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Parker-Hannifin Corporation (NYSE: PH) manufactures motion and fluid control systems, which allow customers to move and position materials, machines, and equipment during manufacturing processes. While it is incorporated in the United States, Parker-Hannifin has focused on its international growth. As of FY08, the company has facilities in 47 foreign countries and approximately 47% of Parker's $12.15 billion net sales come from international customers.[1] [2] This growth is due to Parker's aggressive acquisition of new firms. Between its first quarter of 2008 and that of 2009, acquisitions accounted for 45% of Parker's net sales increase and since 2006, has acquired 34 businesses.[3]
Due to the global economic downturn, Parker's North American Industrial businesses only grew by 4.6% and 1.8% for FY08 and FY07, after an average growth of 13.0% over the previous 3 years. This decrease was a result of lower demand in their automotive, heavy-duty truck, semiconductor and construction equipment markets. While Parker's businesses have been affected by the slowdown, the weakening U.S. Dollar (USD) , primarily versus the Euro (EUR), has increased Parker's net sales for FY08 and FY07 by approximately $544 million and $241 million. [4] This increase occurs when Parker converts its foreign sales numbers into U.S. dollars.
[edit] Company Overview
Parker Hannifin is a worldwide manufacturer of motion and control systems, including fluid power systems, electromechanical controls and their related components. It also sells fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems. Parker has expanded and grown its product line and international business through the acquisitions of complementary businesses. From FY06 to FY08, Parker has acquired approximately 34 other businesses.[5] Some of the recent companies acquired at the end of 2008 were Nexgen Hose Inc., a Canadian manufacturer of PVC hose and tubing, Aqua Pro Inc., a U.S. manufacturer of reverse osmosis filtration systems for marine applications, and EmiTherm Sdn Bhd, a provider of electromagnetic interference (EMI) shielding and thermal management products from Kuala Lumpur, Malaysia.[6]
[edit] Business and Financial Metrics
From FY05-FY08, Parker's net sales have grown by an average of 15.2% each year as it expands its international businesses.[4][7] This growth was larger over the first two years, as revenues have only increased by 13.3% and 14.2% for FY08 and FY07.[4] During those years, Parker's acquisitions accounted for 26% and 45% of the net sales increase, respectively.[4]
Like their net sales, Parker's net income has increased from FY04 to FY08, going from $346 million in net income to $949 million.[4][7] Parker's earnings growth have varied during these four years, growing as little as 11.2% in FY06 and as much as 75% in FY05.[7] Its earnings have continued to increase due to increasing revenues and improved operating efficiency, as their net profit margin has increased from 5.02% to 7.81% from FY04-FY08.[4][7] However, these margins are slightly lower due to business realignment charges from its failure to fully integrate its acquisitions.[8]
Parker's first quarter earnings for 2009 rose 9.0% to $250.2 million versus its first quarter earnings in 2008 of $229.6 million.[9] This was the result of a 10% increase in revenues year over year for Parker, of which 4% was organic growth.[9] The remaining growth comes from the firm's acquisitions and the result of changes in currency exchange rates.
[edit] Business Segments
Parker Hannifin operates in three principal business segments: Industrial; Aerospace; and Climate & Industrial Controls.
[edit] Industrial (76.2% of sales, 81.8% of segment operating income)
The Industrial business segment manufactures Parker's motion control and fluid power system components. It is also the primary source of revenues for Parker's international operations, as it provides products and services to 45 foreign countries.[11] For FY08, the Industrial North American operations had sales of $4.25 billion, which is a 4.6% increase from the prior year.[12] Although net sales increased in North America, Parker's operating margins declined, as Parker had higher product development expenses and higher material costs. The Industrial International segment, however, had a sales increase of 28.3% in 2008, as its net sales grew to $5.006 billion.[12] This is following a 34.4% increase in net sales during 2007.[12] Like in North America, a large part of the increase in net sales is due to acquisitions. In FY08 and FY07, acquisitions accounted for 20% and 40% of the net sales increase.[12] However, unlike in North America, international operating margins improved due to higher sales volume.
[edit] Aerospace (15.1% of sales, 14.7% of segment operating income)
The Aerospace segment produces hydraulic, fuel and pneumatic systems and components which are used in commercial, military and general aviation aircraft. It also provides products and systems for naval vessels and land-based weapons system. In fiscal year 2008, net sales in the Aerospace segment grew by 9.0% to total sales of $1.838 billion.[13] Even though sales volume was lower in the military aftermarket, net sales grew because of increasing volume in both the commercial original equipment manufacturer(OEM) market and aftermarket. Although sales were increasing, operating margins decreased in 2008 because of higher sales volume in the less profitable OEM market.
[edit] Climate & Industrial Control (8.7% of sales, 3.5% of segment operating income)
Parker's Climate & Industrial Control business manufactures motion-control systems and components for use in the refrigeration, air conditioning, and transportation industries. Due to the poor housing market and decreasing residential construction, sales decreased by 1.6% in 2008 as compared to an 8.4% increase during 2007, 70% of which was due to acquisitions. [15] In addition to the housing market, there was also lower demand in the heavy-duty truck and automotive markets. For FY08 and FY07, operating margins for Parker's Climate and Industrial Control business decreased because of poor product mix, lower sales volume, and increasing raw material costs.[15]
[edit] International Operations
As of FY08, Parker's international business accounted for 45.5% of its approximately $12 billion in net sales.[14]Mostly all of these sales are earned in Parker's Industrial International operations. For 2008, approximately 92.5% of international sales were from the industrial operations.[10] Parker classifies its sales into two geographic areas: North America and International. The International segment consists of 45 countries that are primarily located in Europe, Asia Pacific, and Latin America. However, no other country besides the United States accounts for more than 10% of Parker's consolidated sales. [14] Parker's international business has grown significantly over the past few years and it is the main reason for Parker's overall sales growth. From FY06 to FY08, Parker's international sales have grown from $3.167 billion to $5.409 billion, while North American sales have only grown from $6.219 billion to $6.736 billion.[14]
[edit] Key Trends and Forces
[edit] Weak Dollar boosts net sales
47% of Parker-Hannifin's revenues are earned outside of the United States.[2] With almost half of its business occurring in foreign markets, the effects of currency exchange rates can be significant on Parker's net sales numbers. For FY08 and FY07, changes in foreign currency exchange rates, due to a weakening U.S. dollar, increased net sales by $544 million and $241 million.[4] This represents a 4.7% and 2.3% increase in net sales, respectively, for those two years.[4] The increased sales are not due to increasing volume but rather due to the changing exchange rate, as the dollar weakens. Parker's international businesses sell their products in their local foreign currencies. However, since Parker records its revenues in U.S. dollars, it must convert its foreign sales numbers accordingly.
[edit] Global economic downturn decreases demand for Parker's businesses
If the increase in sales during 2008 and 2007 due to acquisitions were removed from Parker's North American Industrial businesses, Parker would only have a slight increase in its 2008 sales and no increase in 2007. This is due to lower end-user demand in the heavy-duty truck, automotive, semiconductor, and construction equipment markets. Subsequently, Parker has begun to layoff workers in North America. As of December 22, 2008, Parker has fired a total of 405 employees as it tries to cut its costs in the face of decreased demand for its products.[16] Two economic indicators of future manufacturing activity are the Institute of Supply Management Index (ISM) and the Eurozone Purchasing Managers Index (PMI). Numbers above 50 generally indicate that the manufacturing economy is expanding. As of September 2008 the ISM index was 43.5 and the PMI index for the Eurozone countries was 45.0. [17]
Demand for Parker's Aerospace products and systems have also decreased as the number of aircraft miles flown and revenue passenger miles have decreased since 2007, although the more recent numbers in 2008 have shown improvement compared to those in 2007.
Due to the subprime crisis and poor economy, housing starts in October 2008 reached their lowest levels since 1959, the year the Commerce Department started recording them.[18] Housing starts were approximately 27% lower in June 2008 from the previous year and 31% lower in September 2008 from the previous year. [15] Demand for Parker's climate control systems, most importantly residential air conditioning, depend on housing starts and residential construction. Consequently, sales in 2008 for Parker's Climate & Industrial Control segment decreased 1.6%.[15]
[edit] Failure to acquire new businesses negatively impacts growth
As of 2008, Parker hasn't faced any trouble acquiring funds to complete the purchases of its acquisitions. However, due to the increased number of its acquisitions, Parker has begun to accumulate more debt. Its Debt to Debt-Equity ratio has increased from 21.4% in FY07 to 35% as of September 30, 2008.[19][20]
Parker has aggressively expanded its international business through numerous acquisitions each year. Its revenues and earnings have grown substantially since 2004, due mostly to its ability to acquire these complementary businesses and expand its operations. Acquisitions have accounted for 26%, 45% and approximately 50% of Parker's total net sales increase during FY08, FY07, and FY06 respectively.[4][7] Due to the fact that its acquisitions account for a substantial portion of its increasing revenues and earnings, failure to find new firms will result in a substantial drop in Parker's future revenue and income growth. It is notable that, although Parker had organic sales growth of 4% year-over-year during its first quarter of 2009, the inflation rate was approximately 5% during this same period. [21]
[edit] Competition
Parker-Hannifin does not compete with one single manufacturer with respect to all of its products and systems. However, Parker's closest competitors are Eaton Corporation (ETN) , Honeywell International (HON) , and ITT Corporation (ITT).
- Eaton (ETN) - Eaton is a global manufacturer of electrical power and control systems for use in agriculture, trucks, aerospace, and automobiles. Like Parker, it also manufactures fluid power and hydraulic systems. Eaton competes with Parker-Hannifin in the U.S. and internationally, as it operates in over 150 countries. Eaton consists of five business segments: Electrical, Hydraulics, Aerospace, Truck, and Automotive.
- Honeywell International (HON) -Honeywell is a worldwide technology and manufacturing company that operates in four main business segments: Aerospace, Automation and Control Solutions, Specialty Materials, and Transportation Systems. 61% of Honeywell's revenues are earned in the United States, but like Parker it is aggressively trying to expand its international operations. International revenues have increased from 29% of total revenues in 2005 to 39% in 2007.[22]
- ITT Corporation (ITT)- ITT designs and manufactures various products and systems in the United States and internationally. It operates in three main segments: Defense Electronics and Services, Fluid Technology, and Motion and Flow Control. It largely competes with Parker with regards to its fluid systems and its motion and flow control systems. Like Parker, it provides systems and services to the aerospace, industrial, and transportation markets.
| Company | Revenue($M) ttm | Net Income($M) ttm | Profit Margin ttm | ROA ttm |
| Parker-Hannifin (PH) | $12,420 | $970.04 | 7.81% | 9.98% |
| Eaton (ETN) | $15,260 | $1,140.00 | 7.54% | 6.08% |
| Honeywell International (HON) | $37,120 | $2,770.00 | 7.47% | 7.36% |
| ITT Corporation (ITT) | $11,280 | $728.10 | 6.81% | 8.23% |
[edit] References
- ↑ PH 2008 10-K, Item 1. Business, page 2
- ↑ 2.0 2.1 PH 2008 10-K, Item 1A. Risk Factors, page 7
- ↑ PH 2008 10-Q, Item 2. Management Discussion and Analysis, page 15
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-3
- ↑ PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-21
- ↑ Parker - Investor Relations- 2008 Financial News Releases
- ↑ 7.0 7.1 7.2 7.3 7.4 7.5 PH 2006 10-K, Exhibit 13 Management Discussion and Analysis, page 13-3
- ↑ PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-4
- ↑ 9.0 9.1 Parker - Investor Relations - 2008 Financial News Releases
- ↑ 10.0 10.1 PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-14
- ↑ PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-18
- ↑ 12.0 12.1 12.2 12.3 PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-5
- ↑ PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-6
- ↑ 14.0 14.1 14.2 14.3 PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-15
- ↑ 15.0 15.1 15.2 15.3 PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-7
- ↑ Forbes.com. Layoff Tracker.
- ↑ PH 2008 10-Q, Item 2. Management Discussion and Analysis, page 13
- ↑ CNNMoney.com. Housing starts, permits at record lows.
- ↑ PH 2008 10-K, Exhibit 13 Management Discussion and Analysis, page 13-8
- ↑ PH 2008 10-Q, Item 2. Management Discussion and Analysis, page 19
- ↑ InflationData.com. Historical U.S. Inflation Rate 1914-present.
- ↑ HON 2007 10-K, Note 24: Geographic Areas, page 99
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