Parker-Hannifin Corporation (PH) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal Year 2013 Parker Hannifin Corp. Earnings Conference Call. My name is Deborah, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Pamela Huggins, Vice President and Treasurer. Please proceed, ma'am.

Thank you, Deborah. Good morning, everyone. It's Pam speaking. I'd like to welcome you to Parker Hannifin's Third Quarter Fiscal Year 2013 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 on the line, those slides will remain posted on the company's Investor information website 1 year after today's call, and that's the same website, phstock.com. So at this time, reference Slide #2 in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements. And if you haven't already done so, please take note of this statement in its entirety. On Slide #3, this slide is required to indicate that in cases where non-GAAP numbers have been used, again, they've 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, Chairman, Chief Executive Officer and President, will provide highlights for the quarter. Second, I'll provide a review, including key performance measures of the third quarter, concluding with the fiscal year 2013 guidance. The third part of the call will obviously consist of the standard Q&A session. And with the fourth part, Don will close with some final comments. So at this time, I'm going to turn it over to Don and ask that you refer to Slide #5 titled Third Quarter Fiscal Year 2013 Highlights.

Thanks, Pam, and welcome to everyone on the call. We certainly appreciate your participation today. I'll just make a couple of comments, and then I'm going to turn it back over to Pam for some more detailed review of the quarter. As you can see, we continue to perform very well despite a challenging global growth environment. Our results this quarter were in line with our third quarter guidance. Therefore from that standpoint, we're doing pretty well. Organic sales were down 6%, as you could see, but were offset by acquisition growth of 4%. And I would like just to keep in mind, have everyone keep in mind, as we mentioned last quarter, higher-margin sales are down and the lower-margin acquisition sales at the early part of the integration, our lower-margin business for us, so that's -- that we'll talk about a little bit later. Soft business conditions are still being seen globally. However, order trends appear to have been -- to bottom out -- have been bottomed out in pretty much all the regions. In the quarter thus far, order trends in April, we'll give you a little preview of this quarter, how it's starting up so far, are in line with our projections for the fourth quarter. So we like what we're seeing in -- early in April, still early, but the order trends look good. As a result, we've maintained our earnings guidance at the mid-point and narrowed the range for the year, and that's pretty typical of what we do after the third quarter in each fiscal year. A few other comments on the quarter. Net income for the quarter was $257 million or $1.68 a share. And that's within our guidance and above the mid-point of the implied guidance range that we provided last quarter, which was about $1.64. So we're a little bit ahead of that. The year-over-year decline in the earnings per share is primarily due to lower organic sales, as I indicated earlier in the Industrial segment, and acquisition-related and integration costs. Total segment operating margin of 14% was very good considering the decline in volume and reflects our global team's response to a changing market condition. Everyone is doing, I think, a very, very good job managing the business through this period. The company continued to perform very well on a cash flow basis, generating $371 million in operating cash flow in the quarter or 11.2% of sales. And I might point out that Parker is continuing a long trend of generating double-digit operating cash flows of sales even during difficult market condition, and I think that's what's so special about this company. With respect to dividends, year-to-date, we have raised the dividend by 10% with a 5% increase in January, the last quarter that we spoke, followed by another 5% increase as announced in the press release today. So that's 10% for the year. We have now more than doubled our dividend payout in the last 5 years. And of course, as you know, we -- this continues our 57 consecutive years of raising dividends for the company. So we're very happy about that as well. We continued our share repurchase activity as we indicated we would, buying back $49 million of Parker's stock in the quarter and bringing the year-to-date share repurchase to $206 million, and we're going to buy back another approximately $50 million in the fourth quarter, in line with the 10b5-1 program. So that's what we're going to do in the fourth quarter. As a reminder, we made 8 acquisitions so far this fiscal year, which total almost $0.5 billion in sales. We also divested the automotive air conditioning portion of the CIC group or segment. We continue to evaluate acquisitions opportunities as we go forward. We have the capacity to pursue acquisitions should that opportunity present itself. Innovation likewise continues as an area of focus. During the quarter, we formalized an agreement with the Shepherd Center in Atlanta to support the clinical evaluation in planned 2014, which would be this coming fiscal year, commercialization of Parker, what we call Indego. And that's a powered exoskeleton that allows people with paraplegia to walk again. So we're pretty excited about that as a new-to-the world-type product that we're going to be introducing. Looking at the remainder of this year, the mid-point of our fiscal 2013 guidance remains the same. And we are tightening the range, and we now anticipate earnings per diluted share of $6.25 to $6.65. So we're going to end up somewhere in that range. We're not just sure where, but we'll be in the range somewhere. As a reminder, these estimates versus last year include an expected increase in pension expense of approximately $0.35 per share as a lower discount rate is required for accounting purposes that reflects current market conditions for interest rates. So that's a quick overview of some of the highlights for the quarter. You can see where we're at. We're very pleased with the results so far as we're progressing through this fiscal year. And it looks like we've got a decent start to the fourth quarter. So if that continues, we're going to finish the year off in a pretty good shape. So with that, I'm going to turn the meeting back over to Pam, who will get in a little bit more detail.

Okay. So if you just reference Slide #6 right now, I'll begin by addressing earnings per share for the quarter. Fully diluted earnings per share for the third quarter came in at $1.68, and this is -- while we don't give quarterly guidance, this was really $0.04 above the mid-point of the previously provided guidance range that we did provide. And just to talk about the beat for a minute, the beat versus the mid-point, that increase came in -- we beat on North America $0.03, Aerospace $0.01, and then below-the-line items to offset with higher other expense and lower taxes. The $1.68 is an increase of 41% sequentially, but a decrease of $0.33 or 17% versus the $2.01 from the same quarter a year ago. So just to lay out for you the puts and takes of that $0.33 decrease. Decreased segment operating income accounts for $0.24 of the $0.33, and this is mainly due to the Industrial International and the continued softness in Europe and Asia; higher corporate general and administrative costs of $0.02, and this is due to higher market-driven employee benefits; higher other expense of $0.05, mainly as a result of higher pension costs, and we've talked about this on several calls now; higher taxes impacted earnings per share by $0.05, mainly due to the geographical earnings mix; and then, of course, less shares were outstanding, impacting the EPS favorably by $0.03, and this is the result of the share repurchases that we've done. So moving to Slide #8 and looking at the top line. Reported revenues for the quarter were 2.5% below last year, coming in at $3.3 billion. As Don said, acquisitions added 4% to revenue in the quarter, but that was offset by the 6% decline in the base business. And we had negative currency impact of almost 1%, and that equates to about $0.03 in the third quarter for the currency impact. Segment operating margins for the quarter decreased 110 basis points from 15.1% to 14% due to the Industrial segment, while Aerospace and CIC actually saw increasing margins versus last year. So on a sequential basis, margins are up 200 basis points. We're really proud of this 14% margin in a slow growth and acquisitive environment. Please note that acquisition, divestiture, integration and related expenses are included in these numbers. And in the quarter, Parker incurred $0.01 in restructuring charges and on a year-to-date basis, $0.04. And we're expecting restructuring to come in at $0.08 to $0.10. So now moving to Slide 9 and focusing on segments commencing with North America. North American organic revenues decreased 8% in the quarter. Acquisitions added 6% to revenues, and currency was relatively minor in this segment. So reported revenues decreased 2%. Operating income decreased from $227 million to $209 million, a 9% decrease over the prior year. And then operating margin's very strong at 16.3% for the quarter. Continuing with the Industrial segment moving to International. Organic revenues decreased 7% for the quarter. Currency was a deduction to revenues in the quarter of 2%. This is mainly where we see our currency impact, and it was mainly due to the weakness of the yen and the real in Brazil. Acquisitions added 5% of sales, so reported revenues decreased 4% for the quarter. Operating margins decreased 290 basis points to 12.3% from 15.2%, reflecting the impact of reduced sales in Asia and Latin America and the impact of the acquisitions that Don talked about. So moving to Slide #11 and focusing on the Aerospace segment. Aerospace third quarter reported an organic revenues, increased 7% in the quarter. Acquisitions and currency had no impact. Margins increased 180 basis points for the quarter to 13.9% from 12.1%, and this is in spite of higher non-recurring engineering charges and represents higher MRO in the quarter. So moving to the Climate and Industrial Controls segment. This slide indicates that core and reported revenues were down 18% as currency was minimal. However, as disclosed last quarter, this segment includes the divestiture. The prior year number hasn't been restated for this divestiture. And had the restatement occurred, revenues would have decreased approximately 3%. With less revenues, segment operating margins as a percent of sales increased to 10.5% from 9.3% a year ago . So now moving to Slide 13, addressing orders. Just to remind everyone, these numbers represent a trailing 3-month average, and they're reported as a percentage increase of the absolute dollars year-over-year excluding acquisitions and currency. Aerospace is reported using a 12-month rolling average. As you can see from this slide, orders declined 7% for the March quarter just ended, reflecting softness in North America and continuing weakness in international. North American orders for the quarter decreased 10%. Industrial International orders decreased 7%, and Aerospace orders were flat for the quarter. Climate and Industrial Controls orders decreased 1%. But the direction for orders in April is positive, but it's probably too soon to call it a trend. So moving to the balance sheet. Parker's balance sheet remains strong. Notes payable and long-term debt payable 1 year -- within 1 year increased primarily due to a higher amount of commercial paper outstanding at the end of the quarter. Commercial paper outstanding at quarter end was more than offset, however, by the amount of cash on hand. DSI, days sales in inventory, was 67 days versus 57 last year, and this increase is due to inventory in connection with acquisitions. The base business inventory is actually down $40 million. Accounts receivable in terms of DSO outstanding closed at 49 days, and that's 1 day less than last year. Weighted average days payable outstanding at the end of March was 56 versus 54 at the end of June. So I think you can see pretty much that the manage -- the working capital is being managed appropriately. Moving to Slide 15. In the quarter, operating activities generated $371 million in cash or 11.2% of sales. Just to walk through the major uses of the cash in the quarter, $225 million was utilized to retire a medium-term note that matured in February, $114 million returned to the shareholders via share repurchases of $50 million -- it was actually $49 million, I'm rounding up, and dividend payments of $64 million. $74 million or 2.2% of sales was utilized in connection with CapEx. Now moving to guidance. The guidance for fiscal year 2013 is shown on Slide 17 -- or 16 through 18. Moving to the next slide, you can see the guidance for revenues and operating margins by segment has been provided, and I'm not going to read through all of these numbers for you here. But I will say that guidance has been provided in total for the items below segment operating income, and that is $471 million at the mid-point. This amount is a little bit higher than the prior year due to higher pension cost as a result of the requirement to lower the discount rate. And we've talked about this on several calls as well. So summarizing the guidance on a diluted earnings per share basis. The guidance for fiscal year 2013 is projected to be $6.25 to $6.65, $6.45 at the mid-point. The components of the changes, as you can see on this slide, they really haven't changed that much. We gained $0.03 in operating income and then lost $0.03 below the line. So the fiscal year guidance remains the same last quarter versus this quarter at the mid-point. Please [ph] remember that the forecast excludes any further acquisitions or the divestitures that may be made in fiscal year 2013. And the guidance assumes the following at the mid-point: Increased revenue year-over-year basically flat and consistent with what was provided last quarter; segment operating margin of 14%, consistent with what was provided last quarter; expenses below segment operating income, including corporate admin, interest and other at the mid-point of $471 million, which I just talked about, and that has a band of 1.3% around it; and this is $5 million higher than what was provided last quarter to reflect the actual third quarter results. A projected full year tax rate of 28%. What you will see is that the third quarter came in a little lower than what we had projected last quarter and the fourth quarter a little higher, but the full year remains the same at 28%. The guidance for restructuring, we talked about last quarter, $0.05 to $0.10. Now it's $0.08 to $0.10, meaning that they'll be $0.04 to $0.06 in the fourth quarter. A couple other salient points with respect to guidance. Sales first half to second half were divided 48%, 52%. 48% in the first half, 52% in the second half; and segment operating income first half to second half divided 45%, 55%. EPS will be higher in the fourth quarter versus the third. So I think that pretty well summarizes what we did with guidance. We'll take any further questions with respect to that in the Q&A session. So we'll move to that right now. Thank you.

[Operator Instructions] Your first question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

Maybe just talk about the April trend. I think you said it was up. I mean, is that a year-over-year comment or kind of sequentially? And what were you seeing kind of inflection points to the good?

I think, Jeff, Jon here, I think for April, when we were making those comments earlier, we were comparing where we are in April versus what the guidance is that we've given to you. So we're going to show up 6% in sales Q4 versus Q3. And the orders that are coming in right now are -- we feel good about, and so we wanted to give you an indication since normally we get a question on that each quarter as to how April looks so far. So it's really that simple.

Okay. And then can you just -- maybe as you kind of went through the quarter, can you just talk regionally where you're feeling maybe a little bit better, a little bit worse?

Jeff, this is Don. Maybe I'll give you just a little bit of kind of an overview of what's happening in different regions from a couple of different perspectives. First of all, if you look at Industrial North America, and I'm talking now about some of our order trends, 3/12s, 12/12s, right now, the 3/12 is like flattening out, and that's of course the precursor to the 12/12. 12/12 is going to follow and flatten out. So we think that we're probably here bouncing off the bottom. We're going to be bouncing off the bottom unless something major happens to move us down another notch, which I don't see happening based on these trends. The comps were tough on North America as we said earlier, so that's part of the story as far as the minus 10%. Europe is in recession, but it's stable. It's been flat at this level for some time now. As I look at the 3/12 and 12/12 trends, I don't see any change in either direction. So we're not seeing any major movement one way or the other on the core business in Europe. Asia, we think, is at the bottom. And there's been some comments -- we're getting some feedback that there'll be a little bit improvement there. So I don't think there's going to be a major move one way or the other over the next 3 months, but I think it's probably going to be stabilized about right where it's at. In Latin America, we've seen a little slight improvement on the 3/12. That should pull the 12/12 up. It's running at about 100% line right now. And so we might see a little bit of glimmer of positive movement in Latin America. So that's basically kind of what we're seeing around the world from a regional perspective with respect to our order trends. Consistent with what we're seeing with the PMI indices, which obviously we track and many of you track, what we're seeing there is that every PMI improved from the December levels, and they're all greater than 50%. So the 50% is kind of the line that everyone's monitoring if we're already ahead of that or behind that. And of course, you can be quite a bit below 50% and still be in a growth mode, but in a very slow growth mode. So everything is trending better than 50% right now, with one exception and that's Europe. And pretty much in line with the comments I just made about Europe that the PMI in Europe is running around 46.8%. It was up just a little bit from December at 46%. I think it was 46.1%. All the other regions, like I said, are over 50% and they were all up slightly over the December levels. So that's all positive. A little bit about the markets. And the market trends pretty much are in line with everything I just said, that we have -- and I'm looking at 25 different market segments, small pieces of our total business. The most positive right now, commercial aerospace aftermarket would be one. Farm and ag really has been very strong for quite some time now. That's probably the strongest specific market segment that we deal in. And then oil and gas has been positive. Marine and residential air conditioning, I think, in line with the improvement in some housing start numbers. I think that's pretty much paralleling that. Flat segments, I'm just going to read now through some of these just for your note. Forestry, being flat; distribution, fairly flat right now, semiconductor, life sciences, process, industrial truck. Construction, relatively flat, but we think that there might be some improvement coming in the construction. Commercial air conditioning and industrial and commercial refrigeration, so you see many of our market segments that we deal in pretty much in line with, like I said, the order trends have been fairly flat. And then there's 5 or 6 negative segments as well. So that's kind of what we're seeing pretty much globally and pretty much in line with what we mentioned earlier about our activity levels in the third quarter, and then, hopefully, a little bit of a pickup maybe in the fourth quarter here. Does that help?

Yes.

Thanks, Jeff.

And the next question comes from the line of Nathan Jones of Stifel. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: My first question is on your guidance. It looks like on the revenue guidance for these segments, there wasn't much of a change there, maybe a little narrowing of the ranges. But on the operating income guidance, each segment looks to have gone up about 10 or 20 basis points. I think in a fairly weak demand environment, that's pretty impressive to be able to raise those numbers. And I was wondering if you could talk about where the improvement is coming from.

Well, I think, Nathan, just running through the segments, it's a little bit of a different story for each one in terms of the sequential improvement from Q3 to Q4. First of all, for North America, we really looked real hard at the -- what happened with the reported order trends and where our revenue guidance was coming out here for Q4. And as we really dug into it, we're finding just a -- that we're down 100 basis points from where we were at this time last year. We know that we've got the potential to get up to the mid-17 ranges in North America from a return on sales standpoint. And as Don was saying, as some of our end markets are continuing to flatten out to slightly increase in North America in Q4, we should be able to utilize capacity better, and we should be able to generate that incremental -- those incremental basis points from an ROS standpoint. International is a bigger hill to climb for us. We have been spending around the world a tremendous amount of time working on the integration of our acquisitions, really trying to get our 2 plus 2 plus 2 plan in around the world. And we're expecting additional improvement in our acquisitions in North America as well as around the world in the international specifically. And as we see that along with the markets start to bottom out, as Don talked earlier, that will be our challenge. But we feel very confident in our revenue and our ROS going forward there. Aerospace is also showing up. And again, there is the volume and the incremental margins from the volume, and the Aerospace supports historically where we are in the commercial OEM uptick sector. And if you look at CIC, this is just a continuing trend for them, especially in some of the markets there that are finally benefiting from the housing recovery in North America really driving some of those CIC numbers. So that would be top-level kind of response to your question. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And my second question on the minus 10% North America order number, was that confined to a particular month? Was it the result of OEMs turning off the spigot for a while there as their demand outlook deteriorated? Or how did that play out, OEM versus aftermarket?

Yes. We -- I don't want to say just one particular month. January was good, February was not very good. March was very reasonable for us, and there's a couple of things impacting that minus 10%. And again, given the guidance that we've just given, understanding that minus 10%, we were very deliberate in trying to make sure that we had everything fit together here as we were looking at the guidance going forward. The fact that we didn't change the guidance doesn't mean that we work real -- doesn't mean that we didn't work real hard trying to validate those numbers. So the minus 10% is really driven by the really tough comps from this time last year with some very high end markets. And we're seeing a few customers, and this is not broad-based, but a few customers pull down on some of their out quarter demand, not their fourth quarter demand, but demand past that fourth quarter that's also impacted that minus 10%. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Was it primarily driven by original equipment rather than aftermarket there?

Yes. Yes.

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

Just wanted to ask you about the wide ranges you've got. You narrowed the range, but you still got a $0.40 range in your guidance for the year, which is -- which means you still got a $0.40 range on the fourth quarter, $1.79 to $2.19. And is it really that invisible? I mean, don't you have better idea of what you would earn than the $0.40 range in the quarter?

Well, Alex, yes, we talk about that quite a bit here, and you bring up a good point. Because we start out at the beginning of the year and usually, we start out at $0.40. And then we narrow it to $0.30. And then we get down to $0.20. So you bring up a good point, and I've talked about this before on calls. I mean, we do keep the range there. But as we well know -- as you well know, because you've heard me talk on these calls long enough to know that we're really gearing towards the mid-point of the guidance. But we do keep that range because, as you well know, there's a lot of uncertainty in the world right now and it's very difficult to know exactly what's going to happen. So that's -- I really can't tell you any more than that than to tell you that we're really focused on the mid-point of the guidance.

Alex, this is Don. If it will make you feel any better, I think that in the past, we used to give the same plus or minus 20% at this point, but it was on a much lower earnings level. So as a percentage, we are getting better. I think we're at about plus or minus 3%. The only thing, like we've said before, the only thing we know for sure is we're going to be wrong, no matter what number we pick. It isn't going to be right. We don't -- we're not that good. But the percentage is shrinking over time as the earnings per share rose. So...

Well, as a percent of the full year.

Yes.

But it's higher. It's 20% in the quarter, so...

Yes. It used to be higher. It used to be higher though.

It's just your traditional conservatism, I think.

Well, Alex, I think if you go back and you look at the guidance that we give at the beginning of each fiscal year and then you look at where we end up at the end of the year, it's usually pretty good.

Yes, it's usually good.

We don't get credit for it, but it's usually pretty good.

You should get credit, I agree. The second question is this. The organic revenue's down 6%. Now that's really not in line. I mean, yes, in Europe perhaps, but the rest of the world is growing. I mean, North America is growing, albeit slowly. Asia is growing much more rapidly than North America. So why would organic revenues be down 6%? Unless there is some inventory correction going on with your customers, in which case, they're going to have to rebuild inventories later, correct? So I'm just asking about that. What's your sense of why the organic growth was down 6%?

I think, Alex -- this is Don, I think obviously, there's some of that going on as far as the OEMs, the larger OEMs. And we know that in the specific market segments that, that would be happening in mining and construction and things like that. So I think you are seeing some of that responsible for that reduction.

What about distribution? What's going on? You should have better handle on that one.

Yes, distribution is actually is coming in. As I indicated, when I look at those order trends for our distribution, the general trends, it's coming in pretty flat. But the 3/12 -- the 12/12s, I think, are running around 100% right now. 3/12 is, I think, close to that same number. I'm just trying to find it, if I have that in my notes here. But distribution is still pretty strong, but it's not as strong as -- in other words, it's not growing at the same rate than it was before, but not bad either.

Okay. So it's actually your sales to OEMs is down, distribution sales flat in the quarter, I mean, not the order rate.

I'm talking about the order trends.

No, but I'm really talking what you did in the quarter and why revenues were down 6% organically. Is that distribution being down as well? And if so, is that an inventory correction?

Yes. Let me just add a little color on that. Yes, distribution in terms of sales for the quarter, it was down. It was in the single digits. But if you look at March versus February, it was really up. And if you look at March versus January, it was up. But yes, year-over-year, it was down in low single digits.

Okay. So was that the inventory reduction on their part is the question really?

Well, I think some of it has to do with the oil and gas markets, too. The oil and gas markets have been extremely strong, and we're up against extremely tough, tough comparables. So it has something to do with that, too.

And your next question comes from the line of Jamie Cook of Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: First, just wanted to dig a little deeper into the international margins, sort of how they're trending relative to your expectations. And if markets continue to be weak, do you feel like you're rightsized, or that we should look for additional restructuring activity even as we sort of look into 2014, which is, for your fiscal year, not too far off? And then I guess my second question, again, sorry, on the order trends. But is -- Don, just to be more specific, as we look to Q2 versus Q1, are there any markets where you feel like OEs will continue to have to take production down? And on the flip side, which markets do you see them taking production up sequentially?

I think that -- and just answer that last part, then I'll let Jon to talk a little bit about the first part of the question. I think -- the way I characterize, we're bouncing off the bottom, okay? I don't think that -- I think the OEMs started adjusting last year, probably second quarter, October time frame. They've been through that period. They've got the adjustments pretty much in place. There may be still a little bit of that going on. But by and large, what I feel is the feedback that we're getting is that's pretty much behind us, and we're just bouncing off the bottom now. And I think that going forward, I think we should see a little bit of a lift. When that happens is anyone's guess. But I don't think it's going to be an inventory situation going forward, where there's going to be a massive reduction in inventory, and that's going to throw us into a tailspin here. I don't see that coming. I think a lot of that is behind us.

Jamie, I just want to add a little color to that. It's probably not real helpful. But as I met with the group presidents and were talking to them, all of these OEMs are different. We actually have some OEMs that are saying, "Hey, get ready. Get ready." Jamie L. Cook - Crédit Suisse AG, Research Division: Which ones? Tell me which one, Pam? Which ones are -- can you get more granular?

Well, I don't want to go into [indiscernible] details, but I will say, specifically, I'll give you an example, one example, and it's a small example. It's on the CIC side, but there are some others. And so some of these OEMs are saying, "Hey, get ready. It's coming." And then some of the others, like Don was talking about, they're saying, hey, they're kind of in a hold mode. So because we're a diversified company, there's a lot of OEMs, and they're all a little bit different. Jamie L. Cook - Crédit Suisse AG, Research Division: I know, but are there any -- can you be more specific by end market, if not OEM?

No, I really can't. Jamie L. Cook - Crédit Suisse AG, Research Division: Okay. All right. And then just second on the international question, sorry.

Well, are you talking about the restructuring, Jamie? Do you want me to address that? Jamie L. Cook - Crédit Suisse AG, Research Division: Well, no. Well, my -- I guess my question is how did the international margins come in relative to your expectations? And I guess my concern is if the markets continue to be weak, do you feel like we're currently rightsized outside of whatever you're gonna do in the fourth quarter? Should we look for additional restructuring that could impact your fiscal year 2014, which isn't too far off?

Right. I think first answer to the question is that we continue to be challenged there in international margins. Again, they're being impacted here by some of the end-market weakness that Don and Pam were talking about, as well as the acquisitions that we're getting behind us here. And going forward here, we should be sequentially better. But to answer your question specifically, Pam alluded to earlier $0.04 to $0.05 in restructuring in Q4. But on one hand, I want to tell you, we'll be going through all the details for our FY '14 here this quarter. And we'll be really very specific when we come out in August about what we're doing in terms of restructuring in 2014. But there's no doubt that in certain end markets in certain regions that restructuring will be greater, significantly greater in FY '14 than in FY '13.

Your next question comes from the line of Steve Volkmann of Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Don, I think a quarter or 2 ago, my memory isn't that great, but you had made a comment that you'd thought the acquisition pipeline was quite full, and you wanted to have a fair amount of dry powder available. And obviously, you do have a lot of dry powder. And granted you've done a few more bolt-ons here. But I guess, I'm just wondering where we stand now. Is there still a lot of opportunity in the acquisition pipeline, or how do we look at that?

Yes. Thanks, Steve. We did 8 this year. So some are larger, some were smaller. But overall, I think we're close to $0.5 billion in revenues. We're looking at some additional opportunities, as we are always. But I mean, we have some specific ones that we're looking at. I don't know -- we try not to project whether we'll get them to the finish line or not, but there are some interesting things that we are looking at. I would say the pipeline compared to where it was a year ago is not as full as it was a year ago, and that's probably because we emptied it somewhat. But there's still opportunities out there for us to do deals and of course, we have the capacity to do it. So if something presents itself that's interesting, we will action it. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay, fair enough. I guess my observation would be you have the capacity to do a lot of things here, which is a good problem to have. But if you think that things are starting to turn better, why not use this opportunity to buy in a bunch more stock before it goes up, I guess is the question.

Well, we are, as I said, we are buying. We did increase that. And from where we were to almost 0.25 billion a year, we'll probably do 0.25 billion this year in stock buyback. We've done more in prior years. We do have capacity, of course, to do more, but my priority has been more dividends. I'm getting more pressure from a lot of our big shareholders saying that we'd like to see you do more on dividend. So it's a matter of allocation, how much do we do dividends, how much do we do share repurchase. We're trying to keep a balance here. If the acquisition opportunities do not result in a deal, then I think there's certainly a possibility we could do more repurchase going forward. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay, great. And then just quickly, it looks like you did a little work on CIC to sort of restructure that business and divest some underperforming assets perhaps. But that still sort of stands out on the margin side as the one that kind of needs the most work and hasn't really made the leap into the -- where the rest of the company is. And just how do we look at that strategically? Is there more to do there? Do you just have to wait for the cycle or how I look at that?

I think, Steve, Jon here, I think we do have more to do there. There's 2 factors. One, just like the divestiture that we did and that we announced back in October 1. We continue to look at that entire group. There's many parts of that group and that segment that are doing really some very exciting things from an innovation standpoint for us, that is really helping us drive organic growth as we look into FY '14 and FY '15. But we're not done with our efforts there to get them up to a ROS and a growth pattern that we see in some of the other markets. They're impacted by the end markets there to a certain degree, which are improving. And they also have a very low capital requirement in that group, too, here. So their return on the invested capital is not as bad as those ROS numbers make it look to be here if you're just comparing those numbers for that group. So I want to leave you with the impression that more work to be done, and we are focused on it, and we're proud of the progress we've been able to make so far.

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

I just want to clarify, if I look at the inventory relative to sales, it was -- inventory was up year-over-year. Sales were down a little bit. But if it -- if I look sequentially, sales, up; inventory, down. Is the year-over-year comparison just related to the acquisitions?

Yes, Andy, yes. In fact, we show our numbers being up about 3 days in DSI. About half of that is really related to the acquisitions. And we're tracking along year-over-year about where we were in inventory for the entire company, but when you look -- so that's the way we're looking at it.

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

The question on the stock's kind of become where do you think Parker is going to guide next year. So if you can give us any insight on where are you in the internal process of starting that fiscal '14 outlook? And appreciating a lack of visibility you have, just the nature of your business and it's probably gotten even more so the last 5 years, just to give us some insight how you're going through that process. How are you thinking about fiscal '14, the feedback you're getting from your folks so far? And that might weave back into the comment of how does the balance sheet usage get influenced if we do look at next year as maybe a little better growth than this year, not negative core growth, but say modest positive core growth?

Yes, I think, David, I think that's -- we've gone through quite a few -- quite a bit of analysis, and our groups are going through that process right now looking at '14. I think the general feeling is it's going to be moderate. I think you used the word moderate, and that's the one I was thinking of as kind of referring to what's probably going to come out of all of these planning meetings that we're having throughout the company. I think we certainly see on the aerospace side a positive story going forward. I think that's going to stand out as probably more positive than the industrial side. But I think the industrial will be positive, but it's going to be at lower levels. It's just going to be a more moderate growth story going forward than we've seen in past years. We'd like to see this back to where it used to be, but I guess we're going to have to wait to see that happen. Europe is really the wild card. As you heard from Jon and Pam, obviously, we're going to have to do some restructuring there. We are going through restructuring now with a lot of the acquisitions. And probably a higher percentage of the acquisitions came from Europe or are in Europe, so we have more work to do there, maybe the larger dollar-size acquisitions are there. We're consolidating sales companies and so forth. So irrespective of whether it grows or not, I think, our performance will improve in that region. So we're really not going to project, I don't think, unless some groups come back with some surprise, a high growth in Europe for sure. I think when you look at Asia, I think we're going to say that we're going to have moderate growth in Asia. Of course, the entire country of China has dropped from 12% down to 7%. And we're just getting adjusted to 7% or 8% growth. That's going to be probably more normal going forward. I don't think that that's going to change, still a pretty, nice level of growth relative to other regions around the world. I don't think we're going to project a big increase in Latin America. I think it will be positive, but it will be small percentages in Latin America. And in North America, I think we'll see a modest increase as well. That's kind of generalizing. I'm not giving you any numbers, hard numbers, because I don't have them myself. But just listening to the groups and understanding where we are in the planning process so far, I think that's kind of how I would characterize what's going to happen in '14. It will be positive. It will be moderate. Some segments will be stronger than others, some regions stronger than others. It will be kind of a little bit of a mixed bag. But overall, I think, from a profitability standpoint, I think we're taking the appropriate actions. As you saw here, generating 14% operating margins in this environment is something this company has never done before at this point in the cycle. I mean, we have really done something very, very spectacular in this company generating those kind of margins I think. And David, you've been tracking us long enough to know where we were in prior cycles, and we're improving every cycle. So hopefully, that gives you a little bit of color. I'm not giving you any exact numbers, but that's kind of the way we look at it.

Yes, I'm just trying to frame it where if you just look at core growth next year, keep it simple, 5%, 30% incremental on it, it adds about $1 of earnings, right? So $6.45-ish gets you to mid-7s. Street's well above $8. So I'm just trying to think how much balance sheet power, internal margin improvement, something to suggest that you can tack on that much more earnings power, unless of course, macro is going to be what it's going to be, maybe the 5% can be 8%, but maybe it's 2%. I'm just thinking for planning purposes, as a CEO trying to figure out how do we grow the company beyond just what the market will throw you, is there something the street's missing other than what's your macro view on '14?

Well, David, Jon here. Just to -- just a couple points. I'm sure I don't have the entire picture for you here, but let me just make a couple points, big macro-improvement in aerospace that we would be expecting here for next year as the trends continue to go positively and the development cycle begins to -- or continues to ebb. Of course, FY '14 is going to have a full year of that $0.5 billion in acquisitions are going to be generating, ever-increasing margins, ever-increasing cash flow, accretive EPS for us. And we will be much further along in the integration mode there. I think, as Don talked earlier, we're coming off the bottom with some signs of some very -- in almost all end markets except for a couple in Asia of continuing the exciting incremental growth in sales and margins there, too. So I would think from a highlight standpoint, that's the way we would look at a lot of the potential tailwinds that would move us up at an even greater rate than you were just referring to.

Yes, and to be clear, I mean, I know consensus is only mid-7s. I was just saying the idea of the bullish view on the earnings growth we usually get out of the company when you go from a negative year to a positive year. So I'm just -- just to clarify I know what the street is. I'm just trying to get a feel, is there something the Street is missing besides the macro view? It's sounds like, obviously, aerospace and the margins were down internationally now for, obviously if Asia can come back and Latin America, that's where you have maybe more operating leverage and then people looking at a near 17% margin in North America. I figure out how much we grow it.

Well, I wish I would have -- yes, I wish I would have said it that clearly the operating leverage.

I appreciate the color. I know with a short visibly company, it's not easiest thing to plan and forecast 12 months out. So I do appreciate the color.

And the next question is from the line of Joel Tiss of BMO Capital Markets.

And along those same lines, can you tell us how big -- roughly how big Europe is as a percent of the whole company now?

Sure. It's about 25%, 24%. 24%, 25%.

Okay. all right. So maybe we, hopefully, eventually get a little bit of a boost out of that, too.

Right, right.

All right. And then the other...

Yes, there's lots of things to think about. I mean, lots of these markets are still down, lots of these regions are down. So to be doing 14% like we say in such as a slow growth environment, and if any of these markets or any of these regions turn, it's going to be really good for Parker. And as you well know, we really pared down on the temporaries, the people count that we rightsized our business to the demand. And so coming out of the downturn, as you well know, we do really well on the margin return on the sales side.

And is there anything else inside the whole portfolio that's worth looking at on the sales side? Or are you pretty much done with that?

I would say the pieces that we really were -- there's always -- there's still a few little pieces. But the majority of what we wanted to accomplish, we've accomplished.

Okay. So it's just more grinding it out.

Yes, there's some small pieces, but it's not -- they wouldn't be significant.

The next question is from the line of Josh Pokrzywinski of MKM partners.

Just wanted a little color, I guess, first question, on how demand trends are trending -- are going in China MRO versus OEM? Or are you passed the destocking? Are you seeing credit kind of flow into some of the larger projects or bigger capital equipment purchases? And then what are you seeing in distribution?

I think in China, Josh, there's really 2 different stories. There's the, as Don talked about earlier, there's the issue with the construction equipment and mining, which does not look good right now, and that's at the bottom. And it's hard to see what's -- where the visibility of that is going to go and when for us. But there are other very important end markets in China for us that are doing very, very well, automation, railway, filtration, our engineer materials, our life sciences end markets, all of them are trending very well in China and very well in Asia altogether. So it's really end-market driven and that's what we're really seeing. We had a very good trends here most recently at the end of the quarter in China. And we will be obviously watching that very closely here as we've gotten good indications in April around this quarter.

Okay, that's helpful. And then I guess, just to go back to an earlier question about the margin trajectory. Can you help me understand any restructuring or one-timers or cost containment that kind of lets out in the fourth quarter? It just seems like there's about 150 basis point leap 3Q to 4Q in the Industrial businesses on somewhat less strong volume growth. Is there anything in mix seasonality or anything in the cost side, which...

Yes, that's a good question, Josh, and let me just walk through some of these things just as a reminder. And I know that you -- once I say them you'll -- I know if you haven't already remembered them, you will. But first thing to remember is the natural cycle of Parker's business. We always do better in the second half. So the 48%-52% split that you're seeing, that's very normal for Parker in good times and bad. We always have that higher volume in the second half, which helps. We have less R&D in the second half in aerospace than in the first half. And then the only seasonal part of our business is really CIC. So we get that pickup from CIC in the second half. As the summer starts coming and people start replacing there air conditioning and the repair them, we get a seasonality effect on CIC. We have a lower tax rate in the second half, because as you well know, we had that sale of the business in the first half. And so our tax rate was very high in the second quarter. The other thing that takes place is stock option expense. We have less stock option expense in the second half than the first half. And we're expecting more MRO in Aerospace in the second half versus the first half. The other thing to remember is currency was negative, more negative in the first half than the second half. And while it's more negative than what we projected the last quarter, it's less than the second half. So those are some of the things...

Maybe I wasn't clear in my question. I meant more 3Q to 4Q. I get the seasonality first half to second half.

Yes, but a lot of these things that I'm mentioning also apply 3Q to 4Q.

Okay. If it's just seasonality, then I think I'm fine. I appreciate it.

And your last question is from the line of Mitch Dobre of Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: It's actually Mig Dobre. So in the vein of the last question, trying to understand guidance a little bit here. If I look at the mid-point, the mid-point is right around $2, which would imply year-over-year earnings growth. And I'm trying to figure out exactly how we're going to get there as orders have actually decelerated. And again, if we're looking at year-over-year earnings, we certainly have seen declines in the first 3 quarters. So is it fair to assume that even though the mid-point has remained unchanged, we really shouldn't be sort of thinking as that is the most likely outcome for the year? Or what am I missing here?

Well, Mig, yes, I think, Mig, first of all, I don't think you're missing anything. I mean, this is the key point that we focused in on here as we were preparing for the call. So it's a very logical question. But as you know, the way we operate here, first thing we do is we go down to the divisional and business unit level, and everybody forecasts going forward month by month. And we have a really good picture of what all of our people that are closest to the customers are really saying about what the volume and the margin trends can be. And so we've got those numbers that support what we're talking about in terms of our guidance that supports it very well. We also have a macro look at what the trends have been for us. We've been able to perform given where we are here in the cycle. We feel very good that the orders are bottoming, and it is counterintuitive that orders would be down and our revenues are going up. But with those revenues going up, the operating leverage that we get by utilizing our manufacturing facilities around the world in a much greater capacity is going to have a tremendous impact here for us on the bottom line. So from our bottoms-up approach, from our look at the end markets, from the positive actions we are going to get from integration of the recent acquisitions that we've done over the last 18 months and from what we're seeing in certain end markets that are still doing pretty darn well, we can get to that very easily to that mid-point of our guidance for Q4. But I don't want you to -- this is a tough call. This is an inflection point for the company and inflection of orders down versus revenues sequentially up. We had the same issue, just to give you some confidence in Q2, when we were looking at Q3. And the mid-point of our guidance for Q3 was up 8% and the revenues Q2 to Q3. And we hit that number on the top line right on the numbers, and we hit the bottom line very darn close too. So we're expecting us to be able to do it in the same kind of a trend here going from Q3 to Q4. So I hope that helps you.

Yes, and then just to summarize, really, you could have asked that exact same question last quarter, and I think we proved that we could do it. So at any rate, let me turn it over to Don right now, who just has a few closing comments, and I would like to thank all of you for your attendance.

Okay. Thanks, Pam. I just want to thank, everybody, on the call for taking the time to be with us this morning. As always, I also like to take the opportunity to thank our employees for their continued commitment and the success that we've had in growing our company and responding to these economic conditions that we see ourself faced with. The team continues to execute the win strategy and adapt quickly to an ever-changing market, as we've covered here in this meeting. During this period of economic uncertainty, we will certainly remain focused on managing our costs and maintaining the strong financial position that we have and keep our focus on our long-term growth strategy and that's what we're working on today. So thanks to everybody on our call. We want to thank you for your continued interest in Parker. And if you have any additional questions, Pam will be here the rest of the day. Feel free to give her a call. Thanks again, and have a nice day.

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