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.
- 2 -
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.
- 4 -
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.
- 5 - 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. - 7 - 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 % - 8 - 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. - 9 - 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. - 10 - 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 - 11 - EXHIBIT INDEX Exhibit No. Description of Exhibit 27 Financial Data Schedule - 12 -
 


5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-Q FOR ITS QUARTERLY PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JUN-30-1998 DEC-31-1997 36,681 0 530,912 6,998 825,042 1,549,340 2,234,620 1,177,452 3,197,591 802,387 491,444 55,906 0 0 1,541,301 3,197,591 2,198,117 2,198,117 1,689,348 1,689,348 0 1,035 23,519 231,899 82,324 149,575 0 0 0 149,575 1.34 1.33