Parker-Hannifin Corporation PH reported first-quarter fiscal 2016 adjusted earnings of $1.52 per share, beating the Zacks Consensus Estimate of $1.45 by 4.8%. However, earnings declined 19.6% on a year-over-year basis.
The weak bottom-line performance was largely attributable to poor revenues recorded during the quarter. Citing no future respite, the company cut its adjusted earnings guidance for fiscal 2016.
Inside the Headlines
Net sales in the quarter fell 12.2% year over year to $2.87 billion, also lagging the Zacks Consensus Estimate of $2.90 billion. The decline in the top line was primarily a result of foreign currency-related headwinds, apart from weakness in key end markets.
The company also reported an 11% drop in orders for the reported quarter due to a decline in the orders rate across both reporting segments.
Operating income for the quarter declined 19.9% year over year to $416.0 million.
During the quarter, Parker-Hannifin bought back shares worth $310 million.
Segmental Performance
Under the Diversified Industrial Segment, North American sales for first-quarter fiscal 2016 slipped 13% to $1.3 billion. Also, the segment reported a 12% year-over-year decline in orders.
The International subdivision, which also falls under Diversified Industrial Segment, reported an 18% decrease in sales to $1.0 billion. Also, orders for the sub segment fell 8% year over year.
On the other hand, revenues in the Aerospace Systems segment recorded a 2% year-over-year rise to $544.6 million, while orders declined 16%.
New "Win Strategy" Launched
Parker-Hannifin disclosed the latest version of its core business system, “Win Strategy”. While the modified version of the “Win Strategy” will run on the originally chalked principles, the new goals are included to boost speed and performance. The new strategies include Engaged People, Premier Customer Experience, Profitable Growth and Financial Performance. Additionally, Parker Hannifin set new financial plans, which comprised a goal of reaching 17% segment operating income margin and 17% return on invested capital in the upcoming five years.
Liquidity
As of Sep 30, 2015, Parker-Hannifin’s cash and cash equivalents were $974.3 compared with $1.18 billion at the end of fourth-quarter fiscal 2015. Long-term debt was $2.73 billion at the end of the first-quarter fiscal 2016, compared with $2.72 billion as of Jun 30, 2015.
Fiscal 2016 Guidance Trimmed
Management revised the adjusted earnings guidance for fiscal 2016 to $5.80–$6.40, down from $6.65–$7.35 per share projected earlier. The latest guidance considers business realignment expenses of approximately 50 cents per share, out of which 30 cents are attributable to the company’s business simplification initiative.
The company expects weak end markets and strong currency headwinds to weigh on its financial performance for fiscal 2016. Also, restructuring initiatives aimed at pruning the business portfolio so as to improve efficiency may affect near-term results adversely, going forward.
Our Take
Going forward, we believe Parker-Hannifin’s new Win Strategy will aid the company in fiscal 2016. This apart, the global restructuring initiatives that have benefited the company in the past, are expected to strengthen the competitive position of this Zacks Rank #5 (Strong Sell) stock.
Some better-ranked companies in the same industry include Barnes Group Inc. B, Graham Corporation GHM and Middleby Corp. MIDD. All three stocks carry Zacks Rank #2 (Buy).
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