Why did Parker-Hannifin's sales grow while its earnings declined in fiscal 2001?

Sales grew 11.0% to $5.98 billion, but acquisitions accounted for all of the increase, while organic demand fell in North American Industrial markets such as heavy-duty trucks, factory automation and machine tools. Earnings declined 7.5% because gross margin fell to 20.9% from 22.3%, reflecting lower volume, underabsorbed overhead, pricing pressure and dilution from recently acquired businesses not yet integrated. Interest expense also rose to $90.4 million from $59.2 million to fund the acquisitions.

How much of fiscal 2001 earnings came from one-time items?

The company recorded a $55.5 million pre-tax gain ($34.7 million after tax, or $0.30 per share) on the sale of a Southern California property, and a $28.7 million pre-tax business realignment charge ($18.5 million after tax, or $0.16 per share). Management also reported a $3.4 million after-tax extraordinary loss on early debt redemption. Net of these items, underlying earnings were weaker than the reported $2.96 diluted EPS suggests, though the net effect of the gain and charges was favorable.

What does the SFAS 142 adoption mean for fiscal 2002 earnings?

Effective July 1, 2001, the company stopped amortizing goodwill, which management estimates will increase fiscal 2002 net income by approximately $51 million, or $0.44 per share. Goodwill is now tested annually for impairment instead, and management does not currently anticipate an impairment charge from the transitional test, though future impairments remain a risk given the company's rising goodwill balance of $953.6 million.

Is the company's balance sheet becoming more leveraged, and is the dividend secure?

Yes, leverage increased: debt-to-debt-equity rose to 35.7% from 31.0%, and excluding the ESOP loan guarantee the ratio was 33.5%. Long-term debt increased to $857 million and notes payable rose to $547 million. Operating cash flow of $532 million covered capital spending and dividends of $79.9 million, and management said the company does not expect additional borrowings in fiscal 2002. The company has paid dividends for 204 consecutive quarters and raised its annual rate to $0.72 per share.

What is the outlook for the Wynn's Specialty Chemical Group and the company's segments?

The company suspended its effort to sell Wynn's Specialty Chemical Group in August 2001 and will consolidate its results beginning in fiscal 2002, moving it from held-for-sale status into the Other Segment. For the segments, management expects North American Industrial order rates to remain soft in the first half of fiscal 2002 with improvement in the second half, Aerospace growth in regional jets and commercial OEM business to continue at a possibly moderating rate, and continued expansion in Europe, Latin America and Asia Pacific.

PH 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 27, 2001. Cited figures are marked; the original filing is the authoritative source.

Parker-Hannifin's fiscal 2001 (year ended June 30, 2001) was a year of top-line growth driven almost entirely by acquisitions, against a sharp deterioration in North American industrial demand.

Net sales rose 11.0% to $5.98 billion^a, but all of that increase came from acquisitions (Wynn's, Invensys pneumatics, Miller Fluid Power/Wilkerson, Commercial Intertech, Gresen), while organic demand fell in heavy-duty trucks, factory automation and machine tools. Net income declined 7.5% to $340.8 million, and diluted EPS was $2.96 versus $3.31 a year earlier. Margins compressed: gross margin fell to 20.9% from 22.3%, and North American Industrial operating margin (excluding realignment charges) dropped to 11.4% from 15.3%.

Earnings were partly cushioned by a $55.5 million^b pre-tax gain on sale of Southern California real property, which flatters the reported figures. The balance sheet took on meaningful leverage to fund roughly $583 million of acquisitions and $335 million of capital expenditures. Debt-to-debt-equity rose to 35.7% from 31.0%, at the upper end of management's 34-37% target, and commercial paper and EUR 300 million Euro Notes funded the deals.

Operating cash flow held steady at $532 million^c, and management stated it does not anticipate additional borrowings in fiscal 2002 for buybacks, capex or working capital. The company also discontinued goodwill amortization under SFAS 142 from July 1, 2001, which management estimates will add roughly $51 million (about $0.44 per share) to fiscal 2002 net income, though goodwill is now subject to impairment testing. Looking forward, management guided to soft North American Industrial volumes through the first half of fiscal 2002, with a recovery expected in the second half, while Aerospace continues to benefit from regional jet and aftermarket strength and the Asia Pacific and Latin American businesses keep expanding.

The company also announced it would suspend the planned sale of the Wynn's Specialty Chemical Group and consolidate it from fiscal 2002. Investors should weigh the acquisition-driven growth, the margin pressure in North America, the higher leverage, and the one-time gain that supported fiscal 2001 earnings.

02—Key points

Key Highlights

Net sales rose 11.0% to $5.98 billion, but the entire increase came from acquisitions; organic sales declined in North American Industrial markets.
Net income fell 7.5% to $340.8 million and diluted EPS fell to $2.96 from $3.31, with gross margin down to 20.9% from 22.3%.
Reported earnings include a $55.5 million pre-tax gain on sale of Southern California real property and $28.7 million of business realignment charges.
Debt-to-debt-equity increased to 35.7% from 31.0%, at the top of management's 34-37% target range, after roughly $583 million of acquisition spending.
Adoption of SFAS 142 eliminating goodwill amortization is estimated to add about $51 million (about $0.44 per share) to fiscal 2002 net income.
Backlog reached $1.99 billion at June 30, 2001, up from $1.80 billion, with Aerospace backlog at $1.21 billion driven by regional jet and commercial build rates.
Management expects soft North American Industrial orders through the first half of fiscal 2002, with recovery anticipated in the second half, and has no plans for additional borrowings in fiscal 2002.

03—Questions

Frequently Asked Questions

Why did Parker-Hannifin's sales grow while its earnings declined in fiscal 2001?
Sales grew 11.0% to $5.98 billion, but acquisitions accounted for all of the increase, while organic demand fell in North American Industrial markets such as heavy-duty trucks, factory automation and machine tools. Earnings declined 7.5% because gross margin fell to 20.9% from 22.3%, reflecting lower volume, underabsorbed overhead, pricing pressure and dilution from recently acquired businesses not yet integrated. Interest expense also rose to $90.4 million from $59.2 million to fund the acquisitions.
How much of fiscal 2001 earnings came from one-time items?
The company recorded a $55.5 million pre-tax gain ($34.7 million after tax, or $0.30 per share) on the sale of a Southern California property, and a $28.7 million pre-tax business realignment charge ($18.5 million after tax, or $0.16 per share). Management also reported a $3.4 million after-tax extraordinary loss on early debt redemption. Net of these items, underlying earnings were weaker than the reported $2.96 diluted EPS suggests, though the net effect of the gain and charges was favorable.
What does the SFAS 142 adoption mean for fiscal 2002 earnings?
Effective July 1, 2001, the company stopped amortizing goodwill, which management estimates will increase fiscal 2002 net income by approximately $51 million, or $0.44 per share. Goodwill is now tested annually for impairment instead, and management does not currently anticipate an impairment charge from the transitional test, though future impairments remain a risk given the company's rising goodwill balance of $953.6 million.
Is the company's balance sheet becoming more leveraged, and is the dividend secure?
Yes, leverage increased: debt-to-debt-equity rose to 35.7% from 31.0%, and excluding the ESOP loan guarantee the ratio was 33.5%. Long-term debt increased to $857 million and notes payable rose to $547 million. Operating cash flow of $532 million covered capital spending and dividends of $79.9 million, and management said the company does not expect additional borrowings in fiscal 2002. The company has paid dividends for 204 consecutive quarters and raised its annual rate to $0.72 per share.
What is the outlook for the Wynn's Specialty Chemical Group and the company's segments?
The company suspended its effort to sell Wynn's Specialty Chemical Group in August 2001 and will consolidate its results beginning in fiscal 2002, moving it from held-for-sale status into the Other Segment. For the segments, management expects North American Industrial order rates to remain soft in the first half of fiscal 2002 with improvement in the second half, Aerospace growth in regional jets and commercial OEM business to continue at a possibly moderating rate, and continued expansion in Europe, Latin America and Asia Pacific.

04—Continue

← View all 10-K filings