Parker-Hannifin Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2021; filed May 6, 2021. The filing covers fiscal 2021, notwithstanding the request metadata’s “2020 Q3.” Parker manufactures motion-control and fluid systems for industrial, mobile, and aerospace markets.
Financial performance
| Metric | Three months ended March 31, 2021 | Year-over-year change | Nine months ended March 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $3.746 billion | +1.2% | $10.389 billion | -1.4% |
| Net income | $472 million | +28.4% | $1.241 billion | +36.2% |
| Diluted EPS | $3.59 | vs. $2.83 | $9.50 | vs. $7.01 |
| Gross margin | 27.5% | vs. 25.3% | 26.7% | vs. 24.7% |
| Net margin | 12.6% | vs. 9.9% | 11.9% | vs. 8.6% |
Cash flow and liquidity: Nine-month operating cash flow was $1.881 billion, compared with $1.291 billion. Capital expenditures were $136 million; operating cash flow less capital expenditures was approximately $1.745 billion. Investing activities provided $51 million, including proceeds from a land sale; financing activities used $2.216 billion. Cash and cash equivalents were $490 million at March 31, 2021, down from $686 million at June 30, 2020. Working capital was $2.012 billion, current ratio 1.7, and $2.316 billion remained available under a $2.5 billion revolving credit facility.
Debt: Long-term debt was $6.572 billion and current debt was $186 million at March 31, 2021, versus $7.652 billion and $810 million, respectively, at June 30, 2020. The company repaid approximately $1.21 billion of term loans during the nine months. Debt-to-debt-plus-equity was 0.48, below the 0.65 covenant limit; Parker reported compliance with its covenants.
Business trends and material changes
- Quarterly sales were nearly flat overall: growth in Diversified Industrial International was offset by declines in Aerospace Systems and Diversified Industrial North America. For the nine months, sales decreased modestly; acquisitions added approximately $394 million and currency increased sales by approximately $146 million.
- Diversified Industrial sales rose 6.4% in the quarter, including 11.1% organic growth in International and a 1.2% organic decline in North America. Segment operating margins improved to 19.1% in North America and 19.8% International, from 15.7% and 15.0%.
- Aerospace Systems quarterly sales declined to $599 million from $745 million; operating margin was 17.1%, unchanged year over year. Commercial OEM and aftermarket demand remained weak, while military volume partly offset the decline. Aerospace backlog was $3.335 billion.
- Total backlog was $6.185 billion, up from $5.543 billion a year earlier; approximately 87% was expected to convert to revenue within 12 months.
- Profitability benefited from cost controls, lower discretionary spending, productivity improvements, lower interest expense, and the absence of prior-year acquisition-related costs. Nine-month results also included a $101 million gain on land sale within a total $108 million gain on disposal of assets.
Outlook, risks, and unusual items
- Management expected fiscal 2021 effective tax rate to be approximately 22.5%. No full-year revenue or earnings guidance is stated in the provided filing text.
- Management said COVID-19 continued to create unpredictable business and economic effects. Commercial aerospace remained significantly disrupted: aircraft miles flown were down approximately 59% and available revenue passenger miles down approximately 70% from the comparable prior-year period.
- Management anticipated realignment savings would increase fiscal 2022 operating income by approximately 1% in each Diversified Industrial business and approximately 3% in Aerospace Systems. Approximately $12 million of additional Diversified Industrial realignment and integration charges were anticipated for the remainder of fiscal 2021; significant additional Aerospace charges were not expected.
- Fiscal 2021 business realignment and acquisition integration charges were $19 million for the nine months; approximately $19 million of remaining realignment payments were expected, mostly by March 31, 2022. Additional charges could occur, with timing and amount uncertain.
- Other disclosed risks include economic and currency conditions, air travel and industrial demand, acquisition integration, raw-material costs, cybersecurity, customer and supplier changes, litigation, taxes, leverage, product liability, and environmental and regulatory requirements. Gross unrecognized tax benefits were $103 million, plus $17 million accrued interest; up to approximately $40 million could be reduced within 12 months.
Important facts for investors to verify
- Whether industrial order trends and backlog convert to sales at the pace and margins management expects, particularly in aerospace.
- How much reported earnings growth reflects sustainable operations versus the land-sale gain, cost actions, and prior-year acquisition-related expenses.
- Whether COVID-19, commercial aviation weakness, and supply or input-cost pressures affect demand, margins, or cash generation.
- Debt repayment, liquidity, and covenant capacity, alongside the resumed share-repurchase program ($50 million repurchased in the quarter).
- The timing and financial effect of remaining restructuring costs, tax-position developments, and any further business realignment actions.