Parker-Hannifin Corporation (PH)

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Parker-Hannifin Corporation (PH)

F1Q2013 Earnings Call

October 19, 2012; 11:00 a.m. ET

Executives

Don Washkewicz - Chairman, Chief Executive Officer & President

Jon Marten - Executive Vice President & Chief Financial Officer

Pamela Huggins - Vice President & Treasurer

Analysts

Joel Tiss - BMO

Stephen Volkmann - Jefferies

Eli Lustgarten - Longbow Securities

Mick Dobray - Robert W. Baird

Alexander Blanton - Clear Harbor Asset

Andrew Casey - Wells Fargo

Linda - Credit Suisse

Nathan Jones - Stifel Nicolaus

Jeff Hammond - KeyBanc

Henry Kirn - UBS

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter 2013 Parker-Hannifin Corp earnings conference call. My name is Erica and I will 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 this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Ms. Pamela Huggins, Vice President and Treasurer; please proceed.

Pamela Huggins

Thanks Erica. Good morning everyone. As Erica just said, its Pamela Huggins speaking and I’d like to welcome you to Parker-Hannifin’s first 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 www.phstock.com. For those of you not on the line, the slides will remain posted on the company’s Investor Information website at www.phstock.com, one-year after today’s call.

At this time I would ask that you reference slide number two in the slide deck, which is the Safe Harbor disclosure statement addressing forward-looking statements, and as usual ask, if haven’t already done so, please take note of this statement in its entirety.

On slide three, this slide as required indicates that in cases where non-GAAP numbers have been used, they’ve been reconciled to the appropriate GAAP numbers and are posted on Parker’s website at phstock.com.

Again, 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 first quarter, concluding with the revised 2013 guidance. The third part of the call will consist of the 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 First Quarter Fiscal Year ‘13 highlights.

Don Washkewicz

Thanks Pam and welcome to everyone on the call. We certainly appreciate you joining us today. I just want to make a couple of comments and then we’ll turn it back over to Pam for some additional detail about the quarter.

First of all, our results in the first quarter largely reflect the impact of the continued weakness in international markets and the softness in North America and that’s particularly late in the quarter and I’ll talk about that in a minute here.

Actually I had a plan going into September, so July and August were actually fairly strong months. We are actually ahead of plan than we experienced in September; a lot of cancellations and rescheduling of orders and so forth by many of our OEM customers as they adjusted to current economic conditions. So that’s really what impacted the quarter for the most part. We were ahead and then a lot of these cancellations, rescheduling. We saw a September come in weaker than what we had anticipated.

Considering what happened in these conditions, we have performed well in the quarter or remain cautious about the outlook, especially going into calendar 2013 and I just say it to keep in mind that we are one of the few companies giving guidance into 2013 due to our mid-year fiscal. Our earnings guidance therefore reflects this caution with regard to the global economy in calendar 2013.

Just a few points about the quarter, a little review of the quarter. Our sales were essentially flat with last year at $3.2 billion and they were impacted by a 9% decline in industrial international sales, so you can see where the weakness is coming from; its in our international segment.

This is the third consecutive quarter in which we have reported a year-over-year decline in this segment, largely as a result of recessionary conditions in Europe and moderating growth in Asia. So really Europe was impacted the most and that followed by Asia. That was partially offset by a 5% growth in North America in the quarter.

Currency was negative 3%, while acquisitions contributed 3% and organic sales were essentially flat and that combination resulted in a flat top line for us for the quarter.

Total segment operating margins were 14.4%, which were actually pretty good when you look historically, they were pretty good numbers, in spite of all of the negative segments that we are talking about here and we are again impacted by the industrial international segment, which had operating margins of about 12.9%, while industrial North American margins remained pretty strong at 17.9%. I might just point out that North America margins were better than our full year North American margin last year, which was at 17.2%. So North America performed very well in the quarter.

Net income for the quarter was $239 million or $1.57 per share and that’s a decline of 18% compared with last year’s first quarter and that EPS reflects additional acquisition integration costs and we’ll talk about that in a bit, as well as aerospace R&D expense. I might add there that the additional expense for aerospace was required to keep pace with our customers timelines for several of these new programs that we’ve been working on, that we landed over the last couple of years, so that’s what impacted the R&D expense. Net cash from operations was slightly negative driven by a $226 million discretionary contribution to the pension plan and this anticipated change was announced previously.

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