Parker-Hannifin Corporation (PH)

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Parker Hannifin Corporation (PH)

F2Q 2013 Earnings Conference Call

January 18, 2013 10:00 ET


Pamela Huggins - Vice President and Treasurer

Don Washkewicz - Chairman, Chief Executive Officer and President

Jon Marten - Executive Vice President and Chief Financial Officer


Jamie Cook - Credit Suisse

Josh Pokrzywinski - MKM Partners

Alex Blanton - Clear Harbor Asset Management

Mig Dobre - Robert W. Baird

Andy Casey - Wells Fargo Securities

Eli Lustgarten - Longbow Securities

Ann Duignan - JPMorgan Securities

Jeff Hammond - KeyBanc Capital Markets

Nathan Jones - Stifel Nicolaus



Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Parker Hannifin Corp Earnings Conference Call. My name is Stephanie, and I will be your coordinator today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today Ms. Pamela Huggins, Vice President and Treasurer. Please proceed.

Pamela Huggins

Thank you, Stephanie. Good morning, everyone. This is Pam Huggins speaking just as Stephanie said. I’d like to welcome you to Parker Hannifin’s second quarter fiscal year 2013 earnings release teleconference. Joining me today is Chairman, Chief Executive Officer and President, Don Washkewicz; and Executive Vice President and Chief Financial Officer, Jon Marten.

For those of you who wish to do so, you may follow today’s presentation with the PowerPoint slides that have been presented on Parker’s website at For those of you not online, the slides will remain posted on the company’s Investor Information website one year after today’s call.

At this time, if you will reference slide number two in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements. And if you haven’t already done, so please take note of this statement in its entirety. This slide as required indicates that in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers and are posted on Parker’s website again at

To cover the agenda for today on slide number four, the call will be in four parts. First, Don Washkewicz, Chairman, Chief Executive Officer and President will provide highlights for the quarter. Second, I’ll provide a review including key performance measures of the second quarter concluding with the fiscal year 2013 guidance. 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.

So, at this time, I’ll turn it over to Don and ask that you refer to slide number five titled second quarter fiscal year ‘13 highlights.

Don Washkewicz

Thanks, Pam and I just like to extend the Happy New Year to everybody on the call. We certainly appreciate your participation today. Just to make a couple of comments and then we’ll turn it back over to Pam for a little bit more detail on the quarter.

As we explained last quarter, the second quarter traditionally is our weakest quarter, and that’s pretty much how it played out this year as well. Sales were essentially flat year-to-year. However, the real key for the quarter what to remember here, this is kind of if you boil everything down what happened is that the organic growth was down 4% and then that was offset by acquisition growth. So, we were losing some of the higher margin business, because that business was down. And we are picking up acquisition business, which was going through integration phase that our margins are a little bit compressed. And that really explains in a nutshell what happened pretty much in the quarter.

Weakness is still being seen in the industrial international segment and pretty much all regions. December, in particular, was weak from mid month on as number of customers we noted, and this is true both in North America and rest of the world, held back on purchases and shipments. So about mid month, everything kind of stopped in December. In anticipation of a better second half, the earnings guidance for fiscal year 2013 is going to remain the same as we communicated to you last quarter.

Just a couple other comments on the quarter, net income for the quarter as you could see was $181 million or $1.19 per share and that was within the range of the guidance that we provided the last quarter, our guidance was $1.10 to $1.20. So, we are in the range. The year-over-year decline in earnings per share reflected continued weakness in Europe, Asia, and Latin America as I indicated before. And then this number is also a reflection of the R&D investments in our Aerospace business as well as the lower margin during integration and acquisition versus organic growth. So, that was really kind of to sum up the quarter what was happening.

We are continuing to do extremely well on cash flow. As you can see generated $354 million in operating cash flow in the quarter, or 11.6% of sales, so when you compare that to last year, last year was 8.2%, so you can see that we are doing a very good job on cash flow management in the company. We are trying to be proactive during this period to adjust budgets to our outlook for the period ahead. And we’ll discuss this certainly further on the Q&A section if you want to get into that a little bit further as far as other specifics there we are doing in adjusting our cost base so forth in line with our go forward forecast.

I thought it would be good maybe just review some of the interesting, exciting long-term initiatives that we have that’s going to continue to help us grow and drive future growth for the company. We announced three acquisitions in the quarter and that will add about $246 million in annual sales for the company. That makes this year eight acquisitions total that we made, totaling about $0.5 billion in additional sales. Now keep in mind as we said before those will be compressed margins on these businesses until we get them fully integrated we are going to have some integration expense in this early period, but as you can see that will accrue to us additional sales in the future and all of these businesses are very good businesses.

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