01—Abstract
Summary
Summary of the 10-K filed August 29, 2013. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2013 (year ended June 30, 2013) was a year of modest top-line contraction and margin pressure, offset by strong cash generation and a much stronger balance sheet position from acquisition spending.
Net sales were $13.0 billiona, down 1.0% from $13.1 billion in fiscal 2012. Excluding a roughly $448 million contribution from acquisitions and a roughly $140 million currency headwind, organic sales fell 3.3%, driven mainly by lower volume in the Industrial Segment. Diluted EPS declined to $6.26 from $7.45, and net income attributable to common shareholders fell to $948 million from $1,152 million.
Gross margin compressed to 22.5% from 24.2%, reflecting higher defined benefit pension costs, Industrial operating inefficiencies, and higher Aerospace engineering development spending. Aerospace was the bright spot, with sales up 7.8% to $2.27 billionb, though its margin also eased. Capital deployment was the defining theme.
Parker completed eight acquisitions for about $621 millionc in cash plus $114 million of assumed debt, and it repurchased roughly 3.0 million shares for $257 million. Operating cash flow was $1.19 billion, down from $1.53 billion, partly because of $226 million in voluntary pension contributions. Total debt rose to $2.83 billion, and the debt-to-debt-plus-equity ratio climbed to 33.0% from 26.1%, still below management's 37% ceiling.
Cash on hand more than doubled to $1.78 billiond, although $1.66 billion of it sits in foreign subsidiaries. Pension funded status improved sharply, with the underfunded amount falling to about $1.29 billion from $1.81 billion. Looking forward, management is reorganizing the company.
Effective July 1, 2013, the Climate & Industrial Controls Segment was folded into the Industrial Segment, and beginning in fiscal 2014 Parker will report two segments, Diversified Industrial and Aerospace Systems. The company also plans a joint venture with GE Aviation, cleared by regulators in July 2013, and expects about $95 million of Industrial realignment charges in fiscal 2014.
Guidance calls for flat to modestly higher Industrial North American sales and a fiscal 2014 Aerospace sales range of flat to up 4%. Investors should weigh the near-term margin pressure and the reorganization against the company's long dividend record (252 consecutive quarterly payments, with a $1.80 annualized rate), its acquisition-led growth strategy, and the ongoing marine hose antitrust exposure in Brazil and the EU.
02—Key points
Key Highlights
- Net sales fell 1.0% to $13.0 billion; organic sales (excluding acquisitions and currency) declined 3.3%, led by lower Industrial Segment volume.
- Gross profit margin contracted to 22.5% from 24.2%, driven by higher defined benefit pension costs, Industrial operating inefficiencies, and Aerospace engineering development costs.
- Diluted EPS was $6.26 versus $7.45 in fiscal 2012, and net income attributable to common shareholders was $948 million versus $1,152 million.
- Acquisition activity was heavy: eight deals for about $621 million in cash plus $114 million of assumed debt, adding roughly $484 million in annual acquired sales; $257 million was spent on share repurchases.
- Operating cash flow fell to $1.19 billion from $1.53 billion, partly due to $226 million of voluntary pension contributions; cash rose to $1.78 billion, of which $1.66 billion was held overseas.
- Debt rose to $2.83 billion, lifting the debt-to-capital ratio to 33.0% (from 26.1%), within the company's 37% target; the company is rated with a goal of at least an 'A' senior debt rating.
- Portfolio restructuring: Climate & Industrial Controls is folded into Industrial effective July 1, 2013, and reporting shifts to Diversified Industrial and Aerospace Systems in fiscal 2014; a GE Aviation joint venture is expected to form in fiscal 2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Parker-Hannifin Corp kept $0.07.
- Revenue$13.02B100.0%
- Cost of revenue−$10.09B77.5%
- Gross profit$2.93B22.5%
- Operating costs−$1.14B8.7%
- Operating income$1.79B13.8%
- Interest, other & tax−$843.1M6.5%
- Net income$948.4M7.3%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed August 29, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $13.02B$13.15B | −1.0% |
| Cost of Revenue | $10.09B$9.96B | +1.3% |
| Gross Profit | $2.93B$3.19B | −8.1% |
| R&D Expenses | $406.61M$365.70M | +11.2% |
| SG&A Expenses | $1.55B$1.52B | +2.3% |
| Operating Income | $1.79B$2.00B | −10.5% |
| Interest Expense | $91.55M$92.79M | −1.3% |
| Net Income | $948.43M$1.15B | −17.7% |
| EPS (Basic) | $6.36$7.62 | −16.5% |
| EPS (Diluted) | $6.26$7.45 | −16.0% |
| Shares Outstanding (Basic) | 149.22M151.22M | −1.3% |
| Shares Outstanding (Diluted) | 151.59M154.66M | −2.0% |
05—Questions
Frequently Asked Questions
Why did Parker's earnings fall in fiscal 2013 even though it made acquisitions?
Acquisitions added about $448 million in sales, but organic volume declined, especially in the Industrial Segment's North American and International operations. Gross margin also fell from 24.2% to 22.5%, due to higher pension expense, operating inefficiencies from lower volume, and integration costs for 2013 acquisitions. Diluted EPS dropped 16% to $6.26.
How strong is Parker's balance sheet after the acquisition spending?
It remains solid but is more leveraged than a year earlier. Debt rose to $2.83 billion and the debt-to-capital ratio reached 33.0%, below the company's 37% ceiling and its 'A' rating goal. Net of cash, the ratio was 15.4%. Current liabilities rose largely from $1.33 billion of commercial paper and notes payable, and the $2.0 billion revolver had $669 million available.
What is changing in the segment structure, and why does it matter?
Effective July 1, 2013, the Climate & Industrial Controls Segment was consolidated into Industrial. Beginning in fiscal 2014, Parker will report two segments: Diversified Industrial and Aerospace Systems. Fiscal 2013 results are still presented on the old three-segment basis, so investors should expect the comparability of fiscal 2014 segment results to change.
What are the main legal and financial risks outside normal operations?
The most notable item is the marine hose cartel investigation involving Parker ITR. The European General Court cut the EU fine from 25.61 million euros to 6.40 million euros in May 2013, with Parker jointly liable for up to 6.30 million euros, and the European Commission has appealed. Brazilian authorities' investigation remains unresolved, so the outcome is uncertain. Environmental reserves are $12.5 million, with a possible range up to $80.1 million.
What should investors expect for fiscal 2014?
Management guided Industrial North American sales flat to up 5%, Industrial International sales flat to up 4.8%, and Aerospace sales flat to up 4%. It expects Industrial North American operating margins of 16.5% to 17.1%, Industrial International margins of 10.3% to 10.7%, and Aerospace margins of 12.4% to 13.4%. About $95 million of Industrial realignment charges is expected, and the GE Aviation joint venture may shift Aerospace product mix and margins.
06—Continue