Parker-Hannifin Corporation — Form 10-Q summary
Reporting period: First quarter of fiscal 2014, the three months ended September 30, 2013. Unaudited results are compared with the quarter ended September 30, 2012; balance-sheet comparisons are with June 30, 2013. Effective July 1, 2013, the company reorganized its reporting into Diversified Industrial and Aerospace Systems, and revised prior-period segment results accordingly.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change / context |
|---|---|---|---|
| Net sales | $3,226.1 million | $3,214.9 million | Up 0.3% |
| Gross profit / margin | $749.7 million / 23.2% | $737.5 million / 22.9% | Margin improved 0.3 percentage points |
| Income before taxes | $324.1 million | $336.1 million | Down 3.6% |
| Net income attributable to common shareholders | $244.3 million | $239.7 million | Up 1.9%; net margin 7.6% versus 7.5% |
| Diluted EPS | $1.61 | $1.57 | Up 2.5% |
| Cash dividends per share | $0.45 | $0.41 | Up 9.8% |
| Operating cash flow | $282.7 million | $(7.0) million | Improved substantially |
| Investing / financing cash flow | $(52.2) million / $(111.0) million | $(262.4) million / $(171.7) million | Lower investing outflows, including no current-quarter acquisitions |
Gross margin benefited from higher International Diversified Industrial volume, favorable mix and lower defined-benefit costs, partly offset by higher Aerospace development and support costs. SG&A rose to $406.9 million from $381.1 million, or 12.6% of sales versus 11.9%, reflecting higher incentive compensation, charitable contributions, R&D and professional-services costs. The effective tax rate fell to 24.6% from 28.6%, helped by geographic earnings mix and a discrete tax benefit; management expects approximately 30% for fiscal 2014.
Segments
| Segment | Sales | Operating income / margin | Notable comparison |
|---|---|---|---|
| Diversified Industrial — North America | $1,387.9 million, down 2.6% | $234.2 million / 16.9% | Lower demand across several end markets; margin was 17.1% a year earlier. |
| Diversified Industrial — International | $1,270.8 million, up 1.8% | $173.4 million / 13.6% | Sales were essentially flat excluding acquisitions and currency; margin improved from 12.5%. |
| Aerospace Systems | $567.5 million, up 4.9% | $57.3 million / 10.1% | Higher commercial OEM and aftermarket volume was partly offset by weaker military OEM; margin fell from 11.4%. |
Acquisitions contributed approximately $60 million of company sales; currency reduced sales by approximately $3 million. Company backlog was not stated as a consolidated total; segment backlog was $1,765.5 million for Diversified Industrial and $1,983.0 million for Aerospace Systems.
Liquidity, debt and balance sheet
- At September 30, cash and equivalents were $1,945.6 million, total assets $12,788.4 million, total liabilities $6,698.6 million and shareholders’ equity $6,086.9 million.
- Working capital was $2,224.2 million versus $2,011.0 million at June 30; the current ratio was 1.64 versus 1.57. Inventory rose to $1,465.4 million from $1,377.4 million; days’ supply was 70, compared with 62 at June 30.
- Total debt was approximately $2,842 million. The company-reported debt-to-debt-and-shareholders’ equity ratio was 31.8%, down from 33.0%; net of cash, the ratio was 12.8% versus 15.4%.
- The $2.0 billion revolving credit facility had $667 million available and expires in October 2017. Commercial paper outstanding was $1,333 million. The company reported compliance with its debt covenants.
- Approximately $1,813 million of cash was held by foreign subsidiaries and generally was not readily available for U.S. use without adverse tax consequences.
Operating cash flow benefited from an $184 million improvement in working-capital cash flows and lower voluntary domestic pension contributions ($75 million versus $226 million). The company repurchased 482,400 shares for approximately $49 million and paid $67.4 million in dividends.
Outlook, commentary and risks
- Fiscal 2014 guidance: Diversified Industrial North American sales expected to be flat to up 4.0% from fiscal 2013, with operating margins of 16.5%–17.0%. International sales expected to rise 0.8%–4.2%, with margins of 11.4%–11.8%. Aerospace Systems sales expected to decline 3.0%–1.4%, with margins of 11.6%–12.2%.
- Management expects approximately $85 million of additional business realignment charges in the remaining three quarters of fiscal 2014; timing was not finalized. Charges recorded this quarter were $11.2 million. The company expects International Diversified Industrial workforce actions to improve operating income by approximately 1% in fiscal 2014 and 2% in fiscal 2015. Additional charges may arise, with timing and amount uncertain.
- In October 2013, the company finalized a joint venture with GE Aviation, selling a 50% interest in a subsidiary. It expects an estimated $255 million after-tax gain in fiscal Q2 2014, subject to accounting adjustments. Aerospace Systems’ future sales outlook reflects the resulting change in consolidation.
- Management cited improving PMI readings in the United States, Eurozone and China, and increases in aircraft miles flown and passenger miles. U.S. defense spending was expected to decline approximately 1% in fiscal 2014; the effect of sequestration remained uncertain.
- Risks include economic and market demand volatility, distributor and end-user demand, defense spending, raw-material costs, product mix, development costs, execution and savings from realignment, acquisitions and divestitures, currencies, and legal proceedings.
- In the marine-hose matter, Brazilian authorities and the subsidiary agreed to resolve the investigation for approximately 5.1 million Brazilian reais. The EU General Court reduced the cartel fine to €6.40 million, with the company and subsidiary jointly liable up to €6.30 million; the European Commission appealed.
Investor verification points
- Confirm that the expected $255 million after-tax GE Aviation joint-venture gain is recognized in fiscal Q2 and assess final valuation adjustments.
- Track the timing and actual cost of the expected $85 million of further realignment charges, and whether projected savings are achieved.
- Compare segment sales and margins with the fiscal 2014 guidance, especially North American industrial demand and Aerospace Systems development costs.
- Monitor inventory growth, working-capital cash conversion, available credit and the company’s substantial offshore cash balance.
- Follow the EU appeal and any remaining legal exposure, as well as the potential impact of U.S. defense spending and sequestration.