Parker-Hannifin Corporation (PH) Q3 2010 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Parker Hannifin Corporation earnings release teleconference. My name is Lacy and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call Ms. Pam Huggins, Vice President and Treasurer. Please proceed.

Thank you, Lacy. Good morning, everyone. This is Pam Huggins speaking. I'd like to welcome you to Parker Hannifin third quarter fiscal year 2010 earnings release teleconference. Joining me today is Chairman, President and Chief Executive Officer, Don Washkewicz and Executive Vice President and Chief Financial Officer, Tim Pistell. Please allow me as usual to address a couple of administrative matters prior to beginning with the actual earnings release. First for those of you online, you can follow today's presentation with a PowerPoint slides that have been presented and for those of you not online the slides will be posted on the Investor Relations portion of Parker's website at phstock.com. Second, as is customary, I would call your attention to slide number two which is the Safe Harbor disclosure and forward-looking statement and that if you haven't also done so, please take note of this statement. Third moving to slide number three, this slide is required indicates that in cases where non-GAAP numbers have been used, they have been reconciled to their appropriate GAAP numbers. Moving to the agenda on slide number four, the call will be in four parts today. First Don, Chairman President and Chief Executive Officer will provide highlights for the quarter. Second, I'll provide a review including key performance measures of the third quarter concluding with a revised outlook for fiscal year 2010. The third part of the call will consist of the standard Q&A session and the fourth part of the call today, Don will close with final comments. At this time, I'll turn it over to Don and ask that you refer to slide number five titled third quarter fiscal year 10 highlights.

Thanks, Pam and welcome to everyone on the call. I want to start with a few highlights to the quarter. First, our results in the third quarter demonstrate that the actions taken over the past year to restructure operations are paying off and more importantly give us greater confidence that a global economic recovery is in fact underway. We have now been able to demonstrate sequential improvement in revenues and earnings for three consecutive quarters and although the comparisons are against our performance on a weak economy a year ago, this quarter we generated positive year-over-year comparisons in revenues and earnings. On the demand side, our total order rate show increases both sequentially and on a year-over-year basis which is again an indication that the recovery cycle is underway. Importantly, we are seeing positive trends across a broad range of markets and geographies and I'll touch on those a little bit later in this broadcast. These are certainly indications of growth for the immediate term. Our plan is to continue to drive strong margin performance targeting at 30% MROS, generate positive cash flow as we prepare for growth and they continuing serving certainly our customers globally. I am pleased to report that our results indicate that we are well on our way to exceeding many of our objectives, just a few of those are as follows. We generated $841 million in operating cash flow year-to-date or 11.7% of sales which is well above our 10% target. We achieved this rate despite voluntarily contributing $100 million to the company's pension fund. Our strong cash position afforded the board the flexibility to approve a dividend increase for the 54th consecutive fiscal year, that is of course this year in a difficult environment and there's only a handful of companies that can match…

Thanks, Don. If you will, at this time, reference slide number six and I'll begin by addressing the earnings per share for the quarter. Earnings per share, it's on the press release this morning came at $0.94 for the quarter and this compares to earnings per share of $0.33 for the same quarter a year ago. On a sequential basis, the earnings per share of $0.94 compares to $0.64 last quarter. Included in this earnings per share of $0.94 is $0.06 in realignment charges and as you know as well, the $0.94 exceeded the guidance that we gave last quarter due to the following. Higher revenues in all segments of the business translating into higher operating profits with a positive EPS impact of $0.25, a lower tax rate with a positive EPS impact of $0.02 due to adjustments in connection with settlement of IRS audits. Slightly higher corporate general and administrative expenses impacting EPS by a penny as a result of higher incentive compensation and then slightly higher interest expense with an EPS impact of $0.01 due to increased commercial paper rates and higher shares outstanding at the end of the quarter as a result of dilution in connection with equity awards and the EPS impact of this was a penny as well. Incremental marginal return on sales in the quarter was a more than respectable 52%, as Don mentioned. As a reminder, marginal return on sales is the difference in segment operating profit divided by the change in revenue for the quarter on a year-over-year basis. Moving to slide number seven. Laying out to components of the earnings per share increase of $0.61 in the quarter versus $0.33 for the same quarter a year ago and this is on a consolidated basis. The puts and takes are as follows.…

Thank you. (Operator Instructions) Our first question will come from the line of Joel Tiss with Buckingham Research. Please proceed. Joel Tiss – Buckingham Research: Wow, that was fast. How are you doing guys? Just two quick questions. One, the corporate expense at $41 million, is that the new run rate?

Yes. Yes. Joel Tiss – Buckingham Research: Okay. And then, are there any signs anywhere that you can see that inventories are starting to rebuild and get back to normal or do you still feel like there's a lot of tightness in the channel? Can you give us a sense of what you are hearing from the customers and what you are seeing out there?

I think what is – this is Don. I think what's happening is that there is some stocking going on but I think it's directly related to the increased level of activity. I don't think any – we are not hearing of anyone that's really going overboard here as far as bringing a lot of inventory, other than to serve the customers with their current level of activity. And I think that is probably going to be the trend here for the next year as we climb out of this. I think everyone is being cautious but I think the other than that is happening is that as raw materials increase, I think there's probably a little bit of a sense that, not only increasing, but as raw materials become more scarce. I think there's probably going to be more of a concern whether people have enough inventory on the shelves to handle the demand. So I think a little bit of that is going to weigh in but right now, I think more or less we are seeing inventory pretty much in line with the increased level of activity. Joel Tiss – Buckingham Research: Thank you very much.

And our next question will come from the line of Jamie Cook with Credit Suisse. Please proceed. Jamie Cook – Credit Suisse: Hi. Good morning and congratulations.

Thank you. Jamie Cook – Credit Suisse: I guess my question is really, again, I think on the industrial rest of world margins which surprised again on the upside. How sustainable do you think that is? Was there anything unusual in the quarter? And then I guess just a bigger question for you, longer term. Don, I thought the comments you made about orders were interesting, being a 83% and 87% of prior peak when you think about 2008. When do you think we start to peak levels in U.S. and Europe and how do you think about that in relations to when we get back to your prior peak earnings?

Jamie, this is Tim. In terms of the margins on the international side, again, keep in mind there's a bit of a bifurcation here in that Latin America and Asia-Pacific are above previous levels – at or above previously levels and are generating very healthy margins. Europe is still struggling, if you will although I have to say that we are starting to see a nice turn here at the end of the quarter. In March, they had some really favorable results. So I think the restructuring that had to be done there took a long time to do, very costly, some that has now been executed and we are seeing the savings come through. As Pam pointed out, unfortunately, there is one other chunk that did not get done in the third quarter. We now anticipate that being done in the fourth quarter and that's about $0.04 a share that we didn't take the hit this quarter. We'll take it in the fourth quarter.

As far as the rate of the recovery – this is Don, Jamie. I think what is going to happen here, going on, barring any additional stimulus, which I don't see, I don't anticipate or predict. I think the rate of recovery that you see right now is going to be the rate that we are going to see going forward, at least the best we can tell. We are going right into forecast period right now and all the groups and divisions are going to be rolling all that out. But my guess right now would be we'll continue to see a gradual climb out like we have seen of late. It won't be a big hockey stick effect, but it will be a gradually climb out like what you've been seeing.

Don, if I could – this is Tim. I just want to add one thing. It's very encouraging to us that the – if you look at the sales in this quarter and you go back and look at our peak sales before the downturn, we generated about 80% of our prior peak. So we are extremely pleased that at still at 80% of our prior peak, we are able to throw off these kind of numbers. Jamie Cook – Credit Suisse: Okay. Thanks. I'll get back in queue. Congratulations.

Thanks, Jamie.

And our next question will come from the line of Eli Lustgarten with Longbow Securities. Please proceed. Eli Lustgarten – Longbow Research: Good morning, everyone.

Good morning Eli. Eli Lustgarten – Longbow Research: Nice quarter. Let me – on clarification. You said Q4 revenue would be how much higher than Q3 because I thought you said 4% organic and I don't know what the other number you said was?

Yes. Organic, it's going to be 4% and then in total, it's about 2% because obviously, you have the effects of FX in there. Eli Lustgarten – Longbow Research: You have a negative FX forecast for the fourth quarter for you guys?

Fourth quarter versus third. Eli Lustgarten – Longbow Research: Yes. I would say, okay. And one other clarification, you had not announced or taken any charge for this new healthcare bill. Is there anyone coming for that? Do you have any…?

We did take a charge, Eli and actually, it was minimal for us. As you remember, we got out of retiree health benefits some time ago so as a result, we only had to take a write-up of $1.2 million. Eli Lustgarten – Longbow Research: So – it was in the quarter?

That's right. All in. Eli Lustgarten – Longbow Research: Okay. Yes and can you talk a little bit about the outlook for the aerospace sector for the rest of this year, particularly as we get into next year? It looks like you are starting to stabilize sales. Are we going to see further pressure as we go through the next few quarters or does this thing stabilize and finally show some improved profitability? You keep winning programs, I just wondered…

If you look at the revenues for this quarter, you are seeing improvement in aerospace across every single segment. I mean, commercial OEM, commercial aftermarket, defense, you are really seeing increases. Now defense we think, it is going to be relatively stable on the OEM side. We are seeing some increases. We had some really good increases in September which is skewing the number a little bit, so that would flatten out a little bit in aerospace aftermarket. So up a little bit. But the commercial aftermarket, we are seeing some increases in that. And then of course, the commercial OEM side is, year-over-year it is still weak, but it's trending upward near term. Eli Lustgarten – Longbow Research: Are we expecting any improvement in profitability as we go into 2011?

Eli, just one other comment. The other positive thing to mention on the aerospace is that the revenue passenger miles are up almost 10%. So that's going to have a very nice impact on us. We are already seeing sequential improvement. I think when we look back, we are going to see this is going to be the bottom in aerospace. Eli Lustgarten – Longbow Research: So we can expect improving profitability over the next several quarters, particularly in 2011?

We are going into that forecast period right now, so we'll give you a better look. But if the revenues continue to come back, we should see improved profitability as well. Eli Lustgarten – Longbow Research: All right. I'll get back in queue. Thanks.

And our next question will come from the line of Alex Blanton with Ingalls & Snyder. Please proceed. Alex Blanton – Ingalls & Snyder: Good morning.

Good morning, Alex. Alex Blanton – Ingalls & Snyder: Pam, looking at your order rates for the three month period, clearly most of that increase is due to lower inventory reduction during this period than the prior period and you said that because you said inventories basically aren't going down anymore, they are basically staying flat, whereas the prior period they were doing down, so your orders were hit. But that doesn't tell us anything about what the rate of growth of the end market really is right here. You said you expect it to continue the way it is has been, but you didn't really quantify it. So could you or have you made any attempt to quantify the rate of recovery in U.S. demand and European demand, Latin America and Asia? At the end market, not back in the supply chain where you are.

Well, I can only – this is Don. I can give you some sequential kind of market trends that we are seeing. I am not going to quantify this for you, but I'll give you some sequential market segment the way we look at some of these segments. Maybe I'll, kind of, run down a few of these for you. On the aerospace side, we already mentioned a commercial aerospace aftermarket and OEM positive sequential market trends in those areas, military aerospace aftermarket positive. Cars and light trucks and residential air conditioning are two segments that, of course, affect our climate and industrial control group, positive market trends in those two segments. Semiconductor construction equipment, oil and gas, farm and ag all positive, as well as most of our general industrial markets that we serve. Heavy duty trucks distribution is very strong, the 312 curves look very strong on distribution, which again serves a broad array of markets, life sciences and mining and machine tools. So when you look at the positive trends, it's pretty much across the board. Now, a little bit softness in power gen and then we would say on the flat side, what segments are flat would be military OEM. On the aerospace side, military OEM aerospace, commercial air conditioning and refrigeration, industrial refrigeration and marine. So you can see that by far, most of the segments are looking very strong sequentially. I'm not quantifying any of that for you, but that is just a general look at some of these segments. Alex Blanton – Ingalls & Snyder: Okay. Second question, for several years you've been developing an energy saving transmission, power transmission system for light trucks and I think you've been working with Waste Management, I believe and Federal Express. You've talked about this at several analyst meetings and this is a potentially very large market should truck manufacturers adopt these energy saving systems. You have some competition, Eaton is one. Could you update us on what is going on there and how close are you into going into production in these new products?

Eli, it's energy recovery that we are into as we frame it and as we've spelled out about four different applications or markets in total could have about a $6 billion potential. So there are a number of us going after that. I think all of us are going to win a piece of that because we are coming up with slightly different solutions, so it's – depends on the application, the solution will be chosen. We are now pretty well fully booked with a prospective customers. Yes, you have named some of the people. We are working with the refuge truck people, we are working with the delivery truck people. We are also getting into other markets and applications as well. The revenues on this will really start to come through beginning next year and then will kick up in a much more meaningful way the year after that. So we are getting some revenue now on the prototypes, but as they say, I think a little bit in '11 and much more in '12. Alex Blanton – Ingalls & Snyder: It's fiscal, right?

Fiscal, yes. Alex Blanton – Ingalls & Snyder: Okay. Thank you.

Thank you, Alex.

And our next question will come from the line of Henry Kirn with UBS. Please proceed. Henry Kirn – UBS: Good morning, guys. Congratulations on a good quarter.

Hi Henry. Henry Kirn – UBS: In your minds, how does the up cycle so far compare to prior up cycles? What are the put and takes?

Well, this is Don. I would say that the up cycle now is more what we would consider more traditional what we'd seen in the past kind of muted, slow recovery and if you remember, if you go back, I've been through enough recessions myself where I can remember some of these things. If you go back far enough, Europe following North America was more traditional. Okay, on the 2001 it wasn't, because there was the 9/11 event that was tied in with that. But if you go back prior to that, you will see that normally North America came out and then Europe followed. Well, it's exactly what is happening here about six months, two quarters is what it takes for Europe to catch up. I think that's what – and that's why it's kind of – getting to earlier in the presentation was that I think that's what we are going to see again here, barring any other actions that would help stimulate that more, which I don't anticipate. So that is how I would compare from what's happened recently. You have to go back a few recessions, but that is kind of the way it used to be. Henry Kirn – UBS: That's helpful. What changed in March for Europe? Your body language is lot more positive there than it was before.

Well, Henry, his is Tim again. What changed is that we finally we're able to execute some of the restructuring that we wanted to do and then see that come through. So it was a good month as well, a pretty good month in terms of sales plus I see the benefits of the actions that we took, started to flow through. Henry Kirn – UBS: Was that more internal or external as compared to your expectations?

Well, it took a little longer to get the restructuring done than we had anticipated, Henry. Working with the works councils over there, it just took longer than we wanted it to. Henry Kirn – UBS: Thanks a lot.

I guess the increased business was external and the execution, I guess, you'd call internal. But in the end, we turned the corner, it looks like. But we have a little more work to do and we want to get it done in the fourth quarter. Henry Kirn – UBS: Thanks a lot.

Thank you.

And our next question will come from the line of David Raso with ISI Group. Please proceed. David Raso – ISI Group: Good morning. My question relates to price versus cost and how you are thinking about your July 1 price increases. Can you give us a little history on what you have seen this past quarter on price versus cost and what are you thinking about going into fiscal 2011?

Thanks, David. This is Don. First of all, let me just say that we've seen pretty dramatic raw material increase. I am going to give you some examples of that. Copper is at a 20 month high. Crude oil, of course we know that that is at a 17 month high. Aluminum is near an 18 month high, zinc near 18 month high, so plating materials and so forth, steel is a 24 month high, so most of our major raw materials are really going up very dramatically. What we've been able to do – our goal is and you know this, is that our goal is to keep our purchasing price index where we measure the purchased unit cost of all of these input raw materials compared to what we were paying the prior year, we want to keep that less than one and we want to keep the sales price index, which is the price of the products in the market that we price in the marketplace in a year-over-year comparison greater than one. Now, let me tell you where we are at. Thank God we went out a couple, few months back with a price increase and I know that there was a lot of questions whether this was going to stick. Parker is crazy what are you doing going out there with these kind of increases and so on and so forth. The bottom line is, we were reading this exactly right. I mean, we were feeling the increases. We weren't going to be lagging behind these kind of increases for three or six months, we're going to get ahead of it. And guess what? Every competitor followed because they felt the same thing. They were just sleeping at the controls. So we are going to…

They probably were raising in March in response to our raise in January. David Raso – ISI Group: Correct. I was thinking trying to stay ahead of it. I'm trying to be sensitive to the, the currency obviously has been helpful and I assume your price versus cost has been a net positive so far, so just trying to peek into fiscal 2011.

There are increases in the works for July. We have two periods in the year, January and July and there will be adjustments made accordingly for those products in those divisions that need them. So that is in the works, no question about it. David Raso – ISI Group: It's not announced in the channel but it's –

There will be adjustments coming. Absolutely. David Raso – ISI Group: Okay. That's helpful.

Dave, this is Tim. As you know, we are a very decentralized environment and we really love that atmosphere and structure and we have – I don't even know how many prices we have across the country. So key metric for all those general managers as Don mentioned, as you keep your sales price index above the purchase price index, procurement price index and we measure that in total, we get that tracked and reported. That is a very key metric. But other than that, it's just too much for us to get down into all the permutations and combinations thereof. David Raso – ISI Group: And last quick one on restructuring activity. When I think about the end of fiscal '10, what is going to be the total restructuring charge for fiscal '10? And just given the improvement you are seeing in the end markets, should we think of fiscal 2011 as having notably less restructuring activity, if much of any at all?

David, this is Pam Huggins. There is will be about $60 million in fiscal year 2010 and we haven't finalized the plans for next year, but there will be some restructuring in next year as well. Now, not to the extent, I don't think of what you are seeing this year but there will be some.

David, again, on – adopting lean enterprise, the whole idea, you are supposed to keep yourself lean at all times. As we've told you, we consider restructuring an ordinary part of doing business. We don't break it out separate, don't like to break it out separately. We talk about it a lot. In a normal year, we said we would do $0.10 to $0.12 probably worth of restructuring. In this downturn, that stepped up, but it like doubled. I think it was probably about double that rate last year, maybe double that rate this year but it still wasn't a huge quantum increase. And I think it will return back to a normal, so anywhere from $0.10 to $0.15 next year, which will be built into the numbers as it always is. David Raso – ISI Group: That's helpful. I appreciate it. Thank you.

Thanks, David.

And our next question will come from the line of Ann Duignan with J.P. Morgan. Please proceed. Ann Duignan – J.P. Morgan: Hi, good morning, guys.

Hi Ann. Ann Duignan – J.P. Morgan: Hi. Just building on Dave's question, could you comment a little bit on your strong incremental profits this past quarter and then looking at input cost versus pricing, should we expect those incrementals to dissipate from here back to your normal 30% or your target of 30%? Is there anything that you can do internally to keep those incrementals higher this cycle versus last?

Ann, this is Tim. I think that – as we told you, I think leading into the second half. In fact, we had already planned for much higher recovery in the second half and some fairly healthy incrementals. And again, so thankfully they are running higher than what we told you. I think we are looking forward to a pretty good strong incremental in the next quarter as well as this fiscal year. But clearly as we get into next fiscal year and things recover more and get more normalized, these incrementals 50 – plus 50% are going to revert back to the more norm of the 30%. Can't sit here today and tell you what the forecast was going to be for next year but absolutely, the 50 will revert back to the 30. Ann Duignan – J.P. Morgan: And just as a follow-up to that, in a normal environment it's usually CapEx spending, adding people. Would you expect the dissipation in incrementals to be driven more by gross margin declines or by SG&A increases?

We fight very hard on the SG&A increases but it will just be simply the bringing back of the people necessary for the production. Initially, we will do that, we will also start to incur overtime. It will be just the normal things. Ann Duignan – J.P. Morgan: Okay. Thanks. That's helpful and then just a follow-up on aerospace. I know that you are pretty bullish on the outlook for aerospace, particularly commercial after markets right now. Have you talked internally about the impact of what is happening in Europe right now and what that could do to commercial aftermarket or do you think it's – in the big scheme of things, it is just immaterial?

Ann, this is Pam. Yes, in fact, I had a conversation with aerospace yesterday. We were talking about this. I was asking lots of questions on it. And I think at the end of the day, yes, the airlines, especially the domestic airlines, they are losing money on this. So obviously, it could affect some of their buying patterns in the short-term. But really, the business today is very much focused outside of domestic North America. And while domestic may get a lot of money on those overseas flights, I think that they are concluding that it is probably not going to have a big impact, at least on our business. Ann Duignan – J.P. Morgan: Okay. That's helpful. I'll get back in queue or talk to you offline. Thanks.

And our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed. Jeff Hammond – KeyBanc Capital Markets: Hi. Good morning.

Jeff, missing in action. I haven't talked to you in a long time. Jeff Hammond – KeyBanc Capital Markets: Don, just a quick question on M&A. I think you've been a little more conservative near term, wanting to focus on delevering the balance sheet. So I guess with the turn in the markets and just feeling better about the balance sheet, how are you thinking about things?

On the balance sheet as far as the M&A, CapEx and so forth, we probably are going to end up. We're going to be – we're very tight right now as far as expenditures. Frankly, we're not turning anything away, but there is just not a whole lot coming through because as we execute lean, we find more and more capacity already in place. But I would say if you are going to model this, we're going to be somewhere between 2% and 3% would be good numbers to look at. That is where we've been tracking over a longer period. I don't see any major changes in that even on the upturn here because keep in mind, before the downturn we were at $12.4 billion company, okay. We are back to $10 billion now. So we have got about a 25% increase to absorb before we need to add much in the way of any capacity, assuming we don't do anything with lean, which we are. So I think that those capital expenditures certainly will come, but they are not going to be up in the 4% to 5% levels like we were in the past. Our focus has been on debt reduction, as you said. We have paid down over $1 billion dollars in debt. We are pretty much out of the commercial paper markets right now. Dividends was the other priority and of course, you saw we raised the dividend and we'll continue to look at dividends. We want to make sure that we don't do anything to upset the trend that we have, the 54 year trend. We topped off the pensions a little bit here. We'll continue to look at that and recalculate pensions to see if we need to do any more on pensions. And then the real focus is going to be on growth, is to really support the internal growth, the programs like Alex mentioned, the energy recovery, we are taking a close look at how much more we need to plow into that to get it to the finish line. We'll get it to the starting line faster, more so than the finish line. We want this to go on for a long time. And also, the acquisition growth which we're certainly looking at this point as well. So that's going to be focus. You can see how it's been shifting from debt, pensions and debt and things like that to a growth focus going forward. Hopefully that's helpful. Jeff Hammond – KeyBanc Capital Markets: On the acquisition front, are you seeing more properties come free? Are you committing more?

There's a lot – of course, we constantly have dialogues with quite a few different companies and there's plenty out there. We want to be selective as to what we go after. We want it to be synergistic with what we have. But yes, there are things available that we can go after at a reasonable price. Jeff Hammond – KeyBanc Capital Markets: Okay. Great. Thanks.

Thanks, Jeff.

And our next question will come from the line of Steve Volkmann with Jefferies. Please proceed. Steve Volkmann – Jefferies & Co: Hi. Good morning.

Hi Steve. Steve Volkmann – Jefferies & Co: Just a quick follow up on CIC. I see you raised the forecast there on the revenue line, but not so much on EBIT and just trying to understand. Is that all automotive driven? And what has to happen to really get those margins kind of moving in the right direction?

Well, Steve, I just want to say that the margins have gone from second quarter 3.5% up to 7.7% up to, targeting around the 8%. So we are seeing an increase. But yes, when you look at what is happening there, the increases that they are seeing are definitely automotive and residential air conditioning related. And the air conditioning residential related improvement is mostly after market So I think we are seeing improvement there. They did a lot of restructuring, as you well know and they are starting to see the improvement of some of that restructuring as well as some of their business coming back. Most of the markets that were heavily affected early in this downturn and have remained affected like heavy duty truck, residential air conditioning, those are big markets for the climate industrial controls group. So we are seeing – if you see orders, they've been improved more than any other segment climate industrial controls. So with that improvement, I think you'll see that the hopes to get them back to double digits here pretty soon.

And hopefully, this is Don. And hopefully, as construction picks up, that is going to help on the residential side and also, the commercial air conditioning refrigeration and industrial refrigeration right now are fairly flat. So we hope that that also will pick up and help the bottom line as well as the top line. Steve Volkmann – Jefferies & Co: Okay, great. That's helpful. And Don, I noticed you didn't talk much about share repurchase in your list of –

That is interesting that you picked up on that, Steve. I knew you would. No, right now we are not looking at share repurchase. We are really kind of focused on growing the business at this point. We want to get back to – we've had a CAGR of 10% plus growth for 30 years or so or 35 years and of course, if you look at the last five years because of this horrible recession, that number is down. So we want to get back to our average of 10 plus on the top line. And so that is what our focus is going to be as far as the cash utilization. Steve Volkmann – Jefferies & Co: Great. Thanks very much.

And our next question will come from the line of Robert McCarthy with Robert W. Baird. Please proceed. Robert McCarthy – Robert W. Baird: Good Morning, everybody. Can you hear me okay?

Yes. Good morning. Robert McCarthy – Robert W. Baird: Good morning, Pam. Don, I'm kind of interested in your comments that you are still expecting a, in your words, gradually climb out. Unless I'm mistaken, the industrial segment just had its strongest quarter for order growth ever. And you are expecting Arrow – I mean three of the four major market segments have apparently turned up. So your numbers should turn up there fairly quickly. So why, outside of just being scared of expectations running way ahead of what you might be able to deliver, why expect a gradual climb out based on what you are seeing?

Well, I just don't see – one quarter doesn't make a trend. We had one quarter that was strong. I just think that it's more prudent to look at this as a gradual climb out unless something happens that tells us it's not going to be. And if we start planning for real bullish numbers around here, the cost will go out of control. The budgets will go crazy. People are budgeting for fiscal 2011 now, fiscal 2011. And we certainly don't want to let the controls off the budgeting process, because they've come up with some blue sky forecast. So we are being cautious. Yes, I think all indications are good that we are going to continue this trend. Could be a little bit better than we are seeing, we don't know. But I think we are being prudent based on what we are looking at right now. Robert McCarthy – Robert W. Baird: So when you say gradual climb out, in your mind, are you planning around a slower than typical recovery?

No. I'd say if you look at the order trend rates that we have been posting, if you take kind of take those and straight line them, I think that is kind of what we are expecting. Just take those and graph them out and draw a straight line and you'll see about the kind of recovery we are expecting. So that's the best way for me to describe it. Robert McCarthy – Robert W. Baird: Okay. Let me ask you, you were kind enough, as you always do every quarter, to run through a list of market segments where you are seeing is strengths and not, but with so many on the positive list, I wonder if you can discriminate a little bit.

I can do that for you, Rob. This is Pam Huggins. Let me do that for you, okay? Looking at the markets on a year-over-year basis and then I'll get to the sequential in a moment. Robert McCarthy – Robert W. Baird: Okay.

But on a year-over-year basis, the strongest markets are semiconductor, cars and light trucks, heavy duty trucks, forestry and construction. Now obviously as you look around the world, they can vary. If you look at Europe, Asia-Pacific, North America, it can vary. On a year-over-year, the weakest for Parker is oil and gas, although I have to tell you that it's turning up. We are seeing improvement there. Power gen and that's just basically doing – that is based on the fact that some of the big OEMs are off for us and then mining. Now sequentially strongest is forestry, mining, machine tools and construction and then sequentially weakest is again, power gen, marine, oil and gas and then cars and light trucks, believe it or not, sequentially. But year-over-year it's one of the strongest. Robert McCarthy – Robert W. Baird: Thanks, Pam. That is very helpful.

Sure.

And our next question will come from the line of Terry Darling with Goldman Sachs. Please proceed. Terry Darling – Goldman Sachs: Thanks. I wanted to come back to the rate of change question from another angle. Looking at the ISM and other macro indicators would suggest that the rate of change really did accelerate quite a bit in March. I am trying to get a feel for what is implied by your June quarter organic revenue guidance relative to what you saw in March. I'm just trying to get a feel for what's implied by your June quarter organic revenue guidance relative to what you saw in March. And it looks like if you take the higher end of your range and back out the other quarters, you are around 30% on organic for both North America industrial and international industrial, 28 on North America, 32 on international. The orders in March, which were the rolling three month average, three month average were 30 and 42. And I would have assumed that you also saw the kind of inflection in March orders rates that we saw in ISM. And so the question is are you essentially assuming a deceleration in organic in the June quarter relative to what you saw in March? And if that is correct, why are you assuming that?

Well, Terry, this Pam speaking. Let me just tell you things have changed over the years with respect to our quarters. There was a time when our fourth quarter was always our strongest quarter and most recently, believe it or not and I'm speaking a little bit under normal terms that March is a very strong month for us. And in fact, can be the strongest month of the year. So you are exactly right. When you look at the fourth quarter, the numbers that you threw out for the organic growth on North America and international are correct. But the other thing that is happening is everybody wanted everything immediately. When we first came out of this downturn, everybody was asking for stuff, give it to me today. And now the lead time on some of this stuff is moving out. So we don't have the same situation that we were in. Terry Darling – Goldman Sachs: So it's a tough thing to calibrate. It does look like your comps are getting a little easier. Your revenues were down sequentially in the June quarter last year versus the March quarter. But maybe there's also some caution around, maybe there's a little bit of inventory rebuild going on that doesn't continue into the June quarter. Is there any thought there?

Well, we do think about that but that depends on who you talk to. We tend to think that for the most part, people are basically buying on demand.

Again Terry, this is hard. March was good. January was really not as good as we hoped and February, so-so. March was good. So it's like Don said, what do you jump off of? We're giving you a quarter. Our people are working on their outlook for FY 2011. And we'll be back in a quarter to give you that whole year look. So yes, we're – this is the best we can do for the quarter and as Don said, we would always want our people to err on the cautious side and not over spend over staff. So that kind of where we are right now. Terry Darling – Goldman Sachs: I appreciate that. And just maybe, you have been helpful with a couple of thoughts on FY 2011. And maybe I'll ask you to take one more stab at it. If we take the fourth quarter organic numbers for both, just talking about international industrial in North America and we annualized those numbers and we add in Don's comments on the, we are going to assume a slow grind higher. It would seem to imply organic for both of those segments of about mid-teens. Is there anything that feels offensive to you about that thought?

Is it larger than the – I would say good try. But we're, again, we're going to – I think we need to – and actually we are going up against someone else I know who started at 10 and we are trying to be respectful. But yes. Terry Darling – Goldman Sachs: Appreciate it, I'll follow up offline. Thanks.

Yeah. Thanks.

Thanks, Terry. So at this time, I want to turn it over to Don who has just a few closing comments.

Yeah. Thanks to everybody on the call. Just a couple of comments. Obviously, we are seeing a more positive environment for demand, pretty much around the world with increased order rates and the global economic recovery emerging. And we feel Parker is in a very, very strong position to benefit as this recovery unfolds. Once again, I want to thank everybody for your participation. I think that we had a lot of good questions and hopefully, cleared up a lot of questions in your mind. We appreciate certainly your interest in Parker. I would like to once again thank all the Parker employees around the world for their continued commitment to serving our customers. Pam will be available the rest of the day for questions, so I'd like to just say goodbye and have a great day.

Thank you. Thanks everyone.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.