Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017, compared with the three months ended September 30, 2015. Balance-sheet figures are compared with June 30, 2016. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2016 | Prior-year quarter / comparison |
|---|---|---|
| Net sales | $2.743 billion | $2.869 billion |
| Gross profit / margin | $637.1 million / 23.2% | $668.4 million / 23.3% |
| SG&A expense / percent of sales | $323.0 million / 11.8% | $370.2 million / 12.9% |
| Net income attributable to common shareholders | $210.1 million | $195.0 million |
| Diluted EPS | $1.55 | $1.41 |
| Operating cash flow | $113.9 million | $19.9 million |
Net income was 7.7% of sales versus 6.8% in the prior-year quarter; the effective tax rate was 28.1% versus 29.2%. The company paid a $0.63-per-share dividend, unchanged year over year.
At September 30, cash and cash equivalents plus marketable securities and other investments totaled $2.141 billion. Working capital was $2.788 billion and the current ratio was 2.12, compared with $2.842 billion and 2.20 at June 30. Total debt, including current maturities, was approximately $3.249 billion on the balance sheet; management’s debt-to-debt-and-shareholders’ equity measure was 41.3%, up from 39.9% at June 30 and above its 37% long-term goal. Operating cash flow included a voluntary $220 million contribution to the domestic qualified pension plan. Cash increased $172.2 million during the quarter.
Segments and changes versus prior year
- Diversified Industrial: Sales were $2.182 billion, down 6.2% as reported and 6.4% excluding acquisitions and currency. North American sales declined 9.3% as reported, reflecting weaker demand in heavy truck, oil and gas, construction equipment, and cars and light trucks. International sales fell 2.3% as reported, with weaker Europe partly offset by Asia Pacific and Latin America. North American and international operating margins improved to 17.2% and 13.5%, respectively, primarily on lower costs from restructuring and the Simplification initiative. Segment backlog was $1.471 billion.
- Aerospace Systems: Sales rose to $561.2 million from $544.6 million, while operating income declined to $73.3 million from $74.0 million and operating margin fell to 13.1% from 13.6%. Higher commercial and military OEM and commercial aftermarket volume was partly offset by weaker military aftermarket activity. Mix, higher engineering and development costs, and favorable prior-year contract settlements affected the comparison. Backlog was $1.694 billion versus $1.702 billion.
- Consolidated sales declined mainly because of Diversified Industrial. Gross margin was nearly flat: cost savings and lower restructuring costs were offset by lower Aerospace margins. Lower SG&A, interest expense, and taxes helped lift net income despite lower sales. Currency changes reduced sales by approximately $4 million.
Outlook, risks, and unusual items
- Fiscal 2017 guidance: Diversified Industrial North American sales expected to decline 5% to 1%, with operating margins of 16.9%–17.3%; International sales expected to increase 1%–6%, with margins of 12.4%–12.8%. Aerospace sales were expected to rise 1%–3%, with margins of 14.8%–15.2%. Management expected a full-year effective tax rate of approximately 28.5%.
- Management cited manufacturing PMIs that were mixed by region, aircraft miles flown and passenger miles up approximately 6%, and September U.S. housing starts down approximately 12% year over year. It highlighted demand, product mix, customer and supplier conditions, foreign exchange, raw-material costs, acquisitions and divestitures, cybersecurity, and execution of cost and growth initiatives as risks to results.
- Business realignment charges were $10.7 million, mainly severance and plant-closure costs. The company expected approximately $36 million of additional Diversified Industrial realignment charges during the remainder of fiscal 2017; timing and amount of other potential charges were not specified. Approximately $35 million of severance payments for current- and prior-year actions remained accrued.
- Fiscal 2017 adoption of share-based payment accounting guidance generated a discrete $9.5 million income-tax benefit. A revised pension-cost estimation method reduced current-quarter pension cost by approximately $8 million versus the prior-year quarter. Both affect period comparability.
- Gross unrecognized tax benefits were $141.5 million, with $13.4 million of related accrued interest; up to approximately $100 million of unrecognized benefits could be reduced within 12 months as examinations or statutes conclude. The filing describes the marine-hose European Commission matter as concluded; in October 2016 the company and subsidiary received a €5.98 million reimbursement, including interest.
- Cash held by foreign subsidiaries was approximately $2.102 billion and was generally not readily available for U.S. use without adverse tax consequences. The company had $537 million of commercial paper outstanding and $1.463 billion available under its $2.0 billion credit line; the credit agreement was amended in October 2016 to extend its expiration to October 2021. The company reported compliance with debt covenants.
Most important facts for investors to verify
- Whether weak Diversified Industrial demand, particularly in North America and Europe, improves in line with the segment sales outlook.
- Whether cost savings sustain segment margins while sales remain pressured, and whether Aerospace mix and development costs affect its margin guidance.
- Whether operating cash flow remains adequate after pension contributions, share repurchases, dividends, and debt maturities, given leverage above management’s 37% goal.
- The realization and timing of announced realignment savings and the expected additional charges, along with the impact of tax settlements and discrete tax items.
- How much foreign-held cash is practically available for U.S. liquidity needs and whether market, currency, customer, or legal developments materially change the outlook.