TEXT - Fitch affirms Parker-Hannifin ratings

Mon Dec 3, 2012 3:57pm EST

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Dec 3 - Fitch Ratings has affirmed Parker-Hannifin Corporation's (NYSE: PH)
long-term Issuer Default Rating (IDR) and debt ratings at 'A' and its short-term
IDR and commercial paper (CP) ratings at 'F1'. A full rating list is shown
below.

 

The ratings and Stable Rating Outlook incorporate Fitch's expectations for 
operating results that will remain solid for the rating, despite a weak 
macroeconomic environment. Organic sales should decline in the low-single 
digits, with sales from recent acquisitions roughly offsetting currency related 
headwinds. 

Operating profit margin should decline from recent peak levels to the low teens 
but range from 10%-13% through the business cycle. Free cash flow (FCF) will 
exceed $500 million through the intermediate term, despite substantial ongoing 
pension contributions.

PH's use of cash for acquisitions and share repurchases remain a concern. 
Nonetheless, the ratings and Outlook incorporate Fitch's belief that PH will 
follow historical patterns of curtailing acquisitions and stock buybacks to 
preserve its solid liquidity position in a downturn. 

Credit protection measures should remain near current levels, which are solid 
for the rating. As of Sept. 30, 2012, Fitch estimates PH's total leverage (total
debt to operating EBITDA) was approximately 0.9 times (x) while interest 
coverage (operating EBITDA to interest expense) was more than 20x. 

Fitch does not anticipate incremental debt reduction beyond the anticipated 
repayment of $225 million of senior notes maturing in February 2013. The ratings
and Outlook contemplate PH's use of incremental debt for acquisitions. 
Nonetheless, Fitch believes PH would use FCF over the subsequent near-term to 
reduce debt and maintain a strong investment grade rating. 

The ratings are supported by PH's: i) balanced mix of original equipment 
manufacturer (OEM) and aftermarket sales, ii) solid annual FCF through the 
business cycle, iii) diversified business and geographic portfolio and iv) 
conservative financial policies. 

Ratings concerns include i) PH's significant exposure to short-cycle businesses,
ii) significant acquisition activity and attendant integration risks, and iii) 
use of FCF to fund substantial pension obligations.

Recessionary conditions in Europe, weak industrial demand in North America and 
lower growth in China are driving negative new orders and backlog tends. At the 
same time, PH should benefit from solid aerospace demand. Sales from companies 
acquired year-to-date (YTD) should add more than $350 million to consolidated 
revenues. 

Lower volume and elevated research and development costs associated with 
commercial aerospace demand will drive operating profit margin lower over the 
near-term. However, Fitch anticipates PH will continue to tweak its global 
footprint to maintain operating profit margins in the low double-digits through 
the business cycle. 

Fitch believes PH's liquidity is more than sufficient as of Sept. 30, 2012 and 
supported by:

--$436 million of cash and cash equivalents (a substantial portion of these 
funds are located outside the U.S.); 

--$2 billion multi-currency revolving credit agreement expiring October 2017.

Liquidity also is supported by annual FCF of more than $500 million and PH is 
authorized to sell up to $1.85 billion of commercial paper (CP). $35 million was
outstanding under the CP program at Sept. 30, 2012. 

Fitch expects pension contributions will remain a meaningful use of FCF through 
the intermediate term. The company plans to contribute approximately $280 
million in fiscal year 2013. PH targets maintaining an 80% funded status for 
domestic plans.

A positive rating action for PH in the near term is unlikely due PH's material 
exposure to short-cycle businesses and likely use of FCF for acquisitions and 
share repurchases. 

Negative rating actions could be triggered by: i) sustained operating profit 
margins below 10%, indicating a structural rather than cyclical profitability 
erosion; or ii) sustained lower FCF from increasing investment intensity in 
capital equipment or inventory. 

Fitch affirms PH's ratings as follows:

--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'.

Approximately $1.8 billion of debt was outstanding at Sept. 30, 2012.
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