01—Abstract
Summary
Summary of the 10-K filed August 22, 2014. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2014 (year ended June 30, 2014) showed modest top-line growth with net sales of $13.2 billiona, up 1.5% from $13.0 billion in fiscal 2013, and operating performance pressured by one-time charges.
Diluted EPS was $6.87b, up from $6.26, but that increase was flattered by a $413 million pre-tax non-cash gain on the deconsolidation of a subsidiary tied to a 50/50 joint venture with GE Aviation. Excluding that gain, goodwill and intangible impairments of roughly $189 million (mainly the Worldwide Energy Products Division), and rising business realignment charges (about $101 million in the Diversified Industrial Segment), underlying profitability was weaker. The effective tax rate rose to 33.1% from 27.6%, and Diversified Industrial International segment margins fell to 10.8% from 11.8%.
The balance sheet strengthened meaningfully. Cash and marketable securities reached about $2.2 billionc, the debt-to-capital ratio fell to 25.9% from 33.0%, and shareholders' equity rose to $6.66 billion. Operating cash flow was $1.39 billion, and management repurchased $200 million of stock while paying $278 million in dividends.
Backlog grew to $3.9 billiond, with about 81% scheduled for delivery within twelve months, which supports near-term revenue visibility. Management guided to continued growth in fiscal 2015, with Diversified Industrial North American sales up 3% to 7% and Aerospace sales up 2% to 3%, while expecting about $55 million in additional realignment charges.
Investors should weigh the headline EPS improvement against the one-time nature of the deconsolidation gain and the impairment and restructuring costs. Key ongoing risks include Western European economic weakness, exposure to non-U.S. markets (about 44% of sales), a $1.4 billion-plus unfunded pension and postretirement liability, and a pending European Commission marine hose cartel appeal involving Parker ITR.
02—Key points
Key Highlights
- Net sales rose 1.5% to $13.2 billion; excluding acquisitions and currency effects, growth was 1.1%, led by Diversified Industrial International volume.
- Diluted EPS rose to $6.87 from $6.26, but results include a $413 million pre-tax gain on deconsolidating a subsidiary and offsetting charges of $189 million for goodwill and intangible impairment and elevated business realignment costs.
- The effective tax rate increased to 33.1% from 27.6%, reflecting discrete tax costs from the impairment and deconsolidation.
- Debt-to-debt-plus-equity fell to 25.9% from 33.0%, and net debt (after cash and marketable securities) was just 2.0%, giving the company substantial financial flexibility.
- Operating cash flow was $1.39 billion; the company repurchased $200 million of shares and paid $278 million in dividends, with the dividend rate at $1.92 annually.
- Backlog increased to $3.9 billion, with about 81% scheduled for delivery within the next twelve months.
- Fiscal 2015 guidance calls for Diversified Industrial North American sales growth of 3% to 7%, International growth of 1% to 4%, and Aerospace sales growth of 2% to 3%, with about $55 million in planned realignment charges.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Parker-Hannifin Corp kept $0.08.
- Revenue$13.22B100.0%
- Cost of revenue−$10.19B77.1%
- Gross profit$3.03B22.9%
- Operating costs−$1.24B9.4%
- Operating income$1.79B13.5%
- Interest, other & tax−$749.2M5.7%
- Net income$1.04B7.9%
04—Financials
Financial Highlights
Figures from 10-KFY2014filed August 22, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $13.22B$13.02B | +1.5% |
| Cost of Revenue | $10.19B$10.09B | +1.0% |
| Gross Profit | $3.03B$2.93B | +3.4% |
| R&D Expenses | $410.13M$406.61M | +0.9% |
| SG&A Expenses | $1.63B$1.55B | +5.1% |
| Operating Income | $1.79B$1.79B | −0.1% |
| Interest Expense | $82.57M$91.55M | −9.8% |
| Net Income | $1.04B$948.43M | +9.8% |
| EPS (Basic) | $6.98$6.36 | +9.7% |
| EPS (Diluted) | $6.87$6.26 | +9.7% |
| Shares Outstanding (Basic) | 149.10M149.22M | −0.1% |
| Shares Outstanding (Diluted) | 151.44M151.59M | −0.1% |
05—Questions
Frequently Asked Questions
How much of the fiscal 2014 earnings growth came from one-time items?
A large share. The $413 million pre-tax gain from deconsolidating a subsidiary tied to the GE Aviation joint venture was non-recurring and boosted reported income significantly. This was partly offset by $189 million in goodwill and intangible impairment charges, mainly related to the Worldwide Energy Products Division, and higher business realignment costs. Investors should evaluate the core operating trend separately from these items.
Why did the effective tax rate rise to 33.1%?
The increase was driven by discrete tax costs from the non-deductible goodwill and intangible impairment, the deconsolidation of a subsidiary, and the expiration of the U.S. Research and Development tax credit. The prior-year rate of 27.6% had been supported by a more favorable geographic earnings mix, which did not repeat in the same way.
How strong is Parker-Hannifin's balance sheet and capacity to return cash to shareholders?
The balance sheet is strong. Debt fell to $2.3 billion, the debt-to-capital ratio dropped to 25.9%, and cash plus marketable securities reached about $2.2 billion. The company generated $1.39 billion in operating cash flow and returned cash through $278 million in dividends and $200 million in buybacks. It has $1.18 billion available on its $2 billion credit line and maintains an A-level credit rating target.
What are the main risks flagged in the filing?
Key risks include slow growth in Western Europe, about 44% of sales from outside the U.S., currency volatility, raw material and component price increases, competition, and pension funding exposure to interest rates and asset returns. The company also faces an ongoing European Commission appeal related to a historical marine hose cartel matter involving Parker ITR, with the potential exposure of up to about 6.3 million euros in joint and several liability.
What does management expect for fiscal 2015?
Management expects Diversified Industrial North American sales to grow 3% to 7% and International sales to grow 1% to 4%, with North American operating margins of 16.5% to 16.9% and International margins of 14.7% to 15.7%. Aerospace sales are projected to rise 2% to 3%, with margins of 13.1% to 13.9%. Management also expects about $55 million in business realignment charges and approximately $63 million in pension contributions.
06—Continue