Parker-Hannifin Corporation (PH) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2011 Parker Hannifin Earnings Conference Call. My name is Keith and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Pam Huggins, Vice President and Treasurer of Parker Hannifin. Please proceed, ma'am.

Thanks, Keith. Good morning, everyone. I'd like to welcome you to Parker Hannifin's Fourth Quarter and Fiscal Year 2011 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 that have been presented on Parker's website at www.phstock.com. For those of you not online, the slides will remain posted on the company's Investor Information website at www.phstock.com one year after today's call. At this time, reference Slide #2 in the slide deck, which is the safe harbor disclosure statement addressing forward-looking statements. If you haven't already done so, please take note of this statement in its entirety. Moving to Slide #3, 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 are posted on Parker's website at phstock.com. To cover the agenda for today on Slide #4, the call will be in 4 parts. First, Don Washkewicz, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the fourth quarter and full year 2011, concluding with the fiscal year 2012 guidance. The third part of the call will consist of the standard Q&A session. And for the fourth part of the call today, Don will close with some final comments. At this time, I'll turn it over to Don and ask that you refer to Slide #5, titled fourth quarter and total year fiscal year 2011 highlights.

Thanks, Pam, and welcome to everyone on the call. I was just reading an old report here before I came into this meeting. It was kind of a wrap up from last quarter and it seems like it continues on. It was a nice report that was done by Nigel Coe and it was titled Cruel and Unusual Punishment. And as I was reflecting on our share price over the last few months, it seems like it just continues on. But anyway, let no good deed go unpunished. To start the call then, I just would like to take a moment to point out some of the highlights of the year. First, I want to take this opportunity to commend our entire global team for delivering the record performance they did in fiscal '11. We just had a -- just a spectacular year. We achieved numerous records in FY '11 and we'll cover some of those today, we're not going to get into all the records but we'll cover some of the highlights of those records as I go forward with this report. Sales were an all-time record at $12.3 billion, representing almost a 24% increase from last year and it surpassed our prerecession peak of $12.1 billion in fiscal 2008. We're able to achieve strong profitability levels as total segment operating margin reached an all-time record at just under 15% for the year. And for those that have been following us for an extended period of time, you'll know that our Win Strategy goal was to hit 15% operating margins and we're right there at that goal now. It's taken us a few years to get there but here we are. So we're accomplishing what we set out to do. Net income was also an all-time record as we crossed the $1 billion mark for the first time at $1.1 billion. And that gave us one of the highest, I think the highest ROS, net margin ROS, numbers in our history at 8.6%, so pretty remarkable results there. That represented, of course, a record diluted earnings per share of $6.37, which was 87% increase from last year. And this was, by the way, at the high end of our most recently provided guidance and matched the Street consensus out there. And I might just reflect a little bit further and just say that if you remember, we finished fiscal '08 which was our record year before the recession and we now have exceeded that sales number just marginally at about $200 million more in sales. And on those additional sales, we delivered $0.84 more earnings per share or 15% more earnings per share on $200 million in sales. I think that's pretty remarkable when you look at the kind of hard work and effort that has gone into building this company by the team worldwide, just a remarkable accomplishment. Just a couple of comments on the quarter. Sales were an all-time record at $3.4 billion and that was up 22% compared to prior year quarter and the majority of that, by the way, was organic growth. Orders remained robust. We published those numbers for you, an increased 15% compared with the fourth quarter last year. Net income was an all-time quarterly record at just under $300 million and increased 32% compared to last year's fourth quarter. So the quarter was extremely strong for us and diluted earnings per share were an all-time further record at $1.79 for the quarter, in line with the Street consensus again. So really, a remarkable accomplishment there. And of course, I mentioned for the year that our operating margins were 14.8%. Likewise, they were for the quarter as well, about 14.8%. Just under that 15% target that we set out to achieve. So, we have a very strong financial position. Operating cash flow for the year was $1.2 billion or 9.5% of sales and that enabled us to increase our dividend, which we did 3 times this past fiscal year. We also repurchased 8 million shares of Parker stock valued at almost $700 million, with almost all of that completed in the fourth quarter. Overall, we're in an extremely strong position. Our cash position is strong yet and we have a great credit situation as well here at the company. We've initiated fiscal 2012 guidance for earnings from operations in the range of $6.70 to $7.50 per diluted share and of course, that would represent another record earnings level for the company, moving up from $6.37. So with that, I'm going to turn it over to Pam who'll get into a little bit more detail.

Thanks, Don. Please reference Slide #6 at this time and I'll begin by addressing earnings per share for the quarter. I'll go through the formal presentation here, a little duplication on what Don said to some extent. Fully diluted earnings per share for the fourth quarter came in at $1.79. This is an increase of $0.44 or 33% versus $1.35 from the same quarter a year ago. On a full year basis, fully diluted earnings per share came in at $6.37 and this compares to $3.40 for fiscal year 2010, an increase of $2.97 or 87%. The fourth quarter earnings per share of $1.79 and the full year earnings per share of $6.37, while at the high end of the range of our guidance, earnings were impacted in the fourth quarter by higher charges related to litigation, incentive compensation and asset write-off. Moving to Slide #7 and laying out the components of the $0.44 increase in earnings per share on a segment basis for the fourth quarter from $1.79 to the $1.35 in 2010, the puts and takes are as follows. Segment operating income added $0.54 to earnings per share for the fourth quarter as a result of higher sales and conversion strength. And while all segments contributed to the increased earnings per share, the majority was derived from the industrial segment. Below segment operating income, or what we refer to as below the line items, impacted earnings per share unfavorably by $0.12. And this was mainly due to other as the result of currency and asset write-off. Moving to Slide #8. On a segment basis, laying out the components of the $2.97 increase in fiscal year 2011 earnings per share from $3.40 to $6.37, again the puts and takes are as follows. Segment operating income added $3.08 to earnings per share for fiscal year 2011 versus 2010 due to higher sales and again, obviously, due to our ability to convert those sales to profits. Sales and operating income increased across all segments of the business. Sales for the year of $12.3 billion exceeded sales of the prior peak in fiscal year 2008. Below segment operating income again, or what we refer to as below the line items, impacted earnings per share unfavorably by $0.10. And again, this $0.10 was mainly due to other and this was the result of higher pension costs for the year. A lower tax rate added $0.09 to earnings as the result of a settlement with the IRS surrounding a previous litigation issue. And shares outstanding increased year-over-year due to the impact of the stock price on the outstanding stock options, impacting earnings per share by $0.07. Moving to Slide #9. Looking at the top line, revenues for the year increased almost 24% to $12.3 billion from $10 billion last year. And again, as I said earlier, these revenues are higher than the prior peak in fiscal year 2008. Sales increased across all segments of the business. The impact of sales as a result of acquisitions was less than 1% and currency was an addition to sales of 2% in the year. After excluding the impact of currency and acquisitions on sales, the total year organic growth was 21%. Segment operating margins for the year increased 340 basis points from 11.4% to 14.8%, an all-time record for the company. So moving to Slide 10 and focusing on segments, commencing with Industrial North America. North America reported a revenue increase of 25% in the year. Acquisitions and currency each added a little less than 1% to revenues in the year. So adjusting for the currency and acquisitions, organic or core revenues increased 23%. Operating income increased from $487 million to $746 million. That's a 53% increase over the prior year. And the margins, 16.5%, increased 310 basis points over fiscal year 2010 of 13.4%. So moving to the international segment, organic revenues increased 24% in the year and currency was in addition to revenues in the year of 4%. Acquisitions had minimal impact. So all of this resulted in an increase in reported revenues for the year of 29%. And in that segment, operating margins increased 500 basis points to 15.3% from 10.3% for fiscal year 2010. So moving to Slide #12 now and addressing the Aerospace segment. Aerospace fiscal year 2011 reported and organic revenues increased 10% as acquisitions had minimal impact and currency had no impact at all. Margins increased 100 basis points for the year to 12.9% from 11.9% last year. Moving to the last segment, Climate and Industrial Controls. Year-over-year total reported revenues increased 22% for the year. Acquisitions increased revenue 1.5% and currency added 1.6%. So base revenues increased in that segment 19%. And again, margins increased 110 basis points, moving to 7.7% from 6.6% last year. So moving to orders for the quarter, Slide 14 details orders by segment. These numbers, as you know, represent a trailing 3-month average and are reported as a percentage increase of absolute dollars year-over-year and they exclude acquisitions and currencies except for Aerospace. Aerospace is reported using a 12-month rolling average. So as reported in the press release this morning and as you can see on this slide, orders are up 15% for the June quarter just ended. This compares to 24% last quarter and 35% a year ago. Please note that the sequential decrease in order rate improvement is due to tougher comparables. North American orders for the quarter just ended increased 11% year-over-year and this compares to 20% last quarter and 46% a year ago. Industrial International orders increased 18% year-over-year and orders were up 22% last quarter and 46% a year ago. Aerospace orders are up 27% for the quarter and this compares to a positive 44% last quarter and a minus 3% a year ago. And then in the Climate and Industrial Controls segment, orders are up 1% for the quarter, 14% last quarter and 35% a year ago. And again, just to reiterate, this sequential decline is due to tougher comparables as order strength remains robust. Moving to the balance sheet, Parker's balance sheet remains solid. Cash on the balance sheet at year end was over $650 million and Parker had 0 commercial paper outstanding. Days sales in inventory decreased to 55 days from 58 days a year ago, which is tough to do in a robust market. Accounts receivable in terms of days sales outstanding closed at 48 days and this is consistent with last year in spite of rising sales. So Parker continues to make progress on weighted average days payable outstanding as well, increasing LIFO by 4 days for the year. Moving to Slide 16. Most notable on this page is that the company generated cash flow of 16.6% in the fourth quarter after adjusting for the $200 million pension contribution. For the year, net cash provided from operating activities for the year was $1.2 billion, representing 9.5% of revenue. If you exclude the $400 million in pension contributions for the year, cash provided from operating activities was 12.7% of sales. The major components of the uses of this $1.2 billion in operating cash flow, $900 million was returned to the shareholders via share repurchases of almost $700 million and dividend payments of over $200 million. $60 million was used in connection with acquisitions and $200 million, a little over $200 million, 1.7% of revenues, used in connection with capital expenditure purchases. And net of these uses, cash increased $82 million in the year. You can see on Slide 17 the debt-to-total cap ratio was 24.7%, and that's down from 25.3% last quarter. So now moving to the 2012 guidance, which is shown on Slides 18 through 20. And on Slide 18, the guidance for revenues and operating margin by segment has been provided. I won't go through each of those numbers. And on Slide 19, guidance has been provided in total for the items below segment operating income. So you can see what that is as well. Slide 20 summarizes the guidance on a diluted earnings per share basis. And as you can see from this slide and in line with what Don said, the guidance for fiscal year 2012 for earnings per share is projected to be $6.70 to $7.50 and this represents a $0.73 increase at the midpoint from the fiscal year 2011 earnings per share. Please remember that this forecast excludes any acquisitions that may be made in the year. The fiscal year 2012 increased guidance versus fiscal year 2011 is due to increased segment operating income with an earnings per share impact of $0.85, increased expenses below the line with an earnings per share impact of $0.07, a higher tax rate and with an earnings per share impact of $0.27. And this guidance assumes the following at the midpoint: increased revenue year-over-year, 7.6%, and segment operating margins of 15.1%. Expenses below segment operating income, including corporate administration, interest; and other at the midpoint of $425 million. And we've put a band around that of plus or minus 4%. The projected full year tax rate is 28%. And just a couple of points with respect to guidance. Sales for the first half versus the second half will be divided 47%, 53%. And earnings per share first half to second half is divided 45%, 55%. Realignment costs for the year are projected at $0.13. And also, first quarter earnings per share will be lower than the quarter just ended and that's due to lower sales, which is normal in a typical cycle; higher nonrecurring expenses in Aerospace; higher other expense due to stock option; and higher taxes offset by favorable interest in share count as a result of share repurchases. So at this time, if everybody is ready, we will open to our standard question-and-answer session.

[Operator Instructions] Our first question here is from the line of Robert McCarthy. Robert McCarthy - Robert W. Baird & Co. Incorporated: Don, I'm struck in the quarter by the fact that in 3 of your 4 segments, International, Aerospace and Climate and Industrial Controls, the top line was at or above your forecast for the quarter but margin in each case came in at the low end or even below your expectations. So can you talk about what happened in those 3 segments that kept their performance from achieving your forecast for the quarter?

Well, what we are really forecasting, Rob, is we don't forecast quarters, first of all. We forecast a year and we give you an update quarterly on that year forecast. But let me just talk a little bit about the quarter to try to be responsive to your question. The fourth quarter, the MROSs were 19%. And if you take FX out of that, out of those numbers, we're closer to 29%, just for starters. There were some one-off items in the quarter as there are in every quarter, but especially in the fourth quarter, when you're trying to true everything up, there was some litigation expense, some incentive compensation changes from what we anticipated. We finished of course, as you can see, stronger than what we were predicting. And -- well, it was within the range that we were predicting but we're up at the high end of that range. So that impacted us a little bit there. Some minor things in the way of asset write-offs and things such as that. In the -- specifically in the CIC group, I can just comment there that we had some restructure carryover into the quarter and that really pushed down their MROS for that group. But that's a one quarter phenomenon and that will be turned around going into this next fiscal year. The only other one maybe I would comment on would be Aerospace and the amount of NRE, nonrecurring engineering, that they've been incurring has been as you know fairly high even though the percent is coming down a little bit from year-to-year, it's still a pretty high number. And that compressed them a little bit down to the 15% MROS number. But those would be some of the things that I would just highlight for the quarter. Again, I don't want to focus too much on a quarter. I'd rather focus on the year. And keep in mind that the fourth quarter, we have all kind of -- all types of one-off type things happening and we could spend all day. I just looked at a sheet of about 100 different items, going both directions. So those would be some of the key ones though, Rob, that I would point out. Robert McCarthy - Robert W. Baird & Co. Incorporated: Is there any way that we could, even on a net basis, all in, for all these different items, put some kind of numbers to it?

I can give you some EPS impact, okay? Robert McCarthy - Robert W. Baird & Co. Incorporated: That would be great.

Yes, just bear with me just a second here. The litigation charges were $0.04. Incentive compensation was $0.03 and asset write-offs, $0.03. Robert McCarthy - Robert W. Baird & Co. Incorporated: And Pam, can you tell us what realignment restructuring expenses were in the quarter?

I can. For the fourth quarter, realignment was $0.02 and this compares to $0.03 for the same quarter in '10. For the whole fiscal year, realignment was $0.06 and this compares to $0.19 last year.

Your next question is from the line of Ann Duignan with JPMorgan. Ann Duignan - JP Morgan Chase & Co: I guess, Don, maybe you could take a step back and kind of reconcile with us the difference between your orders by segment versus your outlook for the revenue growth. Particularly, I'm looking at things like Industrial International and Aerospace, I'm struggling a little bit with the revenues.

I think, Ann, if you look at the range, again this is the reason why I don't give you a point, a data point per se. If you look at the range that we're giving you for next year, I think that will cover all of the potential changes that might occur with respect to the order trend. The higher order trend reflecting higher in the range, if you will, that we've given you. If that doesn't materialize, then we're still covered by the balance of the range. So I think that's the way I would characterize that. I think the other thing you know, obviously, is that in Aerospace, the order trend doesn't directly correlate with anything near term, more so on an annual, like a 12- to 18-month kind of, or a 2-year basis.

Yes, Ann, let me just give you a little numbers around this. I think it might help you in your thought process [ph] here, but in North America, the orders were up 11%. And if you look at the first half for North America, they're up 8%. And I think if you look historically, you'll always see that there's a little bit of a lag. If you look at international, the orders are up 18% and in the first half, we're looking at 16%. And that's at the midpoint. So I think that it's pretty much in line with what we're seeing in terms of orders. Ann Duignan - JP Morgan Chase & Co: Yes. But just the Aerospace one really jumped out with the 12-month moving average. You think you'd have some visibility plus 27% in orders and 3% to 6% revenue growth?

Yes, and that's a good point. And we've done some research on that as well. And when you look at the Aerospace, typically they will come out to only about 1/3 of orders. As you look out -- if you look at the orders and then you look at sales historically, it's only about -- it's about 1/3. And I think that -- and Jon, you can talk about this more, but there's a little bit -- Aerospace growth is actually a little higher than what you're seeing because we had some adjustments last year. And it's pretty typical that we have some things that move around, as you well know, with some of the OEMs. So when you look at that growth for Aerospace, it's a little bit higher than what you're seeing.

Ann, this is Don, one other comment on the Aerospace. Keep in mind that the military is anticipated to be down next year as well from where we are right now. So that impacts that as well. Go ahead, Jon.

Well, the only other point that I would add to that, Ann, would be that for Aerospace, those numbers that we're reporting here for orders are exactly where we're at as of June 30. But when we actually look at the Aerospace growth forecast for FY '12, we're really doing a bottoms-up analysis program by program, division by division. And what this indicates to us is exactly what you're pointing out, is that there's quite a few long lead cycle business, of course. And this long lead cycle business is really booking orders now that we're getting from our customers for FY '13 and FY '14 time period. And so that's really what we're saying. Ann Duignan - JP Morgan Chase & Co: Okay that's helpful to understand that because a lot of other companies only put into orders what's deliverable in the next 12 months, so that's very helpful. Just a real quick one then, on your EPS guidance, 45%, 55%, I mean, that's just pretty meager incrementals in the first half. Can you talk about what some of the headwinds might be? Is it just tough comps? Because Q1 last year was so strong? If you could just give us some color there, that would be great.

I'll start off and somebody might want to add on. But here's what really is happening and this is from a big picture viewpoint, Ann. But last year, if you look, when we came into the year, we were operating that at a fairly low level in terms of the sales volume. And so we have continued to ramp up in terms of sales to a much, much higher level. So when you're comparing this year, the first half to the first half and second half, really we hadn't aligned expenses with the demand yet. So that's really what you're seeing. I mean I could sit here and talk about stock compensation. I could talk about different things like that but really, from a macro perspective, it's that the robust demand, now our expenses are aligned with the $13.2 billion revenue number, whereas the first quarter a year ago it was much, much, much lower.

Ann, one other thing is, this is Don, again MROS for next year is around 20% based on the numbers we're giving you. And if you take the FX out of that, it's close to 30%. So just keep that in mind as well.

And this is Jon, Ann. Just one -- a couple additional points here. We've also got restructuring built into the first half of FY '12 at a greater rate than we had in the first half of last year and over this past year. And then if you really look at the data from a big picture standpoint, Aerospace is also impacting that because there are NRE expenses here and their first half is also high year-over-year at a much higher rate than they are in the second half year-over-year.

Your next question is from the line of David Raso with ISI Group.

It wasn't that long ago you used to give us monthly orders. And given we're already a full month into the quarter and just given some of the concerns out there in the economy, would you mind sharing with us how the orders have trended so far this quarter?

Well, I think David, we're still going to continue with our pattern of not giving out specific month-by-month data because we feel like that the month-by-month information could lead you to draw conclusions here that would not be as meaningful as really taking a look at a quarterly data. So we feel good about sharing with you our quarterly data. I will say that the month of July is not meaningfully different than the quarter. And so if it was, I would report that to you right now, but it's not.

I was just picking up on -- Pam, made sure to say the order growth rate decline was simply due to comps. So I was just trying to get a feel for how the quarter has progressed, Pam, on a growth rate.

Yes, so just to add to that, David, if you look at our orders, April, May and June, the progression was positive each month.

When it comes to the mix of business, as you're seeing the order book represent and also your ability to get any July 1 price increases through, can you help us with that as well?

Say that again, David?

The mix that you're seeing in orders, are we seeing maybe some OE slowdown with a little lean towards aftermarket? Or are we seeing continued strength from your big OE customers on their ordering? I'm just trying to get a feel for the nuances of what we see between your distributors and your OE business at potentially some inflection points around the economy.

Yes, I would have to say that just looking at the different markets, we've got a lot of very strong markets yet. And I just maybe mentioned a few of them for you. And as far as pricing, maybe I'll back up and just answer your first question about pricing. Right now, if we look at our sell price index, and we've talked about what that means and the purchase price index, we're favorable on that right now. So we basically recovered the cost inputs, at least from a raw material standpoint and the margin. And I think that it's important that everybody on the call understand that too, is that when you look at our gross margin, you compare our gross margin here, it has not shown any deterioration as a result of input costs going crazy for us. So we have been very successful there on the pricing side. One of the reasons why you can be successful on the pricing is if you've got the capacity to deliver. In this ramp up, I have to say that we've kept very high service levels around the world and we've been -- we've benefited from that because we've been able to deliver when the customers needed it and others haven't. And it got to a point where, in many cases, a few cents here or there on a per unit cost isn't as important as whether I can get the product or not and ship my products. So we've been very successful there. Yes, we think that we will continue to recover those kind of input cost increase going forward as we have in the past. I think this is just a continuation of the kind of work we've been doing with the Win Strategy and the strategic pricing and the strategic procurement initiative in the company. So I feel very good about that. On some of the markets that you had talked about or you're asking about, I'll just maybe highlight a few of the stronger segments that we see. Now there's a whole long list here I could give you of strong segments, but I'll give you some of the stronger ones. Construction equipment, very strong on the OEM side. Power gen, machine tools, mining, industrial trucks and material handling, marine and forestry. I mean, if we were to say what are the real strong segments, those would be them. But I have a whole long list including heavy-duty truck, farm and ag, commercial aerospace. I can go right on down the list here. I don't want to mention all of these, but it would be easier to tell you what isn't as strong. I really only have one in that category and that's telecom. It's interesting. And there's a couple of flat segments which would be cars and light trucks and commercial air conditioning. But the rest of the segments really are strong. And I think that maybe getting back to the first question on pricing, again maybe I could expand on that a little bit too and talk a little bit about the cost inputs. And from a raw materials standpoint, what's happened there is that this past year, I'm just going to read down a couple of numbers for you. Copper, up 46%. Copper continues to increase on a month-by-month basis but it's up 46%. Aluminum, up 22%, steel, 21%, nickel 19% and oil 26%, just to name a few of these. What we see right now is that they still are increasing, not across the board here, but many of these are increasing -- but at a much decreased rate. So we see them more or less plateauing here. So the demand for price increases going forward I think is going to be less -- or a necessity I should say, not demand, a necessity is going to be less than it has been in the past as a result of the moderation in some of these raw materials. There'll still be certain ones that'll be higher than others that will need more attention. So we've basically been recovering our cost and the margins. And those are some of the markets. I can go into more detail on our cyclicals, which I think might be helpful for those on the call to hear. Just take maybe a minute here and just kind of walk through some things. We look at of course the 3/12 pressure curves and the 12/12 for the various regions around the world and for our major market segments. And we won't go through all of those but I'll just highlight some of what we're seeing. And again, the 3/12 is the precursor to what happens in the 12/12. So it's the last 3 months order trend over the prior year, the same 3 months compared to the last 12 on a 12/12 compared to the prior 12 months order trend. So it's that ratio that we're talking about. So Industrial North America, strong 3/12, okay. Strong 3/12. You can read the newspapers and you say, "well there's a disconnect here." Well, I'm telling you what we're seeing, strong 3/12 and a strong 12/12 on Industrial North America. Europe, strong 3/12 curve, pressure curves, strong 12/12. Asia, a little bit moderating on the 3/12 but it's above the 100% line so we're not in any dangerous territory there and that's extremely strong 12/12, both are above 100%. Latin America is flat on the 3/12. So if you look at one region, it's a small region for us but nevertheless a region, it's flattish and the 12/12 was actually declining somewhat. So if you said that there was a soft spot globally, it would be, right now, Latin America. People don't think about Parker when it comes to distribution. I think of course, those on the call have known now that, that's a very important part of our business and very critical to us long term. And I just have to say that we have some extremely strong numbers coming in from distribution. That represents half of our total business, if you will. And we're looking at 3/12s and 12/12s that are extremely, extremely strong. So we're very, very happy about that. I think that's the -- if you spoke us too much on the OEM, you're going to miss the distribution aftermarket and I just want to point that out to you. Heavy-duty truck, I think everyone knows is very strong on both the 3/12 and 12/12, extremely strong pressure curves in both of those and of course we play in both in the heavy-duty truck market. I mentioned construction before, extremely strong. Refrigeration is a soft spot, declining on the 3/12 and the 12/12, it's flattening. So nothing great to talk about on the refrigeration side of our business. The process side of the business, we're seeing an accelerating 3/12 and also a real strong 12/12, both above, well above 100%. Aerospace's 3/12 is in a slight decline and I think that's the impact of the military part of that business. It still has a strong 12/12, which is above 100%, comfortably above 100%. And the 3/12 is hovering around 100%. So that's the reason for the go-forward forecast of about more moderate 4% to 5% of organic growth that we've shown you. Agriculture, strong, very strong 3/12, very strong 12/12. So we're participating in that as well. And so those would be just some -- and just one comment on the ISM. I mean, we get a lot of people get into these situations where we look at some of these metrics and it's a big knee-jerk reaction, jumping one way or the other and flip-flopping around. The way we look at this ISM, yes, it's an indicator, no question about it. Of course, it dropped down from 55 to 50. I've seen this thing go up from one number, drop down 5, next month, it's up 5. In the meantime, everybody went through all kind of gyrations trying to figure out what's happening in the markets and how bad things are going to get and so forth. Keep in mind that with the ISM above 43, you're still in a growth mode. It's just a slower growth mode. So we use 50 kind of as a bar, but really if you go below 50, you're still growing. It's just at a much slower rate. So North American is at 50, almost 51. It was down from 55. I don't get all concerned about that. I'm looking at my order trends. That's more meaningful to me than these ISM numbers. These are interviews with the purchasing people, a lot of subjective things in there, qualitative, nothing really all that quantitative that I'm familiar with, with these surveys. So the Eurozone, PMI's 50.4%. It was 52% in June. So it's pretty close to what it was. The interesting thing there is that all the major countries are showing strength for Parker. Of course, Germany's a major, major country as far as activity over there. It's one of the strongest. The U.K., Switzerland, France, Sweden and Italy and so forth, they're all strong for us as well. So everything really across the board there in Europe. It's tending to lag, the U.S. coming back out of this recession. And that's fine. That's kind of more of a traditional trend when it comes to a recovery in Europe. China, the PMI is right at 49%. It was down a little bit from the prior months, it was at 50%. So they are still forecasted to have a GDP of almost 10% in calendar '02. I think it was 9.5% in calendar '02 and it was forecasted to be greater than 9% in FY '11. So again, we're investing in China to support that growth over there and I think that growth is going to go on for many, many years to come. And then I think many of you may have seen the cap goods survey which moved up from 64.7 to 64.9, not a major move but it's the highest level since September of 2006. So, those are just some of the things that we would point out with respect to market segments. As you can see, with a very few exceptions, things are not looking all that bad for us at this point in time. That's a long answer for you, David.

Yes, I mean, it's sounds like after all that, macro could prove that guidance wrong. But it sounds like you're thinking the year starts with double-digit growth in the first quarter or 2, which implies the guidance is expecting back half to be low single digits. And I know it's a 12-month outlook so I'm not...

Yes. I mean, I think it's just a reflection in the back half and your numbers are correct. The back half is just our visibility into the back half of the year. We're being mindful of all the macro indicators that are coming out and we feel -- have obviously a lot more confidence in the first half. We have confidence in the second half numbers, but as the year goes on, we're going to continue to update everybody on the sales and how they relate to the order rates and the macro picture. And so, we'll just keep updating everybody. But we do feel good about our mid-single digit growth rates here for the second half.

And your next question is from the line of Alex Blanton with Clear Harbor Asset Management.

David just asked the question I was going to ask. So I'll go on to something else. Let me just ask a question that was asked earlier about the monthly orders in a different way. The ISM numbers that you just mentioned, do you see any indication of that decline of 5 points in your orders currently?

No, I think what we said Alex, this is Don, is that through that quarter, through the fourth quarter, actually our order trends were going up through that whole quarter, okay? So again, you have to -- and I was asking our people, I said I want to see this actual questionnaire that these people use when they do this ISM index because I'm a little bit -- I like to get to the facts. Is this some kind of a quantitative thing that I'm -- you get 3 points for this response, 2 points for that and whatever, or is this just kind of some knee-jerk or seat-of-the-pants type of response. So we're gathering a little bit more of that but my sense right now is that it's an indicator. It's not an exact science. It's just kind of a gut feel, a gut check with however many people that they survey. And so yes, maybe over the long term, looking out over the long term, you might get a better read on general direction. But one month doesn't make a trend in this ISM, believe me. I've seen this thing jump around from one month to the next and it depends on what time of year you're at and so on and so forth. Are you placing a lot of orders? Well, if I just came back from a plant shutdown, yes, I'm placing a lot of orders. Okay, well, what does that mean? Well, I don't know what it means. You just came back from a shutdown. Maybe that's what it means, you're backed up. I don't know. So having said that, I hope I'm answering your question a little bit. But did you have a follow-on to that?

Yes, I did. What was your working capital sales ratio? Year-end, you usually publish a chart on that or table.

Yes, we probably could -- I don't know that we published a chart on working capital, but...

Maybe it was inventory to sales.

Well, inventory to sales is down to about -- it was $0.105 per $1 of sales. Is that about right?

It's about right.

It's about $0.105 per $1 of sales. We've been -- our goal is $0.10. We've done extremely well there. Our working capital...

By the sales increase, you reduced the inventory in the sales ratio?

Exactly. That's the goal. That's what lean does for you. It's to drive inventory down, drive customer service up. And we've been whittling that number down over time and I don't have the exact number in front of me but as I recall it's around $0.105 per $1 of sale. And also the rest of the working capital, receivables and payables -- done extremely well on both of those areas as well. I just can't recite a number for you, Alex. But I can say that I know our payables, days payables are in excess of our days receivables. So at least that's a positive trend there.

Okay. Now, finally, your stock currently is down $5.41.

Yes.

And it's sitting at 10x the top end of your earnings estimate range for this year. What do you think of that?

Well, what I think, I have to say this, that there's a junkyard in town here that is selling for better than -- no, I'm just kidding a little bit, but it's almost the way I feel anymore. The reason that I made the biggest acquisition in the history of the company this last month was because this company is so cheap, it's pathetic. I mean, we bought $700 million worth of shares in one of the best companies in the S&P 500 in the market, which is good old Parker Hannifin with spectacular performance. We bought $700 million, 8 million shares and I'll tell you what, the way things are looking, if it continues to go down, I'm buying more. So that's my message.

You also increased your dividend 3x.

We did, 42% this year. Not too shabby. Like I opened this call, with not understanding what's going on out there, frankly. After every quarter when we achieve record results and increase guidance, we lose $5. It's getting kind of -- it wears on you after a while. But it will correct itself. We're just going to do the best we can. And we manage what we can manage. We can't manage the Street or what happens in the financial community any more than what we're doing right now. So we're just going to do the best we can here and continue to grow this company.

And your next question comes from the line of Henry Kirn with UBS.

Would you mind talking about how much organic growth is baked into the sales guidance? And is there a way to directionally parse that between underlying end market growth, your share gains and the pricing you're looking for?

Okay, Henry, this is Jon. Overall, our organic growth for next year is in the mid-single digit range. It's in the 5% to 7% range for next year. And again, our total growth for next year is being at 7.6%. So therefore, the lion's share of that 7.6% is really the organic growth. Now, the pricing question that you asked, it's very difficult for us to give you a number there. Of course, we're going to be watching all those commodities that Don just alluded to earlier in his comments between the copper, basic steel, oil and a few of the other basic commodities. That helps drive our pricing strategy going forward here. We have to recover those increases and those basic commodities going forward. But it's really hard for us to really kind of give you a number. And we really, in fact, don't really plan for that. We plan at the margin level, given the cost structure that we have. And we try to adjust accordingly at every single division in the company and every single region of the company.

Just a couple more, this is Don. Just a couple more comments about the forecast because maybe some of you are new out there. We purposely, when we go into a fiscal year, we budget tight, okay? And we do that for a good reason. We don't want all the operations spending as if we're running at the top end of our guidance or anything like that. We can always adjust budgets as we go through the year and we get more confidence as far as order trends and so forth. But when we start off a fiscal year, we don't look at any blue sky forecast around here. We don't accept any blue sky forecast. So we want them to budget tight. We don't want to just open the floodgates on bringing a lot of staff in, a lot of overhead and then missing our numbers, okay? That's just not the way we do things around here. And I think for those that have tracked us for a while and followed us, I think you would acknowledge that. As we said in the past, we'll update you every quarter and we have. And as we get more clarity on what's ahead, we'll certainly give that to you. If you look at just calendar, the calendar year now that we are in, we will show growth. If you look at the last 2 quarters of this fiscal year and our next 2 quarters, which would be the calendar year that we're in right now, our growth is 17%. If you look at our peers, I think you'd find an average around 13% or 14%. So the indication is there that we're doing pretty damn good relative to everybody else out there, especially in this tough group of peers that we compare ourselves to. So that's just a little bit of background on how we budget, why we budget and how we go about doing things around here just so you get a sense of that.

That's helpful. And then the last question, Don, you talked about repurchases. Could you touch on how you view that versus M&A as we head into fiscal '12?

Yes. I think, let me just say this on M&A. All of our groups are actively looking for opportunities out there. We're certainly evaluating a number of candidates. We've got plenty of capacity, even after repurchasing $700 million, we still have $600 million and some on the balance sheet in cash and we've got our short-term credit lines, we've got $1 billion there. We've got plenty of long-term opportunity if we needed it. So I think we could do as much as we wanted with respect to share buyback, as well as acquisitions and a combination of the 2. We're certainly looking for those companies with a strategic, synergistic fit to Parker. And we have some that were in the close. You never know you're going to get anything until you actually get it, until you finally sign on the dotted line. But we're down the road a ways on some and not quite as far on others. I would have to say though -- and we acquired a few companies this year, about $70 million worth of businesses this year. I would have to say this though. With as cheap as this company is selling, when we're looking at -- if I can buy this kind of a company called Parker Hannifin and I can pay less than 8x, actually now with the way the price is going, I'm paying 6x maybe, forward-looking EBITDA multiples. There is nothing I'm looking at out there, even broken companies, I got to pay 9x to 10x EBITDA. There is nothing I can buy as cheap as this company. I'm absolutely flabbergasted, I'm flabbergasted as to the kind of the valuations that we have going on around here. But somebody is missing the boat. I'm not sure who. But if it continues down this path, I tell you what, I'm buying Parker Hannifin and I'll pass on the acquisitions because this is the best deal in town.

Okay, your next question is from the line of Terry Darling with Goldman Sachs.

Just a couple of clarifications. Pam, I think you did indicate in response to Ann's question 8% revenue growth, first half for North America industrial. Did I hear that correctly? Because then I thought I heard you say double digits to David. But maybe you were talking about international there. I just wanted to clarify.

No, you're right, you're right. For fiscal year '12, it's around 8% and 16% for international.

Okay. And it was my impression previously that you didn't -- that the company did not put FX into the sales guidance. And is that changed or am I just wrong on that? Because I'm trying to tie in Don's comment about MROS at 30% FX -- x FX relative to that perspective.

What we do, Terry, just to be clear on this, is we don't try to forecast, okay, what currency is going to do. I mean, I don't think any of us know that. So we take the exchange rate at the end of the year and we compare that to the exchange rate in the prior year for all the different currencies. And that's how we come up with our currency projection. So any change from the end of June isn't reflected.

So that's -- what does that imply then within these numbers, 1 point or 2?

Yes. 2%.

2%, okay. And 2 points gets you 1,000 basis points on incrementals? That's the way that math works?

Right.

Okay. And then, Don, can you talk a little bit about how you're thinking about CapEx for next year given some of the uncertainties on growth? Are you moving forward aggressively there? Or are you trying to play cautious from the get-go and see how the year goes?

Well actually, we had a -- going through our planning, our budgeting and process and so forth, we have a big demand for CapEx this year. Actually, in our budgets came in very, very strong. And when I say that very strong, all relative speaking, I mean over 3% for us is very strong. In the past, over 5% would have been very strong. But over 3% is very strong. So we are budgeting higher levels for CapEx. We have some of these programs that we're working on for the higher growing regions that we just can't postpone because some of these construction projects take time to materialize. We don't want to miss that market opportunity. So for instance, in Asia in particular, we want to do some more investment there, localize some more manufacturing and continue to grow and keep pace with the activity levels in that region. So no, we're not shying away. We're trying to support the groups, our operating groups, the best we can with their CapEx requests. But they are at a higher level than they have been in the past. There's no question about it. We will be spending more on CapEx as a percentage, but still not ridiculous from historical standpoints, to what we've done in the past.

Okay. And then just coming back finally to the M&A discussion, Don, I think you, in the past, have talked about trying to acquire in the 4% to 5% of revenues range annually. And this fiscal year, as you said, you were well below that. Is the 4% to 5% goal still there? Do you think that the -- and maybe you can talk about why you think you missed the mark this year? Is it just discipline on valuation? Is it something else in your process that you think you need to address, or what?

No, I think we have the entire organization that -- it's kind of focused on it. The goal for us is really 10% growth nominal, 12% as we -- as kind of a stretch goal for us as we -- this is over a cycle, okay? Kind of on an average. And as we ramp up our innovation initiatives and we're doing that as we speak, we think we can get to 12% annual growth over the cycle, over a period of time. Yes, you're going to have ups and downs throughout that period of time like we've seen here with the recession. But over time, we want to be averaging that. So in any particular year, like we had this last year, it was a lean year. We did maybe $70 million in acquisitions. We would like to have done more. We had certainly the wherewithal to do more. We're just not out there just to buy for the sake of buying. We don't want to get bigger. We want to get better. So we're being very cautious about what we buy and the prices that we pay. And frankly, like I said earlier, and I don't want to belabor this point, but our best buy right now is Parker when I look at kind of what I've been faced with. But that doesn't mean we're going to shy away from acquisitions. I can do both. I can repurchase shares. I can pay dividends. I can acquire companies. We're blessed with a very high cash flow in this company. So I'm confident that, yes, some years, we're going to do better than others. I've had years around here as you've seen in the past where we've acquired $1 billion worth of businesses and others where we haven't acquired much of anything. So it's really on the average that I'm really more focused. Over time, I think we can average in that 5% range. I still feel confident with that. It just not going to -- it might come a little bit more lumpy than it has in the past.

Our next question is from the line of Eli Lustgarten with Longbow Securities.

Just a follow-up on the guidance. Last year, when we went through this very conservative guidance, you forecast nearly the first half of the year pretty strongly and then you basically extrapolated the second half of the year as relatively flat, if I remember correctly, just adjusted for workdays. Then you wound up having to -- it dramatically increased. Did you do something similar to this in that? Because your second half guidance, as you said, looks like a very low number. It looks like you almost just extrapolated the workdays because of no visibility. Is that a fair statement of what you've done?

Well, I think what I would say to that, Eli, is we're following the same process and procedure that we've always followed.

So at this point, you're working with effectively no visibility in the first part of calendar 2012?

Yes. I mean, I think it gets back to what Jon said. We feel pretty comfortable for the first 6 months and once you get out beyond that, it gets a little more difficult. So I think our view is that we will update you every quarter and we do the best that we can at this point in time and then every quarter, we will give you an update.

And can we for a moment focus on the industrial rest of world? The margins there were somewhat disappointing in the fourth quarter versus the rest of the year. I mean, the year came in at 15.3% and the quarter was like 14.7%. Can you -- is that just a negative currency effect? Or is that a sort of -- can you give us some guidance on what caused the margin weakening -- I guess weakening, than probably from what was expected in the quarter?

Eli, to start off on that, you know those charges that we talked about, we had some higher charges in the fourth quarter? Most of those really related to international. And that's what you're seeing. We talked about the litigation charges, the asset write-offs, that type of thing. Those for the most part were in that international segment.

But they weren't below the line? They were in the -- because again when we look at the corporate and then allocating all those charges, that was much higher because most of them would be there. So some portion of it ran up into that segment and that's what held it down?

Right. So we were a little disappointed that those higher charges came through in that fourth quarter in international as well.

Is there any way for you to quantify how much was charged into the quarter from charges?

I did give the EPS impact.

Well, you gave us $0.04, $0.03, $0.03 for the 3 charges.

That's right. That's all I have, is the EPS impact right now.

Yes, yes, because my question, how much of that $0.10 was charged to international versus below the line, is really what I'm trying to get at?

The majority of it.

Okay. And your guidance and profitability is basically at the bottom end flat with what we saw this year at up. Is that all strictly a function of the volume there? Is there any other -- you classify it as being neutral. Is that just strictly a volume phenomena that you're forecasting for us or anything else?

Could you say that question again? I'm not sure that we follow...

Your operating margin forecast by segment at the low end is flat with what you reported basically for the year on that, except for CIC. And it goes up a little bit. Is that just strictly because you basically have volumes relatively weak at the lower end? Is that strictly a volume -- the difference in margin change is strictly a volume number?

Eli, this is Jon. I think that is a big part of it. But also another very big part of it is that as Don said at the beginning of the call, we are at a record level of operating margins. And so we're in new territory for ourselves as we go forth and we think about the kind of margins that we can get going forward. We're not going to see us being able to get the same margin expansion that we were getting when we were coming out of the recovery that started 2 years ago, now that we're into the third year of is it a recovery or is it now into the new normal going forward. So we are reluctant to really forecast record margins in the second half vis-a-vis what we've been able to do in the past year. However, having said that, for the full year, our operating margins are at the 15.1% range. We finished in FY '11 at 14.8%. So we don't want to go, in terms of giving guidance, much higher than that, in the out periods here. We just -- we need to get closer to those out periods. We certainly have the capability of doing much better in terms of margins, where we are right now. But we don't have the experience in really seeing how we perform given the lower growth that we're projecting right now.

Eli, just to remind you too, we do have more restructuring in this year than we had last year.

Did you quantify how much more restructuring this year?

Yes, we have $0.13 this year, whereas last year, the whole year, we only had $0.06.

Yes, Eli, one last, this is Don. Just one last comment about next year, even though we don't have a lot of visibility at this point into the calendar -- next calendar year, I think we all recognize that it's an election year and I would bet money that no one in Washington wants to, at least in the White House, wants to see something bad happen in the economy. So my guess is it's going to be a good year for business. That's just my opinion.

Okay, our next question is from the line of Mark Koznarek with Cleveland research.

We've kind of covered a lot of ground and I just wanted to ask about the Aerospace outlook, if you could dissect that into the -- what your thinking about for the component pieces, commercial OEM, commercial aftermarket and military and contrast that with what we had for fiscal '11 actual, please?

Sure. You're talking about orders, Mark?

I'm talking about the revenue outlook.

Okay. Let me just tell you that when you look at OEM, it was up about 10%, commercial MRO, 17% and then military MRO was relatively flat. However, moving forward right now, the military MRO orders are much stronger than we had anticipated. So when you look at the backlog, there is much higher military orders in the backlog than what you would think, looking at the sales numbers from last year. So when we go into this year, we're expecting military or defense OEM to be down. We're expecting all other segments to be up.

And what were those segments during fiscal '11?

That's what I just gave you. That was the sales revenue year-over-year by segment.

The 10% for commercial OEM, MRO up 17%, that was all fiscal '11?

That's correct.

Your next question is from the line of Jeff Hammond with KeyBanc Capital Markets.

I'm just trying to understand a little bit better the impact of currency on the incrementals because I think you said your guidance is 20% stated but 30% x FX?

Right.

So what's the underlying margin on the translated on the FX translation? Essentially 0?

Well, Jeff, we don't really disclose that. I mean, we've really never talked about that in the past. I don't think I want to talk about that. But I think what I can tell you is we just went back and we took that underlying profitability on that currency and we adjusted the current year as well as the prior year and that's how we came up with that number.

Okay. And then just on the comment about margin expectations, Jon, and I appreciate you're in new territory, but I mean, are you still running the business for incremental margins in that 30% range?

We absolutely are. I mean that 30% range is a deeply embedded part of the culture of the company. We still look at it that way. We still, when we make decisions in terms of new business going forward or renewing old business going forward, we think about what that incremental business is giving us in terms of marginal returns. So it's a very important part of our business going forward and it's an important part of the way that we judge businesses going forward. But -- not to belabor the point here but at 15%, we feel like that we're in -- delivering a lot of shareholder value. We've got -- we've always felt like that we have 4 points of EVA, at a 15% ROS for the company. And we don't want to turn away business that is very profitable but not exactly incremental to the current margins that we have right now. So all of our businesses are out and judging their new business in terms of the 30% MROS. But as Don talked about last quarter, we're not going to see those exact same incrementals throughout the entire business cycle every quarter, quarter after quarter, although we can see that going forward in different periods depending upon the mix of how our businesses are growing.

Okay. And then can you give us ending share count and what share count you're using within the guidance?

Sure. For the guidance, we start out at around 159.3 million and then gradually work up to 160 million. Okay, and we ended fiscal year 2011 with around 164.8 million. So with that, I think we'll end the call, if that's okay with you Jeff, if you're done.

Yes, all set.

Thank you very much. And so for those of you online, I just want to thank you for your participation and I just want to turn it over to Don who just has a few closing comments. Thank you.

Well, thanks to everyone that's on the call. And I just want to once again take this opportunity to thank our employees for their continued commitment to serve the customer and for the record performance we posted this fiscal year end and the record performance that we're anticipating for next fiscal year. So they're focused on the Win Strategy. We've talked about that over the last 10 years. And by the way, this is our 10th anniversary of the Win Strategy. So it's taken a while to get here but we finally arrived and are achieving some of the goals that we set out for us over that period of time. And it's really transformed the company into what I would call a premier high-performance company. So once again, I want to thank you for your participation and your continued interest in Parker. Pam's going to be around for the balance of the day and feel free to give her a call if there's anything that you want to ask further with respect to the company and our performance. Okay, thank you and have a great day.

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