Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2021. Unaudited results compare with the periods ended December 31, 2020; prior-year figures were adjusted for an inventory-accounting method change. Parker operates Diversified Industrial and Aerospace Systems businesses.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3.825 billion, up 12.1% | $7.587 billion, up 14.2% |
| Gross margin | 27.7%, versus 26.2% | 27.8%, versus 26.2% |
| Net income | $388 million, down 13.6% | $839 million, up 9.2% |
| Diluted EPS | $2.97, versus $3.42 | $6.42, versus $5.89 |
| Operating cash flow | Not reported as a quarterly figure here | $1.005 billion, versus $1.354 billion |
Quarterly net margin was 10.1%, compared with 13.1%; six-month net margin was 11.1%, compared with 11.6%. Gross-margin improvement reflected higher volume, continuous-improvement benefits and pricing, partly offset by higher freight, material and labor costs. The quarter’s lower net income chiefly reflects a $149 million loss on Meggitt-related deal-contingent forward contracts and the absence of the prior-year $101 million land-sale gain.
- Diversified Industrial: Quarterly sales were $3.206 billion, up 13.4% as reported (14.7% excluding currency); six-month sales were $6.376 billion, up 16.3%. Quarterly operating margins were 18.7% in North America and 20.8% internationally, both higher year over year.
- Aerospace Systems: Quarterly sales were $618 million, up 5.6%; six-month sales were $1.211 billion, up 4.5%. Quarterly operating margin improved to 18.6% from 15.5%. Management cited stronger commercial OEM and aftermarket volume, partly offset by lower military volume.
- Cash flow and investment: Six-month operating cash flow declined $349 million, primarily due to a $406 million increase in working-capital requirements, partly offset by higher net income. Capital expenditures were $106 million.
Balance sheet, liquidity and capital allocation
- At December 31, cash and cash equivalents were $449 million; marketable securities and other investments were $41 million. A further $2.487 billion of acquisition-restricted cash was recorded in prepaid expenses and other, so reported cash should not be viewed as fully available for general use. Cash-flow statement ending cash, cash equivalents and restricted cash was $2.937 billion.
- Total debt was approximately $8.452 billion, including $2.202 billion classified as current and $6.251 billion long-term. Commercial paper outstanding was $1.899 billion. The company reported $1.101 billion available under its $3.0 billion revolving credit agreement.
- The debt-to-debt-shareholders’ equity covenant ratio was 0.49 to 1.0, against a maximum of 0.65; the company reported compliance with its covenants. Total liabilities were $13.627 billion and shareholders’ equity was $8.755 billion.
- Six-month financing included $1.899 billion of net commercial-paper borrowings. Parker repurchased 929,808 shares for $280 million and paid $266 million in dividends. The quarterly dividend was $1.03 per share.
Outlook, material developments and risks
- The proposed cash acquisition of Meggitt, priced at 800 pence per share and valued at approximately £6.256 billion based on issued shares, remained subject to customary closing conditions, including regulatory clearances. Parker planned to fund it with cash and new debt. Acquisition-related transaction costs were $22 million for the six months; bridge-financing fees were $49 million.
- Deal-contingent forwards with £6.415 billion notional value hedge the sterling purchase price. Their settlement depends on closing, and Parker warned that further fair-value gains or losses before closing could be significant.
- Management expected a fiscal 2022 effective tax rate of approximately 22%, targeted capital expenditures at 2% of sales, and anticipated approximately $26 million of additional Diversified Industrial realignment and integration charges in the remainder of fiscal 2022. It did not expect significant additional Aerospace Systems realignment charges.
- Backlog was $7.148 billion, with approximately 87% expected to convert to revenue within 12 months. Diversified Industrial backlog increased year over year; Aerospace Systems backlog declined slightly.
- Management described commercial aerospace demand as beginning to recover but emphasized continuing uncertainty from COVID-19, supply-chain and labor-market disruption, inflationary input costs, and aerospace conditions. The filing states the ultimate pandemic impact cannot be reasonably estimated and could be material.
- Other disclosed exposures include $100 million of gross unrecognized tax benefits, plus $20 million accrued interest; up to approximately $40 million of the gross benefits could be reduced within 12 months. The filing also identifies acquisition execution, leverage, currency, customer and supplier changes, regulation, and cybersecurity among risks.
Most important facts for investors to verify
- Current status, financing, regulatory approvals and expected closing of the Meggitt acquisition, including the use and release of restricted escrow cash.
- Whether working capital and inventory pressures ease and operating cash flow recovers; inventory days rose to 86 from 75 at June 30, 2021.
- Whether pricing and productivity continue to offset freight, material and labor inflation, and whether backlog converts to sales as expected.
- Quarterly earnings comparability: the $149 million hedge loss in the current period and the approximately $101 million land-sale gain in the prior-year period materially affect the comparison.
- Debt and liquidity after acquisition financing, including covenant headroom and the reported availability under the revolving credit agreement.