Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended December 31, 2020. The company manufactures motion- and control-technology products for industrial, mobile, and aerospace markets. Comparisons are with the corresponding periods ended December 31, 2019, unless noted otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $3.412 billion, down 2.5% | $6.642 billion, down 2.8% |
| Gross margin | 26.2%, up from 23.3% | 26.2%, up from 24.4% |
| Net income attributable to common shareholders | $447 million, up from $204 million | $769 million, up from $543 million |
| Diluted EPS | $3.41, up from $1.57 | $5.89, up from $4.17 |
| Operating cash flow | Not separately reported for the quarter | $1.354 billion, up from $826 million |
Quarterly SG&A was $357 million, or 10.5% of sales, compared with $491 million, or 14.0%; six-month SG&A was $726 million, or 10.9% of sales, versus $890 million, or 13.0%. The six-month effective tax rate was 22.4%, compared with 21.0% a year earlier. Fiscal 2021’s effective tax rate was expected to be approximately 23%.
Segments and operating trends
- Diversified Industrial: Quarterly sales rose 2.3% to $2.827 billion, reflecting acquisition and currency benefits; excluding both, sales declined 2.2%. North American sales fell 3.0%, while international sales increased 9.8% as reported. Segment operating margins improved in both regions, to 18.0% in North America and 17.5% internationally.
- Aerospace Systems: Quarterly sales fell 20.4% to $585 million, and operating margin declined to 15.5% from 16.5%. Lower commercial OEM and aftermarket demand amid COVID-19 was partly offset by military demand. The reduced Boeing 737 MAX production rate also weighed on margin.
- Backlog: Total backlog was $5.762 billion at December 31, including $2.499 billion in Diversified Industrial and $3.263 billion in Aerospace Systems. Approximately 83% of total backlog was expected to be recognized as revenue within 12 months.
Cash, debt, and liquidity
- Cash, cash equivalents, and marketable securities totaled approximately $608 million at December 31, down from $756 million at June 30. Working capital was $1.593 billion, compared with $1.737 billion; the current ratio was 1.5 versus 1.6.
- Balance-sheet debt, including current maturities, was approximately $7.213 billion, down from $8.462 billion at June 30. The company repaid $1.210 billion of long-term borrowings during the half-year, including the remaining balances on two term loans.
- Six-month investing cash flow was positive $79 million, including approximately $111 million of net land-sale proceeds. Financing cash outflow was $1.609 billion, principally reflecting debt repayment, partly offset by other financing activity. Dividends paid were $227 million, or $1.76 per share.
- The company reported $1.890 billion available under its $2.5 billion revolving credit agreement and $610 million of commercial paper outstanding. Its debt-to-debt-and-shareholders’ equity ratio was 0.51 against a maximum covenant ratio of 0.65; it stated that it was in compliance with its covenants.
Changes, outlook, and risks
Profitability increased despite lower sales. Management attributed margin improvement to cost reductions, lower discretionary spending and compensation costs, and the absence of substantial prior-year acquisition-related expenses. Lower average debt and interest rates also reduced interest expense. Results included an approximately $101 million gain on the sale of land, which materially benefited reported income. The prior-year periods included acquisition-related expenses of approximately $49 million in cost of sales and $100 million in SG&A for the quarter, and $51 million and $115 million, respectively, for the six-month period.
COVID-19 continued to adversely affect the business, particularly commercial aerospace, and management said the pandemic’s duration and ultimate financial impact could not be reasonably estimated and could be material. It anticipated approximately $31 million of additional Diversified Industrial realignment and integration charges and approximately $2 million in Aerospace Systems during the remainder of fiscal 2021. Expected savings from workforce actions were projected to increase operating income in later periods. The filing did not provide overall revenue or EPS guidance.
The company reinitiated its share-repurchase program but made no repurchases during the quarter; it intended to resume quarterly repurchases of $50 million in fiscal Q3. Other risks discussed include air-travel recovery and the 737 MAX return to service, economic and market conditions, acquisition integration, restructuring execution, foreign-exchange and interest-rate exposure, cybersecurity, input costs, taxes, litigation, and potential goodwill impairment. Management noted that further pandemic-related disruption or weaker-than-expected demand could lead to a future goodwill impairment test.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating improvement versus the approximately $101 million land-sale gain and prior-year acquisition expenses.
- Whether commercial aerospace demand, aftermarket activity, and margins recover, and how the 737 MAX production outlook develops.
- Whether order trends convert into sales, including the timing and composition of the $5.762 billion backlog.
- Whether planned restructuring savings and remaining charges align with management’s estimates, and whether COVID-19 creates additional impairment or liquidity risks.
- Debt repayment, cash generation, planned repurchases, and compliance with the stated leverage covenant as conditions evolve.