Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2010, three months ended September 30, 2009; filed November 3, 2009. Comparisons are with the quarter ended September 30, 2008 unless otherwise noted. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 |
|---|---|---|
| Net sales | $2,237.2 million | $3,064.7 million |
| Gross profit / margin | $436.2 million / 19.5% | $727.5 million / 23.7% |
| Operating income | $175.3 million | $406.7 million |
| Net income | $74.0 million | $251.8 million |
| Net income attributable to common shareholders | $73.5 million | $250.2 million |
| Diluted EPS | $0.45 | $1.50 |
| Operating cash flow | $260.1 million | $307.3 million |
| Capital expenditures | $30.1 million | $98.3 million |
- Sales fell 27.0%, reflecting lower volume across all segments. Acquisitions contributed about $76 million, while currency reduced sales by $46 million.
- Gross margin declined 4.2 percentage points, primarily from lower volume, manufacturing inefficiencies, and higher business realignment charges. SG&A fell to $301.8 million from $332.7 million, but rose as a share of sales to 13.5% from 10.9%.
- The effective tax rate was 35.1%, versus 29.7%, partly due to discrete tax items from tax-audit settlements. Management expected approximately 30% for FY2010.
- Cash provided by operations was $260.1 million. Investing used $27.0 million and financing used $238.7 million; cash increased $2.2 million to $189.8 million.
Segments and outlook
| Segment | Q1 sales | Q1 operating income / margin | FY2010 outlook in filing |
|---|---|---|---|
| Industrial | $1,633.3 million, down 29.9% reported | $137.994 million; North America 9.7%, International 7.3% | North American sales down 7.8%–11.8%; International down 8.1%–13.1%. Expected margins: North America 9.9%–9.6%; International 6.7%–6.2%. |
| Aerospace | $416.9 million | $53.1 million / 12.7% | Sales down 7.8%–8.6%; margins 11.4%–11.0%. |
| Climate & Industrial Controls | $187.0 million | $10.5 million / 5.6% | Sales down 10.5%–12.9%; margins 4.0%–3.2%. |
Industrial sales fell across North American and international markets, with the largest volume declines in Europe and in construction equipment, heavy-duty truck, agriculture, and machine-tool markets. Aerospace weakness was concentrated in commercial OEM and aftermarket demand; military volume was higher. Climate & Industrial Controls was affected by weaker residential air-conditioning, truck, and automotive demand, partly offset by government automotive incentives.
Management cited improving U.S. and Eurozone manufacturing indicators from June levels and expected near-term sequential improvement, while noting uncertainty beyond that period. U.S. PMI was 52.6 and Eurozone PMI 49.3 at September-end. Aircraft miles flown and passenger miles were down about 4% year over year; housing starts were about 28% lower. The filing gives no consolidated FY2010 revenue or EPS forecast.
Liquidity, debt, and balance sheet
- At September 30, 2009, cash was $189.8 million; current assets were $3,133.5 million and current liabilities $1,835.3 million. Working capital was $1,298.2 million and the current ratio was 1.71, up from 1.56 at June 30, 2009.
- Notes payable were $304.1 million, down from $481.5 million at June 30; long-term debt was $1,855.5 million. Management’s debt-to-debt-equity ratio was 32.5%, compared with 35.2% at June 30 and a stated ceiling of 37%.
- A $1.5 billion revolving credit facility had $1.26 billion available. The company reported compliance with debt covenants and said it expected access to affordable borrowing to continue. Senior debt ratings were investment grade.
- Accounts receivable were $1,452.5 million; days sales outstanding increased to 54 from 53. Inventory was $1,266.3 million; inventory days supply was 77, unchanged from June 30.
- The quarterly dividend remained $0.25 per share. The company repurchased 105,930 shares under its program for approximately $5.0 million.
Material developments, risks, and contingencies
- The company recorded $19.3 million in business realignment charges, primarily severance and plant closures, affecting approximately 1,055 employees. About $5.9 million had been paid by quarter-end; remaining payments were expected by June 30, 2010. Management anticipated savings, but said additional FY2010 charges could occur and amounts and timing were not finalized.
- Management described cost controls including workforce reductions, salary freezes, and short work weeks, and said contingency cost plans were available if conditions worsened. It identified demand, pricing, raw-material costs, customer and supplier health, currency, credit availability, interest rates, air travel, and execution of realignment and growth initiatives as risks.
- Goodwill totaled $2,964.3 million. No impairment was recorded, but the filing identified one reporting unit with $1.9 million of goodwill whose sales-growth shortfall could put fair value below carrying value if it persisted; broader deterioration or a delayed recovery could prompt further impairment testing.
- Marine-hose antitrust matters involving subsidiary Parker ITR remained pending in multiple jurisdictions. The company and subsidiary appealed the European Commission decision, which imposed a €25.61 million fine and assigned the parent joint and several responsibility for €8.32 million. A U.S. class-action settlement was subject to court approval; the company reported a $2.9 million reserve for future losses and no new accruals in the quarter. Other ordinary-course proceedings were not expected by management to materially affect the company.
- Gross unrecognized tax benefits were $150.1 million, including $127.3 million that would affect the effective tax rate if recognized. The company said up to $64 million could be reduced within 12 months through audit settlements and statute expirations.
- Management said interim results are not necessarily indicative of full-year results. No material effect from adopting the cited new accounting guidance was reported. Disclosure controls were concluded effective.
Important facts for investors to verify
- Whether order rates, end-market demand, and segment sales and margin forecasts develop as management anticipated.
- Whether cost reductions deliver the projected savings and whether additional restructuring charges are needed.
- Whether the $1.9 million goodwill-sensitive reporting unit or other units require impairment testing if the downturn persists.
- The outcomes and financial exposure from Parker ITR’s antitrust investigations, appeals, and settlements, including whether the reserve proves sufficient.
- Availability and cost of credit, pension-cost trends, tax-audit outcomes, and the company’s ability to maintain its debt targets while funding operations and shareholder returns.