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Executives

Donald Washkewicz – Chairman, President, Chief Executive Officer

Jon Marten – Executive Vice President, Chief Financial Officer

Pamela Huggins – Vice President, Treasurer

Analysts

Andrew Buscaglia– Credit Suisse

Alex Blanton – Clear Harbor Asset Management

Ingrid Aja – JP Morgan

Terry Darling – Goldman Sachs

David Raso – ISI Group

Eli Lustgarten – Longbow Securities

Jeff Hammond – Keybanc Capital Markets

Richard Hall– Stifel Nicolaus

Steven Volkmann – Jefferies & Co.

Jeff Sprague – Vertical Research

Parker Hannifin Corporation (PH) F3Q2012 Earnings Call April 24, 2012 10:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Third Quarter2012 Parker Hannifin Corporation earnings conference call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen only mode. [Operator Instructions]. I would now like to turn the conference over the call over to your host for today, Ms. Pamela Huggins, Vice President and treasurer. Please proceed.

Pamela J. Huggins

Thank you Lisa. Good morning everyone. It’s Pam speaking. Just as Lisa just said I would like to welcome you to Parker Hannifin’s third quarter fiscal year 2012 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 do wish to do so, you may follow today’s presentation with the PowerPoint slides that have been presented on Parker’s website at www.phstock.com. For those of you not online, the slides will remain posted on the company’s investor information website one year after today’s call. At this time I would ask that you reference slide number two in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements, and again, if you haven’t already done so, please take note of this statement in its entirety.

Slide number three, this slide as required indicates that in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers and are posted on Parker’s website. To cover the agenda for today on slide number four, the call will be in four parts, first Don Washkewicz, the Chairman, Chief Executive Officer and President will provide the highlights for the quarter. Second, I will provide a review including key performance measures of the third quarter, concluding with a revised 2012 guidance. The third part of the call will consist of our standard Q&A session and for the fourth part of the call today Don will close with some final comments. So at this time I will turn it over to Don and ask that you refer to slide number five titled third quarter fiscal year ’12 highlights.

Donald E. Washkewicz

Thanks Pam and welcome to everyone on the call. To start the call I will just take a few moments to point out some of the highlights for the quarter. This was obviously a very strong quarter for Parker. We are really excited about it, we delivered a number of records and I will touch on some of those records here as we go forward. We did exceed our guidance that was given last quarter, so we are pretty excited about the results for that quarter.

Sales were a third quarter record while net income and diluted earnings per share were all-time records for any quarter in Parker’s history, so a pretty remarkable performance there. Although we did have some benefits on the tax side from some prior year tax filings, our results this quarter definitely reflected strong operating performance in our industrial North America sector, and I will share some of those margins with you in a few moments.

Internationally, our results this quarter did slightly exceed our expectations for soft market conditions in Europe and Asia. International markets appear to have somewhat stabilized. You may recall that when we started our fiscal year, our projections were that the first half was going to be strong and the second half was going to be somewhat weak and it’s exactly how this is rolling out, exactly the way we see it now. We predicted these markets would be soft in our second half and they were soft, and we expect them to be soft throughout our last quarter here, pretty much in line with our original forecast that was given at the beginning of the fiscal year.

Substantially, all of our sales growth in the quarter was organic at 5.8%. Currency rather impacted us by 1.3% negative and acquisitions were very minimal at 0.2%. So you can see most of the growth was organic and the majority of that came form from North America and also aerospace.

Looking on the orders side, orders increased 2%. We did report that against tough comps while quarter ending backlog was up 5% compared with quarter end backlog a year ago. So our backlog has never been stronger as well.

Total company’s segment operating margins were a third quarter record at 15.1. Again you can remember this was our target. We have been trying to get to that 15% and finish the year strong at 15, it looks like we are heading it down that path to have another record year from segment operating margins. Of course that was driven primary by, as I indicated earlier, industrial North America margins and those were 17.3%. We have never achieved that before.

Hopefully there is more to come as we look forward on building on that record as well. Year-to-date, our operating cash flow remains strong at 10.3% of sales and exceeded $1 billion. For the quarter operating cash was $443 million or 13.1% of sales, and I might add that this is the highest amount of operating cash in any quarter since fiscal 2008. So really doing a very good job in spite of the fact that some of the regions around the world are soft, the company still performs very, very strong.

Our usage for cash will be to continue our dividend increase record and make accretive acquisitions similar to what we have done recently and opportunistically repurchase Parker shares. Our board recently authorized us to repurchase up to 16 million additional shares during the remainder of this fiscal year.

Today, we announced another 5% increase in our dividend as we now enter our 56th consecutive fiscal year of increased annual dividend payouts and currently Parker’s yield is approximately 2%, and there is only four or five companies that can match that record.

We are also successful as you’ve seen in acquiring Snap-tite Corporation, a strategic high pressure connector and valve acquisition, and also we announced today an agreement to purchase the Olaer Group based in England. So some of the acquisitions that we’ve referenced going back earlier in the year that we are working on you can see that a couple of those are actually have come through the pipeline, so we’re pretty excited about being able to accomplish that.

Combine these two acquisitions that I just mentioned at approximately $300 million in annual sales and that would make the total for the year so far about $341 million in annual revenues added due to acquisitions. Again these are coming later in our year, so that’s going to be accretive to next year’s forecast as we go on and review that with you going forward.

Due to the fact that outperformed relative to guidance in the third quarter, we’ve now increased our earnings range for the full fiscal year. We now expect that fiscal 2012 earnings will be in the range of $7.30 to $7.50 per diluted share. At the mid-point that represents a 4% increase from our previous guidance and I’d also anticipate some all time record year for the company.

We will be giving guidance for our next fiscal year in early August after I finish this fiscal year, and that’s when we will be reporting our fourth quarter results and full year earnings. Our early projections reflect another year of growth in FY ’13. We’ve completed a lot of reviews here at corporate with our groups and so far it looks positive for next year as far as additional growth going forward. So we’re going to be more specific on that when we get on our fourth quarter call end of August.

So with that, I’ll turn it back then over to Pam, and she will give you a little bit more detail.

Pamela J. Huggins

Thanks, Don. At this time, I’d ask that you reference slide number six and I’ll begin by addressing earnings per share. Fully diluted earnings per share for the third quarter came in at $2.01 and this is an increase of $0.33, or 20% versus the $1.68 from the same quarter a year ago. The $0.33 increase in earnings per share for the third quarter year-over-year from $1.68 to $2.01 is comprised of the following. One segment operating income added $0.13 largely due to higher volume industrial North America. Lower tax rate due to a favorable resolution of prior year’s tax filings impacted EPS by $0.13 and non-controlling interest favorably impacted EPS by just a penny. And as a result of shares repurchase, the lower share count had a favorable EPS impact of $0.14. Higher expenses below segment operating income impacted EPS by $0.08 and I will talk about this in just a moment.

Sales were higher in industrial North America in the aerospace, while climate industrial controls group and international sales were down slightly. International is down less than a percent and this is in spite of the sovereign debt issues and slowing economies in Europe and Asia. Climate industrial controls sales are down due to the issues that we have consistently spoken about in previous calls, but income is actually higher than last year.

North America generated increased operating income year-over-year and international and aerospace were slightly lower. International is down as a result of the slower economy in Europe. Continued investment in Asia in the impact of currency mainly the Euro as it weakened against the dollar. The segment did better than projected however, due to a more favorable impact from currency and less restructuring than anticipated as fore stated by the higher volume.

Expenses below segment operating income as I said I would speak to this were impacted by higher other expenses of $25 million, and that’s mainly due to favorable adjustments last year for insurance settlements and higher currency expense this year. The lower tax rate, again as we said was due to the favorable resolution of prior year’s tax filings and the lower share count obviously as a result of the shares that we repurchased last year and this year.

So now moving to slide number eight. Looking at the top line revenues for the quarter increased 5% to $3.4 billion from $3.2 billion last year. This 5% increase in revenue was in spite of a slight decrease in international as a result of slowing economies in Asia and Europe, and climate industrial controls where the residential construction market remains soft. Climate industrial controls however generated more income on less sales.

There was minimal impact from acquisitions in the quarter. Currency reduced sales by 1%, so core growth was 6%. Segment operating margins for the quarter increased 30 basis points from 14.8% to 15.1%, an all time surge for the records of company.

Now moving to slide number nine. Focusing on segments and I’ll commence with North America, North America reported revenues increase of 12% for the quarter. Acquisitions and currency had little impact as such core revenues increase 12% as well. Operating income increase from a $189 million to $227 million, a 20% increase for the quarter year-over-year. Operating margins, a record third quarter increase to 17.3% from 16.1% last year.

Now moving to slide number 10 and continuing with the industrial segment moving to international. Organic revenues in this segment increased 2%, however currency reduced revenues by 3%. Acquisitions had minimal impact in the quarter. So total revenues for the quarter decreased 1%, and again a decrease of 1%, very good in light of what's happening in the macro economy. For the quarter segment operating income decrease to a $195 million from $200 million and operating margins decrease to 15.2% from 15.5%, and again due to the softening economies in Europe and Asia.

So moving to slide number 11 now, I'm focusing on the aerospace segment. They recorded increased revenues of 8%. Acquisitions in currency had no impact and margins decreased for the quarter 160 basis points for the quarter to 12.1% from 13.7% last year. And again this is due to the higher research and development expenses being incurred this year that we have spoken about on previous calls. On a year-to-date basis the aerospace margins are 70 basis points ahead of last year with segment operating income $28 million ahead.

Moving to slide number 12 the climate industrial controls group. For the third quarter year-over-year total reported revenues decreased 6% for the year. Again slow market, some of the slow markets that they are saying that we talked about on previous calls. There is no acquisition impact for the quarter and currency decreased revenues by a percent. So therefore, organic revenues decreased 5%. Segment operating margins however the percent of sales are going up 9.3% for the quarter versus 8.5% last year. And this is due to the continued restructuring efforts that we have spoken about again on previous calls.

So moving to slide number 13 and referencing orders for the quarter. Slide number 13 details orders by segments. And just as a reminder these numbers represent a trailing three month average and are reported as a percentage increase of absolute dollars year-over-year excluding acquisitions in currencies except for aerospace. Aerospace is reported using a 12 month rolling average. So as you can see from the slide, orders are up 2% for the March quarter just ended. North American orders increase 7%, industrial international orders decreased 1%, aerospace orders increased 4%, and this is up from last quarter, and climate industrial controls orders decreased 6%, again due to weakness some other market.

So moving to the balance sheet on Slide 14, Parker’s balance sheet remains solid. Cash on the balance sheet at year-end was over $773 million. Days sales and inventories decreased to 57 days from 63 last quarter, so we are very happy with that performance. Accounts receivable in terms of DSO closed at 50 days versus 49 last year, and then weighted average days payable outstanding increased to 54 days versus 51 last year, so we are happy with that progress as well.

Moving to Slide number 15, addressing cash flow from operations, for the quarter was $443 million at 13.1% of sales, so very, very good cash flow for the quarter. The major components of the uses of that $443 million in the quarter, we returned to shareholders via share repurchase and dividend payments $80 million, $88 million was used in connection with acquisitions as we closed the Camfil Farr and TAIYO acquisitions in the quarter. $57 million utilized for capital expenditure purchases and then in addition to all of these uses of cash, cash increased another $67 million in the quarter largely due to commercial paper proceeds within the quarter, however that was paid by the end of the quarter, so in total cash increased $285 million quarter-to-quarter.

On Slide 16, you can see that the debt to total cap ratio is 24.3% and on a net basis 15.4%, obviously in very good standing and providing the capability to grow the company moving forward.

So getting to the revised guidance for fiscal year 2012, this is shown on Slide 17 through 19. On Slide 17, the guidance for revenues and operating margin by segment has been provided. I’m not going to go through each one of those numbers.

Moving to slide 18, guidance has been provided at the mid-point and in total for the items below segment operating income. Again, you can see the numbers moving to slide 19, it summarizes the guidance on a diluted earnings per share basis, and as you can see, the revised guidance for fiscal year 2012 is projected to be $7.30 to $7.50, just as Don has already said.

So please remember that the revised guidance excludes any acquisitions that will be made in the fourth quarter, and to summarize the revised guidance assumptions for revenues increased 6.7% at the mid-point. Segment operating margins are in the range of 15.1% to 15.3% for the year. And expenses below segment operating income, which includes corporate administration, interest and other, at the midpoint of projected to be approximately $429 million, and we put a band around that of plus or minus 0.7%. The projected full-year tax is 26.5% full-year tax rate.

Just a couple of points with respect to guidance, sales first half, second half are divided 48%, 52%. Earnings per share first half, second half are divided 47%, 53%. Realignment costs are minimal and projected to be 6% for the quarter, $0.04 has already been incurred in the remaining projected expenses that will take place in the fourth quarter.

At this time, we’ll commence with the standard Q&A session. But as a reminder, before we do that, we would like to keep this call to one hour, so please honor the request of one question at a time and one follow-up only when clarification is needed. By adhering to this courtesy, everyone will have a chance to participate.

Lisa, at this time, would you please open the call to begin the question-and-answer session?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Jamie Cook with Credit Suisse. Please proceed.

Andrew Buscaglia– Credit Suisse

Hi, this is Andrew Buscaglia in place of Jamie Cook. I just had a quick question on – can you guys give an updated thought just on the pace of the recovery that you are seeing in Asia and potentially Europe, just a little bit more color there would be great?

Pamela Huggins

Okay, thank you and nice to have you on the call. Jamie is probably on another call as I understand.

Andrew Buscaglia– Credit Suisse

Yeah, we’ve got a few going on.

Pamela Huggins

Yeah okay.

Jon Marten

Okay well, this is Jon and just to begin – I think as Don indicated earlier where we stand in Asia is right where we thought we were going to at the beginning of this year. Don talked about how our revenues internationally industrial are stabilizing. That holds true for Asia as well as for Europe for us when you really look into the guidance by segment you will see that we are basically sequentially up slightly from Q3 to Q4 in our comps versus last year, very tough comps and still showing really good results.

So as Don indicated we are going to be looking at the trends for Asia, China specifically, but Asia in total as well as Europe altogether deeply during our Q4 and we will be updating our guidance from July 1 to June 30 of calendar year ’13 here at the beginning of August. But I think the keyword for us right now is that our international sales both in Europe given the issues there as well as in China given the issues there that have stabilized and that’s what's included in our guidance here for Q4.

Andrew Buscaglia– Credit Suisse

Okay, thanks. And then actually just on this – I saw this acquisition this morning on Olaer. It looks like actually this company is pretty sizeable with $200 million in revenue. There is not a whole lot disclosed in the press release. Could you guys talk to that a little bit more in terms of like what you are expecting, or would appreciate how much you paid for it or can you give any more details there?

Jon Marten

Well, yeah I appreciate the question. I mean I think two key points on that deal. We announced an agreement to acquire that company. So we expect and we are hoping that that deal closes on July 2 and – so that will be impacting our FY 2013. At this stage of our transaction we would not be disclosing that level of detail. We have some work to do and we want to make sure that we get our real good work done with the sellers as well as all the employees of Olaer in Q4 and get this final agreement on by July 2nd. So that’s our plan.

Andrew Buscaglia– Credit Suisse

All right. Thanks guys. I will step back in queue.

Operator

Thank you. Your next question comes from the line of Robert McCarthy with Robert W. Baird and Company. Please proceed.

Unidentified Analyst

Good morning guys. This is Rick Dubber [ph] for Rob McCarthy.

Pamela Huggins

Good morning.

Unidentified Analyst

A quick clarification question when looking at your guidance. So, if we are taking the mid point of the updated guidance, $7.40, and I'm adjusting for the $0.13 tax benefit, then I guess according to my math I'm looking at fourth quarter guidance of about $1.80 which when I am looking at performance in the third quarter again adjusted for the tax benefit of $1.88, at the mid point would suggest a step down in EPS from the third to fourth quarter and that’s something that traditionally speaking we haven’t seen generally speaking.

Pamela Huggins

Oh, that – I don’t know what’s going down here, but this is Pam speaking, and I have the guidance sitting before me by quarter. And while third quarter is a little bit below the third quarter not to the degree that you are mentioning, but one thing to remember is that in the fourth quarter we are not baking in the impact of the third quarter tax benefit. So really the fourth quarter is stronger than the third quarter once you back out that tax benefit.

Unidentified Analyst

Right, I thought I was doing that, but perhaps I got my math wrong. The point is we should be seeing really a step up in operating results in the fourth quarter result.

Pamela Huggins

Yeah, and we do. At the mid point you are seeing well over $10 million and it’s higher than that in terms of the increase. So you are seeing a substantial increase from third quarter to fourth quarter and I throw up that number because I know that you guys are smart enough and are going to be able to back into it anyway.

Unidentified Analyst

Well, hopefully. My follow-up is still on the international side, and some of the commentary, they are positive and we appreciate that. A little bit different than what we’ve heard from Ethan. So I guess I am wondering, what is it that you guys are seeing Europe versus Asia, is there a difference in the way these markets are performing and perhaps mobile versus fixed [inaudible].

Jon Marten

Well, I think that in Europe we are seeing a broad based stabilization in all end markets and all of our businesses in Europe. So we feel very confident in our forecast here for our Q4 and for the balance of the year. Now, in Asia although, yes, we are very well aware of the mobile hydraulics issues in Asia and in China specifically. We have gone through in detail all of our end markets and all of our product lines there and we are seeing a real stabilization of our revenues that are coming from that region. So, yes, mobile hydraulics is down slightly, not a big number, nothing really that concerns us, and we are really happy with the way that our Asian business and our revenues from Asia have materialized here for us as we really look at Q4. And like I said, I think to give you a broader perspective long term we’ll have to give you a really more detailed update in August for that.

Don Washkewicz

Yeah. And Rick, this is Don, I don’t know – you were mentioning other companies, so I am not sure exactly what they are saying. I am not watching their reports. But we are putting a lot of infrastructure into Asia, we are penetrating market in Asia, we are going to continue that along those lines. Our breadth of product line doesn’t even compare to the other people that we are talking about here. We have a broad range of products whether it goes from ceiling or filtration, pretty much across the board, so I don’t think you can do – there is no apples to apples comparison when you are talking about the two companies.

Unidentified Analyst

Thank you.

Pamela Huggins

Thank you.

Operator

Your next question comes from the line of Alex Blanton with Clear Harbor Asset Management. Please proceed.

Alex Blanton – Clear Harbor Asset Management

Hi, good morning.

Pamela Huggins

Good morning.

Alex Blanton – Clear Harbor Asset Management

Pam, could you just give a little more details on the balance sheet ratios, specifically the ones that really measure your progress on getting leaner. I'm talking about inventory to sales ratio for the quarter, how that compares with the past, working capital sales ratio and CapEx to sales and what you expect for the year in the CapEx, because those things have been dropping and they are generating cash for you.

Pamela Huggins

Yeah, Alex, you bring up a good point and I think if you look back, that's one of the strengths of Parker Hannifin, really the way that they are able to manage their working capital, whether it be in an up cycle or a down cycle. When you look at our DSO versus our peer companies, we always are at the very top of that list in managing our receivables. So we are very proud of where we come out with regard to that, and so – and I don't take credit for that, there are a lot of people around the world who work every day to make sure that that is taken care of.

So we have people out in all of those divisions working very hard every day, making sure that we are collecting those receivables and that we don't have the kind of risk that you sometimes see out there.

In terms of inventory, we are trying to get that down, we’ve been talking about that and in fact we have set an all-time record this quarter. Inventory as a percent of sales is 10.9%, and it's the first time it's ever been that low. So, and obviously we are smart enough to know that numbers play a little bit apart in that. But again, all of our divisions around the world working very hard to get that inventory. We said we want to be 10% of sales and at 10.9% we’re getting pretty close to that number, so we’re working very hard on that as well. We still have work to do, but happy with the results thus far.

And then, of course we have gentlemen here who works on the payables side who is very good at seeing results there. We don’t quite do as well as we would like to do there, but we’ve made great progress. You can see the [inaudible] that three-day improvement that I mentioned in my script remarks. So, we are making progress there as well, so we’re very happy with what we’re seeing, but working hard every day to even make it better.

Alex Blanton – Clear Harbor Asset Management

Yeah, the numbers on

Jon Marten

Yeah, Alex, the CapEx was the other number. We’re running around 1.6% right now of sales. And I think that over a longer run we’re not going to see that be 1.6%, but I haven’t been quite amazed myself as to how efficient we’ve been able to get as a result of rolling out lean and really driving that to some of the self-directed work team effort going on in the company and so forth. It’s really gratifying to see these kinds of CapEx numbers. And that just frees up cash to do other things which you’re starting to see here that we’re looking at. So, yeah, it’s a good number.

Alex Blanton – Clear Harbor Asset Management

Thank you.

Pamela Huggins

Thank you, Alex

Operator

Your next question comes from the line of Ann Duignan of JPMorgan Securities. Please proceed.

Ingrid Aja – JP Morgan

Good morning. This is Ingrid Aja, standing in for Ann

Pamela Huggins

Hi, Ingrid. How are you

Ingrid Aja – JP Morgan

I am fine. How are you?

Pamela Huggins

Real good

Ingrid Aja – JP Morgan

Good. You touched on this a little bit, but I was wondering if you could about the climate industrial controls, it continues to disappoint versus our expectations and with orders down 6% in the quarter, I wonder if you could just talk little bit more about the fundamentals in that business and where specifically the weakness is?

Don Washkewicz

Well, the key there – this is Don, the housing starts as a key part of that group that’s tied directly pretty much to housing starts. There is truck activity and there is some industrial valves activity, but primarily the refrigeration, air conditioning parts are tied to a great extend to the housing market. And we know that what the situation is there. I will make a note that, in March, and you don’t see that number in March, but in March that group had double-digit ROS numbers, operating ROS. So it is improving as we go forward. Some of the restructuring that was done last year is starting to come through. So like I said, you are not going to see that number but that’s what it was.

There was less revenues and there was more income. So, yeah, the revenues were down but the income was higher. So I think we’re seeing the benefits of lot of the restructuring that has been going on in that group. So until such time as the housing market really starts to rebound I think we are probably bouncing off the bottom there. And when we start getting some up lift I think this group will start coming back and show some nicer numbers based on a lot of the work that they have done as far as restructuring over the past six to nine months.

Ingrid Aja – JP Morgan

Okay, that’s helpful. So it’s basically offsetting any positive that you are seeing on the chart [inaudible] side.

Don Washkewicz

Yes.

Ingrid Aja – JP Morgan

Okay. And then I was wondering if you could talk a little about acquisitions. Your pace of acquisitions have picked up in recent months. So if you could talk a little bit about what your pipeline is like and what you expect to see? Should we continue to expect to see this kind of activity level?

Don Washkewicz

Well, we have – as we had indicated for the last year or two, some of the ones that we are talking about today we have been – well actually one of them I can tell you I have been looking at for 35 years. So you never can predict when you are going to get something through the pipeline and so that’s gratifying to see where we are at. And there is more in the pipeline. We are working on, we are looking at more, and we anticipate more coming through. It’s hard to predict when because you never know what you run into as you are going through the negotiations.

But we haven’t stopped. We’ve got a lot of dry powder so to speak in cash capacity, debt capacity that we can utilize to make more acquisitions and we intend to do that. I think just the ones we’ve done off late would add about 3% of sales roughly next year just themselves. So I think you can see how we are building some backlog here for another good year in the coming year. But we don’t anticipate stopping here. We want to continue to build on what we have started to get through the pipeline.

Ingrid Aja – JP Morgan

That’s great color. Thank you.

Pamela Huggins

Thank you Ingrid.

Operator

Your next question comes from the line of Terry Darling with Goldman Sachs. Please proceed.

Terry Darling – Goldman Sachs

Thanks.

Pamela Huggins

Good morning Terry.

Terry Darling – Goldman Sachs

Good morning, good morning. Hey, Don, just want to clarify on the re-up on the buy back. I think the way you said it, one could have interpret it to mean that you are looking to execute 16 million share buyback by the end of fiscal 2012. Can you just clarify?

Don Washkewicz

Yeah, we have authority, renewed authority from our board to buy up to 16 million shares in this fourth quarter. We could buy zero or we could buy 16 million or anything in between. So that’s strictly just for the fourth quarter. We have renewed authority for next year, but that’s all separate than what we are talking about now. This specifically has to do with the fourth quarter. And with the stocked away it’s been languishing at the levels that it’s been which has not been where we think it should be. We will take some prudent action here where you are looking at our models where we use a discounted cash flow model, we have a grid that we establish. We are kind of getting in the red zone, okay, if I can put it in those terms as to when we just don’t want to see this drop any further. So, yeah, so we have that capacity and we will utilize it wisely and opportunistically.

Terry Darling – Goldman Sachs

Okay. And I was just wondering if that has implications for the pace of acquisitions.

Don Washkewicz

No. Actually we have – this would give us the ability at $80 a share, you know assuming it’s at $80, to acquire about a 1.2 billion or some thereabouts in shares. We have about, what our debt capacity right now we have another $1.2 billion capacity and that’s not counting any additional earnings going forward that we’ve been generating record cash flows going – over the past year if we look at our record cash flows we are going to have plenty of cash to do the dividends, the share repurchase, and any acquisitions that we want to going forward. I feel pretty comfortable with all that.

Terry Darling – Goldman Sachs

Okay. And then Jon, I'm wondering if you can add a little more detail to the organic growth picture on the international industrial side. Orders in March, down one 3 months trailing average, I was wondering if you can help us with January, February, March progression. I wonder if you can clarify. It looks to me unless I'm missing something on acquisitions and FX that the implied organic range for 4Q is 0 to minus 3. And then I'm wondering also if you can just talk, you should be coming up on some really easy comps in some of the international end markets like semiconductor and such. Do you think to the back half of calendar 2012 how much visibility you have on an acceleration just on easy comps alone?

Don Washkewicz

This is Don, I just have a couple of quick comments and I’ll let Jon follow-up from there. Europe for the year I'm going to touch on Europe I'm going to touch on Asia just separately, but Europe for the year is going to be up about 5%. Remember what we said earlier that the second half, which our second half or third and fourth quarters is going to be weaker. Well, actually it was down on a year-to-year basis third quarter about 1% in Europe. So what you are saying is true. There has been some degradation, but we anticipated that. For the fourth quarter we are looking at down another percent which is on target from what we have predicted and that’s from last year’s fourth quarter so that’s about a 1% down from last year’s fourth quarter which was a pretty strong quarter.

If you look at Asia, we are going to end up for the year about 2.5% up for the full year. The third quarter was up about a percent over last year’s third quarter. Again if you look at Europe and Asia they are kind of offsetting in that respect. Europe was down about a percent third quarter over third quarter, Asia is up about a percent third quarter over third quarter. So you get kind of a flat, stable kind of outlook.

We are looking at Asia about down 2% in the fourth quarter, which is a strong quarter over last year, 2% quarter over quarter in Asia in total. So when we look at all of this together, and keep in mind that Latin America is coming back as a smaller region, of course Latin America is starting to show some life off the bottom, we are looking at kind of a stable outlook, flattish kind of outlook going forward. I hope that helps, and Jon you can add anything that you might want to add to.

Jon Marten

No, I would say that that covers it perfectly. Terry, anything further on that?

Terry Darling – Goldman Sachs

Yeah, just to be clear. Don that’s all in including FX factor or that’s just organic, just on your 4Q commentary.

Don Washkewicz

That’s organic?

Jon Marten

That’s organic.

Terry Darling – Goldman Sachs

Very helpful, thank you.

Operator

Your next question comes from the line of David Raso with ISI Group. Please proceed.

Don Washkewicz

Hi David.

David Raso – ISI Group

Hi, I am sorry, I am here. So if you look at the full year guidance for ’12, basically you are saying the full year revenue is up 6.6 with an incremental of 20.8. So just trying to peak a bit into next year, going into this past year you had a lot stronger order growth, right, up 24, up 15 the last two quarters of last year. This year obviously a little slower, plus 2, and whatever fourth quarter gives us. But you have more acquisitions going into fiscal ’13 than you had in ’12. So trying to think through the incremental margins, how you are thinking about just framework going into next year based on how this year is playing out, right? This 6.6 revenues, 20.8% incremental. How should we think about A, maybe the margins of what you recently acquired, because that’s obviously going to impact how we should think about incremental into next year. Structurally any of the things that you’ve done to the company this year to still allow that kind of incremental next year. Again, I'm just thinking about the revenue going into ’12 as more organic sales growth. At the moment, the revenue growth going to ’13 is more acquisitions, which usually provides lower incremental. If you can help us on just thinking about especially those incrementals for ’13 versus ’12.

Don Washkewicz

Yeah, David, I think the relevant range is still the 20% to 30% incremental returns. That’s with acquisitions. I think at least the early numbers that we have looked at here is kind of falling in that range. Like I said, we are going to give you a more detail and better color as we go forward. But I feel comfortable in that range going forward with the projections that we are going to be giving you from organic as well as the acquisition growth. I think we are going to be doing fine.

We are seeing obviously a pretty strong growth from aerospace, which is positive. I think we had a little negative impact off late because of their higher than expected non-recurring engineering. I think that’s going to drift down a little bit, that’s going to be a little bit more accretive to the MROS going forward. Irrespective of what happens in Europe and Asia, I think as long as they don’t implode more than what we anticipate here, I mean a little softening, I think we are going to be fine with those kind of marginal that I am reflecting here.

David Raso – ISI Group

I mean that is pretty interesting. To think higher incremental next year than this year, those ’13 or at least the initial base case, kind of how we are starting the year, can be a little more acquired revenue in a way to your comment earlier about what you already acquired to give you 3% growth for ’13 already. Can you imply from that to the margins of the recent acquisitions are because I have to say north of 20%? Are those acquired revenues that high a margin?

Don Washkewicz

No, I won’t make those assumptions, no. Keep in mind too that we have been shrinking in CIC all year. We anticipate that not going to be continuing to be continuing forever either. So there is some margin impacts from other areas of the business that you got to take into consideration when you look at the end result for the year.

David Raso – ISI Group

Not to push on it. But just trying to figure, those incremental margins, if they were lower than 20 to 30 on the acquired revenues obviously implies even bigger than 20 to 30 on the base revenue growth. So clearly there must be some restructuring benefits that quantify to some degree.

Don Washkewicz

Yeah, there are restructuring benefits that we have seen and we will continue to see. We are also going to see the continued activity on oil and gas which has been very good for us, very strong. And again, the other thing that we see building and continue to build strong relative to the OEM side of the businesses distribution, distribution is a real strong piece of the puzzle, and we anticipate at least early look at next year looks like that’s going to continue strong as well. That all adds to the higher margins and higher incrementals.

David Raso – ISI Group

All right. I appreciate it. Thank you.

Pamela Huggins

Thanks David.

Operator: Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Eli Lustgarten – Longbow Securities

Good morning everyone.

Pamela Huggins

Good morning Eli.

Eli Lustgarten – Longbow Securities

[Inaudible] to those of us who believed that Parker is a stronger operating company today.

Don Washkewicz

Thanks for hanging in there with us. Everybody else abandoned ship.

Eli Lustgarten – Longbow Securities

Come on, you have got a couple of good guys.

Don Washkewicz

All right, I know we have got a few good ones on the phone.

Eli Lustgarten – Longbow Securities

Yeah a few good ones. Just one clarification, when you talk about $315 million of acquisition. That includes the Olaer one today that you announced?

Don Washkewicz

That’s correct, yeah.

Eli Lustgarten – Longbow Securities

I wanted to make sure that. Can you give us a little bit of color on what's going on in the various segments? You talked – a lot of question about industrial international. You had a much stronger organic showing in North America than you might have suspected from 8% and 7% order patterns going on, something actually stepped up in that business and you are expecting it to continue actually into the fourth quarter. Can you give us some idea on what happened to give us a double digit number as opposed to the order pattern that we are showing?

Jon Marten

Well, I think Eli, I’ll start out, this is John and I know Don will perhaps have some points to add. But, certainly in Q3 in the ordering patterns as well as our conversion, we saw excellent progress in our oil and gas end markets. We saw excellent progress in our construction end markets, and we saw excellent progress in distribution overall. Those markets really helped drive our results in Q3 and drive results in our Q3 to a greater extend that we thought that they would be here as we were looking at Q3 in North America at the end of Q2. So I think in a nut shell I don’t want to just say that it’s just that but those would be the top markets I think. In general I think a key take away would be that North America results with the quarter on the top line and in the orders, is broad based. It’s many, many of the segments that we operate in all across the product lines that we have, and a real testament to some of the diversification efforts that we have been making over the last five years here to really help drive our North American revenues and we are very, very proud of that, very excited about that for the future. And with that oath for the future too.

Eli Lustgarten – Longbow Securities

Can we also talk a little bit about aerospace, are we going to see an acceleration of top line growth with all these wins and there I mean we are still running 7%, 8% plus a little more top line. Are we going to see an acceleration of this, not much in the fourth quarter but in 2013 with better profitability as the R&D comes down, I mean that [inaudible] as we look forward.

Jon Marten

Well, Eli, Jon again. Just a couple of comments on that. Number one, I don’t want to say anything too definitive about FY ’13 today because we really need to study very hard the patterns. But two, just high level points to make. The commercial OEM business and the commercial after market business in aerospace are just fantastic and they are only going to accelerate as time goes on. What we have to balance that out is against what is happening in the defense markets at the OEM level and it defends aftermarket MRO level, and that’s where the really deep analysis will be made. But I think long term as we were talking about on our investor day in December, long term the prospects, the organic prospects going forward are fantastic and we are going to have a lot more to say about the mix in aerospace here at the beginning of August.

Eli Lustgarten – Longbow Securities

All right, thank you.

Pamela Huggins

Thanks Eli.

Operator

Your next question comes from the line of Jeff Hammond with Keybanc Capital Markets.

Jeff Hammond – Keybanc Capital Markets

Hi, good morning guys.

Pamela Huggins

Good morning Jeff.

Jeff Hammond – Keybanc Capital Markets

Yeah, so, you gave us some good color into the fourth quarter on kind of how you are thinking about Asia and Europe. And Don, you said early in the call, you expect growth into fiscal 2013. But as you kind of think directionally, I know you are not prepared to give any guidance, but if you think directionally, how do we kind of think about trajectory into fiscal ’13, as we think geographically North America versus Europe versus Asia.

Don Washkewicz

Well, I'm just going to give you a little bit of color on the order trends. Again we’ve done this in the past. We look real closely at our 3-12 pressure curves in ’12, and that’s a good predictor of what's coming down the road. And if you look at industrial North America just looking at our 3-12 – this is the last three months of the previous year of the same three months in 12-12 would be the last 12 months order trend over the same ’12. North America, both of those trends are very strong and are well above a 100%. We are talking about a 108% on the 3-12, a 112% on the 12-12. So, very strong going into next year. We don’t anticipate any major changes there because they already have orders in the pipeline to cover the early part of next fiscal year already. Europe is flattening out at about a 100, little bit of greater than that on the 12-12 is running about a 110, but 3-12 is running around a 100. So I can see the Europe coming in for a soft landing going into next year which is kind of what I have been saying here. Asia likewise is coming in at around a 100. So we are coming in kind of – that’s what we say those two regions look kind of stable to us right now at the levels that we are looking at here right now.

Jeff Hammond – Keybanc Capital Markets

So it’s good growth in North America and kind of a stable international…

Don Washkewicz

Kind of stable outlook internationally, right. Now, if you look at some of the specific markets, heavy duty truck is strong, I think you probably tracked that as well. Construction, off highway construction is still strong. Refrigeration, as I indicated earlier, the CIC Group is one of our weaker segments. That’s below 100% on the 3-12 and the 12-12, so that’s still got ways to go before it bounce off of the bottom and start seeing some improvement there.

Semiconductor is still weak, according to our pressure curves 3-12 and 12-12 are under a 100 there, and that’s what we anticipate and we have been forecasting. Process has been – process markets have been pretty strong, well above a 100, about a 120 and growing on the 3-12, running about 110% on 12-12. So you can see that that is a real strong market for us. And I mentioned Aerospace before, the Aerospace 3-12 pressure curve is at about 125. So that’s going to be very strong for us next year.

But keep in mind that two areas I think I want you to remember, our distribution and aerospace, I think those two areas, discount the fact that Asia and Europe are going to be whatever they are going to be. We are going to continue to grow our presence in Asia and put more assets on the ground which we are doing and we are going to eat into the market share over there. But we’ll have to see how that develops. I don’t think it’s going to get much worse than it is now, we are not anticipating that. But the real big areas for next year I think you are going to continue to see a real strong North American development and then also Aerospace will be another strong segment. So that would be some of my input on the coming year.

Jeff Hammond – Keybanc Capital Markets

And then the just a quick on European restructuring, can you quantify what your total restructuring will be in this fiscal year and kind of how you think about restructuring benefits into fiscal 2013 on that basis?

Jon Marten

Well, I think our restructuring all together is $0.06 for the year, we’re going to have $0.02 in Q4. And in Europe, specifically, there has not been, as compared to the prior years, nearly as much restructuring as we’ve had in prior years. We feel very good about our cost structure there as it continues to improve over time. And really, we’ve been working with the local councils and the local governments on different programs there that really frankly don’t require us to do a significant restructuring like we maybe had to four or five years ago. So, we really are very optimistic about being able to further improve our cost structure there over time and really improve our bottom-line margins as we continue to grow and add synergies from all of our businesses there and our sales companies and the way that we go to market which is we feel is very unique and very special about on our company.

Jeff Hammond – Keybanc Capital Markets

Great, thanks.

Operator

Your next question comes from the line of Nathan Jones with stifle Nicolaus. Please proceed.

Richard Hall– Stifel Nicolaus

Hey guys this is Richard Hall on for Nathan Jones.

Pamela Huggins

Hi Richard.

Richard Hall– Stifel Nicolaus

How is it going?

Pamela Huggins

Good, welcome.

Richard Hall– Stifel Nicolaus

Good, thanks. So I am looking at the aerospace margins. Obviously they are fairly weak during the quarter. You mentioned that this is because of the R&D impact, primarily because of the R&D impact. So two quick questions here. Is there any way you can quantify what the R&D impact was in the quarter? And then second, and you may have hinted to this earlier. But when you are looking over the next few quarters, should we try to continue to see a little bit of margin pressure from the R&D or is that going to ramp down or how should we think about run rate here?

Jon Marten

Well, I think as Don talked about in his comments, this is Jon, Don talked about in his comments, you know, R&D is a really tough expense. You know, the expense – everything is incurred in that business from an R&D standpoint, and it’s really tough to get the timing right. And so, we really got some expenses into our Q3 that we have been projecting into other quarters. But really when you think about R&D in aerospace as a percent of sales we are still going to be right where we thought that we were going to be at the beginning of the year, last year in FY ’11 we were above 10% heading towards 11% of sales of R&D as a percent of sales. This year we will be FY ’12 well below 10% as a percent of sales in R&D. And we anticipate that trend will continue in our out years as time goes on. A more normalized number is in the 7% to 8% range. And so, that’s what we have been kind of targeting for ourselves, and as Don alluded to there is just a timing issue in Q3.

Richard Hall– Stifel Nicolaus

Sure. Okay, great, thank you.

Pamela Huggins

Thank you.

Operator

Your next question comes from the line of Steven Volkmann with Jefferies. Please proceed.

Steven Volkmann – Jefferies & Co.

Hi good morning. Most of my questions have actually been answered, but I'm just wondering Don, the tone of kind of how we progress through the quarter in CIC, we’ve seen some of your larger or I assume your customers talking about things getting a little bit better as we progress through the quarter and seeing some signs of life in HVAC finally, and I'm just wondering if you might have seen that tone of things through the quarter or is it still too early to think about that?

Pamela Huggins

Steve, this is Pam speaking. Yeah, I think you know what you are referencing we are seeing, but we are not getting too excited here yet. You know I think if you look at the very end of the quarter, in the last month and even in the mid month you saw some things may be picked up, but it’s just too early for us to get too exuberant. But you are right we are reading the same things that you are reading and so I did question our climate industrial controls group about that, and yeah, slightly.

Don Washkewicz

I think Steve we found the bottom. Hopefully going forward we are going to start bumping on the up side here. So, year-over-year we are down 6% on revenues. We’ve got more income than we did last year because of all the restructuring we are down 6% in revenues. We are lean as we have ever been in that group, and believe me we get a little volume we will be generating some nice MROS numbers. But, yeah, I think if you hear the rest of the commentary from other companies I think there is only one way to go from here is up. I mean that’s the only way to go. So it’s just a matter of timing right now.

Steven Volkmann – Jefferies & Co.

I guess that’s mildly encouraging. So since you brought it up Don, I'm going to ask the question. Can you get to the corporate average for the rest of the company margin? Is mid teens doable on this business with reasonable volume or is it still going to be a bit lower?

Don Washkewicz

Again that would depend on just a mix of what's going on there. Certainly we have been in the teens before. We have never been, to the best of my recollection to 15 for any period of time. We might have hit 15 and a quarter. I'm not even sure we did that. I think more like 13 or some or thereabouts. But keeping in mind too that that group has traditionally had a much lower asset intensity to it, and as a result we get to our return on net assets metrics a lot, and a lot lower ROS. Not this data we want to give any group a pass. We still think that we want all these groups to be at 15 plus, and as a matter of fact virtually all of the other groups demonstrated 15% plus kind of performance here especially as you can see now from this month or this quarter.

So, we have got some other things going on in that group that are going to be accretive to us going forward. There are some very significant projects going on in our renovation program with precision cooling and things like that that are higher margin businesses. These are innovative type products coming out and we think that’s going to be accretive to that business as well. We are going to be able to hit 15. The question is, it’s hard to say. I think we are going to certainly be in the teens and approaching 15. Like I said we hit double digits in the pretty down period of time here this last quarter. So it has been gradually coming up and a lot of that’s because of all of the restructuring we are doing. So I think we are setting the field for something good going forward in that group.

Steven Volkmann – Jefferies & Co.

Great. That’s very helpful. And is it sort of order of magnitude, a third of that would be HVAC and the rest would be mobile or?

Pamela Huggins

Yeah. There is about 15% of that business which is on the industrial side, which is the flood control, and then there is 35% which is what we call mobile, which is made up of trucks, refrigeration and trucks, off highway equipment, auto. And then about 50% of the business is stationary air conditioning and refrigeration.

Steven Volkmann – Jefferies & Co.

50%, okay, great. Thanks very much.

Pamela Huggins

Thank you.

Operator

Your next question comes from the line of Jeff Sprague [ph] with Vertical Research. Please proceed.

Jeff Sprague – Vertical Research

Thank you. Good morning everyone.

Pamela J. Huggins

Good morning Jeff.

Jeff Sprague – Vertical Research

A lot of ground’s been covered. Just a couple of little loose ends from me. On aero, just to put a finer point on it Don, you said a higher than expected non-recurring engineering, is that put to bed, I'm assuming that’s a certain business shift program that maybe can remain nameless on the call, but is that totally behind you or there is still some more work to be done there?

Don Washkewicz

That’s a good question. I know that it was unusual for this quarter. Every now and then we get a surprise like this. I can't promise you that we won't get another surprise going down the road. It’s the timing issue as far as how these class roll in, and so our hopes are that this is a one time event, but I can't promise you that. A few quarters down have a timing situation where a lot of things hit all on one quarter, we have another event. But the trend ought to be going down.

Pamela J. Huggins

Yeah, Jeff, I think it’s – we do pretty well on an annual basis but quarter-to-quarter you may see some fluctuation. So why you saw that maybe it was higher in this quarter, you know it’s going to even out for the year. We still think it’s going to be less than last year as a percent of sales. We are still intense on that goal. That’s what we have been communicating and we still feel pretty comfortable that it will come in at that level.

Jeff Sprague – Vertical Research

Great. Just finally from me, just pricing in North America Don, can you give us a little color on what's going on in pricing dynamics and maybe contrast that to cost side of the equation?

Don Washkewicz

Yeah, that’s a good question. You know we had a lot of things going on here on the raw materials side that have been going up and down and sideways and what have you. One of the more significant things that happened was on the polymer side. There was an explosion in Europe of one of the Nylon 11 – Nylon 12 facilities over there which put the automotive business companies in a tizzy because a lot of it is used in fuel lines. We are not in that part of the business, but we do use Nylon 11 and Nylon 12 for air break tubing on trucks and things like that.

We did have alternates that we were able to utilize. We had different constructions for some of these products and we are able to keep our customers out of trouble. So I think there was going to be a ramp up certainly on pricing and some of the raw materials on the polymer side of the business.

If you look at the metals, copper is increasing at a decreasing rate, aluminum for the most part is leveling off now, at least the last numbers that I had seen. Oil was at one year high in March. Steel had an annual all time high, I believe it was in February and Nickel was kind of flat for the year, but pretty volatile, bounces all over the place. So, when you talk about pricing where we are right now is as you know we measure the – what we call the purchase price index and for all of our divisions and all of our purchases worldwide and we aggregate that number for the entire company and then we look at the sell price index through our pricing teams worldwide and we aggregate that and the key here is to make sure that the sell price index is high enough to recover any purchase increases in cost that you’ve incurred and any other costs plus the margin. And I can tell you right now we are running positive there.

So we are staying on top of this and we are recovering these raw material increases as we are inferring them in pricing, and we will continue to do that. There is price increases that are scheduled for the July timeframe, we had some of that happen in the January timeframe and that’s going to continue. And again, our whole mission here is to make sure that we don’t fall behind and jeopardize margins because we are not passing on increases properly. We have done a really, really good job of this over the last probably six, seven years since we have launched our strategic pricing initiative here in the company.

Jeff Sprague – Vertical Research

Thank you, that’s all from me.

Pamela Huggins

Thank you. At this time I think we are going to end the Q&A session. We are past our hour. I would like to thank all of you for attending and to those people out there supporting your analysts. I want to give you a special thank you for participating in the call today and look forward to talking to you later. But before closing, I just want to turn it over to Don, who just has some comments before we close the call. Thank you.

Don Washkewicz

Yeah, thanks Pam and just a couple of last closing comments. First of all thanks all of those on the call. I know that there was another meeting. We were not expecting that to happen. Unfortunately it did happen with another one of our peer companies. So this is going to be tough for people to try to cover both of these meetings. But I think hopefully we gave you a little bit of color on what’s happening at the company and maybe a little glimpse of what we anticipate going into next year.

You can see what’s happening with the acquisitions and how we are going to be managing the cash here. The dividend increase that we have talked about, it’s another 5% that we just announced. That’s 10% for the year. So we are trying to keep our shareholders that we have happy, and we have got some capacity here certainly on the share buyback activity that we can action as we go forward.

So I think you have an idea as to what our plans and our strategies are going forward. I would like to take this opportunity also as long as we are on the call to thank all of our employees worldwide for their continued commitment to serve our customers. They have really done a remarkable job here off late and for continuing to deliver a strong financial performance that we are seeing for the company, setting our all-time records. It’s really gratifying to see all the good work that’s been done and the kind of results that we are achieving as a result of that.

We anticipate a strong finish to fiscal ’12, as we indicated. We don’t see anything bad happening over the next several months here certainly, and we are going to give you the best look at fiscal ’13 in August and we think again that’s going to be a growth year for us.

So I want to thank you for your participation on the call and for your continued interest in Parker, and then if there is any additional questions, of course Pam will be around the rest of the day. She will be happy to take your calls. So with that, take care and have a great day, bye-bye.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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