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, 1998
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 March 31, 1998 110,577,918
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,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 1,196,548 $ 1,047,100 $ 3,394,665 $ 2,976,015
Cost of sales 912,322 800,578 2,601,670 2,316,399
----------- ----------- ----------- -----------
Gross profit 284,226 246,522 792,995 659,616
Selling, general and
administrative expenses 138,458 115,747 396,694 349,734
----------- ----------- ----------- -----------
Income from operations 145,768 130,775 396,301 309,882
Other income (deductions):
Interest expense (13,512) (11,819) (37,031) (36,075)
Interest and other
income, net (363) 664 4,522 7,795
----------- ----------- ----------- -----------
(13,875) (11,155) (32,509) (28,280)
Income before income taxes 131,893 119,620 363,792 281,602
Income taxes 48,668 41,656 130,992 99,969
----------- ----------- ----------- -----------
Net income $ 83,225 $ 77,964 $ 232,800 $ 181,633
=========== =========== =========== ===========
Earnings per share - Basic $ .76 $ .70 $ 2.10 $ 1.63
Earnings per share - Diluted $ .75 $ .70 $ 2.08 $ 1.62
Cash dividends per common share $ .15 $ .13 $ .45 $ .37
See accompanying notes to consolidated financial statements.
- 2 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
March 31, June 30,
1998 1997
ASSETS ---------- -----------
Current assets:
Cash and cash equivalents $ 42,445 $ 68,997
Accounts receivable, net 677,610 601,724
Inventories:
Finished products 404,585 317,494
Work in process 345,607 304,743
Raw materials 123,098 105,610
----------- -----------
873,290 727,847
Prepaid expenses 17,787 17,366
Deferred income taxes 91,142 83,627
----------- -----------
Total current assets 1,702,274 1,499,561
Plant and equipment 2,282,688 2,138,591
Less accumulated depreciation 1,201,199 1,117,848
----------- ----------
1,081,489 1,020,743
Excess cost of investments
over net assets acquired 377,908 285,264
Investments and other assets 226,885 193,378
----------- -----------
Total assets $ 3,388,556 $ 2,998,946
=========== ===========
LIABILITIES
Current liabilities:
Notes payable $ 255,161 $ 69,738
Accounts payable, trade 283,938 266,848
Accrued liabilities 328,290 328,051
Accrued domestic and foreign taxes 68,225 51,374
----------- -----------
Total current liabilities 935,614 716,011
Long-term debt 487,485 432,885
Pensions and other postretirement benefits 260,730 252,709
Deferred income taxes 26,963 26,007
Other liabilities 41,905 24,033
----------- -----------
Total liabilities 1,752,697 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 March 31 and 111,809,085 shares at June 30 55,906 55,905
Additional capital 133,436 150,702
Retained earnings 1,561,123 1,378,297
Foreign currency translation adjustments (61,030) (27,345)
----------- -----------
1,689,435 1,557,559
Common stock in treasury at cost;
1,234,107 shares at March 31 and
282,915 shares at June 30 (53,576) (10,258)
----------- -----------
Total shareholders' equity 1,635,859 1,547,301
----------- -----------
Total liabilities and shareholders' equity $ 3,388,556 $ 2,998,946
=========== ===========
See accompanying notes to consolidated financial statements.
- 3 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
March 31,
----------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 232,800 $ 181,633
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 117,928 113,374
Amortization 20,168 18,151
Deferred income taxes (17,858) (11,730)
Foreign currency transaction loss 2,294 1,323
Gain on sale of plant and equipment (850) (10,405)
Write-off of purchased in-process R&D 5,200
Changes in assets and liabilities:
Accounts receivable (61,196) (46,305)
Inventories (128,150) 6,483
Prepaid expenses 240 1,514
Other assets (24,123) (9,003)
Accounts payable, trade 5,636 (37,917)
Accrued payrolls and other compensation 14,062 (3,989)
Accrued domestic and foreign taxes 16,819 201
Other accrued liabilities (2,313) 34,040
Pensions and other postretirement benefits 10,386 1,720
Other liabilities 7,034 3,563
--------- ---------
Net cash provided by operating activities 198,077 242,653
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $2,320 in 1998
and $917 in 1997) (172,859) (27,424)
Capital expenditures (162,940) (124,524)
Proceeds from sale of plant and equipment 4,195 9,417
Other 3,118 (7,620)
--------- ---------
Net cash used in investing activities (328,486) (150,151)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) from common share activity (70,969) (3,156)
Proceeds (payments) from notes payable, net 187,031 (41,460)
Proceeds from long-term borrowings 52,097 1,994
Payments of long-term borrowings (12,580) (23,817)
Dividends (49,943) (41,663)
--------- ---------
Net cash provided by (used in) financing
activities 105,636 (108,102)
Effect of exchange rate changes on cash (1,779) (2,407)
--------- ---------
Net (decrease) in cash and cash equivalents (26,552) (18,007)
Cash and cash equivalents at beginning of year 68,997 63,953
--------- ---------
Cash and cash equivalents at end of period $ 42,445 $ 45,946
========= =========
Noncash Investing activities:
In 1998 Treasury stock valued at $9,750 was issued for an acquisition.
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 Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales, including intersegment sales
Industrial:
North America $ 645,739 $ 561,474 $ 1,826,680 $ 1,564,199
International 295,692 268,868 841,016 793,231
Aerospace 255,534 216,904 728,159 619,097
Intersegment sales (417) (146) (1,190) (512)
----------- ----------- ----------- -----------
Total $ 1,196,548 $ 1,047,100 $ 3,394,665 $ 2,976,015
=========== =========== =========== ===========
Income from operations before corporate
general and administrative expenses
Industrial:
North America $ 93,934 $ 92,168 $ 266,397 $ 227,193
International 23,828 22,943 62,670 45,062
Aerospace 45,079 28,147 117,400 74,386
----------- ----------- ----------- -----------
Total 162,841 143,258 446,467 346,641
Corporate general and
administrative expenses 17,073 12,483 50,166 36,759
----------- ----------- ----------- -----------
Income from operations $ 145,768 $ 130,775 $ 396,301 $ 309,882
=========== =========== =========== ===========
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 March 31, 1998, the results of operations for
the three and nine months ended March 31, 1998 and 1997 and cash flows
for the nine months then ended.
2. Non-recurring charge
During the three-month period ended March 31, 1998 the Company
incurred an acquisition-related charge of $5.2 million or $.05 per
share. The independent appraisal of Computer Technology Corporation, a
February 1998 acquisition, attributed a portion of the goodwill premium
to in-process research and development. Generally accepted accounting
principles require research and development to be expensed. The charge
was recorded to Cost of sales within the North American Industrial
segment.
3. 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 Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
Numerator: ----------- ----------- ----------- -----------
Net income applicable
to common shares $ 83,225 $ 77,964 $ 232,800 $ 181,633
Denominator:
Basic - weighted
average common shares 110,480,290 111,697,183 111,070,700 111,576,184
Increase in weighted
average from dilutive
effect of exercise of
stock options 1,326,400 879,611 1,076,954 870,087
Diluted - weighted
average common shares,
assuming exercise of
stock options 111,806,690 112,576,794 112,147,654 112,446,271
Basic earnings per share $ .76 $ .70 $ 2.10 $ 1.63
Diluted earnings per share $ .75 $ .70 $ 2.08 $ 1.62
- 6 -
4. Stock repurchase program
The Board of Directors has approved a program to repurchase the
Company's common stock on the open market, at prevailing prices. The
repurchase is funded from operating cash flows and the shares are
initially held as treasury stock. During the three-month period ended
March 31, 1998 the Company purchased 657,500 shares of its common
stock at an average price of $43.52 per share. Year-to-date the
Company has purchased 1,703,272 shares at an average price of $43.87
per share.
5. Acquisitions
In April 1998 the Company acquired the equity of Extrudit Ltd., a
British tubing manufacturer located in Buxton, England. Extrudit had
prior-year annual sales of approximately $5.0 million.
Also in April 1998 the Company purchased the equity of UCC Securities
Limited of Thetford, Norfolk, England. UCC designs, manufactures and
markets a broad range of technology-based hydraulic filtration products
and had prior-year annual sales of approximately $30.0 million.
The Company also acquired the equity of Sempress Pneumatics located
near Rotterdam, the Netherlands in April 1998. This manufacturer of
pneumatic cylinders and valves had prior-year annual sales of
approximately $17.0 million.
In March 1998 the Company acquired the assets of Temeto AB located in
Flen, Sweden. This distributor of hydraulic components had prior-year
annual sales of approximately $14.0 million.
Also in March 1998 the Company purchased the remaining 51% of two
Korean joint ventures - HS Parker Company Ltd., in Yangsan, and the HS
Parker Air Conditioning Components Company Ltd., in Chonan. Prior-year
annual sales were approximately $25.0 million and $9.5 million,
respectively, for these operations. These operations manufacture
hydraulic hose, fittings, hose assemblies and accumulators.
In February 1998 the Company acquired Computer Technology Corporation
of Milford, Ohio via merger. Prior-year annual sales for this
manufacturer of man-machine interface solutions were $13.8 million.
In September 1997 the Company acquired the assets of the Skinner Valve
Division and the equity of Lucifer S.A. from Honeywell. Skinner,
headquartered in New Britain, Connecticut and Lucifer, headquartered in
Geneva, Switzerland, had prior-year annual sales of approximately $93.8
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 $33.0 million, serves ultra-high-
purity markets for the semiconductor, analytical, laboratory and
specialty gas industries.
Total purchase price for these businesses was approximately $236.5
million cash and 216,229 shares of common stock valued at $9.7 million.
All of the above 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 NINE MONTHS ENDED MARCH 31, 1998
AND COMPARABLE PERIODS ENDED MARCH 31, 1997
CONSOLIDATED STATEMENT OF INCOME
Net sales reached a record $1.20 billion for the quarter, an increase of
14.3 percent for the third quarter and 14.1 percent for the nine-month
period ended March 31, 1998. Without the effect of acquisitions, the
increases would have been 11.3 percent and 11.7 percent, respectively.
The growth occurred throughout all segments of the business, reflecting
strong demand for both Industrial and Aerospace products.
Income from operations was $151.0 million for the current third quarter
and $401.5 million for the current nine months, before an acquisition-
related charge of $5.2 million for in-process research & development
purchased as part of the acquisition of Computer Technology Corporation.
Excluding the non-recurring charge, this resulted in an increase of 15.4
percent for the quarter and 29.6 percent for the nine months compared to
the prior year. After the charge, Income from operations was $145.8
million, an 11.5 percent increase for the quarter, and $396.3 million, a
27.9 percent increase for the nine months.
Excluding the R&D charge, Income from operations as a percent of sales
remained fairly steady at 12.6 percent for the quarter but increased to
11.8 percent from 10.4 percent for the nine months. After the charge,
Income from operations as a percent of sales was 12.2 percent for the
quarter and 11.7 percent for the current nine months. Cost of sales,
without the R&D charge in 1998, improved as a percent of sales to 75.8
percent from 76.5 percent for the quarter and to 76.5 percent from 77.8
percent for the nine months. The improvement in gross profit is the
result of better absorption of fixed costs due to higher volume. In
addition, as acquisitions become more integrated they are contributing
higher margins. Selling, general and administrative expenses, as a
percent of sales, increased to 11.6 percent from 11.1 percent for the
quarter, but year-to-date have decreased to 11.7 percent from 11.8
percent. The quarterly increase is primarily due to incentive programs
and initiatives to penetrate new markets.
Interest expense increased $1.7 million to $13.5 million for the quarter
due to increased borrowings to complete acquisitions. Year-to-date
interest has remained steady compared to the prior year.
The effective tax rate for year-to-date 1998 is 36.0 percent, compared to
a rate of 35.5 percent in fiscal 1997. The increase in rate is the result
of receiving no tax benefit for the acquisition-related $5.2 million
charge for in-process R&D.
Net income as a percent of sales, without the R&D charge, remained at 7.4
percent for the quarter and improved to 7.0 percent from 6.1 percent for
the nine months. After the charge, Net income was $83.2 million or 7.0
percent of sales for the quarter and $232.8 million or 6.9 percent of
sales for the nine months.
Backlog increased to $1.67 billion at March 31, 1998 compared to $1.47
billion the prior year and $1.49 billion at June 30, 1997. Approximately
one-half of the increase is due to internal growth within the Aerospace
Segment. The growth within the Industrial Segment was approximately two-
thirds internal growth and one-third from acquisitions.
- 8 -
The Company's performance benefited from strong order-entry rates and a
high level of capacity utilization in North America for both Industrial
and Aerospace products. Current order-entry rates reflect a steady
economy and favorable business climate for the remainder of the fiscal
year. With favorable market conditions, management anticipates continuing
improvement during the fourth quarter.
BUSINESS SEGMENT INFORMATION BY INDUSTRY
INDUSTRIAL - The Industrial Segment 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 15.0 % 16.8 %
Industrial International 10.0 % 6.0 %
Total Industrial 13.4 % 13.2 %
Without the effect of acquisitions completed within the past 12 months,
the increases in Net sales would have been:
Period ending March 31,
Three Months Nine Months
Industrial North America 11.4 % 13.8 %
Industrial International 6.2 % 3.0 %
Total Industrial 9.7 % 10.2 %
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 over 19 percent and the nine-
month increase was approximately 18 percent.
Operating income for the Industrial Segment, before the acquisition-
related charge of $5.2 million for in-process R & D, increased 6.8
percent for the quarter and 22.8 percent for the nine months. Industrial
North American Operating income, before the charge, increased 7.6 percent
for the quarter and 19.5 percent for the nine months. After the charge,
North American Operating income was $93.9 million, a 1.9 percent increase
for the quarter and $266.4 million, a 17.3 percent increase for the nine
months. Industrial International Operating income improved 3.9 percent
for the quarter and 39.1 percent for the nine months.
As a percent of sales, Industrial North American Operating income, before
the R&D charge, was 15.4 percent compared to 16.4 percent for the prior-
year quarter. Nine-month Operating income as a percent of sales improved
to 14.9 percent from 14.5 percent. Industrial International Operating
income decreased to 8.1 percent from 8.5 percent for the quarter, but
increased to 7.5 percent from 5.7 percent for the nine months.
The North American Industrial markets remain healthy. Customers in the
better-performing industrial markets during the period were manufacturers
of light and heavy-duty trucks, agricultural & construction equipment and
machine tools, in addition to the telecommunications and processing
industries. Related markets within Europe are also experiencing steady
growth.
Total Industrial Segment backlog increased 18.8 percent compared to
March 31, 1997 and 17.7 percent since June 30, 1997. Nearly one-third
of the increase was the result of acquisitions. The remainder of the
increase was internal growth primarily within the North American
operations. Strong order-entry indicates a continuation of this growth
through the rest of the fiscal year.
- 9 -
AEROSPACE - Aerospace Segment Net sales were up 17.8 percent for the
quarter and 17.6 percent for the nine months. The continuing high level
of activity reflects robust commercial aircraft deliveries and expanding
volume of commercial repair and overhaul business.
Operating income for the Aerospace Segment increased 60.2 percent for
the quarter and 57.8 percent for the nine-month period. As a percent
of sales Operating income improved to 17.6 percent from 13.0 percent
for the quarter and to 16.1 percent from 12.0 percent for the nine-
month period. Current-year margins are benefiting from improved
capacity utilization due to higher volume. Also, prior-year margins
were affected by the lower margins of the Abex operations which are
now more fully integrated into the segment. In addition, prior-year
margins were impacted by increases to long-term contract reserves
related to several new contracts.
Backlog for the Aerospace Segment increased 11.0 percent from March 31,
1997 and 9.53 percent since June 30, 1997. Current order-entry rates
indicate a continuation of this growth.
CONSOLIDATED BALANCE SHEET
Working capital decreased to $766.7 million at March 31, 1998 from $783.6
million at June 30, 1997 with the ratio of current assets to current
liabilities decreasing to 1.8 to 1. The decline in working capital was
primarily due to an increase in Notes payable which was only partially
offset by an increase in Inventories.
Notes payable increased $185.4 million since June 30, 1997 to finance
recent acquisitions. The debt to debt-equity ratio increased to 31.2
percent at March 31, 1997 from 24.5 percent at June 30, 1997.
Inventories increased $145.4 million since June 30, 1997. Acquisitions
contributed $30.4 million of the increase. The majority of the increase
occurred within the North American Industrial and Aerospace operations.
Months supply increased slightly, primarily within the Aerospace
operations.
Other fluctuations on the Balance Sheet include an increase of $75.9
million in Accounts receivable from June 30, 1997 to March 31, 1998.
Acquisitions contributed $28.4 million of this increase. Higher sales
volume is causing receivables to increase throughout the operations. Days
sales outstanding has remained steady.
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $198.1 million for the nine
months ended March 31, 1998, as compared to $242.7 million for the same
nine months in 1997. The reduction in cash provided was primarily due to
$128.1 million in cash used for an increase in Inventories in the current
year, compared to $6.5 million cash provided by a decrease in Inventories
in fiscal 1997. In addition, Other accrued liabilities used cash of $2.3
million in fiscal 1998 compared to providing cash of $34.0 million in
fiscal 1997. These additional uses were partially offset by the $51.2
million increase in Net income and Accounts payable providing cash of $5.6
million in fiscal 1998 compared to using cash of $37.9 million in fiscal
1997.
Net cash used in investing activities increased to $328.5 million for the
first nine months of fiscal 1998 compared to $150.2 million for the same
period in fiscal 1997, primarily due to an additional $145.4 million used
for acquisitions. Capital expenditures also used additional cash of $38.4
million in fiscal 1998 compared to fiscal 1997.
Financing activities provided net cash of $105.6 million in the first
nine months of fiscal 1998 as opposed to using cash of $108.1 million for
the nine months ended March 31, 1997. The change resulted primarily from
Notes payable providing cash of $187.0 million in fiscal 1998 compared to
using cash of $41.5 million the prior year.
- 10 -
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended March 31, 1998, in reliance upon
Section 4(2) of the Securities Act of 1933, as amended, the Registrant
issued the following shares of Common Stock, $.50 par value (the "Shares"):
(a) 216,229 Shares in connection with the merger of Computer
Technology Corporation ("CTC") into the Registrant, to shareholders of
CTC who elected to receive the Shares in exchange for their CTC common
shares; and
(b) 1,500 Shares upon exercise of stock options pursuant to
the Non-Employee Directors Stock Option Plan at an exercise price of
$24.667 per share.
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 27 - Financial Data Schedule
(b) The Registrant filed a report on Form 8-K on April 6, 1998,
in order to file certain Exhibits to its Registration Statement on Form S-3
(File No. 333-47955), which was declared effective on March 23, 1998.
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, 1998
- 11 -
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule
- 12 -
5
