派克漢尼汾 (PH) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter fiscal year 2014 Parker Hannifin earnings conference call. My name is Philip and I will be your operator for today.

(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, ma'am.

Thank you, Philip. Good morning, everyone. Just as Philip said, this is Pam Huggins speaking and I would like to welcome you to Parker Hannifin's first-quarter fiscal year 2014 earnings release teleconference. Joining me today is Chairman, Chief Executive Officer, and President, Don Washkewicz; and Executive Vice President and Chief Financial Officer, Jon Marten.

For those of you who wish to do so, you may follow today's presentation with the PowerPoint slides. They have been presented on Parker's website at www.pHstock.com. And for those of you not online, the slides will remain posted on the Company's investor information website one year after today's call.

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

Slide number 3 addresses non-GAAP financial measures. This slide, as required, indicates that in cases where non-GAAP numbers have been used they have been reconciled to the appropriate GAAP numbers. And they are posted on Parker's website as well.

Moving to slide number 4 outlining the agenda here. The agenda for today consists of four parts. First, Don Washkewicz, Chairman, Chief Executive Officer, and President, will provide highlights for the quarter.

I will come back on second and provide a review, including key performance measures for the quarter, along with the revised fiscal year 2014 guidance. Then the third part of the call will consist of our standard question-and-answer session.

For the fourth part of the call today Don will close with some final comments as usual. So at this time I will turn it over to Don and ask that you refer to slide number 5 titled, first-quarter fiscal year 2014 highlights.

Thank you, Pam, and welcome to everyone on the call. We certainly appreciate all your participation today. I will make a few brief comments and then Pam is going to return for a more detailed review of the quarter.

I am certainly pleased that we are off to a good start in the first quarter. We continue to execute well in spite of a moderate growth environment out there. Some highlights for the quarter.

Sales remained flat, as anticipated, with acquisition sales offset by divestitures. We were pleased to see our order rates turn positive for the quarter for the first time in five quarters as we showed a 5% improvement year over year. Our order growth is consistent with marginally positive trends that have been reported across major economic indicators of industrial production.

Total segment operating margins were strong at 14.4%. I will just point out that the diversified industrial segment operating margins were above our 15% target at 15.3%, so we are very pleased with that. Of course that was helped by 110 basis point year-over-year improvement in our international business.

Earnings per diluted share increased 2.5% to $1.61 compared to a prior-year quarter. Excluding restructuring expenses, earnings per diluted share were $1.67 or an increase of 6%. We consistently generate operating cash flow greater than 10% of sales, coming in at 11.1% in the first quarter before a discretionary pension contribution. And that contribution was about $75 million.

We remain on track to deliver our 13th consecutive year of cash flow greater than 10%. So, again, that is a nice record that we would like to keep going.

Just a few comments about our restructuring. Restructuring this quarter was $12 million, or $0.06 per diluted share, and that was on a forecast of $19 million, or $0.09 per diluted share. We are still projecting restructuring for the year to be $100 million, as we notified you last time at the last meeting, or $0.47 per diluted share. And that was what we had in our original plan.

Pam is going to go into a little bit more detail as to how this impacts each of the quarters going forward.

New for this quarter, we released supplemental sales information for three global technology platforms within our diversified industrial segment. You will find a factbook with some of the historical data and additional information on these businesses on our investor website. This additional disclosure will give investors great insight into the strong underlying businesses in our portfolio, so we would appreciate any feedback you have once you have an opportunity to review that information.

Looking ahead to the full year, based on a good start for our first quarter and a larger-than-expected gain from the previously announced joint venture with GE Aviation, which will be recorded in the second quarter, we are increasing our guidance for the year. We have updated guidance to the range of $7.78 to $8.38 and diluted earnings per share for fiscal 2014.

This guidance does include the anticipated gain of GE Aviation joint venture, which is $1.68, and an estimated $0.47 per share in restructuring expenses that I mentioned earlier.

So with that we will go ahead and turn it over to Pam for a little bit more detail.

Thanks, Don. So at this time if you will reference slide number 6, I will begin by addressing earnings per share for the quarter. Came in at $1.61, as you saw in the press release for this morning. That compares to $1.57 for the same quarter a year ago, an increase of 3%.

If you exclude the restructuring expenses this quarter, the earnings per diluted share was $1.67, an increase of 6%.

So moving to slide number 7, this lays out the components of the $0.04 increase in fully diluted earnings per share for the first quarter versus the same quarter a year ago. You can see that higher operating income, while it shows $0.01 on that slide, was really $0.06 when you exclude the restructuring.

Our international business came in very strong. There was some offset. It was partially offset by lower income in industrial North America and then, of course, the aerospace business.

The items below segment operating income accounted for the remaining $0.03. This was mainly due to a discrete tax benefit of $0.08, which was offset by higher corporate and general and administrative expense and other expense. It was $0.03 for corporate G&A and $0.04 for other expense, mainly due to market-driven benefits.

So moving to slide number 8. Looking at the top line, revenues for the quarter increased 2% as the result of acquisitions so revenue moved to $3.23 billion from $3.18 billion last year. Of course, we took the opportunity to adjust for the divestiture of the automotive air-conditioning business in October of last year.

So these slides are a little bit different. For those of you who have followed these slides closely, we did take the opportunity to restate fiscal year 2013 for the divestiture.

Segment operating margins for the quarter of 14.4% were basically flat with last year; but however, don't forget that that includes additional restructuring in the quarter.

So moving to slide number 9, I will address Industrial North America. Here you can see that revenues of $1.39 billion; they were relatively flat as additional revenue from acquisitions of 3% was offset by an organic decline of 3%. And, of course, currency was relatively minor.

Operating income decreased to $234 million from $244 million, a 4% decline over the prior year, and this was mainly due to mix.

So moving to slide number 10, addressing Industrial International. For the quarter revenues increased 3%, about half from acquisitions and half organically. Currency had no effect on this business in the quarter, which is unusual, and operating margin increased to $173 million from $157 million. Again, remember we had this increase in margin even with higher restructuring costs in the quarter.

Volume, obviously, contributed to the higher margins as well, and we had good cost control in Asia and Latin America.

So moving to slide number 11, Aerospace reported inorganic revenues increased 5%. There were no acquisitions and the impact of currency on this segment was negligible. Operating margin decreased to $57 million from $62 million versus the same quarter a year ago, and this was due to additional development expenses entering into service costs and a higher OEM (inaudible) mix.

Now moving to the order rates, slide number 12. This slide details orders by segment. Just as a reminder, these numbers represent a trailing three-month average and are reported as a percentage increase of absolute dollars year over year, excluding acquisitions and currency, except for Aerospace. Aerospace is reported using a 12-month rolling average.

So as you can see from this slide, orders were positive 5% for the September quarter just ended, reflecting improvements sequentially across the segment. North America orders were up 3%, Industrial International orders increased 5% for the quarter, and Aerospace orders increased 11% for the quarter. Again using the 12-month rolling.

So orders are showing improvement coming off the bottom turning positive for the first time in the last five quarters.

Moving to the balance sheet, Parker's balance sheet remains strong. Cash on the balance sheet at year-end was $1.9 billion. This is offset partially, however, by outstanding commercial paper of $1.3 billion.

DSI, or days sales in inventory, came in 70 days for the quarter versus 71 for the same quarter a year ago. This decrease in the quarter represents a reduction of approximately $24 million and includes the additional inventory as a result of acquisitions.

Inventory levels are at 11.2% and this is slightly better than last year at this time. Obviously, we did increase inventory sequentially, which is in line with the normal cycle of our business.

Accounts Receivable in terms of DSO closed at 50 and this is a one-day improvement from the same quarter last year. Then, of course, weighted average days payable outstanding at the end of September was 58 versus 56 at the end of June. So good working capital management.

Moving to cash flow on slide 14. You can see the cash flow in the quarter of $358 million. This excludes the $75 million pension contribution that Don talked about. And this $358 million compares to $219 million last year and represents a little over 11% of sales.

So after you increase cash on hand sequentially, it went up by $164 million, the major uses of cash were obviously $117 million returned to the shareholders -- $50 million via share repurchase and dividend payments of $67 million. Then, of course, 1.6% of sales, or $53 million, was utilized in connection with capital expenditures.

So now I will touch guidance, which I know you are all interested in, on slide 15. The guidance for revenues and operating margins by segment has been provided on this slide. Now I'm not going to read through the information on the call on this slide, but this detail has been provided for your convenience. Just so you know, these numbers include the GE Aviation JV and the restructuring costs that Don talked about.

On slide 16 this slide lays out the guidance assumptions, and I will go through them as follows. The full-year guidance assumes increased revenue year over year of 0% to 3%. 1% of this growth is from acquisition carryover, but that acquisition carryover is offset by a 1% reduction in sales in connection with the GE joint venture and the divestiture of the automotive air conditioning business of Climate and Industrial Controls that happened last year in October.

Segment operating margins, 13.4% to 14% are projected. Guidance has been provided in total for the items below segment operating income, what we here refer to as below the line items, and is forecasted to be $75 million at the midpoint. Now this $75 million includes a gain. And as you recall, last quarter the gain was $360 million. This quarter it is $411 million. This gain is recorded in the second quarter.

If you exclude this gain, the total for the below the line items is $486 million and, of course, that is at the midpoint of the range. And, of course, we put a bracket around it of plus or minus 1%.

The full-year tax rate is projected at 30.8%. However, that is due to the JV gain, which is taxed at 38%, and again included in the second quarter. The full-year tax rate, if you exclude this gain, is 28%. So if you look at the third and fourth quarter you will see that 29% tax rate has been included in the guidance.

Then, of course, the number of outstanding shares used in the guidance is 151.8 million.

So let's move to slide 17. Here you can see we summarized the kind on a diluted earnings per share basis for you. Using the assumptions, as I just explained and as documented at the bottom of slide 16, the 2014 earnings per diluted share is projected to be $7.78 to $8.38. And that is $8.08 at the midpoint. Excluding the gain on the JV, the guidance is $6.10 to $6.70.

Now this slide here details the walk or the major components from the midpoint of the initial guidance provided last quarter utilizing the $7.75, walking to the $8.08 provided this quarter. Of the $0.33 increase to the guidance, $0.18 is the result of the increase in the JV gain and the remaining $0.15 is a result of the first quarter [B]. So the $0.33 increase; $0.18 JV, $0.15 B.

A couple of salient points with respect to guidance, sales first half/second half are divided 48%/52%. Segment operating income first half/second half is 45%/55% first half/second half. EPS first half/second half is 55%/45%, but if you exclude the JV, the GE Aviation JV, it is 43%/57%.

Restructuring costs are still projected to be approximately $100 million, in line with what we conveyed last quarter. And the growth to EPS impact, not counting any of the savings, is expected to be $0.47, so unchanged from the last quarter. Our restructuring in the first half is $0.19 and restructuring in the second half is $0.28, giving you the total of $0.47 that we just talked about.

Remember that our guidance excludes any further acquisitions or divestitures that may be made in fiscal year 2014. And I would just like to ask that for your published estimates we ask that you please exclude the GE Aviation gain, if you would.

So at this time I think that we will just move right into the question-and-answer session.

Just one more thing; please remember that we want to get everybody on this call, so I would appreciate if you would limit your questions to one at a time. We have more people covering us and it would be nice to let everybody get a question in today. Thank you.

(Operator Instructions) Andy Casey, Wells Fargo Securities.

Thanks, good morning. On the revenue guidance it looks like you took the top end a little bit lower. Could you talk about what changed to drive that decision?

Andy, Jon here. I think what we did was we looked at our actual results for Q1 and we were comfortable with what our growth rates were that was contained in the original guidance. And because our quarter came in very solid, almost as expected, we ended up deciding to keep the guidance where it is.

You will see components of the guidance on the top line that Aerospace is down a little bit and North America and Industrial International coming along as projected here for us. So that was our thinking at this point and that is how the comparisons came in for the Q and for the year as we rolled everything up from the bottoms up.

Okay, thanks, Jon. Then a follow-up; the cash flow very, very strong again. You have substantial capital allocation potential. Could you update us on what the acquisition pipeline looks like?

This is Don, Andy. We are always looking, with respect to the acquisitions, as far as what is out there and, of course, that is one of our main drivers as far as capital allocation this year is to try to find some good acquisitions.

I can never forecast what we are going to get to the finish line. We are always looking, we are always evaluating. It is hard to predict what you are going to get to the finish line. But that is a priority for us; the acquisitions are a priority.

But also just might want to mention along with that that as far as capital allocation that we are still maintaining a focus on dividends. We have had a major increase over the last five years in dividends and last year was about a 10% increase.

Just so that everybody knows, we finished the year last year at about a 27% payout on dividends and we are looking for something north of that now closer to 30%. Of course that hasn't been approved by our Board; I am just telling you what I would be comfortable with and what we said we are going to be trying to get closer to that 30% number. And that is what our intent would be this year.

So dividends are going to be a priority. Obviously, acquisitions are way high on the list and we are continuing to look at those.

The only other comments on capital allocation that I would make would have to do with share repurchase and we will do about $200 million as a minimum this year. We did $50 million in the first quarter. We will continue that at $50 million a quarter and then potentially do more than that depending on where we end up with our cash balances and the acquisition pipeline toward the end of the year.

The only other thing is that -- we did mentioned earlier is that we did put $75 million into the pension as well.

Okay, thank you very much.

Ann Duignan, JPMorgan.

Good morning, guys. Don, would you just walk us through your normal, what you are seeing out there by end market and by segment? You made an interesting comment, but sequentially it look like there was an improvement. If you could just give us your normal end-market color that would be great.

Sure, sure. Well, maybe I will start with the PMI indices, the ISM Index and so forth, just to give you a little recap of what that looks like. I think when I tell you this it is going to be, along with our [3/12] and our [12/12] pressure curves, our order rate curves, I think you are going to see that they kind of tiny in pretty good with where we are as far as our order rates that we are showing and sharing with you.

From a PMI standpoint, all of the indices now -- unlike in the past, all of the indices now are north of 50%, so that is a good sign. Everything is north of 50% for the global PMI and it is up slightly from the August period, so that is good. And it is up from June as well.

Europe, as far as PMI, has increased slightly from August. I am sorry, has decreased slightly from August, the Europe one, and also Germany has decreased slightly. But they are up quite a bit from June, so I am not looking at that being a negative. I think they are still writing above 50% and that is still a positive place to be.

The US took a big jump; you may have noticed that yourself. It is up around 56% right now, which is really very good territory for us.

China is flat, but north of 50%. It is pretty flat and that is -- we are still seeing kind of a flat environment in Asia, and China in particular. And Brazil is up slightly, but they are just right at about 50% so they are still pretty flat as well.

If you look at the markets, the positive markets that we have as far as positive trends would be as follows. Commercial aerospace aftermarket and commercial aerospace OEM both being positive.

One of the things that I would point out, one of the segments that has moved positive for us, which I think is a big one because half of our business roughly comes from -- on the industrial side -- comes from the aftermarket or distribution, is our distribution now is tracking positive where it had not been in the past. So that is a big change, because it does affect half of our business. And so that is a positive one.

Cars and light trucks our strong, of course; semiconductor and telecom. One of the strongest segments for us right now is oil and gas, but offshore oil and gas. Not land-based oil and gas, offshore. Farm and Ag, forestry and machine tools, those are all solid as well as far as positives.

So then the negative market segments would be the defense part of our business, the aerospace OEM and the aftermarket defense. Mining, of course, is a negative. Power gen and oil and gas, but the land-based oil and gas part of the business. And then residential air-conditioning and commercial air-conditioning are both negative as well.

So that -- and then anything that I did not mention would be kind of flat, which would include like process industries, heavy-duty truck, off-highway construction, industrial trucks, and so forth. Those kind of markets, those would be what I would consider flat.

Just a couple of comments on our pressure curves, our order curves. When we look at Industrial North America and we also look at industrial Europe on a 3/12 pressure curve basis -- these will be the last three months orders divided by the previous year, the same three months of the previous year. So this is what you would call our 3/12 curves.

Industrial North America would be slightly increasing on a 3/12 basis and Europe as well slightly improving on a 3/12 basis. So that is good news and I think that is what you are seeing in the order trends that we have pretty much posted for you as far as those increases in those different regions.

Asia; like the PMI, Asia is flat on a 3/12 basis. It's slightly above 100% on 12/12 but pretty flat, and Latin America is pretty flat overall. So we don't see anything real positive yet from both of those regions.

But, again, the distribution part of our business, both on a 3/12 basis and on a 12/12 pressure curve basis, both improving and both greater than 100%, which means that our business is going to continue to increase going forward for the foreseeable future. So those would be just a few of the comments I would make. If you want me to touch on anything else specifically, I could do that too, Ann.

Maybe, Don, just a quick follow-up on the distribution business. In speaking with your distributors do you get the sense that it is restocking, or is it true end market demand that is driving the increase?

Yes, I think it is in end-market demand. I think that everybody has been managing their inventories pretty good, at least in that channel, for over this cycle. I think now they are really seeing end-market demand and I think that is consistent with the overall order trends and the indices that I have kind of highlighted. I think that would be more end-market demand than anything.

Okay. In fairness to everybody else, I will get back in line. Thanks, guys.

Joel Tiss, BMO Capital Markets.

Don, you made $5 million today on your stock; you can probably take the afternoon off.

See, it pays to stay an investor. There is never a bad time to own Parker's stock, right?

Yes, that is right. Just the first question on margins, can you just talk about why so tough on the aerospace side? It seems like the R&D costs would be coming down and we should start to see some of that benefit.

Then also the opposite on the European margins. Is there anything in there besides just the restructuring that is really pushing those margins up so quickly?

Joel, Jon here. I think, first, on the aerospace margins. Really what we saw in Q1 was the impact of a couple different things. One, we had a mix issue just with a little bit less commercial aftermarket than we had expected and a little bit more OEM business than we had expected. And, of course, that impacts the margins.

Then, also, we saw some effects of some entry into service support that was required -- a little bit more in development expenses and then just supporting some of the new airframes and some of the new programs that are going into service. Our support costs to be sure that we are carrying out our obligations in terms of those programs was higher than we expected.

In terms of international margins and including Europe and Asia, I think what we are seeing there is a little bit higher leverage for ourselves as the volume improves commensurate with the order rates that you are seeing and a little bit of a better increase there. We are also starting to see the benefit in our international margins from our integration efforts from the deals that we did last year and in FY12. So as we continue the integration process we are starting to see slightly better margins there too.

And just a quick follow-up. Is there any way that you can kind of ballpark the incremental margins on the organic volume growth just so we can get a sense of, you know what I mean, how strong of a component that is to the overall improvement?

Well, are you talking about just worldwide, Joel?

Yes, and probably in Europe to because it has been so depressed for so long.

Of course, our margins right now as we are starting to go through that inflection point and our order rates are starting to go up our MROS is higher than our normal MROS targets. We are targeting, of course, to have a cost structure that provides us on the upside 30%-plus and we certainly did see that in our international business here for the quarter. That is what we will be targeting for as we go on.

We feel very comfortable through the cycle at 30% and a little bit above 30% here as we start to inflect out of the downturn and follow the order rates that we reported.

Okay, thanks very much.

Jamie Cook, Credit Suisse.

Good morning. Two questions. One, just on the restructuring actions that you have taken so far, can you provide a little color about what you have done or where you expect to take more actions? I don't know if you can give color in terms of workforce reduction or facility closings or any color by country.

Then I guess my next question; just given the strong orders that you have seen over the quarter, I am surprised that you are taking your revenue down. Now I know Andy sort of asked that, but was there anything unusual in terms of how the months progressed that make you a little more cautious, or is it just it is the first quarter?

Just a little more color there, thanks. Because the orders are actually better than I would've thought.

Thanks, Jamie. First, on the restructuring we are still in the middle of really working out exactly what the timing of all of that is going to be around the world. We feel very comfortable with our $0.47 that we are sticking with here for the quarter and for the year, and we feel very comfortable with what we were able to get accomplished.

We were a penny shy of what we wanted to do in Q1. And just to set the scale for you, that penny shy of what we wanted to do in Q1 was the entire amount of restructuring that we did in FY13. So just to emphasize how big of a program this is for us.

But as we went through all the initiatives, the initiatives are intact; they are intact for this year. Pam has given how they break out from the first half to the second half, but it is tricky in terms of exactly the details behind it at this point. We will be able to probably give you a little bit more detail as to precisely how this has ended up here at the end of Q2.

Now, in terms of the guidance for sales, got to keep in mind a couple things. One, we took a look at how we did in the quarter. We took a look at how the order rates were coming in.

You got to keep in mind that the GE joint venture from an annual revenue standpoint is going to remove $200 million a year from us, from our ability to generate sales. Of course, we won't be able to consolidate that in the future.

We are really just trying to just update it incrementally. We are not taking a look and adjusting our guidance any more specifically than just feeling really good about doing well in the quarter, coming in almost just in line.

The quarter went as we expected and our guidance range is just pretty much intact here. A little bit better in international and maybe not quite as good in some of the other segments, but overall we felt comfortable sticking with our guidance that we put out in August.

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

Jeffrey Hammond, KeyBanc.

Good morning, guys. Couple on the aero side; I guess is there a point in time when you start to get a little impatient about margin progression there and these lingering costs that keep popping up? Just on the top line, again I understand the fine tuning, but why are we lowering the top line given that we are still seeing double-digit order growth out of aero?

You know, Jeff -- this is Don. Yes, it does get a little bit frustrating, but we are in territory that, frankly, we haven't been before with all of these new programs.

I know we hate telling you the same story every quarter and having to push things out a little bit here and there, but we have never really been here before with this order of magnitude of new programs and complex -- the technology was something that we had done in the past. This fly-by-wire technology is new. I think that we would have been a lot more accurate in some of our estimates.

It is just hard to predict. With the number of programs and the complexity hitting this right on for you folks has been tough. We don't like it anymore than you do.

We are doing the best we can. We are just going to continue to stay on it and try to give you the best information we can.

Some of the programs, by the way, have pushed out. From a sales standpoint we have got some orders that have been pushed out from a couple of the programs that we had worked on, so that is a change to the sales mix as well going forward. I don't know, Jon, if you had anything else you wanted to add to that, but --.

No, I think between the mix and the level of complexity and the entry into service support I would say there is a lot of moving parts there. We are really trying as hard as we can to be as accurate as we can when we update the guidance each quarter.

Keep in mind that our backlog for aerospace is at an all-time high. This is all going to pay back for us in the future. This quarter-to-quarter and year-to-year kind of fluctuation is going to occur here when we are in the middle of the unprecedented number of development programs for us.

But we feel very confident that in the long run this pain that we are going through is going to pay off for us and it is really going to drive value for the Company long term.

Okay. Then just quick housekeeping item. Can you give us the pretax restructuring charge in the quarter and where it would have fallen in the three segments?

Jeff, it is Pam speaking. Let me give you the quarterly amount, okay? Last time -- and I just want to make sure that I am very clear with this, because last time we talked about $0.32. The $0.32 that we talked about last time was the net; it was basically cost, less savings.

So we had $0.47 of costs, $0.15 of savings; obviously the net being the $0.32. By quarter the costs are $0.06 in the first quarter, $0.13 in the second quarter, $0.06 in the third quarter, $0.22 in the fourth quarter, and that gets you to your $0.47. What I will say is that close to 95% of that is obviously in the international businesses.

Okay, thanks.

Alex Blanton, Clear Harbor Asset Management.

Thank you. Your CapEx for the first quarter, what was that? Again.

It was 1.8% of sales.

1.8%. And what do you expect for the year in that?

It is going to be around that number, Alex. It has been fluctuating from 1.8% to 2.1% and so we wouldn't expect it to be any less than the 1.8% and probably no more than 2.1%.

So that is about a savings of about 300 basis points from what it ran 10 years ago.

Yes, sir.

Which on $13 billion in sales is $400 million that you can use to repurchase stock or buy our own stock or buy companies, so I think that is an excellent achievement.

The other question I have is on the earnings guidance you have given that to us including the restructuring of $0.47. And if you look at the consensus number, which this morning was $6.53; it is in the middle of that range. But I believe that that consensus excludes the $0.47, is that correct?

So that if you put that $0.47 back in, the consensus would be $6.06 compared with your $6.10 to $6.70 number, is that correct? Is that the way we should look at that?

What I will say about that is we worked very hard in the quarter to try to get everybody on the same page with respect to inclusion or excluding that. And it was very difficult to do that.

So you mean the $6.53 consensus is a mixture of people that are including restructuring and those who aren't?

There could be some of that in there, Alex.

Because usually they work pretty hard to make everybody on the same page at first call.

Right. Well, we had a couple of things moving around this time. We had the JV gain as well as the restructuring. We were pretty good at getting the JV gain excluded, but on the restructuring side it was quite a challenge, let me tell you.

Okay. So you don't really know what the clean number is?

We think most of those numbers exclude the restructuring -- include the restructuring, sorry.

Okay, thank you.

And the reason I say that is because we gave guidance with restructuring in it, so most of the people follow the guidance that we gave.

Okay, thank you.

Alex, just one follow-up on the comment that you made just a minute ago and I think it is a very good observation. It is something that I think we tend to miss because you are looking year on year.

But you don't look over the longer run and see that, because of our win initiative that we started back in the early 2001 timeframe and we have been executing on, we have really driven the need for capital down drastically throughout the Company. Plus the need for facilities and so forth, because we are driving inventory out of our system by executing lean. It has been really a positive, probably one of the most positive things we have done in the Company.

But I want everybody to understand that the dividend increase scenario that we have been executing here, 114% increase over the last five years, would not have been possible had we not driven this capital expenditure down to where we were. That is where the money is coming from that I am using now to pay back to our shareholders.

So I just wanted to make that tie-in because it is exactly what is happening here. We feel a lot more comfortable that we can raise that dividend given the fact that we have done the heavy lifting here.

That is an excellent point. Lean applies to the management of capital as well as the management of factories.

Absolutely.

Okay, thank you.

Stephen Volkmann, Jefferies.

Good morning, guys. Don, I'm wondering, can I take you back to capital allocation for just a moment here? I am curious, as you talk about your focus being on acquisitions, is there any way to sort of size for us what might be in the pipeline?

I realize it is not over till it is over, but is there a chance that there is something kind of a little chunkier that we are waiting to do here? And have you changed any of your thoughts about what you are willing to pay for these things?

No, I think what we are willing to pay I think we are pretty consistent on that. We do a valuation here and we are pretty -- we haven't really changed our method of evaluating or coming up with a value and our discounted cash flow approach over the years has been pretty stable.

The ones that we are looking at are not in the billion dollar category for the most part. I mean there is only a handful of those that we would consider if they were available or actionable; of course, we are always looking at those as well. But I would say are more in the range of $100 million to $300 million kind of size range, maybe even some that are a little less than that would be the ones that we are looking at today.

Again, though, it is hard to say what we are going to get to the finish line. We did about $0.5 billion last year. I would have done more last year if we could have gotten more to the finish line, but we did $0.5 billion, which is 4-point-some-percent of sales.

I would love to do that much again this year. We are going to have to get some moving down the pipe and get them to the finish line here to be able to pull that off.

If not though -- like I said before, if not we will figure out what else to do with the allocating capital elsewhere. We would want to continue to build up a lot of cash on the balance sheet for the long term, so we will figure out what to do there.

That is helpful. I guess what I am wrestling with, and maybe my math is just wrong, but it looks to me like you guys have about $2.5 billion of excess liquidity on your balance sheet right now. If I was just to get you back to 30% net debt to cap, I am coming up with something in that range.

And given that you tend to pay somewhere around one times sales for things, it would appear that you have just way more than you need even for what is in the pipeline. And so I guess I'm just trying to kind of square all that up and figure out why you would want to wait on other options as you described them.

This is Jon. I think one part of that answer is that, as Don talked about, there are the bigger deals that we continue to look at. And as we look at the smaller deals, we have been able to do in some years 10 or 12 relatively smaller deals in the $50 million to $200 million range. So I think your math is correct in terms of our ability to fund these.

We are looking at this very hard every quarter and we take it very seriously in terms of the cash deployment and our needs to do something there. But as Don said, our preference is the pipeline and the acquisition pipeline. We want to make sure that we have got the liquidity to fund all the ones that are in our pipeline. Of course, you never know what is going to get into the very end, but we want to stay prepared for that.

Okay, thank you.

Mig Dobre, Robert W. Baird.

Good morning, guys. So I guess my question is primarily around the cost savings. You detailed the restructuring costs; I'm wondering if you can update us on that a little bit. Obviously, first-quarter performance was quite strong.

And as it pertains to international, it looks to me like in your margin guidance change most of the upside is pretty much housed in the first quarter. How do we think about the rest of the year?

Well, I think you are right there, Mig. I think most of the upside is in the first quarter as we looked out, as I said before in answer to the top-line question. It is the middle of October; we just came out in the middle of August here with our guidance for the year.

What we are trying to explain to everybody here is that this year is starting out just like we thought that it was going to and our restructuring program, as we have revamped the entire program here and looked at it program by program, initiative by initiative for the year, is coming in remarkably close to the way that we originally envisioned it here at the end of our Q4. So we feel confident in our top line and in our restructuring going forward.

Now, as we looked at the guidance then, therefore, for the follow-on portion of the ensuing three quarters, we felt comfortable enough with our look that we had put together at the year-end to maintain that. We made a few minor changes in a couple of the segments and a couple of the quarters here to account for certain activities. We adjusted the tax rate, as Pam explained earlier, and we adjusted for the JV also.

But I would characterize our look at the ensuing three quarters as consistent with what exactly Don said, a moderate growth following in line with our orders growth and our ability to generate cash and operating income here. Just about where we thought it would be here at the end of Q1.

Our savings for the restructuring program has not changed. It is the same as what we had for the beginning of the year at a total of $0.15 for the year. And our first quarter came in just right where we thought that it would, so so far, so good.

We are very proud and we are continuing. And we are determined to get through with this restructuring program and get on with providing value to our shareholders and growing the business.

Okay, very well. Then my follow-up; very much appreciate the technology platforms that you guys have put out there. I am wondering what sort of growth in, say, motion flow and filtration for the year is embedded in your current outlook; can you provide that?

Mig, we don't really have it broken out by that. We didn't break it out by that, but we can get back to you on that, okay?

Appreciate it. Thanks.

Eli Lustgarten, Longbow.

Good morning, everyone. Very nice quarter.

I had a question on restructuring for 2015. I mean $0.06 last year doesn't matter, but $0.47 is material. And it would be Wall Street protocol to always exclude that unless you're going to tell me that $0.47 is an ongoing number for the next several years and I don't think you believe -- indicated that. Is it expected that restructuring in 2015 will be much lower than this year and, therefore, we should exclude it?

Yes, very much so, Eli. We are trying to be as transparent as we can, so the $0.47 is a one-time event for FY14. We don't expect that in FY15.

And that is why people should exclude the number if you want to get an apples-to-apples comparison. I would encourage you to go back to normal protocol as opposed to asking us to bury it in there.

My real question is two parts. One, most of the orders driven by distribution as opposed to OEM across it and, number two, is all the drop in industrial international the restructuring profitability and the slight drop in Industrial North America mix? What is causing the slight decline in profitability in those?

I am sorry, Eli, you broke up there a little bit. Could you repeat the question?

The question was, one, did most of the order gain from distribution as opposed to OEM? It would seem that that would be distribution that drove all your order gains. And the second part of it; is the margin change for the year versus the first quarter principally restructuring in international and mix in North America?

I think that for North America the margins, as you know, are at a historical high. We are cautious on being able to really take a look at increasing our margins there in North America.

I think our order growth there is a combination of distribution and our OEM business. It is not one or the other. So I think that is the way that we are looking at that going forward.

Now in terms of the international margins, I think there are obviously numerous reasons for the increase in our forecast there. But two of the biggest ones are our ability to integrate the acquisitions that we have done in the prior couple years and that ongoing benefit that we are getting there.

And then, of course, per our guidance for FY14 we are continuing to focus on our operations there and trying to -- as Pam said, 95% of our restructuring being there, what we are trying to do is to make sure that we are getting the entire company up to the level where we can maintain for an entire year our 15% ROS targets that Don talked about last quarter. And so we are seeing some improvement in our international margins and we are very pleased by that, and so our updated guidance is just reflecting that marginally.

All right, thank you.

Joseph Ritchie, Goldman Sachs and Company.

Thank you. Good morning, everyone. So just clarification on the $0.32 versus the $0.47 is the $0.15 in benefit that we discussed last quarter then not happening in FY14? And, subsequently, is the run rate for next year still expected to be $80 million in savings?

No, that is exactly right. We still are expecting $80 million and it is moving along just as we thought it would. So the $0.15 is exactly what we reported last quarter and I think if you look at it by quarter it is coming in line with what we said.

Okay, great. That is helpful. Then I guess just one question on industrial international. The margins were great this quarter; it seems like prior restructuring actions have helped.

I take a look at your margin guidance for this year at 11.4% to 11.8%; it seems a bit conservative to me if you assume that the benefits come through through the remainder of the year. Even if you have additional restructuring costs, it seems like the top end of that range is pretty conservative. So maybe you can just discuss that a little bit.

Well, I think that from our viewpoint there we understand always for the Company in all segments, almost, our Q2 is seasonally lower than our Q1, so we will see that impact here for this fiscal year. Our Q3 and our Q4, as I tried to explain earlier, is intact with how we explained our guidance coming out here for the fiscal year.

And so, since we are only two months in, we feel comfortable. Our order rates are coming in where we thought they were, our end markets are, like always, moving up and down slightly. And we continue to tweak how we are projecting our revenue through the changes in the end markets. Not only internationally, but also as well as North America.

So we feel like our numbers that we came in with here for the second half, especially in international industrial, are good numbers for us to be able to project our future EPS.

Because the implication I guess is for the next several quarters that industrial international is going to be down -- margins are going to be down over the next three quarters, despite fairly easy comps. So is that the right way to think about it?

I think, again, getting to the question we see again, we are looking at these numbers with our restructuring in them. If I took out the restructuring out of the international margins, they would not be going down. They would be relatively flat to trending up slightly.

But the bulk of our restructuring is in the second half, not the first half, so if you are looking at it including the restructuring then it may appear to be that way to you. But that is not what the underlying trend is in the business going forward. Does that make sense?

Okay. All right, thanks for the color.

Does that make sense?

Yes, yes. That is helpful. Thank you.

Josh Pokrzywinski, MKM Partners.

Good morning, folks. Pam, if I remember right from the last quarter you gave a little bit of help on first quarter just saying $1.40 midpoint. Any help you can provide on the December quarter, particularly with all of the moving parts coming through?

Sure. I can't do that, because it is very difficult I know for you to see with the JV in there, but I would say that the midpoint -- I can tell you the midpoint and then you can wrap the $0.15 around that if that will be helpful. But if you exclude the JV, it is probably around $1.14, $0.15, somewhere in there.

Okay, that is helpful. I appreciate that. And then, Don, just one last one here.

Going back to some of the comment you made on the PMI earlier, particularly in North America; I think we get pretty consistent feedback that it doesn't feel like a 55-plus PMI environment. Is that the sense you get from your customers? And if so, we do think we start to catch up to that on a more real-time basis?

That is a good question, because I have seen that stated before. I forgot where, what I was reading; I saw some comments to that effect. And I would have a tendency to agree that usually when you are up into that 56 territory, which is where the US PMI is now, that you would expect to see more activity.

I think there is a little bit of a lag this time, but when we look at our 3/12 data, which is our more recent three months' order trends, they are tending to trend in a direction of that PMI where you expect them to be. So I think that is just a little bit of a lag here, maybe a month or two, and I think we are going to be caught up with it. That is just -- really off the top that is my gut feel based on looking at our order trends and the current PMI trends that we are looking at.

Got you. So we should start to see that show up in the December quarter, excluding normal holiday shutdowns and things like that?

Exactly, yes, yes. I think that would be accurate, yes.

All right, I appreciate it.

Just for clarification, on the numbers that I just throughout to you, I want to make sure that you know that that includes the restructuring for the second quarter.

Yes.

Yes, okay, good.

All right, thank you.

Jamie Sullivan, RBC.

Good morning.

Jamie, just -- I would just like to announce that this will be the last question. We will close it up after this and Don will have a few closing comments. Thank you. Go ahead.

Well, thanks for taking my question. So just revisiting the revenue guidance, it sounds like first quarter is at least in line with expectations. The order trends are positive.

In the industrial segment you did take a point off of the top end of the range in the revenue growth. I know that may be minor, but just given the commentary and sort of the trend just wondering why change the range at all at this point in the year. There may be some end markets that are recovering a bit more slowly than you expected, so if you could give a little bit more color.

I think that the way that we were looking at the guidance at the beginning of year when we put it together, we showed a certain -- as the year went on certain end markets improving as the year went on. And as we look at updating all of these numbers, like we do every month and of course in detail every quarter, we saw some of the end markets maybe not coming back quite as strongly.

I pushed it down in the second half slightly. As Don talked about at the beginning, some of the markets that are down, primarily the construction equipment market, is not coming back quite as quickly as we thought, primarily in our international margins. And so we wanted to account for that as well as a few other markets that weren't really quite as strong as we thought that they were going to be as we look out now for the next nine months.

Having said that there is other markets that are doing better than we had projected and when we rolled them all together we ended up deciding to just pull that down by 1 point.

That is very helpful. Then, sorry if you covered it on the aerospace side, but just the walk again from the change last time to this time. Did defense have any impact on those numbers?

I think that there is a -- from a top-line standpoint there is an impact of some defense orders, but this is more timing than it is a significant down shift. And so we think that there is some impact there.

There is also one or two commercial programs where they are also a timing issue, where they are moving from FY14 to FY15. Then the other -- of course the other major factor there is that there is, going forward on an annual basis, $200 million less in revenue that we will see in the aerospace segment as a result of the closing of the JV as of October 1.

Great, that is helpful. Thank you very much.

Thank you. So at this time, Don, we will turn it over to Don who has some closing comments. Prior to that I would just like to say thank all of you for your attendance. Todd and I will, obviously, be around this afternoon. I am sure we will be talking to most of you.

Thanks, Pam. Just a couple comments real quickly here. Just want to once again thank everybody on the call for their participation and for joining us this morning.

Just I guess two key takeaways to recap. There is more takeaways than that, but just maybe a couple of key ones. Just one thing is our expectations for the balance of the fiscal year is for a moderate improvement in our global markets, and more importantly, ongoing growth in our distribution business.

That was suppressed in the past quarters. We see that coming back to life and that is good for Parker, for our future because it represents approximately half of our industrial business. So that is a real key one that I think as far as a take away we should all be pretty happy with.

The other thing is that we do expect to complete the comprehensive restructuring that we talked about. We went into a lot of detail with you about that and there is a lot happening behind the scenes.

When you talk about capital deployment and all that, this is one of the major things we are doing this year in that area. Spending $100 million on this major restructuring is not a typical program for the Company, as we mentioned. So we do plan to complete that as we have outlined it for you and with the full benefit occurring in fiscal 2015. So that is going to be a positive as well.

Then, as always, I would like to just take the opportunity to thank our employees for their continued commitment and success that we have had. Our global team really does continue to do a great job executing on the win strategy and delivering the positive results that we have seen. So I want to thank all of them.

Then just lastly, as Pam indicated, she will be here with Todd the balance of the day if there is any questions or follow-up that is needed. So with that goodbye and have a great day.

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