1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0451060
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
6035 Parkland Blvd., Cleveland, Ohio 44124-4141
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 896-3000
--------------
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
--- ---
Number of Common Shares outstanding at September 30, 1999 111,993,600
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PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
September 30,
-------------------------------
1999 1998
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Net sales $ 1,242,293 $ 1,218,724
Cost of sales 976,621 947,307
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Gross profit 265,672 271,417
Selling, general and administrative expenses 138,148 134,158
Interest expense 14,543 16,075
Interest and other (income) expense, net 624 73
----------- -----------
Income before income taxes 112,357 121,111
Income taxes 38,763 42,994
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Net income $ 73,594 $ 78,117
=========== ===========
Earnings per share - basic $ .67 $ .71
Earnings per share - diluted $ .67 $ .71
Cash dividends per common share $ 17 $ .15
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
September 30, June 30,
ASSETS 1999 1999
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Current assets:
Cash and cash equivalents $ 64,421 $ 33,277
Accounts receivable, net 739,682 738,773
Inventories:
Finished products 471,801 442,361
Work in process 321,221 347,376
Raw materials 127,821 125,393
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920,843 915,130
Prepaid expenses 21,141 22,928
Deferred income taxes 65,907 64,576
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Total current assets 1,811,994 1,774,684
Plant and equipment 2,547,147 2,506,812
Less accumulated depreciation 1,340,135 1,305,943
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1,207,012 1,200,869
Other assets 751,356 730,335
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Total assets $3,770,362 $3,705,888
========== ==========
LIABILITIES
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Current liabilities:
Notes payable $ 59,462 $ 60,609
Accounts payable, trade 288,521 313,173
Accrued liabilities 308,951 328,147
Accrued domestic and foreign taxes 84,159 52,584
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Total current liabilities 741,093 754,513
Long-term debt 717,599 724,757
Pensions and other postretirement benefits 280,101 276,637
Deferred income taxes 32,813 30,800
Other liabilities 68,582 65,319
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Total liabilities 1,840,188 1,852,026
SHAREHOLDERS' EQUITY
--------------------
Serial preferred stock, $.50 par value;
authorized 3,000,000 shares; none issued -- --
Common stock, $.50 par value; authorized
600,000,000 shares; issued 112,042,491 shares at
September 30 and 111,945,179 shares at June 30 56,021 55,973
Additional capital 133,041 132,227
Retained earnings 1,927,429 1,872,356
Unearned compensation related to guarantee of ESOP debt (106,378) (112,000)
Deferred compensation related to stock options 1,304
Accumulated other comprehensive income (79,112) (92,858)
---------- ----------
1,932,305 1,855,698
Less treasury shares, at cost:
48,891 shares at September 30
and 43,836 shares at June 30 (2,131) (1,836)
---------- ----------
Total shareholders' equity 1,930,174 1,853,862
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Total liabilities and shareholders' equity $3,770,362 $3,705,888
========== ==========
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
September 30,
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
- ------------------------------------ ----------- ----------
Net income $ 73,594 $ 78,117
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 43,368 42,924
Amortization 9,835 6,655
Deferred income taxes (2,129) (2,134)
Foreign currency transaction loss (gain) 2,846 (136)
(Gain) loss on sale of plant and equipment (6,832) 628
Changes in assets and liabilities:
Accounts receivable 5,081 13,839
Inventories 1,892 (38,297)
Prepaid expenses 2,175 5,106
Other assets 4,170 (7,147)
Accounts payable, trade (26,411) (66,285)
Accrued payrolls and other compensation (33,047) (52,315)
Accrued domestic and foreign taxes 30,836 32,374
Other accrued liabilities 7,574 (10,639)
Pensions and other postretirement benefits 1,669 6,886
Other liabilities 3,165 9,628
----------- ----------
Net cash provided by operating activities 117,786 19,204
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Acquisitions (less acquired cash of $2,609 in 1998) (3,007) (89,466)
Capital expenditures (50,124) (56,668)
Proceeds from sale of plant and equipment 17,825 931
Other (29,805) 4,299
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Net cash used in investing activities (65,111) (140,904)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from (payments for) common share activity 1,871 (29,581)
(Payments for) proceeds from notes payable, net (3,490) 79,383
Proceeds from long-term borrowings 4,177 206,028
Payments of long-term borrowings (4,213) (105,443)
Dividends (18,521) (16,429)
----------- ----------
Net cash (used in) provided by financing activities (20,176) 133,958
Effect of exchange rate changes on cash (1,355) 1,455
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Net increase in cash and cash equivalents 31,144 13,713
Cash and cash equivalents at beginning of year 33,277 30,488
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Cash and cash equivalents at end of period $ 64,421 $ 44,201
=========== ==========
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION BY INDUSTRY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Parker operates in two industry segments: Industrial and Aerospace. The
Industrial Segment is the largest and includes a significant portion of
International operations.
Industrial - This segment produces a broad range of motion control and fluid
systems and components used in all kinds of manufacturing, packaging,
processing, transportation, mobile construction, agricultural and military
machinery and equipment. Sales are made directly to major original equipment
manufacturers (OEMs) and through a broad distribution network to smaller OEMs
and the aftermarket.
Aerospace - This segment designs and manufactures products and provides
aftermarket support for commercial, military and general aviation aircraft,
missile and spacecraft markets. The Aerospace Segment provides a full range of
systems and components for hydraulic, pneumatic and fuel applications.
Results by Business Segment:
Three Months Ended
September 30,
--------------------------
1999 1998
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Net sales
Industrial:
North America $ 667,669 $ 621,595
International 298,463 315,230
Aerospace 276,161 281,899
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Total $1,242,293 $1,218,724
========== ==========
Segment operating income
Industrial:
North America $ 93,683 $ 82,155
International 11,212 26,822
Aerospace 35,048 43,839
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Total segment operating income 139,943 152,816
Corporate general and administrative expenses 14,113 12,295
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Income before interest expense and other 125,830 140,521
Interest expense 14,543 16,075
Other (1,070) 3,335
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Income before income taxes $ 112,357 $ 121,111
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PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
-----------------------
1. Management representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals except as discussed in Note 2) necessary to present fairly
the financial position as of September 30, 1999, the results of operations
for the three months ended September 30, 1999 and 1998 and cash flows for the
three months then ended.
2. Charges related to business realignment
During the first quarter of fiscal 2000 the Company recorded a $8,555 charge
($5,560 after-tax or $.05 per share) related to the costs of appropriately
structuring its businesses to operate in their current economic environment.
The charge primarily relates to severance costs attributable to approximately
260 employees principally associated with the Industrial International
operations. Substantially all severance payments are expected to be made by
the end of fiscal 2000.
A change in the future utilization of long-lived assets at certain locations
triggered an impairment review of these long-lived assets during the first
quarter of fiscal 2000. The Company evaluated the recoverability of the
long-lived assets and determined that the estimated future undiscounted cash
flows were below the carrying value of these assets. Accordingly, the Company
recorded a non-cash impairment loss of $4,875 ($3,169 after-tax or $.03 per
share). The impairment loss was calculated as the difference between the
carrying value and the estimated fair value of the assets. The Company
estimated fair values based on current sales prices of similar assets. Of the
pre-tax amount, $3,499 relates to the Aerospace segment and $1,376 relates to
the Industrial segment.
The severance costs and impairment loss are presented in the Income statement
in the following captions: $2,552 in Cost of sales; $2,476 in Selling,
general and administrative expenses; and $8,402 in Interest and other
(income) expense, net.
Also recorded in the first quarter of fiscal 2000, was a gain of $6,423
($4,175 after-tax or $.04 per share) realized primarily on the sale of real
property. The gain is reflected in the Income statement in the Interest and
other (income) expense, net caption.
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3. Earnings per share
The following table presents a reconciliation of the numerator and
denominator of basic and diluted earnings per share for the three months
ended September 30, 1999 and 1998.
Three Months Ended
September 30,
-------------------------
Numerator: 1999 1998
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Net income applicable
to common shares $73,594 $ 78,117
Denominator:
------------
Basic - weighted average
common shares 109,069,288 109,366,054
Increase in weighted average
from dilutive effect of
exercise of stock options 1,025,434 761,963
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Diluted - weighted average
common shares, assuming
exercise of stock options 110,094,722 110,128,017
=========== ===========
Basic earnings per share $ .67 $ .71
Diluted earnings per share $ .67 $ .71
4. Stock repurchase program
The Board of Directors has approved a program to repurchase the Company's
common stock on the open market, at prevailing prices. The repurchase is
primarily funded from operating cash flows and the shares are initially held
as treasury stock. The Company did not purchase any shares of its common
stock during the three-month period ended September 30, 1999.
5. Comprehensive income
The Company's only item of other comprehensive income is foreign currency
translation adjustments recorded in shareholders' equity. Comprehensive
income for the three months ended September 30, 1999 and 1998 is as follows:
Three Months Ended
September 30,
---------------------
1999 1998
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Net income $73,594 $ 78,117
Foreign currency
translation adjustments 13,746 25,199
------- --------
Comprehensive income $87,340 $103,316
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PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 1998
CONSOLIDATED STATEMENT OF INCOME
Net sales for the first quarter of fiscal 2000 increased 1.9 percent to $1,242.3
million. Prior-year first quarter sales were $1,218.7 million. Acquisitions
within the past twelve months accounted for approximately two-thirds of the
current-year increase. Higher volume in the North American Industrial operations
also contributed to the increase.
Income from operations for the quarter decreased 7.1 percent to $127.5 million.
As a percent of sales, the current-quarter operating income decreased to 10.3
percent from 11.3 percent in the prior year. Cost of sales, as a percent of
sales, increased to 78.6 percent from 77.7 percent. The declining margins
reflect the weakness experienced in the International Industrial and Aerospace
operations which resulted in lower volume as well as the effect of non-recurring
charges (as discussed in more detail below) recorded in the first quarter of
fiscal 2000. Selling, general and administrative expenses, as a percent of
sales, were 11.1 percent compared to 11.0 percent in the prior year.
Interest expense for the current-year quarter decreased $1.5 million due to
lower average debt outstanding for the quarter.
Interest and other (income) expense, net for fiscal 2000 includes $6.4 million
in gains primarily from the sale of real property and $8.4 million of asset
impairment losses and other plant closure costs.
Net income for the quarter was $73.6 million compared to $78.1 million in the
prior year and declined to 5.9 percent of sales compared to 6.4 percent in the
prior-year quarter.
Backlog declined to $1.63 billion at September 30, 1999 compared to $1.70
billion in the prior year and was the same as the June 30, 1999 level.
RESULTS BY BUSINESS SEGMENT
INDUSTRIAL - Net sales of the Industrial Segment increased 3.1 percent to $966.1
million compared to $936.8 million in the prior year. Industrial North American
sales increased 7.4 percent while Industrial International sales decreased 5.3
percent. Without the effect of acquisitions, North American sales would have
increased 5.6 percent and International sales would have decreased 6.4 percent.
Without the effect of currency rate fluctuations, International sales were
relatively unchanged. The increase in Industrial North American sales was
attributed to higher volume particularly in the semiconductor manufacturing,
telecommunications and filtration markets. International Industrial sales were
affected by the struggling industrial economy in Europe, although Asia Pacific
sales were higher.
Operating income for the Industrial Segment decreased 3.7 percent to $104.9
million. Industrial North America increased 14.0 percent and Industrial
International decreased 58.2 percent. Included in the current year operating
income for Industrial International was $9.0 million in non-recurring charges.
These charges were made as a result of actions the Company took to appropriately
structure the European operations to operate in their current economic
environment. Without the non-recurring charges, Industrial International
operating income decreased 24.8 percent from the prior year. North American
operating income, as a percent of sales, increased to 14.0 percent from 13.2
percent as margins benefited from the higher sales volume. Excluding the
non-recurring charges, Industrial
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International operating income, as a percent of sales, decreased to 6.8 percent
from 8.5 percent primarily due to the underabsorption of overhead costs.
Industrial Segment backlog decreased 5.9 percent compared to a year ago, and
increased 2.6 percent since June 30, 1999. For the remainder of the fiscal year,
business conditions appear favorable for the North American operations and are
expected to remain the same or improve slightly for the European operations.
AEROSPACE - Net sales of the Aerospace Segment decreased 2.0 percent to $276.2
million compared to $281.9 million in the prior year. Operating income decreased
20.1 percent to $35.0 million compared to $43.8 million in the prior year.
Included in the current year operating income was $4.4 million in non-recurring
charges. These charges were a result of the actions the Company took to resize
the business in response to a decline in OEM orders. Excluding the non-recurring
charges, operating income, as a percent of sales, decreased to 14.3 percent from
15.6 percent primarily due to an unfavorable product mix and a lower level of
commercial aviation business.
Backlog for the Aerospace Segment decreased 3.9 percent compared to a year ago
and 1.2 percent since June 30, 1999. Backlog for OEM business has declined as
new orders have not kept pace with current quarter shipments. The decline in
backlog was partially offset by a steady rate of MRO orders. The Company
anticipates reducing inventories for the balance of the year in anticipation of
softer commercial aviation sales.
Corporate general and administrative expenses increased to $14.1 million for
fiscal 2000 compared to $12.3 million in the prior year. The increase is
primarily due to the increased expense associated with incentive compensation
plans as a result of the Company's higher stock price.
Included in Other (in the Results by Business Segment) are gains primarily from
the sale of real property as discussed in the Consolidated Statement of Income
section.
BALANCE SHEET
Working capital increased to $1,070.9 million at September 30, 1999 from
$1,020.2 million at June 30, 1999, with the ratio of current assets to current
liabilities increasing to 2.45 to 1. The increase was primarily due to an
increase in Cash and decreases in Accounts payable and Accrued liabilities,
partially offset by an increase in Accrued domestic and foreign taxes.
Accounts receivable remained relatively flat since June 30, 1999 while
Inventories increased slightly. Days sales outstanding increased to 49 days from
47 days during the quarter while months supply remained the same.
Other assets increased $21.0 million since June 30, 1999, primarily due an
increase in equity investments.
Accrued liabilities decreased $19.2 million since June 30, 1999 primarily due to
the payment of incentive compensation during the quarter.
The increase in Accrued domestic and foreign taxes to $84.2 million at
September 30, 1999 from $52.6 million at June 30, 1999 is due to the timing of
the quarterly income tax payments.
The debt to debt-equity ratio decreased to 28.7 percent at September 30, 1999
compared to 29.8 percent as of June 30, 1999 primarily due to a decrease in
Long-term debt.
Due to the weakening of the dollar, foreign currency translation adjustments
resulted in an increase in net assets of $13.7 million during the first quarter
of fiscal 2000. The translation adjustments primarily affected Accounts
receivable, Inventories and Plant and equipment.
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STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $117.8 million in fiscal 2000
compared to $19.2 million for the three months ended September 30, 1998. The
increase in net cash provided was primarily the result of the activity within
the working capital items - Inventories, Accounts payable, Accrued payrolls and
Other accrued liabilities - which used cash of $50.0 million in fiscal 2000
compared to using cash of $167.5 million in fiscal 1999. In addition, activitiy
in Other assets provided cash in the current year compared to using cash in the
prior year.
Net cash used in investing activities declined to $65.1 million for fiscal 2000
compared to $140.9 million for fiscal 1999 primarily due to a reduction in the
amount spent on acquisitions and an increase in the proceeds received from the
sale of plant and equipment. Included in Other is an increase in cash used for
equity investments in fiscal 2000.
Financing activities used net cash of $20.2 million in fiscal 2000 as opposed to
providing cash of $134.0 million for the three months ended September 30, 1998.
The change resulted primarily from debt borrowings using cash of $3.5 million in
fiscal 2000 compared to providing cash of $180.0 million in the prior year,
partially offset by common stock activity providing cash of $1.9 million in the
current year versus using cash of $29.6 million in the prior year.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
nonperformance 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.
YEAR 2000 CONSIDERATONS
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 which the Company began
several years ago. The cost for these actions is not material to the Company's
results of operations. As of September 30, 1999, all internal standard
application systems, including all information systems plus any equipment or
embedded systems which may be impacted, are year 2000 compliant.
In addition, the Company contacted its key suppliers, customers, distributors
and financial service providers regarding their year 2000 status. Follow-up
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 party's 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 any
unsuccessful modifications would not have an adverse impact on the Company.
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FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q 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 or 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,
including among others, the potential devaluation of currencies.
Any forward-looking statements are 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.
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PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
(a) The Annual Meeting of the Shareholders of the Registrant was held on
October 27, 1999.
(b) Not applicable.
(c)(i) The Shareholders elected four directors to the three-year class whose
term of office will expire in 2002, as follows:
Votes For Votes Withheld
--------- --------------
Paul C. Ely, Jr. 100,519,469.024 1,304,093.782
Peter W. Likins 99,600,567.072 2,222,995.734
Wolfgang R. Schmitt 100,355,660.623 1,467,902.183
Debra L. Starnes 100,523,094.605 1,300,468.201
(ii) The Shareholders approved the appointment of PricewaterhouseCoopers LLP
as auditors of the Corporation for the fiscal year ending June 30, 2000,
as follows:
For 101,154,563.710
Against 224,863.277
Abstain 444,135.819
(d) Not applicable
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Item 6. Exhibits and Reports on Form 8-K.
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(a) The following documents are furnished as exhibits and are numbered pursuant
to Item 601 of Regulation S-K:
Exhibit 10(a) - Parker-Hannifin Corporation Pension Restoration Plan, as
amended and restated effective January 1, 1997.
Exhibit 10(b) - Parker-Hannifin Corporation Deferred Compensation Plan for
Directors, as amended and restated effective January 1, 1997.
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which this
Report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
(Registrant)
/s/ Michael J. Hiemstra
Michael J. Hiemstra
Vice President - Finance and Administration
and Chief Financial Officer
Date: November 9, 1999
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EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
10(a) Parker-Hannifin Corporation Pension Restoration Plan,
as amended and restated effective January 1, 1997.
10(b) Parker-Hannifin Corporation Deferred Compensation
Plan for Directors, as amended and restated effective
January 1, 1997.
27 Financial Data Schedule
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