Parker-Hannifin Corporation — Form 10-Q summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2010 (the third quarter of fiscal 2010), not 2009 as stated in the request metadata. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Parker-Hannifin manufactures motion-control technologies and systems for industrial, aerospace, and climate and industrial controls markets. Its three reportable segments are Industrial, Aerospace, and Climate & Industrial Controls (CIC). Management reported signs of economic recovery in the quarter, following a downturn during which the company reduced costs, managed working capital, and limited spending.
| Metric | Three months ended March 31, 2010 | Three months ended March 31, 2009 | Nine months ended March 31, 2010 | Nine months ended March 31, 2009 |
|---|---|---|---|---|
| Net sales | $2,614.8 | $2,344.7 | $7,206.7 | $8,098.1 |
| Gross profit | $552.4 | $436.1 | $1,473.8 | $1,730.8 |
| Gross margin | 21.1% | 18.6% | 20.5% | 21.4% |
| Net income attributable to common shareholders | $153.9 | $53.4 | $331.9 | $459.0 |
| Diluted EPS | $0.94 | $0.33 | $2.04 | $2.81 |
Quarterly sales rose 11.5%, reflecting higher volume in all segments except Aerospace. Year-to-date sales fell 11.0%, with lower volume across all segments. Quarterly gross-margin improvement reflected higher volume and benefits from prior realignment actions; year-to-date margin declined amid lower volume, manufacturing inefficiencies, and higher realignment charges. The effective tax rate was 25.2% for the quarter and 28.0% year to date; management expected approximately 28% for fiscal 2010.
Segments and material changes
- Industrial: Quarterly sales increased 15.4% as reported (10.8% excluding currency and acquisitions); operating margins improved in North America and internationally. Year-to-date sales decreased 11.4% as reported.
- Aerospace: Quarterly sales were $449.2 million and operating margin was 11.1%, versus $480.0 million and 13.7% a year earlier. Lower commercial OEM and military aftermarket volume contributed to the decline. Backlog was $1,463.4 million, down from $1,707.7 million.
- CIC: Quarterly sales rose 23.9% as reported and operating income was $16.3 million, compared with a $7.4 million loss. Higher volume and cost actions supported the improvement. Year-to-date sales remained down 5.3% as reported.
Quarterly other expense, net, was $4.0 million, compared with $27.5 million a year earlier. The prior-year quarter included $36.2 million of litigation-settlement expense and $11.6 million of insurance-recovery income. Year-to-date 2010 other expense included $11.0 million of asset writedowns. Comparability is also affected by a $22.4 million benefit recognized in the third quarter of fiscal 2009 after the company ended its non-union retiree medical plan’s self-insured arrangement.
Cash flow, balance sheet, and liquidity
- Cash from operations: $841.4 million for the first nine months of fiscal 2010, up from $716.1 million. Management said this was despite lower net income and a $100 million discretionary pension contribution; cash flow also included a $54 million receipt from restructuring an executive life-insurance program.
- Investing and financing: Investing activities used $104.4 million, versus $918.2 million in the prior-year period, reflecting lower acquisition activity and capital spending. Financing activities used $534.3 million, including net repayment of notes payable; prior-year financing provided $81.2 million.
- Cash and working capital: Cash was $380.6 million at March 31, 2010, versus $187.6 million at June 30, 2009. Working capital was $1,282.4 million and the current ratio was 1.62, compared with $1,118.0 million and 1.56, respectively.
- Debt: Notes payable were $366.7 million and long-term debt on the balance sheet was $1,535.9 million. Management reported total debt of $1,902.6 million and a debt-to-debt-plus-shareholders’ equity ratio of 29.2%, down from 35.2% at June 30, 2009. The company had $1,445 million available under its $1.5 billion revolving credit agreement and reported compliance with debt covenants.
- Working-capital indicators: Inventory was $1,196.6 million, down from $1,254.6 million; inventory days declined to 63 from 77. Receivables days declined to 49 from 53.
Outlook, risks, and unusual items
For fiscal 2010, management forecast Industrial North American sales down 3.6%–5.6% and margins of 12.9%–13.1%; Industrial International sales down 1.8%–4.8% and margins of 9.7%–9.9%; Aerospace sales down 7.6%–8.0% and margins of 11.5%–11.7%; and CIC sales ranging from a 0.1% decline to a 0.9% increase, with margins of 6.3%–6.5%. Management noted that additional realignment charges could occur, with timing and amount not finalized.
Management cited improving U.S. and Eurozone manufacturing purchasing-manager indexes and higher North American housing starts, but noted uncertainty beyond the near term. Aerospace indicators were mixed: airline capacity was lower while passenger miles had improved. Principal risks include economic and market conditions, customer demand and cancellations, pricing and raw-material costs, execution and integration of acquisitions, realization of restructuring savings, currency and interest-rate movements, employee benefit costs, and pending litigation.
The company recorded $41.3 million in fiscal 2010 year-to-date business-realignment charges, primarily severance and plant-closure costs; approximately $22.6 million had been paid by March 31, with most remaining payments expected by June 30. Pension contributions were approximately $130 million year to date, with approximately $10 million expected in the final quarter. Three Industrial reporting units had estimated fair values only modestly above carrying values; the annual impairment test found no goodwill impairment, but a weaker-than-expected recovery could trigger further testing.
In the Parker ITR marine-hose matters, the company reported a $2.29 million U.S. fine and a 675,000 Australian-dollar settlement fine, both paid; a Korean fine was also paid. The European Commission’s 25.61 million-euro fine was under appeal, including the company’s joint and several responsibility for 8.32 million euros. Brazilian proceedings remained ongoing. The company reported a $2.9 million remaining reserve for the class-action and regulatory matters. Management stated that other ordinary-course litigation was not expected to materially affect the company.
Important facts for investors to verify
- Confirm the fiscal-period distinction: this is the quarter ended March 31, 2010, despite the request’s “2009 Q3” label.
- Track whether the expected fiscal 2010 segment sales and margin ranges were achieved, especially the Aerospace backlog and Industrial recovery.
- Assess whether restructuring savings materialized and whether additional charges or workforce needs affected those savings.
- Monitor operating cash generation, pension contributions, debt reduction, and available revolving-credit capacity.
- Follow the outcome of the European appeal and remaining Brazilian proceedings, and any related financial exposure.
- Consider the assumptions supporting goodwill valuations of the three Industrial reporting units with relatively limited fair-value headroom.