Parker-Hannifin Corporation — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2015 (fiscal 2015 third quarter). The filing is for 2015, notwithstanding the request metadata’s “2014 Q3.” Parker-Hannifin manufactures motion and control technologies and reports Diversified Industrial and Aerospace Systems segments.
Financial performance
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 |
|---|---|---|
| Net sales | $3.162 billion, down 5.8% year over year | $9.567 billion, down 1.3% |
| Gross margin | 25.0%, versus 22.4% | 24.4%, versus 22.6% |
| Net income | $285.5 million, versus $242.5 million | $833.0 million, versus $740.2 million |
| Diluted EPS | $2.02, versus $1.60 | $5.68, versus $4.88 |
| Operating cash flow | Not presented separately for the quarter | $791.1 million, versus $817.5 million |
Quarter sales fell mainly because foreign-exchange movements reduced revenue by about $205 million; nine-month currency impact was about $336 million. Stronger Aerospace sales and, for the nine-month period, North American Diversified Industrial sales partly offset weaker international sales. Higher margins reflected lower realignment charges, better Aerospace volume and mix, and lower fixed overhead in Diversified Industrial International. Net income also benefited from lower effective taxes year over year. Diluted weighted-average shares fell, supporting EPS growth.
For the nine months, cash used in investing was $797.4 million, including net purchases of marketable securities and investments; cash used in financing was $461.9 million. The company repurchased 10.7 million shares for approximately $1.344 billion and paid $252.7 million in dividends. Cash and marketable securities totaled about $2.031 billion at March 31, 2015, compared with $2.187 billion at June 30, 2014.
Balance sheet, debt, and liquidity
- Current assets were $5.785 billion and current liabilities $2.767 billion; working capital was $3.018 billion and the current ratio was 2.09.
- Total debt, including debt due within one year, was about $3.390 billion, versus $2.325 billion at June 30, 2014. The debt-to-debt-and-shareholders’ equity ratio rose to 39.7% from 25.9%, above the company’s stated 37% financial goal. Net of cash and investments, the ratio was 20.9%.
- The company issued $1.5 billion of medium-term notes: $500 million each due in 2024, 2034, and 2044, at stated rates of 3.30%, 4.20%, and 4.45%. It had $1.55 billion available under its $2.0 billion revolving credit facility and $450 million of commercial paper outstanding. It reported compliance with debt covenants.
- Other comprehensive loss attributable to common shareholders was $347.9 million for the quarter and $814.7 million for the nine months, primarily reflecting foreign-currency translation. Shareholders’ equity declined to $5.152 billion from $6.659 billion at June 30, 2014, reflecting repurchases and currency translation among other items.
Segments, changes, and outlook
- Diversified Industrial: North American sales were nearly flat in the quarter; international sales declined 15.4% reported, including a 13.6% currency impact. Nine-month reported segment sales declined 2.1%. Backlog was $1.663 billion, down from $1.903 billion a year earlier. Management expected fiscal 2015 North American sales growth of 1%–2% and international sales decline of 11%–12%; expected operating margins were 16.2%–16.3% for North America and 12.8%–13.0% internationally.
- Aerospace Systems: Quarter sales increased to $572.4 million from $545.7 million, and operating margin rose to 12.8% from 11.7%. Backlog was $1.848 billion, down from $1.924 billion a year earlier. Fiscal 2015 sales were expected to rise 3%–5% (excluding $49.5 million of prior-year sales from a deconsolidated subsidiary), with operating margins of 13.3%–13.5%.
- Management expected a fiscal 2015 effective tax rate of approximately 26.5%. It cited global manufacturing conditions, aircraft activity, defense spending, housing starts, and order rates as indicators relevant to demand. Order-to-revenue lead times range from one day to 12 weeks for mobile and industrial products and up to 18 months for aerospace.
- Realignment charges were $7.8 million in the quarter and $22.7 million for nine months, mainly severance related to plant closures and workforce reductions, especially in Europe. The company anticipated about $10 million of additional charges for the remainder of fiscal 2015 and expected international workforce actions to add approximately 2% to future annual operating income. Approximately $37 million of current- and prior-year severance payments remained accrued.
Unusual items, risks, and contingencies
- The prior-year nine-month comparison included a $412.6 million gain from deconsolidating a subsidiary into a GE Aviation joint venture and a $188.9 million goodwill and intangible-asset impairment. These items make year-over-year comparisons of other income and operating results less directly comparable.
- Current-period results included significant foreign-currency effects, including transaction gains associated in part with Swiss franc movements, as well as substantial translation losses in other comprehensive income.
- Gross unrecognized tax benefits were $146.5 million, including $79.7 million that would affect the effective tax rate if recognized; the company said up to approximately $110 million could be reduced within 12 months as examinations progress or tax statutes close.
- A European Commission marine-hose cartel matter remained pending after the European Court of Justice reversed a lower-court ruling and referred the case back to the General Court. The company and subsidiary had previously been held jointly liable for up to €6.30 million under the lower-court decision; the ultimate resolution is uncertain.
- Management identified risks including market and currency volatility, customer order changes, raw-material costs, acquisition and divestiture execution, realization of realignment savings, share-repurchase execution, retirement-benefit costs, and litigation. A voluntary U.S. pension retirement program could increase fourth-quarter fiscal 2015 pension cost; the amount depends on participant elections.
Important facts for investors to verify
- Whether currency movements and international demand continue to pressure Diversified Industrial sales and backlog.
- Progress against segment sales and margin guidance, including the potential effect of product mix and development costs in Aerospace.
- Cash generation and the sustainability of large share repurchases and dividends alongside higher debt and the debt-ratio goal.
- Actual costs and savings from realignment actions and the voluntary retirement program.
- Developments in the European marine-hose litigation and resolution of uncertain tax positions.