Parker-Hannifin Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2018; comparisons are with the three months ended September 30, 2017, unless otherwise noted. Parker-Hannifin manufactures motion-control and fluid systems and components, reporting Diversified Industrial and Aerospace Systems segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $3.479 billion | $3.365 billion | +3.4% |
| Gross margin | 25.4% | 25.0% | +0.4 percentage points |
| Operating income before interest and other expense | $540.7 million | $483.9 million | +11.7% |
| Net income attributable to common shareholders | $375.7 million | $285.4 million | +31.6% |
| Diluted EPS | $2.79 | $2.10 | +32.9% |
| Operating cash flow | $159.4 million | $238.0 million | −33.0% |
Net margin rose to 10.8% from 8.5%. SG&A was $394.3 million, or 11.3% of sales, versus $397.0 million, or 11.8%. The effective tax rate was 18.2%, compared with 23.7%.
Segments
- Diversified Industrial: Sales were $2.915 billion, up 2.9% reported and 5.5% excluding divestitures and currency. North America sales grew 5.4%; international sales declined 0.4% reported, but grew 4.6% excluding divestitures and currency. Operating income rose in both regions; margins were 16.4% in North America and 16.7% internationally.
- Aerospace Systems: Sales were $564.5 million, up 6.3%. Operating income increased to $109.9 million from $77.4 million, and margin rose to 19.5% from 14.6%.
Cash flow, liquidity and debt
- Operating cash flow was $159.4 million. The main year-over-year drag was a discretionary $200 million contribution to the domestic qualified pension plan. Capital expenditures were $42.1 million.
- Cash and cash equivalents were $952.1 million, up from $822.1 million at June 30, 2018. Marketable securities and other investments were another $40.8 million. Management’s combined “cash” measure, including those investments, was $992.9 million.
- Working capital was $1.990 billion and the current ratio was 1.60, versus $1.888 billion and 1.59 at fiscal year-end. Inventories increased $141 million; inventory supply rose to 76 days from 64 days at June 30.
- Balance-sheet current debt and notes payable were $796.9 million and long-term debt was $4.313 billion. Commercial paper outstanding was $795 million. The $2.0 billion revolving credit facility had $1.205 billion available and expires in October 2021.
- The debt-to-debt-plus-shareholders’ equity ratio was 0.46, below the 0.60 covenant maximum; the company reported compliance with its covenants. Senior debt ratings were Fitch A−, Moody’s Baa1 and S&P A.
- Financing cash flow was a $7.2 million outflow, including $258.5 million of net notes payable proceeds, $100.1 million of long-term debt repayments, $100.9 million of dividends and $65.4 million of common-share payments. The cash-flow statement reports $65.4 million of share payments; equity activity identifies $50 million as shares purchased at cost.
Changes, outlook and notable items
- Management attributed sales growth mainly to stronger Diversified Industrial North American and Aerospace sales. Foreign exchange reduced quarterly sales by approximately $57 million.
- Aerospace margin improvement reflected higher OEM and aftermarket volume and profitability, stronger joint-venture earnings, lower engineering and development costs, and the absence of unfavorable prior-year contract settlements. Diversified Industrial margins benefited from volume and lower operating expenses, partly offset by facility-consolidation inefficiencies.
- For fiscal 2019, management expected the effective tax rate to be approximately 23%. Diversified Industrial North American sales were forecast to increase 2.6%–5.6%, with operating margins of 16.4%–17.2%; international sales were forecast to decrease 3.7%–0.7%, with margins of 15.5%–15.9%. Aerospace sales were forecast to increase 3.6%–5.6%, with margins of 18.1%–18.5%.
- Management expected approximately $26 million of additional Diversified Industrial realignment and acquisition-integration charges during the remainder of fiscal 2019. Current-quarter such charges were $8.6 million in Diversified Industrial and none in Aerospace Systems.
- Aerospace margins could be pressured by a higher commercial OEM mix and higher-than-expected new-product development costs. Management also cited economic and market conditions, currency movements, trade policy, customer and supplier changes, raw-material costs, acquisition integration, restructuring execution, cybersecurity, labor, environmental compliance and legal proceedings as risks.
- Other (income) expense was a net benefit of $13.9 million, compared with $16.5 million of expense a year earlier, including $22.8 million of income related to equity-method investments in the current quarter. Interest expense fell to $44.3 million from $53.6 million.
- Accounting changes adopted in the quarter included revenue recognition (approximately $5 million increase to opening retained earnings; immaterial effect on quarterly results), intra-entity asset-transfer taxes (approximately $19 million reduction to retained earnings), and fair-value accounting for equity investments (approximately $2 million reclassified to retained earnings). Tax effects under the Tax Cuts and Jobs Act remained provisional.
- Backlog at September 30 was $4.090 billion; approximately 92% was expected to be recognized as revenue within 12 months. The company repurchased 293,941 shares at an average price of approximately $170.08 and paid dividends of $0.76 per share.
Important facts for investors to verify
- Confirm the sustainability of margin and earnings growth, especially Aerospace performance and the expected segment sales and margin ranges.
- Monitor working-capital needs, including rising inventories and days’ supply, and distinguish operating cash generation from the effect of the $200 million pension contribution.
- Track debt, commercial-paper reliance, credit ratings and available revolving-credit capacity against the company’s stated financing objectives.
- Review whether anticipated restructuring savings materialize and whether the expected additional fiscal 2019 charges change.
- Follow final Tax Cuts and Jobs Act accounting, uncertain tax positions and potential tax examination outcomes; the filing says up to approximately $120 million of gross unrecognized tax benefits could be reduced within 12 months.
- Assess whether backlog converts to sales on expected timing and whether market, currency, contract-mix and other disclosed risks affect guidance.