Parker-Hannifin Corporation (PH)

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Parker Hannifin Corporation (PH)

F1Q2011 Earnings Call Transcript

October 19, 2010 10:00 am ET

Executives

Pam Huggins – VP & Treasurer

Don Washkewicz – Chariman, CEO and President

Tim Pistell – EVP, Finance & Administration and CFO

Analysts

Andy Casey – Wells Fargo Securities

Joel Tiss – Buckingham Research Group

Jeff Hammond – KeyBanc Capital Markets

Nigel Coe – Deutsche Bank

David Raso – ISI Group

Bob Cornell – Barclays Capital

Ann Duignan – JPMorgan

Alex Blanton – Ingalls & Snyder

Stephen Volkmann – Jefferies & Co.

Eli Lustgarten – Longbow Research

Jamie Cook – Credit Suisse

Henry Kirn – UBS

Terry Darling – Goldman Sachs

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2011 Parker Hannifin Corporation earnings conference call. My name is Michael 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. 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 conference, Ms. Pam Huggins, Vice President and Treasurer. You may proceed.

Pam Huggins

Thanks, Michael. Good morning, everyone. I’d like to welcome you to Parker Hannifin’s first quarter fiscal year 2011 earnings release teleconference. Joining me today is Chairman, Chief Executive Officer and President, Don Washkewicz; and Executive Vice President and Chief Financial Officer, Tim Pistell.

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 Web site at www.phstock.com. For those of you not online, slides will remain posted on the company’s Investor Information Web site for one year after today’s call.

At this time, reference slide #2 in the slide deck which is the safe harbor disclosure statement addressing forward-looking statements. If you haven’t already done so, please take note of this statement in its entirety.

Moving to slide #3, 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 Web site, again www.phstock.com.

To cover the agenda for today, on slide #4, 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 first quarter, concluding with a revised fiscal year 2011 guidance. The third part of the call will consist of the standard question-and-answer session. And for 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 #5. It’s titled ‘First Quarter Fiscal Year 2011 Highlights.’

Don Washkewicz

Thanks, Pam, and welcome to everyone on the call. To start off what I thought what I would do is take a couple minutes here and just highlight some of the significant records that we achieved this quarter, and as you’ve already seen, we’ve had an outstanding quarter for the company.

Just running down some of the records, diluted earnings per share at $1.51, and the significance of that was that it was an all-time quarterly record for the company, and when I say all-time record, that goes back 92 years. So, pretty spectacular performance from an earnings per share level.

Total segment margins of 15.5%. Industrial North America margins at 17.8%, and international margins on the industrial side of 16.8%. These were all records, again going back in the 92 year history of the company for any particular quarter.

Additionally our first quarter return on sales of 8.7% was a first quarter record. We just missed all time record there. The highest quarter we’ve ever had in the history of the company was 8.9%, just a couple tenths off. So we’re pretty excited about that kind of performance at this point in the cycle.

It’s certainly evident; I think to everyone that the hard work that we’ve completed during the downturn and our ongoing execution of the Win Strategy is certainly what’s happening to drive these margins to these higher levels.

I might point out one other thing and that is in fact we’re achieving these records despite being above 90% of the volume levels that we were at our fiscal 2008, which was our all time record high for earnings.

And in 2008, you may recall we did about $12.1 billion in sales, and that’s without acquisitions. We had about $0.5 billion worth of acquisitions, which would bring it to about $12.6 billion. So when we’re comparing year-to-year, we’re comparing a 2008 year of $12.6 billion to where our guidance is going to guide it to somewhere above $11 billion. So we’re about 10% lower on overall sales, and we’re hitting these record levels at that sales level, which I think is pretty spectacular for the company.

It probably will be a little clearer now as we explained in the last quarter at the beginning of our fiscal year, why we budget the way we do. We budget tight budgets at the beginning of the year because we don’t want to assume that we’re going to have a fantastic year and start spending like we’re having a fantastic year, before it actually develops.

And just like we do with guidance, we have an opportunity every quarter to adjust budgets, if need be, and just like we adjust guidance as the year goes on. So hopefully that’s a little clearer now, that we’ve gone through our first quarter, so you get a better feel for why we budget the way we do.

Just a couple additional orderly highlights, we had another strong quarter in order rates with all segments showing positive comparisons in a 29% increase in total orders for the company, which is extremely good, extremely strong, and this activity pretty much supports our updated guidance that we’ve just given you.

Sales were strong, increasing 26% from prior year quarter with pretty much all of that growth organic. Conditions across most of our markets continues to improve, and we’ll touch on some of those market segments a little bit later, give you a little more color on that. And pretty exciting numbers here, net income more than tripled from the prior year quarter; again a very, very outstanding performance on the bottom line.

We continue to generate top quartile cash flows relative to our peer group. In the first quarter, we took the opportunity to use our strong cash position to make a $200 million discretionary contribution to our pension plan, and as a result, the reported cash flow to sales was 4.3%, but in fact if you exclude that discretionary contribution, we generated 11.4% cash flow, which again puts us in the top quartile of our peer group.

When we look ahead to the full fiscal year 2011, we have increased our guidance for earnings from continuing operations to the range of $5.20 to $5.80 per diluted share. And that’s up now about a $1.50 on nominal, nominal from last quarter’s guidance was $4, and were going up to nominal here of $5.50, so we are up about $1.50 per diluted share, and that represented 38% increase from the midpoint of our previous guidance, and a 62% increase year-over-year.

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