01—Abstract
Summary
Summary of the 10-K filed August 29, 2003. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2003 (year ended June 30, 2003) was a year of modest top-line recovery but mixed profitability.
Net sales rose 4.3% to $6.41 billiona, driven entirely by acquisitions and currency effects, while underlying demand in North American Industrial and Aerospace markets stayed weak. Gross margin improved to 17.2% from 16.8%, helped by financial performance initiatives and lower business realignment charges ($24.6 million in 2003 versus $37.4 million in 2002). Net income rose 50.8% to $196.3 million, or $1.68 diluted EPS, but this comparison benefits from the non-recurring $39.5 million goodwill impairment in 2002, and the 2003 result absorbed roughly $16.9 million of incremental domestic pension expense.
The balance sheet and cash flow picture shows both strength and a notable drag. Operating cash flow fell to $557.5 millionb from $631.0 million because of a $108.0 million discretionary pension contribution. Management used cash to reduce commercial paper and net debt fell by about $146 million, bringing the debt-to-debt-equity ratio to 35.6% against a 34-37% target.
However, the pension funded status deteriorated sharply: the minimum pension liability charge reduced other comprehensive income by $297.5 millionc after tax, and pension and postretirement liabilities rose 81% to $920.4 million. Shareholders' equity declined to $2.52 billion, and book value per share fell to $21.63.
Management guided to flat sales in North American Industrial operations for fiscal 2004, continued weakness in commercial aerospace (OEM and aftermarket), and expected a further $30.0 milliond increase in domestic pension expense, with additional realignment charges possible. Investors should weigh the earnings recovery against the lack of organic growth, the pension burden on future cash flows and earnings, and the reliance on cost-reduction programs to sustain margins.
02—Key points
Key Highlights
- Net sales of $6.41 billion, up 4.3%, with all of the increase attributable to acquisitions and currency effects; organic demand remained weak in North American Industrial and Aerospace.
- Net income of $196.3 million ($1.68 diluted EPS), up 50.8% from $130.2 million, but aided by the absence of the $39.5 million goodwill impairment recorded in 2002.
- Gross margin improved to 17.2% from 16.8%, reflecting financial performance initiatives and lower business realignment charges ($24.6 million in 2003 vs. $37.4 million in 2002).
- Operating cash flow fell to $557.5 million from $631.0 million, primarily due to a $108.0 million discretionary contribution to qualified pension plans.
- Pension burden increased: a $297.5 million after-tax minimum pension liability charge reduced equity, pension liabilities rose 81% to $920.4 million, and FY2004 domestic pension expense is expected to rise by a further $30.0 million.
- Debt reduced by about $146 million to $1.39 billion; debt-to-debt-equity ratio of 35.6% sits within the company's 34-37% target, with $775 million remaining under the shelf registration.
- Aerospace segment operating income fell to $157.3 million (14.2% margin) from $189.4 million as commercial OEM and aftermarket demand declined, with management expecting continued weakness through 2004.
03—Questions
Frequently Asked Questions
Did Parker-Hannifin's earnings growth in fiscal 2003 reflect genuine operating improvement?
Partly. Net income rose 50.8%, but the comparison is flattered by the $39.5 million goodwill impairment charged in 2002. Sales growth came entirely from acquisitions and currency effects rather than organic volume, and North American Industrial sales were essentially flat. Margin gains from cost initiatives and lower restructuring charges were the main sources of improvement.
How significant is the pension issue for investors?
Very significant. Pension and postretirement liabilities rose to $920.4 million, a $297.5 million after-tax equity charge was recorded, and the company made a $108.0 million discretionary contribution that reduced operating cash flow. Management expects domestic pension expense to increase by another $30.0 million in fiscal 2004, and lower assumed returns and discount rates will further pressure results.
What is the outlook for the Aerospace segment?
Management expects commercial OEM and aftermarket businesses to remain depressed throughout fiscal 2004 as airlines delay aircraft orders and fly fewer miles. Military order rates are expected to remain steady. Backlog was flat at about $1.01 billion, with military strength offsetting commercial softness.
Is the company's balance sheet and financing position healthy?
The position is solid but less flattering than the debt figures suggest. Debt declined to $1.39 billion, the company maintains $825 million of committed credit lines supporting commercial paper, and it is in compliance with covenants. However, shareholders' equity fell to $2.52 billion, book value per share declined to $21.63, and working capital rose modestly to $973 million with a current ratio of 1.68.
Is the dividend secure?
The dividend has grown for 47 consecutive fiscal years and has been paid for 212 consecutive quarters. The annual rate was raised to $0.76 per share after the filing period. Cash dividends paid in fiscal 2003 totaled about $85.8 million, which was covered by operating cash flow of $557.5 million even after the pension contribution.
04—Continue