Parker-Hannifin Corporation (PH)

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Parker-Hannifin Corp. (PH)

F1Q10 Earnings Call

October 20, 2009 10:00 a.m. ET


Pam Huggins - VP, Treasurer

Don Washkewicz - Chairman, CEO and President

Tim Pistell - EVP


Joel Tiss - Buckingham Research

Eli Lustgarten - Longbow Securities

Jamie Cook - Credit Suisse

Andy Casey - Wells Fargo Securities

Ann Duignan - JPMorgan

Henry Kirn - UBS

David Raso - ISI Group

Alex Blanton - Ingalls & Snyder

Jeffrey Hammond - KeyBanc

Robert McCarthey - Robert W. Baird



Good day, ladies and gentlemen. And welcome to the First Quarter Fiscal Year 2010 Parker Hannifin Corp. Earnings Conference Call. My name is Shaniqua and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

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

Pam Huggins

Thank you, Shaniqua. Good morning, everyone. This is Pam Huggins speaking. I would like to welcome you to Parker Hannifin's first quarter fiscal year 2010 earnings release teleconference. Joining me today is Don Washkewicz, Chairman, President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer, Tim Pistell.

Prior to beginning with the earnings release, just let me address a couple of administrative matters. First, for those of you online, you can follow today's presentation with the PowerPoint slides that have been presented, and for those of you not online, the slides will be posted on the Investor Relations portion of Parker's website at

Second, as is customary, I’d like to call your attention to slide number two which is the Safe Harbor disclosure on forward-looking statements and again ask that if you haven't already done so, please take note of this statement in its entirety.

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

And moving to slide number four, the agenda. Again the agenda will be in four parts today. First Don Washkewicz, Chairman, President and Chief Executive Officer will provide the highlights for the quarter. Second, I'll provide a review including key performance measures of the quarter, concluding with a revised outlook for fiscal year 2010. The third part of the call will be our standard question-and-answer 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 first quarter highlights. Thank you.

Don Washkewicz

Thank you, Pam and welcome to everyone on the call. I want to start with a few highlights for the quarter. Our results in the first quarter continue to reflect the impact of the global recession on our business, leading to significant declines in revenues and earnings in the quarter compared to last year. However, we have performed remarkably well, considering the level of the global economic weakness. And we are beginning to see signs that we are at the bottom of the cycle, and that does give us reason to be positive about the future.

Our near-term objectives remain the same as they have been. Number one: is managing for cash. And we have been doing this now for the better part of the year. We want to aggressively manage inventory and working capital, and I'll update you on our progress in these areas in a few moments.

We are targeting a 30% MROS, excluding reductions and force inventory reductions and acquisitions. Our major capital projects of course have been under review and continue to be under review. And our acquisition activity is essentially on hold for the time being.

I am pleased to report that we are achieving our objectives. We generated $260 million in operating cash flow in the quarter or 11.6% of sales and that's well above our 10% cash-to-sales target. For the past nine months, we have been able to reduce inventory by $253 million.

Our intention is to continue using free cash flow to pay down debt. In the first quarter, we further reduced outstanding debt levels by $162 million, bringing our debt to total cap ratio to 32.5% at quarter end. And you may recall last year we were approaching that 40% mark, so we brought it down considerably.

So all of these actions are helping us maintain our strong credit ratings. I'm also pleased that we were able to generate segment operating margins to 9%, which is approaching our full year goal of 10%.

Our marginal return on sales in the quarter was at an impressive 30%, even including the impact of acquisitions, inventory reductions and restructuring, so we're making great progress on an incremental basis.

I'm also very pleased with Parker employees throughout the world, as they continue to manage our Company effectively throughout this severe recession. In our markets, we're seeing a mixed picture with some markets beginning to edge higher sequentially. And although we do not anticipate material changes in our markets before calendar year-end, we are cautiously optimistic that a bottom appears to be forming from a demand perspective.

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 condition to benefit from the eventual recovery.

Reflecting, all of what I've said in these conditions and the trends in our business, we are updating and increasing our guidance for fiscal 2010 to the range of $1.55 to $2.05 per diluted share, and that's up from our previous range of $1.25 to $1.75 per diluted share. This earnings range reflects our expectation that MROS will be a decremental 28% in the first half, but will be a positive 45% in the second half of fiscal 2010.

So with that, I'll turn it back over to Pam for a little bit more detail.

Pam Huggins

Thanks, Don. Turn to slide number six. And I'll begin by addressing the diluted earnings per share for the quarter. As you can see, earnings per share came in for the quarter at $0.45 and this compares to $1.50 for the same quarter a year ago.

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