01—Abstract
Summary
Summary of the 10-K filed August 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2010 (year ended June 30, 2010) was a year of contraction followed by early recovery.
Net sales fell 3.1% to $9.99 billiona from $10.31 billion, while net income attributable to common shareholders rose 9% to $554 million (diluted EPS $3.40 vs. $3.13). The earnings improvement came despite lower volume, driven by cost reduction, business realignment savings and a gross margin expansion to 21.5% from 20.6%. Management reported signs of recovery in the second half of the year, with order rates and backlog improving in the Industrial and Climate & Industrial Controls segments, though Aerospace remained soft in commercial OEM and aftermarket volume.
Balance sheet and cash generation were a clear strength. Operating cash flow was $1.22 billion, capital spending was cut to $129 millionb, and management used cash to repay debt, reducing total debt from $2.32 billion to $1.78 billion. The debt-to-debt-plus-equity ratio improved to 28.9% from 35.2%, comfortably inside the company's 37% target.
The dividend was raised for the 54th consecutive year, to $1.08c annualized, and share repurchases were sharply reduced to about $25 million. Investors should weigh several risks: a $1.5 billion pension and postretirement liability (up from $1.23 billion), a legal overhang from the Parker ITR marine hose cartel matters in the U.S., Europe, Brazil and Australia, and a goodwill cushion on several reporting units that the company described as not significantly in excess of carrying value. Management guided to higher sales in fiscal 2011 across all segments, with Industrial North American sales up 5.7% to 9.7% and Aerospace up 2.5% to 5.5%.
02—Key points
Key Highlights
- Net sales declined 3.1% to $9.99 billion, but diluted EPS rose to $3.40 from $3.13 on higher gross margin (21.5% vs. 20.6%) and lower SG&A.
- Operating cash flow of $1.22 billion funded debt reduction; total debt fell about $544 million to $1.78 billion and the debt-to-capital ratio improved to 28.9%.
- Capital expenditures were cut to $129 million (1.3% of sales) from $271 million, supporting free cash flow of roughly $1.09 billion.
- Fiscal 2010 business realignment charges totaled $48.5 million, with about $44 million of expected Industrial savings in fiscal 2011.
- Backlog rose to $3.14 billion from $2.89 billion, driven by Industrial order growth, particularly in Asia Pacific.
- The Parker ITR marine hose antitrust matters remain open, including a Brazilian investigation, a pending Australian matter, and a May 2010 False Claims Act suit; the EU fine was 25.61 million euros.
- Management guided to fiscal 2011 sales growth in every segment, with Industrial North America up 5.7% to 9.7% and Aerospace up 2.5% to 5.5%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Parker-Hannifin Corp kept $0.06.
- Revenue$9.99B100.0%
- Cost of revenue−$7.85B78.5%
- Gross profit$2.15B21.5%
- Operating costs−$1.00B10.0%
- Operating income$1.14B11.4%
- Interest, other & tax−$588.6M5.9%
- Net income$554.1M5.5%
04—Financials
Financial Highlights
Figures from 10-KFY2010filed August 26, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $9.99B$10.31B | −3.1% |
| Cost of Revenue | $7.85B$8.18B | −4.1% |
| Gross Profit | $2.15B$2.13B | +0.9% |
| R&D Expenses | $316.18M$338.91M | −6.7% |
| SG&A Expenses | $1.28B$1.29B | −1.0% |
| Operating Income | $1.14B$1.00B | +13.8% |
| Interest Expense | $103.60M$112.07M | −7.6% |
| Net Income | $554.07M$508.51M | +9.0% |
| EPS (Basic) | $3.44$3.15 | +9.2% |
| EPS (Diluted) | $3.40$3.13 | +8.6% |
| Shares Outstanding (Basic) | 160.91M161.56M | −0.4% |
| Shares Outstanding (Diluted) | 162.90M162.72M | +0.1% |
05—Questions
Frequently Asked Questions
Did Parker-Hannifin's earnings improve despite falling sales?
Yes. Net sales fell 3.1% to $9.99 billion, but net income attributable to common shareholders rose about 9% to $554 million. The gain came from a 90 basis point improvement in gross margin, which management attributed to cost reduction and past business realignment, and from lower SG&A and interest expense. Diluted EPS was $3.40, up from $3.13.
How strong is the balance sheet and cash position?
The balance sheet strengthened. Operating cash flow was $1.22 billion, and the company used it to cut total debt by about $544 million. The debt-to-debt-plus-equity ratio fell to 28.9% from 35.2%, below the 37% internal ceiling and supportive of the company's 'A' senior debt rating goal. Cash rose to $576 million. Pension underfunding, however, grew to about $1.41 billion.
What legal and regulatory risks should investors be aware of?
The most significant is the Parker ITR marine hose matter, which involves alleged cartel conduct spanning up to 21 years. A U.S. class action was settled, but Brazilian and certain private claims remain open, and the European Commission fined Parker ITR 25.61 million euros, with the company jointly liable for 8.32 million euros. The Australian fine has been paid, and a May 2010 False Claims Act suit is pending. Management views the reserves as adequate, but outcomes remain uncertain.
What is the outlook for fiscal 2011?
Management expects sales to increase in all three segments: Industrial North America up 5.7% to 9.7%, Industrial International up 1.6% to 4.6%, Aerospace up 2.5% to 5.5%, and Climate & Industrial Controls up 3.7% to 7.7%. Industrial operating margins are expected to improve, and Aerospace military volume is expected to weaken as defense contracts expire. The company also flagged possible additional realignment charges in 2011.
06—Continue