Parker-Hannifin Corporation (PH)

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Parker-Hannifin Corporation (PH)

F3Q10 (Qtr End 31/03/10) Earnings Call Transcript

April 20, 2010 9:00 am ET

Executives

Pam Huggins – VP and Treasurer

Don Washkewicz – Chairman, President and CEO

Tim Pistell – EVP and CFO

Analysts

Joel Tiss – Buckingham Research

Jamie Cook – Credit Suisse

Eli Lustgarten – Longbow Research

Alex Blanton – Ingalls & Snyder

Henry Kirn – UBS

David Raso – ISI Group

Ann Duignan – J.P. Morgan

Jeff Hammond – KeyBanc Capital Markets

Steve Volkmann – Jefferies & Co

Robert McCarthy – Robert W. Baird

Terry Darling – Goldman Sachs

Presentation

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Parker Hannifin Corporation earnings release teleconference. My name is Lacy and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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, Lacy. Good morning, everyone. This is Pam Huggins speaking. I'd like to welcome you to Parker Hannifin third 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 Officer, Tim Pistell.

Please allow me as usual to address a couple of administrative matters prior to beginning with the actual earnings release. First for those of you online, you can follow today's presentation with a 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 phstock.com.

Second, as is customary, I would call your attention to slide number two which is the Safe Harbor disclosure and forward-looking statement and that if you haven't also done so, please take note of this statement. 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 their appropriate GAAP numbers.

Moving to the agenda on slide number four, the call will be in four parts today. First Don, Chairman President and Chief Executive Officer will provide highlights for the quarter. Second, I'll provide a review including key performance measures of the third quarter concluding with a revised outlook for fiscal year 2010.

The third part of the call will consist of the standard Q&A session and the fourth part of the call today, Don will close with final comments. At this time, I'll turn it over to Don and ask that you refer to slide number five titled third quarter fiscal year 10 highlights.

Don Washkewicz

Thanks, Pam and welcome to everyone on the call. I want to start with a few highlights to the quarter. First, our results in the third quarter demonstrate that the actions taken over the past year to restructure operations are paying off and more importantly give us greater confidence that a global economic recovery is in fact underway.

We have now been able to demonstrate sequential improvement in revenues and earnings for three consecutive quarters and although the comparisons are against our performance on a weak economy a year ago, this quarter we generated positive year-over-year comparisons in revenues and earnings.

On the demand side, our total order rate show increases both sequentially and on a year-over-year basis which is again an indication that the recovery cycle is underway. Importantly, we are seeing positive trends across a broad range of markets and geographies and I'll touch on those a little bit later in this broadcast.

These are certainly indications of growth for the immediate term. Our plan is to continue to drive strong margin performance targeting at 30% MROS, generate positive cash flow as we prepare for growth and they continuing serving certainly our customers globally.

I am pleased to report that our results indicate that we are well on our way to exceeding many of our objectives, just a few of those are as follows. We generated $841 million in operating cash flow year-to-date or 11.7% of sales which is well above our 10% target.

We achieved this rate despite voluntarily contributing $100 million to the company's pension fund. Our strong cash position afforded the board the flexibility to approve a dividend increase for the 54th consecutive fiscal year, that is of course this year in a difficult environment and there's only a handful of companies that can match this record of increasing dividend for that length of time.

Our balance sheet is strong. Our debt-to-debt equity ratio is now at 29% and on a net basis is 25% and this provides us the capacity to grow the business going forward. I'm also very pleased that we're able to generate total segment operating margins at 11.8% in a very difficult period in the third quarter and reached total segment operating margins of 10.5% year-to-date.

This exceeds our full year goal of 10% and far exceeds our margin performance in the same quarter a year ago. Importantly, our marginal return on sales, MROS and again our target for that has been 30% and the quarter wasn't impressive 51.6% reflecting the results of all the restructuring that we've been doing over the past year.

Parker employees throughout the world have responded remarkably to this downturn and have positioned us very well to benefit from the recovery. Of note, we have now increased our margin performance at the bottom and I just want everyone to pay attention to this.

At the bottom of each of the last three manufacturing cycles so we've increased the bottom in each one of those cycles and also we've raised peak margins at the height of each of the last two expansions and of course, we are on track to do that again when this expansion is fully in place. So, of course, this bodes very well for our outlook in the years ahead.

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