Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended December 31, 2011; comparisons are with the periods ended December 31, 2010. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
- Quarter: Sales were $3.107 billion, up 8.4%; gross profit was $725.5 million, with a 23.4% margin, unchanged from the prior-year quarter. Net income was $242.3 million versus $231.8 million, and diluted EPS was $1.56 versus $1.39.
- Six months: Sales were $6.341 billion, up 11.3%; gross profit was $1.545 billion, with a 24.4% margin versus 23.9%. Net income was $540.5 million versus $480.8 million, and diluted EPS was $3.47 versus $2.90.
- Quarterly net margin was 7.8% versus 8.1%; six-month net margin was 8.5% versus 8.4%. The six-month effective tax rate rose to 28.0% from 25.2%; management expects about 29% for fiscal 2012.
- Cash flow: Six-month operating cash flow was $563.4 million versus $408.2 million. Investing activities used $190.8 million and financing activities used $428.9 million. Cash declined $169.5 million to $488.0 million, including a $113.3 million adverse exchange-rate effect.
- Liquidity and debt: Current assets were $4.043 billion and current liabilities $2.120 billion; working capital was $1.923 billion and the current ratio 1.91. Debt was about $1.738 billion, and debt-to-debt-plus-shareholders’ equity was 25.2%, versus 24.7% at June 30, 2011. The $1.5 billion revolving credit facility was fully available; no commercial paper was outstanding at quarter-end.
- The company repurchased about 4.6 million shares for $312 million during the six months and paid $119.0 million in dividends. Capital expenditures were $96.9 million; acquisition spending, net of cash acquired, was $90.5 million.
Business trends and changes versus prior periods
- Industrial and Aerospace drove sales growth. Industrial sales rose 9.6% in the quarter and 12.5% over six months; Aerospace sales rose 8.0% and 10.9%, respectively. Climate & Industrial Controls sales declined 2.9% in the quarter and increased 0.4% over six months.
- Industrial North America benefited from higher demand and improved manufacturing efficiency. Industrial International margins fell amid unfavorable mix and manufacturing inefficiencies. Aerospace benefited from commercial OEM and aftermarket growth and favorable aftermarket mix. Climate & Industrial Controls faced weakness in residential air conditioning.
- Quarterly gross margin was flat despite higher sales, reflecting Industrial manufacturing inefficiencies and unfavorable product mix. Higher incentive and deferred compensation costs increased SG&A; lower average debt reduced interest expense.
- Operating cash flow exceeded the prior-year period partly because the prior year included a $200 million discretionary pension contribution. Working-capital cash use increased to $238 million from $171 million.
Outlook, risks and unusual items
- Fiscal 2012 outlook: Industrial North America sales growth of 8.4%–10.4% and operating margin of 17.0%–17.4%; Industrial International sales growth of 1.9%–3.9% and margin of 14.7%–15.1%; Aerospace sales growth of 7.1%–9.1% and margin of 13.3%–13.7%; Climate & Industrial Controls sales change of -2.7% to +0.3% and margin of 7.7%–8.0%. No consolidated sales or EPS outlook is stated in the filing excerpt.
- Management cited U.S. manufacturing expansion but below-50 PMI readings in the Eurozone and China. Aircraft miles flown and passenger miles were higher year over year; U.S. housing starts were up about 25% year over year. Management noted uncertainty in economic conditions and market demand.
- Potential risks include customer or supplier changes, product mix and pricing, raw-material cost inflation, acquisition integration, realization of realignment savings, currency and global economic conditions, and pension and benefit costs. Aerospace margins could be pressured by a higher-than-expected commercial OEM mix or development costs.
- Business realignment charges were $6.9 million for the six months, primarily severance and plant-closure costs; remaining fiscal 2012 severance payments were expected by March 31, 2012. Further actions and charges may occur, though additional charges were not expected to be material.
- Other items include real-estate sale gains of $0.5 million for the quarter and $2.1 million for six months. Foreign-currency translation reduced equity by about $350 million over six months.
- Tax authorities may settle examinations within 12 months; the company said gross unrecognized tax benefits could decrease by up to $35 million. Marine-hose antitrust matters remain pending in Brazil and on appeal in Europe; a False Claims Act case remains pending against subsidiary Parker ITR after dismissal with prejudice as to the company.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Industrial International margins and order trends stabilize, given weaker regional indicators and lower backlog than at fiscal year-end.
- Delivery against segment sales and margin forecasts, particularly Aerospace mix and Climate & Industrial Controls demand.
- Cash conversion and working-capital trends, including the inventory supply increase to 63 days from 55 days at June 30.
- Use of cash for repurchases and dividends, and the effect of foreign-exchange movements on reported cash, equity and debt.
- Developments in the Parker ITR litigation and tax examinations, including any change in potential exposure or unrecognized tax benefits.