Parker-Hannifin Corporation (PH)

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Parker-Hannifin Corp. (PH)

Q4 2009 Earnings all

July 30, 2009; 10:00 am ET


Don Washkewicz - Chairman, President & Chief Executive Officer

Tim Pistell - Executive Vice President & Chief Financial Officer

Pam Huggins - Vice President & Treasurer


Henry Kirn - UBS

Daniel Dowd - Sanford Bernstein

Mark Koznarek - Cleveland Research

Jamie Cook - Credit Suisse

Ann Duignan - JP Morgan

Nigel Coe - Deutsche Bank

Alex Blanton - Ingalls & Snyder

Jeff Hammond - KeyBanc

Eli Lustgarten - Longbow Research

Robert McCarthy - Robert W Baird

David Raso - ISI Group



Good day, ladies and gentlemen. Welcome to the Parker Hannifin Corporation fourth quarter and fiscal year 2009 earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions)

I’d now like to turn the presentation over to your host for today’s conference, Ms. Pam Huggins, Vice President and Treasurer. Please proceed.

Pam Huggins

Thanks, Michelle. Good morning everyone. This is Pam Huggins speaking, just as Michelle said. I’d like to welcome you to Parker Hannifin’s fourth quarter and fiscal year 2009 earnings release teleconference.

Joining me today is Chairman, President and Chief Executive Officer, Don Washkewicz, and Executive Vice President and Chief Financial Officer, Tim Pistell. As usual just let me address a couple of administrative matters prior to beginning with the actual earnings release.

For those of you online, you may follow today’s presentation with PowerPoint slides that have been presented and for those of you not online the slides will be posted on the IR portion of Parker’s website at Second I discuss may I’d like t call your attention to slide two which is the Safe Harbor disclosure on forward-looking statements and ask that if you already done so please take note of this statement in its entirety.

Third moving to slide three, this slide is required, indicates that in cases where non-GAAP numbers have been used they’ve been reconciled to the appropriate GAAP numbers. Moving to the agenda, on slide four, the call will be in four parts today. First, Don Washkewicz, Chairman, President and Chief Executive Officer will provide highlights for the quarter.

Second I’ll provide a review including key performance measures of the quarter and year and concluding with the outlook for fiscal year 2010. The third part of the call will consist of the standard Q-and-A session and the fourth part of the call today, Don will close with some final comments.

At this time, I’ll turn it over to Don and ask that you refer to slide five titled fourth quarter and year-to-date highlights.

Don Washkewicz

Thank you, Pam and welcome to everyone on the call. I want to start with a few comments for the year. I’m going to be focusing on a year not so much on the quarter at this point. Despite a record first quarter of the global recession hit hard in the third and fourth quarters.

Earlier in the year as we saw the early signs of a recession imminent, we established a go forward strategy I want to kind of go over that with you. Our goals were as follows first of all was manage for cash, not ROS. We knew that making the right decisions would have a negative impact on ROS for instance, inventory reductions, reductions of force, restructuring and so forth

We decided that was the best thing to do for the company. We aggressively wanted to manage inventory and working capital. We targeted a 30% MROS, excluding reductions in force, inventory reductions and acquisitions and I’ll give you an update on that in a few moments, and we wanted to cancel or put on the back burner, if you will, all major capital projects that we had in the works.

As a result of those efforts, we generated $1.1 billion in operating cash flow or 11% of sales, and we’re certainly very pleased with that performance on a cash flow basis. Cash flow is particularly strong in the fourth quarter, as we generated $413 million in operating cash, or a record 19% of sales.

For the year, we reduced inventory $240 million and of course, everyone realizes I’m sure that that’s very difficult to do when you have orders going down, cutting inventories is very difficult and does impact the operating results of the company. Our intention is to continue using free cash flow to pay down debt, and in the fourth quarter, we further reduced outstanding debt levels by $311 million bringing our debt to total cap ratio to 35% at year end.

These actions are helping us maintain our strong credit ratings. I’m also pleased that we were able to generate segment operating margins approaching 10% which was our goal for the year and our marginal return on sales for the year was on target as well. Parker employees throughout the world have responded extremely well and their efforts were instrumental in delivering a number of performance highlights for the year and for the fourth quarter.

Looking at the year ahead and based upon current order rates, which are down 38% and those were in the news release, we do not anticipate any near term changes in our markets for this calendar year. We believe unemployment levels will be the key indicator of an economic recovery, and we will get more bullish when unemployment levels start to show improvement.

Reflecting these conditions and the trends in our business, we are initiating guidance for the fiscal 2010 year in the range of $1.25 to $1.75 per diluted share. This range is consistent with our ongoing MROS target on sales.

So with that we’ll go ahead and turn it back over to Pam and give you a little bit more detail.

Pam Huggins

Thanks, Don. I’ll start with more detail on the quarter. Please refer to slide six starting with the earnings per share for the quarter. Earnings per share of $0.31 for the quarter compares to earnings per share of $1.47 for the same quarter a year ago. Included in this $0.31, however, is a inventory gains from LIFO of $0.09, and this is classified in other, below segment operating margin, for reporting purposes.

Also included in the $0.31 is $81 million in inventory reductions during the quarter, and $0.07 in realignment charges for the quarter. The $0.31 earnings per share exceeds the initial guidance due to lower North America and international earnings, partially offset by higher aerospace earnings, lower SG&A expenses that is the result of the execution of a strong budgetary control environment and lower taxes.

Marginal return on sales was 32% of the decline in revenue and includes the effect of acquisitions, inventory reductions and realignment. The full year earnings per share decreased 43% to $3.13. That’s from $5.53 a year ago.

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