I recently introduced readers to Parker-Hannifin Corporation (NYSE:PH), Emerson Electric Co. (NYSE:EMR), and 3M Co. (NYSE:MMM) in the context of helping you achieve and improve your retirement. I also recently covered Parker-Hannifin's most recent earnings miss and explained why long-term investors shouldn't worry about it. Today, I'd like to focus your attention on an excellent but often underutilized investment tool -- the quarterly conference call. What we learn from these calls can better help you get to know this company and better understand why it deserves a spot on your dividend growth radar.
This was a transition year for Parker-Hannifin
"The significance of this year was that we were able to complete the largest series of restructuring efforts in our history and still deliver strong operating performance that we projected going into the fiscal year. This positions us extremely well heading into fiscal 2015, and sets us up for a continued excellent performance beyond that, and I'm talking about especially into 2016, considering the additional restructuring that we're undertaking."
-- Chairman, CEO, and President Donald E. Washkewicz
Washkewicz highlighted the company's restructuring because expenses and writedowns associated with it are the reason the company missed its latest earnings by 4.3%. Adjusted for these expenses, the company missed by just a penny a share and notched 15.7% earnings growth compared with the same quarter last year.
This form of restructuring is vitally important to Parker-Hannifin and its industrial peers. Remaining flexible and adaptable has been key to this 96-year-old company's impressive growth track record, and it will continue to be so in the coming decades.
Parker-Hannifin is able to grow even in difficult market conditions
"We witnessed slow economic conditions early in the year but saw improvement as the year progressed. We were able to deliver record sales in this slow growth environment. We also experienced increased year-over-year growth in orders for every quarter in fiscal year 2014."
The "slow growth environment" refers to the company's ability to grow revenue just 1.5% this year, even as it reported 9.7% growth in earnings per share.
In a transitional, restructuring year, this kind of margin expansion is impressive and bodes well for the company going forward. That's especially true given management's optimism regarding the next two years, when the company hopes to experience faster top-line growth that will help continue fueling expansion of both earnings and the dividend payout.
That brings us to the next quote -- perhaps the most important one for long-term dividend growth investors.
Parker-Hannifin continues is dividend growth streak
"[W]e have increased ... the dividend 7% this year, and that extends our long-standing dividend increase record to 58 consecutive fiscal years."
The fact that Parker-Hannifin was willing and able to raise its dividend by 7% during what was a "slow growth" year is both a testament to management's commitment to returning cash to shareholders and the company's sound financial footing. For example, the 27% payout ratio means that Parker's dividend growth record isn't likely to be at risk, even should global economic conditions worsen. And they could, considering the IMF has reduced its 2014 global growth projections by 11% relative to its April projections.
Growth in Parker-Hannifin's dividend is also more likely thanks to the company's solid balance sheet. The company has $2.2 billion in cash compared with $2.3 billion in debt and generates $1.3 billion in annual levered free cash flow, a figure that takes interest payments into account. In addition, the company sports a current ratio -- a measure of a company's short-term liquidity -- of 1.87. Finally, the company's debt-to-EBITDA ratio is a low 1.18, which compares very favorably with the industry average of 4.29. (EBITDA stands for earnings before interest, taxes, depreciation, and amortization.) In fact, Parker-Hannifin's EBITDA can cover its annual interest payments an impressive 24 times over.
Parker's ratio, strong free cash flow, and superb EBITDA-to-interest ratio mean that, even should credit markets seize up, as was the case in 2008-2009, the company would be able to continue to function normally and even pay and grow the dividend, as it did during the Great Recession.
Parker-Hannifin is an efficient cash-generating machine
"Segment operating margins were strong at 14.5%, or 15% when adjusted for restructuring, and, of course, as you know, 15% has been our target for some time. So we're leaving this fiscal year at a pretty nice level here. Operating cash flow was also a quarterly record at just over $500 million, or 16% of sales. Once again, we're in an excellent position entering the new year."
Not only is Parker-Hannifin highly profitable in the sectors it competes in -- a sign of strong pricing power and a durable competitive advantage -- but the company is also efficient at turning sales into operating cash flows. In fact, for the full fiscal year, the company's operating cash flow was 10.5% of sales, marking the 13th consecutive year that this important metric was at or above 10%.
What's more, this past quarter's superb 16% sales-to-operating cash flow conversion rate indicates that management's restructuring efforts are working and the company's cash flows going into next year are likely to be even stronger. That bodes well not only for the likelihood that Parker will continue its stellar dividend growth streak, but also for accelerating that rate of growth.
Market conditions are improving
"DSI, or days sales of inventory, came in at 61 days, and this is a five-day improvement sequentially versus the third quarter, and inventory now is 10.4% of sales. This is an all-time record for Parker and an improvement versus last quarter, where inventory as a percent of sales was 11%."
-- Vice President and Treasurer Pamella Huggins
Days sales of inventory is an important metric for investors to keep track of for industrial companies because the trend can tell you how efficient a company is at managing its inventory and exposes potential slowdowns in market conditions. If the DSI is rising, it can be a sign of slowing sales, or it can signal that management is misallocating cash by buying more inventory than its customers want. A falling DSI can either mean sales are picking up or the company is underinvesting in inventory, which can hurt future sales growth.
In this case, management is seeing sales growth accelerating, which a good sign for investors. Of course, with the potential for a global economic slowdown, DSI is something Parker-Hannifin investors should watch closely going forward. But at least this quarter's numbers indicate improving conditions for the company.
The quarterly conference call may initially seem intimidating, sometimes packed full of industry-specific jargon and confusing concepts. However, it's an invaluable resource for learning more about the companies and industries you invest in and count on to grow your long-term wealth. In this case, these five quotes show that Parker-Hannifin is indeed doing well and seeing improving market conditions in the industries it operates in. This bodes well for earnings and dividend growth going forward, as long as global economic growth doesn't continue to slow.