1
Exhibit (13) * to Report
On Form 10-K for Fiscal
Year Ended June 30, 2000
By Parker-Hannifin Corporation
Excerpts from Annual Report to Shareholders for the fiscal year ended
June 30, 2000.
*Numbered in accordance with Item 601 of Regulation S-K.
2
FORWARD-LOOKING STATEMENTS
This Annual Report and other written reports and oral statements made from time
to time by the Company may contain "forward-looking statements", all of which
are subject to risks and uncertainties. All statements which address operating
performance, events or developments that we expect or anticipate will occur in
the future, including statements relating to growth, operating margin
performance, earnings per share or statements expressing general opinions about
future operating results or the markets in which we do business, are
forward-looking statements.
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other factors,
many of which are outside the Company's control, that could cause actual results
to differ materially from such statements. Such factors include:
- continuity of business relationships with and purchases by
major customers, including, among others, orders and delivery
schedules for aircraft components,
- ability of suppliers to provide materials as needed,
- uncertainties surrounding timing, successful completion or
integration of acquisitions,
- competitive pressure on sales and pricing,
- increases in material and other production costs which cannot
be recovered in product pricing,
- difficulties in introducing new products and entering new
markets, and
- uncertainties surrounding the global economy and global market
conditions and the potential devaluation of currencies.
Any forward-looking statements are made based on known events and circumstances
at the time. The Company undertakes no obligation to update or publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date of this Report.
Page 13-1
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DISCUSSION OF STATEMENT OF INCOME
THE CONSOLIDATED STATEMENT OF INCOME summarizes the Company's operating
performance over the last three fiscal years. All year references are to fiscal
years.
NET SALES of $5.36 billion for 2000 were 8.0 percent higher than the $4.96
billion for 1999. Acquisitions completed in 2000 accounted for approximately
two-fifths of this increase. The North American Industrial operations
experienced higher demand within most of its markets, particularly in
semiconductor manufacturing and telecommunications. The Aerospace operations
experienced a slowdown in commercial aircraft build rates which was mitigated by
an increase in demand for regional jets. The Industrial International operations
were adversely affected by a struggling economy in Europe and Latin America in
the first half of the year while higher volume was achieved in the Asia Pacific
region. Currency rate changes reduced volume increases within the International
operations by $104.9 million.
Net Sales of $4.96 billion for 1999 were 7.0 percent higher than the $4.63
billion for 1998. Acquisitions completed in 1999 accounted for approximately
one-half of this increase. The Aerospace operations experienced continued strong
demand in commercial aircraft build rates while the Industrial operations
experienced reduced order demand within most of its markets. Within the
Industrial operations, the European markets weakened in the latter part of 1999
while the Latin American markets operated in a weak economy throughout most of
1999. The Company continued to penetrate markets in the Asia Pacific region.
Volume increases within International operations were partially offset by
currency rate changes.
The Company expects the North American Industrial operations to continue to
improve as record orders received in 2000 are converted to sales and recent
acquisitions are integrated. The European and Latin American markets are
anticipated to continue to improve while the Company expects to carry on its
efforts to expand its infrastructure in the Asia Pacific region. The Aerospace
operations expect the regional jet market to continue to improve while the
commercial aviation OEM business is expected to decline. The defense business is
projected to remain relatively constant.
GROSS PROFIT MARGIN was 22.4 percent in 2000 compared to 22.0 percent in 1999
and 23.4 percent in 1998. Cost of sales for 1998 included a non-cash,
non-recurring charge of $15.8 million for in-process R&D purchased as part of
two acquisitions. The increased margins in 2000 reflect higher volume
experienced in the North American Industrial operations, offset by weakness
experienced in the International Industrial operations as well as the effect of
business realignment charges (see pages 13-8 and 13-9 for further discussion).
The margin decline in 1999 is primarily the result of the underabsorption of
overhead costs and pricing pressure. In addition, gross margins were affected by
recently acquired operations contributing lower margins.
Page 13-2
4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of sales decreased to
10.8 percent, from 11.1 percent in 1999, and 11.5 percent in 1998. This decrease
is the result of continuing a concerted effort to control the level of these
expenses.
INTEREST EXPENSE decreased by $4.5 million in 2000 after an increase of $10.9
million in 1999. The decline in 2000 was due to a lower average level of debt
outstanding throughout the year as compared to 1999. The increase in 1999 was
due to increased borrowings to complete acquisitions.
INTEREST AND OTHER (INCOME), NET was $4.1 million in 2000 compared to $5.1
million in 1999 and $6.8 million in 1998. Fiscal 1999 included $1.7 million in
interest income related to an IRS refund and fiscal 1998 included $3.8 million
of interest income from a settlement with the IRS.
LOSS (GAIN) ON DISPOSAL OF ASSETS was a $5.6 million loss in 2000, a $2.4
million loss in 1999 and a $.1 million gain in 1998. The loss in 2000 includes
$8.4 million of business realignment charges offset by $6.4 million of income
realized on the sale of real property.
INCOME TAXES decreased to an effective rate of 34.5 percent in 2000, compared to
35.0 percent in 1999 and 35.9 percent in 1998. The decrease in the rate from
1999 to 2000 was primarily the result of the utilization of foreign operating
loss carryforwards and lower foreign taxes. The decrease in the rate from 1998
to 1999 was the result of increased tax benefits based on the export of products
manufactured in the U.S.
EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT - On June 30, 1998 the Company
called for redemption all of its outstanding $100 million, 10.375 percent
debentures due 1999-2018.
NET INCOME of $368.2 million for 2000 was 18.6 percent higher than 1999. Net
income of $310.5 million for 1999 was 2.8 percent lower than 1998. Net income as
a percentage of sales was 6.9 percent in 2000, compared to 6.3 percent in 1999
and 6.9 percent in 1998.
Page 13-3
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DISCUSSION OF BALANCE SHEET
THE CONSOLIDATED BALANCE SHEET shows the Company's financial position at year
end, compared with the previous year end. This statement provides information to
assist in assessing factors such as the Company's liquidity and financial
resources. All year references are to fiscal years.
The effect of currency rate changes during the year caused a $32.6 million
decrease in Shareholders' equity. These rate changes also caused significant
decreases in accounts receivable, inventories, goodwill, plant and equipment,
accounts payable and various accrual accounts.
Working capital and the current ratio were as follows:
Working Capital (millions) 2000 1999
- ------------------------------------------------
Current Assets $ 2,153 $ 1,775
Current Liabilities 1,186 755
Working Capital 967 1,020
Current Ratio 1.8 2.4
- ------------------------------------------------
ACCOUNTS RECEIVABLE are primarily receivables due from customers for sales of
product ($777.1 million at June 30, 2000, compared to $684.2 million at June 30,
1999). The current year increase in accounts receivable is primarily due to
acquisitions and increased volume. Days sales outstanding for the Company
decreased to 45 days in 2000 from 47 days in 1999. An increase in the allowance
for doubtful accounts in 2000 is primarily due to receivables obtained through
acquisitions.
INVENTORIES increased to $974.2 million at June 30, 2000, compared to $915.1
million a year ago. The increase was primarily due to acquisitions partially
offset by a decrease in inventory in the Aerospace operations where management
focused on aligning inventory levels with current customer demand. Months supply
of inventory on hand at June 30, 2000 decreased to 3.2 months from 3.5 months at
June 30, 1999.
NET ASSETS HELD FOR SALE represents the estimated net cash proceeds and
estimated net earnings during the holding period of the metal forming and
building systems businesses, which were acquired as part of the Commercial
Intertech transaction. These businesses are expected to be sold in the first
half of 2001.
PLANT AND EQUIPMENT, net of accumulated depreciation, increased $140.0 million
in 2000 as a result of acquisitions and capital expenditures which exceeded
annual depreciation.
INVESTMENTS AND OTHER ASSETS increased $313.7 million in 2000 primarily as a
result of increases in qualified benefit plan assets including those from
acquisitions.
EXCESS COST OF INVESTMENTS OVER NET ASSETS ACQUIRED increased $129.3 million in
2000 as a result of acquisitions, partially offset by current year amortization.
The additional excess cost of investments in 2000 is being amortized over 20
years.
NOTES PAYABLE AND LONG-TERM DEBT PAYABLE WITHIN ONE YEAR increased $274.7
million primarily due to an increase in commercial paper borrowings used to fund
acquisitions.
Page 13-4
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ACCOUNTS PAYABLE, TRADE increased $59.5 million in 2000 primarily due to
acquisitions as well as higher balances in the North American Industrial
operations due to higher production levels.
ACCRUED PAYROLLS AND OTHER COMPENSATION increased $24.1 million in 2000
primarily as a result of increased headcount from acquisitions and incentive
plans which are based on sales and earnings.
ACCRUED DOMESTIC AND FOREIGN TAXES increased to $84.2 million in 2000 from $52.6
million in 1999 primarily due to acquisitions, as well as higher taxable income
in 2000.
LONG-TERM DEBT decreased $23.0 million in 2000 compared to 1999. See the Cash
Flows From Financing Activities section on page 13-7 for further discussion.
The Company's goal is to maintain no less than an "A" rating on senior debt to
ensure availability and reasonable cost of external funds. To meet this
objective, the Company has established a financial goal of maintaining a ratio
of debt to debt-equity of 34 to 37 percent.
Debt to Debt-Equity Ratio (millions) 2000 1999
- -----------------------------------------------------------
Debt $ 1,037 $ 785
Debt & Equity 3,347 2,639
Ratio 31.0% 29.8%
- -----------------------------------------------------------
Excluding the effect of the ESOP loan guarantee on both Long-term debt and
Shareholders' equity, the debt to debt-equity ratio at June 30, 2000 was 28.0
percent.
In fiscal 2001 additional borrowings are not anticipated for the stock
repurchase program, capital investments, or for working capital purposes.
However, additional borrowings were utilized to fund the Wynn's International
acquisition. See Subsequent Event footnote on page 13-33 for further discussion.
These additional borrowings are expected to cause a temporary increase in the
debt to debt-equity ratio above the financial goal noted above but the ratio is
expected to return to the target range once proceeds from the sale of certain
net assets held for sale are realized.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS increased 8.4 percent in 2000. These
costs are explained further in Note 9 to the Consolidated Financial Statements.
OTHER LIABILITIES increased to $71.1 million in 2000 from $65.3 million in 1999
primarily due to increases in deferred compensation plans.
COMMON STOCK IN TREASURY increased to $8.4 million in 2000 from $1.8 million in
1999 due to the repurchase of Company common shares in 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - The Company enters
into forward exchange contracts, costless collar contracts and cross-currency
swap agreements to reduce its exposure to fluctuations in related foreign
currencies. The total value of open contracts and any risk to the Company as a
result of these arrangements is not material to the Company's financial
position, liquidity or results of operations. See the Significant Accounting
Policies footnote on page 13-19 for further discussion.
Page 13-5
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DISCUSSION OF CASH FLOWS
THE CONSOLIDATED STATEMENT OF CASH FLOWS reflects cash inflows and outflows from
the Company's operating, investing and financing activities. All year references
are to fiscal years.
Cash and cash equivalents increased $35.2 million in 2000 after increasing $2.8
million in 1999.
CASH FLOWS FROM OPERATING ACTIVITIES - The Company's largest source of cash
continues to be net cash provided by operating activities. Net cash provided by
operating activities in 2000 was a record $538.0 million compared to $459.1
million in 1999. Net income in 2000 increased $57.7 million over 1999. Accounts
payable provided cash of $21.8 million in 2000 compared to using cash of $33.1
million in 1999 and Accrued payrolls and other compensation provided cash of
$8.0 million in 2000 after using cash of $21.9 million in 1999. These providers
of cash in 2000 were partially offset by Deferred income taxes, which decreased
$11.9 million in 2000 as opposed to increasing $5.7 million in 1999. Other
liabilities provided cash of $5.6 million in 2000 after providing cash of $20.7
million in 1999. Inventories provided cash of $17.2 million in 2000 compared to
providing cash of $30.6 million in 1999 and Accounts receivable used cash of
$42.4 million in 2000 after using cash of $31.4 million in 1999.
The net cash provided by operating activities in 1999 increased $138.5 million
compared to 1998. This increase was principally due to Inventories providing
cash of $30.6 million in 1999 compared to using cash of $185.6 million in 1998.
Accrued domestic and foreign taxes provided cash of $22.1 million in 1999 after
using cash of $15.3 million in 1998. Accounts receivable used cash of $31.4
million in 1999 after using cash of $71.0 million in 1998 and Other liabilities
provided cash of $20.7 million compared to providing cash of $8.6 million in
1998. These providers of cash in 1999 were partially offset with cash used by
Other assets of $57.0 million in 1999 after using cash of $31.6 million in 1998.
Accounts payable used cash of $33.1 million in 1999 after providing cash of
$52.9 million in 1998. Accrued payrolls and other compensation used cash of
$21.9 million in 1999 after providing cash of $27.5 million in 1998.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing activities was
$266.7 million higher in 2000 than 1999, primarily due to Acquisitions using
$261.1 million more cash in 2000, partially offset by an increase of $25.7
million in proceeds received from the sale of plant and equipment in 2000.
Included in Other is an increase in cash used for equity investments in 2000.
Net cash used in investing activities was $146.1 million lower in 1999 than
1998, primarily due to Acquisitions using $143.1 million less cash in 1999.
Also, Capital expenditures decreased by $6.8 million in 1999.
To complete Acquisitions the Company utilized cash of $351.0 million and the
issuance of common stock valued at $184.3 million in 2000; cash of $89.9 million
in 1999; and cash of $233.0 million and treasury shares valued at $11.9 million
in 1998. The net assets of the acquired companies at their respective
acquisition dates consisted of the following:
Page 13-6
8
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------
Assets acquired:
Accounts receivable $ 72,651 $ 16,529 $ 39,286
Inventories 90,319 16,173 43,847
Prepaid expenses 2,329 2,509 1,393
Assets held for sale 164,000
Deferred income taxes 27,814 1,643
Plant & equipment 119,889 17,686 54,718
Other assets 246,915 3,783 3,762
Excess cost of
investments over net
assets acquired 158,230 84,589 162,680
- ----------------------------------------------------------------------
882,147 141,269 307,329
- ----------------------------------------------------------------------
Liabilities and equity
assumed:
Notes payable 2,433 10,433 8,690
Accounts payable 41,315 10,105 21,841
Accrued payrolls 18,345 6,828 4,418
Accrued taxes 102,473 (646) 2,840
Other accrued liabilities 56,432 3,535 11,421
Long-term debt 107,195 20,090 9,706
Pensions and other
postretirement benefits 22,964 471 477
Other liabilities 588 3,033
Unearned compensation (4,285)
- ----------------------------------------------------------------------
346,872 51,404 62,426
- ----------------------------------------------------------------------
Net assets acquired $535,275 $ 89,865 $244,903
- ----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES - In 2000 the Company increased its
outstanding borrowings by a net total of $154.6 million primarily to fund
acquisitions. The majority of the funding occurred in the second half of 2000
and was accomplished through the issuance of commercial paper.
In 1999 the Company decreased its outstanding borrowings by a net total of
$148.4 million. This amount does not include the Company's issuance of the ESOP
debt guarantee of $112.0 million, which is reflected as a non-cash financing
activity. The Company issued $225.0 million in medium-term notes during 1999. As
of June 30, 1999, the Company paid down the majority of its commercial paper
borrowings and selected notes payable attributable to the International
operations with the major source of funding for the repayment coming from the
proceeds received from the sale of treasury shares to the ESOP.
Common share activity in 2000 includes the exercise of stock options and the
repurchase of stock. During 2000 the Company purchased 267,200 shares for
treasury.
Dividends have been paid for 200 consecutive quarters, including a yearly
increase in dividends for the last 44 fiscal years. The current annual dividend
rate is $.68 per share.
In summary, based upon the Company's past performance and current expectations,
management believes the cash flows generated from future operating activities,
should provide adequate funds to support internal growth and continued
improvements in the Company's manufacturing facilities and equipment. The
Company's worldwide financial capabilities may be used to support planned growth
as needed.
Page 13-7
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DISCUSSION OF BUSINESS SEGMENT INFORMATION
THE BUSINESS SEGMENT INFORMATION presents sales, operating income and assets on
a basis that is consistent with the manner in which the Company's various
businesses are managed for internal review and decision-making. All year
references are to fiscal years.
INDUSTRIAL SEGMENT
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Operating income as a
percent of sales 12.1% 11.0% 12.6%
Return on average assets 17.4% 16.0% 19.1%
- -----------------------------------------------------------
Sales for the Industrial North American operations increased to a record $2.94
billion in 2000, 14.7 percent over 1999, following 1999's increase of 4.5
percent over 1998. Acquisitions accounted for one-third of the increase in 2000
and four-fifths of the increase in 1999. The increase in Industrial North
American sales is attributable to higher volume across all businesses,
particularly in the semiconductor manufacturing and telecommunications markets.
Sales in 1999 reflected lower demand within most of the Industrial North
American markets.
International Industrial sales increased to $1.27 billion, 2.7 percent over
1999. Acquisitions accounted for all of the 2000 increase. Without the impact of
changes in currency rates, sales for 2000 increased 11.1 percent, mostly
attributable to higher volume in the Asia Pacific region as well as higher
market demand in Europe and Latin America in the latter part of 2000.
International Industrial sales in 1999 increased to $1.24 billion, 4.7 percent
over 1998. Without the impact of changes in currency rates, volume for 1999
increased 5.8 percent. Acquisitions accounted for all of the 1999 increase.
Industrial North American operating income increased 27.3 percent in 2000 after
a decline of 8.4 percent in 1999. Income from operations as a percent of sales
was 14.5 percent in 2000 compared to 13.1 percent in 1999 and 14.9 percent in
1998. The increased margins in 2000 reflect better capacity utilization as
market demand improved. Recent acquisitions, not yet fully integrated,
contributed slightly lower margins. Raw material prices decreased during the
year.
International operating income increased 2.2 percent in 2000 after a 1999
decrease of 11.4 percent. Operating income in 2000 includes $9.0 million in
business realignment charges that were taken to appropriately structure the
European operations to operate in their current economic environment. Excluding
this charge, income as a percent of sales in 2000 was 7.3 percent compared to
6.6 percent in 1999 and 7.8 percent in 1998. The increased margins reflect
higher volume in the Asia Pacific region and improved market conditions in Latin
America. Margins also benefited from the improved European market demand in the
second half of 2000 with the increased volume improving capacity utilization.
The lower margins in 1999 resulted primarily from struggling European and Latin
American economies.
A significant upward trend in order rates was experienced in 2000 with orders in
virtually all markets continuing on the upswing heading into fiscal 2001. It is
unclear whether the sequential improvement in order rates can be sustained in
2001 as economic indicators for some North American markets are beginning to
signal a slowdown in production. The Industrial European and Latin American
operations are expected to experience modestly improving economies in 2001.
Focused efforts will be made in 2001 to integrate acquisitions completed in 2000
as well as the recently completed Wynn's International acquisition. The Company
will also continue to monitor European operations and take, where necessary,
actions to manage these operations to ensure they are appropriately structured
to operate in their current economic environment.
Page 13-8
10
Backlog for the Industrial Segment was $751.0 million at June 30, 2000, compared
to $546.9 million at the end of 1999 and $585.2 million at the end of 1998. The
higher backlog reflects the strong order rates experienced across all markets
during the year as well as acquisitions. The decline in backlog in 1999 was due
to the weakened demand experienced by the Industrial markets.
Assets for the Industrial Segment increased 20.7 percent in 2000 after an
increase of 3.4 percent in 1999. The increase in 2000 is primarily due to
acquisitions. In 1999 an increase from acquisitions was partially offset by
decreases in inventories and net goodwill as well as the effect of currency
fluctuations. In both years net plant and equipment increased due to capital
expenditures exceeding depreciation.
AEROSPACE SEGMENT
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Operating income as a
percent of sales 15.4% 15.4% 16.1%
Return on average assets 23.4% 23.1% 22.8%
- -----------------------------------------------------------
Sales declined 1.2 percent in 2000 after an increase of 16.1 percent in 1999.
The lower sales resulted from the expected reduction in commercial aircraft
builds partially offset by an increase in regional jet build rates and
maintenance, repair and overhaul business. An increase in commercial aircraft
build rates contributed to the higher volume in 1999.
Operating income was $175.7 million in 2000, $177.2 million in 1999 and $159.6
million in 1998. Operating income in 2000 includes $4.4 million in business
realignment charges that were taken in response to a decline in commercial
aircraft orders. Excluding this charge, as a percent of sales, 2000 income was
15.8 percent compared to 15.4 percent in 1999 and 16.1 percent in 1998. An
increase in margins from a higher mix of aftermarket business offset reduced
margins from the lower volume, which resulted in lower capacity utilization. The
1999 decline in margins reflected a change in mix of sales from aftermarket to
OEM.
Backlog at June 30, 2000 was $1.05 billion compared to $1.08 billion in 1999 and
$1.06 billion in 1998. The lower backlog reflects the decline in commercial
aircraft build rates partially offset by an increase in orders in the regional
jet market. This trend in order rates is expected to continue in 2001.
Assets declined 10.0 percent in 2000 after a 6.0 percent increase in 1999. The
decline in 2000 was primarily due to a reduction in inventory. In 1999,
increases in customer receivables and property, plant and equipment were
partially offset by a decrease in net goodwill.
CORPORATE assets increased 180.9 percent in 2000 and 23.5 percent in 1999. The
2000 amount includes assets held for sale as separately identified on the
Consolidated Balance Sheet. The increase in both years is due to increases in
qualified and non-qualified benefit plan assets including those from
acquisitions in 2000.
Page 13-9
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CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts) For the years ended June 30, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES $5,355,337 $4,958,800 $4,633,023
Cost of sales 4,156,569 3,869,370 3,550,992
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Gross profit 1,198,768 1,089,430 1,082,031
Selling, general and administrative expenses 575,906 550,681 532,134
Interest expense 59,183 63,697 52,787
Interest and other (income), net (4,112) (5,056) (6,783)
Loss (gain) on disposal of assets 5,604 2,414 (95)
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Income before income taxes 562,187 477,694 503,988
Income taxes (Note 4) 193,955 167,193 180,762
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Income before extraordinary item 368,232 310,501 323,226
Extraordinary item - extinguishment of debt (Note 8) (3,675)
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NET INCOME $ 368,232 $ 310,501 $ 319,551
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EARNINGS PER SHARE (Note 5)
Basic earnings per share before extraordinary item $ 3.34 $ 2.85 $ 2.91
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.34 $ 2.85 $ 2.88
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share before extraordinary item $ 3.31 $ 2.83 $ 2.88
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 3.31 $ 2.83 $ 2.85
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Page 13-10
12
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands) For the years ended June 30, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 368,232 $ 310,501 $ 319,551
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment (32,600) (32,832) (32,681)
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 335,632 $ 277,669 $ 286,870
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Page 13-11
13
CONSOLIDATED BALANCE SHEET
(Dollars in thousands) June 30, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 68,460 $ 33,277
Accounts receivable, less allowance for doubtful accounts
(2000 - $10,420; 1999 - $9,397) 840,040 738,773
Inventories (Notes 1 and 6):
Finished products 483,017 442,361
Work in process 344,804 347,376
Raw materials 146,375 125,393
- -----------------------------------------------------------------------------------------------------------------------
974,196 915,130
- -----------------------------------------------------------------------------------------------------------------------
Prepaid expenses 32,706 22,928
Deferred income taxes (Notes 1 and 4) 73,711 64,576
Net assets held for sale (Note 2) 164,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,153,113 1,774,684
Plant and equipment (Note 1):
Land and land improvements 138,394 125,990
Buildings and building equipment 642,770 592,086
Machinery and equipment 1,825,889 1,678,956
Construction in progress 107,197 109,780
- -----------------------------------------------------------------------------------------------------------------------
2,714,250 2,506,812
Less accumulated depreciation 1,373,335 1,305,943
- -----------------------------------------------------------------------------------------------------------------------
1,340,915 1,200,869
Investments and other assets (Note 1) 574,241 260,495
Excess cost of investments over net assets acquired (Note 1) 570,740 441,489
Deferred income taxes (Notes 1 and 4) 7,290 28,351
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,646,299 $ 3,705,888
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Page 13-12
14
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and long-term debt payable within one year (Notes 7 and 8) $ 335,298 $ 60,609
Accounts payable, trade 372,666 313,173
Accrued payrolls and other compensation 169,837 145,745
Accrued domestic and foreign taxes 84,208 52,584
Other accrued liabilities 224,294 182,402
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,186,303 754,513
Long-term debt (Note 8) 701,762 724,757
Pensions and other postretirement benefits (Notes 1 and 9) 299,741 276,637
Deferred income taxes (Notes 1 and 4) 77,939 30,800
Other liabilities 71,096 65,319
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TOTAL LIABILITIES 2,336,841 1,852,026
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SHAREHOLDERS' EQUITY (Note 10)
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
Common stock, $.50 par value, authorized 600,000,000 shares;
issued 116,602,195 shares in 2000 and 111,945,179 shares in 1999 at par value 58,301 55,973
Additional capital 328,938 132,227
Retained earnings 2,165,625 1,872,356
Unearned compensation related to ESOP (Note 8) (110,818) (112,000)
Deferred compensation related to stock options 1,304
Accumulated other comprehensive income (loss) (125,458) (92,858)
- -----------------------------------------------------------------------------------------------------------------------
2,317,892 1,855,698
Common stock in treasury at cost; 214,487 shares in 2000 and 43,836 shares in 1999 (8,434) (1,836)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,309,458 1,853,862
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,646,299 $ 3,705,888
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Page 13-13
15
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) For the years ended June 30, 2000 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 368,232 $ 310,501 $ 319,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 167,356 164,577 153,633
Amortization 39,052 37,469 29,046
Deferred income taxes (11,867) 5,718 7,680
Foreign currency transaction loss (gain) 5,082 (2,495) 3,697
(Gain) loss on sale of plant and equipment (5,288) 1,886 291
Write-off of purchased in-process research and development 15,800
Net effect of extraordinary loss 3,675
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable (42,386) (31,396) (71,034)
Inventories 17,248 30,606 (185,569)
Prepaid expenses (7,881) 2,069 (3,473)
Other assets (53,105) (56,957) (31,620)
Accounts payable, trade 21,792 (33,075) 52,947
Accrued payrolls and other compensation 8,021 (21,892) 27,531
Accrued domestic and foreign taxes 30,124 22,091 (15,282)
Other accrued liabilities (7,533) (3,935) (9,129)
Pensions and other postretirement benefits 3,642 13,258 14,276
Other liabilities 5,551 20,672 8,579
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 538,040 459,097 320,599
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $1,158 in 2000, $2,609 in 1999
and $4,260 in 1998) (351,011) (89,865) (232,953)
Capital expenditures (230,482) (230,122) (236,945)
Proceeds from sale of plant and equipment 32,051 6,382 7,151
Other (30,267) 548 3,630
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (579,709) (313,057) (459,117)
Page 13-14
16
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for) common share activity 1,202 74,076 (96,887)
Proceeds from (payments of) notes payable, net 272,440 (228,896) 190,865
Proceeds from long-term borrowings 12,600 232,886 87,085
(Payments of) long-term borrowings (130,419) (152,397) (13,054)
Dividends paid, net of tax benefit of ESOP shares (74,963) (69,461) (66,501)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 80,860 (143,792) 101,508
Effect of exchange rate changes on cash (4,008) 541 (1,499)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 35,183 2,789 (38,509)
Cash and cash equivalents at beginning of year 33,277 30,488 68,997
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 68,460 $ 33,277 $ 30,488
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Cash paid during the year for:
Interest, net of capitalized interest $ 56,341 $ 62,997 $ 48,105
Income taxes 167,211 129,893 175,546
Non-cash investing activities:
Stock issued for acquisitions 184,263 11,950
Non-cash financing activities:
Capital lease obligations 7,346
ESOP debt guarantee 112,000
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Page 13-15
17
BUSINESS SEGMENT INFORMATION
BY INDUSTRY
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES:
Industrial:
North America $ 2,942,419 $ 2,565,154 $ 2,454,558
International 1,274,590 1,241,256 1,185,584
Aerospace 1,138,328 1,152,390 992,881
- ----------------------------------------------------------------------------------------------------------------------------
$ 5,355,337 $ 4,958,800 $ 4,633,023
- ----------------------------------------------------------------------------------------------------------------------------
SEGMENT OPERATING INCOME:
Industrial:
North America $ 426,630 $ 335,259 $ 365,880
International 84,022 82,245 92,783
Aerospace 175,710 177,213 159,580
- ----------------------------------------------------------------------------------------------------------------------------
Total segment operating income 686,362 594,717 618,243
Corporate administration 58,210 54,176 61,829
- ----------------------------------------------------------------------------------------------------------------------------
Income before interest expense and other 628,152 540,541 556,414
Interest expense 59,183 63,697 52,787
Other 6,782 (850) (361)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 562,187 $ 477,694 $ 503,988
- ----------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Industrial $ 3,207,357 $ 2,657,146 $ 2,570,273
Aerospace 709,731 789,174 744,335
- ----------------------------------------------------------------------------------------------------------------------------
3,917,088 3,446,320 3,314,608
Corporate (a) 729,211 259,568 210,213
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,646,299 $ 3,705,888 $ 3,524,821
- ----------------------------------------------------------------------------------------------------------------------------
PROPERTY ADDITIONS: (b)
Industrial $ 329,651 $ 209,230 $ 245,995
Aerospace 20,720 36,993 33,733
Corporate 1,585 11,935
- ----------------------------------------------------------------------------------------------------------------------------
$ 350,371 $ 247,808 $ 291,663
- ----------------------------------------------------------------------------------------------------------------------------
DEPRECIATION:
Industrial $ 142,078 $ 140,914 $ 130,888
Aerospace 21,342 19,523 19,011
Corporate 3,936 4,140 3,734
- ----------------------------------------------------------------------------------------------------------------------------
$ 167,356 $ 164,577 $ 153,633
- ----------------------------------------------------------------------------------------------------------------------------
The accounting policies of the business segments are the same as those described
in the Significant Accounting Policies footnote except that the business segment
results are prepared on a management basis that is consistent with the manner in
which the Company disaggregates financial information for internal review and
decision-making.
(a) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, benefit plan assets, headquarters
facilities, assets held for sale and the major portion of the Company's
domestic data processing equipment.
(b) Includes value of net plant and equipment at the date of acquisition of
acquired companies accounted for by the purchase method (2000 - $119,889;
1999 - $17,686; 1998 - $54,718).
Page 13-16
18
BY GEOGRAPHIC AREA (c)
(Dollars in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
NET SALES:
North America $ 4,054,367 $ 3,684,786 $ 3,425,704
International 1,300,970 1,274,014 1,207,319
- -----------------------------------------------------------------------------------------------------------------
$ 5,355,337 $ 4,958,800 $ 4,633,023
- -----------------------------------------------------------------------------------------------------------------
LONG-LIVED ASSETS:
North America $ 969,788 $ 873,222 $ 790,162
International 371,127 327,647 345,063
- -----------------------------------------------------------------------------------------------------------------
$ 1,340,915 $ 1,200,869 $ 1,135,225
- -----------------------------------------------------------------------------------------------------------------
(c) Net sales are attributed to countries based on the location of the selling
unit. North America includes the United States, Canada and Mexico. No
country other than the United States represents greater than 10% of
consolidated sales. Long-lived assets are comprised of property, plant and
equipment based on physical location.
Page 13-17
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are summarized below.
NATURE OF OPERATIONS - The Company is a leading worldwide producer of motion
control products, including fluid power systems, electromechanical controls and
related components. The Company evaluates performance based on segment operating
income before Corporate general and administrative expenses, Interest expense
and Income taxes.
The Company operates in two principal business segments: Industrial and
Aerospace. The Industrial Segment is an aggregation of several business units
which produce motion-control and fluid power system components for builders and
users of various types of manufacturing, packaging, processing, transportation,
agricultural, construction, and military machinery, vehicles and equipment.
Industrial Segment products are marketed primarily through field sales employees
and independent distributors. The North American Industrial business represents
the largest portion of the Company's manufacturing plants and distribution
networks and primarily services North America. The International Industrial
operations bring Parker products and services to countries throughout Europe,
Asia Pacific and Latin America.
The Aerospace Segment produces hydraulic, pneumatic and fuel systems and
components which are utilized on virtually every domestic commercial, military
and general aviation aircraft. Its components also perform a vital role in naval
vessels, land-based weapons systems, satellites and space vehicles. This Segment
serves original equipment and maintenance, repair and overhaul customers
worldwide. Its products are marketed by field sales employees and are sold
directly to the manufacturer and to the end user.
There are no individual customers to whom sales are five percent or more of the
Company's consolidated sales. Due to the diverse group of customers throughout
the world the Company does not consider itself exposed to any concentration of
credit risks.
The Company manufactures and markets its products throughout the world. Although
certain risks and uncertainties exist, the diversity and breadth of the
Company's products and geographic operations mitigate significantly the risk
that adverse changes would materially affect the Company's operating results.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of all domestic and foreign subsidiaries. All material intercompany
transactions and profits have been eliminated in the consolidated financial
statements. Within the Business Segment Information, intersegment and interarea
sales are recorded at fair market value and are immaterial in amount.
REVENUE RECOGNITION - Revenue is generally recognized when products are shipped.
CASH - Cash equivalents consist of short-term highly liquid investments, with a
three-month or less maturity, carried at cost plus accrued interest, which are
readily convertible into cash.
INVENTORIES - Inventories are stated at the lower of cost or market. The
majority of domestic inventories are valued by the last-in, first-out method and
the balance of the Company's inventories are valued by the first-in, first-out
method.
Page 13-18
20
LONG-TERM CONTRACTS - The Company enters into long-term contracts for the
production of aerospace products. For financial statement purposes, sales are
recorded as deliveries are made (units of delivery method of
percentage-of-completion). Unbilled costs on these contracts are included in
inventory. Progress payments are netted against the inventory balances.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
PLANT, EQUIPMENT AND DEPRECIATION - Plant and equipment are recorded at cost and
are depreciated principally using the straight-line method for financial
reporting purposes. Depreciation rates are based on estimated useful lives of
the assets, generally 40 years for buildings; 15 years for land improvements and
building equipment; 10 years for machinery; and seven years for equipment.
Improvements which extend the useful life of property are capitalized, and
maintenance and repairs are expensed. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the
appropriate accounts and any gain or loss is included in current income.
INVESTMENTS AND OTHER ASSETS - Investments in joint-venture companies in which
ownership is 50% or less and in which the Company does not have operating
control are stated at cost plus the Company's equity in undistributed earnings.
These investments and the related earnings are not material to the consolidated
financial statements.
EXCESS COST OF INVESTMENTS - The excess cost of investments over net assets
acquired is being amortized, on a straight-line basis, over periods ranging from
15 years to 40 years. Unamortized cost in excess of associated expected
operating cash flows is considered to be impaired and is written down to fair
value.
INCOME TAXES - Income taxes are provided based upon income for financial
reporting purposes. Deferred income taxes arise from temporary differences in
the recognition of income and expense for tax purposes. Tax credits and similar
tax incentives are applied to reduce the provision for income taxes in the year
in which the credits arise.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of most foreign
subsidiaries are translated at current exchange rates, and income and expenses
are translated using weighted average exchange rates. The effects of these
translation adjustments, as well as gains and losses from certain intercompany
transactions, are reported in the Accumulated other comprehensive income (loss)
component of Shareholders' equity. Such adjustments will affect Net income only
upon sale or liquidation of the underlying foreign investments, which is not
contemplated at this time. Exchange gains and losses from transactions in a
currency other than the local currency of the entity involved, and translation
adjustments in countries with highly inflationary economies, are included in
income.
FINANCIAL INSTRUMENTS - The Company's financial instruments consist primarily of
investments in cash, cash equivalents and long-term investments as well as
obligations under notes payable and long-term debt. The carrying values for Cash
and cash equivalents, Investments and other assets and Notes payable approximate
fair value.
The Company enters into forward exchange contracts (forward contracts), costless
collar contracts, and cross-currency swap agreements to reduce its exposure to
fluctuations in related foreign currencies. These contracts are with major
financial institutions and the risk of loss is considered remote. The Company
does not hold or issue derivative financial instruments for trading purposes.
Gains or losses on forward contracts which hedge specific transactions are
recognized in Net income, offsetting the underlying foreign currency gains or
losses. Gains or losses on costless collar contracts are recognized in Net
income when the spot rate of the contract falls outside the collar range.
Cross-currency swap agreements are recorded in Long-term debt as
dollar-denominated receivables with offsetting foreign-currency payables. If the
receivables more than offset the payables, the net difference is reclassified to
an asset. Gains or losses are accrued monthly as an adjustment to Net income,
offsetting the underlying foreign currency gains or losses. The differential
between interest to be received and interest to be paid is accrued monthly as an
adjustment to Interest expense.
In addition, the Company's foreign locations, in the ordinary course of
business, enter into financial guarantees, through financial institutions, which
enable customers to be reimbursed in the event of nonperformance by the Company.
Page 13-19
21
The total value of open contracts and any risk to the Company as a result of the
above mentioned arrangements is not material.
STOCK OPTIONS - The Company applies the intrinsic-value based method to account
for stock options granted to employees or outside Directors to purchase common
shares. The option price equals the market price of the underlying common shares
on the date of grant, therefore no compensation expense is recognized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards
Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard establishes a new model for accounting for
derivatives and hedging activities. Due to the immaterial amount of derivative
and hedging activity within the Company, application of this standard, required
in the first quarter of 2001 as a result of the issuance of SFAS No. 137, is not
expected to have a material impact on the results and financial position of the
Company.
NOTE 2
ACQUISITIONS AND NET ASSETS HELD FOR SALE
On February 3, 2000 the Company acquired the assets of Dana Corporation's Gresen
Hydraulics business, located in Minneapolis, Minnesota and Sarasota, Florida, a
manufacturer of a wide range of hydraulic pumps, motors, cylinders, control
valves, filters and electronic controls for on- and off-highway vehicles. On
April 11, 2000 the Company completed its merger with Commercial Intertech Corp.
of Youngstown, Ohio with the Company being the surviving corporation. Commercial
Intertech's hydraulics business manufactures gear pumps and motors, control
valves and telescopic cylinders for use on heavy-duty mobile equipment. On May
30, 2000 the Company acquired the equity of Whatman's Industrial Filtration
Business, based in Haverill, Massachusetts and Maidstone, United Kingdom, a
manufacturer of high quality purification products and gas generators for a
variety of industrial applications. Combined annual sales for these operations,
for their most recent fiscal year prior to acquisition, were approximately $716
million. Total purchase price for these businesses was approximately $339
million in cash, 4.3 million shares of common stock valued at $184 million and
assumed debt of $104 million.
The Company is currently soliciting offers for the purchase of Commercial
Intertech's building systems and metal forming businesses. These businesses are
valued at the estimated net cash proceeds from their sale plus estimated net
earnings during the holding period and are reflected as Net assets held for sale
on the Consolidated Balance Sheet.
On July 14, 1998 the Company acquired the equity of B.A.G. Acquisition Ltd., the
parent company of Veriflo Corporation, a manufacturer of high-purity regulators
and valves based in Richmond, California. On August 27, 1998 the Company
acquired the equity of Fluid Power Systems, a manufacturer of hydraulic valves
and electrohydraulic systems and controls located in Lincolnshire, Illinois.
Combined annual sales for these operations, for their most recent fiscal year
prior to acquisition, were approximately $107 million. Total purchase price for
these businesses was approximately $85.2 million cash.
On May 1, 1998 the Company acquired the equity of Extrudit Ltd., a tubing
manufacturer located in Buxton, England. On April 30, 1998 the Company purchased
the equity of UCC Securities Limited of Thetford, Norfolk, England, a
manufacturer of technology-based hydraulic filtration products. On April 1, 1998
the Company acquired the equity of Sempress Pneumatics, a manufacturer of
pneumatic cylinders and valves located near Rotterdam, the Netherlands. On March
31, 1998 the Company acquired the assets of Temeto AB located in Flen, Sweden, a
distributor of hydraulic components. On March 26, 1998 the Company purchased the
remaining 51% of two Korean joint ventures - HS Parker Company Ltd., in Yangsan,
and the HS Parker Air Conditioning Components Company Ltd., in Chonan,
manufacturers of hydraulic hose, fittings, hose assemblies and accumulators. On
February 27, 1998 Computer Technology Corporation of Milford, Ohio, a
manufacturer of man-machine interface solutions, was merged into the Company. On
September 26, 1997 the Company acquired the assets of the Skinner solenoid valve
division of Honeywell Inc. and the equity of Honeywell Lucifer, S.A. Skinner is
headquartered in New Britain, Connecticut, and Lucifer is headquartered in
Geneva, Switzerland. On August 4, 1997 the Company acquired the assets of EWAL
Manufacturing of Belleville, New Jersey, a leading producer of precision
fittings and valves. Combined annual sales
Page 13-20
22
for operations acquired in fiscal 1998, for their most recent fiscal year prior
to acquisition, were approximately $243 million. Total purchase price for these
businesses was approximately $236.5 million cash and 263,279 shares of common
stock valued at $11.9 million.
The purchase price allocations of Computer Technology Corporation and UCC
Securities Limited, as determined by independent appraisal, included a $15.8
million asset for purchased in-process research and development. Generally
accepted accounting principles do not allow the capitalization of R&D of this
nature, therefore, a write-off of $15.8 million ($12.0 million after-tax or $.11
per share) is included in Cost of sales in 1998.
These acquisitions were accounted for by the purchase method, and results are
included as of the respective dates of acquisition.
NOTE 3
CHARGES RELATED TO BUSINESS REALIGNMENT
In 2000 the Company recorded a $8,555 charge ($5,560 after-tax or $.05 per
share) related to the costs of appropriately structuring its businesses to
operate in their current economic environment. The charge primarily related to
severance costs attributable to approximately 250 employees principally
associated with the Industrial International operations. As of June 30, 2000,
the Company has made substantially all severance payments.
A change in the future utilization of long-lived assets at certain locations
triggered an impairment review of these long-lived assets during 2000. The
Company evaluated the recoverability of the long-lived assets and determined
that the estimated future undiscounted cash flows were below the carrying value
of these assets. Accordingly, the Company recorded a non-cash impairment loss of
$4,875 ($3,169 after-tax or $.03 per share). Of the pre-tax amount, $3,499
relates to the Aerospace Segment and $1,376 relates to the Industrial Segment.
The severance and impairment loss are presented in the income statement for 2000
in the following captions: $2,552 in Cost of sales; $2,476 in Selling, general
and administrative expenses; and $8,402 in Loss (gain) on disposal of assets.
NOTE 4
INCOME TAXES
Income taxes include the following:
2000 1999 1998
- ------------------------------------------------------------------
Federal $140,663 $113,011 $129,462
Foreign 29,393 34,309 27,847
State and local 11,099 11,236 16,928
Deferred 12,800 8,637 6,525
- ------------------------------------------------------------------
$193,955 $167,193 $180,762
- ------------------------------------------------------------------
A reconciliation of the Company's effective income tax rate to the statutory
Federal rate follows:
2000 1999 1998
- ------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 1.5 1.8 2.1
FSC income not taxed (1.7) (2.3) (1.7)
Foreign tax rate difference (.6) 1.4 .2
Other .3 (.9) .3
- ------------------------------------------------------------------
Effective income tax rate 34.5% 35.0% 35.9%
- ------------------------------------------------------------------
Page 13-21
23
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of assets and liabilities. The
differences comprising the net deferred taxes shown on the Consolidated Balance
Sheet at June 30 were as follows:
2000 1999
- ------------------------------------------------------------------
Postretirement benefits $ 1,710 $ 74,238
Other liabilities and reserves 58,077 38,530
Long-term contracts 5,347 16,344
Operating loss carryforwards 45,182 4,719
Foreign tax credit carryforwards 3,356 2,264
Valuation allowance (26,887) (4,700)
Depreciation (95,138) (77,871)
Inventory 10,532 10,567
- ------------------------------------------------------------------
Net deferred tax asset $ 2,179 $ 64,091
- ------------------------------------------------------------------
Change in net deferred tax asset
(liability):
Provision for deferred tax $(12,800) $ (8,637)
Translation adjustment 320 1,710
Acquisitions (49,432) (1,707)
- ------------------------------------------------------------------
Total change in net deferred tax $(61,912) $ (8,634)
- ------------------------------------------------------------------
At June 30, 2000, the Company has operating loss carryforwards of $45,182 for
tax purposes, some of which can be carried forward indefinitely and others which
can be carried forward from three to 20 years. A valuation allowance has been
established due to the uncertainty of realizing certain foreign operating loss
carryforwards. The increase in the valuation allowance in 2000 was attributable
to the Commercial Intertech acquisition. The recognition of any future tax
benefit resulting from the reduction of $24,703 of the valuation allowance will
reduce any goodwill related to the Commercial Intertech acquisition remaining at
the time of the reduction.
Provision has not been made for additional U.S. or foreign taxes on
undistributed earnings of certain international operations as those earnings
will continue to be reinvested. It is not practicable to estimate the additional
taxes, including applicable foreign withholding taxes, that might be payable on
the eventual remittance of such earnings.
Accumulated undistributed earnings of foreign operations reinvested in their
operations amounted to $276,481, $205,756 and $153,831, at June 30, 2000, 1999
and 1998, respectively.
NOTE 5
EARNINGS PER SHARE
Earnings per share have been computed according to SFAS No. 128, "Earnings per
Share." Basic earnings per share is computed using the weighted average number
of shares of common stock outstanding during the year.
Diluted earnings per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the year. Common
share equivalents represent the dilutive effect of outstanding stock options.
The computation of net income per share was as follows:
Page 13-22
24
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income applicable
to common shares $ 368,232 $ 310,501 $ 319,551
- -------------------------------------------------------------------------------------------------------------
DENOMINATOR:
Basic - weighted average
common shares 110,330,711 108,799,974 110,868,834
Increase in weighted average
from dilutive effect of
exercise of stock options 913,921 878,985 1,090,437
- -------------------------------------------------------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 111,244,632 109,678,959 111,959,271
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.34 $ 2.85 $ 2.88
Diluted earnings per share $ 3.31 $ 2.83 $ 2.85
- -------------------------------------------------------------------------------------------------------------
NOTE 6
INVENTORIES
Inventories valued on the last-in, first-out cost method are approximately 43%
in 2000 and 34% in 1999 of total inventories. The current cost of these
inventories exceeds their valuation determined on the LIFO basis by $141,187 in
2000 and $138,197 in 1999. Progress payments of $20,279 in 2000 and $22,593 in
1999 are netted against inventories.
NOTE 7
FINANCING ARRANGEMENTS
The Company has committed lines of credit totaling $650,865 through several
multi-currency unsecured revolving credit agreements with a group of banks, of
which $362,759 was available at June 30, 2000. The majority of these agreements
expire October 2003. The interest on borrowings is based upon the terms of each
specific borrowing and is subject to market conditions. The agreements also
require facility fees of up to 8/100ths of one percent of the commitment per
annum. Covenants in some of the agreements include a limitation on the Company's
ratio of debt to tangible net worth.
The Company has other lines of credit, primarily short-term, aggregating $89,439
from various foreign banks, of which $73,430 was available at June 30, 2000.
Most of these agreements are renewed annually.
During fiscal 2000 the Company did not issue any medium-term notes leaving
$530,000 available for issuance at June 30, 2000.
The Company is authorized to sell up to $600,000 of short-term commercial paper
notes, rated A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch, Inc. At
June 30, 2000 there were $235,800 of commercial paper notes outstanding which
were supported by the available domestic lines of credit.
Commercial paper, along with short-term borrowings from foreign banks, primarily
make up the balance of Notes payable. The balance and weighted average interest
rate of the Notes payable at June 30, 2000 and 1999 were $314,365 and 5.6% and
$37,305 and 6.4%, respectively.
Page 13-23
25
NOTE 8
DEBT
JUNE 30, 2000 1999
- ------------------------------------------------------------------
Domestic:
Debentures
9.75%, due 2002-2021 $ 100,000 $ 100,000
7.3%, due 2011 100,000 100,000
Medium-term notes
5.65% to 7.39%, due 2004-2019 370,000 370,000
ESOP loan guarantee
6.34%, due 2009 99,741 112,000
Variable rate demand bonds
4.8% to 4.9%, due 2010-2025 20,035 20,035
Foreign:
Bank loans, including revolving credit
1.5% to 12.0%, due 2001-2018 24,764 37,206
Other long-term debt, including capitalized
leases 8,155 8,820
- ------------------------------------------------------------------
Total long-term debt 722,695 748,061
Less long-term debt payable within one year 20,933 23,304
- -----------------------------------------------------------------
Long-term debt, net $ 701,762 $ 724,757
- -------------------------------------------------------------------
On June 30, 1998, the Company called for redemption its outstanding $100,000,
10.375 percent debentures due 1999-2018. The after-tax extraordinary loss for
this transaction, including an early-redemption premium and the write-off of
deferred issuance costs, was $3,675 or $.03 per share. The retirement of the
debt was financed on July 15, 1998, through the issuance of $100,000 of
medium-term notes, due 2019, at an annual interest rate of 6.55 percent.
Principal amounts of Long-term debt payable in the five years ending June 30,
2001 through 2005 are $20,933, $24,580, $22,781, $199,176 and $16,943,
respectively. The carrying value of the Company's Long-term debt (excluding
leases and cross-currency swaps) was $714,540 and $739,241 at June 30, 2000 and
1999, respectively, and was estimated to have a fair value of $668,864 and
$711,505, at June 30, 2000 and 1999, respectively. The estimated fair value of
the Long-term debt was estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rate for similar types of borrowing
arrangements.
ESOP LOAN GUARANTEE - In 1999 the Company's Employee Stock Ownership Plan (ESOP)
was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to
purchase 3,055,413 shares of the Company's common stock from the Company's
treasury. The Company used the proceeds to pay down commercial paper borrowings.
The loan is unconditionally guaranteed by the Company and therefore the unpaid
balance of the borrowing is reflected on the Consolidated Balance Sheet as
Long-term debt. A corresponding amount representing Unearned compensation is
recorded as a deduction from Shareholders' equity.
LEASE COMMITMENTS -- Future minimum rental commitments as of June 30, 2000,
under noncancelable operating leases, which expire at various dates, are as
follows: 2001-$43,732; 2002-$31,663; 2003-$21,462; 2004-$12,726; 2005-$12,585
and after 2005-$30,832.
Rental expense in 2000, 1999 and 1998 was $40,371, $42,280 and $37,065,
respectively.
Page 13-24
26
NOTE 9
RETIREMENT BENEFITS
PENSIONS - The Company has noncontributory defined benefit pension plans
covering eligible employees, including certain employees in foreign countries.
Plans for most salaried employees provide pay-related benefits based on years of
service. Plans for hourly employees generally provide benefits based on
flat-dollar amounts and years of service. The Company also has contractual
arrangements with certain key employees which provide for supplemental
retirement benefits. In general, the Company's policy is to fund these plans
based on legal requirements, tax considerations, local practices and investment
opportunities. The Company also sponsors defined contribution plans and
participates in government-sponsored programs in certain foreign countries.
Pension costs for all plans were $9,304, $23,644 and $19,989 for 2000, 1999 and
1998, respectively. Pension costs for all defined benefit plans accounted for
using SFAS No. 87, "Employers' Accounting for Pensions," are as follows:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Service cost $ 38,179 $ 34,890 $ 28,190
Interest cost 68,807 63,257 57,892
Expected return on plan assets (102,346) (83,798) (68,463)
Net amortization and deferral and other (375) 4,081 445
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 4,265 $ 18,430 $ 18,064
=================================================================================================================================
CHANGE IN BENEFIT OBLIGATION 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 962,663 $ 877,752
Service cost 38,179 34,890
Interest cost 68,807 63,257
Actuarial (gain) loss (11,812) 30,288
Benefits paid (42,659) (40,028)
Acquisitions 157,189
Other (4,753) (3,496)
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 1,167,614 $ 962,663
=================================================================================================================================
CHANGE IN PLAN ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 1,099,989 $ 997,913
Actual return on plan assets 123,997 131,872
Employer contributions 14,295 12,255
Benefits paid (38,543) (36,253)
Acquisitions 393,134
Other (10,787) (5,798)
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,582,085 $ 1,099,989
=================================================================================================================================
FUNDED STATUS
- ---------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of benefit obligation $ 414,471 $ 137,326
Unrecognized net actuarial (gain) (175,644) (144,706)
Unrecognized prior service cost 27,683 23,259
Unrecognized initial net (asset) (7,173) (9,587)
- ---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 259,337 $ 6,292
=================================================================================================================================
AMOUNTS RECOGNIZED ON THE CONSOLIDATED
BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 355,922 $ 104,135
Accrued benefit liability (96,585) (97,843)
- ---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 259,337 $ 6,292
=================================================================================================================================
Page 13-25
27
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $147,286, $124,354 and $37,208, respectively, at June 30,
2000, and $143,177, $122,411 and $28,331, respectively, at June 30, 1999.
The plans' assets consist primarily of listed common stocks, corporate and
government bonds, and real estate investments. At June 30, 2000 and 1999, the
plans' assets included Company stock with market values of $18,203 and $24,314,
respectively.
The assumptions used to measure the benefit obligations and to compute the
expected long-term return on assets for the Company's significant defined
benefit plans are:
2000 1999 1998
- -------------------------------------------------------------------------------
U.S. defined benefit plans
Discount rate 7.5% 7.5% 7.5%
Average increase in
compensation 4.9% 4.9% 4.9%
Expected long-term return on assets 10% 10% 9.5%
Non-U.S. defined benefit plans
Discount rate 4.75 TO 7% 4.5 to 6.5% 4.5 to 7%
Average increase in compensation 3 TO 4% 1.5 to 4% 3 to 4.5%
Expected long-term return on assets 6 TO 8.5% 6 to 9% 5.5 to 9%
- -------------------------------------------------------------------------------
EMPLOYEE SAVINGS PLAN -- The Company sponsors an employee stock ownership plan
(ESOP) as part of its existing savings and investment 401(k) plan (the "Parker
ESOP"), and as of April 11,2000, assumed sponsorship of the Commercial Intertech
ESOP (both plans collectively referred to as "ESOP's"). The ESOP's are available
to eligible domestic employees. Parker Hannifin common stock is used to match
contributions made by employees to the ESOP's up to a maximum of 3.5 percent of
an employee's annual compensation. A breakdown of shares held by the ESOP's is
as follows:
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
Allocated shares 8,660,550 7,866,152 7,631,677
Committed-to-be-released shares 77,038
Suspense shares 3,373,734 3,055,413
- -------------------------------------------------------------------------------
Total shares held by the ESOP's 12,111,322 10,921,565 7,631,677
- -------------------------------------------------------------------------------
Fair value of suspense shares $ 115,550 $ 139,785
- -------------------------------------------------------------------------------
In 1999 the Parker ESOP was leveraged and the loan was unconditionally
guaranteed by the Company. The Company's matching contribution and dividends on
the shares held by the Parker ESOP are used to repay the loan, and shares are
released from the suspense account as the principal and interest are paid.
Shares in the Parker ESOP suspense account are not considered outstanding for
purposes of earnings per share computations until they are released. Company
contributions to the ESOP's, recorded as compensation and interest expense, were
$26,984 in 2000, $24,319 in 1999 and $23,093 in 1998. Dividends earned by the
suspense shares and interest income within the ESOP's totaled $1,214 in 2000 and
$519 in 1999.
In addition to shares within the ESOP's, as of June 30, 2000 employees have
elected to invest in 3,614,913 shares of common stock within the Company Stock
Fund of the Parker Retirement Savings Plan.
Page 13-26
28
OTHER POSTRETIREMENT BENEFITS --The Company provides postretirement medical and
life insurance benefits to certain retirees and eligible dependents. Most plans
are contributory, with retiree contributions adjusted annually. The plans are
unfunded and pay stated percentages of covered medically necessary expenses
incurred by retirees, after subtracting payments by Medicare or other providers
and after stated deductibles have been met. For most plans, the Company has
established cost maximums to more effectively control future medical costs. The
Company has reserved the right to change or eliminate these benefit plans.
Postretirement benefit costs included the following components:
2000 1999 1998
- -------------------------------------------------------------------------------
Service cost $ 4,499 $ 4,301 $ 4,021
Interest cost 10,762 11,158 11,077
Net amortization and deferral (2,758) (1,683) (1,815)
- -------------------------------------------------------------------------------
Net periodic benefit cost $12,503 $ 13,776 $ 13,283
===============================================================================
CHANGE IN BENEFIT OBLIGATION 2000 1999
- -------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 155,282 $ 155,933
Service cost 4,499 4,301
Interest cost 10,762 11,158
Actuarial (gain) (13,838) (8,093)
Benefits paid (7,923) (8,017)
Acquisitions and other 21,805
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 170,587 $ 155,282
===============================================================================
FUNDED STATUS
- -------------------------------------------------------------------------------
Benefit obligation in excess of plan assets$ (170,587) $ (155,282)
Unrecognized net actuarial (gain) (22,472) (10,029)
Unrecognized prior service cost (12,224) (13,679)
- -------------------------------------------------------------------------------
Net amount recognized $ (205,283) $ (178,990)
===============================================================================
AMOUNTS RECOGNIZED ON THE CONSOLIDATED
BALANCE SHEET:
- -------------------------------------------------------------------------------
Accrued benefit liability $ (205,283) $ (178,990)
- -------------------------------------------------------------------------------
The assumptions used to measure the postretirement benefit obligations are:
2000 1999 1998
- -------------------------------------------------------------------------------
Discount rate 7.5% 7.5% 7.5%
Current medical cost trend rate 9% 9.5% 10.25%
Ultimate medical cost trend rate 5.5% 5.5% 6%
Medical cost trend rate decreases to
ultimate in year 2007 2007 2007
===============================================================================
A one percentage point change in assumed health care cost trend rates would have
the following effects:
1% INCREASE 1% DECREASE
- -------------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 1,811 $ (1,476)
Effect on postretirement benefit
obligation $ 15,201 $ (12,590)
===============================================================================
Page 13-27
29
OTHER -- The Company has established nonqualified deferred compensation programs
which permit officers, directors and certain management employees to annually
elect to defer a portion of their compensation, on a pre-tax basis, until their
retirement. The retirement benefit to be provided is based on the amount of
compensation deferred, Company match, and earnings on the deferrals. Deferred
compensation expense was $17,157, $17,849 and $20,426 in 2000, 1999 and 1998,
respectively.
The Company has invested in corporate-owned life insurance policies to assist in
funding these programs. The cash surrender values of these policies are in a
rabbi trust and are recorded as assets of the Company.
NOTE 10
SHAREHOLDERS' EQUITY
COMMON SHARES 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Balance July 1 $ 55,973 $ 55,906 $ 55,905
Shares issued under stock option plans
(2000 - 331,421; 1999 - 133,514;
1998 - 3,650) 164 67 1
Shares issued for purchase acquisition 2,164
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30 $ 58,301 $ 55,973 $ 55,906
=================================================================================================================================
ADDITIONAL CAPITAL
- ---------------------------------------------------------------------------------------------------------------------------------
Balance July 1 $ 132,227 $ 139,726 $ 150,702
Net increase (decrease) for Treasury
or common shares issued
under stock option plans 3,760 (2,194) (11,481)
Shares issued for purchase acquisition 190,379 35 478
Restricted stock (surrendered) issued (24) 27
Shares related to ESOP 2,572 (5,316)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30 $ 328,938 $ 132,227 $ 139,726
=================================================================================================================================
RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------------------------------------------
Balance July 1 $ 1,872,356 $ 1,631,316 $ 1,378,297
Net income 368,232 310,501 319,551
Cash dividends paid on common shares,
net of tax benefit of ESOP shares (74,963) (69,461) (66,501)
Cash payments for stock split
fractional shares (31)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30 $ 2,165,625 $ 1,872,356 $ 1,631,316
=================================================================================================================================
UNEARNED COMPENSATION RELATED TO ESOP
- ---------------------------------------------------------------------------------------------------------------------------------
Balance July 1 $ (112,000) $ $
Unearned compensation
related to ESOP debt guarantee 13,747 (112,000)
ESOP shares related to acquisition (12,565)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30 $ (110,818) $ (112,000) $
=================================================================================================================================
DEFERRED COMPENSATION RELATED TO STOCK OPTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Balance July 1 $ $ $
Deferred compensation
related to stock options 1,304
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30 $ 1,304 $ $
=================================================================================================================================
Page 13-28
30
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
- -------------------------------------------------------------------------------------------------
Balance July 1 $ (92,858) $ (60,026) $ (27,345)
Foreign currency translation (32,600) (32,832) (32,681)
- -------------------------------------------------------------------------------------------------
Balance June 30 $ (125,458) $ (92,858) $ (60,026)
- -------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY
- -------------------------------------------------------------------------------------------------
Balance July 1 $ (1,836) $ (83,472) $ (10,258)
Shares purchased at cost
(2000 - 288,543; 1999 - 1,538,633;
1998 - 2,507,872) (11,132) (48,734) (109,645)
Shares issued under stock option plans
(2000 - 122,957; 1999 - 369,847;
1998 - 563,318) 4,964 14,420 23,187
Shares issued for purchase acquisition (17) 166 11,471
Restricted stock (surrendered) issued (413) (1,532) 1,773
Shares sold to ESOP 117,316
- -------------------------------------------------------------------------------------------------
Balance June 30 $ (8,434) $ (1,836) $ (83,472)
- -------------------------------------------------------------------------------------------------
Shares surrendered upon exercise of stock options; 2000 -235,386; 1999 - 88,188;
1998 - 158,369.
SHARE REPURCHASES - The Board of Directors has authorized the repurchase of a
total of 5.05 million of its common shares. At June 30, 2000, the remaining
authorization to repurchase was 3.28 million shares. Repurchases are made on the
open market, at prevailing prices, and are funded from operating cash flows. The
shares are initially held as treasury stock.
NOTE 11
STOCK INCENTIVE PLANS
EMPLOYEES' STOCK OPTIONS -- The Company's stock option and stock incentive plans
provide for the granting of nonqualified options to officers and key employees
to purchase shares of common stock at a price not less than 100 percent of the
fair market value of the stock on the dates options are granted. Outstanding
options generally are exercisable either one or two years after the date of
grant and expire no more than ten years after grant.
The Company derives a tax deduction measured by the excess of the market value
over the option price at the date nonqualified options are exercised. The
related tax benefit is credited to Additional capital.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and makes no charges against capital with respect to
options granted. SFAS No. 123 does, however, require the disclosure of pro forma
information regarding Net Income and Earnings per share determined as if the
Company had accounted for its stock options under the fair value method. For
purposes of this pro forma disclosure the estimated fair value of the options is
amortized to expense over the options' vesting period.
2000 1999 1998
- -------------------------------------------------------------------------------
Net income: As reported $368,232 $ 310,501 $ 319,551
Pro forma $361,753 $ 308,028 $ 315,567
Earnings per share:
Basic As reported $3.34 $ 2.85 $ 2.88
Pro forma $3.28 $ 2.83 $ 2.85
Diluted As reported $3.31 $ 2.83 $ 2.85
Pro forma $3.25 $ 2.81 $ 2.82
- -------------------------------------------------------------------------------
Page 13-29
31
The fair value for the significant options granted in 2000, 1999 and 1998 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
AUG/99 Jan/99 Aug/98 Aug/97
- ------------------------------------------------------------------------------
Risk-free interest rate 6.1% 4.7% 5.3% 5.6%
Expected life of option 4.6 YRS 4.3 yrs 4.3 yrs 5 yrs
Expected dividend yield of stock 1.7% 1.9% 1.9% 2.3%
Expected volatility of stock 33.8% 30.7% 28.4% 26.9%
==============================================================================
Options exercisable and shares available for future grant on June 30:
2000 1999 1998
- ------------------------------------------------------------------------------
Options exercisable 3,483,071 3,065,577 3,476,016
Weighted-average option price
per share of options exercisable $ 25.51 $ 22.48 $ 20.57
Weighted-average fair value of
options granted during the year $ 14.62 $ 8.35 $ 11.43
Shares available for grant 3,352,083 3,230,548 3,256,232
- ------------------------------------------------------------------------------
A summary of the status and changes of shares subject to options and the related
average price per share follows:
Shares Subject Average Option
To Options Price Per Share
- -----------------------------------------------------------------------------
Outstanding June 30, 1998 3,661,806 $ 21.71
- -----------------------------------------------------------------------------
Granted 1,196,384 31.06
Exercised (591,189) 17.92
Canceled (14,155)
- -----------------------------------------------------------------------------
Outstanding June 30, 1999 4,252,846 $ 24.77
- -----------------------------------------------------------------------------
GRANTED 1,078,799 44.48
ASSUMED 429,485 26.44
EXERCISED (689,764) 18.96
CANCELED (101,464)
- -----------------------------------------------------------------------------
OUTSTANDING JUNE 30, 2000 4,969,902 $ 30.03
=============================================================================
The "Assumed" line identifies the options the Company assumed in the merger with
Commercial Intertech and converted to options to purchase Parker Hannifin common
stock. The exercise prices of the assumed options range from $11.53 to $49.75
after conversion into equivalent exercise prices of Parker Hannifin common
stock. All other terms of the assumed options were unchanged.
Page 13-30
32
The range of exercise prices and the remaining contractual life of options as of
June 30, 2000 were:
- ------------------------------------------------------------------------------
Range of exercise prices $11-$22 $24-$38 $41-$50
- ------------------------------------------------------------------------------
Options outstanding:
Outstanding as of June 30, 2000 1,214,897 2,479,364 1,275,641
Weighted-average remaining
contractual life 3.5 yrs 7.3 yrs 8.7 yrs
Weighted-average exercise price $ 16.46 $ 29.29 $ 44.46
Options exercisable:
Outstanding as of June 30, 2000 1,214,897 2,008,023 260,151
Weighted-average remaining
contractual life 3.5 yrs 7.1 yrs 7.0 yrs
Weighted-average exercise price $ 16.46 $ 28.75 $ 42.84
- ------------------------------------------------------------------------------
RESTRICTED STOCK -- Restricted stock was issued, under the Company's 1993 Stock
Incentive Program, to certain key employees under the Company's 1997-98-99,
1996-97-98 and 1995-96-97 Long Term Incentive Plans (LTIP). Value of the
payments was set at the market value of the Company's common stock on the date
of issuance. Shares were earned and awarded, and an estimated value was accrued,
based upon attainment of criteria specified in the LTIP over the cumulative
years of each 3-year Plan. Plan participants are entitled to cash dividends and
to vote their respective shares, but the shares are restricted as to
transferability for three years following issuance.
Restricted Shares for LTIP Plan 2000 1999 1998
- ------------------------------------------------------------------------------
Number of shares issued 8,023 15,774 39,619
Per share value on date of issuance $ 42.04 $ 40.53 $ 40.00
Total value $ 337 $ 639 $ 1,585
- ------------------------------------------------------------------------------
Under the Company's 1998-99-00 LTIP, a payout of 26,976 shares of restricted
stock, from the Company's 1993 Stock Incentive Program, will be issued to
certain key employees in 2001. The balance of the 1998-99-00 LTIP payout will be
made as deferred cash compensation, as individually elected by the participants.
The total payout, valued at $4,043, has been accrued over the three years of the
plan.
In addition, non-employee members of the Board of Directors have been given the
opportunity to receive all or a portion of their fees in the form of restricted
stock. These shares vest ratably, on an annual basis, over the term of office of
the director. In 2000, 1999 and 1998, 6,012, 5,867 and 4,558 shares were issued,
respectively, in lieu of directors' fees.
NON-EMPLOYEE DIRECTORS' STOCK OPTIONS -- In August 1996, the Company adopted a
stock option plan for non-employee directors to purchase shares of common stock
at a price not less than 100 percent of the fair market value of the stock on
the date the options are granted. Outstanding options are exercisable either one
or two years after the date of grant and expire no more than ten years after
grant.
A summary of the status and changes of shares subject to options and the related
average price per share follows:
Shares Subject Average Option
To Options Price Per Share
- ------------------------------------------------------------------------------
Outstanding June 30, 1998 21,000 $ 31.97
Granted 8,000 31.38
- ------------------------------------------------------------------------------
Outstanding June 30, 1999 29,000 $ 31.81
==============================================================================
GRANTED 7,650 45.00
EXERCISED (3,250) 30.95
CANCELED (2,250)
- ------------------------------------------------------------------------------
OUTSTANDING JUNE 30, 2000 31,150 $ 35.21
==============================================================================
As of June 30, 2000, 23,500 options were exercisable and 336,850 shares were
available for grant.
Page 13-31
33
At June 30, 2000, the Company had 8,301,411 common shares reserved for issuance
in connection with its stock incentive plans.
NOTE 12
SHAREHOLDERS' PROTECTION RIGHTS AGREEMENT
The Board of Directors of the Company declared a dividend of one Right for each
share of Common Stock outstanding on February 17, 1997 in relation to the
Company's Shareholder Protection Rights Agreement. As of June 30, 2000,
116,387,708 shares of Common Stock were reserved for issuance under this
Agreement. Under certain conditions involving acquisition of or an offer for 15
percent or more of the Company's Common Stock, all holders of Rights, except an
acquiring entity, would be entitled to purchase, at an exercise price of $100, a
value of $200 of Common Stock of the Company or an acquiring entity, or at the
option of the Board, to exchange each Right for one share of Common Stock. The
Rights remain in existence until February 17, 2007, unless earlier redeemed (at
one cent per Right), exercised or exchanged under the terms of the agreement. In
the event of an unfriendly business combination attempt, the Rights will cause
substantial dilution to the person attempting the merger. The Rights should not
interfere with any merger or other business combination that is in the best
interest of the Company and its shareholders since the Rights may be redeemed.
NOTE 13
RESEARCH AND DEVELOPMENT
Research and development costs amounted to $89,059 in 2000, $86,953 in 1999, and
$83,117 in 1998. Customer reimbursements included in the total cost for each of
the respective years were $16,409, $15,239 and $15,753. Costs include those
costs related to independent research and development as well as customer
reimbursed and unreimbursed development programs.
NOTE 14
CONTINGENCIES
The Company is involved in various litigation arising in the normal course of
business, including proceedings based on product liability claims, workers'
compensation claims and alleged violations of various environmental laws. The
Company is self-insured in the U.S. for health care, workers' compensation,
general liability and product liability up to predetermined amounts, above which
third party insurance applies. The Company purchases third party product
liability insurance for products manufactured by its international operations
and for products that are used in aerospace applications. Management regularly
reviews the probable outcome of these proceedings, the expenses expected to be
incurred, the availability and limits of the insurance coverage, and the
established accruals for uninsured liabilities. While the outcome of pending
proceedings cannot be predicted with certainty, management believes that any
liabilities that may result from these proceedings are not reasonably likely to
have a material effect on the Company's liquidity, financial condition or
results of operations.
ENVIRONMENTAL - The Company is currently involved in environmental remediation
at 20 manufacturing facilities presently or formerly operated by the Company and
has been named as a "potentially responsible party," along with other companies,
at nine off-site waste disposal facilities and one regional Superfund site.
As of June 30, 2000, the Company has a reserve of $6,910 for environmental
matters which are probable and reasonably estimable. This reserve is recorded
based upon the best estimate of net costs to be incurred in light of the
progress made in determining the magnitude of remediation costs, the timing and
extent of remedial actions required by governmental authorities, the amount of
the Company's liability in proportion to other responsible parties and any
recoveries receivable. This reserve is net of $415 for discounting, at a 7.5%
annual rate, a portion of the costs at six locations for established treatment
procedures required over periods ranging from three to 10 years. The Company
also has an account receivable of $490 for anticipated insurance recoveries.
Page 13-32
34
The Company's estimated total liability for the above mentioned sites ranges
from a minimum of $6,913 to a maximum of $23,698. The actual costs to be
incurred by the Company will be dependent on final delineation of contamination,
final determination of remedial action required, negotiations with federal and
state agencies with respect to cleanup levels, changes in regulatory
requirements, innovations in investigatory and remedial technology,
effectiveness of remedial technologies employed, the ultimate ability to pay of
the other responsible parties, and any insurance recoveries.
NOTE 15
SUBSEQUENT EVENT
On July 21, 2000 the Company completed its purchase of Wynn's International
(Wynn's), for a cash purchase price of approximately $420 million plus the
retirement of approximately $44 million of Wynn's debt. The purchase price was
financed by commercial paper borrowings and a short-term $250 million revolving
line of credit that was obtained to finance the Wynn's acquisition. It is
anticipated that the borrowings in connection with the Wynn's acquisition will
be repaid from internally generated funds and/or refinanced on a long-term basis
in the private or public markets. Wynn's is a leading manufacturer of
precision-engineered sealing media for the automotive, heavy-duty truck and
aerospace markets and has annualized calendar year 2000 sales of approximately
$573 million. The acquisition will be accounted for by the purchase method.
NOTE 16
QUARTERLY INFORMATION (Unaudited)
2000 (a) 1st 2nd 3rd 4th Total
- ----------------------------------------------------------------------------------------------------------
Net sales $1,242,293 $1,239,207 $1,393,659 $1,480,178 $5,355,337
Gross profit 265,672 267,909 319,526 345,661 1,198,768
Net income 73,594 74,963 106,703 112,972 368,232
Diluted earnings
per share .67 .68 .97 .99 3.31
==========================================================================================================
1999 1st 2nd 3rd 4th Total
- ----------------------------------------------------------------------------------------------------------
Net sales $1,218,724 $1,199,021 $1,255,789 $1,285,266 $4,958,800
Gross profit 271,417 255,854 266,652 295,507 1,089,430
Net income 78,117 63,532 76,511 92,341 310,501
Diluted earnings
per share .71 .58 .70 .84 2.83
==========================================================================================================
(a) Results for the first quarter include a charge of $8,555 ($5,560 after-tax
or $.05 per share) related to business realignment costs and a non-cash
impairment loss of $4,875 ($3,169 after-tax or $.03 per share) related to
certain long-lived assets.
Page 13-33
35
NOTE 17
STOCK PRICES AND DIVIDENDS (Unaudited)
(IN DOLLARS) 1ST 2ND 3RD 4TH FULL YEAR
- --------------------------------------------------------------------------------------------
2000 High $ 48-1/8 $ 51-7/16 $ 54 $ 48-5/16 $ 54
Low 43-1/8 41-3/16 33-15/16 34-1/4 33-15/16
Dividends .170 .170 .170 .170 .680
============================================================================================
1999 High $ 38-3/4 $ 38-5/16 $ 39-3/4 $ 50-1/2 $ 50-1/2
Low 26-9/16 27 29-1/2 34 26-9/16
Dividends .150 .150 .170 .170 .640
- --------------------------------------------------------------------------------------------
1998 High $ 48-7/8 $ 51-1/4 $ 52-5/8 $ 52-3/8 $ 52-5/8
Low 39-1/4 39-13/16 41-1/2 36-15/16 36-15/16
Dividends .150 .150 .150 .150 .600
- --------------------------------------------------------------------------------------------
Common Stock Listing: New York Stock Exchange, Stock Symbol PH
Page 13-34
36
REPORT OF MANAGEMENT
The Company's management is responsible for the integrity and accuracy of the
financial information contained in this annual report. Management believes that
the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and that the
other information in this annual report is consistent with those statements. In
preparing the financial statements, management makes informed judgments and
estimates where necessary to reflect the expected effects of events and
transactions that have not been completed.
Management is also responsible for maintaining an internal control system
designed to provide reasonable assurance at reasonable cost that assets are
safeguarded against loss or unauthorized use and that financial records are
adequate and can be relied upon to produce financial statements in accordance
with accounting principles generally accepted in the United States. The system
is supported by written policies and guidelines, by careful selection and
training of financial management personnel and by an internal audit staff which
coordinates its activities with the Company's independent accountants. To foster
a strong ethical climate, the Parker Hannifin Code of Ethics is publicized
throughout the Company. This addresses, among other things, compliance with all
laws and accuracy and integrity of books and records. The Company maintains a
systematic program to assess compliance.
PricewaterhouseCoopers LLP, independent accountants, is retained to conduct an
audit of Parker Hannifin's consolidated financial statements in accordance with
auditing standards generally accepted in the United States and to provide an
independent assessment that helps ensure fair presentation of the Company's
consolidated financial position, results of operations and cash flows.
The Audit Committee of the Board of Directors is composed entirely of
independent outside directors. The Committee meets periodically with management,
internal auditors and the independent accountants to discuss internal accounting
controls and the quality of financial reporting. Financial management, as well
as the internal auditors and the independent accountants, have full and free
access to the Audit Committee.
/s/ Duane E. Collins /s/ Michael J. Hiemstra
Duane E. Collins Michael J. Hiemstra
Chairman of the Board and Vice President -
Chief Executive Officer Finance and Administration
and Chief Financial Officer
Page 13-35
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Parker Hannifin Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, comprehensive income and cash flows present
fairly, in all material respects, the financial position of Parker Hannifin
Corporation and its subsidiaries at June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
July 28, 2000
Page 13-36
38
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information) 2000 1999 1998 (a) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 5,355,337 $ 4,958,800 $ 4,633,023 $ 4,091,081 $ 3,586,448
Cost of sales 4,156,569 3,869,370 3,550,992 3,152,988 2,756,343
Selling, general and administrative expenses 575,906 550,681 532,134 475,180 425,449
Interest expense 59,183 63,697 52,787 46,659 36,667
Income taxes 193,955 167,193 180,762 150,828 134,812
Income - continuing operations 368,232 310,501 323,226 274,039 239,667
Net income 368,232 310,501 319,551 274,039 239,667
Basic earnings per share - continuing operations 3.34 2.85 2.91 2.46 2.15
Diluted earnings per share - continuing operations 3.31 2.83 2.88 2.44 2.14
Basic earnings per share 3.34 2.85 2.88 2.46 2.15
Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 $ 2.44 $ 2.14
Average number of shares outstanding - Basic 110,331 108,800 110,869 111,602 111,261
Average number of shares outstanding - Diluted 111,245 109,679 111,959 112,518 112,189
Cash dividends per share $ .680 $ .640 $ .600 $ .506 $ .480
Net income as a percent of net sales 6.9% 6.3% 6.9% 6.7% 6.7%
Return on average assets 8.8% 8.6% 9.8% 9.3% 9.2%
Return on average equity 17.7% 17.6% 19.8% 18.7% 18.6%
- --------------------------------------------------------------------------------------------------------------------
Book value per share $ 21.22 $ 17.03 $ 15.32 $ 13.87 $ 12.42
Working capital $ 966,810 $ 1,020,171 $ 791,305 $ 783,550 $ 635,242
Ratio of current assets to current liabilities 1.8 2.4 1.8 2.1 1.8
Plant and equipment, net $ 1,340,915 $ 1,200,869 $ 1,135,225 $ 1,020,743 $ 991,777
Total assets 4,646,299 3,705,888 3,524,821 2,998,946 2,887,124
Long-term debt 701,762 724,757 512,943 432,885 439,797
Shareholders' equity $ 2,309,458 $ 1,853,862 $ 1,683,450 $ 1,547,301 $ 1,383,958
Debt to debt-equity percent 31.0% 29.8% 31.6% 24.5% 30.7%
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Depreciation $ 167,356 $ 164,577 $ 153,633 $ 146,253 $ 126,544
Capital expenditures $ 230,482 $ 230,122 $ 236,945 $ 189,201 $ 201,693
Number of employees 43,895 38,928 39,873 34,927 33,289
Number of shareholders 47,671 39,380 44,250 43,014 35,403
Number of shares outstanding at year-end 113,707 108,846 109,873 111,527 111,438
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(a) Includes an extraordinary item for the early retirement of debt.
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