TEXT - Fitch affirms Parker-Hannifin ratings
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.