Parker-Hannifin Corporation (PH)

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Parker-Hannifin Corporation (PH)

F2Q10 Earnings Call

January 19, 2010 10:00 am ET

Executives

Pam Huggins – Vice President, Treasurer

Donald Washkewicz – Chairman, President, Chief Executive Officer

Timothy Pistell – Executive Vice President, Chief Financial Officer

Analysts

Jamie Cook – Credit Suisse

Nigel Coe – Deutsche Bank Securities

Andrew Casey – Wells Fargo Securities

Eli Lustgarten – Longbow Securities

Alex Blanton – Ingalis & Snyder

[Robert Cornell – Barclays Capital]

[Mark Cosmeric – Cleveland Research]

David Raso – ISI Group

Ann Duignan – J. P. Morgan

Jeffrey Hammond – Keybanc

Robert McCarthy – Robert W. Baird

Presentation

Operator

Welcome to the Parker Hannifin Corporation’s second quarter 2010 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Pam Huggins, Vice President and Treasurer.

Pam Huggins

Good morning everyone. It’s Pam Huggins speaking. I hope we can get through this call today. We just had a power outage here, a general power outage not Parker specifically so we’re hoping that we make it through the call.

I would like to welcome you to Parker Hannifin’s second quarter fiscal year 2010 earnings release teleconference. Joining me today is Chairman, President and Chief Executive Officer Don Washkewicz and Executive Vice President and Chief Financial Tim Pistell.

As usual, I need to address a couple of administrative matters prior to beginning with the actual earnings release. First, for those of you online you may follow today’s presentation with the power point slides that have been presented and for those of you not online, the slides will be posted on the IR portion of Parker’s web site at ph.com.

Second, as customary, I’d like to call your attention to Slide 2 which is the safe harbor disclosure on forward-looking statements and ask that if you haven’t already done so, please take note of this statement in its entirety.

Third, moving to Slide 3, this slide is required and indicates in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers.

Moving to the agenda on Slide 4, the call will be in four parts today. First, Don Washkewicz, Chairman, President and Chief Executive Officer will provide highlights on the quarter. Second, I’ll provide an overview including key performance measures of the second quarter, concluding with the revised outlook for fiscal year 2010.

The third part of the call will consist of our standard Q&A session and for the fourth part of the call today, Don will close with some final comments. At this time I will turn it over to Don and ask that you refer to Slide 5 titled Second Quarter Fiscal Year 10 highlights.

Donald Washkewicz

Thank you Pam and welcome to everyone on the call. I want to start with just a few highlights for the quarter.

First, our results in the second quarter demonstrates that the actions taken over the past year to restructure our operations in response to the severe recession are certainly paying off. While our comparisons to the prior year are still negative, comparing our performance to the first quarter of this fiscal year shows significant improvements across many measures.

In particular, our margin performance this quarter and our cash flows are very strong. On the demand side, we’re beginning to see signs that we believe to be a recovering end market demand. We are monitoring orders across all of our markets and are proceeding cautiously.

Early indications are that the early signs of a recovery are coming from multiple regions and a range of markets, and I’ll give you a little bit of a color on that a little bit later in the call. These are certainly good indications for future growth.

Our near term objectives remain the same as they have been during calendar year 2009. We want to continue to manage for cash as we have been, maintain a strong balance sheet. We want to target a 30% MROS or incremental on the upside or downside of 10% operating margin. And then of course, we want to prepare for future growth.

I am pleased to report that we are exceeding our objectives. We’ve generated $346 million in operating cash flow in the quarter or 14.7% of sales. For the first six months we are 13.2%. Both of these are well above our 10% target.

For the past 12 months, we have been able to reduce inventory by $336 million. Our intention is to continue to maintain a strong balance sheet. In the past year we have reduced outstanding debt levels by $1 billion. That brings our commercial paper down to above zero right now, and our debt to equity ratio below 30% at the end of the second quarter. These actions are helping us maintain of course our strong credit ratings and balance sheet.

I’m also pleased that we were able to generate segment operating margins of 10.4%, exceeding our full year goal of 10% and equaling our margin performance in the same quarter a year ago. Our debt to margin return on sales, MROS in the quarter was an impressive 10.6% which far exceeded our target of 30%, and that’s on the down side of course.

Parker employees throughout the world have responded remarkably to this downturn and importantly have positioned us very well to benefit fully from the recovery as it develops. In our markets we continue to see somewhat of a mixed picture, but generally we are witnessing improving trends.

Although order comparisons are easing, we are encouraged that order trends have improved sequentially for the past two consecutive quarters, indicating that the worst is behind us. Regardless, our focus will continue to be managing for cash and maintaining strong margin performance for the foreseeable future, and this will put us in the best possible position to benefit from the recovery.

Reflecting the benefits of restructuring actions and improving market conditions, we are increasing our guidance for fiscal 2010 to the range of $2.40 to $2.80 per diluted share. Our previous range was $1.55 to $2.05 and that’s a mid point of about $1.80. This represents a 44% increase on that midpoint.

I might also draw your attention to the fact that when we started this fiscal year, we started at a guidance of $1.50 at mid point and our current guidance now represents a 73% increase from that starting point. So with that, I’ll turn it back over to Pam.

Pam Huggins

Thanks Don. For more detail on the quarter, reference Slide 6 and I’ll begin by addressing our earnings per share for the quarter. Consistent with what you saw in the press release this morning, earnings per share came in at $0.64 and this compares to $0.96 for the same quarter a year ago.

Read the rest of this transcript for free on seekingalpha.com