10-QPeriod: Q2 FY2020

Parker-Hannifin Corp Quarterly Report for Q2 Ended Dec 31, 2019

Filed February 5, 2020For Securities:PH

Summary

Parker-Hannifin Corporation reported its financial results for the quarter and six months ended December 31, 2019. Revenue for the quarter remained relatively flat year-over-year, while it saw a decrease for the six-month period. This was largely due to lower volumes in the Diversified Industrial segment, partially offset by growth in the Aerospace Systems segment and contributions from recent acquisitions. Net income and earnings per share declined significantly compared to the prior year, primarily driven by increased selling, general, and administrative expenses, including substantial acquisition-related transaction costs for the LORD Corporation and Exotic Metals Forming Company acquisitions. These expenses, along with higher interest costs related to increased debt, impacted profitability. Despite these headwinds, the company's strategic focus on growth opportunities in key sectors and operational efficiencies remains. The company ended the period with a solid backlog, particularly in the Aerospace Systems segment.

Financial Highlights

56 data points
Beta

Revenue

$3.50B

23.2% Gross Margin

Net Income

$202.05M

5.8% Net Margin

EPS (Diluted)

$1.55

Total Assets

$21.04B

Cash & Equivalents

$948.36M

Free Cash Flow

$308.59M

Financial Statements
Beta
Revenue$3.50B
Cost of Revenue$2.69B
Gross Profit$811.84M
SG&A Expenses$491.12M
Operating Income$450.53M
Interest Expense$82.89M
Net Income$202.05M
EPS (Basic)$1.57
EPS (Diluted)$1.55
Shares Outstanding (Basic)128.40M
Shares Outstanding (Diluted)130.50M

Key Highlights

  • 1Revenue for the three months ended December 31, 2019, was $3,497,974, a slight increase from $3,472,045 in the prior year's comparable period.
  • 2Net income attributable to common shareholders decreased to $204,474 for the three months ended December 31, 2019, down from $311,737 in the prior year.
  • 3Diluted earnings per share fell to $1.57 for the quarter, compared to $2.36 in the same period last year.
  • 4The company completed two significant acquisitions: LORD Corporation for approximately $3,453 million and Exotic Metals Forming Company for approximately $1,706 million.
  • 5Acquisition-related transaction costs totaled $114,672 for fiscal 2020 (three months ended December 31, 2019).
  • 6The Diversified Industrial segment experienced a decrease in sales, particularly in North America and International regions, excluding acquisitions and currency effects.
  • 7The Aerospace Systems segment saw an increase in net sales, driven by acquisitions and higher volume in certain sub-segments.

Frequently Asked Questions

The primary driver for the decrease in net income and earnings per share was a significant increase in selling, general, and administrative expenses. This was largely due to acquisition-related transaction costs for the LORD Corporation and Exotic Metals Forming Company acquisitions, as well as higher intangible asset amortization expense. Increased interest expense due to higher average debt outstanding also contributed to the decline in profitability.

The acquisitions of LORD Corporation and Exotic Metals Forming Company had a mixed impact. They contributed positively to net sales, particularly in the Aerospace Systems segment and to a lesser extent in the Diversified Industrial segment. However, they also led to substantial acquisition-related transaction costs and increased intangible asset amortization, which negatively impacted profitability and earnings per share. These acquisitions also significantly increased the company's total assets, goodwill, and long-term debt.

The Diversified Industrial segment faced challenges with decreased sales in both North America and International regions, primarily due to lower demand in various industrial and mobile markets. The company is working to offset these declines through operational efficiencies, simplification initiatives, and integration of acquisitions. While the segment backlog saw an increase partly due to the LORD acquisition, the underlying organic demand requires careful monitoring.

Following the acquisitions, the company's long-term debt increased significantly. Parker-Hannifin has been managing this through a combination of term loans and commercial paper. The company maintains a goal of a strong investment-grade credit profile and is in compliance with its debt covenants. They continue to monitor their debt-to-equity ratio, which was 0.61 to 1.0 at December 31, 2019, below the restrictive covenant limit of 0.65 to 1.0.