1
Exhibit 13
Exhibit (13) * to Report
On Form 10-K for Fiscal
Year Ended June 30, 1999
By Parker-Hannifin Corporation
Excerpts from Annual Report to Shareholders for the fiscal
year ended June 30, 1999.
*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, 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,
- uncertainties surrounding the year 2000 issues,
- 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
DISCUSSION OF STATEMENT OF INCOME
THE CONSOLIDATED STATEMENT OF INCOME summarizes the Company's operating
performance over the last three fiscal years.
NET SALES of $4.96 billion for 1999 were 7.0 percent higher than the $4.63
billion for 1998. Acquisitions 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.
Net sales of $4.63 billion for 1998 were 13.2 percent higher than the $4.09
billion for 1997. Acquisitions accounted for approximately one-fifth of this
increase. The Industrial operations experienced continued strong order demand
within the heavy-duty truck, construction equipment, factory automation,
telecommunications and refrigeration markets. The European operations continued
to grow and the Company continued to penetrate markets in Asia Pacific and Latin
American regions. Volume increases within International operations were
partially offset by currency rate changes. The Aerospace operations experienced
strong demand within the commercial transport, business jet and general aviation
markets.
The Company is anticipating the North American industrial economy for the next
year will stay relatively flat. European and Latin American markets are expected
to be weak in the first half of fiscal 2000 while the Company expects to
continue to penetrate markets in the Asia Pacific region. The Aerospace
operations expect the commercial aviation OEM business to decline while the
defense business is expected to remain relatively constant.
GROSS PROFIT MARGIN was 22.0 percent in 1999 compared to 23.4 percent in 1998
and 22.9 percent in 1997. 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 margin decline in 1999 is primarily the result of the
underabsorption of overhead costs and pricing pressure. In addition, gross
margins continue to be affected by recently acquired operations contributing
lower margins.
3
The improvement in 1998 is primarily the result of better absorption of fixed
costs due to higher volume and the benefits of continued integration of
prior-year acquisitions. The improvement was partially offset by recently
acquired operations contributing lower margins, as their integration continues.
In addition, gross margins were affected by the Asian financial crisis and the
depressed worldwide semiconductor market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of sales decreased to
11.1 percent, from 11.5 percent in 1998, and 11.6 percent in 1997. As volume
increased these expenses remained relatively unchanged, except for decreased
costs from incentive programs.
INTEREST EXPENSE increased by $10.9 million in 1999 and $6.1 million in 1998 due
to increased borrowings to complete acquisitions.
Page 13-2
INTEREST AND OTHER INCOME, NET was $5.1 million in 1999 compared to $6.8 million
in 1998 and $5.6 million in 1997. Fiscal 1999 includes $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 $2.4 million loss in 1999, a $.1 million
gain in 1998 and a $3.0 million gain in 1997. The 1997 gain includes $17.1
million income from the sale of real estate in California. This income was
substantially offset by $13.3 million accrued for exit costs and charges for
impaired assets related to the relocation of the corporate headquarters.
INCOME TAXES decreased to an effective rate of 35.0 percent in 1999, compared to
35.9 percent in 1998 and 35.5 percent in 1997. 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. The increase in the rate from 1997 to 1998 was
the result of receiving no tax benefit for one of the R&D charges.
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 $310.5 million for 1999 was 2.8 percent lower than 1998. Net
income of $319.6 million for 1998 was 16.6 percent higher than 1997. Net income
as a percentage of sales was 6.3 percent in 1999, compared to 6.9 percent in
1998 and 6.7 percent in 1997.
YEAR 2000 CONSIDERATIONS - The Company has been taking actions to assure that
its computerized products and systems and all external interfaces are year 2000
compliant. These actions are part of a formal information technology initiative
that the Company began several years ago. The cost for these actions is not
material to the Company's results of operations. As of July 31, 1999, virtually
all internal standard application systems, including all information systems
plus any equipment or embedded systems, are year 2000 compliant. The few systems
that are currently not compliant consist of noncritical data processing systems,
which are expected to be compliant by the end of the first quarter of fiscal
2000.
In addition, the Company contacted its key suppliers, customers, distributors
and financial service providers regarding their year 2000 status. Follow-up
inquiries and audits with such key third parties were conducted as warranted.
The results of the inquiries and audits indicate that substantially all key
third parties will be year 2000 compliant on a timely basis. The Company does
not anticipate altering its purchasing or production levels as a result of any
key third parties year 2000 noncompliance.
While management does not expect that the consequences of any unsuccessful
modifications would significantly affect the financial position, liquidity, or
results of operations of the Company, there can be no assurance that failure to
be fully compliant by 2000 would not have an impact on the Company.
EURO PREPARATIONS - The Company upgraded its systems to accommodate the Euro
currency in 1999. The cost of this upgrade was immaterial to the Company's
financial results.
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.
The effect of currency rate changes during the year caused a $32.8 million
decrease in Shareholders' equity. These rate changes also caused significant
decreases in accounts receivable, inventories, goodwill and plant and equipment,
as well as significant decreases in accounts payable and the various accrual
accounts.
Working capital and the current ratio were as follows:
Working Capital (millions) 1999 1998
- --------------------------- --------- --------
Current Assets $1,775 $ 1,780
Current Liabilities 755 989
Working Capital 1,020 791
Current Ratio 2.4 1.8
- --------------------------- --------- --------
ACCOUNTS RECEIVABLE are primarily due from customers for sales of product
($684.2 million at June 30, 1999, compared to $642.3 million at June 30, 1998).
The current year increase in accounts receivable is primarily due to
acquisitions and increased volume. Days sales outstanding for the Company
increased slightly to 47 days in 1999 from 46 days in 1998. An increase in the
allowance for doubtful accounts in 1999 is primarily due to receivables obtained
through acquisitions.
INVENTORIES decreased to $915.1 million at June 30, 1999, compared to $944.3
million a year ago, with the decline occurring primarily in the Industrial
operations where management focused on reducing inventory levels to align with
current customer demand. The decline in inventory was partially offset by an
increase in inventory due to acquisitions. Months supply of inventory on hand at
June 30, 1999 decreased to 3.5 months from 3.7 months at June 30, 1998.
PLANT AND EQUIPMENT, net of accumulated depreciation, increased $65.6 million in
1999 as a result of acquisitions and capital expenditures which exceeded annual
depreciation.
INVESTMENTS AND OTHER ASSETS increased $65.9 million in 1999 primarily as a
result of increases in pension assets and the cash surrender value of
corporate-owned life insurance contracts.
EXCESS COST OF INVESTMENTS OVER NET ASSETS ACQUIRED increased $41.8 million in
1999 as a result of acquisitions, partially offset by current year amortization.
The additional excess cost of investments in 1999 is being amortized over 15
years.
NOTES PAYABLE AND LONG-TERM DEBT PAYABLE WITHIN ONE YEAR decreased $204.9
million due to a decrease in commercial paper borrowings and the redemption of
the Company's $100 million 10.375% debentures in July 1998.
ACCOUNTS PAYABLE, TRADE decreased $25.1 million in 1999 due primarily to the
timing of payments made at the Corporate level as well as lower balances in the
International Industrial operations due to lower production levels.
Page 13-4
ACCRUED PAYROLLS AND OTHER COMPENSATION decreased $18.1 million in 1999
primarily as a result of decreased headcount and incentive plans which are based
on sales and earnings.
ACCRUED DOMESTIC AND FOREIGN TAXES increased to $52.6 million in 1999 from $34.4
million in 1998 primarily due to lower estimated tax payments in 1999.
LONG-TERM DEBT increased $211.8 million in 1999 primarily due to increased
borrowings to fund acquisitions and the issuance of the ESOP debt guarantee. See
the Cash Flows From Financing Activities section on page 13-7 for further
discussion.
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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 30 to 33 percent.
Debt to Debt-Equity Ratio 1999 1998
(millions)
- ------------------------------------ -------- -------------
Debt $ 785 $ 778
Debt & Equity 2,639 2,462
Ratio 29.8% 31.6%
- ------------------------------------ -------- -------------
In fiscal 2000 additional borrowings are not anticipated for the stock
repurchase program, capital investments, or for working capital purposes, but
may be utilized for acquisitions.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS increased 4.1 percent in 1999. These
costs are explained further in Note 8 to the Consolidated Financial Statements.
OTHER LIABILITIES increased to $65.3 million in 1999 from $44.2 million in 1998
primarily due to increases in deferred compensation plans.
COMMON STOCK IN TREASURY decreased to $1.8 million in 1999 from $83.5 million in
1998 due to the sale of treasury shares to the Company's ESOP in 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - The Company enters
into forward exchange 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. 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 non-performance by the
Company. 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.
Page 13-5
DISCUSSION OF CASH FLOWS
THE CONSOLIDATED STATEMENT OF CASH FLOWS reflects cash inflows and outflows from
the Company's operating, investing and financing activities.
Cash and cash equivalents increased $2.8 million in 1999 after decreasing $38.5
million in 1998.
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 1999 was a record $459.1 million compared to $320.6
million in 1998. Inventories provided 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.
The net cash provided by operating activities in 1998 decreased $71.7 million
compared to 1997. This decrease was principally due to inventories using cash of
$185.6 million in 1998 compared to $27.0 million in 1997. Other accrued
liabilities used cash of $9.1 million in 1998 compared to providing cash of
$16.0 million in 1997. Accrued domestic and foreign taxes also used cash in 1998
of $15.3 million after providing cash of $4.3 million in 1997. These uses of
cash in 1998 were partially offset with cash provided by an increase of $45.5
million in Net income in 1998 and a $52.9 million increase in Accounts payable
in 1998 compared to an increase of $31.7 million in 1997. In addition, the 1998
write-off of purchased in-process R&D of $15.8 million was a non-cash charge
added back to Net income to reconcile to the net cash provided by operating
activities.
CASH FLOWS FROM INVESTING ACTIVITIES - 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.
6
Net cash used in investing activities was $264.4 million greater in 1998 than
1997, primarily due to Acquisitions using $201.5 million more cash in 1998.
Also, Capital expenditures increased $47.8 million in 1998.
To complete Acquisitions the Company utilized cash of $89.9 million in 1999;
cash of $233.0 million and treasury shares valued at $11.9 million in 1998; and
cash of $31.5 million in 1997. The net assets of the acquired companies at their
respective acquisition dates consisted of the following:
Page 13-6
(In thousands) 1999 1998 1997
- --------------------------- ------------ ------------- -------------
Assets acquired:
Accounts receivable $16,529 $ 39,286 $ 4,549
Inventories 16,173 43,847 13,410
Prepaid expenses 2,509 1,393 247
Deferred income taxes 1,643 1,576
Plant & equipment 17,686 54,718 15,283
Other assets 3,783 3,762 (1,121)
Excess cost of
investments over net
assets acquired 84,589 162,680 11,596
- --------------------------- ------------ ------------- -------------
141,269 307,329 45,540
- --------------------------- ------------ ------------- -------------
Liabilities assumed:
Notes payable 10,433 8,690 2,050
Accounts payable 10,105 21,841 2,418
Accrued payrolls 6,828 4,418 471
Accrued taxes (646) 2,840 941
Other accrued liabilities 3,535 11,421 4,582
Long-term debt 20,090 9,706 2,454
Pensions and other
postretirement benefits 471 477 1,163
Other liabilities 588 3,033
- --------------------------- ------------ ------------- -------------
51,404 62,426 14,079
- --------------------------- ------------ ------------- -------------
Net assets acquired $89,865 $ 244,903 $ 31,461
- --------------------------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES - 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.
In 1998 the Company increased its outstanding borrowings by a net total of
$264.9 million primarily to fund acquisitions. The majority of the funding was
through the issuance of commercial paper. Additional funds were obtained through
the issuance of $50.0 million of medium-term notes.
Common share activity in 1999 includes the repurchase of stock, the exercise of
stock options and the sale of treasury shares to the ESOP. During 1999 the
Company purchased 1,500,000 shares for treasury and sold 3,055,413 shares to the
ESOP.
Dividends have been paid for 196 consecutive quarters, including a yearly
increase in dividends for the last 43 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,
combined with the Company's worldwide financial capabilities, will provide
adequate funds to support planned growth and continued improvements in the
Company's manufacturing facilities and equipment.
7
Page 13-7
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.
INDUSTRIAL SEGMENT
- -----------------------------------------------------------
1999 1998 1997
- -------------------------- ---------- ---------- ----------
Operating income as a
percent of sales 11.0% 12.6% 12.9%
Return on average assets 16.0% 19.1% 18.6%
- -------------------------- ---------- ---------- ----------
Sales for the Industrial North American operations increased to $2.57 billion in
1999, 4.5 percent over 1998, following 1998's increase of 15.2 percent over
1997. Acquisitions accounted for four-fifths of the increase in 1999 and nearly
one-fifth of the increase in 1998. Sales in 1999 reflects lower demand within
most of the Industrial North American markets, particularly in the semiconductor
fabrication, agricultural, petrochemical, factory automation and machine tool
markets. However, growth was experienced in the telecommunications and
refrigeration markets. The growth in 1998 was spread among numerous markets, but
primarily was the result of growth in the light and heavy-duty truck,
construction equipment, telecommunications, factory automation, machine tool and
refrigeration markets.
International Industrial sales increased to a record $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.
International Industrial sales in 1998 increased to $1.19 billion, 8.0 percent
over 1997. Without the impact of changes in currency rates, volume for 1998
increased over 17 percent. Acquisitions contributed over half of the 1998
increase. European markets experienced steady growth during 1998. The Company
also continued to penetrate markets in Asia Pacific and Latin American regions.
Industrial North American operating income decreased 8.4 percent in 1999 after
an increase of 11.4 percent in 1998 over 1997. Operating income in 1998 includes
a $5.2 million R&D charge. Income from operations as a percent of sales was 13.1
percent in 1999 compared to 14.9 percent in 1998 and 15.4 percent in 1997.
Margins in 1999 were adversely affected by the underabsorption of overhead costs
and pricing pressure experienced throughout most of the Industrial markets.
Recently purchased acquisitions, not yet fully integrated, continued to
contribute lower margins. Raw material prices decreased during the year.
International operating income decreased 11.4 percent in 1999 after a 1998
increase of 6.4 percent over 1997. Operating income in 1998 includes a $10.6
million R&D charge. Income as a percent of sales in 1999 was 6.6 percent
compared to 7.8 percent in 1998 and 7.9 percent in 1997. Demand in Europe began
to weaken in the second half of 1999 resulting in lower capacity utilization.
Latin American operations suffered through a weak economy throughout most of
1999, particularly in the Brazilian markets. Results in the Asia Pacific region
continue to improve as the Company continued to expand its infrastructure in
this market. Operating income for 1998 benefited from growth in the European
Industrial markets with increased volume improving capacity utilization.
A slight improvement in the trend of order rates was seen toward the end of
1999; however, it is unclear whether an upward trend will continue or be
sustainable into fiscal 2000 as the Company continues to see mixed business
conditions across its North American markets. The Industrial European and Latin
American operations are expected to experience a continued weak economy in the
first half of fiscal 2000. The Company expects to take the necessary actions to
manage these operations to ensure they are appropriately structured to operate
in their current economic environment.
Page 13-8
Backlog for the Industrial Segment was $546.9 million at June 30, 1999, compared
to $585.2 million at the end of 1998 and $510.8 million at the end of 1997. The
lower backlog reflects the weakened demand experienced during the year by the
Industrial markets. The 1998 increase over backlog in 1997 was due to volume
growth within the North American operations, as well as acquisitions.
8
Assets for the Industrial Segment increased 3.4 percent in 1999 after an
increase of 15.0 percent in 1998. The increase in 1999 is primarily due to
acquisitions, partially offset by decreases in inventories and net goodwill as
well as the effect of currency fluctuations. In 1998 currency fluctuations
partially offset increases from acquisitions and increases in inventories. In
both years net plant and equipment increased due to capital expenditures
exceeding depreciation.
AEROSPACE SEGMENT
- -----------------------------------------------------------
1999 1998 1997
- -------------------------- ---------- ---------- ----------
Operating income as a
percent of sales 15.4% 16.1% 12.9%
Return on average assets 23.1% 22.8% 17.3%
- -------------------------- ---------- ---------- ----------
Sales increased 16.1 percent in 1999 and 15.1 percent in 1998. The continuing
high level of activity in 1999 reflects the increase in commercial aircraft
build rates. Increased commercial aircraft deliveries and continued penetration
of the commercial repair and overhaul businesses contributed to the higher
volume in 1998.
Operating income increased 11.0 percent in 1999 and 43.1 percent in 1998. As a
percent of sales 1999 income was 15.4 percent compared to 16.1 percent in 1998
and 12.9 percent in 1997. Current year margins reflect a change in mix of sales
from aftermarket to OEM . The 1998 increase in margins was primarily the result
of improved capacity utilization due to higher volume and a favorable product
mix.
Backlog at June 30, 1999 was $1.08 billion compared to $1.06 billion in 1998 and
$976.2 million in 1997, reflecting the strong growth of the commercial aircraft
market. A decline in OEM business is expected in fiscal 2000 and the Company
expects to take the necessary steps to resize the business.
Assets increased 6.0 percent in 1999 after a 13.6 percent increase in 1998. For
both periods the increases were primarily in customer receivables and property,
plant and equipment, partially offset by a decrease in net goodwill. The 1998
increase was also due to an increase in inventories.
CORPORATE assets increased 23.5 percent in 1999 primarily due to increases in
qualified and non-qualified benefit plan assets. The increase of 94.9 percent in
1998 is primarily due to a change in the balance sheet classification of
qualified pension assets.
Page 13-9
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CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts) For the year ended June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES $ 4,958,800 $ 4,633,023 $ 4,091,081
Cost of sales 3,869,370 3,550,992 3,152,988
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 1,089,430 1,082,031 938,093
Selling, general and administrative expenses 550,681 532,134 475,180
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 538,749 549,897 462,913
Other income (deductions):
Interest expense (63,697) (52,787) (46,659)
Interest and other income, net 5,056 6,783 5,623
(Loss) gain on disposal of assets (2,414) 95 2,990
- ----------------------------------------------------------------------------------------------------------------------------
(61,055) (45,909) (38,046)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 477,694 503,988 424,867
Income taxes (Note 3) 167,193 180,762 150,828
- ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 310,501 323,226 274,039
Extraordinary item - extinguishment of debt (Note 7) (3,675)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 310,501 $ 319,551 $ 274,039
============================================================================================================================
EARNINGS PER SHARE (Note 4)
Basic earnings per share before extraordinary item $ 2.85 $ 2.91 $ 2.46
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.85 $ 2.88 $ 2.46
============================================================================================================================
Diluted earnings per share before extraordinary item $ 2.83 $ 2.88 $ 2.44
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.83 $ 2.85 $ 2.44
============================================================================================================================
The accompanying notes are an integral part of the financial statements.
Page 13-10
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands) For the year ended June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 310,501 $ 319,551 $ 274,039
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment (32,832) (32,681) (48,070)
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 277,669 $ 286,870 $ 225,969
============================================================================================================================
The accompanying notes are an integral part of the financial statements.
Page 13-11
CONSOLIDATED BALANCE SHEET
(Dollars in thousands) June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
10
Cash and cash equivalents $ 33,277 $ 30,488
Accounts receivable, less allowance for doubtful accounts
(1999 - $9,397; 1998 - $9,004) 738,773 699,179
Inventories (Notes 1 and 5):
Finished products 442,361 416,034
Work in process 347,376 392,880
Raw materials 125,393 135,357
- ---------------------------------------------------------------------------------------------------------------
915,130 944,271
Prepaid expenses 22,928 22,035
Deferred income taxes (Notes 1 and 3) 64,576 84,102
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,774,684 1,780,075
Plant and equipment (Note 1):
Land and land improvements 125,990 113,774
Buildings and building equipment 592,086 552,177
Machinery and equipment 1,678,956 1,560,016
Construction in progress 109,780 119,142
- ---------------------------------------------------------------------------------------------------------------
2,506,812 2,345,109
Less accumulated depreciation 1,305,943 1,209,884
- ---------------------------------------------------------------------------------------------------------------
1,200,869 1,135,225
Investments and other assets (Note 1) 260,495 194,632
Excess cost of investments over net assets acquired (Note 1) 441,489 399,681
Deferred income taxes (Notes 1 and 3) 28,351 15,208
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,705,888 $3,524,821
===============================================================================================================
Page 13-12
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and long-term debt payable within one year (Notes 6 and 7) $ 60,609 $ 265,485
Accounts payable, trade 313,173 338,249
Accrued payrolls and other compensation 145,745 163,879
Accrued domestic and foreign taxes 52,584 34,374
Other accrued liabilities 182,402 186,783
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 754,513 988,770
Long-term debt (Note 7) 724,757 512,943
Pensions and other postretirement benefits (Notes 1 and 8) 276,637 265,675
Deferred income taxes (Notes 1 and 3) 30,800 29,739
Other liabilities 65,319 44,244
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,852,026 1,841,371
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Note 9)
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
Common stock, $.50 par value, authorized 600,000,000 shares;
issued 111,945,179 shares in 1999 and 111,812,025 shares in 1998 at par value 55,973 55,906
Additional capital 132,227 139,726
Retained earnings 1,872,356 1,631,316
Unearned compensation related to guarantee of ESOP debt (Note 7) (112,000) -
Accumulated other comprehensive income (loss) (92,858) (60,026)
- ----------------------------------------------------------------------------------------------------------------
1,855,698 1,766,922
Common stock in treasury at cost; 43,836 shares in 1999 and 1,938,762 shares
in 1998 (1,836) (83,472)
- ----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,853,862 1,683,450
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,705,888 $ 3,524,821
================================================================================================================
The accompanying notes are an integral part of the financial statements.
11
Page 13-13
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) For the year ended June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 310,501 $ 319,551 $ 274,039
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 164,577 153,633 146,253
Amortization 37,469 29,046 23,580
Deferred income taxes 5,718 7,680 (1,269)
Foreign currency transaction (gain) loss (2,495) 3,697 1,947
Loss (gain) on sale of plant and equipment 1,886 291 (9,811)
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 (31,396) (71,034) (76,081)
Inventories 30,606 (185,569) (27,007)
Prepaid expenses 2,069 (3,473) (1,234)
Other assets (56,957) (31,620) (26,130)
Accounts payable, trade (33,075) 52,947 31,672
Accrued payrolls and other compensation (21,892) 27,531 23,929
Accrued domestic and foreign taxes 22,091 (15,282) 4,282
Other accrued liabilities (3,935) (9,129) 16,026
Pensions and other postretirement benefits 13,258 14,276 6,823
Other liabilities 20,672 8,579 5,291
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 459,097 320,599 392,310
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $2,609 in 1999, $4,260 in 1998
and $1,394 in 1997) (89,865) (232,953) (31,461)
Capital expenditures (230,122) (236,945) (189,201)
Proceeds from sale of plant and equipment 6,382 7,151 11,307
Other 548 3,630 14,624
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (313,057) (459,117) (194,731)
Page 13-14
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for) common share activity 74,076 (96,887) (10,184)
(Payments of) proceeds from notes payable, net (228,896) 190,865 (100,655)
Proceeds from long-term borrowings 232,886 87,085 9,390
(Payments of) long-term borrowings (152,397) (13,054) (30,059)
Dividends paid, net of tax benefit of ESOP shares (69,461) (66,501) (56,570)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (143,792) 101,508 (188,078)
Effect of exchange rate changes on cash 541 (1,499) (4,457)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,789 (38,509) 5,044
Cash and cash equivalents at beginning of year 30,488 68,997 63,953
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 33,277 $ 30,488 $ 68,997
============================================================================================================================
Supplemental Data:
Cash paid during the year for:
12
Interest, net of capitalized interest $ 62,997 $ 48,105 $ 46,812
Income taxes 129,893 175,546 145,663
Non-cash investing activities:
Treasury stock issued for acquisitions 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
BUSINESS SEGMENT INFORMATION
BY INDUSTRY
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES:
Industrial:
North America $ 2,565,154 $ 2,454,558 $ 2,130,817
International 1,241,256 1,185,584 1,097,615
Aerospace 1,152,390 992,881 862,649
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,958,800 $ 4,633,023 $ 4,091,081
============================================================================================================================
SEGMENT OPERATING INCOME:
Industrial:
North America $ 335,259 $ 365,880 $ 328,307
International 82,245 92,783 87,216
Aerospace 177,213 159,580 111,533
- ----------------------------------------------------------------------------------------------------------------------------
Total segment operating income 594,717 618,243 527,056
Corporate administration 54,176 61,829 50,582
- ----------------------------------------------------------------------------------------------------------------------------
Income before interest expense and other 540,541 556,414 476,474
Interest expense 63,697 52,787 46,659
Other (850) (361) 4,948
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 477,694 $ 503,988 $ 424,867
============================================================================================================================
IDENTIFIABLE ASSETS:
Industrial $ 2,657,146 $ 2,570,273 $ 2,235,631
Aerospace 789,174 744,335 655,433
- ----------------------------------------------------------------------------------------------------------------------------
3,446,320 3,314,608 2,891,064
Corporate (a) 259,568 210,213 107,882
- ----------------------------------------------------------------------------------------------------------------------------
$ 3,705,888 $ 3,524,821 $ 2,998,946
============================================================================================================================
PROPERTY ADDITIONS: (b)
Industrial $ 209,230 $ 245,995 $ 173,635
Aerospace 36,993 33,733 20,608
Corporate (c) 1,585 11,935 32,078
- ----------------------------------------------------------------------------------------------------------------------------
$ 247,808 $ 291,663 $ 226,321
============================================================================================================================
DEPRECIATION:
Industrial $ 140,914 $ 130,888 $ 121,694
Aerospace 19,523 19,011 21,536
Corporate 4,140 3,734 3,023
- ----------------------------------------------------------------------------------------------------------------------------
$ 164,577 $ 153,633 $ 146,253
============================================================================================================================
The accounting policies of the business segments are the same as those described
13
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, idle facilities 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
(1999 - $17,686; 1998 - $54,718; 1997 - $15,283).
(c) Fiscal 1997 includes $21,837 for real estate acquired in a tax-free
exchange of property.
Page 13-16
BY GEOGRAPHIC AREA (d)
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES:
North America $ 3,684,786 $ 3,425,704 $ 2,969,883
International 1,274,014 1,207,319 1,121,198
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,958,800 $ 4,633,023 $ 4,091,081
============================================================================================================================
LONG-LIVED ASSETS:
North America $ 873,222 $ 790,162 $ 710,049
International 327,647 345,063 310,694
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,200,869 $ 1,135,225 $ 1,020,743
============================================================================================================================
(d) 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
14
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 adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
fiscal 1999. SFAS No. 131 requires segment information to be disclosed based
upon how management internally evaluates the operating performance of its
business units. The Company evaluates performance based on segment operating
income before Corporate general and administrative expenses, Interest expense
and Income taxes. Business segment information for fiscal years 1998 and 1997
have been restated to conform to the new standard.
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 6 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 in any event 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.
Page 13-18
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.
15
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. 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 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, primarily over 15 years
and not exceeding 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
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) 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 net investments in consolidated
subsidiaries are accrued in Shareholders' equity. Gains or losses on forward
contracts which hedge specific transactions are recognized in Net income,
offsetting the underlying foreign currency gains or losses.
Page 13-19
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.
The total value of open contracts and any risk to the Company as a result of the
above mentioned arrangements is not material.
16
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.
In March 1998 the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires expenses incurred during the
application development stage of a software implementation project to be
capitalized and amortized over the useful life of the project. Application of
this standard, required beginning with the first quarter of 2000, is not
expected to have a material impact on the results and financial position of the
Company.
NOTE 2
ACQUISITIONS
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,
Page 13-20
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 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 no 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.
On June 4, 1997 the Company acquired the remaining 50 percent of SAES-Parker UHP
Components Corp., a manufacturer of valves for ultra-pure gas used in
semiconductor manufacturing. On February 3, 1997 the Company purchased Hydroflex
S.A. de C.V., a leading Mexican manufacturer of hydraulic hose, fittings and
adapters located in Toluca, Mexico. On September 5, 1996 the Company purchased
the assets of the industrial hydraulic product line of Hydraulik-Ring AG, of
Nurtingen, Germany. Total purchase price for these businesses was approximately
$29.3 million cash. Combined annual sales for these operations, for their most
recent fiscal year prior to acquisition, were approximately $52 million.
17
These acquisitions were accounted for by the purchase method, and results are
included as of the respective dates of acquisition.
NOTE 3
INCOME TAXES
Income taxes include the following:
1999 1998 1997
- ------------------------------------------------------------------
Federal $113,011 $129,462 $113,819
Foreign 34,309 27,847 27,411
State and local 11,236 16,928 13,587
Deferred 8,637 6,525 (3,989)
- ------------------------------------------------------------------
$167,193 $180,762 $150,828
==================================================================
A reconciliation of the Company's effective income tax rate to the statutory
Federal rate follows:
1999 1998 1997
- ------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 1.8 2.1 2.0
FSC income not taxed (2.3) (1.7) (1.8)
Foreign tax rate difference 1.4 .2 (.3)
Other (.9) .3 .6
- -------------------------------------------------------------------
Effective income tax rate 35.0% 35.9% 35.5%
===================================================================
Page 13-21
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:
1999 1998
- ----------------------------------------------------------------
Postretirement benefits $ 74,238 $ 63,277
Other liabilities and reserves 38,530 52,430
Long-term contracts 16,344 14,816
Operating loss carryforwards 4,719 9,440
Foreign tax credit carryforwards 2,264 3,773
Valuation allowance (4,700) (1,591)
Depreciation (77,871) (80,508)
Inventory 10,567 11,088
- ----------------------------------------------------------------
Net deferred tax asset $ 64,091 $ 72,725
================================================================
Change in net deferred tax asset (liability):
Provision for deferred tax $ (8,637) $ (6,525)
Translation adjustment 1,710 175
Acquisitions (1,707) 784
- ----------------------------------------------------------------
Total change in net deferred tax $ (8,634) $ (5,566)
================================================================
At June 30, 1999, foreign subsidiaries had benefits for operating loss
carryforwards of $4,719 for tax purposes, some of which can be carried forward
indefinitely and others which can be carried forward from three to 10 years.
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.
18
Accumulated undistributed earnings of foreign operations reinvested in their
operations amounted to $205,756, $153,831 and $121,871, at June 30, 1999, 1998
and 1997, respectively.
NOTE 4
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.
Page 13-22
The computation of net income per share was as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator:
---------
Net income applicable
to common shares $ 310,501 $ 319,551 $ 274,039
================================================================================
Denominator:
-----------
Basic - weighted average
common shares 108,799,974 110,868,834 111,601,484
Increase in weighted average
from dilutive effect of
exercise of stock options 878,985 1,090,437 916,569
- --------------------------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 109,678,959 111,959,271 112,518,053
================================================================================
Basic earnings per share $ 2.85 $ 2.88 $ 2.46
Diluted earnings per share $ 2.83 $ 2.85 $ 2.44
================================================================================
NOTE 5
INVENTORIES
Inventories valued on the last-in, first-out cost method are approximately 34%
in 1999 and 36% in 1998 of total inventories. The current cost of these
inventories exceeds their valuation determined on the LIFO basis by $138,197 in
1999 and $139,011 in 1998. Progress payments of $22,593 in 1999 and $23,454 in
1998 are netted against inventories.
NOTE 6
FINANCING ARRANGEMENTS
The Company has committed lines of credit totaling $653,865 through several
multi-currency unsecured revolving credit agreements with a group of banks, of
which $630,570 was available at June 30, 1999. 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.
19
The Company has other lines of credit, primarily short-term, aggregating $84,971
from various foreign banks, of which $62,307 was available at June 30, 1999.
Most of these agreements are renewed annually.
During fiscal 1999 the Company issued $225,000 of medium-term notes leaving
$530,000 available for issuance at June 30, 1999.
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 D-1 by Duff & Phelps.
At June 30, 1999 there were $5,900 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, 1999 and 1998 were $37,305 and 6.4% and
$155,259 and 6.1%, respectively.
Page 13-23
NOTE 7
DEBT
June 30, 1999 1998
- --------------------------------------------------------------------------------
Domestic:
Debentures
9.75%, due 2002-2021 $ 100,000 $ 100,000
7.3%, due 2011 100,000 100,000
10.375%, due 1999-2018 100,000
Medium-term notes
5.65% to 7.39%, due 2004-2019 370,000 145,000
ESOP loan guarantee
6.34%, due 2009 112,000
Commercial paper 100,000
Variable rate demand bonds
3.65% to 3.75%, due 2010-2025 20,035 20,035
Foreign:
Bank loans, including revolving credit
1.0% to 11.50%, due 1999-2018 37,206 54,653
Other long-term debt, including capitalized leases 8,820 3,481
- --------------------------------------------------------------------------------
Total long-term debt 748,061 623,169
Less long-term debt payable within one year 23,304 110,226
- --------------------------------------------------------------------------------
Long-term debt, net $ 724,757 $ 512,943
- --------------------------------------------------------------------------------
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,
2000 through 2004 are $23,304, $22,603, $24,646, $23,533, and $199,004,
respectively. The carrying value of the Company's long-term debt (excluding
leases and cross-currency swaps) was $739,241 and $519,688 at June 30, 1999 and
1998, respectively, and was estimated to have a fair value of $708,224 and
$545,140, at June 30, 1999 and 1998, 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 March 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
20
borrowing is reflected in the Consolidated Balance sheet as Long-term debt. An
equivalent amount representing Unearned compensation is recorded as a deduction
from Shareholders' equity.
LEASE COMMITMENTS -- Future minimum rental commitments as of June 30, 1999,
under noncancelable operating leases, which expire at various dates, are as
follows: 2000-$36,497; 2001-$25,122; 2002-$14,935; 2003-$8,716; 2004-$6,166 and
after 2004-$20,468.
Rental expense in 1999, 1998 and 1997 was $42,280, $37,065, and $33,305,
respectively.
Page 13-24
NOTE 8
RETIREMENT BENEFITS
PENSIONS - Effective July 1, 1998, the company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
revises employers' disclosures for pensions and other postretirement benefit
plans without affecting measurement or recognition criteria. Prior year
information has been restated to conform to the new disclosure requirements.
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 $23,644, $19,989 and $22,773 for 1999, 1998 and
1997, respectively. Pension costs for all defined benefit plans accounted for
using SFAS No. 87, "Employers' Accounting for Pensions," are as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $34,890 $ 28,190 $ 23,715
Interest cost 63,257 57,892 52,726
Expected return on plan assets (83,798) (68,463) (57,021)
Net amortization and deferral and other 4,081 445 1,110
- --------------------------------------------------------------------------------
Net periodic benefit cost $18,430 $ 18,064 $ 20,530
================================================================================
CHANGE IN BENEFIT OBLIGATION 1999 1998
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 877,752 $ 714,699
Service cost 34,890 28,190
Interest cost 63,257 57,892
Actuarial loss 30,288 70,067
Benefits paid (40,028) (33,537)
Acquisitions 37,324
Other (3,496) 3,117
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 962,663 $ 877,752
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 997,913 $ 767,687
Actual return on plan assets 131,872 205,685
Employer contributions 12,255 16,907
Benefits paid (36,253) (31,551)
Acquisitions 39,151
Other (5,798) 34
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $1,099,989 $ 997,913
================================================================================
21
FUNDED STATUS
- --------------------------------------------------------------------------------
Plan assets in excess of benefit obligation $ 137,326 $ 120,161
Unrecognized net actuarial (gain) (144,706) (125,609)
Unrecognized prior service cost 23,259 22,626
Unrecognized initial net (asset) (9,587) (12,731)
- --------------------------------------------------------------------------------
Net amount recognized $ 6,292 $ 4,447
================================================================================
Page 13-25
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 104,135 $ 98,104
Accrued benefit liability (97,843) (93,657)
- --------------------------------------------------------------------------------
Net amount recognized $ 6,292 $ 4,447
================================================================================
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 $143,177, $122,411, and $28,331, respectively, at June 30,
1999, and $132,716, $112,916, and $23,782, respectively, at June 30, 1998.
The plans' assets consist primarily of listed common stocks, corporate and
government bonds, and real estate investments. At June 30, 1999 and 1998, the
plans' assets included Company stock with market values of $24,314 and $20,262,
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:
1999 1998 1997
- --------------------------------------------------------------------------------
U.S. defined benefit plans
Discount rate 7.5% 7.5% 8%
Average increase in
compensation 4.9% 4.9% 5%
Expected long-term return on assets 10% 9.5% 9%
Non-U.S. defined benefit plans
Discount rate 4.5 to 6.5% 4.5 to 7% 7 to 8%
Average increase in compensation 1.5 to 4% 3 to 4.5% 3.5 to 6%
Expected long-term return on assets 6 to 9% 5.5 to 9% 7 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, which is
available to eligible domestic employees. Parker-Hannifin Common Stock is used
to match contributions made by employees to the savings plan up to a maximum of
3.5 percent of an employee's annual compensation. A breakdown of shares held by
the ESOP is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Allocated shares 7,866,152 7,631,677 7,460,378
Suspense shares 3,055,413
- --------------------------------------------------------------------------------
Total shares held by the ESOP 10,921,565 7,631,677 7,460,378
================================================================================
Fair value of suspense shares $ 139,785
================================================================================
In 1999 the ESOP was leveraged and the loan was unconditionally guaranteed by
the Company. The Company shares acquired by the ESOP are held in a suspense
account. The Company's matching contribution and dividends on the shares held by
the ESOP are used to repay the loan, and shares are released from the suspense
account as the principal and interest are paid. The shares in the suspense
account are not considered outstanding for purposes of earnings per share
computations until they are released. Company contributions to the ESOP,
recorded as compensation and interest expense, were $24,319 in 1999, $23,093 in
1998 and $21,235 in 1997. Dividends earned by the suspense shares and interest
income within the ESOP totaled $519 in 1999.
22
In addition to shares within the ESOP, as of June 30, 1999 employees have
elected to invest in 2,653,297 shares of Common Stock within the Company Stock
Fund of the Parker Retirement Savings Plan.
Page 13-26
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:
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 4,301 $ 4,021 $ 3,296
Interest cost 11,158 11,077 11,316
Net amortization and deferral (1,683) (1,815) (830)
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 13,776 $ 13,283 $ 13,782
================================================================================
CHANGE IN BENEFIT OBLIGATION 1999 1998
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 155,933 $ 149,874
Service cost 4,301 4,021
Interest cost 11,158 11,077
Amendments (16,544)
Actuarial (gain) loss (8,093) 13,219
Benefits paid (8,017) (6,146)
Acquisitions 432
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 155,282 $ 155,933
================================================================================
FUNDED STATUS
- --------------------------------------------------------------------------------
Benefit obligation in excess of plan assets $(155,282) $(155,933)
Unrecognized net actuarial (gain) (10,029) (2,251)
Unrecognized prior service cost (13,679) (15,046)
- --------------------------------------------------------------------------------
Net amount recognized $(178,990) $(173,230)
================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET:
- --------------------------------------------------------------------------------
Accrued benefit liability $(178,990) $(173,230)
================================================================================
The assumptions used to measure the postretirement benefit obligations are:
1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.5% 7.5% 8%
Current medical cost trend rate 9.5% 10.25% 10.5%
Ultimate medical cost trend rate 5.5% 6% 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 $ 1,680 $ (1,372)
Effect on postretirement benefit
obligation $ 14,026 $ (11,637)
================================================================================
23
Page 13-27
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 $29,471, $20,426 and $4,862 in 1999, 1998 and 1997,
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 9
SHAREHOLDERS' EQUITY
COMMON SHARES 1999 1998 1997
- --------------------------------------------------------------------------------
Balance July 1 $ 55,906 $ 55,905 $ 55,719
Shares issued under stock option plans
(1999 - 133,514; 1998 - 3,650;
1997 - 432,096) 67 1 139
Restricted stock issued 47
- --------------------------------------------------------------------------------
Balance June 30 $ 55,973 $ 55,906 $ 55,905
================================================================================
ADDITIONAL CAPITAL
- --------------------------------------------------------------------------------
Balance July 1 $ 139,726 $ 150,702 $ 146,686
Net (decrease) increase for Treasury
or common shares issued
under stock option plans (2,194) (11,481) 1,684
Shares issued for purchase acquisition 35 478
Restricted stock (surrendered) issued (24) 27 2,332
Shares sold to ESOP (5,316)
- --------------------------------------------------------------------------------
Balance June 30 $ 132,227 $ 139,726 $ 150,702
================================================================================
RETAINED EARNINGS
- --------------------------------------------------------------------------------
Balance July 1 $ 1,631,316 $ 1,378,297 $ 1,160,828
Net income 310,501 319,551 274,039
Cash dividends paid on common shares,
net of tax benefit of ESOP shares (69,461) (66,501) (56,570)
Cash payments for stock split
fractional shares (31)
- --------------------------------------------------------------------------------
Balance June 30 $ 1,872,356 $ 1,631,316 $ 1,378,297
================================================================================
UNEARNED COMPENSATION RELATED TO ESOP DEBT
- --------------------------------------------------------------------------------
Balance July 1 $ -- $ -- $ --
Unearned compensation
related to ESOP debt (112,000) -- --
- --------------------------------------------------------------------------------
Balance June 30 $ (112,000) $ -- $ --
================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
Balance July 1 $ (60,026) $ (27,345) $ 20,725
Foreign currency translation (32,832) (32,681) (48,070)
- --------------------------------------------------------------------------------
Balance June 30 $ (92,858) $ (60,026) $ (27,345)
================================================================================
Page 13-28
24
COMMON STOCK IN TREASURY
- --------------------------------------------------------------------------------
Balance July 1 $ (83,472) $ (10,258) $ --
Shares purchased at cost
(1999 - 1,538,633; 1998 - 2,522,971;
1997 - 576,021) (48,734) (109,645) (18,690)
Shares issued under stock option plans
(1999 - 369,847; 1998 - 559,668;
1997 - 223,184) 14,420 23,187 6,676
Shares issued for purchase acquisition 166 11,471
Restricted stock (surrendered) issued (1,532) 1,773 1,756
Shares sold to ESOP 117,316 -- --
- --------------------------------------------------------------------------------
Balance June 30 $ (1,836) $ (83,472) $ (10,258)
================================================================================
Shares surrendered upon exercise of stock options; 1999 - 221,342; 1998 -
159,869; 1997 - 153,770.
SHARE REPURCHASES - The Board of Directors has authorized the repurchase of a
total of 5.05 million of its common shares. At June 30, 1999, the remaining
authorization to repurchase was 3.55 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 10
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 between one and 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.
1999 1998 1997
- --------------------------------------------------------------------------------
Net income: As reported $ 310,501 $ 319,551 $ 274,039
Pro forma $ 308,028 $ 315,567 $ 270,758
Earnings per share:
Basic As reported $ 2.85 $ 2.88 $ 2.46
Pro forma $ 2.83 $ 2.85 $ 2.43
Diluted As reported $ 2.83 $ 2.85 $ 2.44
Pro forma $ 2.81 $ 2.82 $ 2.41
- --------------------------------------------------------------------------------
Page 13-29
The fair value for the significant options granted in 1999, 1998 and 1997 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Jan/99 Aug/98 Aug/97 Jan/97 Aug/96
- --------------------------------------------------------------------------------
Risk-free interest rate 4.7% 5.3% 5.6% 6.3% 6.4%
Expected life of option 4.3 YRS 4.3 YRS 5 yrs 5 yrs 5 yrs
25
Expected dividend yield of stock 1.9% 1.9% 2.3% 2.6% 2.6%
Expected volatility of stock 30.7% 28.4% 26.9% 26.5% 26.2%
================================================================================
Options exercisable and shares available for future grant on June 30:
1999 1998 1997
- --------------------------------------------------------------------------------
Options exercisable 3,065,577 3,476,016 2,905,887
Weighted-average option price
per share of options exercisable $ 22.48 $ 20.57 $ 16.41
Weighted-average fair value of
options granted during the year $ 8.35 $ 11.43 $ 7.30
Shares available for grant 3,230,548 3,256,232 3,304,627
================================================================================
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, 1997 4,224,087 $ 19.82
- --------------------------------------------------------------------------------
Granted 190,815 43.04
Exercised (721,687) 19.83
Canceled (31,409)
- --------------------------------------------------------------------------------
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
================================================================================
The range of exercise prices and the remaining contractual life of options as of
June 30, 1999 were:
- --------------------------------------------------------------------------------
Range of exercise prices $12-$20 $25-$37 $43-$49
- --------------------------------------------------------------------------------
Options outstanding:
Outstanding as of June 30, 1999 1,509,665 2,543,092 200,089
Weighted-average remaining
contractual life 3.3 yrs 8.2 yrs 8.1 yrs
Weighted-average exercise price $ 15.81 $ 28.86 $ 43.30
Options exercisable:
Outstanding as of June 30, 1999 1,509,665 1,365,097 190,815
Weighted-average remaining
contractual life 3.3 yrs 3.8 yrs 7.7 yrs
Weighted-average exercise price $ 15.81 $ 26.98 $ 43.05
================================================================================
Page 13-30
RESTRICTED STOCK -- Restricted stock was issued, under the Company's 1993 Stock
Incentive Program, to certain key employees under the Company's 1996-97-98,
1995-96-97 and 1994-95-96 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 the 3-year Plans. 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 1999 1998 1997
- --------------------------------------------------------------------------------
Number of shares issued 15,774 39,619 152,916
Per share value on date of issuance $ 40.53 $ 40.00 $ 25.36
Total value $ 639 $ 1,585 $ 3,878
================================================================================
26
Under the Company's 1997-98-99 LTIP, a payout of 8,023 shares of restricted
stock, from the Company's 1993 Stock Incentive Program, will be issued to
certain key employees in 2000. The balance of the 1997-98-99 LTIP payout will be
made as deferred cash compensation, as individually elected by the participants.
The total payout, valued at $7,539, 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 1999, 1998 and 1997, 5,867, 4,558 and 9,923 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. All outstanding options are exercisable one
year 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, 1997 14,250 $ 24.85
- --------------------------------------------------------------------------------
Granted 8,250 42.96
Exercised (1,500) 24.67
- --------------------------------------------------------------------------------
Outstanding June 30, 1998 21,000 $ 31.97
- --------------------------------------------------------------------------------
Exercised 8,000 31.38
- --------------------------------------------------------------------------------
Outstanding June 30, 1999 29,000 $ 31.81
================================================================================
As of June 30, 1999, 21,000 options were exercisable and 344,500 shares were
available for grant.
At June 30, 1999, the Company had 7,874,817 common shares reserved for issuance
in connection with its stock incentive plans.
Page 13-31
NOTE 11
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, 1999,
108,845,930 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 12
RESEARCH AND DEVELOPMENT
Research and development costs amounted to $86,953 in 1999, $83,117 in 1998, and
$103,155 in 1997. Customer reimbursements included in the total cost for each of
the respective years were $15,239, $15,753 and $35,986. Costs include those
costs related to independent research and development as well as customer
reimbursed and unreimbursed development programs.
NOTE 13
27
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 18 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, 1999, the Company has a reserve of $7,007 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
The Company's estimated total liability for the above mentioned sites ranges
from a minimum of $6,704 to a maximum of $23,559. 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.
Page 13-33
NOTE 14
QUARTERLY INFORMATION (Unaudited)
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
==========================================================================================================
1998 (a) 1st 2nd 3rd 4th Total
- ----------------------------------------------------------------------------------------------------------
Net sales $1,083,169 $1,114,948 $1,196,548 $1,238,358 $4,633,023
Gross Profit 256,030 252,739 284,226 289,036 1,082,031
Income before
extraordinary item 78,261 71,314 83,225 90,426 323,226
Net income 78,261 71,314 83,225 86,751 319,551
Diluted earnings per share
before extraordinary item .70 .63 .75 .80 2.88
Diluted earnings per share .70 .63 .75 .77 2.85
==========================================================================================================
28
(a) Results for the third and fourth quarters include a non-cash, non-recurring
pretax charge of $5.2 million and $10.6 million, respectively, for
in-process R&D purchased as part of two acquisitions. The after-tax impact
was $5.2 million ($.05 per share) and $6.8 million ($.06 per share),
respectively.
Page 13-34
NOTE 15
STOCK PRICES AND DIVIDENDS (Unaudited)
(In dollars) 1st 2nd 3rd 4th Full Year
- ---------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------
1997 High $ 29-3/8 $ 28-1/4 $ 30-7/8 $ 41 $ 41
Low 22-1/4 24-1/8 24-7/8 27 22-1/4
Dividends .120 .120 .133 .133 .506
- ---------------------------------------------------------------------------------------------
Common Stock Listing: New York Stock Exchange, Stock Symbol PH
Page 13-35
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 generally accepted accounting principles. 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, are retained to conduct an
audit of Parker Hannifin's consolidated financial statements in accordance with
generally accepted auditing standards 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.
Duane E. Collins Michael J. Hiemstra
Duane E. Collins Michael J. Hiemstra
President and Vice President -
Chief Executive Officer Finance and Administration
and Chief Financial Officer
29
Page 13-36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Parker Hannifin Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards, 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.
PricewaterhouseCoopers LLP
Cleveland, Ohio
July 29, 1999
Page 13-37
30
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information) 1999 1998 (a) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 4,958,800 $ 4,633,023 $ 4,091,081 $ 3,586,448 $ 3,214,370
Cost of sales 3,869,370 3,550,992 3,152,988 2,756,343 2,448,264
Selling, general and administrative expenses 550,681 532,134 475,180 425,449 384,581
Non-recurring charges - Restructuring & Asset
impairment
Interest expense 63,697 52,787 46,659 36,667 30,922
Income taxes 167,193 180,762 150,828 134,812 130,169
Income - continuing operations 310,501 323,226 274,039 239,667 218,238
Net income 310,501 319,551 274,039 239,667 218,238
Basic earnings per share - continuing operations 2.85 2.91 2.46 2.15 1.97
Diluted earnings per share - continuing operations 2.83 2.88 2.44 2.14 1.96
Basic earnings per share 2.85 2.88 2.46 2.15 1.97
Diluted earnings per share $ 2.83 $ 2.85 $ 2.44 $ 2.14 $ 1.96
Average number of shares outstanding - Basic 108,800 110,869 111,602 111,261 110,576
Average number of shares outstanding - Diluted 109,679 111,959 112,518 112,189 111,149
Cash dividends per share $ .640 $ .600 $ .506 $ .480 $ .453
Net income as a percent of net sales 6.3% 6.9% 6.7% 6.7% 6.8%
Return on average assets 8.6% 9.8% 9.3% 9.2% 10.3%
Return on average equity 17.6% 19.8% 18.7% 18.6% 20.2%
- --------------------------------------------------------------------------------------------------------------------------
Book value per share $ 17.03 $ 15.32 $ 13.87 $ 12.42 $ 10.73
Working capital $ 1,020,171 $ 791,305 $ 783,550 $ 635,242 $ 593,761
Ratio of current assets to current liabilities 2.4 1.8 2.1 1.8 1.9
Plant and equipment, net $ 1,200,869 $ 1,135,225 $ 1,020,743 $ 991,777 $ 815,771
Total assets 3,705,888 3,524,821 2,998,946 2,887,124 2,302,209
Long-term debt 724,757 512,943 432,885 439,797 237,157
Shareholders' equity $ 1,853,862 $ 1,683,450 $ 1,547,301 $ 1,383,958 $ 1,191,514
Debt to debt-equity percent 29.8% 31.6% 24.5% 30.7% 21.9%
- --------------------------------------------------------------------------------------------------------------------------
Depreciation $ 164,577 $ 153,633 $ 146,253 $ 126,544 $ 110,527
Capital expenditures $ 230,122 $ 236,945 $ 189,201 $ 201,693 $ 151,963
Number of employees 38,928 39,873 34,927 33,289 30,590
Number of shareholders 39,380 44,250 43,014 35,403 35,629
Number of shares outstanding at year-end 108,846 109,873 111,527 111,438 111,003
- --------------------------------------------------------------------------------------------------------------------------
(a) Includes an extraordinary item for the early retirement of debt.
Page 13-38