Parker-Hannifin Corporation (PH)

PH 
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Parker Hannifin Corporation (PH)

Q2 2012 Earnings Call

January 20, 2012 10:00 am ET

Executives

Donald Washkewicz – Chairman, President, Chief Executive Officer

Jon Marten – Executive Vice President, Chief Financial Officer

Pamela Huggins – Vice President, Treasurer

Analysts

Jamie Cook – Credit Suisse

Jeff Hammond – KeyBanc

Joel Tiss – Buckingham Research

David Raso – ISI Group

Robert McCarthy – Robert W. Baird

Alex Blanton – Clear Harbor Asset Management

Terry Darling – Goldman Sachs

Ann Duignan – JP Morgan

Presentation

Operator

Good day ladies and gentlemen and welcome to the Second Quarter Fiscal Year 2012 Parker Hannifin Corporation Earnings conference call. My name is Jasmine and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. 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. Pamela Huggins, Vice President and Treasurer. You may proceed.

Pamela Huggins

Thank you very much, Jasmine. Good morning, everyone. This is Pam Huggins speaking. I’d like to welcome you to Parker Hannifin’s second quarter fiscal year 2012 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 can follow today’s presentation with the PowerPoint slides that have been presented on Parker’s website at www.phstock.com. And for those of you not online, the slides will remain posted on the Company’s investor information website at the same location one year after today’s call.

At this time, reference Slide No. 2 in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements; and again, if you haven’t already done so, please take note of this statement in its entirety.

Slide No. 3, as you know, this is required and indicates that in cases where non-GAAP numbers have been used, they have been reconciled to the appropriate GAAP numbers and again are posted on Parker’s website.

To cover the agenda for today on Slide No. 4, the call will be in four parts. First Don, 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 and conclude with the fiscal 2012 guidance. The third part of the call will consist of our standard Q&A session and 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 No. 5, titled Second Quarter Fiscal Year ’12 Highlights.

Donald Washkewicz

Thanks, Pam, and welcome to everyone on the call. To start the call, I’d just like to take a moment to point out some of the highlights for the quarter. First of all, just to make the overall comment that we had just an outstanding quarter for the Company, not only an outstanding quarter but an outstanding first half for the Company, so we’re pretty excited about that. We did some demand moderating this quarter, which is what we anticipated. We had a December meeting with the investors in New York and we talked about that a little bit, especially as it pertains to our international business; so what’s materializing is pretty much what we had seen building over the last several months.

However, we’re certainly pleased to announce a number of second quarter records for the Company, and I’ll just kind of highlight a few of those for you here. We had record sales, net income, and diluted earnings per share, and those were all second quarter records for the Company. Total segment operating margins were also second quarter record at 14.2%. Keep in mind that the second quarter in our fiscal year – not just this fiscal year but in any fiscal year – is typically our worst quarter, and we’ve continued to remind everybody of that. This year was no different, but to come in with 14.2%, we’re pretty excited about those kind of numbers, being able to post those in one of the toughest quarters that we have in our fiscal year.

Again, those—that margin, the 14.2, was really driven by an outstanding performance in our industrial North American operations, and they came in with 16.5% operating margin so well above our 15% target. The other thing I would note is that virtually all our sales growth in the quarter was organic, very little in there for acquisitions, so it was virtually all organic growth. Orders increased, as you had seen in the press release, about 3% and have moderated. Again, at the beginning of this fiscal year, we pretty much predicted this, that the first half was going to be strong and the second half was going to be kind of single digit growth numbers, and that’s pretty much what’s materializing. Now, albeit the mix is a little different; we didn’t expect North America to be quite as strong. We didn’t expect international to be as weak as it is, but we had some offset there but all in all, we’re pretty much doing what we anticipated to be doing for this fiscal year.

The backlog for the quarter—ending backlog was up 4% compared with the same quarter a year ago, so we do have a build in backlog which is a positive note. Operating cash flow remains strong at 9% of sales, and we certainly like that number. I know there will be discussions about acquisitions, and we can talk about that more. We’re at pretty much various stages with regard to acquisitions on a number of acquisitions. We don’t forecast acquisitions; we don’t predict acquisitions because we never know when we’re going to get them to finish line. But as it is right now, there is a number that we are in negotiations with and hopefully some of these will close before the end of the year. So that would be a positive going forward.

We have acquired about 20 million in incremental sales this fiscal year so far, in addition to the buyout of a joint venture that we had in China. Yesterday, we announced an offer to buy out the remaining shares of Taiyo Limited of Japan, and we’ve been a majority shareholder there since about 2006.

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