Parker_Hannifin_Corporation___Market_Analysis_2010

Parker Hannifin Corporation (PH) Parker Hannifin Corporation (PH) is a company that manufactures different electromechanical controls, fluid power systems, and their related components; which together are considered motion control technologies. Currently PH is one of the biggest companies in the world in motion control technology and employs around 55,000 people. As of this year, PH is listed at number 230 in the Fortune 500. Parker Hannifin is headquartered in Cleveland, Ohio and was started in 1918 by Arthur Parker. PH originally went by the name of Parker Appliance Company and is more commonly referred to by the name of Parker, of Cleveland, Ohio. Shortly after it was founded in 1918, a truck accident occurred and destroyed the company’s entire inventory causing it to go bankrupt. Due to this unfortunate event, Arthur Parker retreated back to his previous job at an engineering plant, but vowed to rebirth the company again. In 1924 he was successful in restarting the company and the pneumatic/hydraulic components division did well in serving customers involved in aviation and the automotive industry. Some milestones that Parker Hannifin has been through include the founder, Arthur Parker buying a 450,000 auto plant in Cleveland in the mist of the Great Depression due to his great optimism that his company was going to continue its success in 1935. Eight years later in 1943, Parker had reached 5,000 employees in the Cleveland area; which were all in defense production. Shortly after, in 1945, Arthur Parker passed away leaving his company hurting to the point of liquidation. However, his wife Helen refused to give up and decided to hire new management that would eventually build the company back to its prime. In the 1960’s, PH reached a new level of success when shares of the company were traded on the NYSE and the company reached a spot on the Fortune 500 for the first time ever. Two decades later, Parker Hannifin extended its company by involving itself in a joint venture to China. The growing market overseas gave the company global recognition. In 1988, PH marketed its 70th anniversary and exceeded $2 million in sales. In the past 20 years, PH has continued its ongoing success and has continued to expand its business globally. The company also moved its World Headquarters to a brand new location in Mayfield Heights, Ohio. Today, Parker Hannifin has eight different technology groups which are: fluid connectors, aerospace, filtration, sealing and shielding, hydraulics, climate and industrial controls, and automation. Each of these different segments has brought in a large amount of revenue and has greatly contributed to the great reputation that Parker Hannifin has today in the global eye. Although Parker Hannifin has a great reputation to the public, every business has its strengths and weaknesses and there are always ways to progress towards becoming a better company. Not only is this important to the suppliers, but also to the employees, shareholders, and management. To find ways to advance, it is necessary to look at the past and conduct a time-trend analysis. To do this, financial statements are used and are a very useful tool to help compare the numbers in profitability, asset management, and leverage. This can help to assess the company’s true success and to find ways to improve. When looking at the profitability (Refer to Figure 1.1) of Parker Hannifin over the past 3 years, three ratios can be calculated from the past income statements. These ratios include: profit margin, return on assets, and return on equity which are the most useful in determining how well Parker Hannifin uses its assets and manages its operations. By looking at all three of these measures, the graph shows that each has decreased from 2008 to 2009, but then slightly increased in 2010. The decrease in profit margin could be the result of PH lowering their sales prices; which in turn causes profit margin to shrink. Perhaps when the economy begins to look more promising they can raise their sales prices back up to increase their profit margin and can then be able to generate larger profits even if they are still selling the same amount of inventory. In addition to considering profitability, you can also explore the area of asset management (Refer to Figure 1.2) which includes: total asset turnover, receivables turnover, and inventory turnover. These ratios help to determine how well PH uses its assets to generate sales. When looking at the graph, you can conclude that total asset turnover decreased from 2008- 2010. This is due to the sales decreasing as well as the total assets. To fix this, PH would need to increase their sales where possible. Along with total asset turnover, you can see from figure 1.2 that receivables turnover increased drastically from 2008 to 2009 and then slightly dropped again in 2010. These fluctuating values are the result of not collecting outstanding debts on a constant level. This can be fixed and regulated at a higher rate if Parker Hannifin can create a system to keep their customers wanting to pay their bills and debts on time. If they can standardize this, in the future, hopefully their asset turnover will increase and they can also increase their sales by creating more purchasing opportunities. A third measure of asset management to consider is inventory turnover. This is important to PH because it shows how many times that they turned over their inventory. When looking at Figure 1.2 you can see that inventory turnover increased from 2008 to 2010. Parker Hannifin did a great job over this three year period of keeping a rising turnover rate despite their loss in profit margin. Another area to access when analyzing Parker Hannifin is the leverage that the company has. Leverage is important to PH because it shows how they use debt in their capital structure. The more debt that they have, as a percentage of assets, the greater degree they have in terms of financial leverage. The three measures used to determine this are: debt-equity multiplier, equity multiplier, and times interest earned. The debt-equity multiplier and the equity multiplier can both be derived from the variations of the total debt ratio that they have. They are in sync with one another due to the fact that the equity multiplier is 1 plus the debt-equity ratio. In Figure 1.3, the debt equity multiplier and the equity multiplier both increased from 2008 to 2009 and slightly declined in 2010. The decrease then slight increase over this three year time span could be the cause of debts fluctuating due to PH’s gain and losses. A third ratio that contributes to Parker Hannifin’s financial leverage is times interest earned. Times interest earned can show how well Parker Hannifin covers its interest obligations. By looking at Figure 1.4, Parker Hannifin’s time interest earned decreased by 50% from 2008 to 2009. This drastic change is due to interest increasing by a very large amount and EBIT decreasing by a huge amount over that year. In 2010 the value grew slightly, but it is still evident that Parker Hannifin’s earnings need to rise in order to keep times interest as high as possible. From looking at Parker Hannifin from a raw financial standpoint and then a time-trend analysis standpoint, it is no surprise to conclude that the current economic state that our country is in has affected the company immensely, and 2009 proved to be a rough year for PH in all areas in retrospect of 2008 and the current year. In conclusion, using a time-trend analysis was valuable in helping me to evaluate Parker Hannifin’s performance in the aspect that it helped to compare the company in a more standardized setting with the rest of the industry. Using ratios instead of raw numbers off of a financial statement was useful in deciphering the company’s financial performance over a three year time span by pulling out the most important numbers and comparing them with previous years and with the competition. The ratios used in determining Parker Hannifin’s profitability, asset management, and leverage helped to conclude in what areas the company was/is doing well and in what areas it can show improvement on. Using this analysis is also a proactive way to decide if PH is learning from its past mistakes and correcting them financially. FIGURE 1.1 FIGURE 1.2 FIGURE 1.3 FIGURE 1.4 FINANCIAL STATEMENTS Income Statement | Period Ending | Jun 30, 2010 | Jun 30, 2009 | Jun 30, 2008 | Total Revenue | 9,993,166   | 10,309,015   | 12,145,605   | Cost of Revenue | 7,847,067   | 8,181,348   | 9,339,072   | | Gross Profit | 2,146,099   | 2,127,667   | 2,806,533   | | | Operating Expenses | | Research Development | -   | -   | -   | | Selling General and Administrative | 1,277,080   | 1,290,379   | 1,364,082   | | Non Recurring | -   | 43,763   | (3,396) | | Others | -   | -   | -   | | | | Total Operating Expenses | -   | -   | -   | | | | | | Operating Income or Loss | 869,019   | 837,288   | 1,445,847   | | | | | Income from Continuing Operations | | | Total Other Income/Expenses Net | (10,603) | (42,134) | (20,327) | | | Earnings Before Interest And Taxes | 858,416   | 795,154   | 1,425,520   | | | Interest Expense | 103,599   | 112,071   | 98,996   | | | Income Before Tax | 754,817   | 683,083   | 1,326,524   | | | Income Tax Expense | 198,452   | 172,939   | 377,058   | | | Minority Interest | (2,300) | (1,629) | -   | | | | | Net Income From Continuing Ops | 554,065   | 508,515   | 949,466   | | | | | Non-recurring Events | | | Discontinued Operations | -   | -   | -   | | | Extraordinary Items | -   | -   | -   | | | Effect Of Accounting Changes | -   | -   | -   | | | Other Items | -   | -   | -   | | | | | | Net Income | 554,065   | 508,515   | 949,466   | | Preferred Stock And Other Adjustments | -   | -   | -   | | | | Net Income Applicable To Common Shares | $554,065   | $508,515   | $949,466   | | | Balance Sheet | Period Ending | Jun 30, 2010 | Jun 30, 2009 | Jun 30, 2008 | | Assets | Current Assets | | Cash And Cash Equivalents | 575,526   | 187,611   | 326,048   | | Short Term Investments | -   | -   | -   | | Net Receivables | 1,730,070   | 1,539,285   | 2,192,557   | | Inventory | 1,171,655   | 1,254,550   | 1,494,694   | | Other Current Assets | 111,545   | 142,335   | 82,326   | | Total Current Assets | 3,588,796   | 3,123,781   | 4,095,625   | Long Term Investments | 687,320   | 674,628   | 546,006   | Property Plant and Equipment | 1,697,881   | 1,880,554   | 1,926,522   | Goodwill | 2,786,334   | 2,903,077   | 2,798,092   | Intangible Assets | 1,150,051   | 1,273,862   | 1,020,609   | Accumulated Amortization | -   | -   | -   | Other Assets | -   | -   | -   | Deferred Long Term Asset Charges | -   | -   | -   | | Total Assets | 9,910,382   | 9,855,902   | 10,386,854   | | Liabilities | Current Liabilities | | Accounts Payable | 1,841,619   | 1,524,287   | 2,064,392   | | Short/Current Long Term Debt | 363,272   | 481,467   | 118,864   | | Other Current Liabilities | -   | -   | -   | | Total Current Liabilities | 2,204,891   | 2,005,754   | 2,183,256   | Long Term Debt | 1,413,634   | 1,839,705   | 1,952,452   | Other Liabilities | 1,697,136   | 1,476,546   | 829,497   | Deferred Long Term Liability Charges | 135,321   | 183,457   | 162,678   | Minority Interest | 91,435   | 82,241   | -   | Negative Goodwill | -   | -   | -   | | Total Liabilities | 5,542,417   | 5,587,703   | 5,127,883   | | Stockholders' Equity | Misc Stocks Options Warrants | -   | -   | -   | Redeemable Preferred Stock | -   | -   | -   | Preferred Stock | -   | -   | -   | Common Stock | 90,523   | 90,523   | 90,523   | Retained Earnings | 6,086,545   | 5,722,038   | 5,387,836   | Treasury Stock | (1,237,984) | (1,289,544) | (862,993) | Capital Surplus | 637,442   | 588,201   | 528,802   | Other Stockholder Equity | (1,208,561) | (843,019) | 114,803   | | Total Stockholder Equity | 4,367,965   | 4,268,199   | 5,258,971   | | Net Tangible Assets | $431,580   | $91,260   | $1,440,270   | |