Parker-Hannifin Corporation (PH) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to First Quarter 2012 Parker Hannifin Corp. Earnings Conference Call. My name is Carma, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Ms. Pam Huggins, Vice President and Treasurer. Please proceed.

Thank you, Carma. Good morning, everyone. This is Pam speaking, just as Carma mentioned. I'd like to welcome you to Parker Hannifin's First Quarter Fiscal Year 2012 Earnings Release Teleconference. Joining me today is Don Washkewicz, Chairman, Chief Executive Officer and President; and Jon Marten, Executive Vice President and Chief Financial Officer. For those of you who wish to do so, you can follow today's presentation with the PowerPoint slides that have been presented on Parker's website at www.phstock.com. And for those of you not online, the slides will remain posted on the company's Investor Information website, again, at www.phstock.com and they will remain there one year after today's call. At this time, if you would reference Slide #2 in the slide deck, which is the Safe Harbor disclosure statements, which addresses forward-looking statements. If you haven't done so already, would you 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've been reconciled to the appropriate GAAP numbers and are posted on Parker's website as well. To cover the agenda for today, on Slide #4, the call will be in 4 parts. First, Don, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the first quarter, concluding with the revised fiscal year '12 guidance. The third part of the call will consist of the standard, the question-and-answer session. And for the fourth part of the call today, Don will close with some final comments. So at this time, I'll turn it over to Don and ask that you refer to Slide #5, titled First Quarter Fiscal Year '12 Highlights.

Well, thanks, Pam, and welcome to everyone on the call. To start the call, I want to take a moment to just point out some of the highlights for the quarter. As you could see from the press release, we're off to a great start for fiscal 2012 and I wanted to, first of all, just recognize our global team for delivering just another outstanding quarter performance for the company. So here's a few of the records that we had for the quarter. Sales were a first quarter record, all-time record of $3.2 billion and that was a 14% increase over last year's quarter. And of that, almost 11% was organic growth, of that increase. Orders increased 9% compared with the first quarter last year. We were able to drive very strong profitability levels through our total operating margin from our total segment operating margin that reached an all-time quarterly record of 16.1%. And that was driven by North American Industrial margins at 18.5%. So very strong activities on the margin level in those 2 areas. Our incremental marginal return on sales was 20% for the quarter, and that's better than the first half forecast that we had given you on the guidance, which was about 16%. Again, we still have a quarter to go. So that could trend down a little bit or maybe remain around 20%, but we're pretty pleased with where we started the year as far as our incremental margins so far. Net income was also a record quarterly -- or a quarterly record at $298 million. And that increased almost 20%. And our net income margin was a record 9.2%. I think our last record was in the 8% somewhere -- 8%, somewhere between 8% and 9%. Diluted earnings per share were above guidance and represented an all-time record of $1.91 and that was 26% increase from last year's quarter. We continue to build a very strong financial position, operating cash flow for the quarter was about $309 million or just close to 10% of sales. So very strong cash flow generation for the company. Due to the depressed market conditions and price of our shares, we were active in repurchasing our own stock. We repurchased 4.4 million shares in the quarter and that was close to $300 million worth of Parker stock. And that's on top of the 700 million approximately that we did last year for a total of around $1 billion in the last year or so. So overall, we're very pleased with our strong start to the fiscal year 2012. We remain in an extremely strong position to drive record performance throughout the balance of this fiscal year. We've increased the guidance. As you could see, we had a midpoint before when we started the fiscal year at $7.10, we increased that to $7.55 now. And that represents a 19% increase in earnings at the midpoint and would represent another record year for the company. So we're on a pretty good path here to set another record. Our increased guidance reflects our strong first quarter. Of course, there's a lower share comp because of the repurchases in there but also continued growth based on our order entry trends and so forth that we see, continued growth for the full fiscal 2012. So now I'm going to turn it back over to Pam and she's going to go into a little bit more detail for you.

Thanks, Don. As is the normal course, I'm going to go through my prepared remarks that correspond to the slides and then we'll open it up with our Q&A session. So at this time, if you'll please reference Slide #6, and I'll begin by addressing earnings per share for the quarter. Fully diluted earnings per share for the quarter came in at $1.91. This is an increase of $0.40 or 26% versus the $1.51 from the same quarter a year ago. And this is also an increase over the fourth quarter of $1.79 or 7%. Moving to Slide #7. Laying out the components of the $0.40 increase in earnings per share on a segment basis for the first quarter year-over-year. So reconciling the $1.51 to the $1.91, the primary puts and takes are as follows: Segment operating income added $0.37 to earnings per share for the first quarter. This is notably due to higher sales in all segments of the business, as well as conversion strength that's evidenced by the 20% marginal return on sales achieved for the quarter. Expenses below segment operating income impacted earnings per share unfavorably by $0.02 and this was mainly due to corporate G&A as a of result of benefits that are mark-to-market, which had an unfavorable impact, offset by a favorable currency impact in other. A higher tax rate impacted EPS by $0.04 due to less discrete items in the quarter versus the same quarter a year ago. And the lower share count had a favorable EPS impact in the quarter of $0.10 as a result of the repurchased -- the 4.4 million shares during the first quarter of this year, combined with the 7.8 million shares repurchased through the second quarter -- from the second quarter through the fourth quarter of last year. So the total cost shares repurchased during the quarter was $292 million. So this gets you to the amount that Don just mentioned, $1 billion, $300 million this year and $700 million last year. Approximately 2/3 of the first quarter beat versus initial guidance was due to higher segment operating income, while 1/3 of the beat came from items below segment operating income. And this includes less shares outstanding as a result of the shares repurchased in the quarter. Moving to Slide #8 and looking at the top line, revenues for the year increased 14% to $3.2 billion, up from $2.8 billion last year. Sales increased across all segments of the business. The impact to revenues as a result of acquisitions was less than 1%, and currency was an addition to sales of 3% for the quarter. After excluding the impact of currency and acquisitions on sales, organic or core revenue growth was 10.5%, as Don mentioned. Segment operating margins for the quarter increased 60 basis points from 15.5% to 16.1%, as Don said, an all-time record for the company. So moving to Slide 9 and focusing on segments commencing with the Industrial North America segment, revenues increased in this segment 13% for the quarter. Acquisitions and currency had little impact as acquisitions added a little more than 1% to revenues. Currency added less than 1%. Adjusting for these, core revenues increased 12%. Operating income increased from $189 million to $223 million, this was an 18% increase for the quarter. And operating margins for the quarter increased to 18.5% from 17.8% year-over-year. Moving to Slide #10, continuing with the Industrial segment. Moving to international, organic revenues increased 10% in the year. Currency was an addition to revenues of 7%, and this was down from what we initially projected. Acquisitions had minimal impact on revenues in the quarter, adding less than 1%. And all of this resulted in an increase in reported revenues for the year of 18%. For the quarter, segment operating income increased to $208 million from $184 million and operating margins decreased to 16.2% from 16.8%, mainly due to the continued investment in the region. Moving to Slide #11 and focusing on the Aerospace segment. Reported revenues increased 13.9% and due to the minor impact of acquisitions and currency, core revenues increased 13.7% for the quarter. Margins increased 280 basis points for the year to 13.8% from 10% last year. And this was mainly due to the increase in volume and a favorable mix of aftermarket to OEM. Moving to Slide #12, the Climate and Industrial Control segment. For the first quarter, total reported revenues increased 3%, acquisition impact was minimal for the quarter, increasing revenues less than 1% and currency added 1.8% to sales. So base revenues increased 1% in that segment. Segment operating margins as a percent of sales were 8.2% for the year versus 9.2% last year. And this is mainly due to a less favorable mix in their business during the quarter. Moving to Slide #13, orders for the quarter. As you remember, these numbers represent a trailing 3-month average and they're reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions and currency except for Aerospace. Aerospace is reported using a 12-month rolling average. As you can see from this slide, orders are up 9% for the September quarter just ended. North American orders increased 16%, Industrial International orders increased 4%, Aerospace orders increased 14%, and Climate and Industrial Controls orders decreased 1% due to weakness seen in some of their markets. Moving to the balance sheet. Parker's balance sheet remains solid. Cash on the balance sheet at year end was over $400 million. Days sales and inventory increased to 62 days from 61 a year ago. Accounts receivable in terms of DSO closed at 48 days, 2 days lower than the same quarter last year. Parker continues to work on weighted average days of payable outstanding, increasing to 53 days versus 50 last year. Cash flow from operations for the quarter was a little greater than $309 million at 9.6% of sales and not seen here but as a reminder, last year's cash flow number included a $200 million pension contribution. So the major components of the uses of the $309 million in operating cash flow in the quarter, $355 million returned to the shareholders by share repurchases of $292 million and dividend payments of $63 million. $87 million of cash used in connection with acquisitions, $44 million or 1.4% of revenues utilized for capital expenditure purchases. And in addition to these uses of cash, cash decreased another $56 million in the quarter, but that was mainly due to the effect of exchange rate changes on cash. On to Slide 16, you can see that the debt to total capital ratio is 25.8%. And on a net basis, 20.9%. So now moving to Slide 17, the revised guidance, which I know you were all waiting for. On Slide 17, the guidance for revenues and operating margin by segment has been provided. And on Slide 18, guidance has been provided at the midpoint and in total for the items below segment operating income. And on Slide 19, we've summarized the guidance on a diluted earnings per share basis. As you can see from this slide, the revised guidance for fiscal year 2012 for fully diluted earnings per share is projected to be $7.25 to $7.85. At the midpoint, $7.55. As Don said, this represents a $0.45 increase from the initial fiscal year 2012 guidance provided last quarter. Please remember that the forecast excludes any acquisitions that may be made further in fiscal year 2012. The full year, fiscal year 2012 increased guidance versus that provided last quarter at the midpoint is $0.45. To break this down for you, the increase of $0.45 is due to increased segment operating income with an EPS impact of $0.14, decreased expenses below the line with a favorable EPS impact of $0.09 and a lower share count as a result of share repurchases with a favorable EPS impact of $0.22. The increased guidance incorporates the better first quarter than initially projected and the lower share counts as a result of the shares repurchased in the quarter. So just to summarize the revised guidance, revenues increased 7.6% at the midpoint and this is consistent with the prior guidance. However, due to currency in the better first quarter, the organic growth has increased to 7.7% from 5.4%. Segment operating margins increased to 15.4% from 15.1% and expenses below segment operating income, which includes corporate administration, interest and other at the midpoint are $406 million with a band of plus or minus 2%. Now this is down from the $425 million provided last quarter as a result of lower other in the first half in response to the lower first quarter due to favorable currency, partially offset by higher corporate G&A in the first quarter as discussed earlier. The projected full year tax rate is 28% and a couple of points with respect to guidance. Sales first half, second half are divided 48%, 52%. EPS is divided first half, second half, 46%, 54%. I know that our analysts know this but please be reminded that the first quarter results can't be annualized for the year. The natural cycle of the business is a lower second quarter EPS versus the first quarter. This is due to less workdays in the second quarter versus the first and seasonality kicking in with holidays and vacation. Unique to the second quarter, there will be additional R&D expense for Aerospace and CIC markets will be challenged due to seasonality and weakness in the refrigeration and air-conditioning markets. At this time, we'll now commence with the standard Q&A session.

[Operator Instructions] The first question comes from the line of Ann Duignan from J.P. Morgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: It's Ann Duignan. Could you comment on the difference in end markets when you look at your North American Industrial segment, orders up 16% versus CIC down 4%. I mean, we know CIC is resi, AC and automotive but where are you seeing the strength in the North American Industrial segment?

Well, Ann, this is Don. I can kind of run through some of that for you. I think the place where we see the most strength in North America is really from our North American distribution. When we look at the 3/12 pressure curves and the 12/12 pressure curves there, they're extremely strong, one of the strongest segments for us being the, of course, huge installed base that we have out there in this aftermarket and the fact that, that distribution segment is doing extremely well. So that would be the one area of great strength for us, that's 50% of our Industrial business. Heavy-duty truck is another strong segment, running real strong on both the 3/12 and 12/12 pressure curves. Construction, very strong. Refrigeration's flat. And I think we mentioned that air-conditioning and refrigeration are both flat, both commercial and residential, on both sides. Semiconductor is actually going down. So -- and we've said that last quarter that we anticipated that was going to happen, in fact it is. So the 3/12 is declining and the 12/12 pressure curves is heading for the 100% line. So that's moving in that direction. Process industries are strong on both the 3/12 and 12/12 pressure curves. Aerospace, declining on the 12/12 but we don't see any issue there, no major problems there. And it's a little bit hard to measure, that's because these orders come in a little lumpy. So, right now though, the 12/12 is well above 100%. The other -- I guess, the only other area that I would mention would be agriculture and that's extremely strong and remaining strong, having a very positive 3/12 and 12/12 pressure curves in both areas. So those would be some of the specific markets. Pretty broad-based though, when you look at the strength of the specific OEM markets for us, but also the half of our business that comes from the aftermarket, through distribution primarily, is extremely strong as well. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. And, Don, the distribution business I know a lot of times you don't know who the specific end customer is once it goes through distribution. But could you talk about -- is there any particular geography or region of the country that's particularly strong on distribution or is that pretty broad-based, too?

Ann, we look at that and basically, I would say right now, it's pretty broad-based. Oil and gas has been pretty active, so down in the Southwest, I think we've got a, in particular, a lot of activity going on down there. But when you look across the United States, we see strength pretty much throughout the country and that's really driving this strong quarter entry trends. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And then just as a quick follow-up, can you comment on Europe versus Asia?

Well, Europe is still doing fine. Asia, as you know, is trending down and we anticipated that last quarter. But again, when we talk about Asia going down and China in particular, we're talking about from a 12% GDP down to maybe a 9% or 10% GDP. And we'll see how long that sustains. Typically, what we've seen over there, it's been a short-lived thing and typically activity picks up again. But even at 9% or 10%, we're happy with those kind of numbers, we can deal with that. Incrementals over in Asia are a little bit lower than what we would like to see. But keep in mind that we're putting a lot of infrastructure in Asia to support future growth there. So I mean, both in India and China and elsewhere, we've got a lot of investment going on in Asia to participate in the high growth rates that we're seeing from that region. Europe, kind of the same thing. What we see is -- not the same thing, I shouldn't say, as far as trends. Europe, if we look at the pressure curves in Europe, we would see strong 3/12s, which is indicative of what we're going to see coming up here in the future months as far as the trend of the 12/12. And the 12/12 pressure curves, this would be last 12 months over the previous year, is hanging in there very strong. They're both declining slightly, which can be expected for this part in the business cycle. But I would say right now, Europe looks very good for us. All of the major countries there, being Germany, France, U.K., Italy, are all looking good. So we're not as concerned about the smaller countries. Of course, we want to see strength across the board but the major ones are all doing very well and remain strong for us. So that's the reason we're pretty optimistic about Europe going forward. In spite of the fact that, of course, everybody's been reading the newspapers and I'd just make one other comment, if we haven't talked ourselves into a double-dip by now, we probably won't because we've been talking about it for better part of 2 quarters here. And Europe with the Greece problem and the debt problem hanging over us and the $14 trillion debt in the United States, if we haven't talked ourselves into it yet, I don't think it's probably going to happen anytime soon. So having said that, that's the reason why we're kind of bullish going forward through the balance of our fiscal year. Hopefully, that helps you, Ann.

And the next question comes from the line of Alex Blanton from Clear Harbor.

A couple of questions. The first being on the $0.22 that you said was added by share repurchase to your guidance, does that mean that you were buying more shares than you had expected? Because if you increased the guidance based on greater share count -- greater share repurchase, that means you must be buying more than you thought you would.

We didn't include any share count, any share repurchases in the guidance 3 months ago.

Okay. All right. So what you have in there now, does that include any future repurchase or just what you did in the first quarter?

No, just what we did in the first quarter.

Okay. So you could have further share repurchase and further increases in guidance due to that?

That is right.

Okay. Secondly, the rest of world, Industrial, Industrial International, incremental margin was only 12.5%, and so the margins were down slightly as you mentioned. Could you go over the reasons for that? You already mentioned that you have restructuring and are infrastructure building in Asia.

Right.

But was there was any restructuring? Was there a geographic change, a product mix change? What was it?

No, it's pretty much that if you look at Europe, Alex, we had a very strong incremental in Europe, actually well above 20%. So we were doing pretty good there. The Asia was the big factor and it's pretty much just what I said, we've got a lot of investment going in there. And of course, the order trend has been down, so we're carrying that investment on a lower order activity and a sales activity. And just trying to -- you couldn't believe all the activity going on in Asia, just trying to get our organization -- we're hiring hundreds of engineers and all kind of technical people to try to support this level of activity there. We're doing more systems work. We're putting in a dozen facilities over there, just a tremendous amount of activity. If you look behind the scenes here, you'd be surprised that -- how much is going on here. So it's really that incremental impact by Asia that has really impacted the International number.

Well, I like that answer. That turns a negative into a positive.

Yes. Yes, absolutely.

And finally, you mentioned the aftermarket being strong in North America. Is that because people are postponing replacement and, therefore, doing more repair of old equipment? Are they building inventories out there or just what is it?

I think it's all of the above. I think the facts are here that when you see the strong OEM activity we've got going on, okay, I pointed out the aftermarket because of it's -- in particular, it's extremely strong. But it's so broad-based that I can't really point to any one factor that's driving that. It's just very broad-based and I think it's indicative of the fact that the order trends here in North America are still very positive. There's a lot of activity going on in spite of what you're reading in The New York Times. And so I think that, that's really the -- what's happening is that we just have a broad-base level of activity in a lot of different markets and our distribution is really participating in that. So I can't really point to any specific area for you, Alex.

The next question comes from the line of David Raso from ISI Group.

My question's on the International business. We just saw the orders slow fairly notably from 18 to 4 and obviously, the revenue guidance for the full year went down roughly 300 basis points. But the full year margin, just looking at the midpoint, went up 20 bps. So I'm just trying to connect the dots between slower growth. We saw the first quarter international margins actually down year-over-year, but the guidance for the full year is still implying -- the rest of the year international margins are 15.6 versus only 14.9 the last 3 quarters of last year. So I'm just trying to square up the slower growth outlook. We already have margins down year-over-year but the rest of the year, they're going to be up year-over-year. I'm just trying to square that math up.

Well, David, this is Jon. I think we're seeing a couple of things here from an international standpoint. Number one, we had a -- as we're revising the guidance going forward, we're of course taking into account a very strong first quarter. So that is impacting the numbers that you're looking at here just a little bit. They also -- another major factor that we're seeing internationally that is helping our margins maintain where they have been and really growing to a certain extent is our 2 major initiatives here in the company as encompassed in the Win Strategy, our pricing and what we're trying to do there in Asia and in Europe. And number two, what we're doing from a strategic procurement standpoint, that we've organized ourselves along our supply chains in each region around the world. And those organizations, especially in Asia but also in Europe, are really starting to provide significant benefits to us. And so that gives us the confidence looking forward here at our margins and that's why we can make the guidance the way that we did.

And not to front-run any sensitive and internal announcements you have to make but are we looking at some slower growth potentially internationally and taking some proactive costs out? Because again, the rest of the year to have margins up year-over-year and we're already down in the first quarter. So if you have some quantification or something to make it a little more believable because, again, I'm not sure...

One other fact to just -- again there's going to be a different answer at every single region internationally but if you really focus at some certain specific portions of Europe as an example, the restructuring that we took last year and the year before is really starting to pay benefits for us in this year coming up. And we're starting to see the benefits from that. So, yes, volume, there's no doubt. Volume is changing as indicated by our order pattern, but we are really in a point right now here where the real change at the midpoint is not as significant as it may sound to you right now.

Plus, David, you have to remember that the guidance for the most part is incorporating the beat from the first quarter and it's also incorporating the lower share count.

I was just talking about the international margin.

Right. But there was a beat in the international in the first quarter as well.

And then just lastly, obviously, it was nice to see the strong North American order growth acceleration. How is that working into your thought of pricing going into, more traditionally, a January price increase? In a sense, how much are you embracing this order acceleration with enough confidence to translate it to better pricing for January?

Well, David, this is Don. I would just say that we just raised prices in July, about 2% overall. Our gross margin now is a record for the company. You might have noticed that, at 25%. What we will do is we will have an increase but I think what we have to do is really take a serious look at our cost base because, of course, that's going to be the driver for any pricing change and what happens in the market. And from a cost standpoint, when we look at raw materials, of course raw materials are starting to trend -- not all of them, but some of them are starting to trend down. And the other raw materials, like steel and some of the rubber and plastic ingredients and things like that, are flattening out. So there won't be as much pressure on us, certainly, as there had been in prior periods, to have a really -- need for a price increase to the same extent that we've had in the past. But there will be increases going forward. Again, we'll evaluate that. It will be a group-by-group, division-by-division product line evaluation, using our strategic pricing teams. And -- but I would think that the order of magnitude will be smaller only because there will be a lower, at least at this point, unless something changes, there's a lower, a lot of less pressure due to raw material increases or actually raw materials flattening out here.

And the next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Just wanted to hit on capital allocation. Can you maybe talk about how you're thinking about share buyback, maybe talk through what your new authorization is? And then just what are you seeing in the pipeline? It looks like you did $87 million in acquisitions, was there some acquisitions in there that you didn't announce formally that were completed?

Yes. Jeff, Don here. As far as the share repurchase, we did about -- we were going to do about $80 million a year in share repurchase and that's just to avoid dilution due to share -- stock option exercises and so forth. So we'll do $80 million as a minimum. We, of course, do evaluation on Parker. And we evaluate Parker along with all the other acquisition opportunities out there and we've seen that -- we've had great a opportunity to acquire some shares at a very, very depressed price. So we're looking at that all the time and we're going to evaluate that in light of everything else that we want to spend the money on or potentially spend money on going forward here. Our first priority, of course, for the company is to maintain a strong balance sheet and we want to keep an A-rated debt. That's key for us. From a growth standpoint, of course we want to focus on supporting the 10% growth target for the company, about half of that being acquisitions. We've talked about what. We'd like to do more than what we've done in the recent past. The reason why we cut the $300 million off at $300 million so far this year is because we do have some things in the pipeline that, hopefully, will be coming through. And if that's the case, there's no sense in buying shares back. If we're going to be doing some acquisitions, we'll need a capital for that. So we've kind of held back a little bit here. If that doesn't materialize, I think that -- and if the stock continues to be depressed at these levels that it's at, then we'll certainly take another look and potentially do more share buyback. CapEx, supporting the internal growth is going to be key. You can figure 2% to 3% CapEx is kind of what we've been running. I would anticipate that, that will be what we're going to be doing in the future. And the last component -- well, 2 components actually, pensions. We were trued up as far as pensions. We don't have to do anything as far as pensions this year, so we're pretty much -- we did all that last year. We got caught up, so we're okay until fiscal 2013. And then the dividends, we're going to continue to look at that and the key for dividends is to try to keep the yield approximately in the midpoint of our peer group. We're a little bit lower than that now, we recognize that. And we did increase dividends 42% last year, we're going to take another look going forward here and we'll make a determination what, if anything, we want to do with the dividends. But we want to keep it at about the median of peers. And we want to target about a 25% payout over the cycle. We're a little bit shy of that right now but we're targeting -- we want to basically get caught up and hit about 25% over the cycle on dividend payouts. And we don't want to do anything to disturb that 55-year record of dividend increases year-on-year. So hopefully, that gives you a little overview as to where our priorities are as far as cash deployment.

Right. But I guess you've done $1 billion of buyback and that's been maybe a little more of the bias in absence of acquisition. What I'm hearing is maybe we're a little more focused on M&A.

Well, we have been -- Jeff, we have been focused on M&A. It's just a matter of timing as to what might come through. We did about $80-some-million in this last period, a small one in Korea, we made an acquisition, we did -- purchased out a joint venture, half of a joint venture that we had going on in China. So we invested about $80 million, $90 million in those 2 activities. So it's not that we're not doing anything, we'd like to do more and we do have some more coming back, coming through the pipeline at that. Some are getting close to maybe being announced here but we have some -- we have to work through some issues on a couple of these and get the contracts finalized. So hopefully, we can see something coming through the balance of this fiscal. But I can tell you this, that the entire corporation, all groups, all divisions are actively looking and actively targeting strategic acquisitions, things that will be synergistic, acquisitions that will be synergistic to our current business.

Okay. And any one-time aberrations in the industrial North America margin, 18.5 this quarter?

Jeff, this is Jon. Really, we had a really strong North America results. When you look at division-by-division, region-by-region, we'll have some upsides and downsides, but nothing that we would normally call out in a call like this. And it's just very, very strong, very strong results.

So the guidance, which is lower than the 18.5 reflects a more normal mix and maybe better balance between OE and distribution?

Yes, the mix is a very good term for it here. And as we go through our normal seasonality here, as Pam talked about earlier in Q2, and we look out at Q3 and Q4, we feel good about the guidance that we gave here. And again, that would be the same pattern that we saw in terms of margins in North America Industrial as we saw -- as last year progressed.

And, Jeff, and I just want to caution you, sometimes I think if you look historically, you'll see that third quarter sometimes can be very, very strong. Not to be repeated in the second quarter going forward, if you look at the historical numbers, you'll see that.

The next question comes from the line of Terry Darling from Goldman Sachs.

I'm wondering if we might get a little help on the cadence of the International Industrial order trends through the quarter. Ending June up 18, I think I remember commentary that June was pretty stable with May. And, I guess, I'm wondering did we go negative or just continuously decelerate through the quarter? Or was August kind of funny and you've seen a rebound back in September? I was thinking about a couple of things here in concert. One is the organic guidance going forward is above where the orders are. And second, we've heard from some of the OEMs in the truck area about some production cuts in Europe in the fourth quarter, yet you're seeing -- your view here is continued solid outlook for Europe and -- just trying to put all those pieces together.

Terry, this is Pam speaking. I mean, we you really get down into it and you start looking at the absolute dollars, because the comp sometimes can be a little confusing. You're exactly right, and what you're saying really hits home because what happened is we did see some rebound throughout the quarter in September. I wouldn't say that international orders as a total are on an incline. But we feel pretty comfortable that they're hanging in there. I think it's the way that Don described it. There's a strong 3/12, the 12/12 is hanging in there but we did see rebound in September across the International business.

Okay. And how are you thinking about some of these production cut announcements in the context of the outlook on Europe? Is it just a one-off there or too early to tell or how should we think about that?

Terry, Don. Well those are all in our numbers, okay? All of the activity, all the cuts, everything is represented in those 3/12, 12/12 numbers that we're talking about. So, yes, we are aware of certain segments of the markets over there that are cutting back a little bit. Some of this is typical of what they've done in this last period, because keep in mind, Europe, when you talk about December in Europe, not a whole lot goes on in Europe in December. So they don't need a whole lot of purchases in December to support the December activity. So the second quarter for Europe is really soft as well. I don't know if some of these cuts are more typical of what we see every year or this is something above or beyond that. But based on my order trends in the 3/12s and 12/12s and the specific markets that we track, it doesn't look like anything all that unusual to us.

Okay, that's helpful. And then on the uptick in the Aerospace revenue guidance, is that coming on the military side, is that coming on the commercial side, in OE versus aftermarket? Could we get a little color there?

Terry, I think -- Jon, again, that really what you're seeing there is an uptick in the OEM volume. And that's what's really driving that change in those numbers.

Okay. And then just lastly, I think in the North America Industrial margin guidance going forward, you're actually looking for higher incrementals if we focus on the high end of the range. Spent a lot of time over the last couple of quarters talking about price-cost challenges and kind of labor -- some labor issues, going back to the FY 4Q, FY 3Q of last year. You've talked about the pricing coming through in July and the guidance implies you're feeling better about that. We're seeing some of the commodities come off a little bit, but how would you characterize the view on North America Industrial incremental as accelerating from here?

Well, I think you've hit on it. I think the -- we do feel like the major portion of the headwinds on the price cost relationship are behind us. We feel like that we're more even keeled going forward. We feel like we should get some accelerating incrementals as -- which is what you'll see is indicative in our guidance, when you get a chance to analyze it, going forward here for Industrial North America. And so right now, we're not way ahead from a price-cost but we're not behind like we were as we were talking about in Q2 and Q3 of last year.

The next question comes from the line of Jamie Cook from Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Two questions. One, with regards to the Aerospace margins and the incrementals, which were pretty healthy, can you just comment on sort of what drove the healthy incrementals and how we should think about that -- how we should think about that going forward. And then my second question is last quarter, I think you called out $0.13 of restructuring charges that would hit the first half concentrated in International and CIC. Did I miss -- did we take any in the first quarter or, and is that still -- is the $0.13 still implied in guidance?

Well, first of all, let me try to answer the Aerospace question first, Jamie. The margins in Q1, the increase there that you're seeing is related to the volume that we saw and the mix that we saw, but the volume that we saw related to the MRO portion of commercial, MRO portion of the business, that commercial MRO portion of the business drove the margins that you're seeing right now. Now to the question that you asked about, well, what can we expect from that going forward? That tends to be lumpy over time. So we're not seeing a pattern that is going to give us a step function up in that business for the balance of the year. So our guidance takes into account all the different portions of the Aerospace business, via the OEM and commercial. The OEM and the MRO as well as the commercial and the military portions of the business. Now for the restructuring, we really had $0.15 last year and we're now at $0.09 right now today and we are continuing to focus most of our restructuring in Europe. We're still planning on that restructuring in Europe and we've got it baked into our Q3 and Q4 going forward. And so I'm hoping that, that's answering your question there. Jamie L. Cook - Crédit Suisse AG, Research Division: But to be clear, so we had $0.09 in the first quarter. Was that -- did that all hit international? And then...

No. Let me just clarify. What we had -- last time, we spoke about restructuring. We said that we're going to have about $0.15, okay? Jamie L. Cook - Crédit Suisse AG, Research Division: For fiscal year 2012...[indiscernible]

Yes. And in the first quarter, we had $0.06 projected. Okay, that really came in at about $0.02 for the first quarter. So we didn't do -- so we pushed that into the second, third and fourth quarter. But overall, quite frankly, Jamie, we think that the restructuring is going to be a little bit down from the $0.15 that we gave you last time. Jamie L. Cook - Crédit Suisse AG, Research Division: So how much is that helping you? And why are -- before, we were going to take it all in the first half, why is it taking longer to implement the restructuring?

Well, it's not that it takes longer. There are several projects going on. And sometimes, you don't know exactly when you're going to get approval for those. You have to go through the works councils and those types of things. And so you're -- we're giving you guidance based on estimates that are initially projected hoping that it will get through works council and sometimes, it just doesn't get approved timely and so then we have to push it out.

Jamie, this is Don. But I think what Pam is saying is that we're not getting help from this, okay, extraordinary help. By the time the year's out, we're going to basically burn through about what we said we're going do here, give or take a penny or 2. So I mean, it's not like we're going to be way off the mark. Jamie L. Cook - Crédit Suisse AG, Research Division: Okay. And then just -- is it -- and then it will be split sort of evenly throughout the 9 months is the way to think about it, is the best guess at this point?

Yes, we do have some pushing into second quarter from first. Jamie L. Cook - Crédit Suisse AG, Research Division: So Q2 will be greater, okay.

The next question comes from the line of Josh Pokrzywinski from MKM Partners.

Just wanted to dig in a little bit on the rest of world orders. I would imagine with the price increases you put out in January and then the follow-ons in July, that you're probably carrying the better part of 4 points of price year-over-year. Should that be the way we look at the 4 points of rest of world growth, that it's mostly price at this point?

No, I would not really draw that conclusion. We're certainly seeing volume increases and our guidance is indicative of volume increases here. I mean, after all, we are still in a GDP expansion growth, as Don indicated earlier, in Asia and most of the economies in Asia, of course. And we're seeing still, very healthy growth in some of our key market segments in Europe right now. So no, I would not say that it's all price.

Okay. But just to make sure I was clear on the earlier comment that you had 2 points of price on average across the business for the quarter or just maybe a better understanding of what price is contributing to orders.

That was the July increase that we're talking about? Right. That was just the July increase but when we talk about price increases, we're making generic statements about the price increases that we can take primarily in the aftermarket, in the MRO portion of the business. Of course, there's a big portion of our business at the OEM level in our industrial markets and the timing for all of those price increases over time is much, much harder to predict and to bake into our guidance. But we have an idea of what we're expecting. We know what we -- we know how our costs are trending. We know what we need to do in order to maintain the margins that we are expecting from ourselves. And so we set our guidelines from a pricing standpoint that way. But that global pricing increase number can't be taken across the entire pie there, so to speak. Does that help, Josh?

That does help. And then I just want to focus a bit more, I know that always a conversation around incrementals and maybe the year-over-year isn't as applicable. I'm thinking about the jump from the July quarter to September, kind of almost negative incrementals, lower revenue but higher margin here. What are the big items that we should think about as driving that? And should we be modeling the business kind of sequentially from here or continue to do it year-over-year, because obviously, September 10 to December 10, a big downtick, which kind of continued through the rest of the year. Should we be focused on September '11 as the starting point or more year-over-year?

Josh, this is Don again. Just to comment on incrementals. As we've always said, that -- the kind of the relevant range is in the 20% to 30% range. And, of course, we've been higher than 30% when we're coming out of a deep hole like we did 1 year to 2 years ago, coming out of this recession. And digging out, we're going to have very incrementals. That's trending down to something what we consider more normal because as you're growing, of course, you're going to have to add infrastructure, you're going to add some additional overhead and so forth. That brings our incrementals down in the neighborhood of 20%. And the 20% now is what we did in the first quarter. We forecasted about 16%, all things considered. We did a little bit better but that's the 16% for the half on an incremental basis. The only way that I would say is going forward, you might see worse incrementals if our volume shrinks because, of course, we now have that infrastructure in place. And if you got lower volume on the same infrastructure, your incrementals are going to be lower. That's all baked in into our forecast, and so as we look at the second quarter and we've given you the indication here that, as we do every year on the second quarter, that the second quarter is not going to be as good as the first. And it won't be as good as the third and the fourth quarter because that's just the way our business runs. Keep in mind the incrementals will probably be suppressed slightly because of that as well because their volume is going down. So anytime you have a shrinking volume, you're going to get some compression on incremental. If you got an expansion going on, you're going to have a much more favorable incremental. So I hope that's helpful to you.

That is helpful. And if I can just sneak in one more here. Any chatter from your customers at all or anything you're doing internally that suggests accelerated depreciation is helping out in North America?

Well, I haven't heard anything. This is Don. I don't know if Jon...

No, I would say that, in general, we don't get a lot of that feedback. We've been asking questions and I don't think it's had a material impact on our demand.

Yes, we necessarily would not hear that, Josh, just where we fit in the food chain and the way our business plays out. Not to say that it doesn't have an impact.

The next question comes from the line of Andy Casey from Wells Fargo Securities.

A couple of clarification and one Aerospace question. Quickly, you gave us the average but could you give us the end-of-quarter diluted share count?

Yes, we can give that to you. 155.4.

Okay. And then in the quarter, you talked about a currency gain in other. Can you walk us through that and then in the guidance update, did you adjust the currency assumptions?

Yes. What ends up happening there, there's some -- what I would call intercompany loans, okay? Just -- there's intercompany loans, as well as some structured loans as a result of tax planning. And basically, what falls out in other is just when you're basically taking those loans and putting them back to spot, okay? Because we use the Parker rate, as you know well, throughout the company and the we convert to spot and that's just the spot rate that's showing up there. So that went from a loss, it was a loss last year, to a gain in this first quarter. We did adjust the second quarter to be in line with the first quarter, leaving the third and fourth quarter pretty similar to what we reported last quarter, what we gave you last quarter. Does that make sense?

It does, yes, And then on Aerospace, another look at the margin, are you now beyond some of the elevated R&D expense that you've been encountering over the last few years or is that still built into your expectations?

Well, for the R&D expense, you -- we pretty much hit the number that we were expected to hit in Q1 for R&D. So the increased margins is not as a result of underspending in R&D. Our guidance includes our R&D as we had originally envisioned, the cost structure getting us here in FY '12. The R&D though, as a percent of the total sales, is right now estimated to be -- it has been running about 10, a little over 10. It's now estimated to be in the 9 to 10 range.

The next question comes from the line of Eli Lustgarten from Longbow securities.

Just one clarification, you gave us 155.4 average share count, the actual share count. That was a number reported for the quarter. You're saying the average is the same as the actual share count?

The actual share count at the end was about 151.

Okay. Because that's the number I think Andy -- we were looking for.

Yes. About 151 and the 155.4 is the average over the 3 months.

Okay. I know the second quarter is weaker but your implied guidance puts the second quarter between 1.43 and 1.70 with a midpoint of 1.56. That's a much bigger drop off given the strength of the fourth quarter particularly for OEM equipment going out. Can you -- I understand it's seasonally weaker but can you sort of -- what drives it down that big a drop from the first quarter? I mean, it seem that it should be -- the second quarter should be a lot closer to the 191 than the 150s?

Well, there are several things that are in there. Number one, we built some inventory in the first quarter that we think is going to play out in the second quarter. We also have lower revenues in the second quarter. We have some higher R&D expense that's built in for Aerospace. We also have less maintenance repair into overhaul, that's going to come through in Aerospace in the second quarter versus the first. And as you well know, we have the holidays and vacations and CIC is going to be seasonally weak, picking up in the third and fourth quarter.

Okay. So you really believe it's going to drop down to the 150, 160s?

Yes. And then also the restructuring that I talked about earlier.

Okay. What's the currency assumption for the rest of the year, should I assume it's neutral?

Currency, as you well know, really flipped on us. We don't try to project what currency is. We take the exchange rate at the end of the year and we compare it to the exchange rate in the prior year. And that's what we build into the forecast. So it went from a positive of over $200 million to now it's going to be relatively flat for this year. It's positive in the first quarter and then it sequentially gets negative. It plays out throughout the first -- second, third and fourth quarter. It gets more negative as it goes through the year.

And finally, when you look at the rest of world business, I mean the one thing we worry about is that the ISM in Europe is now basically saying 0, 0 manufacturing growth when we had 48 5. Are you factoring in that basically volumes can start going down in Europe as you go through into the next year calendar year? I mean, that's what all the indicators are saying, that we're going to flatten out Europe manufacturing.

Well, I think, Eli, if you look at those numbers, I think 48 5 or 49, whatever the number is, it doesn't necessarily mean that manufacturing is going to 0. I think there's a relevant range around 50 that's still would indicate growth here, it's just much slower growth. And that certainly would capture to 49. We don't anticipate based on our order trends. I don't think that, that's going to hold up in the -- for the second half. I don't think those kinds of rates are going to hold up. I think what we're seeing from the 3/12 and 12/12 that it's going to be more positive than that. But again, time will tell but again, we're looking at hard orders here that we can see at least out into the second half. And from our major countries, Germany being the strongest and then the other ones that I mentioned earlier, I think we feel pretty confident that Europe is going to continue to grow. And they'll get this issue with Greece behind them hopefully, in the next 6 months or so.

I mean, because all the indications, if I accept that, is that you have to be in the upper part of your range based on the comments you're making right now. If nothing changes, that's sort of what you're indicating at this point. Is that fair?

I wouldn't say that's fair. I mean, we give a range, obviously, because I don't think anybody can be that precise, Eli. But as you well know, we kind of feel comfortable with the midpoint of our range and we wrap a range around that. And the range is wrapped around there because, obviously, in any forecast, there are risks. There are things that can happen to the downside, and there are things that can happen to the upside. And that's for you to determine as just as well as we can. And so really when we're looking at it, we're looking more at the midpoint of the range.

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

On the Asian investments, is it possible to talk a little bit about the time and costs that -- and the time to see the benefits from the investments?

Well, the time to see, we have the infrastructure, well, we have infrastructure going in last year that we're already seeing benefits from. We've got additional, as I mentioned, probably 8 or 10 facilities going in. Some of those facilities are to localize certain products that we were currently importing. We think that we're going to get to abouta $3 billion region by 2014 from maybe what we're going to do, maybe $2 billion this year if we hit our numbers, to $3 billion in a couple of years. So we're building that infrastructure. Again it's about 10 facilities. That would include -- primarily, the facilities would be in China and India, okay? The expansion that we've got going on and new facilities in India and in China. So you're going to see the benefit over the next 2 years here as we build this business up to $3 billion for us.

And with that, are you looking to displace the locals in the market or is it more market share or market growth on the whole?

Yes, it's a combination of both. I think the fact that we're bringing in quality products that the local manufacturers are demanding and the customers are starting to demand and if you're going to export any of that product that they're making there, they're going to have to have the quality of products that we have manufactured. So we're going to be penetrating market there, we're going to be displacing some locals, maybe acquiring some locals along the way, if that's appropriate for us. Really, a combination of all of the above.

At this time, I'd like to turn the call over to Don, who has just a few closing comments and as I won't have a chance afterwards, I would just like to thank all of you for participating on the call today. Thank you. And here's Don.

Yes, Pam, thanks. And just once again, I want to thank everyone on the call for joining us this morning. I think we had a pretty good dialogue and discussion about what -- where we are today and what's going to happen the balance of this fiscal year at least. And so hopefully, we can continue on the path that we're going now and achieve some more records for the company. I also want to once again, thank the employees for their continued commitment to serve our customers. It had been a challenge for us as you're digging out of a deep hole with the cutbacks that we had, to be able to respond. And I think we have done a great job responding. It was through the hard work and effort of those employees that we were able to deliver the record performance that we have now. And this is, by the way, the fourth quarter now, and I know many of those -- our analysts obviously know this, this is the fourth quarter of back-to-back record performance and I know 4 quarters ago they were thinking -- some of the writeups were saying that well this is it, this is the peak. Well, the peak hasn't peaked yet, so we're pretty excited about the fact that we've had 4 quarters. We're going to go for, hopefully, 4 more here. And then many of you have been around 10 years tracking us, some have not. But this is the 10th year now, if you can believe it or not, of the -- when we launched the Win Strategy 10 years ago. And we're confident that we can continue to build on the record results we have here today as we continue to focus on the Win Strategy going forward. So pretty excited about that. A lot of good things to talk about, a lot of good activity going on in the company in a broad base of different markets and areas for us. So, once again, I want to thank you for your participation, all the folks that are on the call and for the questions and review of our business conditions. And if you have any other questions for Pam or for any of us, Pam will be available the rest of the day. So I want to just end with that and say goodbye and have a great day. Thank you.