What drove Parker-Hannifin's record earnings growth in fiscal 1995?

Earnings growth came mainly from a strong North American Industrial recovery, with record volume in heavy-duty trucks, industrial machinery, and construction and farm equipment. International markets in Europe and Latin America also recovered from recession, and the company gained share and made acquisitions. Margins improved from the absorption of fixed costs on higher volume and from benefits of restructuring completed in prior years. The comparison is also flattered by the large 1994 charges, which depressed that year's results.

How healthy is the balance sheet and liquidity position?

The balance sheet is solid. Shareholders' equity rose to $1.19 billion, and the debt-to-debt-equity ratio of 21.9% is within the company's 30-33% target range. Working capital was $593 million with a current ratio of 1.9, slightly below 2.0 in 1994. Cash and equivalents were $63.8 million, and the company had $100 million of available committed credit with $47 million drawn at year end. Management says operating cash flow and worldwide financing sources are adequate for planned growth, and it expects no additional borrowing in fiscal 1996 except possibly for acquisitions.

What are the main risks or concerns for investors?

The Aerospace Segment's commercial and military markets remain weak, and management expects them to be flat through much of 1996, so this segment depends on a market recovery. Working capital is absorbing cash as inventories and receivables grow with volume, with inventories up 27% to $626 million. The company is named a potentially responsible party at 12 off-site waste sites and has an environmental reserve of $11.4 million against an estimated liability range of $10.7 million to $27.1 million. A $22.4 million tax asset for German loss carryforwards is recorded without a valuation allowance and depends on future German profitability.

What is the outlook for fiscal 1996?

Management expects North American Industrial sales to increase further through acquisitions and market share gains, though it notes that many indicators point to a leveling of demand. It expects significant improvement in International Industrial operations as the European and Latin American recoveries continue and Asia Pacific grows. Aerospace is expected to stay flat through much of 1996, with improvements dependent on a recovery in aircraft programs. Capital expenditures are expected to rise again, financed mainly by internal cash flow.

How has the company treated shareholders recently?

The company has paid dividends for 180 consecutive quarters and increased its annual dividend for 39 consecutive fiscal years, to a current annual rate of $0.72 per share. Fiscal 1995 dividends were $0.68 per share, a 6% increase. It executed a 3-for-2 stock split in June 1995, and the stock traded between $25 and $38.50 during the year. Management also operated a share repurchase program that was reflected in equity activity, and it expects to use no new borrowings for repurchases in fiscal 1996.

PH 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 28, 1995. Cited figures are marked; the original filing is the authoritative source.

Parker-Hannifin Corporation's fiscal 1995 (year ended June 30, 1995) was a record year.

Net sales rose 24.8% to $3.21 billion^a from $2.58 billion, with acquisitions contributing roughly one-quarter of the growth. Net income more than quadrupled to $218.2 million, or $2.96 per share, from $47.7 million in 1994, which had been depressed by $56.5 million of restructuring, impairment and downsizing charges. Income before extraordinary items reached 6.8% of sales, up from 2.0% in 1994.

The improvement reflects a strong North American Industrial recovery, a rebound in European and Latin American industrial markets, and margin gains in Aerospace from prior-year restructuring. Gross margin expanded to 23.8%^b from 20.3%. The balance sheet strengthened over the year.

Shareholders' equity grew to $1.19 billion^c (book value of $16.10 per share), and the debt-to-debt-equity ratio was 21.9%, within the company's 30-33% target range and below the prior year's 22.7%. Working capital rose to $593 million, though the current ratio slipped to 1.9 from 2.0. Operating cash flow was $240 million, slightly lower than the prior year's $259 million, because inventories and receivables absorbed $139 million of cash to support volume growth.

Capital expenditures increased to $152 million^d, and acquisitions cost $127 million. The company paid dividends for 180 consecutive quarters and raised its dividend for the 39th straight year. It also executed a 3-for-2 stock split in June 1995.

Key risks are limited. Aerospace sales were flat and remain a concern, although the segment's margins improved sharply. The company is a Superfund potentially responsible party, with an environmental reserve of $11.4 million against an estimated liability range of $10.7 million to $27.1 million.

A $22.4 million deferred tax asset for German net operating losses carries no valuation allowance. Management reports no material legal proceedings and expects to remain a major beneficiary of the North American and international industrial recovery.

02—Key points

Key Highlights

Record fiscal 1995 net sales of $3.21 billion, up 24.8% year over year, with acquisitions contributing about one-quarter of the increase.
Net income of $218.2 million ($2.96 per share) versus $47.7 million in fiscal 1994, which included $56.5 million of restructuring and impairment charges.
Net margin rose to 6.8% from 1.8%, and gross margin expanded to 23.8% from 20.3%.
Industrial Segment (83% of sales) grew 31.2%, with International Industrial sales up 61.1% to $853.5 million and North American sales up 20.6% to $1.8 billion.
Aerospace Segment operating income more than tripled to $63.9 million on flat sales, with operating margin rising to 11.5% from 3.3%.
Balance sheet strengthened: shareholders' equity of $1.19 billion, debt-to-debt-equity of 21.9%, and a backlog of $1.03 billion (up from $852 million).
Operating cash flow of $240 million was funded in part by $152 million of capital expenditures and $127 million of acquisitions; the company also paid $50 million in dividends and executed a 3-for-2 stock split.

03—Questions

Frequently Asked Questions

What drove Parker-Hannifin's record earnings growth in fiscal 1995?
Earnings growth came mainly from a strong North American Industrial recovery, with record volume in heavy-duty trucks, industrial machinery, and construction and farm equipment. International markets in Europe and Latin America also recovered from recession, and the company gained share and made acquisitions. Margins improved from the absorption of fixed costs on higher volume and from benefits of restructuring completed in prior years. The comparison is also flattered by the large 1994 charges, which depressed that year's results.
How healthy is the balance sheet and liquidity position?
The balance sheet is solid. Shareholders' equity rose to $1.19 billion, and the debt-to-debt-equity ratio of 21.9% is within the company's 30-33% target range. Working capital was $593 million with a current ratio of 1.9, slightly below 2.0 in 1994. Cash and equivalents were $63.8 million, and the company had $100 million of available committed credit with $47 million drawn at year end. Management says operating cash flow and worldwide financing sources are adequate for planned growth, and it expects no additional borrowing in fiscal 1996 except possibly for acquisitions.
What are the main risks or concerns for investors?
The Aerospace Segment's commercial and military markets remain weak, and management expects them to be flat through much of 1996, so this segment depends on a market recovery. Working capital is absorbing cash as inventories and receivables grow with volume, with inventories up 27% to $626 million. The company is named a potentially responsible party at 12 off-site waste sites and has an environmental reserve of $11.4 million against an estimated liability range of $10.7 million to $27.1 million. A $22.4 million tax asset for German loss carryforwards is recorded without a valuation allowance and depends on future German profitability.
What is the outlook for fiscal 1996?
Management expects North American Industrial sales to increase further through acquisitions and market share gains, though it notes that many indicators point to a leveling of demand. It expects significant improvement in International Industrial operations as the European and Latin American recoveries continue and Asia Pacific grows. Aerospace is expected to stay flat through much of 1996, with improvements dependent on a recovery in aircraft programs. Capital expenditures are expected to rise again, financed mainly by internal cash flow.
How has the company treated shareholders recently?
The company has paid dividends for 180 consecutive quarters and increased its annual dividend for 39 consecutive fiscal years, to a current annual rate of $0.72 per share. Fiscal 1995 dividends were $0.68 per share, a 6% increase. It executed a 3-for-2 stock split in June 1995, and the stock traded between $25 and $38.50 during the year. Management also operated a share repurchase program that was reflected in equity activity, and it expects to use no new borrowings for repurchases in fiscal 1996.

04—Continue

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