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Parker-Hannifin Corp (NYSE:PH)
Q3 2021 Earnings Call
Apr 29, 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 Fiscal 2021 Third Quarter Earnings Conference Call and Presentation. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

The opening speaker for today's call is Parker's Chief Financial Officer, Mr. Todd Leombruno. Please go ahead, Sir.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Thank you, Elaine, and good morning, everyone. Thanks for joining our FY 2021 Q3 earnings release webcast. As Elaine said, this is Todd Leombruno, Chief Financial Officer speaking. Here with me today are Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee banks. On slide two, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for all non-GAAP measures are included in today's materials. These reconciliations and our presentation are accessible under the investors section at parker.com and will remain available for one year. We'll start the call today with Tom providing some quarter highlights and some strategic commentary, and I will provide a summary of the quarter, financial results and review the increase to guidance that we announced this morning. Tom will then close with key messages and then Tom, Lee and I will take any questions the group may have.

With that, I'll direct you to slide three, and I'll hand it off to Tom.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thank you, Todd, and good morning, everybody. Before I jump into slide three and the quarter, I want to say thank you to all the Parker team members around the world for an outstanding quarter. It's really more than just this quarter, it's really been the whole year and the performance to the pandemic and also the transformation of the company into a top quartile diversified industrial company. These results are all because of your efforts. So let's look at the quarter on top of slide three. Starting with safety, as we always do, we had a 33% reduction in record incidents. We're still in the stop quartile, the combination of safety, lean, our high-performance team structure in Kaizen, were all driving high engagement and high performance, you see that show up in our results. Sales grew about 1%. The organic decline was minus 1%, but in particular, if you take out aerospace and look at the industrial only, industrial segment grew organically almost 4%, so that was significant. We had 5 all-time quarterly records. You can net income, EPS, and the segment registered for Parker, North America and international.

EBITDA margin was very strong at 21.6% as reported, 21.8% adjusted a huge increase versus prior 250 basis points, year-to-date cash flow was an all-time record of $1.9 billion and 18 -- a little over 18% of sales.If you go to the very last row of this page, you see segment operating margin on an adjusted basis, 21.4% and again, a significant improvement versus prior, plus 240 basis points. So a terrific quarter and really tough conditions. If you go to the next slide. I want to talk about the transformation of the company. The old adage that a picture is worth a thousand words, and so I want to take you to slide five, and this is really the picture that speaks to the transformation of the company. Let me explain the chart here for a minute. So you've got in gold Bars, the adjusted EPS. The blue line is global PMI plotted on a quarterly basis. If you look at the last six years and look at that dotted green line, and compare that to the blue global PMI line, you see they are much less correlated effect there divergent. And there's been a step change in performance.

The EPS over this time period is more than doubled from $7 to our guidance of $14.80, so approaching $15 and was propelled that over that time period as an EBITDA margin that's grown 600 basis points. So you might ask how, how that happened? It's really that blue takeaway at the bottom of the page, it's our people. That focus the alignment, the engagement that comes when you have people think and act like an owner. The portfolio, which is a combination of our interconnected technologies and the value they bring and the capital deployment we've done buying some great companies that have added to the strength of the company. Then our performance, which really sits with the strategy of the company, Win Strategy 2.0, at the kind of the beginning of this journey and then The Win Strategy 3.0 most recently in FY 2020. So this combination is really transformed the company. You see that as evidenced in this slide, and we're very proud of it. But if you go to slide six. So that's what's kind of in the rearview mirror. But going forward, we're equally excited about where the company is going to go. And I call this a convergence of positive inflection point. So on the left-hand side is kind of those external inflection points. You're familiar with a lot of these, the macro environment industrial momentum, you see that in our positive orders and positive organic growth industrial we showed in this quarter. Aerospace is going to recover, question is just what the trajectory will be and the timing?

Vaccines are making progress around the world. There's going to b e a significant amount of climate investment. And if you put all that on top of, I didn't write all these down, but low interest rates pent-up CapEx demand and fiscal spending, you have a very attractive environment for industrials for the next several years. On the right-hand side is really the internal things we've been doing, Win Strategy 3.0, in particular, but that last slide that I just went through, spoke to all those internal actions because that's what's been propelling us. Remember that last period, last six years, really had very little help from a macro standpoint. So you look at the three major things I highlight here, performance becoming top quartile strategies to grow faster in the market. You've seen our margin expansion, great cash flow generation consistently over the cycle. Portfolio, we've added three great companies, all accretive on growth cash and margins. And with the rapid debt paydown that we've done, we're positioned to do future capital deployment, which is very exciting.

The technology, I'll get into in the next slide, but the interconnected technologies really is distinctive for us. And then with a climate investment, we are very well positioned with our suite of clean technologies to take advantage of that. So I would tell you that my view and the team's view this is about as good an environment as we've seen in a number of years. Go to slide seven. You've heard me talk about this page. The power of this interconnectedness technology brings the value accretion for customers what I want to do today in light of the clean technology discussion is give you four examples of how this suite of technologies helps with a more clean environment, clean technology world. So the first would be electrification.

And we've got a full portfolio of technologies here, hydraulic, electrohydraulic, pneumatic, electromechanical, no competitors got that breadth of technologies. And we formed about four years ago, the Motion Technology center, which put the best and brightest of engineers to Motion technologies, things that fly as well as things with wheels underneath them. So we put the -- the motion and the aerospace teams together. And this team has come up with a great listing of products around motors, inverters and controllers. But there's also in addition to the typical motion opportunities, there's other challenges around electrification like light weighting, thermal management, shielding, structural adhesives and noise vibration, all these to accomplish what we have a legacy engineered materials and with the LORD acquisition, we're well positioned to take advantage of those. Secondary is batteries and fuel cells that utilize most of the technologies see on this page, third would be clean power sources and that kind of falls into two buckets: Renewables, which we do a lot -- we've always have done a lot of wind and solar; Then the hydrogen, we just recently joined the Hydrogen Council, and it's going to be both onboard as well as infrastructure opportunities as you go out for the next many years. And it's really building in our high-pressure and our cryogenic applications that we have today.

And then we've been a more sustainable company for a long time and really the -- a clean technology example for us that started a lot of things is filtration. And our filtration business protects and purifies assets and equipment for people for a more sustainable environment. So we feel very good about this portfolio for climate investment in the future. Going to slide right. I just want to remind you of our purpose statement enabling engineering brakes that lead into a better tomorrow it's been very inspirational for our team. And I think it comes more to light when we give you examples of the purpose in action, which is on slide nine. And again, kind of following with that clean technology discussion, when I'd highlight electrification, I'm going to highlight in particular, electric vehicles. On the left-hand side, you see applications that are changed because of an HEV or EV versus a combustion engine. On the right-hand side, you see the various technologies that Parker has that addresses those applications. I won't read all those under the Bayou see the major category, safety, related technologies, things that say, weight, thermal management and a variety of things we do critical protection. The big opportunity for us, so we obviously are in the factories helping to make these vehicles and we'll always do that, but the big opportunity for us is the onboard content around Engineered materials. Our bill of material for an EV or HEV is 10x what it was in a combustion engine. And it's one of the key reasons why our LORD business has grown so nicely even despite the pandemic we grew 11% organically in Q3 from LORD. So we're very happy with the progress so far and our purpose and action around electrification as an example.

So with that, I'm going to turn it over to Todd for more details on the quarter.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Okay. Thanks, Tom. I'll just orientate everyone to slide 11, and I'll do a quick review of the financial results for the quarter. Tom mentioned some of these, so I'll try to move quickly. Sales for the quarter were $3.746 billion. That is an increase of 1.2% versus prior year. We are proud of the fact that the Diversified industrial segment did turn positive organically. Industrial segment organic growth was 3.7%. Obviously, that was offset by the Aerospace Systems segment, their organic decline was 19.7%. So all in, that drove total organic sales to minus 1.0. Currency was a favorable impact this quarter of 2.2%. And just a note in respect to acquisitions, this is the first full quarter that we report both LORD and exotic in our organic growth numbers. So therefore, the acquisition impact was zero. Moving to segment operating margins, you saw the number, 21.4%, that's an improvement of 240 basis points from prior year. It's also an improvement of 130 basis points sequentially, strong margin performance there. And that really was a result of just broad-based execution of the Win strategy. We continue to manage our cost in a disciplined manner. The portfolio additions in CLARCOR, LORD and Exotic are all performing soundly. And you've all been familiar with the restructuring activities that we've done in FY 2020 and in FY 2021. Those are on track and on planned and generating the savings that we expected.

Adjusted EBITDA margins did expand 250 basis points from prior year, finished the quarter at 21.8%. And net income is $540 million, which is a 14.4% ROS. That's increased by 22% from prior year. Adjusted EPS is $4.11 that is $0.72 or 21% increase compared to prior year's results of $3.39. And as Tom said, it's just really outstanding performance. And I'd also too like to commend our global team members for generating these results. If you slide to slide 12, this is really a bridge of that $0.72 increase in adjusted EPS versus prior year. And the story here across the board is just strong execution from all of our businesses. This produced robust incrementals in our Diversified Industrial segment and really commendable decrementals in the Aerospace Systems segment. Adjusted segment operating income did increase by $98 million or 14% versus prior year, that equates to $0.58 of EPS and really is the primary driver of the increase in our adjusted EPS number. Interest expense was favorable to prior by $0.12 as we posted yet another quarter of sizable repayment of our serviceable debt, and that is really benefiting from our strong cash flow generation. Other expense, income tax and shares netted to a $0.02 favorable impact compared to prior year.

Moving to slide 13. This is just an update on our discretionary and permanent cost out actions. And this is just a reminder these represent both savings recognized in the current fiscal year from our discretionary actions in response to the pandemic and our permanent realignment actions that were taken at the end of FY 2020 and throughout FY 2021. Discretionary statements came in exactly as we guided, at $25 million for Q3, and now total $215 million year-to-date. There is no change to our discretionary savings forecast for Q4. That remains $10 million. And we continue to forecast the total year to be $225 million in full year savings. Just to note, with the increased demand levels that we're seeing from our positive order entry, our teams have really pivoted to growth and really now these discretionary actions that we knew would diminish across the calendar year have now really been based in reduced travel expenses. If you move to permanent savings, we realized $65 million in Q3. Our total year-to-date is $190 million. The full year forecast, again, here remains, as previously communicated, at $250 million.

One item to note, we did guide that the cost of the FY 2021 restructuring would come in around $60 million. It's now expected to be $10 million less or $50 million but there is no change to the expected savings that we are forecasting. Total incremental impact for the year for both permanent and discretionary savings is $260 million. And just one other thing to note, this will probably be the last quarter that we detail these items as we anniversary the pandemic-induced volume declines and really focus our attention on growth. So the takeaway is savings are on track, no changes other than the expense will be a little bit less. If you go to slide 14, this is just highlighting some items from our segment performance for the third quarter. In our diversified North America business, sales were $1.76 billion. That is an improvement in organic sales sequentially from Q2. It still is down 1.2% from prior year, but if you look at the adjusted operating margins, we did increase those operating margins by 190 basis points versus prior year and reached 21.9% for the quarter. We were able to increase these margins despite that sales decline due to our disciplined cost management, those portfolio improvements we've talked about and really, margins in this segment are at a record level.

If you slide over to order rates, another positive here, they improved significantly from plus one last quarter, and they're now ending the quarter at plus 11. Looking at the diversified industrial international sales, robust organic growth here of 11.1%. Total sales came in at $1.39 billion, and another great story here, adjusted operating margins expanded substantially and reached 21.6%, an improvement of 400 basis points versus prior year. Clearly, the double-digit organic growth, coupled with the cost containment and the effort from our global team really generated this level of record margin performance as well. And again, another plus here is order rates accelerated in this segment and are now plus 14% for the quarter.

If you look at aerospace systems, they continue to really perform soundly in the current environment sales were $599 million for the quarter. Organic sales showed a slight sequential improvement from Q2, but are still down basically 20% from prior year. Commercial end markets are still under pressure. However, there is strength in our military end markets. What's nice here is operating margins were 19.4%, 30 basis points better than prior year, despite that 20% decline in volume. And if you look at our fiscal year, that performance of 19.4% is the highest they've done all year, so we're really proud about that. Decremental margins are also impressive here in this segment. This quarter, they're 18% decremental margins. Order rates appeared to have bottomed and finished at minus 19% for this quarter. And just a reminder, that is on a rolling 12-month basis. So overall, we're pleased about a number of things this quarter. That diversified industrial segment, organic growth of 3.7% as a positive. Total segment margins improved 240 basis points from prior year and at record levels. Orders have turned positive and are plus 6% and our teams really continue to leverage the Win Strategy to drive significant improvements in our business and increased productivity and generate strong cash flow.

So with that, I'll ask you to go to slide 15. This is just some details on our cash flow. Year-to-date cash flow from operations is now $1.9 billion. That's 18.1% of sales. That's up 45% from prior year, and it is a year-to-date record. Improved net income margin, as we've talked about before, is really a key driver in this. It's created a step change in our cash flow generation, but I'd also like to commend our team members' intense focus on our working capital metrics. Each of our working capital metrics is improving and showing positive results, and I'm really proud about that. Moving to free cash flow at 16.8% of sales. That's an increase of 630 basis points over prior year, and our free cash flow conversion is now 141%, which compares to 1.22% in the prior year, so great cash flow generation there. Moving to slide 16, I just want to mention some things we've done on our capital deployment. We did pay down $426 million of debt this quarter. That brings our total debt reduction to a little over $3.2 billion in the last 17 months since the LORD acquisition closed. This reduced our gross debt-to-EBITDA to 2.4%, it was 3.8% in the prior year, and net debt-to-EBITDA is now 2.2%, and that's down from 3.5% in the prior year. Looking at dividends. Last week, you saw our Board of Directors approved a quarterly dividend increase of $0.15 or 17%. This raises our quarterly dividend from $0.88 to $1.03 per share and extends our record of increasing the annual dividends paid per share to 65 consecutive years. And finally, as we mentioned at the Q2 earnings release, we reinstated our 10b5 program and repurchased $50 million of shares in the quarter.

All right. So if you go to slide 17, I'll just provide some color to the increase in guidance that we gave this morning, really, the strong year-to-date performance and these order trends. Have positioned us to increase our full year outlook for sales to a year-over-year increase of 4.5% at the midpoint and the breakdown of that sales change is this. Organic sales are now expected to be flat year-over-year. Acquisitions will add 3%, and the full year currency impact is expected to be 1.5%. We've calculated the impact of currency to spot rates as of the quarter ended March 31 and we held those rates constant to estimate the Q4 21 impact. Moving to segment operating margins. Our guidance for the full year is raised to 20.8% and that would equate to an increase of 190 basis points versus prior year. And just some additional color, some things to note. Corporate G&A, interest and other is expected to be $381 million on an as-reported basis and $479 million on an adjusted basis. The main difference between those two numbers is that $101 million pre-tax or $76 million after-tax gain on real estate that we recognized and adjusted in the other income line in Q2. That's the main item. If you look at our tax rates down just a little bit. We're now expecting the full year tax rate to be 22.5% and moving to EPS on a full year basis. Our as-reported EPS guidance range has increased from $12.96 to $13.26, that's $13.11 at the midpoint. And on an adjusted basis, we're increasing the range from $14.65 to $14.95, and that's $14.80 at the midpoint.

For Q4, adjusted EPS is projected to be $4.18 per share, that excludes $0.54 or $93 million of acquisition-related amortization expense, the finishing of our business realignment expenses and integration cost to achieve. If you look at slide 18, this is just a bridge of our increase -- our adjust EPS guidance, these results that we just reviewed you can see the outperformance that we had in Q3. That increases our previous guide by $0.57. The order strength that we just reviewed and really the exceptional operation and execution by our teams have allowed us to increase Q4 guide by an additional $0.33, and that is exclusively based on increased segment operating income. This raises our full year EPS guide by about 6.5% from prior guide.

And with that, I'll turn it over to Tom for some summary comments and ask you to move to slide 19.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks, Todd. So we've got a highly engaged team. You see that is what's driving our results, the ownership culture that we're building. Record performance in difficult times, these numbers are historical all-time highs for us and not the best of times. The convergence of positive inflection points, we feel it points to a very bright future. And the cash generation and deployment is evidenced by the rapid debt pay down, the acquisition performance. And our dividend increase, which I would just highlight the first time, we've ever been over at $1.03 on a quarterly dividend, which we're very proud of. So the Win Strategy 3.0 and our purpose statement is well positioned, in addition to those inflection points for a very strong future.

I'll turn it back to Elaine for -- to start the Q&A.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Jamie Cook from Credit Suisse.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. A nice quarter. I guess just two questions. One, understanding you don't want to talk about 2022, but I'm trying to understand the setup for incrementals and to what degree if volumes are still there? Can we have above average sort of incrementals and how the discretionary costs sort of factor back in an impact incremental margins? And then I guess my second question is regards to your longer-term margin targets, which you're already starting to beat those targets. So in particular, with volumes not really showing up in your numbers. I'm just trying to think about how we position your margins longer term, potentially, to be at a higher structural level? Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Jamie, it's Tom. So I'll start with the incrementals. The one thing I would point out is our guidance for Q4 is incrementals of about 30%. And if you were to do like-for-like and take out the discretionary savings we had in the Q4 prior period, may be about 50% incremental. So they'd be at the incrementals that we feel based on the cost structure and all the things we've done with Win 2.0, Win 3.0 that we would generate at this point in the cycle. So that's -- we would continue to do 30%. I think as we go into 2022, obviously, we're not guiding to that yet, but I think that's a good round number to use for us. But I would highlight Q4, because -- its impacted by the prior period discretionary, which we don't have now or not as much. And that difference is pretty significant. We go from a 30 to a plus 50 incremental. So it speaks to the underlying power of the business is there.

And then on your question on long-term margin targets, yeah, this is a good problem that we have, that we basically beat our targets by about two years. Our guide at 20.8% at the midpoint on op margin is within split distance of the 2021. And then EBITDA, we don't guide on EBITDA margins will be at the 21% for a full year on EBITDA. So we're actively working on what this new set of targets will be. And I'm sure this is a question everybody had. So we're going to disclose them at IR day, which will be March of next year. And we think that's the appropriate forum to do that, but rest assured, we're working on it and we're not going to settle or be happy with stopping with where we're at, we're going to continue to march forward. And we'll give you that vision when we have Investor Day.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Congrats. Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks, Jamie.

Operator

Our next question comes from the line of Andrew Obin from Bank of America.

Thomas L. Williams -- Chairman and Chief Executive Officer

Hello, Andrew.

Andrew Obin -- Bank of America -- Analyst

Yeah. I guess I'll follow Jamie's lead. I'll ask one question, but it will have two parts. It seems you guys are getting ready for some of the best growth you've seen in a long, long time. And the two-part question that I have for you is, how do you think about your supply chain and manufacturing footprint to meet demand and meet growth over the next three, four, five years in North America. So that's part one. And Part two, for the past decade at least, we didn't really have a lot of growth in North America structurally. And in terms of your distribution channel, do you need -- what do you need to do to optimize your distributors for this new growth environment, do they need to be better capitalized? There's been some consolidation do you need to continue consolidating your dealers? So part one, manufacturing, getting ready for this multiyear upturn? And part two, what do you need to do on the distribution side? Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Okay. Andrew, it's Tom. I'll start. Maybe Lee can pile on with the -- the manufacturing structure of the company. But we feel that we're well positioned to take advantage of this growth. I mean, one of our strengths historically is when there is a spike in demand, our supply chain and -- that we make, buy and sell local-for-local and our manufacturing footprint, which is diversified around the world, has typically been more responsive than our competitors.

And then what we've done with 3.0 and adding Kaizen, and when -- as I started with my opening comments, when you link the safety performance, lean, Kaizen and the high-performance teams, think of the high-performance teams is the structure, how we run the various sales and value streams. You've got a very powerful combination and as we do Kaizens, we keep finding ways to free up capacity, free of floor space, free of capacity and our equipment. We're able to do what we call more simple automation category, which is uses the only free thing in life, which is gravity. And if you saw these, these are gravity induced material handling things and simple automation in the factories, has allowed us to be responsive to this demand. So I think we're well-positioned. Obviously, we're going to have to continue to invest, which we will, but we just found ways to do it more efficiently. And Kaizen has been the great liberator for us to be able to do that. On the channel, the channel has been, to your point, has been consolidating over the last number of years. I think it's a better position than it's ever been to respond. We did see nice growth in distribution sequentially. And our distributors are investing in some inventory for the future. And I think they'll be a position to respond, obviously, we take share through them as well as through our OEMs going direct.

And we've got a great distribution team. Our partners are strong. We've got a great distribution sales force. The distributors have been investing in application engineers and have been relying on us to be better in supply chain, and in their eyes, we can continue to do better, but we have made quite a bit of stride on that. So I think both of those will be well-positioned to take advantage of this upturn.

Andrew Obin -- Bank of America -- Analyst

Thanks.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks Andrew.

Operator

And your next question comes from Scott Davis from Melius Research.

Scott Davis -- Melius Research -- Analyst

Hi, good morning everybody. Thanks for including me. Fascinated by slide 9. I know you've shown it before, but I don't think you guys have disclosed the opportunity difference between the electric vehicle and potential content versus ICE. Is there any way that you can quantify the opportunity for us?

Thomas L. Williams -- Chairman and Chief Executive Officer

Scott, it's Tom. So for competitive reasons and for sensitivities with customers, I won't get into the dollar content, which is why you heard me describe it in terms of just size versus ICE, 10x or build of material. Our build material on board is primarily almost exclusively all engineered materials. So everything when you go down that list on the right-hand side of slide nine, these are all engineered materials. And this has been a combination of a pretty strong portfolio that we had before we did LORD, but then LORD added quite a bit to that. And really, the combination we've got there has really given us a very attractive offering for customers.

And debate is how fast it's going to grow, what percentage of the total fleet will take over. But for us, every time there's a new EV, it's an upside opportunity. Recognize, as I mentioned, the LORD growing 11% in the quarter, LORD is third aerospace. So LORD's aerospace business is doing a little better than legacy parkers because they have pretty big military exposure, but it's feeling pressure just like legacy partners, and for LORD as a whole to show a plus 11%, just shows you the growth we've got on the EV and the HEV side.

Scott Davis -- Melius Research -- Analyst

Okay. Fair enough. And what just again, looking at slide 13 and the discretionary costs versus the permanent. How do you think about this going forward and kind of past the middle of the year? Will expenses kind of go back to pre-COVID levels? Is that something that you guys are starting to model in? Or is there some sort of a improvement to discretionary that's even -- that almost becomes permanent, if you will, like people will travel a little bit less or there's -- you find that you don't need to send 30 people do a trade show, you can send 20. I mean or is that in the numbers already in an open-end question, I guess, Tom?

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

No. Scott, this is Todd. I'll take that question. You're right on all accounts there. When we talked about this last year, because the decline in volume came so quickly, we pulled a number of levers on discretionary expenses. A lot of this was in response to the volume declines, right? And we talked about our permanent actions and that eventually, our permanent actions would right-size the business. We feel like we're there now. But we have found a new way to do business, right? I don't think we will go back to the way we did things, travel, trade shows, those are all great examples. But there will be some, right. We're still trying to figure out what that is, but it will not be like it was before. So that will be essentially a change that will be structural going forward.

Scott Davis -- Melius Research -- Analyst

Okay. Perfect. Good luck, and congrats, guys. Thank you.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Thanks, Scott.

Operator

And you have a question from Joel Tiss from BMO.

Joel Tiss -- BMO -- Analyst

I'm glad you started off with the safety talk, Tom. I've got my mask and my safety glasses on and I got in all my shops and everything. I'm ready for you.

Thomas L. Williams -- Chairman and Chief Executive Officer

I'm proud of you, Joe. Stay safe Joe, stay safe.

Joel Tiss -- BMO -- Analyst

Can you talk a little bit about the inventories in the channel in aerospace? And just sort of maybe more generically how the industry is setting up for 2022 and 2023? Like what are you hearing from your customers and your distributors and things like that?

Thomas L. Williams -- Chairman and Chief Executive Officer

Joel, it's Tom. So on distribution, we saw really nice improvement versus Q2. So distribution came in at plus 2% overall for the quarter versus a minus 6% in the prior period, so an 800 basis point improvement in distribution. We saw really good growth in Asia Pacific and Latin America in that 15% to 20% range. EMEA was flat and North America was just slightly negative low single digits. But pretty much across all our distributors, we saw a combination of actual activity driving demand and then investing in inventory in the coming months. So, I think the channel has turned from -- last quarter, I talked about selective restocking. I think it's pretty much across the board, people planning for the future.

And then in aerospace, we still need time. I think we're bouncing along the bottom there and we saw that the company to be put a great margins and what we're at right now. We have the advantage of being very diversified in our segments between engines, military, commercial, helicopters, etc and down the line that's helped us quite a bit. We're about 50-50 in military and NOE. So we're well positioned. But the question mark there is just, what will the trajectory be? How long do we found along the bottom. Clearly, I think the military side will continue to be strong for us. It was strong this quarter and will continue to be strong going forward, both OE and MRO, we're on the right programs. There in the commercial side, it will be all based on we will be based on line rates from the OEMs, the airframers. And then on the MRO side for commercial, it's all about air traffic shop business and the new see positives with airlines hired pilots back. And departures rates are improving, and that will speak well to shop visits down the road.

Joel Tiss -- BMO -- Analyst

All right. Great. Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks, Joel.

Operator

And you have a question from Joe Ritchie from Goldman Sachs.

Thomas L. Williams -- Chairman and Chief Executive Officer

Good morning, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Hey. Good morning, guys. So I'll ask a multipart one question, but really around free cash flow, because that's been a great story for you guys as well. And so, as we think about next year and the inflection that you're going to see in growth, how do we think about you having to build working capital within your own distribution? And the impact that, that could have on 2022 free cash flow margins.

And then beyond that, like longer term, what's kind of like the right entitlement? If margins are going to be going up longer term, what can free cash flow margins look like longer-term for the company?

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Hey, Joe, this is Todd. I'll take that question. And thanks for noting our superb free cash flow. We are really proud about that. As you know, we don't guide on free cash flow. We're really happy with our results.

There has been a step change. If you look back over time, I kind of alluded to that in the slides there. It's really driven by our increased margin performance. But not only that, I mentioned our working capital. Our teams really have put intense focus on this. And that's one of the areas that we really have improved with these recent acquisitions, kind of bringing them into Parker type terms and Parker type policies. So we're not done with that. We still have room to go on that, on every single one of those metrics. So we do see that improving. Will there be some pressure as growth comes? Absolutely, but it will not adversely affect those numbers. We see a positive future here for cash flow.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Okay. Thank you very much.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

And you have a question from Nathan Jones from Stifel.

Thomas L. Williams -- Chairman and Chief Executive Officer

Nathan.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

Thomas L. Williams -- Chairman and Chief Executive Officer

Morning.

Nathan Jones -- Stifel -- Analyst

I'd like to follow-up on the aerospace side. Tom, specifically on commercial aerospace and even more specifically on the aftermarket side, that's where you guys are going to see the pickup on the commercial side first. Have you seen sequentially that get any better, as we're really seeing the front end of air traffic start to pick up and if not, what's the typical kind of lag you see from when that recovery in air traffic starts to when you actually see the recovery in your aftermarket orders?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yeah. Nathan, it's Tom. So sequentially on sales, for commercial MRO, we saw a 13% improvement going from Q2 to Q3. And the lag is sometimes hard to predict, but the sequence of the increase in available seat kilometers increasing departure rates, drive shop visits to go up at some period of time after that. And that's always the hard part, because it depends on what the routes are in the cycles and particular engine, etc.

But those will start to improve. And then once the shop visits go up, then our flow-through in the commercial MRO is going to happen. So I can't give you an exact lag, because I did it, I would probably be wrong. But clearly, these are all positive signs. Pilots being hired, departure rates going up, available seat kilometers starting to, at least, stabilize and starting to improve. Those will all speak to shop visits going up and they'll drive higher content of MRO for us.

Nathan Jones -- Stifel -- Analyst

Okay. And then one on use of cash here. I think you guys had said, once we get to about mid this year, mid calendar year, you're going to be out of debt to pay off, and obviously producing a lot of cash flow here. Can you talk about your approach to the M&A market now when we might expect to see you back into it? And what the maturity of the pipeline looks like right now?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Nate, this is Tom again. So you're right. Our serviceable debt will be paid off this quarter. So we'll enter FY 2022 with no serviceable debt and our next payment corporate bond to September calendar 2022. So we have opportunities. And the way I would always describe it and the lessons learned from the financial crisis is to continuously work the financial pipeline.

Lee, Todd and myself just did reviews. We do this all the time. Lee does it monthly with his presence. And so this is something we stay on top of building those relationships. So the pipeline is active. But it's always a matter of finding a willing seller and a willing buyer. And so it's this activity business always translate into actual properties being acquired. But we're looking, and certainly, we're going to -- to buy companies with the same kind of themes that you've seen before that either are immediately accretive or accretive within our synergy time period where they can help the growth rates of the company, help margins, help cash flow. And you'll continue to see speed solidated choice. We think we're still the best home of these motion control properties. But we'll also look at the other areas that you've seen us build on in the last several years. And hopefully, by now, people feel good about our track record. We've -- the last three, got a lot of fanfare. We've been good at this for a long time. We've done 80 deals in the last 20 years. And I think you'll see us to continue to be active on that.

First and foremost, for us, the dividends, we were very excited to clip that dollar mark on a quarterly basis. And you'll see us stay on top of that. Our net income is going to grow. And we're going to stay on top of those dividends to match the net income growth. We'll continue to invest in the company organically in productivity. And if we don't find the right properties, which our preference would be to do deals because it drives cash and EBITDA growth, we think we're a great investment, and we'll buy shares on a discretionary basis on top of a 10b5-1. But the pipeline is active and more to come on that.

Nathan Jones -- Stifel -- Analyst

Great. Thanks for taking my questions.

Operator

And we have a question from Julian Mitchell from Barclays.

Thomas L. Williams -- Chairman and Chief Executive Officer

Hello, Julian.

Julian Mitchell -- Barclays -- Analyst

Maybe first question around the, sort of, linked topics of cost inflation and component shortages and the, sort of, unifying factor of tight supply chains. I mean, I guess, two parts. One is do you think there's much evidence of sort of excess stocking up or accelerated stocking up by your customers or channel partners, given all the headlines around supply chain shortages? And then secondly, when you look at Parker itself, how comfortable do you feel on that pricing outlook to offset cost inflation pressures?

Lee C. Banks -- President and Chief Operating Officer

Julian, it's Lee. I was waiting for somebody to ask for a question around material cost and pricing. I'm looking at a commodity chart right now, which has got trends year-over-year, quarter-over-quarter, going back to the last big inflation period at CRT. But the thing I would say about our team is we saw this coming early on as we did this. And as you know, we've got really two great internal processes inside the company. It's how we track our PPI, which our input cost and how we track our selling price index to make sure that we always maintain this margin neutral kind of role. So we've been active with price through the distribution channel, and we'll continue to do that. We're fortunate to have great contracts in place with many OEMs that have raw material cost escalators in them. But our goal on the whole pricing side is to be margin neutral. We've done that before, we'll continue to do that.

On the supply chain side, I would say, just echo what Tom said earlier, the biggest benefit is our business model. So we design, source make, sell in the region for the region. Everything you read about in the paper, we're not immune to that. I mean there's still things that happen on a day-to-day basis. But I would just tell you, from a company standpoint, it's not material. I mean, we manage it day in and day out. So on pricing, I think we're active in a good place on the supply chain side. We're managing it. The model is set up. So I don't think we'll get hurt, and it's really not going to be material.

Julian Mitchell -- Barclays -- Analyst

And then how about on your own sort of customers or channel partners? Do you see them kind of across the board doing any kind of accelerated stocking up because of the supply chain issues being so well publicized? Or do you think that the activity is kind of normal for what one would expect as you see a macro inflection positive?

Lee C. Banks -- President and Chief Operating Officer

Listen, everybody is very, very busy right now. I would say supply chain issues aside. North America, labor is very tight. I mean, you read about that debt as a fact. So a lot of our customers are doing what we're doing, just really using Kaizen, automation where appropriate, etc. But I don't look, every time there's a ramp, there's a little bit of a bullwhip effect, but this is no different than anything I've seen in the past. It's just people trying to manage the increase in demand.

Julian Mitchell -- Barclays -- Analyst

Great. Thank you.

Lee C. Banks -- President and Chief Operating Officer

Thank you.

Operator

And you have a question from John Inch from Gordon Haskett.

John Inch -- Gordon Haskett -- Analyst

Thank you. Good morning, everyone. Hey, Lee, maybe to pick up on some of the themes here. What are you seeing in terms of competitive behavior, particularly given the inflationary backdrop? How are competitors jacking, jostling and how is that maybe modifying your own behavior in this period of post pandemic or emerging from post pandemic?

Lee C. Banks -- President and Chief Operating Officer

I think that really the narrative right now, John, is around supply. I think everybody's -- we're structured much differently than many of our competitors. So the issues that you read about every day maybe are not as imperative to us. But I think the narrative right now is around supply. People are looking for continuity of supply, if they can get it. Everybody understands what's happening with commodity prices. So I don't really see any negative customer actions taking place.

I will tell you, as -- and we've talked about this for years, this is always an inflection point for us where we tend to do better than the market as we come out of this. It's a combination of two things. We've done a lot of work with OE customers on design during the downturn. Because are looking to simplify their designs, take costs out. We do that through our application centers. We see the benefit of that as we ramp up. And then second, our internal distribution systems are really poised to take advantage of disruptions with competitors.

John Inch -- Gordon Haskett -- Analyst

Well, I was wondering, like, as prices go up and everybody is trying to raise in various aspects of their operations. Our competitors -- one of the ways the competitor might instigate a price cut to position themselves by not raising commensurately, say, compared with other people or other companies or players. Are you seeing any of that kind of that behavior? Or is it still a little bit too soon to tell?

Thomas L. Williams -- Chairman and Chief Executive Officer

I haven't seen that kind of a fit behavior, and I typically really don't see that in this kind of the cycle. You see more of that, John, when you're at the bottom of the cycle and people are trying to fill up factories.

John Inch -- Gordon Haskett -- Analyst

Yes. That makes sense. And then, Tom, simple by design, as it becomes more ingrained as, let's call it, an operating competitive advantage for Parker. Do you think it would be used to perhaps offensively target companies for M&A, picking up on the M&A theme? I was thinking it could maybe provide a bit of an arbitrage opportunity for safe parker to be able to go in and maybe even bid more, knowing you can drive more synergies than other bidders that don't have simplified design as part of their arsenal.

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, John, it's Tom. So clearly, simplify a sign. I would just say everything that's in Win 3.0 is part of our basket of goods that go into evaluating acquisitions. So we look at what the best practices are for the acquisition of best practices that we bring, that combination of one equals three generates the synergy plan. And that's -- the bigger the synergies, which you're alluding to is the by design, the opportunity you have to pay. And what we really look for is what's the synergized EBITDA multiple that we're done. And is that something that makes sense given where we're trading.

The other part, aside from acquisitions, to get at what Lee was talking about with competitive dynamics. Simple by Design is an opportunity for share gain. As we come up with products that are simpler to make better easier supply chains, more reliable, etc. And maybe in some areas where we don't currently have share, it allows us to penetrate an account overall, we've got 11%, 12% market share of this $135 billion space. We've got lots of room to grow. Simplify it signs just one of many share gain opportunities.

John Inch -- Gordon Haskett -- Analyst

Yes. Great. Thank you very much.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thanks John.

Operator

And you have a question from Jeff Sprague from Vertical Research.

Thomas L. Williams -- Chairman and Chief Executive Officer

Good morning Jeff.

Jeff Sprague -- Vertical Research -- Analyst

Hey, good morning. Thanks, everyone. Hey, I guess two for me. Just thinking about this idea, Tom, of trying to break the gravitational pull of the PMI. Actually, two questions. One, just kind of maybe fundamental in the business and maybe a second kind of philosophical. First, obviously, the PMI is a broad industrial benchmark, right? Have you considered that calling your segments diversified industrial just suggests you are an industrial proxy? Perhaps some kind of different earnings presentation would make sense. You give us this global technology platforms, but we don't know anything about the profitability of those subsegments. So that's more of a philosophical question. I wonder if you've thought about that.

And then secondly, although most of your business is short cycle, right, I would argue, it's really a broad mix of early, mid and late. And I think, to some degree, people confuse short with early I just wonder if you could kind of give us some rough buckets. What percent of your business you would actually characterize as early cycle versus mid-cycle versus late cycle?

Thomas L. Williams -- Chairman and Chief Executive Officer

Okay. Jeff, it's Tom. So those are -- that's a good question, hard one. First of all, that whole PMI gravitational pull, that's one of the reasons besides, I think it's just a great way to describe the company when we did slide five and that's, for those of you who are not looking at your slides, that's the whole PMI versus our EPS trend. And I hope you -- all people got the point there, this company is dramatically and have underlying dramatically different. And yes, we'll never be completely detached from PMIs, because obviously that represents total manufacturing activity. And we would benefit from that. But we didn't get much help from that over the last six years. And you've seen us double EPS and 600 basis points to EBITDA margins. So we'll continue that. And hopefully, people recognize, that we don't need the macros to help us.

We have enough self help, with 2.0 and 3.0 to keep lasting us for many, many years. The current environment is going to get better. So we are going to get some up with that. Your comment philosophically on reporting segments, yes, that's been a raging internal debate for many, many years. There's, pros and cons to a probably longer discussion, than I can do on an earnings call. But we continue to think that representing the way we do today is the best way because if you go back to those 8 to 10 technologies and the fact that, two-thirds of our revenue comes from customers who buy and perform all those technologies.

That's exactly how we go to market. We don't go-to-market specifically with one-off technologies all the time. We go to market, to look at our commercial teams, leveraging that breadth of technology. So that's how we're representing the company to shareholders is exactly how we go to market. Now we early versus mid versus late, I'm not even going to try to do that. Other than I'm going to reinforce your point, yes, we are a mixture. And obviously, you can look at aerospace. And we characterize that as long. But where do you want to put EV? EV, we're feeling that now. But EV is a long-term change that's going to happen. Where do you want to put all the clean technologies? I could add up all the things I talked about on that, one slide related to clean technology. And you get a pretty significant percentage of the company. Obviously, hydrogen's long, very long cycle what's happening there, electrification is a little more near-term. So it's -- I think unfairly, we've been characterized as early and maybe because it just historically, how we used to report orders on a monthly basis.

And people could see those things sooner. I think we're a good mix. And I think, hopefully, over the last six years, people recognize we're a good bet. You want to bet your money, embedded on this team.

Jeff Sprague -- Vertical Research -- Analyst

Great. Thanks for that perspective.

Lee C. Banks -- President and Chief Operating Officer

Thanks, Jeff.

Operator

And you have a question from David Raso from Evercore ISI.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Good morning, David.

David Raso -- Evercore ISI -- Analyst

Curious, it seemed like the January price increases you put through were relatively modest. So I think kind of where we were in the cost escalation moment, it made sense. But as the quarter has gone on and we look out to fiscal 2022, I'm assuming the Fluid Connector Group put out an increase. But you don't usually do a lot of increases for July 1. The setup here feels though more accommodative to you putting price increases through. So two questions, is it fair to say we should see a lot more mid-year price increases than we've seen in the past? And second, is the lead time issue significant enough where distributors who would normally want to get ahead of that increase are not able to, given the lead times?

I'm just trying to get a sense of how much of the price increase we could think about for 2022 and sales that kind of capture it versus maybe a little bit of a natural pre-buy that you see sometimes when you announce an increase?

Lee C. Banks -- President and Chief Operating Officer

Yeah. David, it's Lee. I'll take that question. So I think it's fair to say you'd see mid-year price increases going on to the distribution channels, not only in North America but globally, given where we are with input costs, etc. And I would say, by and large, you're probably pretty correct, lead-times that a lot of pre-buying, while there's some, it's not what you would expect if the level of activity wasn't so strong as it is right now.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Thanks David. I know everyone's got a pretty packed schedule today. So, Elaine will take one more question before we wrap-up.

Operator

Okay. The last question comes from Josh Pokrzywinski from Morgan Stanley

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Good morning Josh. How are you? We've lost Josh.

Operator

Do you want to take another question?

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

We'll go to the next question.

Operator

All right. The next question is from the line of Nigel Coe, Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. I'm getting speechless by the results. Thanks to put me in here. So, look, I think Jeff had a really good point on the sort of early cycle points. The fact that you're still negative in two of your three segments, I think it's sort of proof that you're not a category cycle.

So, I think that's an important point. I did want to go back to your comments about incremental margins for 2022. And I know that, that wasn't guidance necessarily, but if you could do 3% income margins with the temporary costs coming back and perhaps obviously, inflation pre-rampant in the back half of the calendar year. I guess what going to ask is, do you think that there's a line of sight based on water today hitting that 5% incremental margin for FY 2022?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Nigel, it's Tom. So, you're right. We are not a guidance discussion for 2022, 2022 is hard enough to do and we do it in August. But I think philosophically, our goal and what is best-in-class is to do a 30% incremental. And I think the evidence that we're going to do about 30% in Q4, even with the tough comps that we have high discretionary cost as we did in Q4 of prior period, our evidence that we can do that going into 2022.

We'll see when we pull the numbers together because this Q4 is probably one of our tougher comparisons. And it will -- in Q1 are probably not a tough comparison, but it will get progressively easier as we go through 2022 of those comparisons. But I think 30% is still on our radar and Q4 is good evidence. If we can do it in Q4, we can do it going forward.

Nigel Coe -- Wolfe Research -- Analyst

And that kind of that rate the question then. If you can do it in an environment like this, presuming fiscal year 2022, mix isn't going to be that helpful, I don't think, in FY 2022. But once aerospace as kicking back into gear, do you think 35%, maybe plus could be a good run rate beyond FY 2022?

Thomas L. Williams -- Chairman and Chief Executive Officer

I missed the word. What was before FY 2022 there?

Nigel Coe -- Wolfe Research -- Analyst

I mean, do you think that better than 3% could be a good number to use beyond FY 2022?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Over the business cycle, we've always told people if you're modeling us over multi-years, use 30. Now clearly, in inflections, we've done better than that, 40, 50 range. But this is -- while we're in inflection now is a little bit masked because of the prior period, big huge discretionary savings, is why I gave a number, if you took that out, it'd be 50%. So, typically, we glide pretty high up at the beginning, 30% over the cycle, 10% later in the cycle, you're down into the 20s. But if you're modeling multiyear, I would use 30%.

Nigel Coe -- Wolfe Research -- Analyst

Okay. That's great. Thanks.

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Thanks, Nigel. All right, Elaine, that concludes our call today. I'd just like to thank everyone for joining us. As always, we appreciate your interest in Parker. Rob and Jeff will be here all day if you have further questions or if you need clarification. I hope everyone has a great afternoon, and stay safe, everyone.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Thomas L. Williams -- Chairman and Chief Executive Officer

Todd M. Leombruno -- Executive Vice President and Chief Financial Officer

Lee C. Banks -- President and Chief Operating Officer

Jamie Cook -- Credit Suisse -- Analyst

Andrew Obin -- Bank of America -- Analyst

Scott Davis -- Melius Research -- Analyst

Joel Tiss -- BMO -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Nathan Jones -- Stifel -- Analyst

Julian Mitchell -- Barclays -- Analyst

John Inch -- Gordon Haskett -- Analyst

Jeff Sprague -- Vertical Research -- Analyst

David Raso -- Evercore ISI -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

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