Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 31, 2014, with year-to-date results for the nine months ended that date. The filing period differs from the request metadata’s “2013 Q3.” Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Parker-Hannifin manufactures motion-control and fluid systems for industrial, aerospace, and other markets. Its two reporting segments are Diversified Industrial and Aerospace Systems. The company reorganized its segment structure effective July 1, 2013 and revised prior-period segment results accordingly.
| Metric | Three months to Mar. 31, 2014 | Three months to Mar. 31, 2013 | Nine months to Mar. 31, 2014 | Nine months to Mar. 31, 2013 |
|---|---|---|---|---|
| Net sales | $3,358.4 | $3,307.0 | $9,690.6 | $9,587.5 |
| Gross profit | $752.5 | $737.9 | $2,188.3 | $2,118.9 |
| Gross margin | 22.4% | 22.3% | 22.6% | 22.1% |
| Net income | $242.5 | $256.6 | $740.2 | $677.7 |
| Diluted EPS | $1.60 | $1.68 | $4.88 | $4.46 |
Financial position, cash flow, and debt
- For the nine months, operating cash flow was $817.5 million, versus $718.8 million a year earlier. Capital expenditures were $167.4 million, giving approximate operating cash flow less capital expenditures of $650.1 million, compared with $504.7 million.
- Cash increased to $2,096.0 million from $1,781.4 million at June 30, 2013. Investing activities provided $28.3 million, including $202.5 million of net proceeds from the GE Aviation joint-venture transaction; financing activities used $582.7 million.
- At March 31, 2014, total debt was approximately $2,587 million, comprising $1,078.8 million due within one year and $1,508.6 million long-term debt. Debt-to-debt-and-shareholders’ equity was 28.6%, down from 33.0% at June 30, 2013; net of cash, the reported ratio was 7.1%.
- Working capital was $2,581.8 million and the current ratio was 1.77, versus $2,011.0 million and 1.57 at June 30, 2013. The $2,000 million revolving credit facility had $922 million available. Commercial paper outstanding was $1,078 million.
- Cash dividends were $0.48 per share for the quarter and $1.38 year to date. The company repurchased 1.34 million shares for $150 million year to date.
Material changes and segment performance
- Quarterly sales increased about 1.6%; nine-month sales increased about 1.1%. Quarterly net income declined about 5.5%, while year-to-date net income increased about 9.2%. Year-to-date results include significant nonrecurring items described below.
- Quarterly gross margin improved modestly; year-to-date margin rose to 22.6% from 22.1%. Higher volume, favorable Diversified Industrial mix, and lower pension costs helped, partly offset by realignment charges and unfavorable Aerospace Systems mix. SG&A increased as a share of sales to 12.5% year to date from 11.9%.
- Diversified Industrial: Quarterly sales were $2,812.7 million, up from $2,729.0 million; segment operating income was $369.9 million, down from $382.7 million. North American quarterly margin improved to 16.7% from 15.7%, while International margin declined to 9.4% from 12.2%, principally reflecting higher realignment charges.
- Aerospace Systems: Quarterly sales were $545.7 million versus $578.0 million; operating income was $64.0 million versus $80.1 million, and margin was 11.7% versus 13.9%. Lower sales reflected the absence of the deconsolidated subsidiary and reduced military and aftermarket volume.
Outlook, unusual items, and risks
- The company expected fiscal 2014 effective tax rate of approximately 34%. Segment outlook: Diversified Industrial North American sales growth of about 2% and margin of 16.6%; International sales growth of about 4% and margin of 11.7%; Aerospace Systems sales growth of about 3% excluding the deconsolidated subsidiary and margin of about 11.8%.
- Management anticipated approximately $30 million of additional business realignment charges in the remainder of fiscal 2014. About $65 million of remaining fiscal 2014 severance payments were expected by March 31, 2015. Management expected International realignment actions to improve operating income by approximately 3% in fiscal 2014 and 10% in fiscal 2015.
- A $413 million pretax gain arose from deconsolidating a subsidiary after selling a 50% interest to GE Aviation and retaining an equity-method investment. This noncash accounting gain materially benefited year-to-date earnings; the cash-flow statement separately reports $202.5 million of net deconsolidation proceeds.
- The company recorded $188.9 million of goodwill and intangible-asset impairment charges related to its Worldwide Energy Products Division, following a change in strategic direction. These noncash charges included $140.3 million of goodwill and $43.7 million of intangible assets; the filing also describes impairment of property, plant and equipment.
- Other risks include uncertain demand across industrial and aerospace markets, customer and product-mix changes, raw-material costs, currency movements, realignment execution and impairment assumptions. The filing identifies an ongoing European Commission appeal concerning a marine-hose cartel fine; the General Court had reduced the fine to €6.40 million, with the company and subsidiary jointly liable up to €6.30 million. A Brazilian investigation was resolved.
- Management reported effective disclosure controls as of March 31, 2014 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring operating performance from the $413 million deconsolidation gain and $188.9 million impairment charge when assessing year-to-date earnings and tax effects.
- Track International Diversified Industrial margins, planned realignment costs and whether expected savings are achieved.
- Monitor Aerospace Systems backlog and margins, including the effects of the joint venture and mix shifts.
- Review cash availability and debt maturities, including the substantial foreign-held cash balance, commercial-paper needs, and credit-facility availability.
- Follow the GE Aviation joint venture’s future contribution and the outcome of the European Commission appeal.