Fitch Affirms Parker-Hannifin's Ratings at 'A/F1'; Outlook Stable
NEW YORK -- November 27, 2013
Fitch Ratings has affirmed Parker-Hannifin Corp.'s (NYSE: PH) ratings
including its 'A' long-term Issuer Default Rating (IDR). A full list of rating
actions is shown below. The ratings affect approximately $2.8 billion of total
debt. The Rating Outlook is Stable.
The ratings and Outlook reflect PH's strong market positions with
long-standing customer relations solid financial flexibility, conservative
financial policies, Fitch's near-term expectations for modest revenue growth,
stable operating profitability, solid free cash flow (FCF), and strengthening
credit protection measures. The 'F1' short-term IDR reflects solid liquidity
resources, including a $2 billion RCF that more than fully backs up the $1.8
billion CP program.
Fitch expects macroeconomic headwinds could result in low organic revenue
growth in the current fiscal year. Leading indicators point to cautious
recovery, with trends in several of industrial markets (including
transportation and oil and gas), refrigeration and commercial aerospace
offsetting ongoing weakness in mining, defense and air conditioning.
Nonetheless, Fitch anticipates low- to mid-single digit organic revenue growth
beyond the near term, driven by secular demand in developing markets and
market share gains across a broad set of fragmented and expanding end markets.
Acquisition activity will be uneven but remain a core part of PH's strategy,
particularly in markets that enable the company to leverage technology
platforms and obtain capabilities that can accelerate penetration in
Fitch continues to expect operating profit margin will exceed 10% through a
normalized cycle and improve from a Fitch estimated 11.2% for the latest 12
months (LTM) ended Sept. 30, 2013. In conjunction with higher volumes, PH's
footprint reorganization in Europe should drive modest margin expansion.
Fitch believes PH will be challenged to consistently achieve long-term
operating profit margin target of 15%, given expectations that the majority of
growth will be in developing economies.
Fitch expects annual free cash flow (FCF) will remain solid and range from
$500 million to $1 billion over the intermediate-term, driven by operating
EBITDA growth, low capital intensity and further inventory efficiencies. The
company should continue to spend roughly 2% of revenues on capital despite
modest consolidation initiatives in Europe and organic expansion in developing
economies. Footprint consolidation also should enable structurally lower
inventory to sales metrics.
In the absence of operating EBITDA enhancing acquisitions, Fitch expects PH to
use FCF for modest debt reduction to strengthen credit protection measures.
The ratings and Outlook incorporate PH maintaining total leverage (total debt
to operating EBITDA) below 1.5 times (x) at current mid-cycle revenue levels.
Fitch estimates total leverage was 1.6x for the LTM ended Sept. 30, 2013
versus 0.9x for the comparable prior year period, driven by roughly $1 billion
of incremental CP borrowings.
Beyond modest debt reduction, Fitch anticipates PH will use FCF for
acquisitions and share repurchases. The company's spending on acquisitions has
been uneven in recent years but Fitch anticipates smaller technology platform
enabling deals rather than larger market share driven transactions. Pension
contributions will be manageable over the intermediate term with expected cash
contributions of $75 million, $6 million and $145 million for the next three
Negative rating actions could result from:
--Sustained total leverage above 1.5x from structurally higher debt levels,
indicating a shift in financial policies or to fund share repurchases due to
--Sustained operating margin deterioration, indicating less competitive
Fitch does not anticipate positive rating action in the absence of a
commitment from management to limit total leverage or structurally higher
The ratings are supported by:
--Leading motion control technology resulting in significant customer, product
and end market diversification and smoothing operating metrics through the
--Long-standing customer relationships and research and development (R&D)
investments support profit margins and share by fostering ongoing design
--Solid annual free cash flow (FCF) of $500 million to $1 billion through the
Credit concerns include:
--Elevated total leverage for mid-cycle revenue levels.
--Lower organic revenue growth rates for the majority of revenues in North
America and Europe with less exposure to faster growing developing economies.
--Need for steady stream of new product introductions (NPI) to offset profit
erosion for seasoned products.
Fitch believes PH's liquidity was solid at Sept. 30, 2013 and consisted of:
--$1.9 billion of cash and cash equivalents, approximately $1.8 billion of
which was located overseas;
--$2 billion multi-currency RCF expiring 2017;
--Annual FCF of $500 million to $1 billion
The company has authorization to issue up to $1.8 billion of CP, also
supporting liquidity. $1.3 billion of CP was outstanding as of Sept. 30, 2013.
Additionally, cash balances will be augmented by net proceeds from selling
certain assets to form a joint venture (JV) with General Electric (GE)
Total debt at Sept. 30, 2013 was $2.8 billion and consisted of:
--$1.3 billion of borrowings under the CP program;
--$450 million of 5.5% senior notes due 2018;
--$100 million of 6.55% senior notes due 2018;
--$300 million of 3.5% senior notes due 2022;
--$325 million of 6.25% senior notes due 2038;
--$260 million of 4.125% senior unsecured Eurobonds;
--$63 million of other debt, including borrowings under a fully drawn Japanese
Fitch has affirmed the following ratings:
--Long-term IDR at 'A';
--Senior unsecured credit facilities at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
Eric Ause, +1-312-606-2302
James Rizzo, +1-212-908-0548
Brian Bertsch, New York, +1-212-908-0549
Press spacebar to pause and continue. Press esc to stop.