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 December 31, 1997
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)
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 December 31, 1997 110,884,096
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
Net sales $ 1,114,948 $ 969,587 $ 2,198,117 $ 1,928,915
Cost of sales 862,209 761,323 1,689,348 1,515,821
___________ ___________ ___________ ___________
Gross profit 252,739 208,264 508,769 413,094
Selling, general and
administrative expenses 132,961 119,543 258,236 233,987
___________ ___________ ___________ ___________
Income from operations 119,778 88,721 250,533 179,107
Other income (deductions):
Interest expense (13,082) (11,942) (23,519) (24,256)
Interest and other income, net 3,868 5,351 4,885 7,131
___________ ___________ ___________ ___________
(9,214) (6,591) (18,634) (17,125)
___________ ___________ ___________ ___________
Income before income taxes 110,564 82,130 231,899 161,982
Income taxes 39,250 29,566 82,324 58,313
___________ ___________ ___________ ___________
Net income $ 71,314 $ 52,564 $ 149,575 $ 103,669
=========== =========== =========== ===========
Earnings per share - Basic $ .64 $ .47 $ 1.34 $ .93
Earnings per share - Diluted $ .63 $ .47 $ 1.33 $ .92
Cash dividends per common share $ .15 $ .12 $ .30 $ .24
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
December 31, June 30,
1997 1997
___________ ___________
ASSETS
Current assets:
Cash and cash equivalents $ 36,681 $ 68,997
Accounts receivable, net 578,433 601,724
Inventories:
Finished products 377,403 317,494
Work in process 329,783 304,743
Raw materials 117,856 105,610
___________ ___________
825,042 727,847
Prepaid expenses 15,383 17,366
Deferred income taxes 93,801 83,627
___________ ___________
Total current assets 1,549,340 1,499,561
Plant and equipment 2,234,620 2,138,591
Less accumulated depreciation 1,177,452 1,117,848
___________ ___________
1,057,168 1,020,743
Excess cost of investments over
net assets acquired 370,113 285,264
Investments and other assets 220,970 193,378
___________ ___________
Total assets $ 3,197,591 $ 2,998,946
=========== ===========
LIABILITIES
Current liabilities:
Notes payable $ 205,733 $ 69,738
Accounts payable, trade 249,975 266,848
Accrued liabilities 302,294 328,051
Accrued domestic and foreign taxes 44,385 51,374
___________ ___________
Total current liabilities 802,387 716,011
Long-term debt 474,436 432,885
Pensions and other postretirement benefits 256,755 252,709
Deferred income taxes 27,443 26,007
Other liabilities 39,363 24,033
___________ ___________
Total liabilities 1,600,384 1,451,645
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 111,812,025 shares at
December 31 and 111,809,085 shares at June 30 55,906 55,905
Additional capital 137,501 150,702
Retained earnings 1,494,435 1,378,297
Foreign currency translation adjustments (50,181) (27,345)
___________ ___________
1,637,661 1,557,559
Common stock in treasury at cost;
927,929 shares at December 31 and
282,915 shares at June 30 (40,454) (10,258)
___________ ___________
Total shareholders' equity 1,597,207 1,547,301
___________ ___________
Total liabilities and shareholders' equity $ 3,197,591 $ 2,998,946
=========== ===========
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
_____________________
1997 1996
_________ _________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 149,575 $ 103,669
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 79,906 75,807
Amortization 13,079 12,195
Deferred income taxes (16,111) (10,401)
Foreign currency transaction loss 1,171 918
Gain on sale of plant and equipment (766) (10,877)
Changes in assets and liabilities:
Accounts receivable 30,376 34,538
Inventories (84,278) 589
Prepaid expenses 2,008 2,314
Other assets (20,674) (8,784)
Accounts payable, trade (20,106) (45,762)
Accrued payrolls and other compensation (21,347) (20,720)
Accrued domestic and foreign taxes (6,135) (5,308)
Other accrued liabilities 8,220 18,123
Pensions and other postretirement benefits 5,418 5,820
Other liabilities 6,602 3,412
_________ _________
Net cash provided by operating activities 126,938 155,533
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (excluding cash of $697 in 1996) (143,546) (17,926)
Capital expenditures (112,000) (83,051)
Proceeds from sale of plant and equipment 2,983 8,419
Other (3,053) (14,566)
_________ _________
Net cash used in investing activities (255,616) (107,124)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) from common share activity (44,732) (2,618)
Proceeds (payments) from notes payable, net 132,021 (27,827)
Proceeds from long-term borrowings 50,086 171
Payments of long-term borrowings (6,213) (11,532)
Dividends (33,407) (26,766)
_________ _________
Net cash provided by (used in)
financing activities 97,755 (68,572)
Effect of exchange rate changes on cash (1,393) (1,058)
_________ _________
Net (decrease) in cash and cash equivalents (32,316) (21,221)
Cash and cash equivalents at beginning of year 68,997 63,953
_________ _________
Cash and cash equivalents at end of period $ 36,681 $ 42,732
========= =========
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, 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 Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
Net sales, including intersegment sales
Industrial:
North America $ 595,442 $ 498,975 $ 1,180,941 $ 1,002,725
International 280,926 264,603 545,324 524,363
Aerospace 239,071 206,257 472,625 402,193
Intersegment sales (491) (248) (773) (366)
___________ ___________ ___________ ___________
Total $ 1,114,948 $ 969,587 $ 2,198,117 $ 1,928,915
=========== =========== =========== ===========
Income from operations before corporate
general and administrative expenses
Industrial:
North America $ 82,781 $ 66,422 $ 172,463 $ 135,025
International 18,691 9,190 38,842 22,119
Aerospace 35,405 25,315 72,321 46,239
___________ ___________ ___________ ___________
Total 136,877 100,927 283,626 203,383
Corporate general and administrative
expenses 17,099 12,206 33,093 24,276
___________ ___________ ___________ ___________
Income from operations $ 119,778 $ 88,721 $ 250,533 $ 179,107
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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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) necessary to present fairly the financial position as
of December 31, 1997, the results of operations for the three and six
months ended December 31, 1997 and 1996 and cash flows for the six months
then ended.
2. Earnings per share
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS 128
replaced the previously reported "primary earnings per share" with "basic
earnings per share" and replaced "fully diluted earnings per share" with
"diluted earnings per share". This Statement had no effect on the
resulting earnings per share for the Company. Earnings per share were
computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
Numerator:
Net income applicable
to common shares $ 71,314 $ 52,564 $ 149,575 $ 103,669
Denominator:
Basic - weighted average
common shares 111,128,438 111,576,773 111,365,904 111,515,685
Increase in weighted average
from dilutive effect of
exercise of stock options 1,052,499 837,390 952,230 854,615
___________ ___________ ___________ ___________
Diluted - weighted average
common shares, assuming
exercise of stock options 112,180,937 112,414,163 112,318,134 112,370,300
=========== =========== =========== ===========
Basic earnings per share $ .64 $ .47 $ 1.34 $ .93
Diluted earnings per share $ .63 $ .47 $ 1.33 $ .92
3. 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
will be funded from operating cash flows and the shares will initially be
held as treasury stock. During the three-month period ended December 31,
1997 the Company purchased 782,127 shares of its common stock at an
average price of $44.291 per share. Year-to-date the Company has
purchased 1,045,772 shares at an average price of $44.091 per share.
- 6 -
4. Acquisitions
In September 1997 the Company acquired the assets of the Skinner and
Lucifer solenoid valve divisions of Honeywell. Skinner, headquartered in
New Britain, Connecticut and Lucifer, headquartered in Geneva,
Switzerland, had prior-year annual sales of approximately $94 million.
In August 1997 the Company acquired the assets of EWAL Manufacturing of
Belleville, New Jersey, a leading producer of precision fittings and
valves. EWAL, with annual sales of $33 million, serves ultra-high-purity
markets for the semiconductor, analytical, laboratory and specialty gas
industries.
Total purchase price for these businesses was approximately $140.2
million in cash. Both acquisitions are being accounted for by the
purchase method.
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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 AND SIX MONTHS ENDED DECEMBER 31, 1997
AND COMPARABLE PERIODS ENDED DECEMBER 31, 1996
CONSOLIDATED STATEMENT OF INCOME
Net sales increased 15.0 percent for the second quarter and 14.0 percent for
the six-month period ended December 31, 1997. Without the effect of
acquisitions the increases would have been 11.9 percent for both periods. In
addition to acquisitions, these increases are the result of the continuing
strength of the North American Industrial markets, unprecedented demand for
aerospace products and a steady recovery in Europe.
Income from operations was $119.8 million for the current second quarter and
$250.5 million for the current six months, an increase of 35.0 percent for the
quarter and 39.9 percent for the six months. As a percent of sales, Income
from operations increased to 10.7 percent from 9.2 percent for the quarter and
to 11.4 percent from 9.3 percent for the six months. Cost of sales as a
percent of sales decreased to 77.3 percent from 78.5 percent for the quarter
and to 76.9 percent from 78.6 percent for the six-month period. Selling,
general and administrative expenses, as a percent of sales, also decreased,
improving to 11.9 percent of sales from 12.3 percent for the quarter and to
11.7 percent from 12.1 percent for the six months. The improved margins are
the result of higher volume among most of the operations, and therefore better
absorption of fixed costs.
Interest expense increased $1.1 million for the quarter ended December 31,
1997, compared to the same period ended December 31, 1996, due to the
increased borrowings incurred to complete recent acquisitions. Interest
expense for the current six months decreased $.7 million compared to the same
period for the prior year.
Interest and other income for the prior-year quarter and six months 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.
Net income increased 35.7 percent for the quarter, and 44.3 percent for the
half, as compared to the prior year. As a percent of sales, Net income
increased to 6.4 percent from 5.4 percent for the quarter and to 6.8 percent
from 5.4 percent for the six months.
Backlog increased to $1.64 billion at December 31, 1997 compared to $1.39
billion the prior year and $1.49 billion at June 30, 1997. A majority of the
increase over the prior year was the result of growth within the Aerospace
Segment. The increase since June 30, 1997 has occurred in both the Industrial
and Aerospace operations.
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 December 31,
Three Months Six Months
Industrial North America 19.3 % 17.8 %
Industrial International 6.2 % 4.0 %
Total Industrial 14.8 % 13.0 %
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Without the effect of currency-rate changes, International sales would have
increased over 19 percent for the quarter and over 17 percent for the six
months. Without the effect of acquisitions completed within the past 12
months, the increases in Net sales would have been:
Period ending December 31,
Three Months Six Months
Industrial North America 15.3 % 15.2 %
Industrial International 2.4 % 1.4 %
Total Industrial 10.8 % 10.5 %
Operating income for the Industrial Segment increased 34.2 percent for the
quarter and 34.5 percent for the six months. Industrial North American
Operating income increased 24.6 percent for the quarter and 27.7 percent for
the six months while Industrial International results more than doubled for
the quarter and increased 75.6 percent for the six months. Without the effect
of acquisitions the total Industrial Segment Operating income would have
increased 31.5 percent for the quarter and 33.4 percent for the six months.
As a percent of sales, Industrial North American Operating income increased to
13.9 percent from 13.3 percent for the quarter and to 14.6 percent from 13.5
percent for the six months. Industrial International Operating income
increased to 6.7 percent from 3.5 percent for the quarter, and to 7.1 percent
from 4.2 percent for the six months.
Order demand has been strong for the North American Industrial operations,
especially within industries such as electromagnetic shielding, factory
automation, machine tool and light and heavy-duty truck manufacturing. Based
upon this demand, management expects continuing strength throughout the second
half. Related markets within Europe are also experiencing steady growth which
is helping to utilize existing capacity and improve margins. In addition,
previous years' acquisitions are now fully integrated and able to contribute
higher margins. Management expects this growth and improved margins to
continue during the second half.
The Company's exposure to Asia Pacific markets is relatively minor. Current-
year operations are profitable and experiencing returns equivalent to the
prior year.
Total Industrial Segment backlog increased 16.8 percent compared to December
31, 1996 and 12.1 percent since June 30, 1997. Approximately one-fourth of the
increase in both periods is the result of acquisitions. The remainder of the
growth is internal growth primarily within the North American operations.
AEROSPACE - Aerospace Segment Net sales were up 15.9 percent for the quarter
and 17.5 percent for the six months. Increased commercial aircraft deliveries
and continued penetration of the commercial repair and overhaul businesses
contributed to the higher volume.
Operating income for the Aerospace Segment increased 39.9 percent for the
quarter and 56.4 percent for the six-month period. As a percent of sales
Operating income improved to 14.8 percent from 12.3 percent for the quarter
and to 15.3 percent from 11.5 percent for the six-month period. Prior-year
margins were affected by the lower margins of the Abex operations which are
now more fully integrated with the segment.
Management expects the Aerospace operations will continue to strengthen
through the second half of the fiscal year as orders show excellent prospects
for continued profitable growth. Backlog for the Aerospace Segment increased
17.8 percent from December 31, 1996, and 8.9 percent since June 30, 1997 as
original equipment orders continue to build.
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CONSOLIDATED BALANCE SHEET
Working capital decreased to $747.0 million at December 31, 1997 from $783.6
million at June 30, 1997 with the ratio of current assets to current
liabilities decreasing slightly to 1.9 to 1. The decrease was primarily due to
an increase in Notes payable, partially offset by an increase in Inventories.
Accounts receivable were lower on December 31, 1997 than on June 30, 1997
primarily due to the lower level of sales in the month of December as a result
of the holidays. Days sales outstanding have increased slightly since June 30,
1997.
Inventories increased since June 30, 1997 as a result of acquisitions within
the Industrial segment and volume increases throughout both the Industrial and
Aerospace operations. Months supply increased slightly since June 30, 1997.
Accounts payable, trade decreased $16.9 million since June 30, 1997 with the
reduction occurring consistently throughout the operations. A portion of the
decrease was the result of lower production in the month of December.
The debt to debt-equity ratio increased to 29.9 percent at December 31, 1997
from 24.5 percent at June 30, 1997 as a result of increases in Notes payable
and Long-term debt, both of which were utilized to finance recent
acquisitions.
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $126.9 million for the six
months ended December 31, 1997, as compared to $155.5 million for the same six
months in 1996. The reduction in cash provided was primarily due to $84.3
million in cash used for an increase in Inventories in the current year,
compared to $.5 million cash provided by a decrease in Inventories in fiscal
1997. Also, increases in long-term investments in the current year resulted in
an incremental use of $11.9 million cash within Other assets. These uses were
partially offset by the $45.9 million increase in Net income and a $25.6
million reduction in the cash used for Accounts payable.
Net cash used in investing activities increased to $255.6 million for the
first six months of fiscal 1998 compared to $107.1 million for same period in
fiscal 1997 primarily due to an additional $125.6 million used for
acquisitions. Capital expenditures also increased to $112.0 million for the
first six months in fiscal 1998 compared to $83.1 million in the first six
months of fiscal 1997.
Financing activities provided net cash of $97.8 million in the first six
months of fiscal 1998 as opposed to using cash of $68.6 million for the six
months ended December 31, 1996. The change resulted primarily from Notes
payable providing cash of $132.0 million in the first six months of fiscal
1998 compared to using cash of $27.8 million the prior year.
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PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
During the quarter ended December 31, 1997, the Registrant issued
3,535 Common Shares, $.50 per value, to three Directors of the Registrant in
lieu of fees pursuant to the Registrant's Non-Employee Directors Stock Plan,
in reliance on Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are furnished as exhibits and numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 27 - Financial Data Schedule
(b) The Registrant filed a report on Form 8-K on December 16,
1997 with respect to the computation of ratio of earnings to fixed charges.
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)
Michael J. Hiemstra
Michael J. Hiemstra
Vice President - Finance and
Administration and Chief
Financial Officer
Date: February 12, 1998
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EXHIBIT INDEX
Exhibit No. Description of Exhibit
27 Financial Data Schedule
- 12 -