Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014. Financial statements are unaudited; dollar amounts below are U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Net sales | $3.135 billion, up 0.9% year over year | $6.405 billion, up 1.1% |
| Gross profit / margin | $733.4 million / 23.4%, versus 22.1% | $1.543 billion / 24.1%, versus 22.7% |
| Net income attributable to common shareholders | $267.3 million, versus $253.3 million | $547.3 million, versus $497.6 million |
| Diluted EPS | $1.80, versus $1.66 | $3.66, versus $3.28 |
| Operating cash flow | Six-month period: $538.5 million, versus $540.1 million |
Quarterly net margin was 8.5%, compared with 8.2%; the six-month net margin was 8.5%, compared with 7.9%. Six-month capital expenditures were $109.8 million. Cash dividends per share were $0.63 for the quarter and $1.11 for the six months.
Balance sheet, liquidity and capital allocation
- At December 31, cash and cash equivalents were $1.075 billion; marketable securities and other investments were $886.9 million. The company reported working capital of $3.389 billion and a current ratio of 2.45.
- Total debt was approximately $2.968 billion, up from $2.325 billion at June 30, 2014. Debt-to-debt-and-shareholders’ equity was 34.0%, versus 25.9% at June 30; management’s stated maximum goal is 37%. Net of cash and marketable securities, the ratio was 14.9%.
- The company issued $1.5 billion of 10-, 20- and 30-year notes at coupon rates of 3.30%, 4.20% and 4.45%, respectively, and used part of the proceeds to repay commercial paper. No commercial paper was outstanding at quarter-end. A $2.0 billion revolving credit facility was entirely available.
- Six-month share repurchases were $866.7 million for 6.83 million shares; the repurchase authorization was increased to 35 million shares. Financing cash outflow was $347.3 million. Cash and cash equivalents decreased $538.2 million, including an $88.7 million adverse exchange-rate effect.
- Approximately $1.953 billion of cash and investments was held by foreign subsidiaries and may not be readily available in the U.S. without adverse tax consequences; management said this would not impair planned liquidity needs.
Changes versus the prior comparable period
- Sales growth reflected stronger Diversified Industrial North American and Aerospace Systems activity, offset by weaker reported Diversified Industrial International sales. Currency reduced sales by approximately $108 million in the quarter and $131 million for the six months.
- Gross margin improved on higher volume and favorable product mix in North America and Aerospace, and lower fixed overhead in international operations. SG&A declined, partly due to lower realignment, stock-compensation and incentive-compensation costs.
- Prior-year comparisons are materially affected by unusual items: prior-year results included a $413 million pre-tax gain on deconsolidation of a subsidiary and a $188.9 million goodwill and intangible-asset impairment. No comparable impairment was recorded in fiscal 2015. The prior-year gain makes reported year-over-year comparisons of other income and pre-tax income especially non-comparable.
- Foreign currency translation reduced six-month other comprehensive income by $519.0 million and contributed to the decline in shareholders’ equity.
Segments, outlook and management commentary
- Diversified Industrial: Quarterly North American sales rose 4.8% as reported and international sales fell 7.0%; excluding acquisitions and currency, they increased 5.2% and 0.3%, respectively. Quarterly operating margins were 16.3% in North America and 11.5% internationally. Fiscal 2015 sales guidance: North America up 3%–6%, international down 8%–6%; margin guidance: 16.8%–17.2% and 14.3%–14.5%, respectively.
- Aerospace Systems: Quarterly sales were $558.4 million, up from $503.8 million; operating margin improved to 12.0% from 8.9%. Fiscal 2015 sales are expected to rise 4%–5%, excluding $49.5 million of fiscal 2014 sales from the deconsolidated subsidiary; expected margin is 13.2%–13.6%. Management cautioned that a greater commercial OEM mix or higher new-product development costs could reduce margins.
- Management expects the fiscal 2015 effective tax rate to be approximately 27%. The current-period rate benefited from tax items and a greater share of estimated foreign earnings in lower-tax jurisdictions.
- Business realignment charges were $14.9 million for the first six months, mainly related to workforce reductions and plant closures, largely in Europe. Approximately $24 million of additional charges were expected in the remainder of fiscal 2015. Management expects realignment actions to support future results but does not expect the current-year workforce reductions to materially affect future operating income.
- Market indicators were mixed: U.S. manufacturing PMI was 55.5, Eurozone 50.6 and China 49.6 at December 31. Aircraft miles flown and passenger miles were each reported up approximately 6% year over year; U.S. housing starts were up approximately 5%.
Risks, contingencies and other notable items
- Key stated risks include changes in demand, customer and supplier relationships, product mix and pricing; raw-material costs; foreign exchange; acquisition and divestiture execution; benefits costs; and the ability to realize savings from realignment efforts.
- A European Commission marine-hose cartel matter remains pending: the European Court of Justice reversed a prior General Court ruling and referred the case back. The prior ruling had reduced the fine and limited joint liability; the ultimate outcome remains uncertain.
- Gross unrecognized tax benefits were $143.8 million, with $64.5 million that would affect the effective tax rate if recognized. Management said up to approximately $100 million could be reduced within 12 months, depending on examinations or statute closures.
- Management reported disclosure controls were effective at December 31, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether segment sales, margins and order/backlog trends support the fiscal 2015 guidance, particularly international industrial weakness and aerospace mix risks.
- The effect of currency movements and the extent to which reported growth reflects underlying volume rather than exchange rates or portfolio changes.
- Cash conversion and working-capital trends: operating cash flow was nearly flat year over year while inventories increased and days’ supply rose to 72 from 61 at June 30.
- Debt and capital returns after the $1.5 billion note issuance and substantial share repurchases; monitor leverage against management’s 37% ceiling.
- Developments in the marine-hose litigation and tax examinations, including the possible resolution of uncertain tax positions.