Fitch Affirms Parker-Hannifin's Ratings at 'A/F1'; Outlook Stable

Fitch Ratings has affirmed Parker-Hannifin Corp.'s (NYSE: PH) ratings including its 'A' long-term Issuer Default Rating (IDR) and rates PH's up to $1.5 billion of new senior notes at 'A'. A full list of rating actions is shown below. The ratings affect approximately $3.7 billion of total debt on a pro forma basis as of Sept. 30, 2014, before the repayment of outstanding commercial paper (CP). The Rating Outlook is Stable.

The ratings and Outlook reflect Fitch's expectations for solid operating performance, driven by modest organic revenue growth from PH's strong market positions in diversified end markets. Fitch expects strengthening profitability from restructuring, resulting in the continuation of solid annual free cash flow (FCF).

Pro forma for the proposed senior notes issuance, credit protection measures will weaken and leave only modest headroom for further debt issuance. Fitch estimates total leverage (total debt to operating EBITDA) will increase to 1.4 times (x), assuming $1.5 billion of new senior notes, from 1.2x for the LTM ended Sept. 30, 2014. Fitch expects PH will maintain mid-cycle total leverage (total debt to operating EBITDA) below 1.5 times (x) over the long term.

The 'F1' short-term IDR reflects solid liquidity resources, including a $2 billion RCF that more than fully backs up the $1.85 billion CP program.

Over the long-term, Fitch anticipates low- to mid-single digit organic revenue growth, driven by faster growing developing markets. The potential for market share gains across a broad set of fragmented and expanding end markets could add to the top line, as will smaller acquisitions enabling PH to leverage technology platforms.

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.

Fitch anticipates operating profit margin expansion to exceed 13% in the near term versus a Fitch estimated 11.7% for the latest 12 months (LTM) ended Sept. 30, 2014, driven by higher revenues and a lower fixed cost from the company's footprint reorganization in Europe. Fitch continues to expect operating profit margin will remain above 10% through a normalized cycle. Fitch believes expectations for higher growth rates in developing economies will constrain significant operating profit margin expansion over the long-term.

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 and low capital intensity of roughly 2% of revenues. Fitch expects PH to use FCF primarily to support $2 billion to $3 billion of share repurchases over the next two years.

Beyond share repurchases and the reduction of CP borrowings, PH may use FCF for acquisitions. Acquisition spending remains uneven and Fitch anticipates smaller technology platform enabling deals rather than larger market share driven transactions. Pension contributions will be manageable over the intermediate term with no meaningful anticipated cash contributions over the intermediate term.

RATINGS TRIGGERS:

Negative rating actions could result from:

--Expectations for structural debt levels above 1.75x for a sustained period of time due to geographical cash location issues or additional share repurchases;

--Expectations for operating margin (EBIT) structurally below 10%, driven by lower new product introduction (NPI) sales levels or sustained pricing pressures. This would suggest reduced competitiveness.

Fitch does not anticipate positive rating action in the absence of a commitment from management to structurally reduce total leverage or operating EBIT sustained above 15%.

RATINGS DRIVERS:

The ratings are supported by:

--Leading motion control technology resulting in significant customer, product and end market diversification, reducing operating volatility through the cycle;

--Long-standing customer relationships and research and development (R&D) investments support profit margins and share by fostering ongoing design collaboration;

--Solid annual free cash flow (FCF) of $500 million to $1 billion through the cycle.

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, 2014 and consisted of:

--$2.03 billion of cash and cash equivalents, of which $2.01 billion was located overseas;

--$1.3 billion of availability under the company's $2 billion RCF, which more than fully backs-up PH's authorization to issue up to $1.85 billion of CP. $702 million of CP was outstanding as of Sept. 30, 2014.

Annual FCF of $500 million to $1 billion also supports liquidity.

Total debt at Sept. 30, 2014 was $2.8 billion and consisted of:

--$702 million of borrowings under the CP program;

--$260 million of 4.125% senior unsecured Eurobonds due 2016;

--$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;

--$56 million of other debt.

Fitch has affirmed the following ratings:

Parker-Hannifin Corporation

--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'.

Fitch has assigned 'A' ratings to PH's $1.5 billion senior notes offering.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=926696

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