Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 31, 2019 (Parker-Hannifin fiscal 2019 third quarter), with nine-month results through that date. This differs from the request metadata’s “2018 Q3.” Amounts below are in U.S. dollars; financial statement figures are shown in millions unless noted.
Financial results
| Metric | Three months ended March 31, 2019 | Prior-year quarter | Nine months ended March 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Net sales | $3,687.5 | $3,749.6 | $10,638.9 | $10,484.9 |
| Gross margin | 25.0% | 24.8% | 25.1% | 24.6% |
| Net income | $411.4 | $366.1 | $1,099.2 | $708.0 |
| Diluted EPS | $3.14 | $2.70 | $8.29 | $5.22 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $1,092.6 | $901.2 |
- Quarterly sales fell 1.7%; nine-month sales rose 1.5%. Currency reduced sales by approximately $111 million in the quarter and $241 million year to date.
- Quarterly net income increased 12.4%; nine-month net income increased 55.3%. The nine-month comparison is affected by the prior-year tax expense associated with U.S. tax reform; the effective tax rate was 22.6% versus 41.2% in the prior-year period.
- SG&A was $360.9 million in the quarter and $1,152.4 million year to date, down from $416.5 million and $1,221.8 million, respectively. Management cited restructuring and simplification benefits, lower amortization and lower incentive compensation. Interest expense also declined, primarily due to lower average debt.
Segments and operating trends
- Diversified Industrial: Quarterly sales were $3,035.4 million, down 3.7% reported; excluding currency and divestitures, sales increased 0.3%. Nine-month reported sales were essentially flat, while sales excluding currency and divestitures rose 3.3%. Quarterly operating margins were 16.4% in North America and 16.2% internationally.
- Aerospace Systems: Quarterly sales were $652.1 million, up from $598.4 million; operating margin improved to 20.7% from 17.8%. Nine-month sales were $1,832.9 million and operating margin was 20.0%, versus $1,679.3 million and 16.2% in the prior year. Management cited higher aftermarket and OEM volume and profitability.
- Total backlog was $4,241 million at March 31, 2019; approximately 90% was expected to be recognized as revenue within 12 months. Diversified Industrial backlog declined year over year as shipments exceeded orders; Aerospace backlog increased as orders exceeded shipments.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,092.6 million, up from $901.2 million. Capital expenditures were $145.1 million, implying operating cash flow less capital expenditures of approximately $947.5 million. The operating cash flow increase reflected higher net income and working-capital contributions, partly offset by a $200 million discretionary pension contribution.
- Cash, cash equivalents and marketable securities totaled $1,168.9 million at March 31, 2019, compared with $855.1 million at June 30, 2018. Working capital was $1,988.8 million and the current ratio was 1.56, versus 1.59 at fiscal year-end.
- Balance-sheet notes payable and debt payable within one year were $1,017.3 million; long-term debt was $4,284.2 million. The company had $1,013 million of commercial paper outstanding and $987 million available under its $2 billion revolving credit facility. It reported compliance with debt covenants; the debt-to-debt-plus-equity ratio was 0.47 against a maximum of 0.60.
- Nine-month financing cash outflow was $690.2 million, including $750 million of share repurchases and $299.0 million of dividends; net commercial paper borrowings were $479 million. The company repurchased 4.46 million shares during the nine-month period.
Outlook, risks and notable items
- For fiscal 2019, management expected Diversified Industrial North American sales to increase 0.9%–1.9% and International sales to decrease 4.3%–5.3%; respective operating-margin ranges were 16.4%–16.8% and 16.0%–16.4%. Aerospace sales were expected to increase 7%–8%, with operating margins of 19.3%–19.7%. The expected fiscal 2019 effective tax rate was approximately 23%.
- Management noted that a greater share of commercial OEM volume or higher-than-expected new product development costs could pressure Aerospace margins. Market indicators were mixed: Eurozone manufacturing PMI was 47.5, while March 2019 U.S. housing starts were about 14% below March 2018. Global aircraft miles flown and available revenue passenger miles were each up approximately 6% year over year.
- On April 29, 2019, after quarter-end, Parker announced a definitive agreement to acquire LORD Corporation for approximately $3.7 billion in cash, intended to be financed with new debt. Closing remained subject to conditions. The filing identifies potential execution, regulatory, integration, financing and synergy risks.
- Business realignment and acquisition integration costs were $12.7 million in the quarter and $30.8 million year to date. Management expected approximately $9 million of additional such costs during the remainder of fiscal 2019 and anticipated fiscal 2020 operating-income benefits from workforce reductions.
- Gross unrecognized tax benefits were $140.3 million, with $23.3 million of accrued interest. The company said up to approximately $100 million of unrecognized tax benefits could be reduced within 12 months as examinations progress or statutes close.
- Other risks cited include market and customer demand, currency and trade-policy changes, raw-material costs, contract estimates, acquisitions and divestitures, restructuring execution, labor, cybersecurity, environmental compliance and legal proceedings. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing is for fiscal 2019 Q3, not 2018 Q3.
- Track order rates and backlog conversion, particularly the decline in Diversified Industrial backlog and strength in Aerospace backlog.
- Assess whether segment sales and margin guidance was achieved, including the expected decline in Diversified Industrial International sales.
- Review financing, leverage, ratings and covenant capacity in light of the proposed LORD acquisition and its planned debt funding.
- Separate underlying earnings performance from the prior-year tax comparison, restructuring costs, currency effects and other nonrecurring items.