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
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
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
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
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
--$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
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
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.