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Text: Today's agenda appears on slide three.
We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter.
Following Tom's comments, I'll provide a more detailed review of our first quarter performance, together with the revised guidance for the full year fiscal 2021.
Tom will then provide a few summary comments and we'll open the call for a question-and-answer session.
We plan to end the call at the top of the hour.
Please refer now to slide four, and Tom will get us started.
I hope that you, your family and your friends are all safe and healthy.
So before I go through the quarter results, I wanted to highlight slide four, which is really our strategic positioning slide on one page.
It's how we create value for our customers, our shareholders and our people.
And I'm going to highlight some of these through the course of my remarks in the opening slides here.
But really, the output of all these differentiators is really that last bullet.
It enables us to be great generators and deployers of cash over the cycle, which is a proven strength of ours that has only gotten better over the years.
This list is what sets us apart.
It is what enables us to be a top-quartile company.
Hopefully, a company that you'll want to be a shareholder of.
If you go to slide five.
This is one of those competitive differentiators, which is the breadth of our technologies.
This is a portfolio of 8-motion control technologies that are all interconnected and complementary to each other.
It's how we bring value to customers.
It's how we solve problems for our customers.
Our customers see the value in it, too.
It has 60% of our revenue comes from customers who buy from four or more of these technologies.
So if you go to slide six, we'll talk about the quarter.
It was an outstanding quarter, great results really in the face of unprecedented times.
So starting with the first bullet, something that we take great pride in.
We are a top-quartile safety performance company.
In addition to that, we continue to reduce recordable injuries and incidents by 31%.
Organic decline was 13% year-over-year, but that showed nice improvement versus the prior quarter, which was a 21% decline.
So we are pleased to see the progress there.
EBITDA margin was 19.5% as reported or 20.1% adjusted.
That makes two quarters in a row that we've been greater than 20% EBITDA margins we're excited about, and it was 100 basis point improvement versus the prior year.
We did a great job on debt reduction.
We paid down debt in the quarter of $557 million.
And our cash flow from operations was just an outstanding level at 22.8%.
So I call your attention to a little table at the bottom of the page.
And go to that last row, the total segment operating margin adjusted row.
See, we came in at 19.9% for the quarter.
That was 110 basis point improvement versus the prior year.
Our decrementals were just terrific.
If you look at our decrementals on an adjusted basis with acquisitions, they were favorable, meaning that we had less sales and we had more income versus the prior year.
On a legacy basis, so Parker without acquisitions, again on an adjusted basis, was a 14% decremental.
Just great results by the operating team.
So if we go to slide seven.
The deleveraging progress has been just dynamite.
You can see we paid down $2 billion worth of debt in the last 11 months.
We've now paid off 37% of the LORD and Exotic transaction debt.
And you can see the multiples, whether it's on a gross basis or on a net basis, we continue to make nice progress reducing those leverage multiples.
So we're very proud of that.
Moving to slide eight.
These outstanding results are really underpinned by a couple of factors versus the prior period restructuring that we've done, The Win Strategy and the performance enhancements that it's driving and the speed and agility of our pandemic response.
And just for clarification, when you look at these numbers, these are cost-out actions that represent the savings that are recognized in the year as a result of our pandemic response.
The incremental amount is footnoted at the bottom of this page.
That was $210 million year-over-year incremental.
But the big thing that I want to make a point on this page is the shift to more permanent reductions.
And while we didn't put it on here -- we didn't put Q4.
But if you go back and look at your Q4 notes, we were 90% discretionary, 10% permanent.
This quarter, Q1, we are now 30% permanent and moving to a full year of 60% permanent.
If you just go to that full year section of the page and looking at FY '21, see $175 million discretionary.
It's a little bit less than what we showed you last quarter, primarily because our volume is better, and we didn't need to and act as many of those discretionary type of actions.
Most of our wage reductions have been restored to normal effective October 1, with some minor exceptions in countries where those government support supplementary income or short work weeks, which we've continued.
Permanent actions stayed the same at $250 million, and we're right on track to deliver that.
And really, I think this bodes well when you look at the shift to more permanent actions for the remainder of FY '21, it sets us up very nicely for FY '22.
So if we go to the next slide, we talk about our transformation.
And clearly, I'm going to show you a couple of numbers here.
Hopefully, you're going to believe the company is definitely transformed.
And we'll talk about how, and we'll talk about more importantly where we're going to go in the future.
Next page is on the how portion of it.
It's been a combination of portfolio of things we've done as well as just sheer performance improvements.
And on the performance side, it all starts with the Parker business system, which is The Win Strategy; and two major updates that we've made that you're familiar with, which is really propelling our performance.
We simplified the organization from a structure standpoint.
And we acquired three outstanding companies that were accretive on growth, margins and cash flow.
And they're performing very well during the pandemic.
And I think the best evidence, which is the slide you've seen before is on slide 11, which is the transformation across the last five manufacturing sessions on how we've been raising the floor operating margin.
We wanted to put this slide in again because we've updated it based on the latest adjustments, where we include deal-related amortization in our adjustments.
And we did that through all the prior periods.
So the reported in change, that's in gray, and gold is the adjusted.
And you can see that the improvement now is even more pronounced, 1,100 basis points over this period of time.
And obviously, we intend to keep moving in this direction.
If you go to slide 12.
We're going to talk more about the future now and where we're going.
And it's going to be all around Win Strategy 3.0, which we just recently changed in our purpose statement, which is in that blue box then at the bottom.
Both of these changes have created excitement within the company and an inspiration from our people on that higher purpose that we're all trying to live up to.
Slide 13, where I'm going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate.
I'm going to make a comment on each one of these.
So start with simplification.
You've seen what we've done on structural things, and organization design work continues.
Simplification is going to expand into more 80/20 and Simple by Design.
And of course, you're all familiar with 80/20.
For us, it's still early days with lots of upside.
The Simple by Design is the realization that 70% of your cost is tied up in how you design the product.
And what we want for our company is design excellence and operating excellence.
We want both of those things.
And the way you get design excellence is through Simple by Design.
It's going to have three major buckets that's going to be a complexity assessment of our existing and new designs.
We're going to use four guiding principles on how we design products.
We're going to design with forward thinking.
We're going to design to reduce how we use material.
We're going to design to reuse things that we use across the company.
We're going to design the flow.
And we're going to enable all this with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and knowledgeable fashion.
Second bullet is innovation.
In our stage gate process, we call internally Winovation.
So that's taking an idea to launch for a new product.
And we're making three changes there.
One is in metrics, and that's called PVI, product vitality index, another new metric for most of you be familiar with this.
It's the percent of revenue that comes from new products and things that we've launched and commercialized over the last five years.
We're holding people accountable to that, and we're seeing nice progress.
We've also included two key process changes.
One is new product blueprinting, which is an outside-in orientation for engineers.
So it's spending more time with customers and end users to understand their pain points and their needs so that we design and develop better products to solve those.
And of course, Simple by Design is embedded into the new Winovation as well.
Third bullet is digital leadership.
Now we put this on there before the pandemic but, of course, with the pandemic, this is even more important.
We've got four big areas that when we say digital leadership, we mean four things: digital customer experience; digital products, which would be IoT; digital operations; and then digital productivity.
And digital productivity is where we would do include our data analytics and artificial intelligence.
Next bullet is growing distribution.
We just want to continue the great progress we've been making, especially growing international distribution.
The next one is kaizen and kaizen -- our brand at kaizen is unique.
And it's really combining kaizen; our high-performance team structure, which is how we build the company; our natural work teams; and that ownership that creates in our plants, warehouses and the offices; and the use of Lean.
And I would just tell you that COVID has not slowed us down one second on the use of kaizen.
We are continuing to have the same activity and the same results.
We're very pleased with that progress.
On the acquisition front, we want to be the consolidator of choice and continue to buy great companies like you've seen us do the last several years.
And then underpinning all this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short.
And we're going to roll this out over the next two years, FY '22 and '23.
We've been piled again over the last two years, '20 and '21.
And it's going to replace return on net assets as our annual incentive.
It's going to have three simple components: earnings, revenue and cash.
So it will be easy to explain, easier for our people to understand.
Those three metrics are highly aligned to total shareholder return.
And this will provide a better linkage to our annual performance.
So we feel very excited to continuing the performance changes we've been making and the performance lift we're going to get with 3.0 that the transformation that you've seen is going to continue in the future.
Moving to slide 14.
You probably saw on Monday, we've made -- Monday this week, we made some important organization announcements.
And the first one, the lady that's sitting right next to me is strategically positioned six feet away from me, though.
Cathy Suever is retiring January 1.
This is part of Cathy's long-term plan.
And she has 33 years with the company and 33 great years.
And that everything she's done, she's excelled in, and she basically helped us a tremendous amount.
Whether it was bad times in recessions or good times with expansions, it's been a big part of the Win Strategy.
And her team -- her and her team did what we did in those acquisitions as a huge led by the finance team and really made a big difference for us.
A great example of values and results, and a great example for the rest of our leadership team.
So this is Cathy's last earnings call.
And I could see she's pretty tore up about that.
But she's going out in style because these are fantastic results to do as your last earnings call.
Now succeeding Cathy on slide 15 is Todd Leombruno, and Todd will be our CFO on January one of next year.
I think a lot of you know Todd.
Todd was Investor Relations and knows the company extremely well, 27 years with the company.
He's been a Division Controller, Group Controller, now Corporate Controller.
And he'll be joining Lee and myself in the office as Chief Executive and CFO.
So Todd, if you want to just make a few introductory comments to everybody?
First of all, I just want to say congratulations to Cathy on a wonderful 33-year career with Parker-Hannifin.
We worked so closely and so well together for so many years.
So we wish you nothing but the best in retirement.
And we look forward to hearing all about your retirement and ventures, and we will stay close.
I couldn't be more humbled and appreciative for this opportunity.
We have a fantastic global team, and we are committed to delivering top-quartile performance and continuing the transformation of the company.
And for the investment community, Tom already mentioned this, but I still remember many of you from my time in Investor Relations.
I look forward to reconnecting and also seeing some new faces very soon.
But Cathy is not retiring yet.
I'd like you to now refer to slide 17, and I'll summarize the first quarter financial results.
This slide presents as reported and adjusted earnings per share for the first quarter.
Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales.
Adjustments from the fiscal 2021 as reported results netted to $0.60, including business realignment expenses of $0.12; integration costs to achieve of $0.03; and acquisition-related amortization of $0.63, offset by the tax effect of these adjustments of $0.18.
Prior year first quarter earnings per share were adjusted by a net $0.45, the details of which are included in the reconciliation tables for non-GAAP financial measures.
On slide 18, you'll find the significant components of the walk from adjusted earnings per share of $3.05 for the first quarter of fiscal 2020 to $3.07 for the first quarter of this year.
Despite organic sales declining 13% and total sales dropping 3%, adjusted segment operating income increased the equivalent of $0.09 per share or $16 million.
Decremental margins on a year-over-year basis were favorable, demonstrating excellent cost containment and productivity by our teams.
In addition, we realized an $0.08 increase from lower corporate G&A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Other income was $0.14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales.
Moving to slide 19, we show total Parker sales and segment operating margin for the first quarter.
Organic sales decreased 13% year-over-year.
This decline was partially offset by favorable acquisition impact of 9.1% and currency impact of 0.8%.
Despite declining sales, total adjusted segment operating margin improved to 19.9% versus 18.8% last year.
This 110 basis point improvement reflects positive impacts from our Win Strategy initiatives and the hard work and dedication to cost containment and productivity improvements by our teams.
Moving to slide 20.
I'll discuss the business segments, starting with Diversified Industrial North America.
For the first quarter, North American organic sales were down 14.1%, and currency negatively impacted sales 0.3%.
These were partially offset by an 8.5% benefit from acquisitions.
Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 21% of sales versus 19.4% last year.
This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our Win Strategy initiatives.
Moving to the Diversified Industrial International segment on slide 21.
Organic sales for the first quarter in the Industrial International segment decreased by 7.3%.
This was offset by contributions from acquisitions of 9.1% and currency of 2.9%.
Operating margin for the first quarter on an adjusted basis increased to 19.2% of sales versus 17% in the prior year, an impressive incremental margin of 66.5%.
The teams continue to work on controlling costs and utilizing the tools of our Win Strategy.
I'll now move to slide 22 to review the Aerospace Systems segment.
Organic sales decreased 20.1% for the first quarter partially offset by acquisitions, contributing 10.8%.
Significant declines in the commercial businesses, both OEM and aftermarket, were partially offset by higher sales in both military OEM and military aftermarket.
The diversity of our aerospace portfolio, which includes business jets, general aviation and helicopters, is providing some additional balance against the current market pressures.
Operating margin for the first quarter was 18.1% of sales versus 20.4% in the prior year for a decremental margin of 43.5%.
Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes.
On slide 23, we report cash flow from operating activities.
Cash flow from operating activities increased 64% to a first quarter record of $737 million and an impressive 22.8% of sales.
Free cash flow for the current quarter was 21.5%.
And with a drop in net income of just $17 million, the free cash flow conversion from net income jumped to 216%.
This compares to a conversion rate of 118% last year.
The teams remain very focused and effective in managing their working capital and consistently generating great cash flow.
Moving to slide 24, we show the details of order rates by segment.
Total orders decreased by 12% as of the quarter ending September.
This year-over-year decline is a consolidation of minus 11% within Diversified Industrial North America, minus 4% within Diversified Industrial International and minus 25% within Aerospace Systems orders.
Just a reminder that we report the Aerospace Systems orders on a 12-month rolling average.
Looking ahead, the updated full year earnings guidance for fiscal year '21 is outlined on slide 25.
Guidance is being provided on both an as-reported and an adjusted basis.
Based on our current indicators, we have revised our outlook for total sales for the year to a year-over-year decline of 3.5% at the midpoint.
This includes an estimated organic decline of 7.3%, offset by increases from acquisitions of 2.8% and currency of 1%.
This calculated the impact of currency to spot rates as of the quarter ended September 30, 2020, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year '21.
Please note our revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing COVID infections.
You can see the forecasted as-reported and adjusted operating margins by segment.
At the midpoint, total Parker adjusted margins are now forecasted to increase 30 basis points from prior year.
For guidance, we are estimating adjusted margins in a range of 19% to 19.4% for the full fiscal year.
For the below-the-line items, please note a significant difference between the as-reported estimate of $400 million versus the adjusted estimate of $500 million.
In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101 million pre-tax or $76 million after tax that will be recognized as other income.
Since this is an unusual onetime item, we plan to remove this gain as an adjustment to our adjusted earnings per share.
The full year effective tax rate is projected to be 23%.
For the full year, the guidance range for earnings per share on an as-reported basis is now $9.93 to $10.53 or $10.23 at the midpoint.
On an adjusted earnings per share basis, the guidance range is now $11.70 to $12.30 or $12 even at the midpoint.
The adjustments to the as-reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the full year fiscal '21.
Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year '21.
Also included in the adjustments to the as-reported forecasts are integration costs to achieve of $18 million.
Synergy savings for LORD are projected to be an additional $40 million, getting to a run rate of $80 million by the end of the year.
And for Exotic, we anticipate a run rate of $2 million savings by the end of the year.
Acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year.
Some additional key assumptions for full year 2021 guidance at the midpoint are sales are now divided 48% first half, 52% second half.
Adjusted segment operating income is split 46% first half and 54% second half.
Adjusted earnings per share first half, second half is divided 45%-55%.
Second quarter fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint.
And this excludes $0.63 or $106 million of projected acquisition-related amortization expense, business realignment expenses and integration costs to achieve, offset in part by the gain on real estate of $0.59 or $101 million.
On slide 26, you'll find a reconciliation of the major components of the revised fiscal year 2021 adjusted earnings per share guidance of $12 even at the midpoint compared to the prior guidance of $10.30.
The teams outperformed our original estimates, beating the first quarter's guidance by $0.92.
With this performance and our continuing efforts to control costs, we are raising our estimated margins, which will in turn generate $0.81 of additional segment operating income over the next three quarters.
This calculates to an estimated decremental margin of 11.4% for the year.
Other minor adjustments to below operating income line items reduces our estimate by a net $0.03.
All in, this leaves $12 even adjusted earnings per share at the midpoint for our current guide for fiscal '21.
So the portfolio, our motion control technologies, gives us a clear competitive advantage versus our competitors.
We continue to transform it with the three acquisitions, and we really feel strongly with the Win Strategy 3.0 in our purpose statement that our best days are ahead of us.
And with that, I'll hand it over to Sonia to start the Q&A.

user
parker-hannifin q1 adjusted earnings per share $3.07.
q1 adjusted earnings per share $3.07.
sees fy earnings per share $9.93 to $10.53.
sees fy 2021 earnings per share of $11.70 to $12.30 on an adjusted basis.

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