aerospace segment. They reported increased revenues of 8%. Acquisitions and currency had no impact. And margins decreased for the quarter, 160 basis points for the quarter, to 12.1% from 13.7% last year. And, again, this is due to the higher research and development expenses being incurred this year that we have spoken about on previous calls. On a year-to-date basis, Aerospace margins are 70 basis points ahead of last year, with segment operating income $28 million ahead.

So moving to slide number 12, the Climate and Industrial Controls group -- for the third quarter, year-over-year total reported revenues decreased 6% for the year. Again, slow markets, some of the slow markets that they're seeing that we've talked about previous calls. There was no acquisition impact for the quarter, and currency decreased revenues by 1%. So, therefore, organic revenues decreased 5%. Segment operating margins, however, as a percent of sales, are going up -- 9.3% for the quarter versus 8.5% last year. And this is due to the continued restructuring efforts that we've spoken about, again, on previous calls.

So moving to slide number 13, and referencing orders for the quarter, slide number 13 details orders by segment. And just as a reminder, this numbers represent a trailing three-month average, and are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions and currencies, except for Aerospace. Aerospace is reported using a 12-month rolling average.

So as you can see from the slide, orders are up 2% for the March quarter just ended. North American orders increased 7%. Industrial International orders decreased 1%. Aerospace orders increased 4%, and this is up from last quarter. And Climate and Industrial Controls orders decreased 6%, again, due to weakness in some of their markets.

So moving to the balance sheet on slide 14, Parker's balance sheet remains solid. Cash on the balance sheet at year-end (See Press Release) was over $773 million. Days sales and inventories decreased from to 57 days from 63 last quarter, so we're very happy with that performance. Accounts receivable, in terms of DSL, closed at 50 days versus 49 last year. And then, weighted average days payable outstanding increased to 54 days versus 51 last year. So we're happy with that progress as well.

Moving to slide number 15, addressing cash flow from operations -- for the quarter, it was $443 million at 13.1% of sales; so very, very good cash flow for the quarter. The major components of the uses of that $443 million in the quarter we return to shareholders via a share repurchase and dividend payments, $80 million. $88 million was used in connection with acquisitions, as we close the Camfil Farr and TAIYO acquisitions in the quarter. $57 million utilized for capital expenditure purchases and then in addition to all of these, uses of cash -- cash increased another $67 million in the quarter, largely due to commercial paper proceeds within the quarter. However, that was paid by the end of the quarter; so, in total cash, increase $285 million quarter to quarter.

On slide 16, you can see that the debt to total cash ratio is 24.3%, and on a net basis, 15.4%. Obviously, in very good standing and providing the capability to grow the Company moving forward.

So getting to the revised guidance for fiscal year 2012 -- this is shown on slide 17 through 19. On slide 17, the guidance for revenues and operating margin by segment has been provided. I'm not go going to go through each one of those numbers. Moving to slide 18 -- guidance has been provided at the midpoint, and then total sub-items below segment operating income.

Again, you can see the numbers, moving to slide 19; it summarizes the guidance on diluted earnings per share basis. And, as you can see, the revised guidance for fiscal year 2012 is projected to be $7.30 to $7.50, just as Don has already said.

So, please remember that the revised guidance excludes any acquisitions that will be made in the fourth quarter. And to summarize the revised guidance assumptions for you, revenues increased 6.7% at the midpoint. Segment operating margins are in the range of 15.1% to 15.3% for the year. And expenses below segment operating income -- which includes corporate, administration, interest and other -- at the midpoint, are projected to be approximately $429 million. And we put a [beta] around that of plus or minus 0.7%.

The projected full-year tax is 26.5%, full-year tax rate. And just a couple points with respect to guidance. Sales first half, second half are divided 48%, 52%. Earnings per share first half, second half, are divided 47%, 53%. Realignment costs are minimal, and projected to be 6% for the quarter. $0.04 has already been incurred, and the remaining projected expenses will take place in the fourth quarter.

At this time, we'll commence with the standard Q&A session. But as a reminder, before we do that, we would like to keep this call to an hour. So please honor the request of one question at a time, and one follow-up only when clarification is needed. By adhering to this courtesy, everyone will have a chance to participate.

So, Lisa, at this time would you please open the call to begin the question-and-answer session?

(Operator Instructions). Jamie Cook, Credit Suisse.

Hi this is Andrew Buscaglia from -- in place of Jamie Cook. Just had a quick question on -- can you guys give any updated thoughts on the pace of your recovery that you're seeing in Asia and, actually, Europe? Just a little bit more color there would be great.

Okay, thank you. Nice to have you on the call. Jamie's probably on another call, as I understand.

Yes, we got a few going on.

Yes, okay.

Well, okay, this is Jon. And just to begin, I think as Don indicated earlier, where we stand in Asia is right where we thought we were going to at the beginning of this year. Don talk about how our revenues internationally, industrial, are stabilizing. That holds true for Asia as well as for Europe for us. When you really look into the guidance by segment, you'll see that we're basically sequentially up slightly from Q3 to Q4 in our comps versus last year -- are very tough comps, and still showing really good results.

So, as Don indicated, we're going to be looking at the trends for Asia -- China specifically, but Asia in total, as well as Europe all together deeply during our Q4. And we'll be updating our guidance from July 1 to June 30 of calendar year '13 here at the beginning of August. But I think the key word for us right now is that our international sales book in Europe -- given the issues there, as well as in China, given the issues there -- have stabilized, and that's what's included in our guidance here for Q4.

Okay, thanks. And then actually just on this -- I saw this acquisition this morning on Olaer. It looks like it -- actually this company is pretty sizable with $200 million in revenue. There's not a whole lot disclosed in the press release. Can you guys talk to that a little bit more, in terms of what you're expecting for accretion and how much you paid for it? Or can you give any more detail --

Well, yes, I appreciate the question; I think, two key points on that deal. We announced an agreement to acquire that company. So we expect, and we're hoping, that that deal closes on July 2. So that will be impacting our FY 13. And at this stage of our transaction, we would not be disclosing that level of detail. We have some work to do. And we want to make sure we get our real good work done with the sellers, as well as all the employees of Olaer in Q4, and get this final agreement done by July 2. So that's our plan.

All right, thanks guys. I'll step back in the queue.

Robert McCarthy, Robert W. Baird & Co.

Good morning guys, this is Mig Dobre for Rob McCarthy.

A quick clarification question when looking at your guidance. If we're taking the midpoint of the updated guidance, $7.40, and I'm adjusting for the $0.13 tax benefit, then I guess according to my math, I'm looking at fourth-quarter guidance of about $1.80. Which -- when I'm looking at performance in the third quarter, again adjusted for the tax benefit of $1.88 at the midpoint, would suggest a step down in EPS from the third to the fourth quarter. And that's something, traditionally speaking, we haven't seen. Generally --

That is -- I don't know what's going on here, but this is Pam speaking. And I have the guidance sitting before me, by quarter. And while third quarter is a little bit below the third quarter -- not to the degree that your mentioning. But one thing to remember is that in the fourth quarter we are not baking in the impact of the third quarter tax benefit. So really the fourth quarter is stronger than the third quarter, once you back out that tax benefit.

Right, I thought I was doing that, but perhaps I got my math wrong. The point is, we should be seeing, really, a step up in operating results in the fourth quarter --

Yes, and we do. At the midpoint you're seeing well in -- well over $10 million, and it's higher than that, in terms of the increase. So you are seeing a substantial increase from third quarter to fourth quarter. And I throw out that number because I know that you guys are smart enough, and are going to be able to back into it anyway.

Well, hopefully. And then my follow-up is still on the International side. And some of the commentary there positive, and we appreciate that; a little bit different than what we heard from [Eaton]. So I guess I'm wondering, what is it that you guys are seeing in Europe versus Asia? Is there a difference in the way these markets are performing, and perhaps mobile versus six exposure as well?

Well I think that -- this is Jon again -- I think that in Europe, we're seeing a broad-based stabilization in all end markets and all of our businesses in Europe. So we feel very confident in our forecast here for Q4 and for the balance of the year. Now, in Asia, although yes, we are very well aware of the mobile hydraulics issues in Asia and in China specifically, we have gone through in detail all of our end markets, and all of our raw product lines there. And we are seeing a real stabilization of our revenues that are coming from that region. So yes, mobile hydraulics is down slightly, not a big number. Nothing really that that concerns us. And we are really happy with the way that our Asian business and our revenues from Asia have materialized here for us, as we really look at Q4. And, like I say, I think to give you a broader perspective long-term, we'll have to give you a really more detailed update in August for that.

Yes, and Rick -- this is Don. I don't know -- you're mentioning other companies so I'm not sure exactly what they're saying. I'm not watching their reports. But we are putting a lot of infrastructure into Asia. We are penetrating market in Asia. We're going to continue that along those lines. Our breadth of product line is -- doesn't even compare to the other people that we're talking about here. We have a broad range of products, whether it goes from ceiling or filtration, pretty much across the board. So I don't think you can do a -- there's no apples-to-apples comparison when you're talking about the two companies.

Thank you.

Alex Blanton, Clear Harbor Asset Management.

Pam, could you show a little more details on the balance sheet ratios? Specifically the ones that really measure your progress on getting leaner? I'm talking about inventory to sales ratio for the quarter and how that compares to the past; working capital sales ratio; and CapEx to sales. And what you expect us for the year in the CapEx, because those things have been dropping, and they're generating cash for you.

Yes, Alex, you bring up a good point. And I think if you look back, that's one of the strengths of Parker Hannifin, really, the way that they're able to manage their working capital, whether it be in an up cycle or a down cycle. When you look at our DSO versus our peer companies, we all us always are at the very top of that list in managing our receivables. So we are very proud of where we come out with regard to that. And I don't take credit for that. There are lot of people around the world who work every day to make sure that that is taken care of. So we have people out in all of those divisions working very hard every day making sure that we are collecting those receivables and that we don't have the kind of risk that you sometimes see out there.

In terms of inventory, we are trying to get that down. We've been talking about that. In fact, we've set an all-time record this quarter -- inventory as a percent of sales is 10.9%. And it's the first time it's ever been that low. And, obviously, we're smart enough to know that numbers play a little bit of part in -- you know, play a part in that. But again, all of our divisions around the world, working very hard to get that inventory. We said we want to be 10% of sales. And at 10.9% we're getting pretty close to that number. So we're working very hard on that as well. And we still have work to do, but happy with the results thus far.

And then of course, we have a gentleman here who works on the payable side, who is very good at seeing results there. We don't quite do as well as we would like to do there, but we've made great progress. You can see the (inaudible), that three-day improvement that I mentioned in my script remarks. So we are making progress there as well. So we're very happy with what we're seeing, but working hard every day to even make it better.

Yes, the numbers on CapEx?

Yes, Alex, the CapEx was the other number. We are running around 1.6% right now of sales. I think that over the longer run, we're not going to see that be 1.6%. But I've been quite amazed myself at how efficient we've been able to get as a result of rolling out lean and really driving that, and some of these self-directed work team effort going on in the Company and so forth. It's really gratifying to see these kind of CapEx numbers. And that just frees up cash to do other things, which you're starting to see here, that we're looking at. Yes, it's a good number.

Thank you.

Ann Duignan, JPMorgan Securities.

Good morning, this is Ingrid Aja standing in for Ann. We've touched on this a little bit, but I'm wondering if we could talk about the Climate and Industrial Controls. It continues to disappoint versus our expectations. And with orders down 6% in the quarter, I was wondering if you could just talk a little bit more about the fundamentals in that business, and where specifically the weakness is.

Well, the key there -- this is Don -- the housing starts is a key part of that group, that's tied prettied directly pretty much to housing starts. There's truck activity in there as well and some industrial valve activity. But the primary -- primarily the refrigeration, air conditioning parts tied, to a great extent, to the housing market. And we know that's what the situation is there.

I will make a note that in March, and we don't see the number in March, but in March that group hit double-digit ROS numbers; operating ROS. So it is improving as we go forward. Some of the restructuring that was done last year is starting to come through. So, like I said, you're not going to see that number, but that's what it was.

The -- there was less revenues and there was more income. So, yes, the revenues were down but that income was higher. So I think we're seeing the benefits a lot of the restructuring that has gone on in that group. So until such time as the housing market really starts to rebound, I think we're probably bouncing off the bottom there. And when we start getting some uplift, I think this group will start coming back and showing some nicer numbers, based on a lot of the work that they've done as far as restructuring over the past 6 to 9 months.

Okay, that's helpful. So it's basically offsetting any positive that are seeing on the truck-auto kind of aside.

Yes.

Okay. And then, I was just wondering if we could talk a little about acquisitions. Your pace of acquisitions has picked up in recent months. So if you could talk a little bit about what you're pipeline is like, and what you expect to see. Can we continue to expect to see this kind of activity level?

Well we have, as we had indicated for the past last year or two, we've -- some of the ones that we're talking about today, we've been -- well, actually, one of them I can tell you -- I've been looking at for 35 years. So you never can predict when you're going to get something through the pipeline. So that's gratifying to see where we are at.

And there's more in the pipeline. We're working on more. We're looking at more. And we anticipate more coming through. It's hard to predict when, because you never know what you run into as you're going through negotiations. But we haven't stopped. We've got a lot of dry powder, so to speak, cash and cash capacity; that capacity, then we can utilize to make more acquisitions. And we intend to do that.

I think just that the ones we've done of late would add about 3% of sales roughly next year, just themselves. So I think you can see how we're building some backlog here for another good year in the coming year. But we don't anticipate stopping here. We want to continue to build on what we've started to get through the pipeline.

That's great color, thank you.

Terry Darling, Goldman Sachs.

Thanks. Hey Don, just want to clarify on the re-up on the buyback. I think the way you said it, one could have interpreted it to mean that you're looking to execute 16 million share buyback by the end of fiscal '12. Can you just clarify?

Yes, we have authority, renewed authority, from our Board to buy up to 16 million shares in this fourth quarter. And that -- we could buy zero or we could buy 16 million or anything in between. So that's strictly just for the fourth quarter. We have renewed authority for next year, but that's all separate than what we're talking about now. This specifically has to do with the fourth quarter. And with this stock, the way it's been languishing at the levels it's been -- which has not been where we think it should be -- we'll take some prudent action here.

We're looking at our models. We used a discounted cash flow model. We have a grid that we establish. And we're kind of getting in the red zone, okay? If I can put it in those terms, as to when we just don't want to see this drop any further. Yes, so we have that capacity and we'll utilize it wisely and opportunistically.

Okay. And I just wondered if that has implications for the pace of acquisitions.

No, actually we have -- this would give us the ability at $80 a share, assuming it's at $80, to acquire about 1.2 billion or somewhere thereabouts in shares. We have about -- with our debt capacity right now, we have another about 1.2 billion capacity. And that's not counting any additional earnings going forward that we've been generating record cash flows going -- you know, over the past year, you look at our record cash flows, we're going to have plenty of cash to do the dividends, the share repurchase and any acquisitions that we want to going forward. I feel pretty comfortable with all that.

Okay. And then, Jon,, I'm wondering if you could add a little more detail to do organic growth picture on the International Industrial site. Orders in March down one, three months trailing average. I'm wondering if you can help us with January, February, March progression. I wonder if you could clarify -- it looks to me, unless I'm missing something on acquisitions and FX -- that the implied organic range for 4Q, was 0 to minus 3.

And then, wondering also if you can just talk -- you should be coming out on some really easy comps in some of the international end markets like semiconductor and such. I just think that to the back half of calendar '12, how much visibility you have on acceleration, just on easy comps alone.

This is Don. I just have a couple quick comments and I'll let Jon follow-up from there. Europe, for the year, I'm going to touch on Europe and I'll touch on Asia just separately. But Europe, for the year, is going to be up about 5%. Remember what we said earlier, that the second half, which our second half for third and fourth quarter was going to weaker. Actually, it was down on a year-to-year basis, third-quarter, about 1% in Europe, so what you're saying is true. There's been some degradation. But we anticipated that. For the quarter -- fourth quarter, we're looking at down another 1%, which is on target from what we had predicted. And that's from last year's fourth quarter. So that's about a 1% down from last year's fourth quarter, which was a pretty strong quarter.

If you look at Asia, we're going to end up, for the year, about 2.5% up for the full year. The third quarter was up about 1% over last year's third quarter. Again, if you look at Europe and Asia, they are kind of all offsetting in that respect. Europe was down about 1% third quarter over third quarter; Asia is up about 1% third quarter over third quarter. So you get kind of a flat, stable kind of an outlook. We're looking at Asia about down 2% in the fourth quarter, which is a strong quarter last year; 2% quarter over quarter in Asia in total.

So when we look at all of this together -- and keep in mind that Latin America's coming back -- that's a smaller region for us, but Latin America's starting to show some life off the bottom. We're looking at kind of a stable outlook, flattish kind of outlook going forward. And I hope that helps. And, Jon, you can add anything that you might want to add, too.

No, I would say that covers it perfectly. Terry, anything further on that?

Yes, just to be clear, Jon -- that's all-in, including FX effect? Or that's just organic? And on the -- just on your fourth Q commentary.

That's organic.

That's organic.

Okay. Very helpful, very helpful, thank you.

David Raso, ISI Group.

So if you look at the full-year guidance for 2012, basically you're saying the full-year revenue is up 6.6%, with an incremental of 20.8%. So, just trying to peek a bit into next year. Going into the past year, you had a lot stronger order growth, right? Up 24%, up 15%, the last two quarters of last year. This year, obviously a little slower, plus two and whatever fourth quarter gives us.

But you have more acquisitions going into fiscal 2013 than you had in 2012. So trying to think through the incremental margins, how you're thinking about it, just framework, going into next year, based off -- how you -- this year is playing out -- the 6.6% revenues, 20.8% incrementals. How should we think about, a., maybe the margins of what you recently acquired? Because that's obviously going to have a how we should think about incrementals into next year; and, structurally, any of the things that you've done to the Company this year to still allow that kind of incremental next year.

Because, again, just thinking about the revenue going into 2012 was more organic sales growth. At the moment, the revenue growth going into 2013 is more acquisitions, which usually provides lower incrementals. Again, if you can help us on just thinking about structuring these incrementals for 2013 versus 2012.

Yes, David. I think the relevant range is still the 20% to 30% incremental returns. That's with acquisitions. I think -- the early numbers that we've looked at here has kind of fallen in that range. We'll give you -- like I said, we're going to give you more detail and better color as we go forward. But I feel comfortable in that range, going forward, with the projections that we're going to be giving you, just from organic as well as the acquisition growth. I think we're going to be doing fine.

We're seeing obviously a pretty strong growth from Aerospace, which is positive. I think we've had a little negative impact of late, because of their higher-than-expected nonrecurring engineering. I think that's going to drip down a little. But that's going to be a little bit more accretive to the MROS going forward. And irrespective of what happens in Europe and Asia, I think as long as they don't implode more than what we anticipate here -- I mean a little softening -- I think we're going to be fine with us those kind of marginals that I'm reflecting here.

That is pretty interesting, though, to think higher incrementals next year than this year, those 13, at least the initial base case, kind of how we are starting the year, is going to be a little more acquired revenue. To your comment earlier about what you've already acquired could give you 3% growth for 2013 already. Can I imply from that the margins of recent acquisitions are -- I guess I have to say north of 20%? Are those acquired revenues that high a margin?

No, I would make those assumptions, no. Keep in mind, too, that we've been shrinking in CIC all year. We anticipate that not going to be continuing forever, either. So there some margin impacts from other areas of the business that you got to take into consideration when you look at the end results for the year.

Not to push on it, but trying to figure -- those incremental margins, if they're lower to than 20% to 30% on the acquired revenues, it obviously implies even bigger than 20% to 30% on the base revenue growth. So clearly there must be some restructuring benefits that (multiple speakers) modified to some degree.

Yes, there are restructuring benefits that we have seen and will continue to see. We're also going to see the continued activity in oil and gas, which has been very good for us, very strong. And again, the others thing that we see building, and continuing to build strong relative to the OEM side of the business is distribution. Distribution is a real strong piece of the puzzle. We anticipate, at least in the early look at next year, looks like that that's going to continue strong as well. That all adds to the higher margins and higher incrementals.

All right, I appreciate it. Thank you.

Eli Lustgarten, Longbow Securities.

You can tell who -- those of us who believe that Parker's a stronger operating company than today.

Thanks for hanging in there with us. Everybody else abandoned ship there.

Come on, you've got a couple of good guys.

I know we got a few good ones on the phone.

Yes, you do. Just one clarification -- when you talk about $350 million of acquisition, that includes the Olaer one today that you announced?

That's correct, yes.

That's right.

I wanted to make sure of that. And can you give us a little bit of color of what's going on in the various segments? You talked about -- all the questions have been on Industrial International. You had a much stronger organic showing in North America than you might have suspected from 8% and 7% order patterns, going on. So something actually stepped up in that business. And you're expecting it to continue, actually, into the fourth quarter. So can you give us some idea of what's happened, to give us a double-digit number, as opposed to the order -- what the order patterns were showing?

Well I think -- Eli, I'll start out. This is Jon. And I guess will perhaps have some points to add. But you know, certainly, in Q3, in the ordering patterns as well as our conversion, we saw excellent progress in our oil and gas end markets. We saw excellent progress in our construction end markets. And we saw excellent progress in distribution overall. And so, those markets really helped drive our results in Q3, and drive results in our Q3 to a greater extent that we thought that they -- that they would be here, as we were looking at Q3 in North America at the end of Q2.

So I think, in a nutshell, I don't want to just say that it's just that, but those would be the top markets, I think, in general. I think that a key takeaway would be that North America results for the quarter on the top line and in the orders is broad-based. It's many, many of the segments that we operate in all across the product lines that we have. And a real testament to some of the diversification efforts that we've been making over the last five years here to really help drive our North American revenues. And we're very, very proud of that. Very excited about that for the future, what that bodes for the future, too.

Yes. And can we also talk a bit about Aerospace? Are we going to see an acceleration of topline growth with all these wins there? I mean, we're still running 7%, 8% plus a little more top line. Are we going to see an acceleration of this -- not so much fourth quarter but in 2013, with better profitability as the R&D comes down? Is that what's in store for us as we look forward?

Will, Eli -- Jon again -- just a couple comments on that. Number one, I don't want to say anything too definitive about FY 13 today, because we really need to study very hard the patterns. But two just high-level points to make -- the commercial OEM business and the commercial aftermarket business in Aerospace are just fantastic. And they're only going to accelerate as time goes on. What we have to balance that out is against what is happening in the defense markets at the OEM level, and in the defense aftermarket MRO level. And that's where the really deep analysis will be made. But I think, long-term, as we were talking about at our investor-day in December, long-term the prospects -- the organic prospects going forward are fantastic. And we're going to have a lot more to say about the mix in Aerospace here at the beginning of August.

All right, thank you.

Jeff Hammond, KeyBanc Capital Markets.

You gave us some good color into the fourth quarter on how you're thinking about Asia and Europe. And, Don, you said early in the call you expect growth into fiscal '13. But as you think directionally, I know you're not prepared to give any guidance, but if you think directionally how do we think about trajectory into fiscal '13 as we think geographically, North America versus Europe versus Asia?

Well, you know -- I'm just going to give you a little bit of color on the order trends as we -- and again, we've done this in the past. We look real closely at our 3/12 pressure curves and '12 curves, and that's a good predictor of what's coming down the road. If you look at Industrial North America, just looking at our 3/12 -- and that's just the last three months from the previous year, and the same three months. And the 12/12 would be the last 12 months order trend over the (technical difficulty)same 12. North America is -- both of those trends are very strong and are well above 100%. We're talking about 108% on the 3/12; 112% on the 12/12; and it's -- so very strong going into next year.

We don't anticipate any major changes there because we already have orders in the pipeline to cover the early part of next fiscal year already. Europe is flattening out at about 100%. A little bit greater than that on the 12/12s, running about 110%, but 3/12s running around 100%. So I can see Europe coming in for a soft landing going into next year, which is kind of what I've been saying here. Asia, likewise, is coming in at around 100%, so we're coming in kind of -- that's why we say those two regions look kind of stable to us right now at the levels that we are looking at here right now.

So it's good growth in North America and kind of a stable (multiple speakers).

Kind of stable outlook internationally, right now. If you look at some of the specific markets, heavy-duty trucks is strong; I think you'd probably track back as well. Construction -- off-highway construction is still strong. Refrigeration, as I indicated earlier, with the CIC group, is one of our weaker segments. That's below 100% on the 3/12 and the 12/12, so that still got a ways to go before you bounce off of the bottom and start seeing some improvement there.

Semiconductor is still weak, according to our pressure curves, at 3/12 and 12/12 are under 100% there. That's what we anticipate and have been forecasting. Process has been -- the process markets have been pretty strong, well above 100%; about 120% and growing on the 3/12; running about 110% on the 12/12. So you can see that that is a very real strong market for us.

And then I mentioned Aerospace before. The Aerospace 3/12 pressure curves to about 125%, so that's going to be very strong for us next year. But keep in mind, the two areas that I think I want you to remember are distribution and Aerospace. I think those two areas -- when you discount the fact that Asia and Europe are going to be whatever they're going to be -- we're going to continue to grow our presence in Asia and put more assets on the ground, which were doing. And we're going to eat into the market share over there but we'll have to see how that develops.

I don't think it's going to get much worse than it is now. We're not anticipating that. But the real big areas for next year -- I think you're going to continue to see a real strong North American development, and then also Aerospace will be another strong segment. So that would be some of my input on the coming year.

And then just a quick one on European restructuring. Can you quantify on what your total restructuring will be in this fiscal year? And how you think about restructuring benefits into fiscal '13 on that basis?

Well, I think that -- this is Jon -- I think our restructuring, all together, is $0.06 for the year. We're going to have $0.02 in Q4. In Europe specifically, there has not been, as compared to the prior year, nearly as much restructuring as we've had in prior years. We feel very good about our cost structure there, and it continues to improve over time. And, really, we've been working with the local councils and the local governments on different programs there that really, frankly, don't require us to do a significant restructuring like we maybe had to four or five years ago.

So we really are very optimistic about being able to further improve our cost structure there over time, and really improve our bottom-line margins as we continue to grow. And synergies from all of our businesses there and our sales companies and the way that we go to market, which is we feel, is very unique and very special about Company.

Great, thanks.

Nathan Jones, Stifel Nicolaus.

Hey guys, this is Richard Hall in for Nathan Jones. So I'm looking at Aerospace margins. Obviously they were fairly weak during the quarter. You mentioned that this is because of the R&D impact -- or primarily because of the R&D impact. So two quick questions here -- is there any way you can quantify what the R&D impact was in the quarter? And then, second, you may have hinted to this earlier, but when we were looking over the next few quarters, should we expect to continue to see a little bit of margin pressure in the R&D? Or is that going to ramp down? Or how should we think about a run rate here?

Well I think it's -- Don talked about in his comments -- this is Jon -- as Don talked about in his comments, R&D is a really tough expense. We expense everything that's incurred in that business, from an R&D standpoint. And it's really tough to get the timing right. And so we really got some expenses into our Q3 that we've been projecting into other quarters.

But really when you think about R&D and Aerospace as a percent of sales, we're still going to be right where we thought that we were going to be at the beginning of the year. Last year, in FY 11, we were above 10% heading towards 11% of sales -- R&D as a percent of sales. This year we will be, FY 12, well below 10% as a percent of sales in R&D. And I -- we anticipate that trend will continue in our out years as time goes on. A more normalized number is in the 7% to 8% range. And so, that's what we've been targeting for ourselves. And as Don alluded to, there's just a timing issue in Q3.

Sure. Okay great, thank you.

Stephen Volkmann, Jeffries.

Hi, good morning, it's me. (multiple speakers)

Hey, there is somebody out there. (laughter)

So, most of my questions have actually been answered. But I'm just wondering on the tone of how we progress through the quarter in CIC. We've seen some of your larger, or who I assume are your customers, talking about things getting a little bit better as we progress through the quarter, and seeing some signs of life in HVAC finally. And I'm just wondering if you might have seen that tone of things through the quarter? Or is it still too early to think about that?

Well -- Steve, this is Pam speaking -- yes, I think what you're referencing, we are seeing. But we're not getting too excited here yet. I think if you look at the very end of the quarter, in the last month and even in the midmonth, you saw some things maybe pick up. But it's just too early to get for us to get to exuberant. But you're right, we are reading the same things that you're reading. And so I did question our Climate and Industrial Controls group about that. And yes, slightly.

I think, Steve, we found the bottom. Hopefully, going forward, were going to start bumping on the upside here, so we -- year-over-year, we're down 6% on revenues. We've got more income than we did last year because of all the restructuring. We're down 6% on revenues. We're lean as we've ever been in that group. And believe me, when we get a little volume we'll be generating some nice MROS numbers. Yes, I think if you hear the rest of the commentary from other companies, I think there's only one way to go from here, is up. I mean, that's the only way to go. So it's just a matter of timing right now.

I guess that's mildly encouraging. So since you brought it up, Don, I'm going to ask the question here. Can it get to the corporate average for the rest of the Company margin? Is mid-teens doable in this business, with reasonable volume? Or is it still going to be a bit lower?

You know, again, that would depend on just a mix of what's going on there. Certainly, we've been in the teens before. We have never been, to the best of my recollection, ever to 15 for any period of time. We might have hit 15.25, I'm not even sure we did that, I think more like 13 or somewhere thereabouts.

But keep in mind, too, that that group has traditionally had a much lower acid intensity to it, and as a result we get to our return on net assets matrix a lot -- and a lot lower ROS. Not to say that we want to give any group of past. We still think that we want all these groups to be at 15- plus. And as a matter of fact, virtually all the other groups have demonstrated 15%-plus kind of performance here, especially as you can see now from this month for this quarter.

So we've got some other things going on in that group that are going to be accretive to us going forward. There is some very significant projects going on in a renovation program, with precision tooling and things like that are higher-margin business. These are innovative type products coming out. And we think that's going to be accretive to that business as well.

So how -- if we're going to be able to hit 15%, the question is -- it's hard to say. I think we're going to certainly be in the teens, and approaching 15%. Like I said, we hit double-digits in the down -- pretty down period of time here this last quarter. And so it's been gradually coming up, and a lot of that that's because of all the restructuring we're doing. So I think we're setting the field for something good going forward in that group.

Great, that's very helpful. And is it sort of order of magnitude, a third of that would be HVAC and the rest would be mobile, or --?

Yes, there's about 15% of that business which is on the industrial side, which is the fluid control. And then there's 35%, which is what we call mobile, which is made up of trucks; refrigeration in trucks; off-highway equipment; auto. And then about 50% of the business is stationary air-conditioning and refrigeration.

50%. Okay, great. Thanks very much.

Jeff Sprague, Vertical Research.

A lot of ground has been covered. Just a couple of little loose ends for me -- on Aero, just to put a finer point on it, Don -- you said higher-than-expected nonrecurring engineering. Is that put to bed? I'm assuming that's a certain business program that maybe can remain nameless on the call. But is that totally behind you? Or is there still some more work to be done there?

That's a good question. I know that it was unusual for this quarter. We -- every now and then, we get a surprise like this. I can't promise you that we won't get another surprise going down the road. It's a timing issue as far as how these costs roll in. And so our hopes are that this is a one-time event, but I can't promise you that we wouldn't, a few quarters down, have a timing situation, where a lot of things hit all in one quarter and we have another event. But the trend ought to be going down.

Yes, Jeff, I think it's -- we do pretty well on an annual basis. But quarter to quarter, you may see some fluctuations. So while you saw them, maybe it was higher in this quarter, it's going to even out for the year. We still think it's going to be less than last year as a percent of sales. We're still intent that goal. That's what we've been communicating, and we still feel pretty comfortable that it will come in at that level.

Right. And just finally, from me -- just pricing in North America, Don. Can you give us a little color on what's going on in pricing dynamics, and maybe contrast that to the cost side of the equation?

Yes, that's a good question. We've had a lot of things going on here, on the raw materials side, that have been going up and down and sideways and what have you. One of the more significant things that happened was on the polymer side. There was an explosion in Europe of one of the nylon 11 -- nylon 12 facilities over there, which put the automotive business companies in a tizzy, because a lot of it's used in fuel lines.

We're not in that part of the business, but we do use nylon 11 and nylon 12 for air brake tubing on trucks and things like that. We did have alternates that we were able to utilize. We had different constructions for some of these products and were able to keep our customers out of trouble. So I think there's going to be a ramp-up, certainly, on pricing on some of the raw materials on the polymer side of the business.

If you look at the metals -- Copper is increasing at a decreasing rate. Aluminum, for the most part, is leveling off now, at least the last numbers that I've seen. Oil was a one-year high in March. Steel had an annual all-time high, I believe it was in February. And nickel is kind of flat for the year, but pretty volatile. It bounces all over the place. So when you talk about pricing, where we are right now is -- as you know, we measure the -- what we call the purchase price index for all our divisions and all of our purchases worldwide, and we aggregate that number for the entire Company.

And then we look at the sale price index, through our pricing teams worldwide, and we aggregate that. The key here is to make sure that the sale price index is high enough to recover any purchase increases in costs that you've incurred, and any other costs, plus the margin. And I can tell you right now, we're running positive there. So we are staying on top of this. And we're recovering these raw material increases as we are incurring them in pricing. And we'll continue to do that.

There are some price increases that are scheduled for the July timeframe. We had some happen in the January timeframe, and that's going to continue. And again, our whole mission here is to make sure that we don't fall behind and jeopardize margins because we are not passing on increases promptly. We've done a really, really good job of this over the last probably six, seven years, since we've launched our strategic pricing initiative here in Company.

Thank you, that's all for me.

Thank you. At this time, I think we're going to end the Q&A session. We're past our hour. I would like to thank all of you for attending. And to those people out there supporting your analysts, I want to give you a special thank you for participating in the call today, and look forward to talking to you later.

But before closing, I just want to turn it over to Don, who just has some comments before we close the call. Thank you.

Yes, thanks Pam. And just a couple last closing comments -- I want to, first of all, thank all of those on the call. I know that there was another meeting. We were not expecting that to happen. Unfortunately, it did happen with another one of our peer companies. So this is going to be tough for people to try to cover both of these meetings.

I think, hopefully, we gave you a little bit of color on what's happening at the Company, and maybe a little glimpse of what we anticipate going into next year. You can see what's happening with the acquisitions and how we're going to be managing the cash here. The dividend increase that we talked about, that's another 5% that we just announced. That's 10% for the year, so we're trying to keep our shareholders that we have happy.

And we've got some capacity here, certainly on the share buyback activity, that we can action as we go forward. I think you have an idea as to what our plans and strategies are going forward.

I'd like to take this opportunity to also, as long as we're on the call, to thank all of our employees worldwide for their continued commitment to serve our customers. They really have done a remarkable job here of late; and for continuing to deliver the strong financial performance that were seen for the Company, setting all-time records. It's really gratifying to see that all of the good work that's been done and the kind of results that we're achieving as a result of that.

We anticipate a strong finish to fiscal '12, as we indicated. We don't see anything bad happening over the next several months. You're certainly -- and we're going to give you the best look at fiscal '13 in August. And we think, again, that's going to be a growth year for us.

So I want to thank you for your participation on the call, and your continued interest in Parker. And then, if there's any additional questions, of course Pam will be around the rest of the day. She'll be happy to take your calls.

So with that, take care and have a great day. Bye-bye.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.