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Parker Hannifin (PH)

Q2 2011 Earnings Call

January 20, 2011 10:00 am ET


Donald Washkewicz - Chairman, Chief Executive Officer and President

Jon Marten - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance & Administration

Pamela Huggins - Vice President and Treasurer


Stephen Volkmann - Jefferies & Company, Inc.

Jeffrey Hammond - KeyBanc Capital Markets Inc.

Henry Kirn - UBS Investment Bank

Alexander Blanton - Ingalls & Snyder

Terry Darling - Goldman Sachs Group Inc.

Mark Koznarek - Cleveland Research

Andrew Casey - Wells Fargo Securities, LLC

Eli Lustgarten - Longbow Research LLC

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Robert McCarthy - Robert W. Baird & Co. Incorporated

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Jamie Cook - Crédit Suisse AG

Nigel Coe - Deutsche Bank AG



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Parker Hannifin Corporation Earnings Conference call. My name is Katelyn and I will be your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today, to Ms. Pam Huggins, Vice President and Treasurer. You may proceed.

Pamela Huggins

Thank you, Katelyn. Good morning, everyone. This is Pam speaking just as Katelyn said. I'd like to welcome you to Parker Hannifin’s Second Quarter Fiscal Year 2011 Earnings Release Teleconference. Joining me today is Chairman, Chief Executive Officer and President, Don Washkewicz; and for the first time, 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 For those of you not online, the slides, they’ll remain posted on the company's Investor Information website, again at, and they'll be on there for one year after today's call.

So at this time, if you'll reference Slide #2 in the slide deck, this is the Safe Harbor disclosure statement addressing forward-looking statements. No different from prior quarters. If you haven't already done so however, please take note of this statement in its entirety. 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 website.

To cover the agenda for today, on Slide #4, the call will be in four parts, as usual. 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 second quarter concluding, of course, with what you're most interested in, which is the revised 2011 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 #5 titled Second Quarter Fiscal Year '11 Highlights.

Donald Washkewicz

Thanks, Pam, and welcome to everyone on the call this morning. I'd like to start off by pointing out that this is Jon Marten's first call as Chief Financial Officer of the company, and we're very excited to have him participate in this meeting this morning. Jon has been with Parker for 24 years and has distinguished himself as a leader within our organization with extensive experience throughout our operations. Jon also has worked closely with our senior leadership team, which has prepared him well for this next step. He is very much looking forward to meeting many of you in the coming months. And as I understand it, Pam will be introducing Jon to many of you in their travels this coming month.

So to start the call, I'd like to take a moment to point out some of the highlights of the quarter. Maybe just an intro comment, I think we had just an outstanding quarter for the company. We set quite a few records. I'll cover some of those with you now. Sales were a second quarter record and increased 22% from the prior year quarter. Orders increased 29%, indicating that the economy continues its recovery across many markets. You can see obviously that we're building backlog and that 29% is greater than the 22% increase in sales in the quarter, so that bodes well for the future. Also, a little later in the call, I'll touch on some of the markets and what we are seeing in some of the various markets and regions around the world.

Net income was a second quarter record at $232 million and it really basically doubled compared with last year's second quarter. And diluted earnings per share was a record as well at $1.39 and well ahead of our expectations. I want to point out that we are achieving these records on lower volume levels than we did in fiscal 2008 when sales peaked. And so obviously, all the hard work over the past two years is really paying off for the company.

Total segment margins were 14%, which is as well that's very strong for us, a very strong performance, especially considering that the December quarter is traditionally a weaker quarter, actually, our weakest quarter typically from a margin perspective. So in a second quarter, to come in with 14%, we're pretty ecstatic about those margins. Industrial North America margins were strong at 15.2%, as were Industrial International margins at 14.6%. And we are also pleased to see Aerospace margins improve significantly from last quarter and reach 13.8%. Now those on the call that have been on the call last couple of calls may recall that the last quarter's call, we said that Aerospace had bottomed and certainly, these numbers would indicate that it has and it's on its upward climb here. So we're feeling pretty good about Aerospace going forward.

Our cash flow remains strong, at 7.2% of sales, and excluding a discretionary contribution of $200 million in the first quarter, year-to-date operating cash flow is at 10.7% of sales and that exceeds the company's target of 10% So again, very, very nice performance for the company. During the quarter, we completed one acquisition and that's in addition of two we did last quarter. And we certainly have more opportunities in the pipeline that we're looking at. And as you know, we don't forecast acquisitions but we are certainly actively pursuing them and pursuing strategic opportunities going forward. We're certainly very pleased that we performed so well in what has historically been a seasonally weak quarter for the company.

Looking ahead to the full fiscal year 2011, we have increased our guidance for earnings from continuing operations to a range of $5.80 to $6.20 per diluted share, and that gives you a $6 midpoint. And that number represents a 9% increase from the midpoint of our previous guidance and a 76% increase year-over-year. So pretty nice improvement as we go forward. Again, I've told you from the beginning that what we'll do is we'll continue to update these numbers as we go forward. As we see things developing out in the marketplace, we'll give you a new look at what our guidance is and what we think we're going to do for the year.

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