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Text: Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com.
If you move to Slide 3, you'll see our agenda, we'll begin with Chairman and Chief Executive Officer, Tom Williams, providing some strategic comments and highlights from our second quarter, following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increased to guidance for the remainder of our fiscal year FY '21.
Tom will then provide a few summary comments and will open the call to questions from Tom, we, or myself.
And with that, Tom, I'll hand it off to you.
Now, before I move to Slide 4, I want to make a few opening comments.
Calendar 2020 was an extremely difficult year, to say the least for all of us, both professionally and personally and I hope all of you are staying safe.
Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis.
We've rallied around our purpose, and the one strategy, we've showed that Parker is an exceptional performer, even in the most difficult of environments.
So if you go to Slide 4, one of our key competitive advantages are breadth in motion control technologies.
We're now up to two-thirds of our revenue this -- you heard me talk about this is probably 160% but now the two-thirds of our revenue comes from customers who buy from four more of these technologies.
As these interconnected technologies that enable us to create even more value for our customers and create a distinct competitive advantage versus our competitors.
If you move to Slide 5, we just had outstanding performance in the quarter.
I will run you through some of the highlights.
Top quartile safety performance, we had a 23% reduction in recordable incidents this now makes 75% reduction for the last five years, which has been phenomenal.
Sales decline was 2.5% year-over-year, you can see it was a little over 6% from an organic standpoint this was significantly better than our guidance and about a 50% plus improvement from where we were on Q1.
Q2 was a record net income at $447 million, the EBITDA margin was a little over 23%, as reported or 20.8% adjusted.
You can see the significant improvement versus prior 230 basis points.
Year-to-date cash flow from operations was a record at 20.4% of sales.
And then the table to bottom there has got segment operating margin, both as reported and adjusted basis so I'd call your attention to the adjusted row, 20.4% segment our operating margin adjusted and again a giant increase versus prior plus 230 basis points.
So there's a lot of numbers on this page, we have a lot of companies to track.
So the easy way to remember this is, is the quarter we put up 320's and we happen to highlight them in gold, so greater than 20% EBITDA margin, CFOA margin and segment operating margin, so we're pretty proud of that.
And those are all who create results during the pandemic, so just fantastic job by the whole team.
If you go to Slide 6, we're going to talk about cash flow the cash flow quarter paid down $767 million of debt in a quarter.
If you look at our last 14 months it's $2.8 billion of debt this was a little over half of the acquisition debt, so we took almost organic size, just great progress there.
You see the ratios in the middle of the page there, of significance, if we go back a year ago, we were 4.0 and now we're at 2.7 on a gross debt to EBITDA basis.
And we've now reinstated effective in this quarter Q3 our 10b5-1 share repurchase program.
So I'll move to the next slide, which is our transformation of the company, and hopefully, just the last two slides are indicative of how the company has transformed, but I'd like to give a little more color and context, as to what we're doing.
So if you move to Slide eight, this is our strategy, summary on a page and it's flanked on the left side with why we win, which you've heard me talk about this in the past.
This is a list of our competitive advantages, and I've highlighted those.
So I'm not going to talk about on this really today, but their historical success factors that will continue on into the future.
I want to focus most of the time for my next couple of slides on where we're going and I've got a slide in each one of these bullets, and the output of really this historical success factors on where we're going, is that we want to be a top quartile company, and we want to stand out in the crowd and we think we're doing that.
So we go to Slide 9, the Win Strategy and this is 3.0, this is our business system a pound for pound this has been the most impactful change we've made to-date to the Win Strategy, and it's going to be Win 3.0 and our purpose statement.
There are going to be a powerhouse behind our future performance.
If you go to 10, you've seen our purpose statement enabling engineering breakthroughs that lead to a better tomorrow this is a statement that everybody has really rallied around the foundry inspiration within the company.
It's enabled everyone to connect their efforts to this higher calling, this higher purpose of life and really it helps to answer the question, how can we help through our customers create a better tomorrow.
And I've given what's going on with the coronavirus and the vaccine, Slide 11, is probably a great highlight of our purpose and action and just how essential we are to the vaccine value chain.
The way to read this slide to go left to right, and go in a clockwise fashion, we will start in the upper left hand corner.
So we're in a development and production phase of these vaccines mixing purification filtration and dispensing then you got to get the product moved around, so we are in sterile transfer containers especially designed and then where all of our motion and control technologies are in both air and ground transportation to move the product around the world.
You need to be able to start locally and that requires low temperature refrigeration.
So our refrigeration technologies are at play there.
And then when we administer to the patient, again you need on-premise refrigeration and then stoppers and syringe sales as part of engineered materials offering.
If you move to Slide 12, my last slide from my opening comments, I want to focus on our strategy to grow faster in the market and our proxy for the market is global industrial production growth, which is GIPI, that acronym.
So on the left hand side, it's a series of portfolio things that you've seen us make transforming the portfolio company buying three great companies, $3 billion of acquired revenue we're all accretive on growth, cash margins.
And a matter of fact, as an example, LORD grew mid-single digits last quarter, while the rest of the company, total company grew minus 6%.
On the right hand side, there is a list of organic growth strategies.
And what's interesting about this list with the exception of international distribution, these are all new with Win Strategy 3.0.
So I'm going to make a quick comment on each one.
So strategic positioning is really our effort to focus on stronger divisional strategies, and we have with every division we do three, three a month, and these are extremely productive conversations with our general managers to how they're going to position your division to win versus the competition.
Second, both are an Innovation we made two big changes one is the metric PVI which is product vitality index to measure of new products as a percent of sales looking at a five-year period for new products, and the new product blueprinting, which is that NPB acronym there, is really a change to our ideation process to create better ideas coming into the renovation funnel.
The output of what we're trying to do here is that we want our PBI context the percent of sales to grow by 600 basis points over the next five years and more innovative portfolio, better chances to grow, better margins etc.
And then Simple by Design, I've talked a lot about that.
It's a speed initiative, it's a cost initiative, it's a customer experience initiative, it's a recognition that 70% of your costs are tied up on how you design a product and Simply by Design is all about focusing on design excellence.
So when you put together design excellence with operational excellence, it's a dynamite pairing.
International Distribution is going to continue from the success we've had with 2.0.
Digital Leadership is really a four-pronged attack, digital customer experience, digital products, digital operations and digital productivity and digital productivity is where we have a concerted effort on our official intelligence and debt analytics.
And then lastly, a new incentive plan, our Annual Cash Incentive Plan are acronym ACIP and that's going to focus our divisions and or company on driving growth cash and earnings.
So it's this combination, and it's this combination that's helped us perform better on the top line organically, particular in the current downturn and it will be our catapult to growing fast in the market as we go forward.
So with that, I'm going to hand it back to Todd for more details for the quarter.
I'd like to direct everyone to Slide 14, and I'll just begin summarizing our strong second quarter results.
This slide displays, as reported and adjusted earnings per share for the second quarter, and I'll focus on adjusted earnings per share.
We generated $3.44 this quarter and that compares to $2.98 last year.
If you look at the breakdown of adjustments for the FY '22 or excuse me FY '21, as reported numbers it netted to $0.03 this quarter, and that is made up in the following buckets, business realignment expenses of $0.14, integration cost to achieve of $0.02, acquisition-related amortization expense of $0.62, and as we communicated last quarter, we are adjusting out the gain on the sale of land that amounted to $0.77.
And all-in the net tax impact of all of those adjustments, is $0.02.
Last year, our second quarter earnings per share were adjusted by $1.41, the details of which are included in the reconciliation tables for non-GAAP financial measures.
If you move to Slide 15, this is just a walk from the $2.98 to the $3.44 for the quarter and despite organic sales declining 6% and total sales declining 2.5%, adjusted segment operating income increased by $70 million or $0.11, that equated to $0.42 per share,so very strong operating beat for the quarter.
Detrimental margins on a year-over-basis are favorable, demonstrating the excellent operational execution, robust cost containment by our team members really in every segment and every region.
If you continue on the slide, we had a slight headwind from higher corporate G&A just $0.02, that was a result of market-based adjustments to investment tied to deferred comp.
And as Tom mentioned, our strong cash flow allowed us to pay off a significant portion of debt on a year-over-year basis that reduced our interest expense, that equated to $0.12 for the quarter.
And then if you look at the remaining items, other expense was just $0.01, slightly higher, we had a higher effective tax rate that impacted us by $0.03 and finally slightly higher diluted shares resulted in a $0.02 impact, that's how we get to the $3.44.
If you move to Slide 16.
This is savings from our Cost Out Actions and I know there's been a lot of questions on this, just on, from some of the early reports.
Just a reminder, these represent savings recognized in the year, as a result of our discretionary actions in response to the pandemic and volume declines, plus the savings we realized from our permanent realignment actions taken in FY '20 and also in FY '21.
So if you look at this, our second quarter discretionary savings exceeded our forecast and now amount to $190 million on a year-to-date basis.
We are now forecasting for the full year that discretionary total will increase to $225 million or an increase of $50 million.
The majority of that increase was recognized in the second quarter and roughly amounted to $35 million above our forecast.
Just a reminder, as demand continues to increase and our teams pivot to support growth, we expect these discretionary savings to be lower in the second half.
Permanent actions remain on track.
There is no changes to what we have communicated previously, our full-year forecast will generate savings of $250 million and that will be $210 million incremental.
And we believe, that this will help us generate a strong incremental margins that we have in our guidance for the second half.
If we move to Slide 17, this is just a walk of the total results for the company's our sales and segment operating margin, and as Tom mentioned, organic sales did decline by 6.1% this year.
The decline was partially offset by the contributions from acquisitions, that was 2.6% and currency impact of 1%.
And again, despite these lower sales, total adjusted segment operating margins improved to 20.4% versus 17.9% last year.
This 250 basis point improvement reflects all the positive impacts from our Win Strategy initiatives, the hard work and dedication to cost containment and productivity improvements, as well as savings from those realignment activities, I just spoke off and really performance of the recent acquisition.
So strong execution really across the entire company to get these results.
If we jump into the segments, if you go to Slide 18, looking at Diversified Industrial North America, sales there declined by 5.9%, acquisitions were a plus of 3.1% and currency-only slightly negatively impacted sales.
But again, even with these lower sales our operating margin for the second quarter on an adjusted basis increased sizably to 21.3%, last year it was 18.2%.
So again another impressive 310 basis point improvement, focused on our long-term initiatives around Win Strategy along with the productivity improvements, diligent cost containment actions and really some increased synergies we're seeing out of the LORD acquisitions.
So if we go to the next slide, Slide 19, for Diversified Industrial International, organic sales for the quarter increased by 3.1%, acquisitions added 3.2% and currency accounted for 3.5%, again strong operating performance here, for the quarter, we reached 20.3% of sales versus 16% in the prior year.
And again, same story, Win Strategy initiatives, strong synergy growth and really our teams around the world are rallying together in light of the pandemic.
If we go to Slide 20, and talk about Aerospace Systems' Segment.
And again, what we'll see here is a decline of 20.9% for the quarter, acquisitions helped us by 0.4%, and again, a small currency impact of 0.1% really declines in the commercial business is both in the OEM and aftermarkets and markets were the main impact, these were partially offset by higher sales in both military OEM and military aftermarket sales.
Operating margins for the second quarter was 18% versus last year's 20.2%, this resulted in a detrimental margin of 28.8%, which is in line with our expectations, and really the result of all the previous actions we've taken to realign the Aerospace business to current market conditions, along with strong cost controls and really helping to offset the pandemic imposed to the mix that we're seeing from the commercial and military businesses.
Slide 21, is just some highlights on cash flow.
Tom already mentioned this, but our operating cash flow activities increased 64% year-over-year to a record of $1.35 billion of cash, this is an impressive 20.4% of sales.
Our global teams are really focused on this, very disciplined in managing our working capital across the world, and we're really focused on delivering strong cash flow generation.
If you look at free cash flow, year-to-date, we now move to 19%, that's an increase of 78% versus prior year and our cash flow conversion is now 164% versus 130% last year.
So just strong cash flow performance from the team, very impressive results.
If we want to just focus on orders, real quick moving to Slide 22, our orders came in at flat this year or this quarter I should say and that was really driven by plus 1% and our Industrial North American businesses plus 10% in our Diversified Industrial businesses and minus 18% on a 12 month basis in Aerospace.
So, all-in, we came in flat and that's the first time in seven quarters, I believe that the numbers have been not negative.
If we move to Slide 23, in the guidance, obviously, we have a pretty large guidance increase.
We are now providing this on an as reported and adjusted basis.
And based on the strong performance we just spoke off in the first half, all the current indicators that we see right now we have increased our total outlook for sales to a year-over-year increase of 1.7% at the midpoint,this includes the forecasted organic decline of 3.4%, offset by increases from acquisitions of 2.9% and currency of 2.2%.
And again, just a reminder we've calculated the impact of currency to spot rates based on the quarter ending December 30th and we've held those rates steady as we look through the second half of our fiscal year.
In respect to margins, for adjusted operating margins by segment, at the midpoint we are now forecasting to increase margins 150 basis points year-over-year and that range is expected to be 20.2% to 20.4% for the full year.
And if you note for items below segment operating income, there is a fairly significant difference between the as reported estimate of $388 million and the adjusted forecast of $487 million.
The difference is that land sale that we spoke about that's $101 million pre-tax, $76 million after-tax that was recognized as other income in Q2.
Full-year effective tax rate, no change, we still expect that to be 23%, and for the full year, the guidance range for earnings per share on an as reported basis is now $11.90 to $12.40 or $12.15 at the midpoint and on an adjusted per share basis, the guidance range is now $13.65 to $14.15 or $13.90, at the midpoint.
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 year associated with savings projected from those actions to be $50 million in the current year, and acquisition and integration cost to achieve $50 million of expense.
Synergy savings for the lower acquisition are now projected to reach $100 million, that is an increase of $20 million from our prior stated numbers of $80 million and that is included in our guidance.
Exotic synergies remain are expected to be $2 million for the full year.
Just a reminder, acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year, and some assumptions that we have baked into the guidance here, at the midpoint, our sales are divided 48% first half 52% second half, and both, adjusted segment operating income and adjusted earnings per share is split 47% first half, 53% second half.
For the third quarter of FY '21, we are forecasting adjusted earnings per share to be $3.54 at the midpoint and that excludes $0.57 or $97 million of acquisition-related amortization expense, the business realignment expense and integration cost, we achieved in the quarter.
So if you look at -- move to Slide 24, this is really just the walk from our previous guide to our revised guide.
We had guided at $12 per share last quarter based on the strong second quarter performance, we exceeded our estimates by a $1.6 and we've mentioned this, but the improving demand environment along with the strong operational performance, some additional extended discretionary savings, the permanent restructuring savings, and increased LORD synergies, we feel confident in raising our forecasted margins, which at $0.85 of segment operating income over the next two quarters for the remainder of the fiscal year.
So the majority of this increase is based on operational performance.
This calculated to an estimated incremental margin of 41% for the second half and then some other minor adjustments to the below segment operating income lines are a negative impact of $0.01 and that's a net of interest expense and income tax.
So that's how we get to the $13.90.
That is approximately a 60% increase from our prior guidance.
And just want to wrap things up with these great results don't happen by accident, they're driven by a highly engaged global team.
Our focus on safety, high performance team is lean in Kaizen is driving an ownership culture within the company, hence resulting a top quartile engagement as well as top quartile results.
We talked about the portfolio, it's a big competitive advantage of us at connectivity, the transformation on those three acquisitions is a fact that they're outgrowing and generating more cash and margins on legacy Parker, our performance over the cycle, but we're just reflecting the last 5 years and just use round numbers, our margins are up 500 basis points.
In a five-year period of time that was not just the easiest five-year period of time for industrial companies.
And then our Win Strategy 3.0 in particular in the Purpose Statement are going to be the powerhouse behind accelerating our performance intoo the future.
And Gigi, I'm going to hand it back to you for start the Q&A.

user
q2 adjusted earnings per share $3.44.
increases fiscal 2021 earnings per share guidance midpoint to $12.15 as reported, or $13.90 adjusted.
qtrly orders were flat for total parker.
during quarter, company made debt repayments of $767 million.
outlook for key end markets continues to be uncertain in current environment.
increased guidance for earnings per share to range of $11.90 to $12.40, or $13.65 to $14.15 on an adjusted basis for fy 2021.

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