派克漢尼汾 (PH) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-three 2014 Parker Hannifin Corp. earnings conference call. My name is Carolyn and I will be your operator for today. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

And now I would like to turn the call over to Pamela Huggins. Please go ahead.

Thanks, Carolyn. Good morning, everyone. This is Pam Huggins speaking, just as Carolyn said. I would like to welcome you to Parker Hannifin's third-quarter fiscal-year 2014 earnings release teleconference.

Joining me today is Chairman, CEO, and President Don Washkewicz, and Executive Vice President and CFO Jon Marten. 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. For those of you who aren't on the line today, the slides will remain posted on the Company's investor information website one year after today's call.

At this time, reference slide number 2 in the slide deck, which is the Safe Harbor disclosure statement, which addresses forward-looking statements. We ask that you please take note of this statement in its entirety, if you haven't already done so. The slide also indicates, as required, 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 as well.

Slide number 3, moving to the agenda, the agenda today consists of four parts. First, Don Washkewicz, Chairman, CEO and President, will provide highlights for the quarter. Second, I will provide a review including key performance measures for the quarter and concluding with the updated fiscal-year 2014 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 will turn it over to Don and ask that you refer to slide number 4, titled Highlights 3rd Quarter Fiscal Year 2014.

Thank you, Pam, and welcome to everyone on the call. We appreciate your participation this morning.

We delivered a strong quarter operationally that was ahead of expectations, and we are on track with our previously announced restructuring initiatives; and we will talk a little bit more about restructuring a little bit later in the presentation. Restructuring costs were higher than planned, reflecting final agreements with employee works councils, and I believe we talked a little bit about that in the last meeting.

Some highlights for the quarter. Sales increased 3%, adjusting to our previously announced joint venture with GE Aviation, as reported, sales increased 2%. The strongest organic sales growth, of 5%, was in our Diversified Industrial International business.

We are very pleased to see a third consecutive quarter of order growth producing a 7% improvement year-over-year. Our order growth trend is giving us increased confidence in the global economy.

Total segment operating margins were approximately 13%, but close to 15% excluding restructuring expenses. And I think everyone on the call knows that that is our target ROS that we have been shooting for. So excluding the restructuring we have been closer to 15%.

We were particularly pleased to see strong operating margin performance in the Diversified Industrial International businesses, where operating margins were just above 9%; but when you exclude restructuring expenses, that approached 14%. So that is extremely strong for that segment of our business. So we are pretty much hitting on all cylinders right now.

Earnings per diluted share were $1.88 adjusted for $0.28 per diluted share in restructuring expenses in the quarter. As-reported earnings per diluted share were $1.60.

As I said, I will give you a few comments on our restructuring. We have incurred now $0.40 year-to-date. Critical steps were completed in the quarter that allows us to move forward with a range of initiatives.

And I just wanted to take this opportunity to give our global team special thanks in all the countries that were affected by the restructuring for working through these difficult negotiations. They did just a remarkable job and brought us pretty much on target with what we projected we would be able to do for the year.

We are now projecting our total restructuring for the year to be $118 million or $0.55 per diluted share, and that is up from $100 million that we talked about previously. The increase reflects negotiations completed in the third quarter as well as some additional initiatives that we decided to take some action on this year.

So I think that is all good, and I think that is all going to accrue for improvements in the years to come -- in the next year to come, I should say.

Cash flow continues to be strong. Year-to-date, Parker generated operating cash flow of 8.4% of sales, or 9.4% before pension contributions and restructuring. We expect to deliver our 13th consecutive year of cash flow greater than 10% before pension contributions in fiscal 2014.

And so that would make it pretty much every year since we launched our Win Strategy that we have been able to deliver cash flow greater than 10%. So we're pretty proud of that accomplishment as well.

Our first priority for capital allocation will remain increasing the dividend. Next will be to pursue acquisitions to grow our business. We have continued our share repurchase program, having completed roughly $150 million in share repurchases year-to-date.

As we announced last year, we approved our regular quarterly dividend, which will bring our record to 58 consecutive years of increasing our annual dividend. That is not just paying the dividend, but increasing the dividend for 58 consecutive years. And that is still among the top-five dividend increase records in the S&P 500.

And just one other comment on the 10b5-1; we plan to do another $50 million in the fourth quarter. So that would bring us to about $200 million in share repurchases to the 10b5-1 for the fiscal year, and that is pretty much in line with what we have told you before.

We celebrated another milestone last week at the New York Stock Exchange where we celebrated 50 years as a New York Stock Exchange listed company by ringing the closing bell. That was a very nice event that we had.

This past quarter we also announced a clinical trial agreement for our Indego exoskeleton technology, with five of the top 10 rehabilitation centers in the US. We're certainly very excited about this technology and the impact it will have on humanity going forward.

The commercial version of Indego, which enhances many of the unique features of the original design is going to be introduced in May at a tradeshow in Germany. And we think this is really tremendous technology, and it is another foundation that we will be building on going forward that adds another layer of technology to the Company.

Looking ahead to the full year, we are increasing our guidance and have provided adjusted earnings guidance in the range of $6.40 to $6.60 per diluted share for fiscal 2014; and that brings us to about a $6.50 midpoint. Our guidance includes -- by the way, the midpoint was $6.40, so we are bringing it from $6.40 to $6.50.

Our guidance includes $0.55 per diluted share in restructuring expenses, but does not include the gain on our previously announced joint venture, which was $1.68 per diluted share, and the second-quarter asset write-downs of $1.26 per diluted share.

So that's what I wanted to do as far as an open here; and now I am going to turn it back over to Pam and we will get into a little bit more detail for you.

Thanks, Don. Let's reference slide number 5 now, and I will begin by addressing earnings per share for the quarter. On this slide, to the left you can see that adjusted fully diluted earnings per share for the third quarter came in at $1.88 versus $1.69 for the same quarter last year, which is an increase of $0.19 or 11%.

As you recall, last quarter, we planned to have $0.20 in restructuring, and we came in at $0.28 for the quarter. And this compares to restructuring last year of $0.01.

So moving to slide number 6, this chart on slide number 6 lays out the significant components of the walk from the adjusted earnings per share of $1.69 last year for the third quarter to the $1.88 for the third quarter of this year. And as you can see from this slide, the significant items are increased segment operating margin due to North America and International, and lower below-the-line expenses, due mainly to pension expense, partially offset by a higher tax rate due to the expiration of the R&D credit.

So moving to slide number 7 and, on the far right, focusing on the adjusted number here, you can see that sales increased almost 3.5% in the quarter versus the same quarter last year. And as shown in the gold box on the left, currency reduced sales by a little less than 1%.

So adjusted for realignment costs in the quarter, segment operating margins detailed at the bottom of the slide of 14.7% are ahead of last year of 14.1%. Realignment costs in the quarter were $60 million versus realignment costs last year of $2 million.

The higher segment operating income this year at $493 million versus $465 million last year, a 6% improvement. And that is due to higher volume in International; a slight volume increase, product mix, and tight cost control in North America.

So now moving to slide number 8 and focusing on Diversified Industrial North America, focusing on the segments here. For the quarter, North American reported revenues increased to $1.46 billion from $1.43 billion, an increase of almost 2% -- 1.9%. And if you adjust for the unfavorable currency impact, mainly the Canadian currency, organic growth was up almost 2.5%. Adjusted operating income increased to $243 million from $225 million, an 8% increase over the same quarter prior-year; and again, mainly the result of higher volume in the quarter, product mix, and tight cost controls.

So moving to slide number 9, addressing Diversified Industrial International, for the quarter, organic revenues increased 5% and unfavorable currency reduced sales by a little less than 1%. As such, the reported revenue growth for the quarter was 4%. The increased sales in this business were mainly due to higher volume in Europe.

Adjusting for realignment costs, operating margin for the quarter increased to $186 million from $159 million for the same quarter a year ago. Realignment costs were $59 million in the quarter; so of the total $60 million that we had in restructuring in the quarter, $59 million related to International. And last year in International there was $1 million in realignment costs.

Margins increased 150 basis points from 12.2% to 13.7%, and again due to higher volume.

So moving to slide number 10 and addressing Aerospace Systems, revenues adjusted for the previously announced joint venture increased 2%; and the impact of acquisitions and currency on this segment was negligible. Operating margin decreased to $64 million from $80 million versus the same quarter a year ago; and this is really due to the OEM MRO mix in this particular quarter.

So, moving to order rates, slide number 12, it details order changes by segment. These numbers represent a trailing average and are reported as a percentage increase of absolute dollars year-over-year; and they exclude acquisitions, divestitures, and currency.

Diversified Industrial uses a three-month average while Aerospace Systems uses a 12-month average. As you can see from this slide, total orders were positive 7% for the March quarter just ended, representing three quarters of positive numbers.

Diversified Industrial North American orders for the quarter just ended increased 6%. Diversified Industrial International orders increased 5% for the quarter. Europe, Asia Pacific, and Latin America were all positive.

Aerospace Systems orders increased 16% for the quarter.

So now, we will move to the balance sheet. Parker's balance sheet remains strong. Cash on the balance sheet at year-end was slightly over $2 billion, at $2.1 billion, and commercial paper outstanding of $1.1 billion.

DSI, or days sales in inventory, came in at 66 days. This is a six-day improvement sequentially versus the second quarter.

Inventory levels at 11% of sales are improved versus last year, where inventory as a percent of sales was 11.3%. Accounts receivable in terms of DSO closed at 50. That is a one-day increase from last quarter, but that is mainly due to the higher sales at the end of the quarter in March.

Weighted average days payable outstanding at the end of March was 56. And this is fairly consistent with last quarter.

So now, moving to slide 13, cash flow. Adjusted year-to-date cash flow from operations was $907 million or 9.4% of sales. This compares to $944 million last year or 9.9% of sales, adjusting for or adding back the discretionary pension contributions and the cash extended for the restructuring activities. In addition to the cash flow from operations, we have proceeds of more than $200 million from investing activities as well.

So after increasing cash on hand by $315 million, the major uses of cash year-to-date are as follows: $357 million returned to the shareholders via share repurchases of $150 million and dividend payments of $207 million; $254 million utilized in the paydown of commercial paper; and $167 million or 1.7% of sales utilized in connection with capital expenditures.

So now moving to slide number 14 and focusing on guidance, which I know all of you are interested in, the guidance on this slide, it's -- we have the guidance for sales growth, segment operating margins, of course below-the-line items, the tax, shares outstanding, and adjusted earnings per share. Beginning at the top of the page with sales, sales are expected to increase approximately 1.5% at the midpoint for the year. But on an adjusted basis this is 3%, adjusting for the joint venture.

Segment operating margins, they're forecasted at 13.8% at the midpoint. This is slightly ahead of the projection last quarter, which was 13.7%; and this is obviously due to the better performance in the third quarter.

Also included on this slide is the projection for below-the-line items, which you know includes corporate admin, interest, and other. So the forecast is $461 million for the year at the midpoint. This obviously excludes the nonrecurring items such as the joint venture and the asset write-downs that were recorded in the second quarter.

The full-year tax rate now is projected at 34%. This is lower than that projected last quarter and, again, due to the lower tax rate in the third quarter as a result of some discrete items. A 29% tax rate is projected for the fourth quarter; and the number of shares outstanding used in the guidance is 151.7 million.

So for the full year, as Don said, the adjusted earnings per share guidance is $6.40 to $6.60. That is $6.50 at the midpoint.

And this guidance range excludes the joint venture gain of $1.68 and the asset write-offs, $1.26, that were recorded in the second quarter. But the $6.50 does include the projected realignment costs for the year of $0.55.

So just a couple of points with regard to guidance. Sales first-half/second-half are divided 48% in the first half, 52% in the second half. Segment operating income in the first half versus the second half is divided 46% in the first half, 54% in the second half.

Looking at EPS, the first half and the second half, the first half is 44%, second half 56%. And again, this excludes the JV gain and the asset write-off but includes the realignment costs.

So forth-quarter fully diluted earnings per share is projected to be $2.04 at the midpoint.

Realignment costs are projected to be approximately $118 million, up from the $100 million that we referenced last quarter, mainly due to the higher costs incurred in the third quarter. So the gross EPS impact to the year is $0.55 in realignment costs. The third quarter year-to-date gross impact of realignment costs is $0.40.

And we are projecting $0.15 for the fourth quarter. This $0.15 that we are projecting for the fourth quarter is very much in line with what was provided last quarter.

So now, savings are projected at $30 million or $0.15, very much in line -- this is exactly what we said last quarter. However, savings next year increase from the incremental $50 million that we talked about last quarter to $60 million.

So again, please remember that the forecast excludes any further acquisitions or divestitures that may be made in fiscal-year 2014. And for published estimates we ask that you please exclude the joint venture gain and the asset write-downs, but please include the restructuring expenses.

So at this time, we will now commence with the standard Q&A session. And as a reminder, please honor our request, one question at a time, because we want to make sure that everybody gets -- has a chance to ask their question. Thank you.

(Operator Instructions) Joe Ritchie, Goldman Sachs.

Good morning, (technical difficulty)

Hey, Joe, can I ask you a question? Did you guys hear her?

I can't even hear Joe.

Sorry. Jeffrey Hammond has gone -- directing the call. Sorry about that. I'll get Joe back in.

Hi, can you hear me?

Yes, hey, Jeff. A question for you. It's Pam speaking. Were you able to hear us talking?

Yes, yes, I heard the intro remarks and we just had that little pause before the Q&A.

Okay. Thank you so much, because we couldn't tell how much was being cut off there.

Yes. So maybe just to jump in, can you just talk about any weather impact you saw, and if March and April were materially better in North America than January/February?

Okay, Joe. First, Jon here.

It's Jeff.

Oh, Jeff? Okay. Now in terms of weather first, it is really hard for us to quantify the impact. Of course, we are aware of the weather here in the upper Midwest and Northeast; but we are a global Company and it is very hard for us to quantify a number for weather.

So we are conscious of it, but we purposely decided not to call that out because we don't see that as a -- certainly not an important factor for our quarter that we just finished.

Now the other question you had, Jeff -- I'm sorry. Please repeat it.

No, that's fine. Then just margins on Aerospace, I think you tweaked that up in the guidance. They were in the quarter a little bit lighter than I was thinking and imply 15% I think for the fourth quarter.

Can you just talk about the trend there? And then how do we start thinking about some of these nonrecurring and R&D costs going away into 2015?

Right. We are showing right now in our updated guidance that the yearly number for R&D trends below 10% to about 9.6%. In the quarter in our guidance is implied 8.7% R&D as a percent of sales.

And so the trends in Q4 for Aerospace are up in revenues and flattish in actual expenses R&D; but as a percent of sales, trending down for Q4.

Okay, thanks.

Joe Ritchie.

Hi, can you hear me now?

Yes, I can hear you, Joe.

Okay. Good morning, everyone. So the first question I have -- and I did appreciate the color that you gave us on the incremental savings. But I guess one of the things I want to better understand is, how do I think about the margin trajectory for 2015?

I think historically you guys have suggested a 15% number for 2015; but just based on all the incremental initiatives that you are doing, the restructuring that you are doing, that number just seems way too light to me. So perhaps you can comment on that.

Yes, Joe, this is Don Washkewicz. Really, right now, let me just describe the process, the forecasting process. We've got about 150 divisions right now that are working on our fiscal 2015 plan, and that is a global initiative.

So they will roll up in the next month or so to our Group Presidents, our Group levels. And then those Group presentations will be made to the management committee at the Company.

So really at this point it is really premature for us to really give you anything solid. Of course, we are not backing down from what we said before, is that our target is 15%, and we talked a lot about that so we are not backing down from that.

But I can't give you anything more specific until I see what the Groups are coming in with. And then what we will do is we will aggregate all that and come up with -- we will present that to the Board. Once the Board signs off on it, then we will present it to you at the next meeting and give you a real good -- not only give you the numbers but we will give you a lot of insight as to how we arrived at the numbers.

But we are right in the middle of that process, so it would be premature for me to predict anything at this point, other than the fact that we are not backing down from what we told you earlier.

Okay, Don. That's helpful. I guess my follow-up question is on capital allocation. You have talked about the propensity to get out in the market and acquire assets that are available.

Perhaps you can just provide a little bit of color on what you are seeing in the marketplace today. And if things don't materialize, do you have a higher inclination to perhaps more aggressively buy back shares, just given how strong your balance sheet is?

Yes, well, as I said, I am just going to repeat this a little bit, but I have stated this in the past. The first priority, and I mentioned it in my opening comments, is the dividend. And that was -- that has been our first priority and it will continue to be our first.

Just to give you a little color on that, we have increased now 58 years in a row, actually increased the dividend. In the last five years it is 92%, roughly, increase in the dividend.

What we are trying to get to, this is a repeat as well, we are trying to get 30% payout. Last year we finished at 27%; we are at about 28% now; and we are going to gradually move it up and get to the 30% payout level. So that is the dividend.

The second thing is CapEx. The only comment I will make on CapEx, because that is a critical part of our allocation as well, is that we have doubled the size of the Company with a CapEx running around 2% to 2.5%, which I think is unheard of in this day and age. And it is really a tribute to the Lean initiatives and the Win Strategy that we were able to do that. So we are in pretty good shape on CapEx.

You mentioned acquisitions. That is our next priority, would be acquisitions. We have a number of them that we are looking at.

We have got some in the pipeline. We have got some expressions of interest out there. I can't predict anything and I won't predict if we get them to the finish line or not, because you never know until you actually sign the paperwork.

But we are still hopeful that we are going to be able to do something in the way of acquisitions. And if we don't, to your second question, yes, we will be looking at this year, this calendar year, we will be looking at potential share repurchases.

We realize that there is -- we have plenty of capacity. Our first priority is to grow the Company and use that capacity to grow the Company. But if that is not in the near-term cards, we will utilize capacity to do some share repurchases. So we are not backing down from that.

As far as pensions are concerned, I mentioned earlier I think we did $75 million this year. We don't anticipate we will have to do anything else there. So that kind of gives you the total look at what we are looking at as far as capital allocation.

Perfect. Thanks, Don. I will get back in queue.

Mig Dobre, Robert W. Baird.

Good morning. Thanks for taking my question. Just clarification on Aerospace really quickly. Did I hear it correct that you expect to exit fiscal 2014 with 8.7% R&D as a percentage of sales?

Yes. Discretely for the quarter, Mig. This is Jon. For the year, we will be at about 9.6%.

Okay, great. Are you still aiming for 8% or the very low 8%s? And is that something that is achievable maybe over say the next 12 months?

Well, we don't want to get into guidance too much for FY15, Mig. But that has been our stated goal, to get it down into the low 8%s. We intend to do that; and as Don described, we will be really pulling it all together here in Q4.

And we will give you a much fuller report, but there has been no change in our intentions there.

I appreciate that. Then my last question, real quick, is on OE versus distributor demand in the Industrial segments, if you could provide any color there.

Yes, let me just talk a little bit about -- maybe I will talk about several aspects of what is happening out in the marketplace. A little bit of comment on the PMI index, first of all, which gives you a general look in the different regions around the world just from a high level.

Actually that we saw this month, this period, a little bit of a disconnect -- not a major disconnect, a little disconnect from our order trends, that PMIs actually -- all the PMIs for all the regions actually dropped slightly. Overall, probably not all that significant. Overall globally, dropped about 0.6%.

But we saw a negative movement on every region, with the exception of the eurozone, which was actually slightly positive. But the good news, having said that, it is not all bad. These movements happen and sometimes we lead, sometimes we lag.

But the good news is that everybody is above 50. Every region is above 50: Germany, eurozone, US, global, and so forth, with the exception of China, which is at about 48 right now. So, that is the PMI look.

When you look at some of the markets, actually the list is very long on positive markets for us right now and fairly short on weaker markets and flat markets. Let me just run down quickly for you.

Of course, we participate in a lot of OEM markets as well as the distribution segment of our business. So some of the strongest markets for us right now -- or segments I should say -- would be distribution, which would be a very strong; I will talk a little bit about the order trends there in distribution in a few minutes.

Oil and gas is very strong for us. Cars and light trucks are very strong. Some of the other positive markets, the markets that are trending in a positive way, are machine tools, power-gen, general industrial markets, off-highway construction, heavy-duty trucks, pharma and ag, industrial machinery -- industrial trucks, I should say, which is the material handling type of lift trucks, and forestry.

Also, on the process side, industrial refrigeration and commercial refrigeration is strong. And on the Aerospace side, it would be the Aerospace commercial aftermarket and the Aerospace commercial OEMs.

So you can see that unlike prior quarters, we really are looking at a much better overall picture here in just about all of the market segments.

Weaker segments then, let me just run down a couple weaker ones for you. Process industries would be weaker. Telecom and life sciences would be a couple weaker segments. And of course, ongoing weakness in the aerospace-defense MRO and OEM part of the business.

And then flat, pretty flat would be semiconductor, mining, and marine. So as you can see, much more positive in this quarter than what we have seen in the past, pretty much across the board.

When we look at regions, then on a 3/12 and a 12/12 basis, of course you have seen the 3/12 number so you know what is happening there. Those are the numbers that we post every quarter; you don't really see the 12/12 necessarily. I will just give you a little color on what is happening here.

First of all, all regions are tracking above 100% on the 12/12. This is the last 12 months' orders divided by the prior 12 months' orders.

Everything is above 100%, which is very good. That is a very good sign.

And all regions are tracking above 100% on the 3/12 with the exception of Latin America. Latin America in our International segment was actually down below 100% slightly; and that is pulling -- that is going to pull their 12/12 down a little bit from where it stands right now.

But these are very good signs, I think, from an order trend standpoint. Positive signs for us going through the -- setting us up for a good close for the fiscal year.

Just a little bit about the order trends. I know in some of those specific segments that I mentioned before distribution is extremely strong right now; and remember, that is half of our Industrial business, so this is a very major number for us.

So it's -- the 3/12 there is running about 109%; and the 12/12 is north of 100% as well. And actually it is less than the 3/12, so it's going to be pulling up the 12/12 over time. So distribution, very strong. We are very happy about that.

Growing is the heavy-duty truck business. The 3/12 there is north of 100% and as well as the 12/12; and the 3/12 is greater than the 12/12, so it is pulling the 12/12 up over time, so that is good.

Bad -- a bad market for us right now, but it is improving, is construction. 3/12 is less than 100%, and the 12/12 is even worse as far as less than 100%. So actually the 3/12 is improving and pulling the 12/12 up over time. So even though that is a segment that has been beat up pretty bad over the last year, there is some light at the end of the tunnel there it looks like, over time.

Softening is -- what we would consider softening would be semiconductor, and that is tracking less than 100% right now in the 3/12; but the 12/12 is still low over 100%. So over time we will just have to watch and see how that materializes going forward.

Growing segment for us would be ag, which is running both above 100% on the 3/12 and the 12/12; and it has been running like this for quite a while for us. So we like what is happening in ag.

Bad, one of the -- probably the worst segments, I should say, and actually getting worse is some of the process markets. Actually the 3/12 is running well under 100%, closer to like 75%, and that is dragging the 12/12 down along with it. So process markets being one of the worst segments.

Another very strong segment for us would be aerospace. 3/12 is running well over 120% or right around 125%; and the 12/12 is running around 120%, 121%. So that segment is extremely strong.

So I know that is a lot to absorb, but that is how we see it right now. And that gives you a good look at our order trends.

What the general summation of all that is, that just about every place things are looking a little better and a little bit more positive with the exception maybe of Latin America and maybe a couple of these segments that I mentioned. But there are quite a few strong segments in here too.

Great. Thanks for the color, then.

Alex Blanton, Clear Harbor Asset Management.

Good morning. I wanted to go back to the fourth quarter. I was off for a little bit, so this might have been asked. But if we look at what is implied with fourth quarter, you are saying without restructuring, excluding that, $1.77, versus $1.88 in the third quarter. And then if we include the restructuring, the gap has narrowed; it is just about flat, $1.62 versus $1.60.

Typically you have a stronger fourth quarter than third. So what is the reason for this implied decline?

Alex, I just want to make sure that we are all clear about the numbers. For the fourth quarter at the midpoint we have $2.04 projected. Okay?

It is higher than what we projected last quarter; but the restructuring that we are projecting is pretty much the same. We said $0.14 last quarter, and now we are saying $0.15 in the fourth quarter. So I just want to make sure that we have the numbers.

We really -- this guidance, when you look at the guidance that we are giving you today compared to the guidance that we gave you last quarter, really the only thing that is different is we built in the third-quarter beat, because we beat our third quarter versus what we said; and we adjusted the International numbers because of the order rates, the consistency in the order rates; and we felt that we got through a lot of the noise that was happening in Europe as a result of the restructuring.

So we took the International numbers up. But that is the only difference when you look at previous guidance versus the guidance today.

Okay. Well, I was using the full year of $7.05. That is $6.50 plus the $0.55 of restructuring, right?

Well, if you take the $6.50, we had $0.47 in restructuring last year. Now we have $0.55, okay? The difference is the restructuring that you saw in the third quarter, which is $0.08 higher.

I know that. But if you take the full year -- it's $7.05, without the restructuring, correct?

Well, it's $6.50 plus the restructuring that is included as $0.55.

$7.05; and then I looked in the -- it is $5.28 without the restructuring for nine months.

The $6.50 has the restructuring in it. You are right. $0.55 plus the $6.50 gives you your $7.05.

Okay. I will have to take this off-line. Thanks.

Okay, thank you.

Nathan Jones, Stifel.

Good morning, Don, Jon, Pam. Don, if I could just push you a bit more on the balance sheet, the balance sheet is obviously suboptimal at the moment. And it's -- you are at as low a leverage ratio as far back as my model goes for Parker.

You have talked about wanting to do acquisitions. You would need to do some fairly large acquisitions to get the balance sheet back into a more optimal capital structure.

Is it safe to assume that you are working on some larger deals and some deals that would be record size for Parker at this point?

Well, we are looking at everything that comes across. I mean, in all different sizes. There is no specific size that we are targeting on, so we're looking at a lot of different things.

And whatever we end up getting across the finish line, if we have excess capital and we think it is prudent to do some share repurchase, we will do some share repurchase with whatever we have got left and bring everything back into the normal range, what you typically have seen us do in the past.

I wouldn't read anything more than that into this. I think, like I said, we have got some expressions of interest out there. We've got things that have fallen out of the pipeline. We've got other things that are coming into the pipeline.

And until we can get something across the finish line, I just can't really give you much more to go on there. But with the exception that we hear what you are saying; and, Nathan, you're consistent. You have been saying this for a long time now, so you are very consistent, and we appreciate that.

But that is what I would say, is we would certainly try to do the acquisitions. And the balance, if we have a balance left after that, we would do some share repurchase.

And that would have to be approved by our Board, too, so I can't even give you a hard number on that. But we would -- I think the Board would be in agreement with that.

Do you have a targeted time frame for getting the capital structure back more in line with the historical level that Parker has had?

Yes, I think what we would say is that we are looking at the calendar year here. We are a few months or three or four months into the calendar year now. We are saying this calendar year I think would a relevant time frame that we would be looking at.

Okay. My follow-up question is on inventory destocking versus restocking. Can you talk about any pockets where you are continuing to see inventory destocking? And with orders starting to firm, if you are starting to see anywhere where there is any inventory restocking?

I don't think that, with the exception maybe a couple segments that are not tracking very strong like right now, which would be not very significant in the overall, I don't see a whole lot of destocking going on right now. I see more of cautious stocking relative to and maybe in line with normal growth activities right now, pretty much across the board in all those segments I mentioned.

I don't see big movements one way or the other. No great destocking nor any great emphasis on restocking above the current demand levels.

All right. Thanks very much.

Jamie Cook, Credit Suisse.

Hi, good morning. Just a clarification and a question. Don, not to belabor the balance sheet question, but now you are saying you're really not going to have an answer on the share repurchase or anything until calendar-year 2014, whereas before I thought we would hear something by the end of your fiscal year. Are you pushing things out, or was I incorrect?

And then my second question is, just your confidence level in the ability to achieve 15% margin next year in International Industrial. It sounds like now the restructuring is ahead of plan; I think the concern was it would be behind.

And given the signs that Europe is getting better, how should we think about incrementals in that business coming out as we approach next year? Thanks.

Well, let me just say that I don't know that I have been specific. I think we have been talking about the year; and so I am saying calendar-year 2014, it could happen in fiscal year 2014. Certainly we might take some action.

But we really don't have another Board meeting until after the end of the fiscal year. So chances are we probably wouldn't do a major share repurchase before then. So it is really more like calendar 2014.

I don't know that I was specific one way or the other. I think we just said the year, within a year, in the past.

And then the question on the 15%, I am going to let Jon handle that. I think he has some information for you.

I think, Jamie, the trends in International for us in our restructuring for FY15 certainly indicate to us that we can get there. Pam talked about the restructuring, without the restructuring, in the slide that she had for the quarter, that being well north of 14%. And given that we are boosting up our savings projected for next year with the additional restructuring that we spoke about this morning, we feel good that we are on track to do 15% in 2015.

So we are optimistic. We don't want to get too far out ahead of ourselves, because we want to really get through to make sure that the numbers are footing here in the quarter and that we really understand precisely the final impact of all the different restructuring initiatives.

One of the things that I find myself doing sometimes is minimizing the difficulty that we have gone through in the past three quarters, getting this restructuring done. It is awfully complex, very tough work.

Our employees in Europe have worked very, very hard to get us to the point that we are at right now. And certainly all of our employees around the world that have been working on this restructuring program have just done yeoman's work.

And so I don't want to really project anything other than what we talked about this morning, which is an additional incremental $60 million in savings for Industrial International for FY15.

Okay, thank you. I will get back in queue.

Ann Duignan, JPMorgan.

Hi, guys. Good morning. Don, can you just give us some color? I am struggling with your comments on the process industry. I think of process industries as industries that use natural gas and will be benefiting and maybe thriving in this environment.

Could you give me some more color on what exactly you are seeing in process industries, and what process industries are we talking about? Just some color.

I think for the most part what I would be referring to would be chemical process, probably would be dominant within what I have been referring to here. So yes, you're right; there are some petroleum refineries and things like that probably would still be doing okay.

Chemical process I think is more what I am referring to here. And semiconductor I mentioned earlier as a separate item.

Yes, yes. The semiconductor is pretty consistent, but the process just seems inconsistent.

Yes, it depends on who lumps what into that bucket, I think, is going to maybe make a difference for you.

Yes, yes. Got you. Thank you; I appreciate the color on that. Then on the acquisition front, it struck me last night; I saw that Stanadyne sold its filtration business to Clarcor; that was about a $100 million business.

I might have thought that that would have been exactly in Parker Hannifin's sweet spot, filtration; maybe a little vehicle related. But is that still the kind of business that Parker might be looking at? And what are you seeing on the competitive front out there on pricing when deals are coming to fruition?

Ann, the filtration business for us is a great business for us. And that business that you were talking about did fit into that category. And we are in the process of looking at all filtration companies.

Please keep in mind that we are looking at every deal possible. And when we look at every deal possible, we are focusing in on synergies that we can get and what we can deliver to our shareholders at the end of the day; and that is how we do our valuations.

And without commenting on that specific deal, we feel very good about our process. As Don talked about, we have got several businesses in our pipeline in general, and we will always be sure to emphasize the filtration business.

Don, do you want to add something to that?

Yes. I think, Ann, you had asked about the pricing, as to what is happening on pricing. Generally, I think what we are seeing, and it has been typical here of late, is that people are looking in the rearview mirror and seeing what kind of multiples businesses have gone for prior to 2009, prior to the Big Recession.

I think that is still in their memory banks, and I think they still feel that even going into a much slower growth period that we are looking at now, that they still think that the properties command much higher multiples than what we would normally think that we could justify based on a discounted cash flow.

So I think that is where we are at now with probably a lot of other companies. We are looking at a future with growth rates that are not going to be bad, but they are not going to be as great as they were back prior to the Big Recession, at least not in the near term.

And so the valuations we think are a little bit more pricey than they have been in the past. I think people need to forget a little bit about -- or maybe need to not forget, but need to make an apples-to-apples comparison of what is going on in the past to what is going on now.

Because we know that there's only two lines on that discounted cash flow that make a difference. It is the sales growth line and operating margin. And with the sales growth being down a little bit from what it was in the past, I think the multiples should come down with that.

Yes, I guess if I were the seller, Don, I would argue that maybe we don't have the big peaks and troughs we have had historically, either; and so your earnings volatility is lower; therefore you need to pay for that.

Yes, well, that would be one -- yes, I would say the same thing, Ann (laughter).

If you were selling your business.

Right, right.

Okay. I will get back in line given how many earnings we have had today, so I appreciate it. Good talking to you.

Josh Pokrzywinski,

Morning, folks. How you doing? Just a question on North American operating margin. I know that last quarter there was a little bit of debate, and I think some fine-point tuning on guidance.

Having a hard time calling what perhaps peak margins look like there, maybe some debate of whether or not you were at peak, given that they were so strong and mix was a tailwind. Seems like with the performance here and the guide that that is a little bit less of an issue.

Is that a comfort with the sustainability of the current mix and profitability? Is that just better visibility on end markets? Any more color you would like to add?

I think we just have a little bit better visibility on where we are with the end markets. Coming out of Q2 is always a tough time for us, because we are always sequentially moving up from Q2 into Q3. And trying to make a judgment about those margins at that time, Josh, was a little bit more difficult than it is for us now.

And you can tell by our implied margins for Q4 we are even more bullish than we were last quarter.

Excellent. Then, Jon, just a question on pension. With rates where they are today, any sense of what that year-over-year delta could look like in 2015, if we freeze the rate environment here?

Yes, I think that -- a couple things to keep in mind. Number one, we will need to reevaluate our discount rate, and that is one part of it.

There will be a potential change in the mortality table. That will be another part of it.

There will be another change in the rate of return on our assets. That will be another part of it.

So, just as Don described how we are doing things at the division operating level and rolling everything up, we will be looking at all of those factors and getting the latest data points. It is too soon to be bullish or pessimistic on the pensions for FY15 at this point. Pam, do you want to add anything to that?

No, I think that you said it very well. We will be looking at it; but we do have all three of those factors to consider this year-end.

Whereas in the past we had the discount rate and the long-term rate of return, we also have the mortality table that we will be taking into consideration, which will be somewhat as an offset to obviously any improvement in the discount rate. So we will keep you posted.

Got you. If I can just sneak in one last clarification on the balance sheet and an update there. Am I understanding right, the plan always, the entire time, was somewhere between August and, call it, December that you guys were going to update us on plans, and that is still the case? I think last quarter you said fiscal year-end, but it was really more no sooner than fiscal year-end.

You're talking about the capital allocation?

Yes, capital allocation, that's right.

Yes, I think right now we are saying calendar year. And, yes, we will update you in August, for sure.

Okay. Thank you very much.

Eli Lustgarten.

Good morning. Very nice quarter. Just one clarification first question that (inaudible) confused me. You gave us $2.04 guidance for the midpoint for the fourth quarter, and that includes the $0.15; so that is really a $2.19 operating quarter. Is that correct?

Thank you, Eli, and I appreciate you pointing that out. Just to add on to that a little bit that may help Alex. Last year, for the fourth quarter we gave $1.98, which included $0.14 of restructuring. So it is $2.19 now versus $2.12 then.

Yes, so it's strong. And what is driving this fourth quarter is the improvement in profitability almost across all the businesses quarter to quarter, plus a little bit better volume. Is that correct?

I think that is a very good summarization. Thank you.

Okay. Can we talk a little bit about pricing across the industries at this point? Are we seeing any issues -- outside of I know Latin America has pricing problems. When you have volume problems, you're going to have pricing problems.

But is pricing pretty stable around? Or is there any movement in prices at all?

Well, Eli, I think that we are managing that pretty good. The pricing, we do raise -- I assume you are talking about how we are pricing relative to the raw material inputs?

Yes, well, just across the board versus the industry and versus competitors.

I think what we are doing, we are managing this pretty well. What we have and it is a global index, we have what we call the purchase price index. And the goal there is to be less than 1; that is basically how we aggregate all the purchases we have from prior periods to current period of time. The times to volume, we aggregate all that.

And we are tracking less than 1. So I think on a purchase price basis we are doing a very good job. We're recovering the cost and as well as the margin.

And on a sell price we have also an index which call a sell price index. That works pretty much the same way. We track that around the world globally for all of our operations, all of our sales.

And we want that to be tracking greater than 1. So if we accomplish both of those things, which we are doing, then we are going to be recovering our costs and the margins.

We increase the aftermarket twice a year -- well, could be once or twice a year, but it'd be at two different times, depending on what the need is, either in January or July. So that is when we address the aftermarket, any changes there.

And the OEMs are addressed based on the anniversary of the contract that we would sign with OEMs. So that varies throughout the year.

To talk about some of the input costs, actually the input costs have been going up somewhat. But like I said, we have been recovering them as they have been going up.

Just some of the energy ones would be oil and natural gas. Oil is up slightly over last July when we started a fiscal. Natural gas is up about 30% from last July, so that is up quite a bit.

Then some of the raw material inputs being -- castings, that is up around 8%; steel, just looking at a couple of the other ones, steel and aluminum, steel is up about 5%, aluminum up 10%; copper up 3%; nickel up 5%. So some of the more exotic metals are up about 5%.

So there is some pressure coming from raw materials, but like I said, we have been managing that pretty well and so far we are staying ahead of the curve. I hope that is helpful.

Right, thank you very much.

Sure, Eli. Yes, Pam? Pam has one thing to add there.

I am just going to say at this time we will take one more question, and then we will move to Don's closing comments. Thank you.

Jamie Sullivan, RBC Capital Markets.

Hi, good morning. Just a question on the savings side of the restructuring program. Can you give some color?

I know you mentioned $30 million for the year. What were the savings that you achieved in the third quarter and year-to-date so far?

Yes, Jamie; Jon here. The savings in Q3 would be -- bear with me for one minute -- $8 million. So that would be $8 million of the $30 million.

And for the year, we would be at $17 million year-to-date of the $30 million.

Okay, great. Then, on the $10 million in additional savings that you will get next year, was there a particular area that you uncovered through the process? Or was it the initial plan had some additional costs, but also additional savings with it? Just maybe some additional details on where the $10 million in additional savings is coming from.

Yes, it is more the latter than the former. This is because we have moved the restructuring number from $100 million to $118 million. As we went through all the additional projects, we found that in some cases we were doing a little bit better in terms of savings than we had before, and in some cases we have had to increase the savings.

And in other cases -- and again, sometimes we make it sound very simple. These are many, many, many different projects all throughout the world, and so they go both ways. But when you aggregate them all together, we get to that additional $10 million.

But it is really mostly related to the delta between the $100 million that we originally talked about at the beginning of this fiscal year, and the $118 million that we are talking about today.

Thanks very much.

Thank you. So at this time, I will turn it over to Don, who has a few comments. Thanks.

Thanks, Pam. So just a couple closing comments.

First of all, I want to think again everyone on the call for joining us this morning. With our restructuring proceeding as planned, I think you can see with the strong operating execution and positive order trends we expect to close out the year on a positive note. And we will be well positioned heading into fiscal-year 2015, so we are very pleased with where we are today.

A lot of hard work and effort went into the restructuring activities, which were referred to early in the year as a self-help program; and it is a self-help program, and I think we have executed extremely well along those lines. Very difficult, but the team has really performed very well.

I would like to take the opportunity to thank our employees, all the employees for their continued commitment and the success that we have had. Our global team continues to do a great job executing the Win Strategy and delivering positive results.

So at this time, we will close out and I would just like to wish everyone a great day. And then if there any other questions, Pam will be available for those throughout the balance of the day. Just give her a call.

Thank you very much. We know you have a lot of calls today. It is very active at this time, especially this quarter at the end of the month. So thank you very much for your participation. Bye-bye.

Thank you. That concludes your conference call for today. You may now disconnect. Have a good day.