Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal 2018 second quarter and first six months ended December 31, 2017; comparable periods ended December 31, 2016. Dollar amounts are in millions unless noted.
Business context and results
Parker-Hannifin manufactures motion-control and fluid systems and operates through Diversified Industrial and Aerospace Systems. Sales are made to industrial, mobile, transportation, and aerospace markets.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3,370.7, up 26.2% | $6,735.3, up 24.4% |
| Gross margin | 23.8%, versus 23.5% | 24.3%, versus 23.3% |
| Income before taxes | $360.2, versus $320.7 | $734.5, versus $613.0 |
| Net income attributable to common shareholders | $56.2, versus $241.3 | $341.6, versus $451.4 |
| Diluted EPS | $0.41, versus $1.78 | $2.51, versus $3.33 |
| Net margin | 1.7%, versus 9.0% | 5.1%, versus 8.3% |
Revenue growth reflected stronger Diversified Industrial sales, contributions from acquisitions, and favorable currency translation. Acquisitions contributed approximately $356 million of quarterly sales and $738 million for the six months; currency added approximately $90 million and $127 million, respectively. Segment operating income was $477.8 million for the quarter and $1,003.0 million for the six months, compared with $384.0 million and $795.1 million.
Segments and material changes
- Diversified Industrial: Quarterly sales rose 32.6% as reported, or 11.8% excluding acquisitions and currency; six-month sales rose 31.2% as reported, or 11.2% excluding those effects. North American operating margins fell to 14.4% for the quarter and 15.2% for the six months, while International margins increased to 13.1% and 14.3%, respectively. Management cited acquisition amortization, incomplete CLARCOR integration, raw-material costs, volume, and efficiency actions.
- Aerospace Systems: Quarterly sales increased 1.1% to $549.7 million; six-month sales declined 2.2% to $1,080.9 million. Operating margins improved to 15.9% for the quarter and 15.2% for the six months, mainly on aftermarket profitability and mix, lower operating costs, and lower engineering development costs.
- Quarterly and six-month sales growth benefited from strong industrial demand. Diversified Industrial backlog was $2,140.9 million, versus $1,505.6 million a year earlier; Aerospace backlog was $1,820.9 million, versus $1,664.9 million.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $460.3 million, versus $404.2 million. Investing cash flow was a use of $145.4 million, including $144.8 million of capital expenditures; financing cash flow was a use of $182.8 million. Cash and cash equivalents increased $139.9 million to $1,024.8 million. Operating cash flow less capital expenditures was approximately $315.6 million.
- At December 31, cash, marketable securities, and other investments totaled $1,132.7 million. Working capital was $1,748.7 million and the current ratio was 1.49.
- Current debt and notes payable were $1,248.2 million and long-term debt was $4,798.4 million, totaling approximately $6,046.6 million. Debt to debt-plus-shareholders’ equity was 0.525, below the 0.60 covenant limit. The company reported compliance with its covenants.
- The $2.0 billion revolving credit agreement had $1,327 million available; commercial paper outstanding was $673 million. Senior debt ratings included Fitch A-, Moody’s Baa1, and S&P A; management’s stated goal is at least an “A” rating.
Outlook, unusual items, and risks
- Management expected fiscal 2018 Diversified Industrial North American sales to increase 22%–26% and International sales to increase 16%–20% from fiscal 2017. Expected operating margins were 16.3%–16.7% for North America and 14.0%–14.4% for International.
- Fiscal 2018 Aerospace sales were expected to be flat to 2% higher, with operating margins of 15.5%–15.9%. Management noted that a greater commercial OEM mix or higher-than-expected product-development costs could reduce margins.
- The company expected a fiscal 2018 effective tax rate of approximately 38%; the one-time Tax Cuts and Jobs Act adjustments were estimated to add approximately 13 percentage points. For the quarter, the Act produced an approximately $287 million transition-tax expense, partly offset by an approximately $62 million tax benefit from remeasuring tax assets and liabilities. These preliminary estimates may change.
- Other unusual items included an approximately $20 million investment writedown and $28.4 million real-estate sale gain in fiscal 2018; the six-month period also included a $13.8 million investment-sale loss. Business realignment and acquisition-integration costs were $24.7 million for the quarter and $39.4 million for the six months. Approximately $69 million of additional such costs was expected during the remainder of fiscal 2018; management anticipated savings to benefit fiscal 2019 results.
- Management cited improving manufacturing indicators and higher aircraft activity, while housing starts were lower year over year. Risks include market and customer demand, raw-material costs, acquisition integration, execution and savings from restructuring, currency and interest rates, tax-law interpretation, legal matters, and cybersecurity.
Important facts for investors to verify
- How final Tax Cuts and Jobs Act calculations affect reported tax expense, future tax rates, and foreign cash repatriation.
- Whether industrial growth, segment margin guidance, and backlog convert into sales and earnings as expected.
- Progress integrating CLARCOR and whether restructuring costs, timing, and projected savings match management’s estimates.
- Cash conversion and inventory growth: inventory was $1,780.3 million, up from $1,549.5 million at June 30, 2017.
- Debt, credit ratings, and covenant headroom, particularly following acquisition-related borrowing and share repurchases.