01—Abstract
Summary
Summary of the 10-K filed August 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2009 (year ended June 30, 2009) was a sharp cyclical downturn.
Net sales fell 15.1% to $10.31 billiona from $12.15 billion, and net income dropped 46% to $508.5 million from $949.5 million. Diluted EPS was $3.13, down from $5.53. Gross margin compressed to 20.6% from 23.1%, driven by lower volume, manufacturing inefficiencies, and $40.9 million of business realignment charges in cost of sales.
The Industrial and Climate & Industrial Controls segments bore most of the weakness, while Aerospace grew sales 2.5% to $1.88 billionb and maintained a 13.9% operating margin. Management expects recessionary-like conditions to persist in fiscal 2010, though at a slower rate of decline. Balance sheet and cash flow remain solid but weaker than the prior year.
Operating cash flow was $1.13 billionc, down from $1.32 billion, helped by a $598 million reduction in receivables. Total debt rose to $2.32 billion, and the debt-to-debt-equity ratio increased to 35.2% from 28.3%, approaching the company's 37% internal ceiling. Shareholders' equity fell to $4.28 billion from $5.26 billion, largely due to a $494.5 million currency translation hit and $481 million in retirement-benefit funding adjustments.
Parker continued its dividend, now $1.00d per share, and repurchased about $448 million of stock. It also completed nine acquisitions with roughly $532 million in aggregate annual revenue. Backlog declined 21% to $2.89 billion.
Key risks for investors include continued end-market weakness in industrial and commercial markets, currency exposure (about 44% of sales came from outside the U.S.), rising pension obligations (the pension liability roughly tripled to $1.23 billion), and an ongoing antitrust matter involving the Parker ITR marine hose business. That matter has resulted in U.S., European, and other investigations and class actions, with a settlement of the U.S. class action pending court approval.
02—Key points
Key Highlights
- Net sales declined 15.1% to $10.31 billion; the decline was driven by lower volume in all segments except Aerospace, along with a roughly $490 million currency headwind.
- Diluted EPS fell to $3.13 from $5.53 (down 43%), and net income margin compressed to 4.9% from 7.8%.
- Aerospace was the only growing segment, with sales up 2.5% to $1.88 billion and a 13.9% operating margin, supported by aftermarket strength.
- Climate & Industrial Controls swung to an operating loss of $3.7 million on sales down 24.4%, and management guides to a 2.1%-2.9% margin for fiscal 2010.
- Leverage rose: debt-to-debt-equity reached 35.2% (up from 28.3%), approaching the 37% internal ceiling, and shareholders' equity fell 19% to $4.28 billion.
- Operating cash flow of $1.13 billion and free cash flow of roughly $858 million still covered the $1.00-per-share dividend and about $448 million in share repurchases.
- Parker ITR marine hose antitrust exposure continues, including EU fines (€25.61 million, with €8.32 million allocated to the Company), U.S. class-action settlement pending court approval, and ongoing DOJ and foreign investigations.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Parker-Hannifin Corp kept $0.05.
- Revenue$10.31B100.0%
- Cost of revenue−$8.18B79.4%
- Gross profit$2.13B20.6%
- Operating costs−$1.12B10.9%
- Operating income$1.00B9.7%
- Interest, other & tax−$495.3M4.8%
- Net income$508.5M4.9%
04—Financials
Financial Highlights
Figures from 10-KFY2009filed August 27, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $10.31B$12.15B | −15.1% |
| Cost of Revenue | $8.18B$9.34B | −12.4% |
| Gross Profit | $2.13B$2.81B | −24.2% |
| R&D Expenses | $338.91M$303.10M | +11.8% |
| SG&A Expenses | $1.29B$1.36B | −5.4% |
| Operating Income | $1.00B— | — |
| Interest Expense | $112.07M$99.00M | +13.2% |
| Net Income | $508.51M$949.47M | −46.4% |
| EPS (Basic) | $3.15$5.64 | −44.1% |
| EPS (Diluted) | $3.13$5.53 | −43.4% |
| Shares Outstanding (Basic) | 161.56M168.29M | −4.0% |
| Shares Outstanding (Diluted) | 162.72M171.64M | −5.2% |
05—Questions
Frequently Asked Questions
Why did Parker-Hannifin's earnings fall so sharply in fiscal 2009?
The global recession caused a steep drop in demand across the Industrial and Climate & Industrial Controls segments. Lower volume led to manufacturing inefficiencies that pushed gross margin down to 20.6% from 23.1%. Other pressures included $40.9 million in business realignment charges in cost of sales, $37.4 million in litigation settlement expenses, and $13.8 million in investment writedowns, partly offset by $11.6 million of insurance recoveries and a lower effective tax rate of 25.4%.
Is Parker's balance sheet still healthy despite the downturn?
Parker remains financially sound, though leverage has increased. Total debt rose to $2.32 billion from $2.07 billion, mainly to fund acquisitions and share buybacks, and the debt-to-debt-equity ratio reached 35.2%. The company says it has no less than an 'A' senior debt rating goal, maintains a $1.5 billion revolving credit facility with about $1.07 billion available, and is in compliance with all covenants. Pension underfunding also grew substantially, with the pension and postretirement liability rising to $1.23 billion from $492 million.
What is the outlook for fiscal 2010?
Management expects recessionary-like conditions in its Industrial and Climate & Industrial Controls segments to continue in fiscal 2010, although the rate of decline should lessen. Industrial North American sales are guided down 6.7% to 11.5%, Industrial International sales down 11.7% to 16.2%, Aerospace sales down 5.7% to 6.6%, and Climate & Industrial Controls sales down 10.1% to 13.1%. Management also warned that commercial aerospace aftermarket conditions will weaken and that further realignment charges are possible.
How much exposure does Parker have to the marine hose antitrust investigations?
Parker ITR, a subsidiary acquired in 2002, faces multiple antitrust matters over alleged price-fixing and bid-rigging in marine hose. The European Commission fined Parker ITR €25.61 million and held the Company jointly responsible for €8.32 million; both are under appeal. A U.S. class-action settlement is subject to court approval, and the Department of Justice investigation is ongoing. Brazilian, Australian, and Korean matters are also pending, and Korea imposed a small fine of about $34 thousand. The Company carries a $2.8 million reserve for these matters, and legal expenses are expensed as incurred. The filing does not state a total amount for potential exposure beyond these items.
Did Parker continue returning cash to shareholders?
Yes. Parker paid $1.00 per share in dividends in fiscal 2009, up from $0.84, and has increased its dividend for 53 consecutive years. Cash dividends totaled about $162 million. The company repurchased 7.56 million shares for roughly $448 million at an average price of $59.25. The shareholder protection rights plan, the 10 million share repurchase authorization, and the annual repurchase limit of the greater of 7.5 million shares or 5% of shares outstanding remain in place.
06—Continue