Why did net income drop so sharply in fiscal 2002?

Lower sales volume across nearly all markets, particularly semiconductors, heavy-duty trucks, and factory automation, led to underabsorbed manufacturing overhead and lower gross margins. The company also took a $39.5 million goodwill impairment, $37.4 million in business realignment charges, and a $5.0 million equity investment write-down, and its effective tax rate rose to 40.3% because goodwill impairment was not tax-deductible.

Is the revenue growth in fiscal 2002 organic?

No. Reported net sales rose 2.8% to $6.15 billion, but that growth came entirely from acquisitions such as Wynn's, Chelsea, Aeroquip AC&R, Dayco's fluid management business, and ITR. Excluding acquisitions, sales declined 9.5%, with Industrial North America down about 15% and Aerospace down 2.7%.

Is the dividend at risk?

The filing shows no sign of cut. The annual dividend rate is $0.72 per share, with 208 consecutive quarterly payments and 46 straight years of annual increases. Operating cash flow of $631 million comfortably covered the $82.8 million of dividends paid, although earnings coverage was thin, with net income of $130 million.

What is the outlook for fiscal 2003?

Management expects North American and European Industrial volumes to stay flat through the first half of fiscal 2003, with modest improvement in the second half and a pronounced increase in order rates. Aerospace commercial OEM and aftermarket demand is expected to remain depressed through 2003, while defense stays steady. The company also expects roughly $23 million of additional realignment costs and about $23 million more in domestic pension expense.

How is the balance sheet positioned?

Debt rose to $1.51 billion, and the debt-to-debt-equity ratio increased to 36.8% from 35.7%, within the company's 34–37% target range. Liquidity remains adequate, with $825 million in committed credit lines, $1.0 billion available on the shelf registration, and a current ratio of 1.64. The company is in compliance with all covenants and targets an A rating on senior debt.

PH 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 14, 2002. Cited figures are marked; the original filing is the authoritative source.

Parker-Hannifin's fiscal 2002 (year ended June 30, 2002) was a sharply weaker year driven by a severe industrial downturn.

Net sales rose 2.8% to $6.15 billion^a, but that increase was entirely due to acquisitions; excluding them, sales fell 9.5%. Gross margin compressed from 20.9% to 16.8%, and net income fell 61.8% to $130.2 million (2.1% of sales), or $1.12 diluted EPS versus $2.96 the prior year. The decline reflected lower volume across Industrial and Aerospace, underabsorption of manufacturing costs, a $39.5 million goodwill impairment, $37.4 million in business realignment charges, and a higher effective tax rate of 40.3% driven by non-deductible goodwill.

The balance sheet remained solid. Debt-to-debt-equity rose to 36.8% from 35.7%, operating cash flow improved to $631.0 million^b from $532.2 million mainly through working capital reduction, and capital expenditures fell to $206.6 million from $334.7 million. Management guided to flat volume in North American and European Industrial operations through the first half of fiscal 2003, with modest improvement in the second half, a continued downturn in commercial aerospace OEM and aftermarket, and about $23 million of additional realignment costs in 2003.

Dividends were held at an annual rate of $0.72^c, extending a streak of 208 consecutive quarterly payments. For investors, the key issues are the depth of the cyclical trough, the margin recovery timeline, and whether the company can keep cash generation and the dividend intact while leverage is near its target range. The filing also discloses a $13.4 million environmental reserve against a potential liability of up to $34.9 million, and it reports no material legal proceedings.

02—Key points

Key Highlights

Net sales up 2.8% to $6.15 billion, but organic sales declined 9.5% excluding 2002 acquisitions, reflecting broad recessionary demand weakness.
Net income fell 61.8% to $130.2 million; diluted EPS was $1.12 versus $2.96, with net margin of 2.1% versus 5.7%.
Gross margin contracted to 16.8% from 20.9%, driven by underabsorption of manufacturing costs and realignment charges.
A $39.5 million goodwill impairment charge (SFAS 142) was recorded, primarily in the Industrial and Other segments.
Operating cash flow rose to $631.0 million and capex fell to $206.6 million, supporting a $0.72 annual dividend and debt-to-capital of 36.8%.
Aerospace operating margin held up at 16.1%, but segment sales declined 2.7% and management expects commercial OEM and aftermarket to remain depressed through 2003.
Management expects a pronounced increase in Industrial order rates in the second half of fiscal 2003, and plans about $23 million in additional realignment costs.

03—Questions

Frequently Asked Questions

Why did net income drop so sharply in fiscal 2002?
Lower sales volume across nearly all markets, particularly semiconductors, heavy-duty trucks, and factory automation, led to underabsorbed manufacturing overhead and lower gross margins. The company also took a $39.5 million goodwill impairment, $37.4 million in business realignment charges, and a $5.0 million equity investment write-down, and its effective tax rate rose to 40.3% because goodwill impairment was not tax-deductible.
Is the revenue growth in fiscal 2002 organic?
No. Reported net sales rose 2.8% to $6.15 billion, but that growth came entirely from acquisitions such as Wynn's, Chelsea, Aeroquip AC&R, Dayco's fluid management business, and ITR. Excluding acquisitions, sales declined 9.5%, with Industrial North America down about 15% and Aerospace down 2.7%.
Is the dividend at risk?
The filing shows no sign of cut. The annual dividend rate is $0.72 per share, with 208 consecutive quarterly payments and 46 straight years of annual increases. Operating cash flow of $631 million comfortably covered the $82.8 million of dividends paid, although earnings coverage was thin, with net income of $130 million.
What is the outlook for fiscal 2003?
Management expects North American and European Industrial volumes to stay flat through the first half of fiscal 2003, with modest improvement in the second half and a pronounced increase in order rates. Aerospace commercial OEM and aftermarket demand is expected to remain depressed through 2003, while defense stays steady. The company also expects roughly $23 million of additional realignment costs and about $23 million more in domestic pension expense.
How is the balance sheet positioned?
Debt rose to $1.51 billion, and the debt-to-debt-equity ratio increased to 36.8% from 35.7%, within the company's 34–37% target range. Liquidity remains adequate, with $825 million in committed credit lines, $1.0 billion available on the shelf registration, and a current ratio of 1.64. The company is in compliance with all covenants and targets an A rating on senior debt.

04—Continue

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