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Parker-Hannifin Corp (NYSE:PH)
Q2 2021 Earnings Call
Feb 4, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Parker Hannifin Corporation's Fiscal 2021 Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to your speaker today, Todd Leombruno, Chief Financial Officer. Thank you. Please go ahead, sir.

Todd M. Leombruno -- Chief Financial Officer

Thank you, Gigi, and welcome everyone to our earnings release webcast, This is Todd Leombruno, Chief Financial Officer and joining me today are Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee Banks. Today's commentary and the slide presentation will be accessible as an on-demand webcast on our Investor Information website located at phstock.com and will remain available for one year.

If you move to Slide 2, you'll see the company's safe harbor disclosure statement addressing forward-looking statements, as well as non-GAAP financial measures. Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com.

If you move to Slide 3, you'll see our agenda, we'll begin with Chairman and Chief Executive Officer, Tom Williams, providing some strategic comments and highlights from our second quarter, following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increased to guidance for the remainder of our fiscal year FY '21. Tom will then provide a few summary comments and will open the call to questions from Tom, we, or myself. And with that, Tom, I'll hand it off to you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thank you, Todd, and good morning everybody, thanks for your participation today. Now, before I move to Slide 4, I want to make a few opening comments. Calendar 2020 was an extremely difficult year, to say the least for all of us, both professionally and personally and I hope all of you are staying safe. Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis. We've rallied around our purpose, and the one strategy, we've showed that Parker is an exceptional performer, even in the most difficult of environments. I'd like to take this opportunity beginning here to thank our global team for this great performance we're going to see evidence for that over the next couple of slides.

So if you go to Slide 4, one of our key competitive advantages are breadth in motion control technologies. We're now up to two-thirds of our revenue this -- you heard me talk about this is probably 160% but now the two-thirds of our revenue comes from customers who buy from four more of these technologies. As these interconnected technologies that enable us to create even more value for our customers and create a distinct competitive advantage versus our competitors.

If you move to Slide 5, we just had outstanding performance in the quarter. I will run you through some of the highlights. Top quartile safety performance, we had a 23% reduction in recordable incidents this now makes 75% reduction for the last five years, which has been phenomenal. Sales decline was 2.5% year-over-year, you can see it was a little over 6% from an organic standpoint this was significantly better than our guidance and about a 50% plus improvement from where we were on Q1. Q2 was a record net income at $447 million, the EBITDA margin was a little over 23%, as reported or 20.8% adjusted. You can see the significant improvement versus prior 230 basis points.

Year-to-date cash flow from operations was a record at 20.4% of sales. And then the table to bottom there has got segment operating margin, both as reported and adjusted basis so I'd call your attention to the adjusted row, 20.4% segment our operating margin adjusted and again a giant increase versus prior plus 230 basis points. So there's a lot of numbers on this page, we have a lot of companies to track. So the easy way to remember this is, is the quarter we put up 320's and we happen to highlight them in gold, so greater than 20% EBITDA margin, CFOA margin and segment operating margin, so we're pretty proud of that. And those are all who create results during the pandemic, so just fantastic job by the whole team.

If you go to Slide 6, we're going to talk about cash flow the cash flow quarter paid down $767 million of debt in a quarter. If you look at our last 14 months it's $2.8 billion of debt this was a little over half of the acquisition debt, so we took almost organic size, just great progress there. You see the ratios in the middle of the page there, of significance, if we go back a year ago, we were 4.0 and now we're at 2.7 on a gross debt to EBITDA basis. And we've now reinstated effective in this quarter Q3 our 10b5-1 share repurchase program.

So I'll move to the next slide, which is our transformation of the company, and hopefully, just the last two slides are indicative of how the company has transformed, but I'd like to give a little more color and context, as to what we're doing. So if you move to Slide eight, this is our strategy, summary on a page and it's flanked on the left side with why we win, which you've heard me talk about this in the past.

This is a list of our competitive advantages, and I've highlighted those. So I'm not going to talk about on this really today, but their historical success factors that will continue on into the future. I want to focus most of the time for my next couple of slides on where we're going and I've got a slide in each one of these bullets, and the output of really this historical success factors on where we're going, is that we want to be a top quartile company, and we want to stand out in the crowd and we think we're doing that.

So we go to Slide 9, the Win Strategy and this is 3.0, this is our business system a pound for pound this has been the most impactful change we've made to-date to the Win Strategy, and it's going to be Win 3.0 and our purpose statement. There are going to be a powerhouse behind our future performance.

If you go to 10, you've seen our purpose statement enabling engineering breakthroughs that lead to a better tomorrow this is a statement that everybody has really rallied around the foundry inspiration within the company. It's enabled everyone to connect their efforts to this higher calling, this higher purpose of life and really it helps to answer the question, how can we help through our customers create a better tomorrow.

And I've given what's going on with the coronavirus and the vaccine, Slide 11, is probably a great highlight of our purpose and action and just how essential we are to the vaccine value chain. The way to read this slide to go left to right, and go in a clockwise fashion, we will start in the upper left hand corner. So we're in a development and production phase of these vaccines mixing purification filtration and dispensing then you got to get the product moved around, so we are in sterile transfer containers especially designed and then where all of our motion and control technologies are in both air and ground transportation to move the product around the world.

You need to be able to start locally and that requires low temperature refrigeration. So our refrigeration technologies are at play there. And then when we administer to the patient, again you need on-premise refrigeration and then stoppers and syringe sales as part of engineered materials offering.

So we're very proud to be part of this value chain, and through our customers helping to create a better tomorrow that all of us, as I started this call are striving for as we try to exit the pandemic and deliver billions of vaccines to the people around the world over the next quarters and years.

If you move to Slide 12, my last slide from my opening comments, I want to focus on our strategy to grow faster in the market and our proxy for the market is global industrial production growth, which is GIPI, that acronym. So on the left hand side, it's a series of portfolio things that you've seen us make transforming the portfolio company buying three great companies, $3 billion of acquired revenue we're all accretive on growth, cash margins. And a matter of fact, as an example, LORD grew mid-single digits last quarter, while the rest of the company, total company grew minus 6%.

On the right hand side, there is a list of organic growth strategies. And what's interesting about this list with the exception of international distribution, these are all new with Win Strategy 3.0. So I'm going to make a quick comment on each one. So strategic positioning is really our effort to focus on stronger divisional strategies, and we have with every division we do three, three a month, and these are extremely productive conversations with our general managers to how they're going to position your division to win versus the competition.

Second, both are an Innovation we made two big changes one is the metric PVI which is product vitality index to measure of new products as a percent of sales looking at a five-year period for new products, and the new product blueprinting, which is that NPB acronym there, is really a change to our ideation process to create better ideas coming into the renovation funnel.

The output of what we're trying to do here is that we want our PBI context the percent of sales to grow by 600 basis points over the next five years and more innovative portfolio, better chances to grow, better margins etc. And then Simple by Design, I've talked a lot about that. It's a speed initiative, it's a cost initiative, it's a customer experience initiative, it's a recognition that 70% of your costs are tied up on how you design a product and Simply by Design is all about focusing on design excellence. So when you put together design excellence with operational excellence, it's a dynamite pairing.

International Distribution is going to continue from the success we've had with 2.0. Digital Leadership is really a four-pronged attack, digital customer experience, digital products, digital operations and digital productivity and digital productivity is where we have a concerted effort on our official intelligence and debt analytics.

And then lastly, a new incentive plan, our Annual Cash Incentive Plan are acronym ACIP and that's going to focus our divisions and or company on driving growth cash and earnings. So it's this combination, and it's this combination that's helped us perform better on the top line organically, particular in the current downturn and it will be our catapult to growing fast in the market as we go forward. So with that, I'm going to hand it back to Todd for more details for the quarter.

Todd M. Leombruno -- Chief Financial Officer

Thanks, Tom. I'd like to direct everyone to Slide 14, and I'll just begin summarizing our strong second quarter results. This slide displays, as reported and adjusted earnings per share for the second quarter, and I'll focus on adjusted earnings per share. We generated $3.44 this quarter and that compares to $2.98 last year. If you look at the breakdown of adjustments for the FY '22 or excuse me FY '21, as reported numbers it netted to $0.03 this quarter, and that is made up in the following buckets, business realignment expenses of $0.14, integration cost to achieve of $0.02, acquisition-related amortization expense of $0.62, and as we communicated last quarter, we are adjusting out the gain on the sale of land that amounted to $0.77. And all-in the net tax impact of all of those adjustments, is $0.02. Last year, our second quarter earnings per share were adjusted by $1.41, the details of which are included in the reconciliation tables for non-GAAP financial measures. If you move to Slide 15, this is just a walk from the $2.98 to the $3.44 for the quarter and despite organic sales declining 6% and total sales declining 2.5%, adjusted segment operating income increased by $70 million or $0.11, that equated to $0.42 per share,so very strong operating beat for the quarter.

Detrimental margins on a year-over-basis are favorable, demonstrating the excellent operational execution, robust cost containment by our team members really in every segment and every region. If you continue on the slide, we had a slight headwind from higher corporate G&A just $0.02, that was a result of market-based adjustments to investment tied to deferred comp. And as Tom mentioned, our strong cash flow allowed us to pay off a significant portion of debt on a year-over-year basis that reduced our interest expense, that equated to $0.12 for the quarter. And then if you look at the remaining items, other expense was just $0.01, slightly higher, we had a higher effective tax rate that impacted us by $0.03 and finally slightly higher diluted shares resulted in a $0.02 impact, that's how we get to the $3.44.

If you move to Slide 16. This is savings from our Cost Out Actions and I know there's been a lot of questions on this, just on, from some of the early reports. Just a reminder, these represent savings recognized in the year, as a result of our discretionary actions in response to the pandemic and volume declines, plus the savings we realized from our permanent realignment actions taken in FY '20 and also in FY '21.

So if you look at this, our second quarter discretionary savings exceeded our forecast and now amount to $190 million on a year-to-date basis. We are now forecasting for the full year that discretionary total will increase to $225 million or an increase of $50 million. The majority of that increase was recognized in the second quarter and roughly amounted to $35 million above our forecast. Just a reminder, as demand continues to increase and our teams pivot to support growth, we expect these discretionary savings to be lower in the second half.

Permanent actions remain on track. There is no changes to what we have communicated previously, our full-year forecast will generate savings of $250 million and that will be $210 million incremental. And we believe, that this will help us generate a strong incremental margins that we have in our guidance for the second half.

If we move to Slide 17, this is just a walk of the total results for the company's our sales and segment operating margin, and as Tom mentioned, organic sales did decline by 6.1% this year. The decline was partially offset by the contributions from acquisitions, that was 2.6% and currency impact of 1%. And again, despite these lower sales, total adjusted segment operating margins improved to 20.4% versus 17.9% last year. This 250 basis point improvement reflects all the positive impacts from our Win Strategy initiatives, the hard work and dedication to cost containment and productivity improvements, as well as savings from those realignment activities, I just spoke off and really performance of the recent acquisition. So strong execution really across the entire company to get these results.

If we jump into the segments, if you go to Slide 18, looking at Diversified Industrial North America, sales there declined by 5.9%, acquisitions were a plus of 3.1% and currency-only slightly negatively impacted sales. But again, even with these lower sales our operating margin for the second quarter on an adjusted basis increased sizably to 21.3%, last year it was 18.2%. So again another impressive 310 basis point improvement, focused on our long-term initiatives around Win Strategy along with the productivity improvements, diligent cost containment actions and really some increased synergies we're seeing out of the LORD acquisitions.

So if we go to the next slide, Slide 19, for Diversified Industrial International, organic sales for the quarter increased by 3.1%, acquisitions added 3.2% and currency accounted for 3.5%, again strong operating performance here, for the quarter, we reached 20.3% of sales versus 16% in the prior year. And again, same story, Win Strategy initiatives, strong synergy growth and really our teams around the world are rallying together in light of the pandemic.

If we go to Slide 20, and talk about Aerospace Systems' Segment. And again, what we'll see here is a decline of 20.9% for the quarter, acquisitions helped us by 0.4%, and again, a small currency impact of 0.1% really declines in the commercial business is both in the OEM and aftermarkets and markets were the main impact, these were partially offset by higher sales in both military OEM and military aftermarket sales.

Operating margins for the second quarter was 18% versus last year's 20.2%, this resulted in a detrimental margin of 28.8%, which is in line with our expectations, and really the result of all the previous actions we've taken to realign the Aerospace business to current market conditions, along with strong cost controls and really helping to offset the pandemic imposed to the mix that we're seeing from the commercial and military businesses.

Slide 21, is just some highlights on cash flow. Tom already mentioned this, but our operating cash flow activities increased 64% year-over-year to a record of $1.35 billion of cash, this is an impressive 20.4% of sales. Our global teams are really focused on this, very disciplined in managing our working capital across the world, and we're really focused on delivering strong cash flow generation. If you look at free cash flow, year-to-date, we now move to 19%, that's an increase of 78% versus prior year and our cash flow conversion is now 164% versus 130% last year. So just strong cash flow performance from the team, very impressive results.

If we want to just focus on orders, real quick moving to Slide 22, our orders came in at flat this year or this quarter I should say and that was really driven by plus 1% and our Industrial North American businesses plus 10% in our Diversified Industrial businesses and minus 18% on a 12 month basis in Aerospace. So, all-in, we came in flat and that's the first time in seven quarters, I believe that the numbers have been not negative.

If we move to Slide 23, in the guidance, obviously, we have a pretty large guidance increase. We are now providing this on an as reported and adjusted basis. And based on the strong performance we just spoke off in the first half, all the current indicators that we see right now we have increased our total outlook for sales to a year-over-year increase of 1.7% at the midpoint,this includes the forecasted organic decline of 3.4%, offset by increases from acquisitions of 2.9% and currency of 2.2%. And again, just a reminder we've calculated the impact of currency to spot rates based on the quarter ending December 30th and we've held those rates steady as we look through the second half of our fiscal year.

In respect to margins, for adjusted operating margins by segment, at the midpoint we are now forecasting to increase margins 150 basis points year-over-year and that range is expected to be 20.2% to 20.4% for the full year. And if you note for items below segment operating income, there is a fairly significant difference between the as reported estimate of $388 million and the adjusted forecast of $487 million. The difference is that land sale that we spoke about that's $101 million pre-tax, $76 million after-tax that was recognized as other income in Q2. And since that's an unusual one-time item, we are going to adjust that from-- we have adjusted that from our results,

Full-year effective tax rate, no change, we still expect that to be 23%, and for the full year, the guidance range for earnings per share on an as reported basis is now $11.90 to $12.40 or $12.15 at the midpoint and on an adjusted per share basis, the guidance range is now $13.65 to $14.15 or $13.90, at the midpoint. Adjustments to the as reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the year associated with savings projected from those actions to be $50 million in the current year, and acquisition and integration cost to achieve $50 million of expense. Synergy savings for the lower acquisition are now projected to reach $100 million, that is an increase of $20 million from our prior stated numbers of $80 million and that is included in our guidance. Exotic synergies remain are expected to be $2 million for the full year.

Just a reminder, acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year, and some assumptions that we have baked into the guidance here, at the midpoint, our sales are divided 48% first half 52% second half, and both, adjusted segment operating income and adjusted EPS is split 47% first half, 53% second half. For the third quarter of FY '21, we are forecasting adjusted earnings per share to be $3.54 at the midpoint and that excludes $0.57 or $97 million of acquisition-related amortization expense, the business realignment expense and integration cost, we achieved in the quarter.

So if you look at -- move to Slide 24, this is really just the walk from our previous guide to our revised guide. We had guided at $12 per share last quarter based on the strong second quarter performance, we exceeded our estimates by a $1.6 and we've mentioned this, but the improving demand environment along with the strong operational performance, some additional extended discretionary savings, the permanent restructuring savings, and increased LORD synergies, we feel confident in raising our forecasted margins, which at $0.85 of segment operating income over the next two quarters for the remainder of the fiscal year. So the majority of this increase is based on operational performance. This calculated to an estimated incremental margin of 41% for the second half and then some other minor adjustments to the below segment operating income lines are a negative impact of $0.01 and that's a net of interest expense and income tax. So that's how we get to the $13.90. That is approximately a 60% increase from our prior guidance.

So I'll then direct you to Slide 25, I'll turn it back over to Tom for some comments.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thank you, Todd. And just want to wrap things up with these great results don't happen by accident, they're driven by a highly engaged global team. Our focus on safety, high performance team is lean in Kaizen is driving an ownership culture within the company, hence resulting a top quartile engagement as well as top quartile results. We talked about the portfolio, it's a big competitive advantage of us at connectivity, the transformation on those three acquisitions is a fact that they're outgrowing and generating more cash and margins on legacy Parker, our performance over the cycle, but we're just reflecting the last 5 years and just use round numbers, our margins are up 500 basis points. In a five-year period of time that was not just the easiest five-year period of time for industrial companies. And then our Win Strategy 3.0 in particular in the Purpose Statement are going to be the powerhouse behind accelerating our performance intoo the future.

So again my thanks to everybody for all their hard work and the great results. And Gigi, I'm going to hand it back to you for start the Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Joe Ritchie from Goldman Sachs. Your line is now open.

Joe Ritchie -- Goldman Sachs -- Analyst

Hi, thanks, good morning everybody, and congratulations on a fantastic quarter.

Todd M. Leombruno -- Chief Financial Officer

Thanks, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Maybe just kind of as a starting off. Tom, obviously, it seems like things are -- things are kind of coming off the bottom here, you're starting to see some improvement in the order trends in your industrial businesses, both domestically and internationally. Can you maybe just like walk us through exactly what you saw? What you're currently seeing and what you saw kind of transpire as the quarter went on?

Thomas L. Williams -- Chairman and Chief Executive Officer

Sure. On the order to Joe, we saw, if you look at total Parker from minus 12% to 0% and North America by minus 11% to plus 1% International from plus 4% to minus 4% plus 10% and then Aerospace got improved from minus 25% to minus 18%. Pretty much North America, International improved throughout the whole quarter. And from our view, it looks like Aerospace is finding bottom. International piece in particular, if you look at that plus 10%, that was EMEA plus 7%, Asia plus 13% and Latin America plus 27%, so pretty strong rebound across all the particular regions internationally. When I look at some of the higher level sub-segments or the major buckets outside of Aerospace, Distribution get better, it was minus 14% to prior quarter and minus 6% this quarter. Industrial, things are stationary went from minus 7% to plus 1.5%, and mobile saw the bigger improved from minus 13% to plus 2.5%. So we saw all the sub-segments improved nicely with a large recovery being on mobile, and we look at our end markets in the four phases of growth.

We have roughly about 30% of our end markets are accelerating growth and about two-thirds are in TSO and decline, so we continue to move all the various end markets into either bottoming out, and you saw decline is starting to turn for accelerating growth. And maybe I'll pause, Joe, I don't know if you want me to go through all the end markets, but that's, that's the color we saw. In distribution, we saw an entity stocking, which was encouraging. Our distributors are I would say cautiously optimistic, they're being careful, there is some uncertainty obviously in the next 6 months. And what we're seeing from distribution is selective restocking and in particular focusing on those longer lead-time type of products that they can get ahead of demand and position themselves to take share, which we're happy to help them with that.

And in general, what we're seeing from distribution in some cases with some of the OEMs is placing a little larger stock orders, which was scheduled releases over the next several quarters, which were all indicators of people I think trying to plan as few you things returning and starting to get ahead of things.

Joe Ritchie -- Goldman Sachs -- Analyst

Yeah, that's super helpful and great to hear, Tom. If I -- could i just ask one follow-up question and really just focusing on like the sustainability of margin improvement going forward. Clearly, you've got a lot of long-term actions and within the Win Strategy that are going to help, but I really want to focus on the temporary cost actions that are benefiting FY '21 the roughly $225 million. How should we think about that beyond 2021? Are you -- is that going to be a headwind beyond this year or are there other actions that you can take to mitigate some of those expenses coming back?

Todd M. Leombruno -- Chief Financial Officer

Joe, this is Todd. I'll take that one. I mean some of these things are volume-related. So as volume continues to come back. We expect some of those cost to come back in the business. But really what we saw in the second quarter was a lot of productivity improvements. This has been based on our focus on Kaizen for a long time, many elements of our Win Strategy initiatives have helped drive that. But there has been strict cost containment by our teams, really around the globe. What did surprise us a little bit was lower travel and lower discretionary expenses. That's why we increased the discretionary expenses for the remainder of the year, just based on the current situation that we see in the world right now, but we do see that returning. Nowhere, will it go back to the levels that we've seen in the past, but we do see it going out from where we are at right now.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Thank you, both.

Operator

Thank you. Our next question comes from the line of Nicole Deblase from Deutsche Bank. Your line is now open.

Nicole Deblase -- Deutsche Bank -- Analyst

Yeah, thanks, good morning guys.

Thomas L. Williams -- Chairman and Chief Executive Officer

Good morning, Nicole.

Nicole Deblase -- Deutsche Bank -- Analyst

Can we start with just looking at the 3Q outlook what's baked in at the mid-point with respect to organic growth? And if there is any big change or divergence in the incremental margins you're expecting in 3Q, relative to 4Q?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, Nicole. This is Tom. So if I take the top line and maybe to help with the guide for the full year, so we reduced the guide on, decline on organic from minus 7.5% to minus 3.5%, but I think it was probably of most interest to analysts and shareholders is, what we think the second half is going to be. So the second half, our assumptions as a guide is both America and International both in that kind of in that 6% to 7%, positive organic growth and Aerospace around minus 11% for the second half.

When we look at Q3, I want to focus on the top line, I'll come back to the decrementals and incrementals. Q3, we're going to see a slight improvement in the industrial portion of the company about 100 basis points, as there is still some uncertainty. And those orders, I referred to earlier on as scheduled releases are going out multiple quarters. We see Aerospace, about the same as we had in Q2. And when we go to Q4, we've got North America and that upper-teens International around plus 10% Aerospace getting to flat and that puts total Parker in Q4 in the low-teens for Q4.

So again, Industrials for the second half of that plus 6% to 7% range and Aerospace of minus 11%. So when we think about the margin side of things, Q3 margins are going to be slightly less than Q2, and that's mainly from the reasons that how is this driven we're going to have less discretionary savings in Q2 than we had in Q3. Q3 should be around $25 million and Q2 is $65 million, so you've got $40 million less of discretionary savings going into Q3. We'll still have a favorable -- and MROS, and then people aren't familiar with what that term is that's basically you have less sales and you get more earnings. So you can't really calculate it an incremental but it's favorable.

Now when we go to Q4, we've got approximately 30%, MROS. I would just make the comment for Q4 really for the first half of FY '22 that the incremental MROS are going to be a tough comp for us. So the plus 30% this is against remember in Q4 prior period, we had a gargantuan discretionary cost outs, all the big wage reductions at that time. If you were to make it like-for-like and take out discretionary actions for both periods, this would be a greater than 60% incremental. And so it's -- the business is performing at a very high level, you'll see margins get a little better in the Q4 that will be our highest margin quarter.

And if you just look at for the second half, we go from 20.1%, that's the first half, total company the 20.7% in the second half, so continued improvement, and we're not going to stop there. Obviously, we -- our goal is to keep driving this, as we go into FY '22.

Nicole Deblase -- Deutsche Bank -- Analyst

Got it. Thanks, Tom, that's super helpful. And then maybe just as a follow-up, can you just talk about any impact you're seeing to production supply chain with respect to COVID? And the level of confidence you have, as a result in ramping as this recovery does take place?

Thomas L. Williams -- Chairman and Chief Executive Officer

When -- Nicole it's Tom again. When we look at COVID and its impact, we're mirroring case rates in the local communities that we're at. We've done a great job of, I would say almost exclusively our cases originate from outside of work and we'll try to take the position we'll not be able to be safe at home and safe at work, but we like them to be the safest possible that could be when they're at work. We're not immune to know absenteeism type of things related to this, but it's not been material impact to us. We've been able to keep up with demand, keep up with our lead times. And if you look at us historically, obviously the pandemic is a unique phenomenon.

But we have periods of increased demand, we out service our competitors, it's something we've proven time in and time out. I would look for us to have the opportunity to take share because our lead times and our customer experience would be better than our competitors, so I feel very good. And on the supply chain side, we've purposely laid out a strategy years ago to be local for locals. So we make buy sell in the region for the region, so that supply chains strategy, that operational strategy allows us to be very flexible based on what's happening, do not have all our eggs in one basket and one particular region to be overly exposed on trade, tariffs and those type of things, so we feel very good about where we are in supply chain.

Nicole Deblase -- Deutsche Bank -- Analyst

Thanks, Tom. I'll pass the line.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks Nicole.

Operator

Thank you. Our next question comes from the line of Scott Davis from Melius Research. Your line is now open.

Scott Davis -- Melius Research -- Analyst

Hi, good morning guys.

Thomas L. Williams -- Chairman and Chief Executive Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

And I don't say this very often, but congrats on a great, not just a couple of quarters but man great last two or three years has been just phenomenal, impressive. But anyways, I want to talk a little bit about M&A, because you've been so successful in that front, which is not perhaps now something folks would have expected out of Parker in the old days, you're going to be down to 2.5 turns of debt, as you said, this year. And are you ready to reload on the M&A front? Do you have an interesting backlog at all that you want to talk about?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, Scott. First of all, this is Tom. Thank you for your comment and the recognition of progress, and it doesn't go unnoticed. And we do appreciate that. On the M&A side, what's been interesting we're really happy about the cash flow and the ability to pay down debt is clearly ahead of schedule, and we're going to be in a position come -- end of this fiscal year, where all of our service with the debt to term loans and the CP that we took out, for these acquisitions, will be all paid off and our next corporate bond is not due to September of '22 and it's a nominal amount of $300 million. So we are going to be in a position with a much stronger balance sheet to look at capital deployment across all the dates.

Now, in particular, you talked about M&A, so that lesson to learned for us historically is to never stop working the M&A pipeline. And so we're continuing to build those relationships, we are building those relationships across a couple of fixed themes, we want to be the consolidator choice within our space. We think we are the best leader in the space, we think we're the best home, which means, we'd like to be looking at anything within our space. In particular though, if we only have a certain amount of money and all eight of --- of the technology that I referred to earlier on were all on the table we'd like to focus on filtration as our materials instrumentation in Aerospace, we think those -- you've seen us focus on those to-date.

But I would tell you, we like the entire portfolio. And what we've been working on is what you saw us do with the last three deals, buy companies that wasn't very quickly or within a reasonable period of time with synergies, can outgrow, can outpace margins, can outpace cash flow for the based business and that's what we did, and that's going to be the flavor, you're going to see as we go forward. If we don't find the right properties, we think we're a great investment and we're going to invest in Parker and buy our shares.

Scott Davis -- Melius Research -- Analyst

Makes sense, Tom. Can you talk a little bit about how, when you do a deal, how do you integrate? I mean, how do you bring or how do you bring win into an asset? Do you come in with all the tools, you come in with a lean first or is there some sort of a or is it case-by-case? Is there a playbook? I don't think I've ever heard you guys talk about that, I'm just kind of curious.

Thomas L. Williams -- Chairman and Chief Executive Officer

It's a good question. There is obviously there's lessons learned and we've learned over the years and how to organize the project management office, what you're going to do on day one. And there's really two big kind of things that you're looking at. You're looking at all the integration tasks, those basic task of putting the business together, and then your synergy test. We've learned to make sure you've got a dedicated integration team and you put the best in price people and those various leadership positions, put a great integration manager. But the key thing to remember is, we're buying great companies. And they're bringing good things to us, and we're trying to bring good things to them as we become one team, and it's a concept of one-plus-one equals three, so we're going to take the best of the acquisition and the best of Parker and obviously we work to Win Strategy. But we do give some latitude within the respective acquisitions to how they wanted and want to ensure there is no -- it's not an option that you're going to implement it, but we give them latitude as to how they want to phase it and because obviously certain parts might be more applicable faster for the respective acquisitions. We have a real robust cadence, as far as review, and frankly, I think we've gotten pretty good at this and something we want to keep doing.

Scott Davis -- Melius Research -- Analyst

Helpful. I'll pass it on. Thank you, and good luck for the rest of the year, guys.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks, Scott. Appreciate your comments.

Operator

Thank you. Our next question comes from the line of Andrew Obin from Bank of America. Your line is now open.

Andrew Obin -- Bank of America -- Analyst

Yes. Can you hear me?

Todd M. Leombruno -- Chief Financial Officer

Yes, we can hear you, Andrew. How are you?

Andrew Obin -- Bank of America -- Analyst

Yeah, great quarter. Great.free cash flow conversion as well.

Todd M. Leombruno -- Chief Financial Officer

Thank you.

Andrew Obin -- Bank of America -- Analyst

Just couple of questions from me. The first one you sort of talked about your dealers still being cautious. I mean if you look at our channel checks. If you look what other publicly traded hydraulics companies or the ones that are -- yet still hydraulics companies sort of talk about what they are seeing in the channel. They're just kind of a bit more optimistic relative to what you guys are saying and sort of our channel checks I think a bit more optimistic on outlook as well. Just trying to understand is that Parker-based conservatism or are your dealers are more conservative, your channel just knows something that we just don't see across the industry?

Todd M. Leombruno -- Chief Financial Officer

Well, you're probably referring to one of our neighbors, and they would be much more heavy mobile than stationery and distribution, and we're not a hydraulics company, we're diversified industrial company, so that's a big, big difference. But...

Andrew Obin -- Bank of America -- Analyst

Also talking about a smaller competitor down in Florida, I guess.

Todd M. Leombruno -- Chief Financial Officer

Okay, well, our distributors still feel good, but part of what they're doing is placing orders, making scheduled releases over the next couple of quarters. Now, we still think that if I look at going to Q3, that we're going to go from minus 6% to getting to probably flat on North America and EMEA and will be probably in that upper teens when you look at Asia Pacific. Then when you get to Q4, we'll be very strong in North America and EMEA probably on that plus 10%, and that China has a tough comp. And now Q4 because you remember that's when they rebounded in the pandemic, so they're probably going to be flat on distribution, but our distributors still feel very good. And when we look at distribution for the whole second half, it will underpin a nice positive.

Andrew Obin -- Bank of America -- Analyst

Got you. Second question, when you sort of talked about China and I think we've been sort of talking about hydraulics competition emerging out of China for the past 20 years, but it does seem that we finally are at a point where you are sort of seeing Chinese competitors. And particularly the fact that China is leading recovery this time around, how do you see competition in China from the local competitors this time around? And in this upturn, how different is that? And then also, some of them are talking about getting into industrial applications now. Even though probably you have a bigger moat there, but just how do you think about Chinese competition coming out of this downturn and in the next cycle? Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Andrew it's Tom, again. That's been a question really for a while now. And I really don't see it much different coming out of this and it was when we went into it. Just as a reflection China for us grew about 10% last quarter, so, we did quite well in China, Asia Pacific overall grew about 7%. And the way we win in China, is we're in China with the same or better cost structure because we have a nice density of plants in China and a supply -- a very robust supply chain in China, and we have the breadth of our technology, so we go to compete. And again, that's a distinguishing characteristic that we have around the world. We're not just competing as a Chinese fitting company or a Chinese host company, we can put the whole portfolio technology together and that discussion with the customer they can't beat us, when we're having a discussion around cost of ownership or the weight of the product, reliability, the ease of assembly. All those type of things that you can do when you're a multi-technology and obviously, these multi-technologies are interconnected, they're not despair technologies, they're interconnected technologies that create a big value proposition for customers. So that's been -- we can beat MRO cost because we're there or the same cost structure better, and we have a better basket to sell more problems with customers.

Andrew Obin -- Bank of America -- Analyst

Thank you very much.

Todd M. Leombruno -- Chief Financial Officer

Thanks, Andrew. Take care.

Operator

Thank you. Our next question comes from the line of David Raso from Evercore. Your line is now open.

David Raso -- Evercore ISI -- Analyst

Hi, my question is on Aerospace. But if you could clarify first. We've seen the fourth quarter-- the fiscal fourth quarter, Aerospace organic sales flat? Just want to make sure, I heard that correctly.

Thomas L. Williams -- Chairman and Chief Executive Officer

Yeah, David, this is Tom. Flat to prior year.

David Raso -- Evercore ISI -- Analyst

And then, I'm not asking for a '21 guidance. But can you take us through your thoughts on how you see the cadence of the Aerospace recovery? And obviously may color also how you think about M&A in the space as well. So I'm trying to tie those two together, and give us a little label and if you're ready at flat in calendar 2Q fiscal 4Q. How are you thinking about the slope from there?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yeah, Dave, it's Tom, again. So we like this space. This is all of our Motion Control Technologies going into things that fly. We're going to things that fly, things that are stationary and things that have wheels under them. And the way we look at Aerospace is that we have it size to win in the current climate. The current climate is finding bottom and it's going to be a slow turn coming back up, but my view over the next several years is, it's going to gradually show improvement. Now, what is the pace of improvement? I think it's going to mirror the pace of vaccine deliveries and the comfort that travelers feel. And I think you'll see resident -- personal travel come back much more aggressively. The business travel will come back that will probably plateau at a certain level based on just the efficiencies of digital tools.

But we're positioned to win right now with the kind of up margins in this current climate and it's only going to get better forward as we move forward. So with respect to M&A, I actually think this is a good time to look at M&A and the Aerospace arena, depending on the right property and right pricing obviously, but I think the future is bright. Now, it's going to be -- it's a long-cycle business, so it will turn slower than an additional turn would be. But again, if you position to win now, and you're going to have a gradual upturn, it speaks to nice incrementals and nice positive year-over-year changes per year over the next several years.

David Raso -- Evercore ISI -- Analyst

Yeah, I'm just trying to balance the dance that's has been going on with the stock, right. The traditional crowd that looks at the ISM and says, hey, this is fantastic right now, how much better can it get, while the compounded crowd looks at your cash flow, the deleveraging and say, look, we can definitely move the ball forward here. This is not just an old ISM play. And the timing of the M&A, I think it's important to balance that -- those two crowds. Not to get inside your M&A department here, but when you listed those four categories can you just give us some sense of, if you had your druthers identical kind of assets when you think of where you're positioned, your size, the competitive landscape and then obviously how you view the cycle playing out, of those, I mean would you prioritize them all between Filtration and Engineered Materials, Filtration and Aerospace?

Todd M. Leombruno -- Chief Financial Officer

I probably won't prioritize, not to disappoint you being vague on the answer, but we like all of properties. Well, I'll come back to the very first thing, this is what I always remind the board or remind shareholders, we want to be the consolidator choice within our space. So those eight Motion Control Technologies that I believe was on Slide 4, it is the space we plan, and we have a big advantage that we're not disparate pieces of businesses. But now, two-thirds of this revenue come from people to buy from these -- all these technologies for four or more. We like all those technologies. I think the thing you're going to see us look for is, and the theme that you've seen in the last three deals is within the period of time depending on synergies, they're going to be growth accretive, margin accretive and cash accretive, and that's a different strategy, I think for the company. Our Tennessee, we would prefer to buy things that are not ultra-small, but if you just look at the histogram with targets it's more in the mid-size category, just because of the lay of the land. There's fewer of these really super large targets that you can look at -- we will look at them obviously. When I say mid-size, what changed for us versus the past is our mid-size is now bigger. The mid-size target for us would be envision and exotic like deal, which historically would have been the largest deals in the history of the company. For Lord and CLARCOR. So our appetite is there. If I could go David your -- the comments you made about the is and which itself was a thoughtful comment, the power of this portfolio besides being interconnected is that the cycle somewhat balance each other. So yes, we will see some near-term and we'll see how long near-term turns out to be on industrial reports of the company that's going to have much more robust macro conditions, but then following that, the Aerospace business is going to start to be healing. And I think sequentially those time periods are going to be complementary to each other.

The other part is that, this five-year period, that I envision going forward is going to be I think, much easier for industrial companies in the last five-year period, because we want to tune us for recession for the pandemic. I'm not going to award here. I guess it's possible to have that happen again, but the odds are low that it would repeat. So I think it's a much better time. And we have enough self-help for all those people that I'd like you to encourage we are no longer a short cycle debt, we are debt over the cycle. And we have all kinds of room Win Strategy 3.0 just started and those FY '23 targets are not an endpoint, they're a mile marker, we're going to blow past.

David Raso -- Evercore ISI -- Analyst

I appreciate the comments. Thank you, Tom.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks, Dave.

Operator

Thank you. Our next question comes from the line of Mig Dobre from Baird. Your line is now open.

Mircea Dobre -- Robert W. Baird -- Analyst

Thank you. Good morning, and maybe just to kind of pick up on this topic here. Tom, you've spent the better part of last year of sort of showcasing how the business is performing different than it has in prior downturns, right, or entering an upturn. And I'm curious to get your perspective as to how this next upturn might be different than what we have seen historically?

Thomas L. Williams -- Chairman and Chief Executive Officer

Well, I think it's always hard to predict. One cycle versus the other. I think you will continue us -- continue to see us perform very well on converting on the incremental side. Just I would caution people incrementals for Q4 this year and for the first half of next year are going to be tough comps. We're going to try to flatten a field when we'll give you the results, so you'll be able to see the real incrementals of the company.

But I think you would expect to see us north of $40 million in the first couple of quarters and will glide down in the 30s, but we're going to be at a much -- that stair-step slide that I've showed for the last couple of quarters our intention is to keep raising the ceiling, and raising the floors. So this next ceiling, this next cycle, our expectation is going to be higher than the last ceiling. We're doing it right now, this is an even earlier and that's a good period right now and we're breaking records on margins. So I'm bullish because there's a lot of positive factors. You just look at interest rates, what's happening with global industrial production, forecasts. In my view a pent-up need for capex, given that there has been two industrial recession in the last number of years and Aerospace cycle that will follow and in larger cycle, so you get the benefit of those. I think we're on top of each other. And just a tremendous amount of self-help.

Lot of what you've seen has propelled these margins to-date is prior period restructuring and Win Strategy 2.0. Win Strategy 3.0 and I mentioned not just being bias because I'm a part author of it is better than 2.0 hands down, and you've only seen about a year of that in play. And so 3.0 is going to get -- has tremendous legs. So we have a still portfolio self-help, and the big thing is that we're back in the capital deployment game. So, the steady dividends, share repurchases and acquisitions obviously that formula we're going to raise that can ensure all the shareholders listening, there will be a Q4 increase to the dividend. We're not going to break our track record, and then we'll continue to do what we've always done, is look at the acquisitions versus share repurchases, and try to make the best decision on behalf of shareholders, for what is the best long-term return for them.

Mircea Dobre -- Robert W. Baird -- Analyst

I appreciate that. I guess, perhaps you're going to want to punt on this, but you're pretty close to your stated fiscal '23 target. At what point do we expect an update to this? And I'm also curious, as to how you're thinking about free cash flow margin here? I mean, even taking out the working capital benefit that you had year-to-date free cash flow margin is quite impressive. How sustainable do you think this is especially, as perhaps we need to see a little more working capital coming back into the business?Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

So, it may all start on the '23 targets. So I'm going to let Todd take the free cash flow one. You're right, I'm going to punt, but hopefully you recognized, we've not hesitated to changes. So we've gone from -- I'm just going to use, segment operating margin gone from 15% to 17% to 19% to now 21%. So we've not hesitated to update it. We just want to prove for several quarters that we're closer at it. And once we do that we'll be prepared to give you a better vision of that. Now let Todd talk about free cash flows.

Todd M. Leombruno -- Chief Financial Officer

Yeah, Mig, you're right. Our cash flow has been really impressive. And like I said, it's really the work of our global team, really focusing very quickly on working capital management. We know there's going to be some pressure on working capital as growth returns of the business, so we're well aware of that. But as Tom said, we've basically had a step-changer. Our margins are a different profile than they used to be, and that obviously feeds the free cash flow. So we think historically we're going to be better than we've been historically, and we're positive on that going forward.

Mircea Dobre -- Robert W. Baird -- Analyst

Great. Thank you.

Todd M. Leombruno -- Chief Financial Officer

Thanks, Mig.

Operator

Thank you. Our next question comes from the line of Nigel Coe from Wolfe, your line is now open.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning everyone, and great job. You make it look easy, but I know it's not, so well done. So we're pretty deep into the Q&A here. We have been at the end markets roll down, so if you remissed not to do that. But just a small clarification. The lag on distribution -- distributors orders versus OE, I'm sorry, versus OEM, I'm quite surprised with that, is that normal at this point in the cycle, as we turn back up or is this a quirk of this pandemic?

Thomas L. Williams -- Chairman and Chief Executive Officer

Nigel, it's Tom. No, it's very normal. Mobile tends to lead, which is doing now, and then industrial, and then to all the distributor -- remember the distribution, well, we'll service some smaller to medium size OEMs that's primarily the aftermarket. And so that tends to lag a hair after you see a sharp return, which is what you're seeing with some of the other end markets. And I will spin you through the end markets quickly, and I'm going to break it into the buckets like I have historically done. I'm starting with the positive end markets, the greater than 10%, this is for the total company was semiconductor, life science, power generation, agriculture, refrigeration, Aerospace, military OEM and Aerospace military MRO. On the positive high-single digits was automotive, positive low-single digits was construction and heavy-duty truck and then under the declining markets I guess four buckets, low-single digit decline was telecom and tires high-single digit decline was lawn and turf, material handling, mining those of foundries, distribution, especially it's on a market that's put it in there.

The 10% to 20% range is rail, marine and forestry and the greater than 20% was machine tools of oil and gas, aerospace commercial OEM and aerospace commercial MRO.

Nigel Coe -- Wolfe Research -- Analyst

Great, thanks, Thomas. That's wonderful. And then just on the margins between International and North America. We now have very close convergence between these margins, is that really a function of their recovery profile mix press or are we in a situation now where these margins going forward will be very comparable?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yeah, Nigel, we've worked to this for many, many, many years to get those margins comparable. And I really give credit to our International team that made great progress. So we're not where we want to be, we still have plans to move it forward, but we see those margins. There is no reasons why those margin can't be similar.

Nigel Coe -- Wolfe Research -- Analyst

Great, thanks, Tom.

Thomas L. Williams -- Chairman and Chief Executive Officer

You know,Gigi, I think we have time for maybe one more question.

Operator

Thank you. Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley, your line is now open.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good morning.

Thomas L. Williams -- Chairman and Chief Executive Officer

Good morning, Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Just following up on Dave Raso's question from earlier just on PMIP, because I guess is there anything in the business today, Tom that you're seeing that would say that the PMI is maybe not indicative of where the business and your recovery -- your customers are in recovery. Like maybe things don't feel quite as far along, as they normally would with like a 60 PMI. Whether it's inventory levels, which we sort of talked about or just the types of end market leadership? Anything that would make you feel like maybe this has kind of some longer legs to it than you would normally see at this point?

Thomas L. Williams -- Chairman and Chief Executive Officer

Josh, this is Tom. I still think that you'll see relatively to similar correlation if you were to plot our orders historically against PMI is anywhere from a three to six month lag. I think the pandemic has the potential to maybe influence that a little bit. We'll just have to see as that plays through. But I would just characterize, I feel better about this next several years than I do about what happened the last six years of lease in my time in the company. Because I just think about we went through a natural resource recession, we went to the most current recession then we had the pandemic. And so I think there is a need for industrial and infrastructure type of activities. I think Aerospace will return longer-term. So I just think there's a better, potentially more stable macro environment in the next couple of years.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful, and I agree with that. And I guess just kind of related to that, all the while bringing up the segment operating margins within striking distance on your target even with aero still on its back, at what point this gross margin become a limiter? I mean you've defined yourself mixing higher on that front because the distance between the two is narrower than we see in most of our coverage. So what point does that? I mean, more differentiated growth or M&A mix like what you had with what is exotic, just any observation you would make on what it takes to get to the steps beyond?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yeah, Josh. Again, it's Tom. One clarification. Our gross margin might look different than you compare to other companies because we embed a fair amount of the SG&A and or cost of goods sold, so our gross margin has some of that in there versus other people might be booking their SG&A in different categories. But your question is stepping higher levels really, can margins continue to grow higher and absolutely can. If you look at what I was referring to earlier on about early days Win Strategy 3.0 and all the initiatives we have underneath there, I feel very good about our potential there and just very strong legs on what the future can hold.

You put that in place with maybe little better macro environment, as you can have a lot more volume induced leverage. And then we're coming into a period of time when we have a stronger balance sheet, so we can put that to work as well. So what I've told people before when they close on this if you like what's happened in the last six years, and the environment we had would basically no macro help the next several years are going to be fantastic.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

That's great, I appreciate it.

Todd M. Leombruno -- Chief Financial Officer

Thanks, Josh. Thanks, Tom. All right, everyone, this concludes the Q&A portion of our earnings call. We appreciate all your comments. And as always thank you for your interest in Parker. Robin and Jeff are going to be available throughout the day if anyone needs any follow-ups. We thank you again, and everyone stay safe. Thanks.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Todd M. Leombruno -- Chief Financial Officer

Thomas L. Williams -- Chairman and Chief Executive Officer

Joe Ritchie -- Goldman Sachs -- Analyst

Nicole Deblase -- Deutsche Bank -- Analyst

Scott Davis -- Melius Research -- Analyst

Andrew Obin -- Bank of America -- Analyst

David Raso -- Evercore ISI -- Analyst

Mircea Dobre -- Robert W. Baird -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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