Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. The company manufactures motion-control and fluid systems and components, serving industrial, mobile, and aerospace markets. Comparisons are with the corresponding 2018 periods unless noted.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 |
|---|---|---|
| Net sales | $3.498 billion, up 0.7% | $6.832 billion, down 1.7% |
| Gross margin | 23.3%, versus 25.0% | 24.4%, versus 25.2% |
| Net income | $204.6 million, down 34% | $543.6 million, down 21% |
| Net income margin | 5.8%, versus 9.0% | 8.0%, versus 9.9% |
| Diluted EPS | $1.57, versus $2.36 | $4.17, versus $5.15 |
| Operating cash flow | Not separately presented for the quarter | $826 million, versus $541 million |
For the quarter, sales were nearly flat as acquisition contributions offset weaker Diversified Industrial demand. Six-month sales declined despite contributions from acquisitions. The lower gross and net margins reflected weaker volume and margins, acquisition-related costs, and higher amortization and transaction expenses. The six-month effective tax rate was 21.0%, versus 22.8%; management cited higher discrete tax benefits.
Segments and material changes
- Diversified Industrial: Quarterly sales declined 3.2% and six-month sales declined 5.3% as reported. Excluding acquisitions and currency, sales fell 8.9% and 7.2%, respectively. Both North American and international sales and operating margins decreased, principally with weaker demand and lower volume.
- Aerospace Systems: Quarterly sales rose to $735 million from $616 million; six-month sales rose to $1.366 billion from $1.181 billion. Acquisitions and higher aftermarket and selected OEM volumes contributed. Operating margin declined to 16.5% from 19.7% for the quarter and to 17.9% from 19.6% for six months, reflecting acquisition expenses and amortization.
- Acquisitions: Parker completed the LORD Corporation acquisition in October for approximately $3.453 billion and the Exotic Metals Forming Company acquisition in September for approximately $1.706 billion. Together they contributed $286 million of quarterly and $307 million of six-month sales, but reported an acquisition-period operating loss of $20.1 million for six months. Fiscal 2020 acquisition transaction costs were $114.7 million; preliminary purchase-price allocations may be revised.
- Backlog: Total backlog was $5.503 billion at December 31; approximately 89% was expected to be recognized as revenue within 12 months. Segment backlog increases were significantly affected by the LORD and Exotic acquisitions.
Cash, debt, and liquidity
- Six-month operating cash flow was $826 million. Investing cash use was $5.155 billion, primarily reflecting acquisitions; capital expenditures were $119 million. Financing provided $2.054 billion, including term loans and commercial paper borrowings.
- Cash and cash equivalents were $948 million at December 31, down from $3.220 billion at June 30. Management’s cash measure, including marketable securities and other investments, was $1.093 billion. Working capital was $1.570 billion versus $4.521 billion, and the current ratio was 1.4 versus 2.4.
- Current debt was $1.604 billion and long-term debt was $8.141 billion. Debt increased mainly to finance acquisitions. Commercial paper outstanding was $1.518 billion; $982 million was available under the $2.5 billion credit agreement.
- The company reported a 0.61 debt-to-debt-plus-shareholders’ equity ratio against a 0.65 covenant maximum and stated it was in compliance. Shareholders’ equity was $6.330 billion. Six-month dividends paid were $227 million and share repurchases were approximately $100 million.
Outlook, risks, and unusual items
- Management expected a fiscal 2020 effective tax rate of approximately 22.5%.
- Management anticipated approximately $40 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2020. It expected workforce-reduction savings to increase operating income by approximately 1% in fiscal 2020 and 2021 for each Diversified Industrial geographic business.
- Management cited market and economic uncertainty, including weaker manufacturing conditions in parts of Europe, the return to service of the Boeing 737 MAX, and the coronavirus outbreak in China. Other stated risks include acquisition integration, leverage and debt service, currency and interest rates, customer demand, raw-material costs, taxes, litigation, cybersecurity, and potential goodwill impairment.
- Gross unrecognized tax benefits were $136.1 million, plus $26.6 million accrued interest. Up to approximately $100 million of unrecognized benefits could be reduced within 12 months, depending on tax examinations or statute closures.
- The company adopted lease accounting on July 1, 2019, recording approximately $126 million of right-of-use assets and lease liabilities; management said income and cash-flow impacts were not material. The effect of the forthcoming credit-loss accounting standard had not yet been determined.
Investor facts to verify
- Whether organic demand and margins in Diversified Industrial continue to weaken, and how market conditions affect backlog and orders.
- Whether LORD and Exotic deliver expected integration benefits and whether purchase-price allocation revisions or integration costs materially affect results.
- Debt levels, refinancing needs, interest-rate exposure, covenant headroom, and available credit following the acquisitions.
- Progress against the stated fiscal 2020 tax-rate outlook and potential resolution of uncertain tax positions.
- Exposure to the Boeing 737 MAX return-to-service timeline and the economic effects of the coronavirus outbreak identified in the filing.