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Rating Action:

Moody's assigns Baa1 to Parker-Hannifin's new senior unsecured notes

05 Jun 2019

New York, June 05, 2019 -- Moody's Investors Service (Moody's) assigned Baa1 senior unsecured ratings to Parker-Hannifin Corporation's (Parker-Hannifin) recently announced multi-tranche, benchmark-sized bond issuances. All other ratings remain unchanged.

The proceeds from this issuance, along with a delayed-draw term loan (unrated) and commercial paper borrowings, are expected to fund the nearly $3.7 billion acquisition of LORD Corporation (LORD) that was announced April 2019 and is expected to close late-2019.

RATINGS RATIONALE

Parker-Hannifin's Baa1 senior unsecured rating reflects the company's position as a leading supplier of motion and control systems and components, with considerable scale - pro forma revenues approaching $16 billion - and largely favorable long-term market opportunities, as indicated by a solid organic growth rate trend that is expected to be 2% - 4% over the next couple of years. The company benefits from considerable diversification within a broad and fairly well-balanced industrial group of platforms - Aerospace Systems, Motion Systems, Filtration and Flow & Process Control -- that are spread across a global customer base. The acquisition of LORD, a leader in specialty adhesives and coatings, vibration and motion control systems, strengthens Parker-Hannifin's technology content across the materials science platform. LORD maintains an active patent portfolio along with significant trade secrets and proprietary formulations, that along with significant R&D spending (greater than 5% of revenues) to boost innovation, will augment Parker-Hannifin's margins (EBITDA margin currently in the 20% range).

Acquisition financing is expected to include a significant percentage of short-term debt, enabling Parker-Hannifin to quickly de-lever which it demonstrated following the Clarcor, Inc. acquisition in early-2017. Importantly, management's plan to apply the majority of cumulative free cash flow (over $1.2 billion) to short-term debt repayment will be instrumental in restoring credit metrics back towards pre-acquisition levels within twelve months after the transaction closes.

About half of Parker-Hannifin's revenues are derived from aftermarket sales, which help mitigate the impact of periodic weakness in what are otherwise inherently cyclical OEM-driven businesses. Margins have steadily climbed over the past 3+ years despite uneven macroeconomic environments and should continue expanding with LORD's higher-margin product portfolio. Combined free cash flow is strong and expected to approach $1.4 billion for FY2020 led by solid organic revenue growth and ongoing gains from the Win Strategy.

LORD generates higher margins (low-20% range) than Parker-Hannifin (just below 20%), produces solid free cash flow and complements Parker-Hannifin's capabilities in the engineered materials space, where LORD is a leader in adhesives for bonding rubber to various substrates as well as coatings used to enhance rubber surfaces. LORD is also expected to generate organic revenue growth greater than legacy Parker-Hannifin, led by current high-growth applications lightweighting and electrification in the automotive sector. Nonetheless, LORD's end markets can be cyclical, like Parker-Hannifin's, and are largely OEM/first-build focused, with less of an aftermarket revenue stream than Parker-Hannifin. Consequently, LORD is susceptible to economic slowdowns with sizable exposure to the automotive and industrial (oil & gas, building & construction) end markets.

The stable outlook is based on Moody's expectations that the combined company's annual organic revenue growth will be 2% - 4% and that management will utilize a majority of the $1.2+ billion of free cash flow to repay short-term acquisition-related debt over the twelve months following the transaction close. Accordingly, debt-to-EBITDA is anticipated to approach 3x by Parker-Hannifin's fiscal year end 2020 (June 2020). The stable outlook also includes Moody's expectation that stronger earnings and margin growth will be realized even in a lower organic revenue growth environment.

Moody's took the following rating actions on Parker-Hannifin Corporation:

- Senior Unsecured Notes, Assigned at Baa1

Ratings are not expected to be upgraded in the near-term as Moody's anticipates that leverage and ensuing financial risk will remain elevated for some time, especially if Parker-Hannifin's key end markets experience weakening fundamentals. Over a longer time horizon, ratings could be upgraded with expectations for debt-to-EBITDA to fall below 2.5x for a sustained period and for free cash flow-to-debt to comfortably exceed 15%. Meaningful deviation from or protraction of the anticipated debt-reduction process, whether by weak performance, additional debt-financed acquisitions or share repurchases could result in a ratings downgrade. Additionally, the ratings could be downgraded if organic growth stalls out/turns negative, margins meaningfully deteriorate, debt-to-EBITDA remains above 3.25x or free cash flow-to-debt falls below 10%. A shift to a more aggressive financial policy could also trigger negative rating actions.

Parker-Hannifin Corporation is a leading manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. Revenues for the latest twelve months ended March 31, 2019 were approximately $14.5 billion.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eric Greaser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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