Earnings Call Transcript - PH Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Parker-Hannifin Fiscal 2021 Third Quarter Earnings Conference Call and Presentation. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. The opening speaker for today's call is Parker's Chief Financial Officer, Mr. Todd Leombruno. Please go ahead, sir.

Todd Leombruno, CFO

Thank you, Elaine. And, good morning everyone. Thanks for joining our FY'21 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 will 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 increased guidance that we announced this morning. Tom will then close with key messages and then Tom, Lee and I will take any questions that the Group may have. With that, I'll direct you to Slide three, and I'll hand it off to Tom.

Tom Williams, CEO

Thank you, Todd. And good morning everybody. Before I jump into Slide three in 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 during the pandemic, and also the transformation of the company into a top quartile competitor. 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, had a 33% reduction in recordable incidents, we're still in the top quartile, the combination of safety, lean, our high-performance team structure in Kaizen, 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, the industrial segment grew organically almost 4%, that was significant. We had record results. You can see that net income EPS in the segment for Parker North American International EBITDA margin was very strong at 21.6% as reported and 21.8% adjusted, a huge increase versus prior by 250 basis points. Year-to-date cash flow was an all-time record of 1.9 billion and 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%. Again, a significant improvement versus prior by 240 basis points. So, a terrific quarter in 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. 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 with the blue global PMI line, you see they are much less correlated, in fact, they are diverging and there's been a step change in performance of the EPS over this time period, it has more than doubled from $7 to our guidance of $14.80, so approaching $15, propelled by an EBITDA margin that's grown 600 basis points. You might ask how that happened, that's really the takeaway in the bottom of the page, it's our people, that focus, the alignment, the engagement that comes when you have people thinking like an owner, the portfolio, which is a combination of our interconnected technologies and the value they bring and capital deployment we've done by buying some great companies that have added to the strength of the company. Our performance really sits within the strategy of the company, Strategy 3.0 most recently in FY '20. This combination has really transformed the company you see that as a business slide and we're very proud of it. But if you go to slide six, 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've called this a convergence of positive inflection points, so on the left-hand side it is kind of those external inflection points, you're familiar with a lot of these - macro environment momentum, you see that in our positive orders and positive organic growth industrial, we showed in this quarter. Aerospace is going to recover; the question is just what the trajectory will be in the timing, vaccines are making progress around the world. There's going to be a significant amount of climate investment. If you put all that on top of low interest rates pent-up CapEx demand of fiscal spending, you have a very attractive environment for industrials for the next several years. On the right-hand side, it is really the internal things we've been doing, particularly shown in 3.0, at the last line. I just 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. Look at the three major things, I highlighted here, performance becoming top quartile, strategies to grow fast in the market you've seen our margin expansion, great cash flow generation consistently over the cycle, portfolio, we've added three great companies that are accretive on growth cash margins, and with the rapid debt pay down that we've done, we're positioned to do future capital deployment, which is very exciting. The technology will get into in the next Slide, but the interconnected technology is really distinctive for us. And with 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 interconnection of the technology brings that value accretive for customers, what I want to do today in light of the Clean Technology discussion is give you forward samples and how this suite of technologies helps with clean environment clean technology world. The first would be electrification and we've got a full portfolio technologies here hydraulic, electro hydraulic, electromechanical, low competitors got that breadth of technologies and we've formed about four years ago the Motion Technology Center, which put the best and brightest of engineers doing Motion Technologies and things of Slide as well as things with wheels underneath. So we put the motion and the aerospace teams together and this team has come up with a great listing of products around motors and burners and controllers, but there's also in addition to the typical motion opportunities, there are other challenges of our electrification like light weighting, thermal management, shielding, structural adhesives, noise, vibration. All of these combine with our legacy Engineered Materials and with LORD acquisition, we're well positioned to take advantage of those. The second is batteries and fuel cells that utilize most of the technology seen on this page. Thirdly, clean power sources and that kind of falls into renewables, which we do a lot and 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 on board as well as infrastructure opportunities as you go up for the next many years and it's building in our high pressure and cryogenic applications that we have today. We've been a more sustainable company for a long time - the 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 more sustainable environments. So we feel very good about this portfolio is more climate investments in the future. Going to Slide eight, just want to remind you of our purpose statement enabling engineering breakthroughs that lead to a better tomorrow. It's been very inspirational for our team, and I think it comes more into light when we give you examples of the purpose in action, which is on Slide nine. Again, kind of following with a clean technology discussion when I highlight electrification, I'm going to highlight in particular electric vehicles. On the left-hand side, you see applications that have changed because of an AGV an EV instead of a combustion engine. On the right-hand side, you see the various technologies of Parker has that address those applications. I won't read all those major categories of safety-related technologies, things would say weight, thermal management, variety of things we do for critical protection. The big opportunity for us, we will obviously be in the fact is helping to make these vehicles, and we'll always do that, but the big opportunity for us is the content around engineered materials. Our build material for an EV or HEV is ten times what it was on a combustion engine and it's one of the key reasons why our LORD business has grown nicely even despite the pandemic, we grew 11% organically in Q3 for 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'll turn it over to Todd for more details on the quarter.

Todd Leombruno, CFO

Okay. Thanks, Tom. I'll just direct 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, whose 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 acquisition, this is the first full quarter that we report both LORD and Exotic in our organic growth numbers. Thus 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 the result of just broad-based execution of the Win Strategy. We continue to manage our costs in a disciplined manner. The portfolio additions in core for LORD and Exotic are all performing soundly, and you've all been familiar with the restructuring activities that we've done in FY '20 and in FY '21; those are on track and unplanned 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% return on finance that's increased by 22% from prior year. Adjusted EPS was $4.11, that is a $0.72 or 21% increase compared to prior year's results of $3.39. As Tom said, it's just really outstanding performance, and I'd also like to commend our global team members for generating these results. If you go to Slide 12, this was really a bridge of that $0.72 increase in adjusted EPS versus prior year. The story here across the board is the 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 '20 and throughout FY '21. Discretionary savings came in exactly as we guided at $25 million for Q3 and now totaled $215 million year-to-date. There is no change to our discretionary savings forecast for Q4; that remains at $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 grow, 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 '21 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 from both permanent and discretionary savings is $260 million. 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 to 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 are 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 cost containment and the effort from our global team really generated this level of record margin performance as well. 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 are 18% decremental margins. Order rates appear to a bottom 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 at plus 6 and our team is really continuing 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, just to give 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. We'll also 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 of 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 122% 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. 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 $1.3 per share and extended our record of increasing the annual dividends paid per share to 65 consecutive years. Finally, as we mentioned at the Q2 earnings release, we've 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 on 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. 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 is increased from 12.96 to 13.26; that's $13.11 at the midpoint. On an adjusted basis, we're increasing the range from 14.65 to 14.95; that's $14.80 at the midpoint. For Q4, adjusted EPS was projected to be $4.18 per share that excludes $0.54 or $93 million of acquisition-related amortization expense, the finishing of our business reliant expenses and integration costs. If you look at Slide 18, this is just a bridge of our increase to our adjusted EPS guidance. Now, 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 guidance. With that, I'll turn it over to Tom for some summary comments and ask you to move to Slide 19.

Tom Williams, CEO

Thanks, Todd. So we've got a highly engaged team. You see that this was 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 points to a very bright future and the cash generation and deployment as evidenced by the rapid debt pay down, acquisition performance, and our dividend increase, which I would just highlight is the first time we've been over $1 at $1.3 on a quarterly dividend, which we're very proud. The Win Strategy 3.0 and our Purpose Statement is well positioned in addition to inflection points for a very strong future. I'll turn it back to Elaine to start the Q&A.

Operator, Operator

Operator instructions. And your first question comes from the line of Jamie Cook from Credit Suisse.

Jamie Cook, Analyst

Hi, good morning and 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 that discretionary cost sort of factor back in and impact incremental margins? And then I guess my second question, as regards to your longer-term margin targets, which you're starting to beat, in particular, if volume is 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.

Tom Williams, CEO

Jamie, this is 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 Q4 prior periods, maybe about a 50% incremental. So we would continue to do 30%. I think as we go into 22, obviously we're not guiding to that yet. So I think just a good round number to use for us, but I'll highlight Q4 because it is impacted by the prior period discretionary which we don't have now, and that difference is pretty significant to go from the 30 to plus 50 incremental. So, it speaks to the underlying power of the business being there. On your question on long-term margin targets; yes, this is a good problem that we have that we basically beat our targets by about two years, our guide of 20.0 needed to mid-point on operating margin is within spitting distance of the '21 and then our EBITDA but we don't guide on EBITDA margins; we'll be at the 21% for the 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 has, so we are going to disclose this at Investor Day, which will be in March of next year, and we think that's the appropriate form to do that, rest assured, we're working on it and we're not going to settle or be happy with stopping where we are; we're going to continue to march forward and we'll give you that vision when we have Investor Day.

Andrew Obin, Analyst

Hi, I guess I'll follow Jamie, 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. 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 growth over the next three, four or five years in North America? 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 has been some consolidation; do you need to continue or consolidate your dealers? So, part one manufacturing getting ready for this multi-year upturn and part two, what do you need to do on the distribution side? Thank you.

Tom Williams, CEO

Okay. This is Tom, I'll start and maybe Lee can pile on with the manufacturing structure of the company. But we feel that we're well positioned to take advantage of this growth - one of our strengths historically is when there is a spike in demand, our supply chain and the fact that we make-buy-sell local for local and our manufacturing footprint, which is diversified around the world, have typically been more responsive than our competitors. What we've done with 3.0 and adding Kaizen, safely linking performance and lean, made our high-performance team structure very 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've just found ways to do it more efficiently, and Kaizen has been a great liberator for us. On the channel, to your point, the channel has been consolidating over the last number of years. I think it's better positioned than it's ever been to respond, we did see nice growth in distribution sequentially and our distributors are investing in inventory for the future. I think we will be positioned to respond, absolutely take share through them as well as through our OEMs going direct. We've got a great distribution team, our partners are strong; we've got a great distribution sales force, we've been investing in application engineers and they're relying on us to be better on supply chain. We're continuing to do better, but we have made quite a bit of progress.

Scott Davis, Analyst

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

Tom Williams, CEO

Hello Scott. This is Tom. 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; a ten times build material. Our build material board is primarily almost exclusively all engineered materials. But when you go down that list on the right-hand side of Slide nine, these are all engineered materials and this would be a combination of a pretty strong portfolio that we had before we did LORD, but LORD added quite a bit to that. Really the combination we've got there is really given us a very attractive offering for customers and the debate is how fast it's going to grow and what percentage of total fleet will take over. For us every time there's a new EV, it's an upside opportunity recognized; as I mentioned, as being positive growth during Q3. Our LORD business is doing a little better than legacy Parker's because they have a pretty big exposure, but it's feeling pressure just like legacy is and for LORD as a whole to show a plus 11% growth in Q3 shows you the growth you got on the EV and EHV side.

Scott Davis, Analyst

Okay, fair enough. And what - just again, looking at Slide 13 and the discretionary cost versus that 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 an improvement to discretionary that's even that almost becomes permanent, if you will, like people will travel a little bit less or you find that you don't need to send 30 people to a trade show; you can send 20? Or is that in the numbers already?

Tom Williams, CEO

Scott, this is Tom. I'll take that question. You're right on all accounts there; when we talked about this last year, the decline in volume came so quickly that we bought 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, 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.

Joel Tiss, 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 all my shots; I'm ready for it. Can you talk a little bit about the inventories in the channel and in Aerospace and just sort of maybe more generically how the industry is setting up for '22 and '23? What are you hearing from your customers and your distributors and things like that?

Todd Leombruno, CFO

Joel, this is Todd. So on distribution, we saw really nice improvement versus Q2; distribution came in at plus two overall for the quarter versus a minus six in the prior period. So a whopping 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 in North America, 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 response. I think the channel has turned from, you know last quarter I talked about selective restocking, I think it's pretty much across the board, people planning for the future; in aerospace, we still need time; I think we're bouncing along the bottom there, and we've sized the company to maintain operating margins now. We have the advantage of being very diversified in our segments between engines, military, commercial, helicopters, et cetera, going down the line, and that's helped us quite a bit. We're about 50 50 on military and original equipment, so we're well positioned, but quite a question mark there is just what the trajectory will be and how long do we bounce 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 with us and over on the right programs there. On the commercial side, it will be all based on that; we will be based on line rates from the OEMs, the airframers. And on the MRO side for commercial, it's all about air traffic shop business; you see positives with airlines hiring pilots back and departure rates are improving and that will lead to shop investment growth.

Joe Ritchie, Analyst

Hi, thanks. Hey, good morning guys. I'll ask a multi-part question but really around free cash flow because that's been a great story for you guys as well. 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? Then beyond that, what's kind of like the right entitlement if margins are going to be going up longer term, what can free cash flow margin look like long-term for the company?

Todd Leombruno, CFO

Hey Joe, this is Todd. I'll take that question and thanks for noting our superb free cash flow. We are really proud of 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 briefly alluded to that in the slides. It's really driven by our increased margin performance; not only that, I mentioned our working capital. Our team has put an intense focus on this. That's one of the areas that really has improved with these recent acquisitions, kind of bringing them into Parker type terms and Parker type policies. 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 for cash flow.

Nathan Jones, Analyst

Good morning everyone. 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, but 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 of your aftermarket orders?

Todd Leombruno, CFO

Yeah, Nathan, it's Todd. So sequentially in sales for commercial MRO, we saw a 13% improvement from Q2 to Q3 and the lag is sometimes hard to predict, but the increase in available seat-kilometers, the increase in departure rates drive shop visits to go up at some period of time after that, and that's always the hard part, depends on what the routes are in the cycles and particular engine, etc. Those will start to improve and once shop visits go up then our flow-through in the commercial MRO is going to happen. I can't give you an exact lag because I could probably be wrong, but clearly, these are all positive signs: increased departure rates, available seat-kilometers starting to at least stabilize and start to improve; those will all drive the growth of shop visits and will lead to higher content of MRO for us. This is Todd again. You're right; our serviceable debt will be paid off this quarter. We'll enter FY '22 with no serviceable debt and our next payment corporate partner due is September calendar 22. We have opportunities, and wherever I've described in the lessons learned from the financial crisis is to continuously work on the financial pipeline. We just did reviews and we do this all the time, monthly. So this is something we stay on top of, build those relationships. The pipeline is active, but there's always a matter of finding a willing seller, willing buyer. Activity doesn’t always translate into actual properties being acquired. We're looking at it and certainly we're going to continue to acquire companies with the same kinds of themes that you've seen before; they must be immediately accretive or accretive within a synergy time period, help the growth rates of the company, help margins. You will continue to see us still consolidating because we think we are still the best home for motion control properties, but we'll also look at the other areas that you've seen us build on in the last several years. Hopefully, by now people feel good about our track record. We've had a lot of fanfare over the last three years, but we've been good at this for a long time – 80 deals over the last 20 years. You'll see us continue to build upon that; first and foremost, our dividend. We're very excited to clip that dollar mark on a quarterly basis. 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 that income growth. We will continue to invest in the company organically and in productivity and if we don't find the right properties, which our preference would be to do deals, because those drive cash and EBITDA growth. We think we're a great investment and we'll buy shares on a discretionary basis on top of the 10b51. The pipeline is active and we'll have more to come on that.

Julian Mitchell, 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 is 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 Banks, COO

Julian, it's Lee. I was waiting for somebody to ask the question on material costs and pricing. I'm looking at a commodity chart right now, which has got trends year-over-year, quarter-over-quarter going back the last big inflation period. It's a sea of red. The thing I would say about our team is we saw this coming early on as we did this. 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 strategy. 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. 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. We designed source, make, sell, local for local. 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. We manage it day in and day out.

Julian Mitchell, Analyst

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

Lee Banks, COO

Listen, everybody is very, very busy right now. I would say supply chain issues aside, North America labor is very tight. I read about that and it is a fact. A lot of our customers are doing what we're doing, just really using Kaizen automation where appropriate, etc. 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.

John Inch, Analyst

Thank you. Good morning, everyone. 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 jockeying, jostling, and how is that maybe modifying your own behavior in this period of post-pandemic or emerging from post-pandemic?

Lee Banks, COO

I think really the narrative right now, John, is around supply. I think everybody's structured much differently than many of our competitors, so the issues that you read about every day may not be as imperative to us. But I think the narrative right now is around supply; people are looking for continuity of supply, they can get it. Everybody understands what's happening with commodity prices. I don't really see any negative customer actions taking place. I will tell you, as we've talked about 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 as we're looking to simplify their designs and take costs out. We do that through our application centers, and 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.

Tom Williams, CEO

Okay, I was wondering if as prices go up, and everybody is trying to raise in various aspects of their operations, how might a competitor instigate price toughness to position themselves by not raising commensurately, say compared to other players? Are we seeing any of that kind of behavior, or is it still a little bit too soon to tell?

Lee Banks, COO

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

Tom Williams, CEO

Yeah, that makes sense. And then, Tom, simplified design as it becomes more ingrained as an operating competitive advantage for Parker, do you think it could be used to perhaps offensively target companies for M&A? Picking up on the M&A theme, I was thinking it could provide a bit of an arbitrage opportunity for a safe partner to be able to go in and bid more than you could drive more synergies than other bidders that are going to have simplified designs? Hey, John. Everything that's in Win 3.0 is part of our basket of goods that go into evaluating an acquisition. So we look at what the best practices are for the acquisition. This practice that we bring that combination of one plus one equals three generates the synergy plan; and that's the figure, the synergies which you alluded to, the opportunity you have to pay, and we look for is what's the synergized EBITDA multiple we're done. Is that something that makes sense given where we're trading? The other part, aside from acquisitions to get at, believe was talking about was competitive dynamics. The simplified design is an opportunity for share gain as we come up with products similar to make that easier, supply chains, more reliable, etc.

Jeff Sprague, Analyst

Hey, good morning. Thanks everyone. I guess two parts from me, just thinking about this idea of trying to break the gravitational pull of the PMI. Obviously, the PMI is a broad industrial benchmark. Have you considered calling your segments Diversified Industrial to suggest you're in an industrial proxy? Perhaps some kind of different earnings presentation would make sense; you give us global technology platforms, but we don't know anything about the profitability of those sub-segments? So, that's more of a philosophical question. I wonder if you've thought about that. And then second, although most of your business is short cycle, right, I would argue it's really a broad mix of early, mid, and late. I think to some degree, people confuse short with early; I just wonder if you could kind of give us some rough buckets on what percent of your business you would characterize as early cycle versus mid-cycle versus late cycle?

Tom Williams, CEO

Okay, Jeff. So those are good questions, hard ones. First of all, the whole PMI gravitational pull, that's one of the reasons, besides, I think it's just a great way to describe the company, that I referred to Slide five - for those users looking at your slides. That's where they can observe there are different trends with respect to PMI and EPS. I hope people got the point. This company is dramatically different. Yes, we will never be completely detached from PMIs because obviously that represents total manufacturing activity and we will benefit from that, but we didn't get much help in that over the last six years, and you've seen us double EPS and as 600 basis points added to EBITDA margins. We will continue with that, and hopefully people recognize that we don't need the macro environments to help us. We have enough self-help with 2.0 and 3.0 to keep lasting for many, many years. The current environment is going to get better, so we are going to get some of your comments philosophically on reporting segments. Yes, that's been an ongoing internal debate for many, many years, and there are pros and cons to it. This is probably a longer discussion than we 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 eight technologies and the fact that two-thirds of our revenue comes from customers at Viper technologies, that's exactly how we market ourselves. We don't go to market, specifically one off technologies, all the time; we go to market using commercially focused teams utilizing technologies. So, that's how we're presenting the company to shareholders is exactly how we go to market. As to the issue of 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 characterize that as long, but where do you want to put EVs? We're feeling that now, but it's a long-term change. Where do you want to put all the clean technologies? I could add up all the things I've talked about and that one slide related to clean technology and you get a pretty significant percentage of the company. Obviously, hydrogen is long, very long cycle - what's happening there? Notifications still imply a more near-term cycle. So I think, unfairly we've been characterized as early and maybe because I've just historically focused to report orders on a monthly basis, and people could see those things sooner. I think we're a good mix, and hopefully over the last six years, people recognize we're the right place to invest their money.

David Raso, Analyst

Curious; it seemed like the January price increases you put through were relatively modest, I think kind of where we were in the cost escalation moment, if it made sense. But as the quarter has gone on and we look out to fiscal '22, I'm aware 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 secondly, 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 trying to get a sense of how much of the price increase we could think about for '22 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 Banks, COO

Yes, David. It's Lee. I'll take that question. So, I think it's fair to say you'll see mid-year price increases going after the distribution channels, not only in North America but globally, given where we are with input costs, etc. By and large, I'd say we're probably pretty correct that lead times are allowing for pre-buying. While there are some, it wouldn’t exceed our expectations, so if the level of activity wasn't so strong as it is right now.

Operator, Operator

All right. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.