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, 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)
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, 1997 74,462,462
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, 1997 and 1996 3
Consolidated Balance Sheet -
March 31, 1997 and June 30, 1996 4
Consolidated Statement of Cash Flows -
Nine Months Ended March 31, 1997
and 1996 5
Business Segment Information by Industry -
Three Months and Nine Months Ended
March 31, 1997 and 1996 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 11* - Computation of Earnings per Common Share 13
EXHIBIT 27* - Financial Data Schedule 14
*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,
_______________________ _________________________
1997 1996 1997 1996
___________ _________ ___________ ___________
Net sales $ 1,047,100 $ 931,356 $ 2,976,015 $ 2,594,786
Cost of sales 800,578 707,927 2,316,399 1,995,017
___________ _________ ___________ ___________
Gross profit 246,522 223,429 659,616 599,769
Selling, general and
administrative expenses 115,747 106,504 349,734 305,412
___________ _________ ___________ ___________
Income from operations 130,775 116,925 309,882 294,357
Other income (deductions):
Interest expense (11,819) (8,359) (36,075) (23,588)
Interest and other income, net 664 1,161 7,795 6,849
___________ _________ ___________ ___________
(11,155) (7,198) (28,280) (16,739)
___________ _________ ___________ ___________
Income before income taxes 119,620 109,727 281,602 277,618
Income taxes 41,656 40,599 99,969 102,719
___________ _________ ___________ ___________
Net income $ 77,964 $ 69,128 $ 181,633 $ 174,899
=========== ========= =========== ===========
Earnings per share $ 1.05 $ .93 $ 2.44 $ 2.36
=========== ========= =========== ===========
Cash dividends per common share $ .20 $ .18 $ .56 $ .54
=========== ========= =========== ===========
See accompanying notes to consolidated financial statements.
- 3 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
March 31, June 30,
1997 1996
___________ ___________
ASSETS
Current assets:
Cash and cash equivalents $ 45,946 $ 63,953
Accounts receivable, net 597,217 538,645
Inventories:
Finished products 322,739 332,213
Work in process 268,435 269,934
Raw materials 105,070 105,078
___________ ___________
696,244 707,225
Prepaid expenses 14,539 16,031
Deferred income taxes 90,147 76,270
___________ ___________
Total current assets 1,444,093 1,402,124
Plant and equipment 2,111,547 2,048,293
Less accumulated depreciation 1,130,840 1,056,516
___________ ___________
980,707 991,777
Excess cost of investments over net assets acquired 292,908 320,152
Investments and other assets 189,089 173,071
___________ ___________
Total assets $ 2,906,797 $ 2,887,124
=========== ===========
LIABILITIES
Current liabilities:
Notes payable $ 124,190 $ 173,789
Accounts payable, trade 197,999 236,871
Accrued liabilities 328,856 306,504
Accrued domestic and foreign taxes 47,983 49,718
___________ ___________
Total current liabilities 699,028 766,882
Long-term debt 421,677 439,797
Pensions and other postretirement benefits 249,867 253,616
Deferred income taxes 25,343 24,683
Other liabilities 21,998 18,188
___________ ___________
Total liabilities 1,417,913 1,503,166
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 74,520,076 shares at
March 31 and 74,291,917 shares at June 30 37,260 37,146
Additional capital 168,681 165,259
Retained earnings 1,300,798 1,160,828
Currency translation adjustment (15,261) 20,725
___________ ___________
1,491,478 1,383,958
Less treasury shares, at cost:
57,614 shares at March 31 (2,594) --
___________ ___________
Total shareholders' equity 1,488,884 1,383,958
___________ ___________
Total liabilities and shareholders' equity $ 2,906,797 $ 2,887,124
=========== ===========
See accompanying notes to consolidated financial statements.
- 4 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
March 31,
_____________________
1997 1996
_________ _________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,633 $ 174,899
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 113,374 94,769
Amortization 18,151 8,210
Deferred income taxes (11,730) (8,822)
Foreign currency transaction loss 1,323 780
(Gain) loss on sale of plant and equipment (10,405) 750
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (46,305) (8,321)
Inventories 6,483 (17,634)
Prepaid expenses 1,514 1,385
Other assets (9,003) (9,136)
Accounts payable, trade (37,917) (39,952)
Accrued liabilities 30,051 (1,932)
Accrued domestic and foreign taxes 201 11,043
Pensions and other postretirement benefits 1,720 (1,789)
Other liabilities 3,563 5,190
_________ _________
Net cash provided by operating activities 242,653 209,440
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (excluding cash of $917 in 1997
and $19,437 in 1996) (27,424) (166,975)
Capital expenditures (124,524) (147,236)
Proceeds from sale of plant and equipment 9,417 8,386
Other (7,620) (3,193)
_________ _________
Net cash used in investing activities (150,151) (309,018)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds from common share activity (3,156) 1,025
(Payments) proceeds from notes payable, net (41,460) 78,156
Proceeds from long-term borrowings 1,994 67,013
Payments of long-term borrowings (23,817) (5,252)
Dividends (41,663) (40,029)
_________ _________
Net cash (used in) provided by
financing activities (108,102) 100,913
Effect of exchange rate changes on cash (2,407) (1,230)
_________ _________
Net (decrease) increase in cash and cash equivalents (18,007) 105
Cash and cash equivalents at beginning of year 63,953 63,830
_________ _________
Cash and cash equivalents at end of period $ 45,946 $ 63,935
========= =========
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,
_______________________ _________________________
1997 1996 1997 1996
___________ _________ ___________ ___________
Net sales, including intersegment sales
Industrial:
North America $ 561,474 $ 515,404 $ 1,564,199 $ 1,452,053
International 268,868 263,802 793,231 720,970
Aerospace 216,904 152,363 619,097 422,257
Intersegment sales (146) (213) (512) (494)
___________ _________ ___________ ___________
Total $ 1,047,100 $ 931,356 $ 2,976,015 $ 2,594,786
=========== ========= =========== ===========
Income from operations before corporate
general and administrative expenses
Industrial:
North America $ 92,168 $ 79,101 $ 227,193 $ 205,511
International 22,943 23,125 45,062 61,858
Aerospace 28,147 26,349 74,386 61,801
___________ _________ ___________ ___________
Total 143,258 128,575 346,641 329,170
Corporate general and administrative
expenses 12,483 11,650 36,759 34,813
___________ _________ ___________ ___________
Income from operations $ 130,775 $ 116,925 $ 309,882 $ 294,357
=========== ========= =========== ===========
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, 1997, the results of operations for the three and nine months ended
March 31, 1997 and 1996 and cash flows for the nine months then ended.
2. Earnings per share
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.
The Board of Directors has reaffirmed the repurchase, from time to time, of
up to 2.8 million shares of 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 March 31, 1997 the Company purchased 57,614 shares of its common
stock at an average price of $44.97 per share. Year-to-date the Company has
purchased 159,614 shares at an average price of $40.18 per share.
3. Acquisitions
On February 3, 1997, following receipt of Mexican government approval, the
Company purchased Hydroflex S.A. de C.V, a leading Mexican manufacturer of
hydraulic hose, fittings and adapters located in Toluca, Mexico for
approximately $9.2 million cash. Annual sales for this operation for the most
recent year prior to acquisition were approximately $11 million.
On September 5, 1996 the Company purchased the assets of the industrial
hydraulic product line of Hydraulik-Ring AG, of Nurtingen, Germany, for
approximately $17 million cash. Annual sales for this operation for the
most recent year prior to acquisition were approximately $31 million.
Both acquisitions are being accounted for by the purchase method.
4. Contingencies
In November 1996 a jury verdict was rendered against the Company in connection
with the termination of ASI Marine Industrial as a Company distributor.
The verdict against the Company included $1.6 million in compensatory damages
and $6.0 million in punitive damages. On appeal, the Company intends to seek a
new trial on all issues and believes that substantial grounds exist for the
punitive damages, at a minimum, to be reversed. In the opinion of management,
the ultimate liability with respect to this litigation will not have a material
adverse effect on the results of operations, cash flows or financial position of
the Company.
- 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, 1997
AND COMPARABLE PERIODS ENDED MARCH 31, 1996
CONSOLIDATED STATEMENT OF INCOME
Net sales reached $1.0 billion for the quarter, an increase of 12.4 percent
for the third quarter and 14.7 percent for the nine-month period ended
March 31, 1997. Without the effect of acquisitions the increases would have
been 3.9 percent and 4.6 percent, respectively. The Aerospace operations
continued to achieve significant gains, while the Industrial operations also
accomplished strong growth during the quarter.
Income from operations was $130.8 million for the current third quarter and
$309.9 million for the current nine months, an increase of 11.8 percent for
the quarter and 5.3 percent for the nine months. As a percent of sales,
Income from operations remained fairly steady for the quarter but decreased
to 10.4 percent from 11.3 percent for the nine months. Cost of sales as a
percent of sales increased to 76.5 percent from 76.0 percent for the quarter
and 77.8 percent from 76.9 percent for the nine-month period. The decline in
gross profit is partially due to lower margins achieved by newly acquired
operations, but is also the result of lower volume, and therefore lower
absorption of fixed costs, within certain businesses in Europe. Selling,
general and administrative expenses, as a percent of sales, decreased to 11.1
percent from 11.4 percent for the quarter, but remained steady for the nine-
month period.
Interest expense increased $3.5 million for the quarter and $12.5 million for
the nine months ended March 31, 1997, compared to the same periods ended
March 31, 1996, due to the increased borrowings incurred to complete
acquisitions.
Interest and other income for the nine months ended March 31, 1997 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.
The effective tax rate for the year was reduced to 35.5 percent from 36.0
percent during the current quarter, resulting from an increased tax benefit
based on the export of product manufactured in the U.S. The reduction from
the prior-year tax rate of 37.0 percent is due to foreign tax-credit benefits
and a reduction in the effective state-tax rate.
Net income increased 12.8 percent for the quarter and 3.9 percent for the
nine months, compared to the prior year. As a percent of sales, Net income
remained steady at 7.4 percent for the quarter, but decreased to 6.1 percent
from 6.7 percent for the nine months.
Backlog increased to $1.5 billion at March 31, 1997 compared to $1.1 billion
the prior year and $1.3 billion at June 30, 1996. A majority of the increase
in backlog over the prior year was due to acquisitions and growth within the
Aerospace Segment.
The Company's performance in recent months has benefited from strong order-
entry rates, a high level of capacity utilization in North America, and cost
reductions in Europe and Latin America. With favorable market conditions,
management anticipates further improvement in the results for the fourth
quarter.
- 8 -
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 8.9 % 7.7 %
Industrial International 1.9 % 10.0 %
Total Industrial 6.6 % 8.5%
Without the effect of acquisitions completed within the past 12 months, the
fluctuations in Net sales would have been:
Period ending March 31,
Three Months Nine Months
Industrial North America 7.6 % 6.0 %
Industrial International (8.1) % (3.4) %
Total Industrial 2.3 % 2.9 %
Without the significant impact of changes in currency rates, but with the
effect of acquisitions, volume for the Industrial International operations
for the third quarter increased more than 10 percent and the nine-month
increase was approximately 15 percent.
Operating income for the Industrial Segment increased 12.6 percent for the
quarter and 1.8 percent for the nine months. Industrial North American
Operating income increased 16.5 percent for the quarter and 10.6 percent for
the nine months while Industrial International results were relatively flat
for the quarter, and decreased 27.2 percent for the nine months. Without the
effect of acquisitions the total Industrial Segment Operating income would
have increased 10.5 percent for the quarter and 1.5 percent for the nine
months. As a percent of sales, Industrial North American Operating income
increased to 16.4 percent from 15.3 percent for the quarter and to 14.5
percent from 14.2 percent for the nine months. Industrial International
Operating income decreased to 8.5 percent from 8.8 percent for the quarter,
and to 5.7 percent from 8.6 percent for the nine months.
The North American Industrial markets remain healthy and are beginning to
give indications of strong growth. Increasing demand by the factory
automation, machine tool, and agricultural and construction equipment markets
contributed to the Company's growth during the quarter. There has also been
increasing demand for sealing products, and light-truck and automotive
products. Higher capacity utilization resulting from the increased volume
improved operating margins.
The weak demand in Europe is also beginning to show modest improvement as
order trends are improving. Reduced overhead and better capacity utilization,
along with further integration of the VOAC acquisition, resulted in improved
operating margins for the quarter.
Total Industrial Segment backlog increased 7.7 percent compared to March 31,
1996 and 8.9 percent since June 30, 1996. These increases are primarily the
result of internal growth within the North American operations.
AEROSPACE - Aerospace Segment Net sales were up 42.4 percent for the quarter
and 46.6 percent for the nine months. Without the effect of the Abex
acquisition the increases would have been 12.0 percent and 12.4 percent,
respectively.
Operating income for the Aerospace Segment increased 6.8 percent for the
quarter and 20.4 percent for the nine-month period. As a percent of sales
Operating income declined to 13.0 percent from 17.3 percent for the quarter
and to 12.0 percent from 14.6 percent for the nine-month period. The decline
in margins from the prior year is primarily the result of lower margins
contributed by the Abex operations which are still in the integration phase.
In addition, the segment incurred an increase in long-term contract reserves
related to several new contracts.
- 9 -
Current demand for Parker components and systems in both the commercial
original equipment and spares markets is excellent and is expected to
continue to grow during the fourth quarter. Backlog for the Aerospace Segment
increased 56.3 percent from March 31, 1996, primarily as a result of the Abex
acquisition, and increased 12.3 percent since June 30, 1996.
CONSOLIDATED BALANCE SHEET
Working capital increased to $745.1 million at March 31, 1997 from $635.2
million at June 30, 1996 with the ratio of current assets to current
liabilities increasing slightly to 2.1 to 1. The increase was primarily due
to an increase in Accounts receivable, net and decreases in Accounts payable,
trade and Notes payable.
Accounts receivable were higher on March 31, 1997 than on June 30, 1996
primarily due to the higher level of sales volume within the Aerospace and
North American Industrial operations. The March 31, 1997 Accounts receivable
balance also includes a noncash receivable of $21.5 million related to a
transaction the Company entered into in December 1996 to sell real estate in
California. The proceeds from the sale will be used in a Section 1031 tax-
free exchange for the new corporate headquarters.
Inventories decreased $11.0 million since June 30, 1996 with the majority of
the reduction within the European Industrial operations. Months supply has
been reduced for nearly all operations.
Accounts payable, trade decreased $38.9 million since June 30, 1996 with the
reduction occurring consistently throughout the operations. Accrued
liabilities increased since June 30, 1996 primarily due to an increase in
long-term contract reserves within the Aerospace operations.
The debt to debt-equity ratio decreased to 26.8 percent at March 31, 1997
from 30.7 percent at June 30, 1996 as a result of decreases in both Notes
payable and Long-term debt.
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities increased $33.2 million for the
nine months ended March 31, 1997, compared to the same nine months in 1996.
This increase is primarily due to a $6.7 million increase in Net income and
an increase of $28.5 million in Depreciation and Amortization expenses. The
principal working capital items - Accounts receivable, Inventories, and
Accounts payable, trade - used cash of $77.7 million in fiscal 1997 compared
to $65.9 million in fiscal 1996.
Net cash used in investing activities of $150.2 million for the nine months
ended March 31, 1997 was primarily for capital expenditures of $124.5
million. Fiscal 1996 investing activities used cash of $309.0 million, which
included $167.0 million for acquisitions and $147.2 million for capital
expenditures.
Financing activities used cash of $108.1 million for the nine months ended
March 31, 1997 primarily to reduce debt and pay dividends. The same period
in 1996 provided cash of $100.9 million as the Company increased debt to
provide cash for acquisitions.
- 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 11 - Computation of Earnings per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Registrant filed a report on Form 8-K on
February 4, 1997, as amended February 5, 1997, with respect to the declaration
by the Board of Directors of a dividend of rights under a Shareholder
Protection Rights Agreement.
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: May 14, 1997
- 11 -
EXHIBIT INDEX
Sequential
Exhibit No. Description of Exhibit Page
11 Computation of Earnings
Per Common Share 13
27 Financial Data Schedule 14
- 12 -
EXHIBIT 11
PARKER-HANNIFIN CORPORATION
FORM 10-Q
COMPUTATION OF EARNINGS PER COMMON SHARE
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
Net income applicable to common shares $ 77,964 $ 69,128 $ 181,633 $ 174,899
=========== =========== =========== ===========
Weighted average common shares outstanding
for the period 74,464,789 74,188,578 74,384,123 74,139,081
Increase in weighted average from dilutive
effect of exercise of stock options 586,407 512,212 580,058 604,061
___________ ___________ ___________ ___________
Weighted average common shares, assuming
issuance of the above securities 75,051,196 74,700,790 74,964,181 74,743,142
=========== =========== =========== ===========
Earnings per common share:
Primary $ 1.05 $ .93 $ 2.44 $ 2.36
Fully diluted (A) $ 1.04 $ .93 $ 2.42 $ 2.34
(A) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required for income statement presentation
because it results in dilution of less than 3 percent.
- 13 -
5
