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 March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File number 1-4982 PARKER-HANNIFIN CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-0451060 (State or other (IRS Employer jurisdiction of Identification No.) incorporation) 17325 Euclid Avenue, Cleveland, Ohio 44112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 531-3000 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 March 31, 1996 74,222,670 PARKER-HANNIFIN CORPORATION INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income - Three Months and Nine Months Ended March 31, 1996 and 1995 3 Consolidated Balance Sheet - March 31, 1996 and June 30, 1995 4 Consolidated Statement of Cash Flows - Nine Months Ended March 31, 1996 and 1995 5 Business Segment Information by Industry - Three Months and Nine Months Ended March 31, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 EXHIBIT 10* - Parker-Hannifin Corporation Change in 13-29 Control Severance Plan EXHIBIT 11* - Computation of Earnings per Common Share 30 EXHIBIT 27* - Financial Data Schedule 31 *Numbered in accordance with Item 601 of Regulation S-K. - 2 - PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, _____________________ _________________________ 1996 1995 1996 1995 _________ _________ ___________ ___________ Net sales $ 931,356 $ 879,673 $ 2,594,786 $ 2,330,361 Cost of sales 707,927 666,968 1,995,017 1,790,357 _________ _________ ___________ ___________ Gross profit 223,429 212,705 599,769 540,004 Selling, general and administrative expenses 106,504 98,863 305,412 271,566 _________ _________ ___________ ___________ Income from operations 116,925 113,842 294,357 268,438 Other income (deductions): Interest expense (8,359) (7,801) (23,588) (22,679) Interest and other income, net 1,161 (1,237) 6,849 (901) _________ _________ ___________ ___________ (7,198) (9,038) (16,739) (23,580) _________ _________ ___________ ___________ Income before income taxes 109,727 104,804 277,618 244,858 Income taxes 40,599 38,949 102,719 94,270 _________ _________ ___________ ___________ Net income $ 69,128 $ 65,855 $ 174,899 $ 150,588 ========= ========= =========== =========== Earnings per share (A) $ .93 $ .89 $ 2.36 $ 2.04 Cash dividends per common share $ .180 $ .167 $ .540 $ .500 (A) Fiscal 1995 per share amounts have been adjusted for the 3-shares-for-2 common stock split paid June 2, 1995. See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands) March 31, June 30, 1996 1995 (Unaudited) ___________ ___________ ASSETS Current assets: Cash and cash equivalents $ 63,935 $ 63,830 Accounts receivable, net 521,746 484,962 Inventories: Finished products 332,889 314,180 Work in process 228,605 201,386 Raw materials 102,162 110,340 ___________ ___________ 663,656 625,906 Prepaid expenses 13,177 14,994 Deferred income taxes 65,891 56,690 ___________ ___________ Total current assets 1,328,405 1,246,382 Plant and equipment 1,965,456 1,812,667 Less accumulated depreciation 1,045,018 996,896 ___________ ___________ 920,438 815,771 Other assets 334,762 240,056 ___________ ___________ Total assets $ 2,583,605 $ 2,302,209 =========== =========== LIABILITIES Current liabilities: Notes payable $ 171,834 $ 97,372 Accounts payable, trade 196,868 227,482 Accrued liabilities 283,717 280,891 Accrued domestic and foreign taxes 62,368 46,876 ___________ ___________ Total current liabilities 714,787 652,621 Long-term debt 302,562 237,157 Pensions and other postretirement benefits 196,235 188,292 Deferred income taxes 30,487 23,512 Other liabilities 14,183 9,113 ___________ ___________ Total liabilities 1,258,254 1,110,695 SHAREHOLDERS' EQUITY Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued -- -- Common stock, $.50 par value; authorized 300,000,000 shares; issued 74,222,670 shares at March 31 and 74,002,402 shares at June 30 37,111 37,001 Additional capital 161,353 158,454 Retained earnings 1,109,356 974,486 Deferred compensation related to guarantee of ESOP debt (6,895) (13,468) Currency translation adjustment 24,426 35,041 ___________ ___________ Total shareholders' equity 1,325,351 1,191,514 ___________ ___________ Total liabilities and shareholders' equity $ 2,583,605 $ 2,302,209 =========== =========== See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months Ended March 31, _____________________ 1996 1995 _________ _________ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 174,899 $ 150,588 Adjustments to reconcile net income to net cash provided by operations: Depreciation 94,769 83,650 Amortization 8,210 6,692 Deferred income taxes (8,822) (6,030) Foreign currency transaction loss 780 1,700 Loss on sale of plant and equipment 750 1,478 Changes in assets and liabilities: Accounts receivable (8,321) (61,411) Inventories (17,634) (35,438) Prepaid expenses 1,385 1,981 Other assets (9,136) (8,302) Accounts payable, trade (39,952) 821 Accrued payrolls and other compensation (5,236) 8,525 Accrued domestic and foreign taxes 11,043 (9,910) Other accrued liabilities 3,304 (6,573) Pensions and other postretirement benefits (1,789) 11,262 Other liabilities 5,190 580 _________ _________ Net cash provided by operating activities 209,440 139,613 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions (excluding cash of $19,437 in 1996 and $5,699 in 1995) (166,975) (119,242) Capital expenditures (147,236) (101,821) Proceeds from sale of plant and equipment 8,386 9,920 Other (3,193) 2,215 _________ _________ Net cash used in investing activities (309,018) (208,928) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common share activity 1,025 7,164 Proceeds from notes payable, net 78,156 74,069 Proceeds from long-term borrowings 67,013 19,140 Payments of long-term borrowings (5,252) (32,321) Dividends (40,029) (36,859) _________ _________ Net cash provided by financing activities 100,913 31,193 Effect of exchange rate changes on cash (1,230) 1,048 _________ _________ Net increase (decrease) in cash and cash equivalents 105 (37,074) Cash and cash equivalents at beginning of year 63,830 81,590 _________ _________ Cash and cash equivalents at end of period $ 63,935 $ 44,516 ========= ========= See accompanying notes to consolidated financial statements. - 5 -
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 the 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, and agricultural and military machinery and equipment. Sales are direct 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 Nine Months Ended March 31, March 31, _____________________ _________________________ 1996 1995 1996 1995 _________ _________ ___________ ___________ Net sales, including intersegment sales Industrial: North America $ 515,404 $ 500,649 $ 1,452,053 $ 1,340,708 International 263,802 243,486 720,970 604,326 Aerospace 152,363 135,587 422,257 385,687 Intersegment sales (213) (49) (494) (360) _________ _________ ___________ ___________ Total $ 931,356 $ 879,673 $ 2,594,786 $ 2,330,361 ========= ========= =========== =========== Income from operations before corporate general and administrative expenses Industrial: North America $ 79,101 $ 78,125 $ 205,511 $ 195,831 International 23,125 31,061 61,858 59,190 Aerospace 26,349 16,116 61,801 45,007 _________ _________ ___________ ___________ Total 128,575 125,302 329,170 300,028 Corporate general and administrative expenses 11,650 11,460 34,813 31,590 _________ _________ ___________ ___________ Income from operations $ 116,925 $ 113,842 $ 294,357 $ 268,438 ========= ========= =========== =========== See accompanying notes to consolidated financial statements.
- 6 - 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) necessary to present fairly the financial position as of March 31, 1996, the results of operations for the three and nine months ended March 31, 1996 and 1995 and cash flows for the nine months then ended. 2. Segment Reclassification Fiscal 1995 results have been restated to reclassify an operating division from the Aerospace Segment to the Industrial Segment (North America) to be consistent with fiscal 1996 reporting. Existing business practices, distribution methods and internal organization more properly align this operating division with the Industrial Segment. The effect on both Segments is immaterial. 3. Earnings Per Share Fiscal 1995 per share amounts have been adjusted for the 3-shares-for-2 common stock split paid June 2, 1995. Primary earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share are not presented because such dilution is not material. 4. Acquisitions Effective April 15, 1996 the Company completed an agreement with Power Control Technologies, Inc. to purchase the aerospace assets of the Abex / NWL Division of Pneumo Abex Corporation for approximately $201 million cash. Abex / NWL, headquartered in Kalamazoo, Michigan, is a major international producer of aerospace hydraulic actuation equipment, engine thrust-reverser actuators, hydraulic pumps, electrohydraulic servovalves, hydraulic systems, and electromechanical actuation equipment with annual sales of approximately $200 million. On February 29, 1996 the Company completed the acquisition of VOAC Hydraulics AB of Boras, Sweden for approximately $163 million cash. VOAC is a worldwide leader in the manufacturing of mobile hydraulic equipment and had calendar 1995 annual sales of approximately $166 million. VOAC had been owned by AVC Intressenter AB, a holding company jointly owned by Atlas Copco AB and Volvo Aero Corporation, both of Sweden. On July 31, 1995 the Company purchased the General Valve Corp. of Fairfield, New Jersey, a leading producer of miniature solenoid valves for high-technology applications for approximately 152,000 shares of common stock. Also, on August 4, 1995 the Company purchased inventory and machinery from Teledyne Fluid Systems consisting of the Republic Valve product line, the Sprague double-diaphragm pump line and the Sprague airborne accumulator product line for approximately $5.2 million in cash. Sales by these operations for their most recent fiscal year prior to acquisition approximated $16.8 million. These acquisitions were accounted for by the purchase method. - 7 - PARKER-HANNIFIN CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1996 AND COMPARABLE PERIODS ENDED MARCH 31, 1995 CONSOLIDATED STATEMENT OF INCOME Net sales increased 5.9 percent for the third quarter and 11.3 percent for the nine-month period ended March 31, 1996. Approximately one-half of these increases were due to acquisitions in the Industrial Segment. Market conditions for the Industrial Segment have been uneven with downturns in some markets being offset by gains in others. Aerospace Segment sales continue to build. Income from operations was $116.9 million for the current third quarter and $294.4 million for the current nine months, an increase of 2.7 percent for the quarter and 9.7 percent for the nine months. Significant increases within the Aerospace Segment were offset by decreases in operating income in the International operations of the Industrial Segment. As a percent of sales, Income from operations decreased to 12.6 percent from 12.9 percent for the quarter and to 11.3 percent from 11.5 percent for the nine months. Cost of sales as a percent of sales increased to 76.0 percent from 75.8 percent for the quarter and to 76.9 percent from 76.8 percent for the nine-month period. Selling, general and administrative expenses, as a percent of sales, increased to 11.4 percent from 11.2 percent for the quarter and to 11.8 percent from 11.7 percent for the nine-month period. The effective income tax rate for the current quarter and nine-month period was 37.0 percent compared to fiscal 1995 rates of 37.2 percent for the quarter and 38.5 percent for the nine-month period. The lower rate in fiscal 1996 is due to the continuing benefit realized from the use of net operating loss carry-forwards and a change in the geographic mix of earnings. Net income increased 5.0 percent for the quarter and 16.1 percent for the nine-month period, as compared to the prior year. As a percent of sales, Net income decreased to 7.4 percent from 7.5 percent for the quarter but increased to 6.7 percent from 6.5 percent for the nine months. Backlog increased to $1,068.2 million at March 31, 1996 as compared to $998.1 million the prior year and $1,025.7 million at June 30, 1995. The increase in backlog was partially due to acquisitions, but was primarily due to increased volume for both the Aerospace and Industrial Segments. BUSINESS SEGMENT INFORMATION BY INDUSTRY INDUSTRIAL - The Industrial Segment operations achieved the following Net sales increases in the current year when compared to the equivalent prior-year period: Period ending March 31, Three Months Nine Months Industrial North America 2.9 % 8.3 % Industrial International 8.3 % 19.3 % Total Industrial 4.7 % 11.7 % - 8 - Without the effect of currency-rate changes, International sales would have increased more than 10 percent for the quarter and nearly 17 percent for the nine months. Without the effect of acquisitions, the increases would have been: Period ending March 31, Three Months Nine Months Industrial North America 0.7 % 4.5 % Industrial International 2.4 % 9.1 % Total Industrial 1.3 % 5.9 % The rate of sales growth for the Industrial operations has moderated appreciably in Europe and in some North American markets as compared to the significant growth rate experienced during fiscal 1995. The sales increases achieved were the result of market growth and the market share gains the Company achieved through concentrated efforts towards reaching expanding markets and providing premier customer service. For fiscal 1996, Industrial North America volume is expected to modestly exceed prior year volume (excluding the effect of acquisitions) while the moderate growth in the Industrial International volume is expected to continue. Sales in Latin America have slowed due to a weakened general economy and are expected to be at lower levels through the remainder of the fiscal year. Operating income for the Industrial Segment decreased 6.4 percent for the quarter but increased 4.8 percent for the nine months. Industrial North America Operating income increased 1.2 percent for the quarter and 4.9 percent for the nine months. Without the effect of acquisitions results would have remained flat for the quarter and increased 1.8 percent for the nine months. As a percent of sales, Industrial North America Operating income decreased to 15.3 percent from 15.6 percent for the quarter and to 14.2 percent from 14.6 percent for the nine months. Industrial International results decreased 25.5 percent for the quarter compared to an unusually high third quarter in 1995, but increased 4.5 percent for the nine months. Without the effect of acquisitions these results would have decreased 32.5 percent for the quarter and 5.9 percent for the nine months. As a percent of sales, Industrial International Operating income decreased to 8.8 percent from 12.8 percent for the quarter and to 8.6 percent from 9.8 percent for the nine months. A downturn in heavy-duty truck and automotive markets, offset by gains in factory automation, process control, and electromagnetic-interference protection markets is causing the Industrial Segment to re-align inventories, resulting in a negative impact on manufacturing costs and overhead absorption. Results in Asia Pacific are stronger than anticipated, but a weakened economy in Latin America has diluted current-year earnings $.05 per share for the quarter and $.14 per share for the nine months compared to last year. Management expects margin improvements during the fourth quarter in both North America and overall International operations, although conditions in Latin America remain uncertain. Total Industrial Segment backlog increased 6.3 percent compared to March 31, 1995 and 6.5 percent since June 30, 1995 with the increases occurring within the International operations. AEROSPACE - Aerospace Segment Net sales were up 12.4 percent for the quarter and 9.5 percent for the nine months. The increase is primarily attributable to increased volume in aftermarket sales, initial provisioning for commercial aircraft such as the Boeing 777, and OEM military sales to domestic airframe manufacturers for foreign markets. Similar increases are expected to continue through the fourth quarter. Operating income for the Aerospace Segment increased 63.5 percent for the quarter and 37.3 percent for the nine-month period. As a percent of sales Operating income improved to 17.3 percent from 11.9 percent for the quarter and to 14.6 percent from 11.7 percent for the nine-month period. This margin improvement is due to the favorable product mix and the benefits being realized from the ability to produce higher volume with downsized operations. - 9 - Management expects the trend of increasing volume to continue during the remainder of this fiscal year, but margins are expected to normalize to levels experienced in the prior year. Aerospace Segment backlog increased 7.6 percent from March 31, 1995, and 2.4 percent since June 30, 1995. CONSOLIDATED BALANCE SHEET Working capital increased to $613.6 million at March 31, 1996 from $593.8 million at June 30, 1995 with the ratio of current assets to current liabilities remaining level at 1.9 to 1. Accounts receivable were $36.8 million higher on March 31, 1996 than on June 30, 1995 primarily due to acquisitions. Inventory levels were $37.7 million higher at March 31, 1996 due to acquisitions and also due to increases in the Aerospace segment as a result of higher volume. Accounts payable, trade decreased $30.6 million since June 30, 1995 primarily as a result of the timing of payments for raw material purchases. Plant and equipment, net increased $104.7 million since June 30, 1995 with $68.8 million of the increase the result of acquisitions. Other assets increased $94.7 million since June 30, 1995, primarily as a result of increased goodwill. Notes payable increased $74.5 million and Long-term debt increased $65.4 million since June 30, 1995 primarily to provide cash for acquisitions. The debt to debt-equity ratio, excluding the effect of the ESOP loan guarantee on both Long-term debt and Shareholders' equity, increased to 26.0 percent at March 31, 1996 from 21.0 percent at June 30, 1995. CONSOLIDATED STATEMENT OF CASH FLOWS Net cash provided by operating activities was $209.4 million for the nine months ended March 31, 1996, as compared to $139.6 million for the same nine months in 1995. Net income contributed an additional $24.3 million in fiscal 1996 as compared to fiscal 1995. Changes in the principal working capital items (Accounts receivable, Inventories, and Accounts payable, trade) resulted in the use of less cash - $65.9 million in fiscal 1996 as compared to $96.0 million in fiscal 1995. The change in Accrued domestic and foreign taxes provided $11.0 million cash in fiscal 1996 as compared to using cash of $9.9 million in fiscal 1995. Net cash used in investing activities increased to $309.0 million from $208.9 million for the nine months ended March 31, 1996 and 1995 as a result of more cash used for Acquisitions and higher Capital expenditures in fiscal 1996. Financing activities provided cash of $100.9 million for the nine months ended March 31, 1996 and $31.2 million for the same period in 1995. Fiscal 1996 acquisition activity caused the need for a higher level of borrowings. - 10 - PARKER-HANNIFIN CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K: Exhibit 10 - Parker-Hannifin Corporation Change in Control Severance Plan Exhibit 11 - Computation of Earnings per Common Share 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 Date: May 13, 1996 - 11 - EXHIBIT INDEX Sequential Exhibit No. Description of Exhibit Page 10 Parker-Hannifin Corporation 13 Change in Control Severance Plan* 11 Computation of Earnings Per Common Share 30 27 Financial Data Schedule 31 *Compensatory plan or arrangement - 12 -