Parker-Hannifin Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. The request metadata says “2017 Q4,” but this filing covers FY2018; it also reports Q4 FY2018 results separately below. Unless otherwise stated, amounts are U.S. dollars.
Business context
Parker-Hannifin manufactures motion- and control-technology products for mobile, industrial and aerospace markets. FY2018 net sales were $14.3 billion: Diversified Industrial accounted for 84% and Aerospace Systems 16%. The company served approximately 455,000 customers; no individual customer represented more than 3% of sales.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $14.302 billion | $12.029 billion |
| Net income attributable to common shareholders | $1.061 billion | $983 million |
| Diluted EPS | $7.83 | $7.25 |
| Gross profit margin | 24.7% | 23.6% |
| Operating cash flow | $1.600 billion | $1.302 billion |
| Capital expenditures | $248 million | $204 million |
| Cash and cash equivalents | $822 million | $885 million |
| Long-term debt, net | $4.319 billion | $4.862 billion |
| Working capital / current ratio | $1.888 billion / 1.6 | $1.384 billion / 1.4 |
Sales rose 18.9%, reflecting higher volume, 2017 acquisitions (about $970 million of incremental FY2018 sales) and favorable currency effects (about $295 million). Sales excluding acquisitions, divestitures and currency grew 10.2% in Diversified Industrial. Net income increased about 8%, while the effective tax rate rose to 37.7% from 26.0%, primarily due to one-time Tax Cuts and Jobs Act (TCJA) adjustments. Operating cash flow increased, although working capital used $251 million of cash. Financing cash flow was a $1.682 billion outflow, including approximately $945 million of long-term debt repayment.
FY2018 diluted EPS was $7.83. In Q4 FY2018, net sales were $3.817 billion, common-shareholder net income was $353 million and diluted EPS was $2.62; Q4 FY2017 figures were $3.496 billion, $293 million and $2.15, respectively.
Segment operating margins improved in Aerospace Systems to 17.2% from 14.8% and in Diversified Industrial International to 14.5% from 13.2%; Diversified Industrial North America decreased to 16.0% from 16.3%. Management attributed the overall gross-margin improvement mainly to Aerospace product mix and lower simplification-related costs, partly offset by unfavorable industrial product mix, raw-material prices and manufacturing-consolidation inefficiencies.
Material changes and unusual items
- The $233 million provisional net TCJA tax charge included a $297 million transition-tax expense, partly offset by an approximately $80 million deferred-tax remeasurement benefit. Management said the accounting remained provisional and was still being evaluated.
- FY2018 included a roughly $20 million pretax loss on the sale of the global Facet filtration business, a $27 million investment writedown and a $14 million loss on sale of an investment.
- Business realignment and acquisition-integration charges were about $83 million in FY2018. Management expected approximately $35 million of related charges in FY2019.
- No acquisitions were completed in FY2018. The prior-year Clarcor acquisition contributed materially to sales and increased the scale and complexity of the business.
Outlook, risks and contingencies
For FY2019, management forecast Diversified Industrial North American sales growth of 2.6%–5.6% and operating margins of 16.4%–17.2%. International sales were expected to range from a 2.5% decline to 0.5% growth, with margins of 15.3%–15.7%. Aerospace sales were expected to grow 2.5%–4.5%, with operating margins of 17.2%–17.6%. Management noted that a higher commercial OEM mix or higher product-development costs could pressure Aerospace margins. It also expected FY2018 workforce reductions to add about 3% to operating income in each Diversified Industrial geography in FY2019.
Key disclosed risks include economic and end-market volatility, foreign-exchange exposure, tariffs and trade-policy changes, raw-material availability and prices, competitive pressure, cybersecurity, acquisition integration, tax uncertainty, product liability, environmental obligations, pensions and government-contract exposure. Environmental remediation reserves were $18 million; estimated total exposure ranged from $18 million to $81 million. The company said pending litigation was not expected to materially affect liquidity, financial condition or results, while noting outcomes cannot be predicted with certainty.
At June 30, 2018, commercial paper outstanding was $534 million and $1.466 billion remained available under a $2 billion revolving credit facility. The company reported compliance with debt covenants. Senior-debt ratings were Fitch A-, Moody’s Baa1 and S&P A. It had $175 million of gross unrecognized tax benefits, including interest, with settlement timing uncertain. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- How much of sales and earnings growth reflects underlying volume versus acquisitions and currency, and whether FY2019 guidance was achieved.
- The final TCJA accounting, transition-tax cash payments and future tax effects; the reported FY2018 tax rate includes a large one-time charge.
- Whether management’s expected margin gains and cost savings materialized, including against the planned FY2019 realignment charges.
- Debt reduction, refinancing needs, borrowing costs and liquidity, considering commercial paper, long-term maturities and credit ratings.
- Developments in the $18 million–$81 million environmental exposure range, uncertain tax positions, pension obligations and other contingencies.