10-QPeriod: Q3 FY2020

Parker-Hannifin Corp Quarterly Report for Q3 Ended Mar 31, 2020

Filed May 6, 2020For Securities:PH

Summary

Parker-Hannifin Corporation (PH) reported results for the third quarter and first nine months of fiscal year 2020, ending March 31, 2020. Net sales remained largely flat year-over-year for the quarter but saw a slight decrease over the nine-month period, impacted by currency headwinds and weaker demand in certain industrial markets, partially offset by contributions from recent strategic acquisitions. Despite flat top-line performance, the company saw a decrease in net income and earnings per share, reflecting higher interest expenses and increased selling, general, and administrative (SG&A) costs, particularly due to amortization from recent large acquisitions and transaction costs. The company also proactively addressed the emerging COVID-19 pandemic by suspending its share repurchase program and implementing cost-saving measures, anticipating future negative impacts on its business. The balance sheet reflects a significant increase in goodwill and intangible assets due to the acquisitions of LORD Corporation and Exotic Metals Forming Company LLC, and higher debt levels to finance these transactions.

Financial Highlights

56 data points
Beta

Revenue

$3.70B

25.5% Gross Margin

Net Income

$372.71M

10.1% Net Margin

EPS (Diluted)

$2.87

Total Assets

$20.37B

Cash & Equivalents

$697.62M

Free Cash Flow

$400.98M

Financial Statements
Beta
Revenue$3.70B
Cost of Revenue$2.76B
Gross Profit$942.79M
SG&A Expenses$413.46M
Operating Income$535.68M
Interest Expense$80.77M
Net Income$372.71M
EPS (Basic)$2.90
EPS (Diluted)$2.87
Shares Outstanding (Basic)128.29M
Shares Outstanding (Diluted)129.75M

Key Highlights

  • 1Net sales for the three months ended March 31, 2020, were $3,702.4 million, a slight increase from $3,687.5 million in the prior year period. Nine-month sales decreased to $10,534.9 million from $10,638.9 million.
  • 2Diluted earnings per share (EPS) for the quarter decreased to $2.83 from $3.14 in the prior year. Nine-month diluted EPS fell to $7.01 from $8.29.
  • 3The company completed significant acquisitions: LORD Corporation for approximately $3,455 million and Exotic Metals Forming Company LLC for approximately $1,706 million, leading to a substantial increase in goodwill and intangible assets.
  • 4Debt levels increased significantly, with total long-term debt rising to $8,097.9 million from $6,520.8 million, primarily to finance the recent acquisitions.
  • 5The company reported $5,543 million in backlog as of March 31, 2020, indicating a substantial order book for future revenue.
  • 6Management noted the emerging impact of COVID-19, stating it did not materially affect third-quarter results but is expected to negatively impact the fourth quarter and beyond. The share repurchase program was suspended in March 2020 as a precautionary measure.
  • 7The Diversified Industrial segment experienced a sales decline (excluding acquisitions and currency impacts) in both North America and International markets, while the Aerospace Systems segment saw growth driven by acquisitions and aftermarket volume, though impacted by commercial OEM slowdowns.

Frequently Asked Questions

The acquisitions of LORD Corporation and Exotic Metals Forming Company LLC were significant events, contributing $3,455 million and $1,706 million respectively. These acquisitions increased the company's goodwill and intangible assets substantially. While they boosted sales by $343 million in the quarter and $651 million in the nine-month period, they also led to higher interest expenses and increased selling, general, and administrative (SG&A) costs, including amortization expenses and acquisition-related transaction costs.

The company's debt increased significantly to fund the recent acquisitions. Total long-term debt rose to $8,097.9 million as of March 31, 2020, up from $6,520.8 million at the end of the previous fiscal year. This increase was primarily driven by new term loans taken out to finance the LORD and Exotic acquisitions. Despite higher debt, the company remained in compliance with its financial covenants.

While the COVID-19 outbreak did not materially affect the company's reported results for the third quarter of fiscal 2020, management anticipates a negative impact on its business and results of operations for the fourth quarter and beyond. This is due to expected disruptions in customer demand, particularly in the aerospace industry, and potential supply chain issues. In response, the company has suspended its share repurchase program and implemented cost-saving measures to preserve cash and strengthen its financial position.

The Diversified Industrial segment experienced challenges, with sales declining (excluding acquisitions and currency impacts) in both North American and International markets due to lower demand across various industries. Conversely, the Aerospace Systems segment saw increased net sales, driven by acquisitions and higher volume in the aftermarket. However, this segment was partially offset by lower demand in commercial original equipment manufacturer (OEM) businesses and was negatively impacted by the Boeing 737 MAX production issues.