01—Abstract
Summary
Summary of the 10-K filed August 26, 2015. Cited figures are marked; the original filing is the authoritative source.
Parker-Hannifin's fiscal 2015 (year ended June 30, 2015) was a year of top-line contraction driven by currency, with underlying operations roughly flat.
Net sales fell 3.8% to $12.71 billiona from $13.22 billion, but excluding a roughly $547 million currency headwind and about $14 million of acquisition contribution, sales were essentially unchanged. Gross margin improved to 24.0% from 22.9%, helped by lower business realignment charges ($19.4 million vs. $63.6 million in cost of sales) and lower Aerospace product support costs. Diluted EPS rose to $6.97 from $6.87, but this was flattered by the absence of the prior year's $189 million goodwill impairment and the $413 million deconsolidation gain (booked in 2014), so the reported comparison overstates underlying improvement.
Net income attributable to common shareholders was $1.01 billionb, essentially flat with 2014. The balance sheet shifted meaningfully toward leverage as a capital allocation choice. Management repurchased 11.1 million shares for $1.39 billion and issued $1.5 billion of medium-term notes in 2015, which pushed the debt-to-debt-plus-equity ratio to 36.6% from 25.9%, approaching the company's stated 37% ceiling.
Cash fell to $1.91 billion, shareholders' equity dropped to $5.10 billionc from $6.66 billion (largely from $765 million of currency translation losses and the buybacks), and the company remains rated with a goal of maintaining no less than an "A" senior debt rating. Dividends were raised to an annualized $2.52 per share, extending a streak of 59 consecutive annual increases. Forward-looking guidance for fiscal 2016 points to continued pressure in Diversified Industrial International (sales down 2% to 6%), a stable North American segment (down 3% to up 1%), and Aerospace growth of 1% to 3% with margins of 14.2% to 14.8%.
Management expects roughly $100 milliond in business realignment charges in 2016, and the Parker ITR marine hose cartel matter remains open at the European Court level. Investors should weigh the strong cash generation and dividend record against weaker organic growth, a tighter balance sheet, and currency headwinds.
02—Key points
Key Highlights
- Net sales declined 3.8% to $12.71 billion, but were essentially unchanged excluding a ~$547 million currency headwind and ~$14 million from acquisitions.
- Gross profit margin improved to 24.0% from 22.9%, aided by lower business realignment charges and lower Aerospace product support costs.
- Diluted EPS rose to $6.97 from $6.87, though 2014 included a $189 million goodwill impairment and a $413 million deconsolidation gain, which distort year-over-year comparisons.
- Share repurchases of $1.39 billion (11.1 million shares) were funded in part by $1.5 billion of new medium-term notes, lifting the debt-to-capital ratio to 36.6% from 25.9% against a 37% internal ceiling.
- Shareholders' equity fell to $5.10 billion from $6.66 billion, reflecting $765 million of currency translation losses and buybacks.
- Operating cash flow was $1.30 billion, slightly below $1.39 billion in 2014, with free cash flow after capex of roughly $1.09 billion.
- Fiscal 2016 guidance calls for continued weakness in Diversified Industrial International (-2% to -6%), roughly flat North American sales, Aerospace growth of 1% to 3%, and ~$100 million in expected realignment charges.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Parker-Hannifin Corp kept $0.08.
- Revenue$12.71B100.0%
- Cost of revenue−$9.66B76.0%
- Gross profit$3.06B24.0%
- Operating costs−$1.22B9.6%
- Operating income$1.84B14.5%
- Interest, other & tax−$826.3M6.5%
- Net income$1.01B8.0%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed August 26, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $12.71B$13.22B | −3.8% |
| Cost of Revenue | $9.66B$10.19B | −5.2% |
| Gross Profit | $3.06B$3.03B | +0.9% |
| R&D Expenses | $403.08M$410.13M | −1.7% |
| SG&A Expenses | $1.54B$1.63B | −5.5% |
| Operating Income | $1.84B$1.79B | +2.7% |
| Interest Expense | $118.41M$82.57M | +43.4% |
| Net Income | $1.01B$1.04B | −2.8% |
| EPS (Basic) | $7.08$6.98 | +1.4% |
| EPS (Diluted) | $6.97$6.87 | +1.5% |
| Shares Outstanding (Basic) | 142.93M149.10M | −4.1% |
| Shares Outstanding (Diluted) | 145.11M151.44M | −4.2% |
05—Questions
Frequently Asked Questions
Did Parker-Hannifin's underlying business grow in fiscal 2015?
Not on an organic basis. Reported net sales fell 3.8%, but excluding currency effects (about -$547 million) and acquisitions (about +$14 million), sales were essentially unchanged from 2014. North American Diversified Industrial and Aerospace volumes grew, offset by lower volume in International Diversified Industrial operations, particularly Europe and Latin America.
Why did the balance sheet and leverage change so much in 2015?
The company funded roughly $1.39 billion of share repurchases and a $1.5 billion medium-term note issuance, which lifted total debt to $2.95 billion from $2.33 billion. Combined with a $1.9 billion reduction in shareholders' equity, the debt-to-debt-plus-equity ratio rose to 36.6% from 25.9%, close to the company's 37% target ceiling. Net of cash and investments, the ratio was 16.8%.
Are the 2015 EPS gains sustainable, given the prior-year items?
The year-over-year EPS comparison is misleading. The 2014 results included a $189 million goodwill and intangible impairment (Energy Products Division) that depressed that year, but also a $413 million pre-tax deconsolidation gain that boosted it. Net income was nearly flat ($1.01 billion vs. $1.04 billion). Gross margin improvement, driven by lower realignment charges, is a more durable positive, but part of the gain reflects reduced restructuring spending that may recur.
What are the main risks flagged for investors in this filing?
Key risks include: slowing economic conditions in Western Europe and Brazil; currency volatility (42% of sales are non-U.S.); raw material and supplier price increases; competitive pricing pressure; ongoing business realignment costs (~$100 million expected in 2016); pension funding exposure, with $1.6 billion of underfunded status; and the pending European Commission marine hose cartel matter, where the company remains jointly liable for up to 6.3 million euros.
How secure is the dividend and what is the capital return outlook?
The dividend is well covered by cash flow and has increased for 59 consecutive years, with an annual rate of $2.52 per share after $340 million paid in fiscal 2015. The company also has 24.4 million shares remaining under its repurchase authorization. However, buybacks in 2015 were debt-funded, and management's leverage target and the company's goal of maintaining an A senior debt rating may constrain future repurchase pace.
06—Continue