Parker-Hannifin Corporation — Form 10-Q Summary
Business context and period: This filing covers the three months ended September 30, 2020, Parker-Hannifin’s fiscal 2021 first quarter, compared with the three months ended September 30, 2019. The company manufactures motion-control and fluid systems for industrial, mobile and aerospace markets. Management said COVID-19 continued to adversely affect business, particularly commercial aerospace.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $3.231 billion | $3.335 billion |
| Gross margin | 26.2% | 25.6% |
| Income before income taxes | $415.3 million | $433.2 million |
| Net income attributable to common shareholders | $321.4 million | $338.9 million |
| Diluted EPS | $2.47 | $2.60 |
| Net margin | 10.0% | 10.2% |
| Cash from operating activities | $737.4 million | $449.1 million |
| Capital expenditures | $42.1 million | $50.3 million |
Revenue fell about 3.1%, while common-shareholder net income and diluted EPS declined about 5.2% and 5.0%, respectively. Gross margin improved modestly, but lower sales and a sharp reduction in other income weighed on earnings. Operating cash flow increased mainly because of improved working-capital movements. Operating cash flow less capital expenditures was approximately $695 million, a calculated measure.
Segments
- Diversified Industrial: Sales were $2.657 billion versus $2.703 billion. Excluding acquisitions and currency, sales declined 11.4%. North America and international operating margins improved to 17.6% and 16.6%, respectively, from 16.9% and 15.6%, reflecting product mix and cost reductions.
- Aerospace Systems: Sales were $573 million versus $631 million; operating margin fell to 15.1% from 19.5%. Commercial OEM and aftermarket weakness related to COVID-19 and reduced Boeing 737 MAX production were among the pressures. Military sales partly offset the declines.
Company backlog was $5.064 billion; approximately 85% was expected to convert to revenue within 12 months. Diversified Industrial backlog was $2.201 billion, compared with $1.880 billion a year earlier; Aerospace backlog was $2.863 billion, compared with $3.142 billion.
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $742 million and marketable securities and other investments were $33 million. Total current assets were $4.869 billion and current liabilities were $3.328 billion; working capital was $1.541 billion and the current ratio was 1.5.
- Long-term debt was $7.058 billion, with $884 million of notes payable and debt due within one year. The company repaid the remaining $320 million on one term loan and paid down $352 million on another during the quarter.
- The company had $1.662 billion available under its $2.5 billion revolving credit facility; $838 million of commercial paper was outstanding. Its debt-to-debt-plus-shareholders’ equity ratio was 0.55, below the 0.65 covenant limit. Management reported compliance with debt covenants.
- Financing activities used $693 million, including $672 million of long-term debt repayments and $114 million of net commercial-paper borrowings. Dividends paid were $114 million. Share repurchases were suspended.
Changes, outlook and risks
- Management attributed lower sales primarily to reduced volume across segments, partly offset by $305 million of sales from acquisitions and a $26 million favorable currency effect. SG&A declined with lower discretionary spending and wage costs, while gross margin benefited from cost controls and mix.
- Management expected the fiscal 2021 effective tax rate to be approximately 23%. The filing gives no clear consolidated revenue or EPS forecast.
- Management anticipated approximately $57 million of additional Diversified Industrial business realignment and acquisition-integration charges and approximately $3 million for Aerospace Systems in the remainder of fiscal 2021. Further costs could vary with business conditions.
- COVID-19’s duration and financial impact remained uncertain. Management highlighted continuing aerospace disruption, economic and market demand risks, potential goodwill impairment if conditions worsen, and risks involving acquisitions, supply chains, debt, taxes and Boeing 737 MAX timing.
- After quarter-end, Parker sold land in October for approximately $111 million net proceeds, recording an estimated $76 million after-tax gain.
- Gross unrecognized tax benefits were $92 million, plus $15 million accrued interest; up to approximately $30 million could be reduced within 12 months, subject to tax examinations or statute closures.
Important facts for investors to verify
- Whether industrial demand and reported backlog convert into shipments and revenue, and whether aerospace commercial demand recovers.
- Whether cost savings offset lower volume and whether the anticipated restructuring charges and savings occur as described.
- Debt repayment progress, commercial-paper usage, revolver availability and covenant headroom.
- The final proceeds and gain from the October land sale and how they affect subsequent-period results and cash.
- Changes in COVID-19-related assumptions, receivable credit-loss allowances and potential goodwill or intangible-asset impairment assessments.