Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2009; filed February 4, 2010. The unaudited statements cover the three and six months ended December 31, 2009, compared with the corresponding 2008 periods. Parker-Hannifin manufactures motion- and control-related products and reports Industrial, Aerospace, and Climate & Industrial Controls segments.
Key financial results
Amounts are in millions of dollars unless stated otherwise.
| Metric | Three months ended Dec. 31, 2009 | Three months ended Dec. 31, 2008 | Six months ended Dec. 31, 2009 | Six months ended Dec. 31, 2008 |
|---|---|---|---|---|
| Net sales | $2,354.7 | $2,688.7 | $4,591.9 | $5,753.3 |
| Gross profit | $485.2 | $567.2 | $921.4 | $1,294.7 |
| Gross margin | 20.6% | 21.1% | 20.1% | 22.5% |
| Net income | $105.0 | $156.8 | $178.9 | $408.6 |
| Net income attributable to common shareholders | $104.5 | $155.4 | $178.0 | $405.6 |
| Diluted EPS | $0.64 | $0.96 | $1.10 | $2.47 |
- Sales fell 12.4% in the quarter and 20.2% for the six-month period. Lower sales across all segments drove weaker earnings; reported sales included favorable currency effects of about $101 million for the quarter and $55 million year to date.
- Lower volumes and related manufacturing inefficiencies, along with higher year-to-date realignment charges, pressured gross margin. SG&A declined, chiefly from lower sales and incentive compensation. Interest expense also declined with lower average debt and borrowing rates.
- Other expense included $7.7 million of asset writedowns in both the quarter and six-month period, including assets of a business held for sale. Six-month other expense also included $3.2 million of income from restructuring the executive life insurance program.
- The effective tax rate was 26.2% for the quarter and 30.2% year to date; management expected approximately 29% for fiscal 2010. Higher rates versus the prior-year periods primarily reflected discrete tax items related to tax-audit settlements.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $606.3 million, versus $444.5 million a year earlier, despite lower net income. The current period included a $54 million cash receipt from restructuring an executive life insurance program; improved working-capital management also supported cash generation.
- Investing cash outflow was $69.9 million, compared with $871.9 million, reflecting no current-period acquisitions and lower capital spending. Financing cash outflow was $484.3 million, mainly reflecting debt repayment; the prior year included substantial commercial-paper borrowing and share repurchases.
- Cash was $233.9 million at December 31, 2009, up from $187.6 million at June 30. Working capital was $1,142.5 million and the current ratio was 1.60, compared with 1.56 at fiscal year-end. Receivables and inventories declined; days sales outstanding improved to 48 from 53 and inventory supply to 72 days from 77.
- Debt was $1,943.8 million and the debt-to-debt-and-equity ratio was 29.9%, down from 35.2% at June 30 and below the company’s 37% maximum goal. The $1.5 billion revolving credit facility had $1,439 million available. The company reported compliance with debt covenants and said borrowing remained available at affordable rates.
- Cash dividends were $0.25 per share for the quarter and $0.50 for the six months, unchanged from the comparable periods. Pension and other postretirement benefit liabilities totaled $1,258.3 million. The company contributed $22 million to qualified defined-benefit plans in the first half and expected to contribute about $118 million in the second half, most of it discretionary.
Segments and changes versus prior periods
- Industrial: Quarterly sales fell 12.6% as reported; excluding acquisitions and currency, they fell 17.6%. North American operating margin improved to 13.5% from 10.8%, while international margin declined to 8.9% from 11.0%. For the first six months, both regions’ sales and operating income were substantially lower year over year.
- Aerospace: Quarterly sales declined to $400.6 million from $473.7 million and operating margin fell to 10.2% from 14.7%. Lower commercial and military OEM and commercial aftermarket volumes were cited; lower higher-margin commercial aftermarket activity particularly affected margins.
- Climate & Industrial Controls: Quarterly sales declined to $174.9 million from $179.2 million, but the segment returned to operating profit of $6.1 million from a $12.8 million loss. Cost controls and prior realignment actions more than offset lower volume.
- Company-wide business realignment charges were $7.1 million for the quarter and $26.4 million for the six months, primarily severance related to plant closures and workforce reductions. About $13.7 million of severance had been paid by December 31; remaining payments were expected by June 30, 2010.
Outlook, risks, and unusual items
- For fiscal 2010, management expected Industrial North American sales to decline 6.3%–10.3% and international sales 1.4%–6.4% from fiscal 2009; projected operating margins were 12.4%–12.6% and 8.4%–8.8%, respectively. Aerospace sales were expected to decline 7.9%–8.7%, with margins of 11.1%–11.4%. Climate & Industrial Controls sales were expected to decline 4.3%–6.7%, with margins of 5.6%–6.2%.
- Management noted improving U.S. and Eurozone manufacturing indexes and a late-quarter easing in some industrial demand declines, but said the broader economic outlook remained uncertain. It cited weaker air-traffic measures and did not expect North American housing starts to rise significantly for the remainder of fiscal 2010.
- Management anticipated cost savings from first-half workforce reductions of about $18 million in fiscal 2010 and $27 million in fiscal 2011 for Industrial, and $2 million and $3 million, respectively, for Climate & Industrial Controls. Further realignment charges remained possible; actual savings could be lower if demand recovery requires rehiring.
- The company wrote down the Seal Aftermarket business, including its goodwill, as it pursued a divestiture. Its annual fiscal 2010 goodwill impairment test was in process and expected to be completed by the end of fiscal third quarter. Management warned that a significantly delayed recovery could prompt additional impairment testing.
- Unrecognized tax benefits were $141.6 million, including $11.0 million of accrued interest. The company said up to $65 million of unrecognized tax benefits could be reduced within 12 months through audit settlements and statute expirations.
- Marine-hose cartel-related proceedings involving subsidiary Parker ITR remained a material legal matter. The company appealed the European Commission decision, which included an €8.32 million joint-and-several fine for the company; a proposed Australian settlement provided for a total fine of AUD 675,000. U.S. class-action settlement approval was granted January 13, 2010. The remaining reserve for these matters was $2.4 million. Management believed other pending proceedings would not materially adversely affect the company.
- Other stated risks included customer and supplier changes, market demand and pricing, raw-material costs, pension and health-care costs, currency and interest-rate movements, credit availability, acquisitions, and realization of restructuring savings.
Important facts for investors to verify
- Whether demand and order-rate trends, particularly in Industrial and Aerospace, support the fiscal 2010 segment sales and margin outlook.
- Whether restructuring savings are realized and whether additional charges or workforce changes are required.
- The outcome of the goodwill impairment test and the planned Seal Aftermarket divestiture.
- Developments in Parker ITR litigation and regulatory investigations, as well as the potential timing and amount of tax-benefit settlements.
- Whether operating cash generation, pension funding, and available credit remain adequate as the business recovers.