Parker-Hannifin Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020. The filing is a fiscal-year 10-K, not a standalone 2019 Q4 filing; quarterly figures below are for fiscal Q4 2020, ended June 30, 2020.
Business context and results
Parker-Hannifin is a diversified manufacturer of motion and control technologies, serving mobile, industrial, and aerospace markets. Diversified Industrial generated 80% of FY2020 net sales and Aerospace Systems 20%. No customer accounted for more than 3% of sales.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $13.696 billion | $14.320 billion |
| Gross margin | 24.9% | 25.3% |
| Net income attributable to common shareholders | $1.206 billion | $1.512 billion |
| Diluted EPS | $9.29 | $11.48 |
| Cash provided by operating activities | $2.071 billion | $1.730 billion |
| Capital expenditures | $233 million | $195 million |
Sales fell 4.4% and common net income fell 20.2% year over year. Operating cash flow increased; operating cash flow less capital expenditures was approximately $1.838 billion, versus $1.535 billion in FY2019 (derived from reported figures). SG&A rose to 12.1% of sales from 10.8%, while interest expense increased to $308 million from $190 million.
Segments and quarterly comparison
- Diversified Industrial: Sales were $10.961 billion, down 7.2% reported and 11.0% excluding acquisitions and currency. Operating income declined in both North America and International operations; margins were 15.3% and 15.0%, respectively.
- Aerospace Systems: Sales rose to $2.735 billion, largely reflecting acquisitions and military business, but operating income declined to $477 million and margin fell to 17.4% from 19.4%. Commercial aerospace weakness and the 737 MAX production halt weighed on results.
- Fiscal Q4: Sales were $3.161 billion versus $3.681 billion in Q4 FY2019; common net income was $296 million versus $414 million; diluted EPS was $2.27 versus $3.17.
Financial position, liquidity, and material changes
At June 30, 2020, cash and marketable securities totaled approximately $756 million. Current assets were $4.885 billion, current liabilities $3.148 billion, working capital $1.737 billion, and the current ratio 1.6. Long-term debt was $7.652 billion, with an additional $810 million of notes payable and debt due within one year. Total debt on those reported balance-sheet lines was approximately $8.462 billion.
Debt increased principally to fund the Lord and Exotic acquisitions, completed for approximately $3.455 billion and $1.706 billion, respectively. Acquisition-related investing cash outflow was $5.076 billion. Goodwill increased to $7.870 billion from $5.454 billion and net intangible assets to $3.799 billion from $1.783 billion. Cash declined from $3.220 billion to $686 million, while $1.777 billion remained available under the $2.5 billion revolving credit agreement. The company reported compliance with debt covenants; its debt-to-debt-plus-equity ratio was 0.58 against a maximum of 0.65.
Backlog increased to $5.138 billion from $4.220 billion, with approximately 85% expected to be delivered within 12 months. The increase included acquired backlog, particularly in aerospace. Dividends were $3.52 per share, up from $3.16; the share repurchase program was suspended in March 2020, and repurchases fell to $147 million from $800 million.
Outlook, risks, and unusual items
- Management said COVID-19 had disrupted operations, customer demand, and supply chains, with commercial aerospace especially affected. The duration and financial impact were not reasonably estimable and could be material. No specific consolidated revenue or EPS guidance is provided in the filing.
- Management cited cost and cash-preservation actions including salary reductions, reduced schedules, lower discretionary spending, targeted restructuring, and limiting capital expenditures to safety needs and strategic investments. For FY2021, it expected approximately $53 million of Diversified Industrial and $12 million of Aerospace Systems realignment charges. Estimated operating-income benefits from FY2020 workforce reductions were about 5% for Diversified Industrial North America, 2% for International, and 13% for Aerospace Systems.
- FY2020 included $119 million of acquisition-related transaction expenses, $69 million of acquisition-related costs noted in the margin discussion, and business realignment and integration charges. A favorable foreign tax audit settlement contributed to the lower effective tax rate of 20.2%, versus 21.7%.
- Key risks include continued pandemic and aerospace-market weakness, integration and valuation risks from acquisitions, potential goodwill impairment, leverage and interest-rate exposure, currency and raw-material volatility, cybersecurity, litigation, and environmental obligations. Environmental remediation accruals were $19.4 million; estimated total exposure ranged from $19.4 million to $81.9 million. The pension funded deficit was approximately $1.812 billion.
Most important facts for investors to verify
- Whether post-pandemic demand and order trends recover, particularly in commercial aerospace, and how backlog converts to revenue.
- Whether Lord and Exotic deliver expected benefits and whether their preliminary purchase accounting, acquired intangible valuations, and goodwill remain supportable.
- Whether debt, cash generation, and covenant headroom remain adequate as acquisition financing is serviced and maturities approach.
- Whether restructuring savings materialize as estimated and whether further charges are required.
- Whether environmental, pension, tax, and potential impairment exposures change materially from the amounts disclosed.