Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal 2013 second quarter and first six months ended December 31, 2012; compared with the periods ended December 31, 2011. The company manufactures motion-control and fluid systems for industrial, aerospace, and climate-control markets.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Net sales | $3.065 billion; down 1.3% year over year | $6.280 billion; down 1.0% |
| Gross margin | 21.0%, versus 23.4% | 22.0%, versus 24.4% |
| Net income | $181.1 million, versus $242.3 million | $421.1 million, versus $540.5 million |
| Diluted EPS | $1.19, versus $1.56 | $2.77, versus $3.47 |
| Operating cash flow | Not reported separately for the quarter | $347.3 million, versus $563.4 million |
Quarterly SG&A was $381.1 million, or 12.4% of sales, compared with $368.7 million, or 11.9%. The six-month effective tax rate was 29.7%, versus 28.0%. Dividends were $0.41 per share for the quarter and $0.82 for the six months.
Segments and changes versus prior year
- Industrial: Quarterly sales were $2.367 billion, down 1.5% as reported; excluding acquisitions and currency, down 5.7%. North American and international operating margins fell to 15.4% and 10.6%, respectively. Backlog was $1.720 billion, versus $1.813 billion a year earlier.
- Aerospace: Quarterly sales rose to $528.7 million from $496.5 million, while operating margin declined to 9.9% from 14.2%. Backlog increased to $1.932 billion from $1.751 billion.
- Climate & Industrial Controls: Quarterly sales declined to $170.2 million from $208.2 million, mainly reflecting the automotive business divestiture. Operating margin was 4.8%, versus 4.7%; backlog was $114.6 million, versus $160.5 million.
Management attributed lower consolidated margins primarily to higher defined-benefit costs, Industrial operating inefficiencies, and Aerospace product mix and engineering-development costs. Sales were affected by weaker Industrial international and Climate & Industrial Controls volume, partly offset by growth in North American Industrial and Aerospace and acquisition contributions. Currency reduced sales by about $19 million in the quarter and $110 million year to date.
Cash, balance sheet, debt, and liquidity
- Cash was $497.6 million at December 31, down from $838.3 million at June 30, 2012. Working capital was $1.608 billion and the current ratio was 1.65, compared with 1.81 at June 30.
- Total debt was approximately $2.019 billion; management’s debt-to-debt-plus-shareholders’ equity ratio was 27.5%, versus 26.1% at June 30. The stated financial goal is no more than 37%.
- A $2.0 billion revolving credit facility had $1.718 billion available. Commercial paper outstanding was $282 million. The company reported compliance with debt covenants.
- Six-month investing cash use was $687.0 million, including $621.7 million for acquisitions and $140.2 million of capital expenditures, partly offset by business-sale proceeds. Financing cash use was $56.8 million, including $157.0 million of share repurchases and $123.3 million of dividends.
- Operating cash flow declined partly because of lower net income and $226 million of voluntary contributions to the domestic qualified pension plan. Cash held by foreign subsidiaries was $440 million and generally not readily available for U.S. use without adverse tax consequences.
Outlook, risks, and unusual items
- Fiscal 2013 segment outlook: Industrial North American sales from a 0.7% decline to 2.3% growth, with margins of 16.5%–16.9%; Industrial International sales down 4.7%–1.6%, with margins of 12.5%–12.9%; Aerospace sales up 6.6%–9.6%, with margins of 12.2%–12.4%; Climate & Industrial Controls sales down 14.5%–11.5%, with margins of 9.4%–9.8%.
- Management expected a fiscal 2013 effective tax rate of approximately 28%, including an estimated two-percentage-point reduction from tax legislation enacted January 2, 2013. No consolidated sales or EPS forecast is stated in the supplied filing text.
- The company completed eight acquisitions in the first half, for approximately $622 million in cash plus $114 million of assumed debt; acquired businesses had prior-year sales of $484 million. It completed the divestiture of the automotive businesses of Mobile Climate Systems and agreed to sell its Turkey refrigeration-components business. The transactions produced an approximately $17 million net pretax gain; the Turkey sale was expected to close in the third quarter and was expected to result in a loss on completion.
- Business realignment charges included severance and plant-closure costs; further actions and charges may occur. Pension expense rose materially, largely due to recognized actuarial losses. The annual goodwill impairment test was in progress; management expected completion by the end of fiscal third quarter and reported no identified impairment indicators for long-lived assets in the first half.
- Risks cited include economic and market weakness, customer or distributor changes, acquisition integration, cost-saving execution, raw-material costs, currency and interest rates, retirement-benefit costs, competition, and legal proceedings. Marine-hose cartel investigations remain pending in Brazil; the European Commission imposed a fine that Parker ITR and the company appealed.
- The filing corrected a prior disclosure of foreign undistributed earnings reinvested overseas: the June 30, 2012 amount was $2.4 billion, not $669 million. The company stated the correction did not affect reported results, financial position, or cash flows.
Investor verification priorities
- Assess whether margin pressure and Industrial demand weakness persist, and compare subsequent segment results and backlog with the fiscal 2013 outlook.
- Track cash generation after the voluntary pension contribution, acquisition spending, capital expenditures, dividends, and share repurchases.
- Verify acquisition integration and the completion and final financial effects of the Turkey divestiture and other portfolio actions.
- Monitor pension assumptions and expense, goodwill impairment-test results, tax-rate developments, and the availability of overseas cash.
- Review updates on the marine-hose legal matters, including the status and potential consequences of the European appeal and Brazilian investigation.