Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended September 30, 2022. Comparisons are with the three months ended September 30, 2021, unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $4.233 billion | $3.763 billion |
| Gross profit margin | 34.0% | 33.4% |
| Income before taxes | $503 million | $572 million |
| Net income attributable to common shareholders | $388 million | $451 million |
| Diluted EPS | $2.98 | $3.45 |
| Operating cash flow | $457 million | $424 million |
Sales rose about 12.5%, primarily on higher volume, with approximately $143 million contributed by acquisitions and a $203 million adverse currency impact. Gross margin improved on higher volume, pricing, and cost management, partly offset by inflation-related freight, material, and labor costs. SG&A rose to $836 million from $627 million, including $109 million of acquisition transaction costs. Interest expense increased to $118 million from $59 million, principally reflecting higher average debt. Net income and diluted EPS declined despite sales growth.
Other income, net, was $20 million. Significant items included a $373 million gain on the aircraft wheel and brake divestiture and a $390 million loss on deal-contingent forward contracts related to the Meggitt acquisition. The filing reports foreign-currency translation losses of $306 million and total comprehensive income attributable to common shareholders of $87 million, versus $412 million in the prior-year quarter.
Segments and backlog
- Diversified Industrial: Sales were $3.487 billion versus $3.170 billion. Sales excluding acquisitions and currency increased 15.4%. Segment operating income was $747 million versus $625 million; margins improved in both North America and international operations.
- Aerospace Systems: Sales were $746 million versus $593 million, including $115 million from Meggitt. Operating income decreased to $92 million from $118 million, and margin fell to 12.4% from 20.0%. The company cited contract loss reserves, acquisition-related costs, and supply-chain and labor disruption.
- Backlog: Total company backlog was $10.2 billion; approximately 82% was expected to be recognized as revenue within 12 months. Segment backlog was $4.901 billion for Diversified Industrial and $5.346 billion for Aerospace Systems; Meggitt contributed to the increases.
Cash, debt, and liquidity
Operating cash flow was $457 million. Investing activities used $7.927 billion, largely reflecting the $7.146 billion net cash acquisition payment and $1.405 billion of deal-contingent forward contract settlements, partly offset by $441 million of divestiture proceeds. Financing activities provided $1.340 billion, including $2.0 billion drawn under a term loan. Cash and cash equivalents were $502 million at September 30, down from $536 million at June 30; the June balance sheet included $6.1 billion of restricted acquisition escrow funds that had been used by quarter-end.
Total debt was approximately $13.964 billion, including current maturities, compared with approximately $11.480 billion at June 30. Commercial paper outstanding was $1.3 billion. The company had $1.7 billion available under its $3.0 billion revolving credit agreement. Its debt-to-debt-and-shareholders’ equity ratio was 0.62, below the 0.65 covenant maximum; management reported compliance with debt covenants. Inventory was $3.130 billion, up from $2.215 billion at June 30; days of inventory supply rose to 94 from 77.
Acquisition, outlook, and risks
Parker completed its acquisition of Meggitt on September 12, 2022, for an aggregate cash purchase price of $7.2 billion, including assumed debt. The preliminary purchase price allocation includes $5.419 billion of intangible assets and $2.831 billion of goodwill and remains subject to revision during the measurement period. Meggitt contributed $143 million in sales and a $27 million segment operating loss for the post-acquisition period in the quarter. The company also assumed $113 million of environmental liabilities. In September, Parker sold its aircraft wheel and brake business for $441 million in proceeds, recording a $373 million pretax gain.
Management expects a fiscal 2023 effective tax rate of approximately 23%. It anticipates approximately $40 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2023 for Diversified Industrial, and approximately $46 million for Aerospace Systems. The filing does not provide a clear full-year sales or earnings forecast. Management said cash from operations and the commercial paper program should meet operating needs for the foreseeable future, and targets capital expenditures of 2% of sales.
Management highlighted uncertainty from inflation, supply-chain and labor constraints, the Russia-Ukraine war, COVID-19 effects, and disruption in aerospace. It also identified acquisition integration and leverage as risks. A March 2022 cybersecurity incident exposed team-member personal information; a class-action lawsuit was filed, but the company reported no significant financial or operational impact. A 100-basis-point increase in near-term interest rates was estimated to increase annual interest expense by approximately $37 million. The company reported effective disclosure controls and no material subsequent events requiring adjustment or disclosure.
The prior-year income statement was reclassified to align expense presentation; the reclassification did not affect net income, EPS, cash flows, or financial position.
Important facts for investors to verify
- How Meggitt integration, acquisition accounting revisions, and acquired debt affect future margins, cash flows, and leverage.
- Whether aerospace margins recover as supply-chain and labor constraints ease, and how contract loss reserves develop.
- Whether backlog converts to sales as expected, particularly given the company’s order and shipment trends.
- The durability of pricing and cost savings against persistent inflation, currency movements, and weaker demand in some markets.
- Progress on the disclosed lawsuit and any further financial or operational effects from the cybersecurity incident.