How strong was Parker-Hannifin's growth in fiscal 2007, and how much came from acquisitions versus organic growth?

Net sales grew 14.2% to $10.72 billion. Management attributed the increase mainly to higher volume across all segments. Acquisitions completed in the prior 12 months contributed about 45% of the sales increase, and currency translation added roughly $241 million. Net income grew 23%, and diluted EPS from continuing operations increased 33% to $7.01.

What is the outlook for fiscal 2008 across the business segments?

Management expects strong conditions to continue in Industrial International operations (sales up about 9.5%) and the Aerospace Segment (sales flat to slightly higher, with operating margins of 15.7% to 16.1%). Industrial North America is expected to grow only about 1% in sales, with margins of 14.5% to 14.9%, because automotive, heavy-duty truck and construction markets remain soft. Climate & Industrial Controls is expected to have flat to slightly higher sales and margins of 7.8% to 8.2%. Pension expense is expected to fall by about $14 million, and a German tax rate change should provide a one-time benefit of about $7 million.

What are the most significant legal and regulatory risks disclosed?

The most significant risk concerns the marine oil and gas hose business of subsidiary Parker ITR. A grand jury subpoena was issued in April 2007, and the Japan Fair Trade Commission and European Commission have opened investigations. Several U.S. class action lawsuits allege antitrust violations, including price-fixing and bid-rigging over at least eight years. The company says it cannot reasonably estimate the potential loss or range of loss. Management believes other pending proceedings will not have a material adverse effect.

How is the company returning capital and managing its balance sheet?

Parker-Hannifin repurchased 5.45 million shares in fiscal 2007 at an average price of $79.47, and net common share activity used $364 million in cash. Dividends were $1.04 per share, up from $0.92. In August 2007 the board authorized a $500 million accelerated share repurchase, and a 3-for-2 stock split is effective October 1, 2007. The debt-to-debt-equity ratio was 21.4%, versus a stated target of no more than 37%, and the company said it aims to maintain at least an 'A' rating on senior debt. Long-term debt was $1.09 billion, and the company held a $1.025 billion revolving credit facility, with $896 million available at year-end.

What are the company's environmental obligations?

Parker-Hannifin is remediating environmental contamination at 34 manufacturing facilities it presently or formerly operated, and it has been named a potentially responsible party at one off-site disposal facility and three regional sites, including Superfund-related sites. The recorded environmental reserve is about $17.8 million. The estimated total liability for these sites ranges from $17.8 million to $73.1 million, and the largest single-site estimate is about $7.9 million. Management believes compliance costs will not have a material effect on capital expenditures, earnings or competitive position.

PH 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 29, 2007. Cited figures are marked; the original filing is the authoritative source.

Parker-Hannifin's fiscal 2007 (year ended June 30, 2007) was a record year.

Net sales rose 14.2% to $10.72 billion^a, driven by higher volume across all segments and acquisitions, with currency adding about $241 million. Net income increased 23% to $830.0 million, and diluted EPS from continuing operations reached $7.01, up from $5.28. Gross margin expanded to 22.8% from 21.5%, though SG&A grew faster (18.3%), and the effective tax rate fell to 28.4%.

The company completed 11 acquisitions with roughly $260 million^b in aggregate incremental annual revenue, and it ended the year with a backlog of about $2.94 billion, 87% of which was scheduled for delivery within twelve months. The outlook is mixed by segment. Management expects continued strength in Industrial International and Aerospace, while Industrial North America (especially automotive, heavy-duty truck and construction) and Climate & Industrial Controls are expected to remain soft.

Cash from operations was $955 million^c, and the company returned capital to shareholders through $433 million of share repurchases and dividends of $1.04 per share. Management also announced a 3-for-2 stock split effective October 1, 2007, and a $500 million accelerated share repurchase in August 2007, funded partly by commercial paper. The key risk flagged in the filing is a legal and regulatory matter involving its Parker ITR subsidiary's marine oil and gas hose business.

The company faces a grand jury subpoena in the Southern District of Florida, Japan Fair Trade Commission and European Commission inquiries, and class action antitrust suits alleging price-fixing over at least eight years. The company says it cannot reasonably estimate potential losses. Environmental exposure is also notable, with a reserve of about $17.8 million and an estimated liability range of up to $73.1 million^d across 34 facilities and several Superfund-related sites.

02—Key points

Key Highlights

Record fiscal 2007 results: net sales of $10.72 billion (+14.2%) and net income of $830.0 million (+23.3%), with diluted EPS from continuing operations of $7.01 versus $5.28 in fiscal 2006.
Gross margin improved to 22.8% from 21.5%, supported by higher volume and financial performance initiatives, though recent acquisitions not yet fully integrated weighed on margins.
Segment mix: Industrial (74% of sales) with International operations up 34.4% and North America up 1.8%; Aerospace operating margin rose to 16.0% from 14.7%; Climate & Industrial Controls margin fell to 7.7% from 8.5%.
Strong backlog of $2.94 billion at June 30, 2007 (up from $2.70 billion), with about 87% scheduled for delivery within the next twelve months.
Capital returns and balance-sheet actions: $364 million net outflow from common share activity, a 3-for-2 stock split effective October 1, 2007, a $500 million accelerated share repurchase in August 2007, and a 51st consecutive annual dividend increase.
Pension and benefit costs fell: qualified defined benefit plans reduced expense by about $21 million, and the unfunded pension liability dropped sharply after adopting SFAS 158, with pension and postretirement liabilities declining by $457 million.
Material legal exposure: a grand jury subpoena, JFTC and European Commission investigations, and U.S. class action antitrust suits concerning the marine oil and gas hose business of subsidiary Parker ITR, with no estimate of potential loss currently possible.

03—Questions

Frequently Asked Questions

How strong was Parker-Hannifin's growth in fiscal 2007, and how much came from acquisitions versus organic growth?
Net sales grew 14.2% to $10.72 billion. Management attributed the increase mainly to higher volume across all segments. Acquisitions completed in the prior 12 months contributed about 45% of the sales increase, and currency translation added roughly $241 million. Net income grew 23%, and diluted EPS from continuing operations increased 33% to $7.01.
What is the outlook for fiscal 2008 across the business segments?
Management expects strong conditions to continue in Industrial International operations (sales up about 9.5%) and the Aerospace Segment (sales flat to slightly higher, with operating margins of 15.7% to 16.1%). Industrial North America is expected to grow only about 1% in sales, with margins of 14.5% to 14.9%, because automotive, heavy-duty truck and construction markets remain soft. Climate & Industrial Controls is expected to have flat to slightly higher sales and margins of 7.8% to 8.2%. Pension expense is expected to fall by about $14 million, and a German tax rate change should provide a one-time benefit of about $7 million.
What are the most significant legal and regulatory risks disclosed?
The most significant risk concerns the marine oil and gas hose business of subsidiary Parker ITR. A grand jury subpoena was issued in April 2007, and the Japan Fair Trade Commission and European Commission have opened investigations. Several U.S. class action lawsuits allege antitrust violations, including price-fixing and bid-rigging over at least eight years. The company says it cannot reasonably estimate the potential loss or range of loss. Management believes other pending proceedings will not have a material adverse effect.
How is the company returning capital and managing its balance sheet?
Parker-Hannifin repurchased 5.45 million shares in fiscal 2007 at an average price of $79.47, and net common share activity used $364 million in cash. Dividends were $1.04 per share, up from $0.92. In August 2007 the board authorized a $500 million accelerated share repurchase, and a 3-for-2 stock split is effective October 1, 2007. The debt-to-debt-equity ratio was 21.4%, versus a stated target of no more than 37%, and the company said it aims to maintain at least an 'A' rating on senior debt. Long-term debt was $1.09 billion, and the company held a $1.025 billion revolving credit facility, with $896 million available at year-end.
What are the company's environmental obligations?
Parker-Hannifin is remediating environmental contamination at 34 manufacturing facilities it presently or formerly operated, and it has been named a potentially responsible party at one off-site disposal facility and three regional sites, including Superfund-related sites. The recorded environmental reserve is about $17.8 million. The estimated total liability for these sites ranges from $17.8 million to $73.1 million, and the largest single-site estimate is about $7.9 million. Management believes compliance costs will not have a material effect on capital expenditures, earnings or competitive position.

04—Continue

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