UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2007
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 No. 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
| Ohio | 34-0451060 | |
| (State or other jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 6035 Parkland Boulevard, Cleveland, Ohio | 44124-4141 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on which Registered | |
| Common Shares, $.50 par value |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act (Check one).
Large Accelerated Filer: x Accelerated Filer: ¨ Non- Accelerated Filer: ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The approximate aggregate market value of the outstanding common stock held by non-affiliates of the Registrant as of December 31, 2006, excluding, for purposes of this computation only, stock holdings of the Registrant’s Directors and Officers: $8,757,537,997.
The number of Common Shares outstanding on July 31, 2007 was 116,168,848.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference:
| (1) | Annual Report to Shareholders of the Company for the fiscal year ended June 30, 2007 is incorporated by reference into Parts I and II hereof. |
| (2) | Definitive Proxy Statement for the Company’s 2007 Annual Meeting of Shareholders to be held on October 24, 2007 is incorporated by reference into Part III hereof. |
PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 2007
PART I
ITEM 1. Business. Parker-Hannifin Corporation is a leading worldwide full-line diversified manufacturer of motion control products, including fluid power systems, electromechanical controls and related components. Fluid power involves the transfer and control of power through the medium of liquid, gas or air, in hydraulic, pneumatic and vacuum applications. Fluid power systems move and position materials, control machines, vehicles and equipment and improve industrial efficiency and productivity. Components of a simple fluid power system include one or more pumps which generate pressure, one or more valves which control the flow of the fluid, one or more actuators which translate the pressure from the fluid into mechanical energy, one or more filters to ensure proper fluid condition and numerous hoses, couplings, fittings and seals. Electromechanical control involves the use of electronic components and systems to control motion and precisely locate or vary speed in automation and aerospace applications. In addition to motion control products, the Company also is a leading worldwide producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems.
The Company was incorporated in Ohio in 1938. Its principal executive offices are located at 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, telephone (216) 896-3000. As used in this Annual Report on Form 10-K, unless the context otherwise requires, the term “Company” or “Parker” refers to Parker-Hannifin Corporation and its subsidiaries.
The Company’s investor relations internet website address is www.phstock.com. The Company makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after filing or furnishing such material electronically with the Securities and Exchange Commission. The information contained on or accessible through the Company’s website is not part of this Annual Report on Form 10-K.
The Board of Directors has adopted a written charter for each of the committees of the Board of Directors. These charters, as well as the Company’s Code of Ethics, Guidelines on Corporate Governance Issues and Independence Standards for Directors, are posted and available on the Company’s investor relations internet website at www.phstock.com under the Corporate Governance page. Shareholders may request copies of these corporate governance documents, free of charge, by writing to Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, Attention: Secretary, or by calling (216) 896-3000.
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The Company’s manufacturing, service, distribution and administrative facilities are located in 35 states and in 42 foreign countries. The Company’s motion control technology is used in the products of its three principal business segments: Industrial; Aerospace; and Climate & Industrial Controls. The products are sold as original and replacement equipment through product and distribution centers worldwide. The Company markets its products through direct-sales employees, independent distributors, sales representatives and builder/dealers. Parker products are supplied to approximately 427,000 customers in virtually every significant manufacturing, transportation and processing industry. For the fiscal year ended June 30, 2007, total net sales were $10,718,058,717. Industrial Segment products accounted for 74%, Aerospace Segment products for 16%, and Climate & Industrial Controls Segment products for 10% of those net sales.
Markets
Motion control systems are used throughout industries in applications which include moving materials, controlling machines, vehicles and equipment and positioning materials during manufacturing processes. Motion control systems contribute to the efficient use of energy and improve industrial productivity.
The approximately 427,000 customers who purchase the Company’s products are found throughout virtually every significant manufacturing, transportation and processing industry. No single customer accounted for more than 3% of the Company’s total net sales for the fiscal year ended June 30, 2007.
Industrial Segment. Sales of Industrial Segment products are made primarily to original equipment manufacturers and their replacement markets in all major production and processing industries. Major markets for products of the Fluid Connectors Group are aerial lift, agriculture, bulk chemical handling, construction machinery, food and beverage, fuel and gas delivery, industrial machinery, medical, mining, mobile, oil and gas, and transportation. Major markets for products of the Hydraulics Group are aerial lift, agriculture, construction machinery, forestry, industrial machinery, machine tool, marine, mining, oil and gas, power generation and energy, and truck hydraulics. Major markets for products of the Automation Group are conveyor and material handling, factory automation, life science and medical, machine tool, packaging machinery, paper machinery, plastics machinery and conversion, primary metal, semiconductor and electronic, and transportation and automotive. Major markets for products of the Seal Group are aerospace, chemical processing, consumer, energy, oil and gas, fluid power, general industrial, information technology, life science, military, semiconductor, telecommunication, and transportation. Major markets for products of the Instrumentation Group are chemical and refining, food and beverage, medical and dental, microelectronic, oil and gas, and power generation. Major markets for products of the Filtration Group are food and beverage, industrial machinery, life science, marine, mobile equipment, oil and gas, power generation, process, and transportation.
Aerospace Segment. Sales of Aerospace Segment products are made primarily to original equipment manufacturers in the commercial, military and general aviation markets and to end users for maintenance, repair and overhaul. Major markets for products of the Aerospace Segment are aircraft engine, business and general aviation, commercial transport, electronics cooling, helicopter, land-based
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weapon system, military aircraft, missile and launch vehicle, power generation and energy, regional transport, and unmanned aerial vehicle.
Climate & Industrial Controls Segment. Sales of Climate & Industrial Controls Segment products are made primarily to original equipment manufacturers and their replacement markets. Major markets for products of the Climate & Industrial Controls Segment are agriculture, air conditioning, appliance, food and beverage, industrial and commercial refrigeration, industrial machinery, oil and gas, life science and medical, precision cooling, process, supermarket, and transportation.
Principal Products and Methods of Distribution
Industrial Segment. The product lines of the Company’s Industrial Segment consist of a broad range of motion control and fluid systems and components. The Fluid Connectors Group manufactures a broad range of connectors which control, transmit and contain fluid, including the following: brass fittings and valves; diagnostic equipment; hose couplings; industrial hose; PTFE hose and tubing; quick couplings; rubber and thermoplastic hose; tube fittings and adapters; and tubing and plastic fittings. The Hydraulics Group produces a broad range of hydraulic components and systems for builders and users of industrial and mobile machinery and equipment, such as the following: accumulators; cylinders; motors and pumps; systems; valves and controls; hydrostatic steering units; integrated hydraulic circuits; power take-off equipment; power units; and rotary actuators. The Automation Group produces a broad range of pneumatic and electromechanical components and systems. Pneumatic products include the following: air preparation units; pneumatic accessories; pneumatic actuators and grippers; pneumatic valves and controls; structural extrusions; and vacuum generators, cups and sensors. Electromechanical products include the following: AC/DC drives and systems; electric actuators; gantry robots and slides; human-machine interfaces; manifolds; rotary actuators; and stepper motors, servo motors, drives and controls. The Seal Group manufactures static and dynamic sealing devices, including the following: dynamic seals; elastomeric o-rings; electromagnetic interference shielding; extruded and precision-cut fabricated elastomeric seals; high-temperature metal seals; homogeneous and inserted elastomeric shapes; metal and plastic retained composite seals; and thermal management products. The Filtration Group manufactures filters, systems and instruments to monitor and remove contaminants from fuel, air, oil, water and other fluids and gases, including the following: analytical gas generators; compressed air and gas filters and dryers; condition monitoring devices; engine air, fuel and oil filtration and systems; hydraulic, lubrication and coolant filters; nitrogen, hydrogen and zero air generators; and process, chemical, water and microfiltration filters. The Instrumentation Group manufactures high quality critical flow components for process instrumentation, healthcare and ultra-high-purity applications, including the following: analytical sample conditioning products and systems; chemical injection fittings and valves; fluoropolymer chemical delivery fittings, valves and pumps; high-purity gas delivery fittings, valves and regulators; process control fittings, valves, regulators and manifold valves; and process control manifolds.
Industrial Segment products include custom units which are engineered and produced to original equipment manufacturers’ specifications for application to a particular end product and standard items. Both custom and standard products are also used in the replacement of original motion control system components. Industrial Segment products are marketed primarily through field sales employees and approximately 8,400 independent distributors.
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Aerospace Segment. Principal products of the Company’s Aerospace Segment are hydraulic, fuel and pneumatic systems and components used on commercial and military airframe and engine programs. The Aerospace Segment also manufactures a broad range of fluid conveyance systems, fluid metering, delivery and atomization devices, inert nitrogen generating systems, as well as connectors, hoses, fittings, tube fittings and quick disconnects which control, transmit and contain fluid for aircraft applications.
The Aerospace Segment offers complete hydraulic and primary flight control systems that include hydraulic, electrohydraulic and electromechanical components used for precise control of aircraft rudders, elevators, ailerons and other aerodynamic control surfaces and utility hydraulic components such as reservoirs, accumulators, selector valves, electrohydraulic servo valves, thrust-reverser actuators, engine-driven pumps, motor pumps, nose wheel steering systems, electromechanical actuators, engine controls and electronic controllers. The Aerospace Segment also designs and manufactures aircraft wheels and brakes for general aviation and military markets.
The Aerospace Segment fuel product line includes complete fuel systems as well as components such as the following: fuel transfer and pressurization controls; in-flight refueling systems; fuel pumps and valves; fuel measurement and management systems; center of gravity controls; engine fuel injection atomization nozzles, manifolds and augmentor controls; and electronic monitoring computers.
The Aerospace Segment produces various pneumatic systems and components including the following: bleed air control systems; pressure regulators; low-pressure pneumatic controls; engine starter systems; engine bleed control and anti-ice systems; and electronic control and monitoring computers.
Aerospace Segment products are marketed by the Company’s regional sales organization and are sold directly to manufacturers and end users.
Climate & Industrial Controls Segment. The principal products of the Company’s Climate & Industrial Controls Segment are refrigeration and air conditioning systems and components and fluid control process systems and components for use primarily in the mobile and stationary refrigeration and air conditioning industry.
The Climate & Industrial Controls Segment manufactures components and systems for use in industrial, residential, commercial, mobile air conditioning and refrigeration systems and other applications, including accumulators, CO2 controls, electronic controllers, filter driers, hand shut-off valves, heat exchangers, hose and fittings, pressure regulating valves, refrigerant distributors, safety relief valves, solenoid valves, and thermostatic expansion valves. Climate & Industrial Controls Segment products are marketed primarily through field sales employees and independent distributors and wholesalers.
Competition
All aspects of the Company’s business are highly competitive. No single manufacturer competes with respect to all products manufactured and sold by the Company and the degree of competition varies with different products. In the Industrial Segment, the Company competes on the basis of product
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quality and innovation, customer service, manufacturing and distribution capability, and price competitiveness. The Company believes that, in most of the major markets for its Industrial Segment products, it is one of the primary suppliers of motion control systems and components.
In the Aerospace Segment, the Company has developed alliances with key customers based on the Company’s advanced technological and engineering capabilities, superior performance in quality, delivery, and service, and price competitiveness, which has enabled the Company to obtain significant original equipment business on new aircraft programs for its systems and components and, thereby, to obtain the follow-on repair and replacement business for these programs. The Company believes that it is one of the primary suppliers in the aerospace market.
In the Climate & Industrial Controls Segment, the Company competes on the basis of product quality and innovation, customer service, manufacturing and distribution capability, and price competitiveness. The Company believes that it is one of the primary suppliers in the climate and industrial controls market.
Research and Product Development
The Company continually researches the feasibility of new products and services through its development laboratories and testing facilities in many of its worldwide manufacturing locations. Its research and product development staff includes chemists, mechanical, electronic and electrical engineers and physicists.
Research and development costs relating to the development of new products and services and the improvement of existing products and services amounted to $253,091,228 in fiscal year 2007, $203,702,371 in fiscal year 2006 and $164,228,546 in fiscal year 2005. These amounts include costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Costs incurred in connection with research and development contracts for each of the respective fiscal years 2007, 2006 and 2005 were $40,893,768, $37,531,597 and $34,756,921. These costs are included in the total research and development cost for each of the respective years.
Patents, Trademarks, Licenses
The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-exclusive rights to use a number of patents owned by others. In addition, patent applications on certain products are now pending, although there can be no assurance that patents will be issued. The Company is not dependent to any material extent on any single patent or group of patents.
Backlog and Seasonal Nature of Business
The Company’s backlog by business segment for the past two fiscal years, as set forth on pages 13-5 to 13-6 of Exhibit 13 to this Annual Report on Form 10-K, is incorporated into this section by reference. The Company’s backlog at June 30, 2007 was approximately $2,935,232,549 and at June 30, 2006 was approximately $2,695,876,258. Approximately 87% of the Company’s backlog at June 30,
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2007 is scheduled for delivery in the succeeding twelve months. The Company’s business generally is not seasonal in nature.
Environmental Regulation
The Company is subject to U.S. federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. Among other environmental laws, the Company is subject to the U.S. federal “Superfund” law, under which the Company has been designated as a “potentially responsible party” and may be liable for cleanup costs associated with various waste sites, some of which are on the U.S. Environmental Protection Agency’s Superfund priority list.
As of June 30, 2007, the Company is involved in environmental remediation at 34 manufacturing facilities presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other companies, at one off-site waste disposal facility and three regional sites.
The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management effort and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes, will not have in the future, material effects on the capital expenditures, earnings, or competitive position of the Company.
As of June 30, 2007, the Company has a reserve of $17,832,500 for environmental matters which are probable and reasonably estimable. This reserve is recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
The Company’s estimated total liability for the above mentioned sites ranges from a minimum of $17,832,500 to a maximum of $73,148,029. The largest estimate for any one site is approximately $7,854,753. The actual costs to be incurred by the Company will be dependent on final delineation of contamination, final determination of remedial action required, negotiations with federal and state agencies with respect to cleanup levels, changes in regulatory requirements, innovations in investigatory and remedial technology, effectiveness of remedial technologies employed, the ultimate ability to pay of the other responsible parties, and any insurance or third-party recoveries.
Energy Matters and Sources and Availability of Raw Materials
The Company’s primary energy source for each of its business segments is electric power. While the Company cannot predict future costs of such electric power, the primary source for production of the required electric power will be coal from substantial, proven coal reserves available to electric utilities. The Company is subject to governmental regulations in regard to energy supplies both in the United
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States and elsewhere. To date, the Company has not experienced any significant disruptions of its operations due to energy curtailments.
Steel, brass, aluminum, elastomeric and thermoplastic materials and chemicals are the principal raw materials used by the Company. These materials are available from numerous sources in quantities sufficient to meet the requirements of the Company.
Employees
The Company employed 57,338 persons as of June 30, 2007, of whom approximately 28,873 were employed by foreign subsidiaries.
Business Segment Information
The Company’s net sales, segment operating income and identifiable assets by business segment and net sales and long-lived assets by geographic area for the past three fiscal years, as set forth on pages 13-14 to 13-15 of Exhibit 13 to this Annual Report on Form 10-K, are incorporated into this section by reference.
Acquisitions and Divestitures
During fiscal year 2007, the Company completed a number of acquisitions. The description of these transactions, as set forth on pages 13-21 to 13-22 of Exhibit 13 to this Annual Report on Form 10-K, is incorporated into this section by reference.
ITEM 1A. Risk Factors.
The Company’s business, financial condition, results of operations and cash flows are subject to various risk factors, including, but not limited to those set forth below, any one of which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K. The risk factors described below are those that the Company believes are currently the most significant. Additional risk factors not currently known to the Company or that the Company believes are immaterial also may impair the Company’s business, financial condition, results of operations and cash flows.
The Company is subject to risks relating to its foreign operations.
In fiscal year 2007, approximately 43% of the Company’s net sales were derived from customers outside the United States. In addition, many of the Company’s manufacturing operations and suppliers are located outside the United States. The Company expects net sales from foreign markets to continue to represent a significant portion of its total net sales. The Company’s foreign operations are subject to risk in addition to those risks of its domestic operations, including:
| • | fluctuations in currency exchange rates; |
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| • | limitations on ownership and on repatriation of earnings; |
| • | transportation delays and interruptions; |
| • | political, social and economic instability and disruptions; |
| • | government embargoes or foreign trade restrictions; |
| • | the imposition of duties and tariffs and other trade barriers; |
| • | import and export controls; |
| • | labor unrest and current and changing regulatory environments; |
| • | the potential for nationalization of enterprises; |
| • | difficulties in staffing and managing multi-national operations; |
| • | limitations on its ability to enforce legal rights and remedies; and |
| • | potentially adverse tax consequences. |
If the Company is unable to manage successfully the risks associated with expanding its global business or adequately manage operational fluctuations internationally, the risks could have a material adverse effect on the Company’s business, results of operations or financial condition.
Demand for and supply of the Company’s products may be adversely affected by numerous factors, some of which the Company cannot predict or control, which could adversely affect its results of operations.
Numerous factors may affect the demand for and supply of the Company’s products, including:
| • | changes in the market acceptance of its products; |
| • | increased competition in the markets it serves; |
| • | changes in economic conditions in individual markets; |
| • | declines in the general level of industrial production; or |
| • | declines in the availability or increases in the prices of raw materials. |
If any of these factors occur, the demand for and supply of the Company’s products could suffer, which would adversely affect its results of operations.
The Company operates in a highly competitive environment.
The Company’s domestic and foreign operations are subject to significant competitive pressures. To compete successfully, the Company’s Industrial Segment and Climate & Industrial Controls Segment must excel in terms of product quality and innovation, customer service, manufacturing and distribution capability and price competitiveness and its Aerospace Segment must excel on the basis of technological and engineering capability, quality, delivery and service, and price competitiveness. The financial resources and performance of certain of the Company’s competitors may put the Company at a competitive disadvantage, which would adversely affect its results of operations.
The Company’s future growth is partly dependent on the development of new products and technologies and preservation of its intellectual property.
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The markets the Company operates in are characterized by rapidly changing technologies and frequent introductions of new products and services. The Company’s ability to develop new products based on technological innovation can affect its competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products and services or failure to gain market acceptance of new products and technologies may significantly reduce future revenues and materially adversely affect the Company’s competitive position.
Protecting the Company’s intellectual property is critical to its innovation efforts. The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-exclusive rights under patents owned by others. The Company’s intellectual property may be challenged or infringed upon by third parties or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of the Company’s intellectual property rights or inability to preserve existing intellectual property rights could materially adversely impact the Company’s competitive position and results of operations.
The raw materials used in the Company’s production processes and by its suppliers of component parts are subject to price and supply fluctuations that could increase the Company’s costs of products and adversely affect the Company’s results of operations.
The Company’s supply of raw materials for its businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company’s results of operations and profit margins. While the Company generally attempts to pass along increased raw material prices to its customers in the form of price increases, there may be a time delay between the increased raw material prices and the Company’s ability to increase the price of its products, or it may be unable to increase the prices of its products due to pricing pressure or other factors.
The Company’s suppliers of component parts may significantly and quickly increase their prices in response to increases in costs of raw materials that they use to manufacture their component parts. In those circumstances, the Company may not be able to increase its prices commensurately with its increased costs. Consequently, its results of operations and financial condition may be materially adversely affected.
The Company may face limitations on its ability to complete acquisitions or successfully integrate acquired businesses.
The Company expects to continue its strategy of identifying and acquiring businesses with complementary products and services that it believes will enhance its operations and profitability. However, there can be no assurance that the Company will be able to continue to find suitable businesses to purchase or that it will be able to acquire such businesses on acceptable terms.
In addition, no guarantee can be given that the Company will be able to integrate successfully any business that it purchases into its existing business or that any acquired businesses will be profitable. The successful integration of new businesses depends on the Company’s ability to manage these new businesses and cut excess costs. If the Company is unable to complete the integration of new businesses
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in a timely manner, its results of operations and financial condition could be materially adversely affected.
Potential product liability risks exist from the products that the Company sells.
The Company’s businesses expose it to potential product liability risks that are inherent in the design, manufacture and sale of its products and the products of third-party vendors that it uses or resells. The Company currently maintains what it believes to be suitable and adequate product liability insurance. There can be no assurance, however, that the Company will be able to maintain its product liability insurance on acceptable terms or that its product liability insurance will provide adequate protection against potential liabilities. In the event of a claim against it, a lack of sufficient insurance coverage could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Moreover, even if it maintains adequate insurance, any successful claim could have a material adverse effect on the Company’s financial condition, liquidity and results of operations and on the ability to obtain suitable or adequate insurance.
The Company may be adversely affected by the impact of environmental and safety regulations to which it is subject.
The Company’s operations necessitate the use and handling of hazardous materials and, as a result, it is subject to various U.S. federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damage and personal injury resulting from past and current spills, disposals or other releases of, or the exposure to, hazardous materials. Among other environmental laws, the Company is subject to the U.S. federal “Superfund” law, under which it has been designated as a “potentially responsible party” and may be liable for clean-up costs associated with various waste sites, some of which are on the U.S. Environmental Protection Agency’s Superfund priority list. The Company could incur substantial costs as a result of non-compliance with or liability for cleanup or other costs or damages under environmental laws, including the Superfund law.
The Company may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company does business with the U.S government and as such is subject to increased government regulations.
In addition to normal business risks, doing business with the U.S. government subjects the Company to increased risks, including dependence on the level of government spending and compliance with and changes in governmental procurement regulations. Agreements relating to the sale of products to government entities may be subject to termination, reduction or modification, either at the convenience of the government or for the Company’s failure to perform under the applicable contract. The Company is subject to government investigations of business practices and compliance with government procurement regulations. If the Company were charged with wrongdoing as a result of any
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such investigation, it could be suspended from bidding on or receiving awards of new government contracts, which could have a material adverse effect on the Company’s results of operations.
Changes in the Company’s tax rates or exposure to additional income tax liabilities could affect profitability.
The Company is subject to income taxes in the United States and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. The Company’s effective tax rate could be adversely affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or tax laws. The amount of income taxes paid is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company’s tax liabilities.
Increasing costs of certain employee and retiree benefits could adversely affect the Company’s results of operations.
The amount of expenses recorded for the Company’s defined benefit pension plans is dependent on changes in market interest rates and the value of plan assets, which are dependent on actual plan asset returns. Significant changes in market interest rates and decreases in the fair value of plan assets and investment losses on plan assets may adversely affect the Company’s future results of operations.
ITEM 1B. Unresolved Staff Comments. None.
ITEM 1C. Executive Officers of the Registrant.
The Company’s Executive Officers are as follows:
| Name |
Position |
Officer Since(1) |
Age | |||
| Donald E. Washkewicz |
Chairman of the Board, Chief Executive Officer and President | 1997 | 57 | |||
| John D. Myslenski |
Executive Vice President – Sales, Marketing and Operations Support | 1997 | 56 | |||
| Timothy K. Pistell |
Executive Vice President – Finance and Administration and Chief Financial Officer | 1993 | 60 | |||
| Lee C. Banks |
Senior Vice President and Operating Officer | 2001 | 44 | |||
| Robert P. Barker |
Senior Vice President, Operating Officer and President, Aerospace Group | 2003 | 57 | |||
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| Thomas L. Williams |
Senior Vice President and Operating Officer | 2005 | 48 | |||
| Robert W. Bond |
Vice President and President, Fluid Connectors Group | 2000 | 49 | |||
| Jeffery A. Cullman |
Vice President and President, Hydraulics Group | 2006 | 52 | |||
| John G. Dedinsky, Jr. |
Vice President – Global Supply Chain and Procurement | 2006 | 50 | |||
| Dana A. Dennis |
Vice President and Controller | 1999 | 59 | |||
| Heinz Droxner |
Vice President and President, Seal Group | 2002 | 62 | |||
| William G. Eline |
Vice President – Chief Information Officer | 2002 | 51 | |||
| John R. Greco |
Vice President and President, Instrumentation Group | 2006 | 53 | |||
| Thomas F. Healy |
Vice President and President, Climate & Industrial Controls Group | 2006 | 47 | |||
| William R. Hoelting |
Vice President – Tax | 2007 | 50 | |||
| Pamela J. Huggins |
Vice President and Treasurer | 2003 | 53 | |||
| Marwan M. Kashkoush |
Corporate Vice President – Worldwide Sales and Marketing | 2000 | 53 | |||
| A. Ricardo Machado |
Vice President and President, Latin America Group | 2006 | 59 | |||
| M. Craig Maxwell |
Vice President – Technology and Innovation | 2003 | 49 | |||
| John K. Oelslager |
Vice President and President, Filtration Group | 1997 | 64 | |||
| Thomas A. Piraino, Jr. |
Vice President, General Counsel and Secretary | 1998 | 58 | |||
| Daniel S. Serbin |
Vice President – Human Resources | 2005 | 53 | |||
| Roger S. Sherrard |
Vice President and President, Automation Group | 2003 | 41 | |||
| Joseph J. Vicic |
Vice President and President, Asia Pacific Group | 2006 | 62 | |||
| (1) | Officers of the Company serve for a term of office from the date of election to the next organizational meeting of the Board of Directors and until their respective successors are elected, except in the case of death, resignation or removal. Messrs. Dennis, Droxner, |
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| Oelslager and Piraino have served in the executive capacities indicated above opposite their respective names during each of the past five years. |
Mr. Washkewicz has served as a Director of the Company since 2000. Mr. Washkewicz has been Chairman of the Board of Directors of the Company since October 2004, Chief Executive Officer of the Company since July 2001, and President since January 2007. He was previously the President of the Company from February 2000 to October 2004.
Mr. Myslenski has been Executive Vice President – Sales, Marketing and Operations Support since August 2003. He was Senior Vice President from August 2002 to October 2003, Operating Officer from October 2001 to October 2003 and Corporate Vice President from July 2001 to August 2002.
Mr. Pistell has been Executive Vice President – Finance and Administration since April 2005 and has been Chief Financial Officer since April 2003. He was Vice President – Finance and Administration from April 2003 to April 2005, a Vice President from October 2001 to April 2003 and Treasurer from July 1993 to April 2003.
Mr. Banks was elected as a Senior Vice President and Operating Officer in November 2006. He was a Vice President from October 2001 to November 2006, President of the Hydraulics Group from October 2003 to November 2006, and President of the Instrumentation Group from July 2001 to November 2003.
Mr. Barker was elected as a Senior Vice President and Operating Officer in November 2006 and has been President of the Aerospace Group since March 2003. He was a Vice President from April 2003 to November 2006 and Vice President-Operations of the Aerospace Group from April 1996 to March 2003.
Mr. Williams was elected as a Senior Vice President and Operating Officer in November 2006. He was a Vice President and President of the Instrumentation Group from March 2005 to November 2006; Vice President – Operations of the Hydraulics Group from November 2003 to February 2005; General Manager, Global Services of GE Transportation Systems (producer of rail locomotive) from October 2002 to November 2003 and General Manager, Global Sourcing and Components of GE Lighting (light bulbs and lighting systems) from November 1999 to October 2002.
Mr. Bond has been a Vice President since July 2000 and President of the Fluid Connectors Group since March 2005. He was President of the Automation Group from April 2000 to February 2005.
Mr. Cullman was elected as a Vice President and named President of the Hydraulics Group in November 2006. He was Vice President—Operations of the Hydraulics Group from July 2002 to November 2006.
Mr. Dedinsky has been Vice President – Global Supply Chain and Procurement since January 2006. He was Vice President – Global Sourcing and Procurement from July 2004 to January 2006 and Vice President – Procurement from August 2000 to July 2004.
- 13 -
Mr. Eline has been Vice President – Chief Information Officer since August 2002. He was Vice President – Information Technology International from July 2000 to August 2002.
Mr. Greco was elected as a Vice President and named President of the Instrumentation Group in November 2006. He was Vice President and General Manager of the Global Parflex Division from August 2005 to November 2006 and General Manager of the Parflex Division from July 2002 to August 2005.
Mr. Healy has been a Vice President since April 2006 and President of the Climate & Industrial Controls Group since July 2006. He was a Climate & Industrial Controls Group Vice President and General Manager of Mobile Climate Systems Division from September 2004 to April 2006 and General Manager of Nichols Portland Division from July 1998 to September 2004.
Mr. Hoelting was elected as Vice President – Tax in February 2007. He was Vice President – Taxation from January 1998 to February 2007.
Ms. Huggins has been a Vice President and Treasurer since April 2003. She was Vice President and Controller of the Filtration Group from June 1999 to April 2003.
Mr. Kashkoush has been Corporate Vice President – Worldwide Sales and Marketing since October 2003. He was Vice President from July 2000 to October 2003 and President of the Hydraulics Group from February 2000 to October 2003.
Mr. Machado has been a Vice President since January 2006 and President of the Latin America Group since March 2000.
Mr. Maxwell has been Vice President – Technology and Innovation since July 2003. He was Vice President – Engineering and Innovation from January 2003 to July 2003 and Business Unit Manager of the Fluid Control Division from July 2002 to January 2003.
Mr. Serbin has been Vice President – Human Resources since May 2005. He was Vice President – Human Resources of the Fluid Connectors Group from October 2003 to April 2005 and Vice President – Human Resources of the Hydraulics Group and the Automation Group from July 1995 to October 2003.
Mr. Sherrard has been a Vice President since November 2003 and President of the Automation Group since March 2005. He was the President of the Instrumentation Group from November 2003 to February 2005 and General Manager of the Automation Actuator Division from May 2000 to November 2003.
Mr. Vicic has been a Vice President since January 2006 and President of the Asia Pacific Group since April 1994.
- 14 -
ITEM 2. Properties. The following table sets forth the principal plants and other materially important physical properties of the Company and its subsidiaries. Leased properties are indicated with an asterisk. A “(1)” indicates that the property is occupied by the Company’s Industrial Segment, a “(2)” indicates that the property is occupied by the Company’s Aerospace Segment and a “(3)” indicates that the property is occupied by the Company’s Climate & Industrial Controls Segment.
UNITED STATES
| State |
City | |
| Alabama |
Boaz(1) | |
| Huntsville(1) | ||
| Jacksonville(1) | ||
| Arizona |
Glendale(2) | |
| Tolleson(2) | ||
| Tucson(1) | ||
| Arkansas |
Benton(1) | |
| California |
Camarillo(2) | |
| Irvine(1)(2) | ||
| Modesto(1) | ||
| Oxnard(1) | ||
| Richmond(1) | ||
| Rohnert Park(1) | ||
| San Diego(1) | ||
| Sante Fe Springs*(1) | ||
| Connecticut |
New Britain(3) | |
| North Haven(1) | ||
| Florida | Jacksonville(2) | |
| Miami*(1)(3) | ||
| Sarasota(1) | ||
| Vero Beach*(1) | ||
| Georgia |
Dublin(2) | |
| Illinois |
Bensenville(1) | |
| Broadview(3) | ||
| Des Plaines(1) | ||
| Elgin(1) | ||
| Lincolnshire(1) | ||
| Rockford(1) | ||
| Woodridge*(1) | ||
| Indiana |
Albion(1) | |
| Ashley(1) | ||
| Goshen(1) | ||
| Indianapolis*(1) | ||
| Ligonier(1) | ||
| Mishawaka*(1) | ||
| New Haven(3) |
- 15 -
| State |
City | |
| Syracuse(1) | ||
| Tell City(1) | ||
| Iowa |
Red Oak(1) | |
| Kansas |
Manhattan(1) | |
| Kentucky |
Lexington(1) | |
| Maine |
Kittery(1) | |
| Portland(3) | ||
| Maryland |
Baltimore*(1) | |
| Massachusetts |
Devens(2) | |
| Haverhill*(1) | ||
| Woburn(1) | ||
| Michigan |
Kalamazoo(2) | |
| Lakeview(1) | ||
| Mason(1) | ||
| Otsego(1) | ||
| Oxford(1) | ||
| Richland(1) | ||
| Troy*(1)(3) | ||
| Minnesota |
Blaine(1) | |
| Chanhassen(1) | ||
| Deerwood(1) | ||
| Golden Valley(1) | ||
| New Hope*(1) | ||
| New Ulm(1) | ||
| Mississippi | Batesville(3) | |
| Booneville(3) | ||
| Holly Springs(1) | ||
| Madison(3) | ||
| Olive Branch(1) | ||
| Missouri |
Kennett(3) | |
| Mexico*(3) | ||
| Owensville(3) | ||
| Washington(3) | ||
| Nebraska |
Alliance(1) | |
| Gothenburg(1) | ||
| Lincoln(1) | ||
| McCook (1) | ||
| Nevada |
Carson City(1) | |
| New Hampshire |
Hollis*(1) | |
| Hudson(1) | ||
| Portsmouth*(1) | ||
| New Jersey |
Pine Brook*(1) | |
| New York |
Clyde(2) | |
| Fairport*(1) |
- 16 -
| State |
City | |
| Lancaster*(1) | ||
| Lyons(3) | ||
| Marion(1) | ||
| Port Washington*(1) | ||
| Smithtown(2) | ||
| North Carolina |
Charlotte(1) | |
| Forest City(1) | ||
| Kings Mountain(1) | ||
| Randleman*(1) | ||
| Wilson(1) | ||
| Ohio |
Akron(1) | |
| Avon(2) | ||
| Brookville(1) | ||
| Columbus(1) | ||
| Eastlake(1) | ||
| Eaton(1) | ||
| Elyria(1)(2) | ||
| Fremont*(1) | ||
| Hicksville(1) | ||
| Kent(1) | ||
| Lewisburg(1) | ||
| Marysville(1) | ||
| Mayfield Heights(1)(2)(3) | ||
| Mentor(2) | ||
| Metamora(1) | ||
| Milford*(1) | ||
| Ravenna(1) | ||
| St. Marys(1) | ||
| Strongsville*(1) | ||
| Vandalia(1) | ||
| Wadsworth(1) | ||
| Wickliffe(1) | ||
| Youngstown(1) | ||
| Oregon |
Eugene(1) | |
| Pennsylvania |
Canton(1) | |
| Harrison City(1) | ||
| Hatfield(1) | ||
| Reading(1) | ||
| South Carolina |
Beaufort(1) | |
| Bishopville (1) | ||
| Moncks Corner(2) | ||
| Spartanburg(1) | ||
| Tennessee |
Collierville*(3) | |
| Greeneville(1) |
- 17 -
| State |
City | |
| Greenfield(3) | ||
| Lebanon(1) | ||
| Livingston(1) | ||
| Texas |
Dallas*(3) | |
| Ft. Worth(1)(2) | ||
| Houston*(1) | ||
| Mansfield(2) | ||
| Nacogdoches(1) | ||
| Utah |
Ogden(2) | |
| Salt Lake City(1) | ||
| Virginia |
Iron Gate*(1) | |
| Lynchburg(1) | ||
| Roanoke*(1) | ||
| Washington |
Seattle*(1)(2) | |
| Wisconsin |
Chetek(1) | |
| Grantsburg(1) | ||
| Manitowoc(1) | ||
| Mauston(3) |
FOREIGN COUNTRIES
| Country |
City | |
| Argentina |
Buenos Aires(1)(3) | |
| Australia |
Castle Hill(1) | |
| Elizabeth West (1) | ||
| Wodonga(1) | ||
| Austria |
Wiener Neustadt(1) | |
| Belgium |
Boom*(1) | |
| Brussels*(1) | ||
| Brazil |
Cachoerinha(1) | |
| Jacarei(1)(3) | ||
| São Paulo(1)(3) | ||
| Sao Jose dos Campos(1)(2) | ||
| Canada |
Grimsby(1) | |
| Milton(1) | ||
| Mississauga*(1) | ||
| Orillia(1) | ||
| Owen Sound(1) | ||
| Chile |
Santiago*(1) | |
| Czech Republic |
Chomutov(1)(3) | |
| Prague*(1)(3) | ||
| Sadská(1) | ||
| Denmark |
Ballerup*(1)(3) | |
| Espergarde(1) |
- 18 -
| Country |
City | |
| Egypt |
Cairo*(1) | |
| England |
Barnstaple (1) | |
| Birtley(1) | ||
| Bolden*(1) | ||
| Brampton*(3) | ||
| Burgess Hill*(1) | ||
| Buxton(1) | ||
| Cannock*(1)(3) | ||
| Cornwall*(1) | ||
| Cradley Heath(1) | ||
| Crewkerne(1) | ||
| Crook Durham(3) | ||
| Derby*(1) | ||
| Dewsbury(1) | ||
| Grantham(1) | ||
| Halesowen(1) | ||
| Hemel Hempstead(1)(3) | ||
| Littlehampton*(1) | ||
| Marlow*(1) | ||
| Ossett(1) | ||
| Rotherham(1) | ||
| Sheffield(1) | ||
| Stanley*(1) | ||
| Tamworth*(1) | ||
| Team Valley(1) | ||
| Warwick(1) | ||
| Watford*(1) | ||
| Finland |
Hyrynsalmi*(1) | |
| Oulu*(1) | ||
| Tampere(1) | ||
| Urjala(1) | ||
| Vantaa(1) | ||
| France |
Annemasse(1) | |
| Contamine(1)(3) | ||
| Dijon(1) | ||
| Evreux(1) | ||
| Paris*(1) | ||
| St. Ouen L’Aumone*(1) | ||
| Vierzon(1) | ||
| Wissembourg(1) | ||
| Germany |
Bad Schonborn*(1) | |
| Bielefeld(1) | ||
| Bietigheim-Bissingen(1) | ||
| Chemnitz(1) |
- 19 -
| Country |
City | |
| Cologne(1)(3)* | ||
| Erfurt(1) | ||
| Essen(1) | ||
| Geringswalde(1) | ||
| Heppenheim*(1) | ||
| Hochmössingen(1) | ||
| Kaarst(1) | ||
| Lampertheim(1) | ||
| Mücke(1) | ||
| Nussdorf*(1) | ||
| Offenburg*(1) | ||
| Pleidelsheim(1) | ||
| Scholß-Holte(1) | ||
| Stuhr-Seckenhausen(1) | ||
| Weiherdamm*(1) | ||
| Wiesbaden(2) | ||
| Greece |
Athens*(1) | |
| Hungary |
Budapest*(1) | |
| India |
Hyderabad(1) | |
| Mumbai(1)(3) | ||
| Ireland |
Dublin*(1) | |
| Italy |
Adro(1) | |
| Arsago Seprio(1) | ||
| Bologna*(1) | ||
| Corsico(1)(3) | ||
| Gessate(3) | ||
| Milan*(1) | ||
| Ortona*(1) | ||
| Padova*(1) | ||
| Siziano*(1) | ||
| Veniano*(1) | ||
| Japan |
Tokyo*(1)(3) | |
| Yokohama(1)(2) | ||
| Malaysia |
Kuala Lumpur*(2) | |
| Mexico |
Apoduca(1) | |
| Guaymas*(2) | ||
| Matamoros(1) | ||
| Montemorelos(3) | ||
| Monterrey(1)(3) | ||
| Tijuana(1) | ||
| Toluca(1) | ||
| Namibia |
Windhoek*(1) | |
| Netherlands |
Amelo*(1) | |
| Arnhem(1) |
- 20 -
| Country |
City | |
| Etten-Leur*(1) | ||
| Hendrik-Ido-Ambacht(1) | ||
| Hoogezand(1) | ||
| Oldenzaal(1)(3) | ||
| New Zealand |
Mt. Wellington(1) | |
| Norway |
Langhus(1) | |
| Peoples Republic of China |
Dong Guan(1) | |
| Hong Kong*(1)(3) | ||
| Shanghai(1)(3) | ||
| Shenzhan*(1) | ||
| Tianjin(1) | ||
| Wuxi*(3) | ||
| Poland |
Siechnice(1) | |
| Swiebodzice*(3) | ||
| Warsaw(1)(3) | ||
| Wroclaw(1) | ||
| Portugal |
Porto*(1) | |
| Singapore |
Singapore(1)(2)(3) | |
| Slovenia |
Novo Mesto*(1) | |
| South Africa |
Kempton Park(1)(3) | |
| South Korea |
Chonan(3) | |
| Hwaseong(1) | ||
| Seoul*(1) | ||
| Siheung(1) | ||
| Yangsan(1) | ||
| Spain |
Barcelona*(1) | |
| Madrid*(1)(3) | ||
| Sweden |
Borås(1) | |
| Falköping(1) | ||
| Skovde*(1) | ||
| Spånga(1) | ||
| Trollhätten(1) | ||
| Switzerland |
Geneva(3) | |
| Taiwan |
Taipei*(1)(3) | |
| Thailand |
Bangkok*(1)(3) | |
| Turkey |
Istanbul*(1) | |
| Kocaeli(3) | ||
| Ukraine |
Kiev*(1) | |
| United Arab Emirates |
Abu Dhabi*(1) | |
| Venezuela |
Caracas*(1)(3) |
The Company believes that its properties have been adequately maintained, are in good condition generally and are suitable and adequate for its business as presently conducted. The extent of utilization of the Company’s properties varies among its plants and from time to time. The Company’s
- 21 -
restructuring efforts over the past several years have brought capacity levels closer to present and anticipated needs. Most of the Company’s material manufacturing facilities remain capable of handling additional volume increases.
ITEM 3. Legal Proceedings. On April 27, 2007, a grand jury in the Southern District of Florida issued a subpoena to the Company’s subsidiary, Parker ITR. The subpoena requires the production of documents, in particular documents related to communications with competitors and customers related to Parker ITR’s marine oil and gas hose business. The Company is responding to this subpoena. On May 7, 2007, the Japan Fair Trade Commission (“JFTC”) requested that Parker ITR appoint an agent related to an investigation of marine hose suppliers. Parker ITR appointed such an agent by power of attorney. Parker ITR has also been required to submit a report to the JTFC on specific topics. The Company and Parker ITR continue to cooperate with the JFTC. On May 15, 2007, the European Commission issued a Request for Information to the Company and its subsidiary, Parker ITR. After the Company and Parker ITR filed a response the European Commission requested additional information. The Company and Parker ITR continue to cooperate with the European Commission
In addition, there are currently four class action lawsuits pending in the Southern District of Florida and one in the Southern District of New York alleging that the Company, Parker ITR and a number of other defendants engaged in violations of Section 1 of the Sherman Act. The class action complaints allege that Parker ITR and the other defendants, for a period of at least eight years, conspired with competitors in unreasonable restraint of trade to artificially raise, fix, maintain or stabilize prices, rig bids and allocate markets and customers for marine oil and gas hose in the United States. In three cases, a summons has been issued for Parker ITR, but service has not yet been effected. The Company, which is only named in one case in the Southern District of Florida, was served on July 13, 2007 and had filed its answer denying the allegations.
ITEM 4. Submission of Matters to a Vote of Security Holders. None.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| (a) | Market for the Registrant’s Common Equity. The Company’s common stock is listed for trading on the New York Stock Exchange. Information regarding stock price and dividend information with respect to the Company’s common stock, as set forth on page 13-40 of Exhibit 13 to this Annual Report on Form 10-K, is incorporated into this section by reference. As of July 31, 2007, the number of shareholders of record of the Company was 4,282. |
| (b) | Use of Proceeds. Not Applicable. |
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| (c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The information set forth in the following table does not take into account the 3-shares-for-2 stock split authorized by the Board of Directors on August 16, 2007. The stock split will be effected on October 1, 2007. |
| Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid Per Share |
(c) Total Number of as Part of Publicly or Programs (1) |
(d) Maximum Number Under
the Plans or | |||||
| April 1, 2007 through April 30, 2007 |
71,300 | $ | 88.32 | 71,300 | 9,691,373 | ||||
| May 1, 2007 through May 31, 2007 |
72,500 | $ | 95.14 | 72,500 | 9,618,873 | ||||
| June 1, 2007 through June 30, 2007 |
68,200 | $ | 99.74 | 68,200 | 9,550,673 | ||||
| Total: |
212,000 | $ | 94.33 | 212,000 | 9,550,673 | ||||
| (1) | On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase of up to 3.0 million shares of its common stock. From time to time, the Board of Directors has adjusted the number of shares authorized for repurchase under this program. On January 25, 2007, the Company publicly announced that its Board of Directors approved an increase in the number of shares authorized for repurchase under this program so that, beginning on such date, the aggregate number of shares authorized for repurchase was equal to 10 million. There is no expiration date for this program. |
On August 16, 2007, the Company publicly announced that its Board of Directors authorized the accelerated repurchase of $500 million worth of its common stock. This authorization is in addition to the repurchase program described above.
ITEM 6. Selected Financial Data. The information set forth on page 13-44 of Exhibit 13 to this Annual Report on Form 10-K is incorporated into this section by reference.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The information set forth on pages 13-2 to 13-12 of Exhibit 13 to this Annual Report on Form 10-K is incorporated into this section by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company enters into forward exchange contracts and costless collar contracts to reduce its exposure to fluctuations in foreign currencies. In addition, in the ordinary course of business, the Company’s foreign locations
- 23 -
enter into various financial guarantees through financial institutions which enable customers to be reimbursed in the event of non-performance by the Company. The total carrying amount and fair value amount of open contracts and any risk to the Company as a result of these arrangements is not material to the Company’s financial position, liquidity or results of operations.
The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company’s objective is to maintain a 60/40 mix between fixed rate and variable rate debt, thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt by approximately $2,051,323.
For further discussion, see the discussion of Significant Accounting Policies Footnote on pages 13-19 to 13-20 of Exhibit 13 to this Annual Report on Form 10-K and incorporated into this section by reference.
ITEM 8. Financial Statements and Supplementary Data. The information set forth on pages 13-13 to 13-40 of Exhibit 13 to this Annual Report on Form 10-K is incorporated into this section by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
ITEM 9A. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of fiscal year 2007. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of fiscal year 2007, the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting set forth on page 13-41 of Exhibit 13 to this Annual Report on Form 10-K is incorporated into this section by reference. The Report of Independent Registered Public Accounting Firm set forth on pages 13-42 and 13-43 of Exhibit 13 to this Annual Report on Form 10-K is incorporated into this section by reference.
There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information. None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance. Information required with respect to the Directors of the Company is set forth under the caption “Election of Directors” in the definitive Proxy Statement for the Company’s 2007 Annual Meeting of Shareholders to be held October
- 24 -
24, 2007 (the “2007 Proxy Statement”) and is incorporated herein by reference. Information with respect to the executive officers of the Company is included in Part I hereof under the caption “Executive Officers of the Registrant”.
The information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2007 Proxy Statement is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer and Controller. The Code of Ethics is posted on the Company’s investor relations internet website at www.phstock.com under the Corporate Governance page. Any amendments to, or a waiver from, a provision of the Company’s Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer or Controller will also be posted at www.phstock.com under the Corporate Governance page.
The information set forth under the captions “Audit Committee Financial Experts” and “Report of the Audit Committee” in the 2007 Proxy Statement is incorporated herein by reference.
ITEM 11. Executive Compensation. The information set forth under the captions “Compensation Discussion and Analysis”, “Compensation Committee Report”, and “Compensation Tables” in the 2007 Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information set forth under the caption “Principal Shareholders” in the 2007 Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information. The following table sets forth certain information regarding the Company’s equity compensation plans as of June 30, 2007, unless otherwise indicated. The information set forth in this table does not take into account the 3-shares-for-2 stock split authorized by the Board of Directors of the Company on August 16, 2007. The stock split will be effected on October 1, 2007.
| Plan Category |
Column (a) Number of securities to |
Column (b) Weighted-average |
Column (c) Number of securities |
||||||
| Equity compensation plans approved by security holders |
8,653,834 | (2) | $ | 57.91 | 6,568,684 | (3) | |||
| Equity compensation |
|||||||||
| plans not approved by security holders(4) |
59,538 | $ | 48.05 | 0 | |||||
| Total |
8,713,372 | $ | 57.84 | 6,568,684 | |||||
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| (1) | In connection with the merger of Commercial Intertech Corp. with and into the Company in April 2000, the Company assumed the administration of the outstanding options under the Commercial Intertech stock option plans until such options are exercised or expire. No new options will be granted under the Commercial Intertech stock option plans. The stock options assumed pursuant to the merger are not included in the table. The number of the Company’s common shares to be issued upon the exercise of these outstanding options is 13,372. The weighted-average exercise price of those outstanding options is $36.61. |
| (2) | Includes 196,279 shares, which represents the actual payout of restricted stock under the 2005-06-07 Long-Term Incentive award (“LTI award”) (which payout was made after June 30, 2007) and the maximum future payouts of restricted stock that may be issued under the Company’s 2006-07-08 and 2007-08-09 LTI awards. Under the Company’s 2006-07-08 and 2007-08-09 LTI awards, payouts will be made in restricted stock unless the participant has made a prior deferral election pursuant to the Executive Deferral Plan. Payouts are determined by comparing the Company’s results during the performance period to the performance of a group of its peers during the same period for the following weighted performance measures: (a) compound annual revenue growth (20% weight); (b) compound annual growth in fully-diluted earnings per share (40% weight); and (c) average return on invested capital (40% weight). Also includes 56,254 phantom shares being held in an account pursuant to the Company’s Stock Option Deferral Plan (which Plan has not been approved by shareholders). The phantom shares resulted from exercises of stock options granted under the Company’s 1990 Employees Stock Option Plan, which was approved by the shareholders. No further deferral elections may be made under the Company’s Stock Option Deferral Plan. |
| (3) | The total number of securities available for issuance under the Company’s 2003 Stock Incentive Plan is equal to the sum of (i) 9,000,000; plus (ii) the amount of any shares that are not delivered to an employee by reason of (A) the expiration, termination, cancellation or forfeiture of an award under the Company’s 1993 Stock Incentive Program; and (B) the tendering or withholding of shares to satisfy all or a portion of the exercise price or tax withholding obligations relating to shares issued or distributed under an award under the 1993 Stock Incentive Program. The maximum number of shares that may be issued under the Company’s 2003 Stock Incentive Plan as restricted stock is limited to 5,000,000 shares. The maximum number of shares that may be issued under the Company’s 2004 Non-Employee Directors’ Stock Incentive Plan is 250,000. The maximum number of shares that may be issued under the Company’s Non-Employee Directors’ Stock Plan, as amended and restated, is 230,000, all of which are granted as common stock, subject to such conditions or restrictions as the Human Resources and Compensation Committee may determine. |
| (4) | The Company’s 1996 Non-Employee Directors Stock Option Plan provides for the issuance of up to 375,000 shares of the Company’s common stock pursuant to stock options granted to the Company’s Directors who are not current or retired employees of the Company. Each option was granted at an exercise price equal to 100% of the fair market value of the Company’s common stock on the date the options were granted. Grants have a ten-year term and vest 50% following one year of continued service and the remaining 50% following the second year of continued service from the date granted. No further options will be granted under the 1996 Non-Employee Directors Stock Option Plan. |
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The information set forth under the captions “Certain Relationships and Related Transactions”, “Review and Approval of Transactions with Related Persons”, and “Director Independence” in the 2007 Proxy Statement is incorporated herein by reference.
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ITEM 14. Principal Accountant Fees and Services. The information set forth under the captions “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Audit Committee Pre-Approval Policies and Procedures” in the 2007 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
| a. | The following are filed as part of this report: |
| 1. | Financial Statements and Schedule |
The financial statements and schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed or incorporated by reference as part of this Annual Report on Form 10-K.
| 2. | Exhibits |
The exhibits listed in the accompanying Exhibit Index and required by Item 601 of Regulation S-K (numbered in accordance with Item 601 of Regulation S-K) are filed, furnished or incorporated by reference as part of this Annual Report on Form 10-K.
- 27 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
| By: | /s/ Timothy K. Pistell | |
| Timothy K. Pistell | ||
| Executive Vice President - Finance and | ||
| Administration and Chief Financial Officer | ||
August 29, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature and Title
DONALD E. WASHKEWICZ, Chairman of the Board of Directors and Chief Executive Officer; DANA A. DENNIS, Principal Accounting Officer; LINDA S. HARTY, Director; WILLIAM E. KASSLING, Director; ROBERT J. KOHLHEPP, Director; GIULIO MAZZALUPI, Director; KLAUS-PETER MÜLLER, Director; CANDY M. OBOURN, Director; JOSEPH M. SCAMINACE, Director; WOLFGANG R. SCHMITT, Director; and MARKOS I. TAMBAKERAS, Director.
Date: August 29, 2007
| /s/ Timothy K. Pistell |
| Timothy K. Pistell, Executive Vice President – Finance and Administration, Principal Financial Officer and Attorney-in-Fact |
- 28 -
PARKER-HANNIFIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
| Reference | ||||
| Form 10-K Annual Report (Page) |
Excerpt from Exhibit 13 (Page) | |||
| Data incorporated by reference from Exhibit 13: | ||||
| Management’s Report on Internal Control over Financial Reporting |
— | 13-41 | ||
| Report of Independent Registered Public Accounting Firm |
— | 13-42 to 13-43 | ||
| Consolidated Statement of Income for the years ended June 30, 2007, 2006 and 2005 |
— | 13-13 | ||
| Consolidated Statement of Comprehensive Income for the years ended June 30, 2007, 2006 and 2005 |
— | 13-13 | ||
| Consolidated Balance Sheet at June 30, 2007 and 2006 |
— | 13-16 | ||
| Consolidated Statement of Cash Flows for the years ended June 30, 2007, 2006 and 2005 |
— | 13-17 | ||
| Notes to Consolidated Financial Statements |
— | 13-18 to 13-40 | ||
| Schedule: | ||||
| II—Valuation and Qualifying Accounts |
F-2 | — | ||
Individual financial statements and related applicable schedules for the Registrant (separately) have been omitted because the Registrant is primarily an operating company and its subsidiaries are considered to be wholly-owned.
F-1
PARKER-HANNIFIN CORPORATION
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2005, 2006 and 2007
(Dollars in Thousands)
| Column A |
Column B | Column C | Column D | Column E | ||||||||||
| Description |
Balance at Beginning Of Period |
Additions Charged to Costs and Expenses |
Other (Deductions)/ Additions (A) |
Balance At End Of Period | ||||||||||
| Allowance for doubtful accounts: |
||||||||||||||
| Year ended June 30, 2005 |
$ | 12,792 | $ | 5,322 | $ | (4,954 | ) | $ | 13,160 | |||||
| Year ended June 30, 2006 |
$ | 13,160 | $ | 4,362 | $ | (5,190 | ) | $ | 12,332 | |||||
| Year ended June 30, 2007 |
$ | 12,332 | $ | 2,133 | $ | (2,810 | ) | $ | 11,655 | |||||
| Deferred tax asset valuation allowance: |
||||||||||||||
| Year ended June 30, 2005 |
$ | 52,730 | $ | (25,509 | ) | $ | 5,017 | $ | 32,238 | |||||
| Year ended June 30, 2006 |
$ | 32,238 | $ | (27,798 | ) | $ | 2,951 | $ | 7,391 | |||||
| Year ended June 30, 2007 |
$ | 7,391 | $ | 20,788 | $ | 717 | $ | 28,896 | ||||||
| (A) | For allowance for doubtful accounts, net balance of deductions due to uncollectible accounts charged off and additions due to acquisitions or recoveries. For deferred tax asset valuation allowance, primarily represents additions due to acquisitions. |
F-2
Exhibit Index
| Exhibit No. | Description of Exhibit | |
| Articles of Incorporation and By-Laws: | ||
| (3)(a) | Amended Articles of Incorporation incorporated by reference to Exhibit 3 to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 1997 (Commission File No. 1-4982). | |
| (3)(b) | Code of Regulations, as amended, incorporated by reference to Exhibit 3(b) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2001 (Commission File No. 1-4982). | |
| Instruments Defining Rights of Security Holders: | ||
| Shareholder Protection Rights Agreement, dated as of February 8, 2007, between the Registrant and National City Bank incorporated by reference to Exhibit 1 to the Registrant’s Form 8-A filed on February 8, 2007 (Commission File No. 1-4982). | ||
| The Registrant is a party to other instruments, copies of which will be furnished to the Commission upon request, defining the rights of holders of its long-term debt identified in Note 9 of the Notes to Consolidated Financial Statements on page 13-28 of Exhibit 13 hereto, which Note is incorporated herein by reference. | ||
| Material Contracts: | ||
| (10)(a) | Form of Change in Control Severance Agreement entered into by the Registrant and executive officers, as amended and restated, incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2003 (Commission File No. 1-4982).* | |
| (10)(b) | Parker-Hannifin Corporation Change in Control Severance Plan, as amended, incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2001 (Commission File No. 1-4982).* | |
| (10)(c) | Form of Indemnification Agreement entered into by the Registrant and its directors and executive officers incorporated by reference to Exhibit 10(c) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2003 (Commission File No. 1-4982).* | |
| (10)(e) | Cancellation Agreement, dated December 29, 2003, between the Registrant, Duane E. Collins and the Trust incorporated by reference to Exhibit 10(c) to the Registrant’s Report on Form 10-Q for the quarterly period ended March 31, 2004 (Commission File No. 1-4982).* | |
| (10)(f) | Form of Executive Life Insurance Agreement entered into by the Registrant and certain executives (including executive officers), as restated, incorporated by reference to Exhibit | |
| 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2002 (Commission File No. 1-4982).* | ||
| (10)(g) | Form of Termination Agreement to the Executive Life Insurance Agreement entered into by the Registrant and executive officers incorporated by reference to Exhibit 10(g) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 1-4982).* | |
| (10)(h) | Description of the Parker-Hannifin Corporation Officer Life Insurance Plan incorporated by reference to Exhibit 10(h) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 1-4982).* | |
| (10)(i) | Parker-Hannifin Corporation Supplemental Executive Retirement Benefits Program (Restatement) incorporated by reference to Exhibit 10(k) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982).* | |
| (10)(j) | Form of Notice of Change to Long Term Disability Benefit and Tax Election Form for certain Executive Officers.* | |
| (10)(k) | Parker-Hannifin Corporation 1993 Stock Incentive Program, as amended, incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 1997 (Commission File No. 1-4982).* | |
| (10)(l) | Parker-Hannifin Corporation 2003 Stock Incentive Plan, as amended and restated, incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed with the Commission on August 16, 2005 (Commission File No. 1-4982).* | |
| (10)(m) | Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed with the Commission on September 26, 2005 (Commission File No. 1-4982).* | |
| (10)(n) | Form of 2007 Grant Letter for Stock Options with Tandem Stock Appreciation Rights for Executive Officers incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | |
| (10)(o) | Form of Grant Letter for Stock Options with Tandem Stock Appreciation Rights for Executive Officers incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K filed with the Commission on August 21, 2007 (Commission File No. 1-4982).* | |
| (10)(p) | Form of 2007 Target Incentive Bonus Award Letter incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | |
| (10)(q) | Form of 2007 Target Incentive Bonus Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.5 to the | |
| Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | ||
| (10)(r) | Form of 2008 Target Incentive Bonus Awards Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed with the Commission on August 21, 2007 (Commission File No. 1-4982).* | |
| (10)(s) | Description of the Parker-Hannifin Corporation 2005-06-07 Long Term Incentive Plan incorporated by reference to Exhibit 10(s) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982).* | |
| (10)(t) | Form of 2006-07-08 Long Term Incentive Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2005 (Commission File No. 1-4982).* | |
| (10)(u) | Form of 2007-08-09 Long Term Incentive Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.6 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | |
| (10)(v) | Form of 2008-09-10 Long Term Incentive Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K filed with the Commission on August 21, 2007 (Commission File No. 1-4982).* | |
| (10)(w) | Form of 2007 RONA Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.7 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | |
| (10)(x) | Form of RONA Award Letter under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10.5 to the Registrant’s Report on Form 8-K filed with the Commission on August 21, 2007 (Commission File No. 1-4982).* | |
| (10)(y) | Parker-Hannifin Corporation Savings Restoration Plan, as restated, incorporated by reference to Exhibit 10(t) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982).* | |
| (10)(z) | Amendment to the Parker-Hannifin Corporation Savings Restoration Plan, as restated, incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2005 (Commission File No. 1-4982).* | |
| (10)(aa) | Parker-Hannifin Corporation Pension Restoration Plan, as amended and restated, incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 1999 (Commission File No. 1-4982).* | |
| (10)(bb) | Parker-Hannifin Corporation Executive Deferral Plan, as restated, incorporated by reference to Exhibit 10(v) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982).* | |
| (10)(cc) | Amendment to the Parker-Hannifin Corporation Executive Deferral Plan, as restated, incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2005 (Commission File No. 1-4982).* | |
| (10)(dd) | Parker-Hannifin Corporation Volume Incentive Plan, as amended, incorporated by reference to Exhibit 10(t) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2000 (Commission File No. 1-4982).* | |
| (10)(ee) | Parker-Hannifin Corporation Non-Employee Directors’ Stock Plan, as amended and restated, incorporated by reference to Exhibit 10(x) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982).* | |
| (10)(ff) | Parker-Hannifin Corporation Non-Employee Directors Stock Option Plan incorporated by reference to Exhibit 10(w) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2001 (Commission File No. 1-4982).* | |
| (10)(gg) | Parker-Hannifin Corporation 2004 Non-Employee Directors’ Stock Incentive Plan incorporated by reference to Exhibit 10(y) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 1-4982).* | |
| (10)(hh) | Form of 2007 Grant Letter for Restricted Stock for Non-Employee Directors incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | |
| (10)(ii) | Parker-Hannifin Corporation Deferred Compensation Plan for Directors, as amended and restated, incorporated by reference to Exhibit 10(x) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2001 (Commission File No. 1-4982).* | |
| (10)(jj) | Amendment to the Parker-Hannifin Corporation Deferred Compensation Plan for Directors, as amended and restated, incorporated by reference to Exhibit 10(c) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2005 (Commission File No. 1-4982).* | |
| (10)(kk) | Parker-Hannifin Corporation Stock Option Deferral Plan incorporated by reference to Exhibit 10(u) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 1998 (Commission File No. 1-4982).* | |
| (10)(ll) | Summary of the Compensation of the Non-Employee Members of the Board of Directors incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2004 (Commission File No. 1-4982). * | |
| (10)(mm) | Summary of the Compensation of the Non-Employee Members of the Board of Directors, effective October 1, 2006, incorporated by reference to Exhibit 10.1 to the Registrant’s | |
| Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982).* | ||
| (10)(nn) | Notice of Issuance of Restricted Stock for Nickolas W. Vande Steeg, dated November 20, 2006, incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K filed with the Commission on November 21, 2006 (Commission File No. 1-4982).* | |
| (11) | Computation of Common Shares Outstanding and Earnings Per Share is incorporated by reference to Note 5 of the Notes to Consolidated Financial Statements on page 13-25 of Exhibit 13 hereto. | |
| (12) | Computation of Ratio of Earnings to Fixed Charges as of June 30, 2007. | |
| (13) | Excerpts from Annual Report to Shareholders for the fiscal year ended June 30, 2007 which are incorporated herein by reference thereto. | |
| (21) | List of subsidiaries of the Registrant. | |
| (23) | Consent of Independent Registered Public Accounting Firm. | |
| (24) | Power of Attorney. | |
| (31)(i)(a) | Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
| (31)(i)(b) | Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
| (32) | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. | |
| * | Management contracts or compensatory plans or arrangements. |
Shareholders may request a copy of any of the exhibits to this Annual Report on Form 10-K by writing to the Secretary, Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141.
Exhibit 10(j)
| To:
|
[Executive Officer] |
| ||
| From:
|
Craig Mockler | |||
| Date:
|
May 18, 2007 | |||
| Action Required By: |
May 31, 2007 | |||
NOTICE OF CHANGE TO LONG TERM DISABILITY (“LTD”) BENEFIT
& TAX ELECTION FORM
As part of our ongoing review process we have enhanced the Long Term Disability (LTD) benefit for all employees on the executive payroll (Grade 19 and above, General Managers and Vice Presidents).
The change, which was effective as of April 15, 2007, increases the maximum monthly benefit to which you may be entitled under the LTD plan. With this change, your new LTD benefit is two-thirds (2/3) of your annual compensation1 up to $595,000. This is a significant increase in your potential LTD benefit, from a cap of $8,888 per month to $33,000 per month.
Your new LTD benefit will be achieved through the issuance of two (2) separate insurance policies: (1) a group policy having a maximum monthly benefit of $15,000; and (2) an individual insurance policy having a maximum monthly benefit of up to $18,000. When combined, your new benefit will replace two-thirds (2/3) of your annual compensation up to $595,000.
The cost of your LTD benefit is paid by Parker and is determined based on individual factors, including your age.
[The following two paragraphs would be included only in letters sent to executives who participate in Parker’s Supplemental Executive Retirement Plan.]
As a participant of Parker’s Supplemental Executive Retirement Plan (“SERP”), if you have at least 10 years of service and become disabled as defined in the LTD plan, you are eligible for early retirement under the SERP. Your SERP benefit would be 55% of your annual compensation, less the following:
| (a) | Company contributions towards your Social Security benefits; |
| (b) | 1% per year for the first 5 years before age 65; |
| (c) | 2% per year for any additional years prior to age 60; and |
| (d) | The excess, if any, of your combined SERP and LTD benefits over two-thirds (2/3) of your annual compensation. |
| 1 |
Annual compensation is defined as your base salary plus RONA bonuses paid during the calendar year ending 12/31 of the year prior to your disability. |
Your total disability benefit from this entire new LTD package and the SERP benefit will not exceed two-thirds (2/3) of your annual compensation.
As a member of Parker’s leadership team, we are committed to delivering you a competitive total rewards package. This enhanced disability benefit is part of that package and is reflective of this on-going commitment. We suggest you share a copy of this notice with your financial advisor.
This benefit will be administered by Oswald Companies. Either Maryann Hudec or Scott Thompson would be pleased to answer any questions you have regarding this benefit. Their contact information is provided below for your convenience.
Your Individual Long-Term Disability Benefits Summary:
| (a) | Your Monthly Benefit: Based on your annual compensation as of 12/31/2006, if you were to become disabled as defined under the policy, you would be currently eligible to receive the following LTD benefits: |
| (i) | Group Policy: $ ___________ per month. |
| (ii) | Individual Policy: $ ____________ per month. |
| (b) | Parker’s Cost: The estimated premium cost to Parker for these policies is $ , however, because the cost of this benefit is determined based on individual factors, this amount will not be confirmed until you have submitted the UnumProvident Guaranteed Standard Application (see below). |
Action Required:
In order to participate in this benefit, you must fill out and complete the UnumProvident Guaranteed Standard Application included with this letter and the Tax Election portion of this letter return both in the enclosed envelope no later than May 31, 2007.
LONG-TERM DISABILITY BENEFIT
TAX ELECTION:
Because the cost of your LTD benefit is paid by Parker, it is considered additional compensation, and is taxable to you. You may elect to have this benefit taxed either at the time the premiums are paid on your behalf, or upon your receipt of disability benefits should that occur.
Please elect one of the following options for the taxation of your LTD benefit:
¨ (1) I elect to have the cost of premiums paid by Parker for my LTD benefit included in my monthly earnings. Accordingly, I will be currently subject to tax on such amount and each month Parker will withhold applicable income and employment taxes in accordance with IRS requirements. However, If I become disabled and qualify for this benefit, I WILL NOT pay federal income tax or employment tax on the benefit when received. Your additional compensation and withholding for the first month will be based on premiums
which were paid to commence coverage on 4/15/2007, the effective date of the policy.
¨ (2) I elect not to have the cost of premiums paid by Parker for my LTD benefit added to my monthly earnings. While I will not currently be subject to income or employment taxes on this amount, if I become disabled and qualify for this benefit, I WILL pay tax on the benefits when received, in accordance with the federal, state and local income tax laws in effect at that time.
Please sign, date and return this election form either via e-mail or in the enclosed envelope no later than: May 31, 2007.
| Signature: | ||||||
| Date | ||||||
| Printed: |
Questions?
If you have questions regarding your new Long Term Disability benefit, please the following Oswald Companies representatives:
| • | Maryann Hudec at 216-367-8830 or mhudec@oswaldcompanies.com (or Toll Free at 1-800-466-0468 ext. 8830) or |
| • | Scott Thompson at 216-367-4948 or sthompson@oswaldcompanies.com (or Toll Free at 1-800-466-0468 ext. 4948) |
Exhibit 12
Exhibit (12) * to Report
on Form 10-K for Fiscal
Year Ended June 30, 2007
by Parker-Hannifin Corporation
Computation of Ratio of Earnings to Fixed Charges
as of June 30, 2007
| Fiscal Year Ended June 30, | |||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||
| EARNINGS |
|||||||||||||||
| Income from continuing operations before income taxes |
$ | 1,159,282 | $ | 899,958 | $ | 738,271 | $ | 472,956 | $ | 286,608 | |||||
| Add: |
|||||||||||||||
| Interest on indebtedness, exclusive of interest capitalized in accordance with FASB #34 and interest on ESOP loan guarantee |
80,053 | 71,100 | 62,482 | 67,183 | 75,068 | ||||||||||
| Amortization of deferred loan costs |
1,511 | 1,888 | 1,457 | 2,293 | 1,786 | ||||||||||
| Portion of rents representative of interest factor |
29,000 | 25,609 | 21,507 | 21,213 | 20,585 | ||||||||||
| Equity share of losses of companies for which debt obligations are not guaranteed |
2,124 | 897 | 2,895 | ||||||||||||
| Amortization of previously capitalized interest |
282 | 304 | 280 | 291 | 291 | ||||||||||
| Income as adjusted |
$ | 1,272,252 | $ | 999,756 | $ | 823,997 | $ | 563,936 | $ | 387,233 | |||||
| FIXED CHARGES |
|||||||||||||||
| Interest on indebtedness, exclusive of interest capitalized in accordance with FASB #34 and interest on ESOP loan guarantee |
$ | 80,053 | $ | 71,100 | $ | 62,482 | $ | 67,183 | $ | 75,068 | |||||
| Capitalized interest |
436 | 178 | |||||||||||||
| Amortization of deferred loan costs |
1,511 | 1,888 | 1,457 | 2,293 | 1,786 | ||||||||||
| Portion of rents representative of interest factor |
29,000 | 25,609 | 21,507 | 21,213 | 20,585 | ||||||||||
| Fixed charges |
$ | 111,000 | $ | 98,775 | $ | 85,446 | $ | 90,689 | $ | 97,439 | |||||
| RATIO OF EARNINGS TO FIXED CHARGES |
11.46x | 10.12x | 9.64x | 6.22x | 3.97x | ||||||||||
Exhibit 13
Exhibit (13) to Report
On Form 10-K for Fiscal
Year Ended June 30, 2007
By Parker-Hannifin Corporation
Forward-Looking Statements
Forward-looking statements contained in this Annual Report and other written reports and oral statements are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the Company’s future performance and earnings projections of the Company may differ materially from current expectations, depending on economic conditions within both its industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins and growth and innovation initiatives. A change in economic conditions in individual markets may have a particularly volatile effect on segment performance. Among other factors which may affect future performance are:
| • | changes in business relationships with and purchases by or from major customers or suppliers, including delays or cancellations in shipments, or significant changes in financial condition, |
| • | uncertainties surrounding timing, successful completion or integration of acquisitions, |
| • | threats associated with and efforts to combat terrorism, |
| • | competitive market conditions and resulting effects on sales and pricing, |
| • | increases in raw material costs that cannot be recovered in product pricing, |
| • | the Company’s ability to manage costs related to insurance and employee retirement and health care benefits, and |
| • | global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, interest rates and credit availability. |
The Company undertakes no obligation to update or publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report.
13 - 1
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overview
The Company is a leading worldwide diversified manufacturer of motion control products and systems, providing precision engineered solutions for a wide variety of commercial, mobile, industrial and aerospace markets.
The Company’s order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company has historically published its order rates on a monthly basis. However, beginning in fiscal 2008, the Company will publish order rates on a quarterly basis in order to more effectively characterize the longer term trends of the Company’s markets. The lead time between the time an order is received and revenue is realized can range from one day to 12 weeks for commercial, mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:
| • | Institute of Supply Management (ISM) index of manufacturing activity with respect to North American commercial, mobile and industrial markets, |
| • | Purchasing Managers Index (PMI) on manufacturing activity with respect to most International commercial, mobile and industrial markets, and |
| • | Aircraft miles flown and revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets. |
An ISM and PMI index above 50 indicates that the manufacturing economy is expanding resulting in the expectation that the Company’s order rates in the commercial, mobile and industrial markets should be positive year-over-year. The ISM index at the end of fiscal 2007 was 56.0 and the most recent PMI for the Eurozone countries was 54.1. With respect to the commercial aerospace market, aircraft miles flown and revenue passenger miles in 2007 have shown moderate improvement over comparable fiscal 2006 levels and the Company expects similar improvement in fiscal 2008. The Company anticipates that Department of Defense spending in fiscal 2008 will be about 2 percent higher than the fiscal 2007 level.
The Company also believes that there is a high correlation between interest rates and Industrial manufacturing activity. The Federal Reserve did not change the federal funds rate during fiscal 2007 but did raise the federal funds rate eight times during fiscal 2006. Increases in the federal funds rate typically have a negative impact on industrial production thereby lowering future order rates while decreases in the federal funds rate typically have the opposite effect.
The Company’s major opportunities for growth are as follows:
| • | Leverage the Company’s broad product line with customers desiring to consolidate their vendor base and outsource system engineering, |
| • | Marketing systems solutions for customer applications, |
| • | Expand the Company’s business presence outside of North America, |
| • | New product introductions, including those resulting from the Company’s innovation initiatives, |
| • | Completing strategic acquisitions in a consolidating motion and control industry, and |
| • | Expanding the Company’s vast distribution network. |
The financial condition of the Company remains strong as evidenced by the continued generation of substantial cash flows from operating activities, which were $955 million or 8.9 percent of sales in fiscal 2007, a debt to debt-equity ratio of 21.4 percent, ample borrowing capabilities and strong short-term credit ratings.
Acquisition opportunities remain available to the Company within its target markets. During fiscal 2007, the Company completed 11 acquisitions whose aggregate incremental annual revenues were approximately $260 million. The Company believes that future financial results will reflect the benefit of a fast and efficient integration of the companies recently acquired. Acquisitions will continue to be considered from time to time to the extent there is a strong strategic fit, while at the same time, maintaining the Company’s strong financial position. The Company will also continue to assess the strategic fit of its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.
13 - 2
The Company routinely strives to improve customer service levels and manage changes in raw material prices and expenses related to employee health and welfare benefits. The Company is currently focused on maintaining its financial strength through the current Industrial North American slowdown, especially in the automotive, heavy-duty truck and construction markets. The Company has in place a number of strategic financial performance initiatives relating to growth and margin improvement in order to meet these challenges, including strategic procurement, strategic pricing, lean enterprise, product innovation and business realignments.
The discussion below is structured to separately discuss each of the financial statements presented on pages 13-13 to 13-17. All year references are to fiscal years.
Discussion of Consolidated Statement of Income
The Consolidated Statement of Income summarizes the Company’s operating performance over the last three fiscal years.
| (millions) |
2007 | 2006 | 2005 | |||||||||
| Net sales |
$ | 10,718 | $ | 9,386 | $ | 8,069 | ||||||
| Gross profit margin |
22.8 | % | 21.5 | % | 20.8 | % | ||||||
| Selling, general and administrative expenses |
$ | 1,227 | $ | 1,037 | $ | 860 | ||||||
| Interest expense |
83 | 76 | 67 | |||||||||
| Other (income) expense, net |
(7 | ) | (9 | ) | 8 | |||||||
| (Gain) loss on disposal of assets |
(17 | ) | 15 | 4 | ||||||||
| Effective tax rate from continuing operations |
28.4 | % | 29.1 | % | 27.8 | % | ||||||
| Income from continuing operations |
$ | 830 | $ | 638 | $ | 533 | ||||||
| Income from continuing operations, as a percent of sales |
7.7 | % | 6.8 | % | 6.6 | % | ||||||
| Discontinued operations |
$ | 35 | $ | 72 | ||||||||
| Net income |
$ | 830 | $ | 673 | $ | 605 | ||||||
Net sales in 2007 were 14.2 percent higher than 2006. The increase in sales in 2007 primarily reflects higher volume experienced across all Segments. Acquisitions completed within the last 12 months contributed about 45 percent of the net sales increase. The effect of currency rate changes increased net sales by approximately $241 million.
Net sales in 2006 were 16.3 percent higher than 2005. The increase in sales in 2006 primarily reflects higher volume experienced across all Segments. Acquisitions completed within the last 12 months contributed about one-half of the net sales increase. The effect of currency rate changes reduced net sales in 2006 by approximately $38 million.
During 2007, the Company experienced strong business conditions in several of the markets of the Industrial International businesses and the Aerospace Segment. Softer business conditions were experienced in a number of markets of the Industrial North America businesses and the Climate & Industrial Controls Segment. For 2008, the Company expects the strong business conditions experienced in the Industrial International businesses and the Aerospace Segment to continue while business conditions in a number of the markets in the Industrial North American operations and Climate & Industrial Controls segment will continue to be soft.
Gross profit margin was higher in 2007 primarily due to a combination of the increase in sales and the effects of the Company’s financial performance initiatives, especially in the Industrial International businesses. Current-year acquisitions, not yet fully integrated, negatively affected the current-year gross margin. The higher margins in 2006 were primarily due to a combination of the increase in sales as well as the effects of the Company’s financial performance initiatives, especially in the areas of lean manufacturing and strategic procurement.
13 - 3
Selling, general and administrative expenses increased 18.3 percent in 2007 primarily due to the higher sales volume as well as higher expenses related to research and development, incentive compensation and professional fees.
Interest expense increased in 2007 primarily due to higher average debt outstanding as well as higher interest rates, primarily on commercial paper borrowings. Interest expense increased in 2006 as a result of higher average debt outstanding resulting from an increase in borrowings used to fund 2006 acquisition activity.
(Gain) loss on disposal of assets includes plant and equipment disposals, divestitures of businesses and miscellaneous asset adjustments.
| (millions) |
2007 | 2006 | 2005 | ||||||||
| Plant and equipment disposals |
$ | (11 | ) | $ | (1 | ) | $ | 3 | |||
| Divestitures |
(6 | ) | 10 | ||||||||
| Asset adjustments |
6 | 1 | |||||||||
The amount for divestitures in 2007 primarily relates to the final accounting for a business divested in 2002. The amount for divestitures in 2006 primarily relates to the sale of the Thermoplastics division.
Effective tax rate from continuing operations was lower in 2007 primarily due to a higher amount of research and development tax credits received in 2007 as compared to 2006. The effective tax rate in 2006 was higher primarily due to a lower level of research and development tax credits as compared to 2005, partially offset by the effect of tax planning initiatives. In August 2007, a new German tax rate was enacted. The effect of the new tax rate will be accounted for as a discrete tax item in the first quarter of fiscal 2008 resulting in a tax benefit of approximately $7 million.
Income from continuing operations—In addition to the individual income statement items discussed above, the Company’s qualified defined benefit plans positively affected net income in 2007 by a decrease in expense of approximately $21 million and adversely affected net income in 2006 by an additional expense of approximately $19 million, both primarily due to changes in actuarial assumptions and the amortization of actuarial losses. Net income in 2008 is expected to be positively affected by a decrease in pension expense related to the Company’s qualified defined benefit plans of approximately $14 million primarily due to changes in actuarial assumptions and lower expense from the amortization of prior years’ actuarial losses.
Discontinued operations represents the operating results and related gain on the sale, net of tax, of the Astron Buildings business which was divested in August 2005 and the Wynn’s Specialty Chemical business which was divested in December 2004.
Other comprehensive income (loss)—Items included in other comprehensive income (loss) are gains and losses that under generally accepted accounting principles are recorded directly into stockholders’ equity. The following are the Company’s items of other comprehensive income (loss):
| (millions) |
2007 | 2006 | 2005 | |||||||
| Foreign currency translation |
$ | 120 | $ | 104 | $ | 13 | ||||
| Net unrealized gains (losses) |
5 | (18 | ) | |||||||
| Minimum pension liability prior to the adoption of FAS 158 |
222 | 167 | (154 | ) | ||||||
13 - 4
The change in foreign currency translation in 2007 and 2006 primarily resulted from the weakening of the U.S. dollar against most other currencies. See Note 10 to the Consolidated Financial Statements for discussion of the minimum pension liability.
Discussion of Business Segment Information
The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company’s various businesses are managed for internal review and decision-making. See Note 1 to the Consolidated Financial Statements for a description of the Company’s reportable business segments.
Industrial Segment (millions)
| 2007 | 2006 | 2005 | ||||||||||
| Sales |
||||||||||||
| North America |
$ | 4,064 | $ | 3,993 | $ | 3,517 | ||||||
| International |
3,901 | 2,903 | 2,398 | |||||||||
| Operating income |
||||||||||||
| North America |
598 | 597 | 468 | |||||||||
| International |
533 | 354 | 267 | |||||||||
| Operating income as a percent of sales |
||||||||||||
| North America |
14.7 | % | 15.0 | % | 13.3 | % | ||||||
| International |
13.7 | % | 12.2 | % | 11.1 | % | ||||||
| Backlog |
$ | 1,393 | $ | 1,178 | $ | 944 | ||||||
| Assets |
6,669 | 6,154 | 4,714 | |||||||||
| Return on average assets |
17.7 | % | 17.5 | % | 16.4 | % | ||||||
Sales in 2007 for the Industrial North American operations were 1.8 percent higher than 2006 following a 13.6 percent increase from 2005 to 2006. Acquisitions accounted for all of the sales increase in 2007. Excluding acquisitions, sales were lower in 2007 as a result of lower end-user demand experienced in several markets, most notably automotive, heavy-duty truck and construction. The sales increase from 2005 to 2006 was primarily due to acquisitions as well as higher end-user demand experienced in virtually all markets, with the largest increases in heavy-duty truck, construction and oil and gas.
Sales in the Industrial International operations increased 34.4 percent in 2007 following an increase of 21.0 percent from 2005 to 2006. The sales increase in 2007 was primarily due to acquisitions, which accounted for about 40 percent of the sales increase, as well as higher volume in Europe, Latin America and the Asia Pacific region. Foreign currency rate changes, primarily the weakening of the U.S. dollar against the Euro, increased net sales in 2007 by $222 million. The increase in sales from 2005 to 2006 was primarily due to acquisitions, which accounted for about 70 percent of the sales increase, as well as higher volume in Europe and the Asia Pacific region.
The lower Industrial North American operating margins in 2007 were primarily due to the lower volume, higher business realignment charges and higher raw material costs more than offsetting margin improvement from lean manufacturing initiatives. The higher Industrial North American operating margins in 2006 were primarily due to the increased sales volume as well as operating efficiencies. Acquisitions, not yet fully integrated, negatively impacted margins in both 2007 and 2006. Included in Industrial North American operating income in 2007, 2006 and 2005 are business realignment charges of $9.8 million, $5.4 million and $3.7 million, respectively. The business realignment charges resulted from actions the Company took to structure the Industrial North American operations to operate in their then current economic environment and primarily consisted of severance costs and costs relating to the consolidation of manufacturing operations.
The Industrial International operating margin improvement in 2007 and 2006 was primarily due to the higher sales volume, especially throughout all businesses in Europe, as well as the effects of the Company’s financial performance initiatives. Acquisitions, not fully integrated, negatively impacted margins in 2007 and 2006. Operating income in 2007, 2006 and 2005 included $8.9 million, $10.3 million and $9.9 million, respectively, of business realignment charges that were taken to appropriately structure primarily the European operations.
13 - 5
The Company anticipates Industrial North American sales for 2008 will exceed the 2007 level by about one percent and Industrial International sales for 2008 will exceed the 2007 level by about 9.5 percent. Industrial North American operating margins in 2008 are expected to range from 14.5 percent to 14.9 percent and Industrial International margins are expected to range from 14.0 percent to 14.4 percent. The Company expects to continue to take actions necessary to structure appropriately the Industrial Segment operations to operate in their current economic environment. Such actions may include the necessity to record business realignment charges in 2008.
The increase in total Industrial Segment backlog in 2007 was primarily due to higher order rates in the Industrial International businesses. The increase in backlog in 2006 was primarily due to acquisitions, which contributed about one-half of the increase, as well as higher order rates in both the Industrial North American and Industrial International businesses.
The increase in assets in 2007 and 2006 was primarily due to current-year acquisitions and the effect of currency fluctuations partially offset by a decrease in property, plant and equipment.
Aerospace Segment (millions)
| 2007 | 2006 | 2005 | ||||||||||
| Sales |
$ | 1,685 | $ | 1,505 | $ | 1,359 | ||||||
| Operating income |
270 | 221 | 199 | |||||||||
| Operating income as a percent of sales |
16.0 | % | 14.7 | % | 14.7 | % | ||||||
| Backlog |
$ | 1,359 | $ | 1,328 | $ | 1,229 | ||||||
| Assets |
779 | 748 | 658 | |||||||||
| Return on average assets |
35.4 | % | 31.4 | % | 30.8 | % | ||||||
Sales in 2007 increased 12.0 percent compared to an increase of 10.7 percent from 2005 to 2006. The increase in sales in both 2007 and 2006 was primarily due to an increase in both commercial original equipment manufacturer (OEM) and aftermarket volume. Sales in 2006 also benefited from higher military market volume.
The higher margins in 2007 were primarily due to the increased volume, with a higher concentration of sales occurring in the aftermarket businesses. Operating margin in 2006 remained at the 2005 level primarily due to a higher concentration of 2006 sales occurring in the commercial and military OEM businesses as well as higher engineering costs incurred in 2006 for new programs.
Shipments in 2007 were about the same as order rates resulting in a slight change in backlog from 2006. The increase in backlog in 2006 was primarily due to higher order rates experienced in both the commercial and military businesses. For 2008, sales are expected to remain at or be slightly higher than in 2007 and operating margins are expected to range from 15.7 percent to 16.1 percent. Heavier concentration of commercial OEM volume in future product mix could result in lower margins.
The increase in assets in 2007 and 2006 was primarily due to increases in accounts receivable and inventory. A portion of the increase in assets in 2006 was also attributable to an acquisition.
Climate & Industrial Controls Segment (millions)
| 2007 | 2006 | 2005 | ||||||||||
| Sales |
$ | 1,068 | $ | 985 | $ | 794 | ||||||
| Operating income |
82 | 83 | 75 | |||||||||
| Operating income as a percent of sales |
7.7 | % | 8.5 | % | 9.4 | % | ||||||
| Backlog |
$ | 183 | $ | 190 | $ | 131 | ||||||
| Assets |
831 | 812 | 696 | |||||||||
| Return on average assets |
10.0 | % | 11.0 | % | 14.2 | % | ||||||
13 - 6
Sales in 2007 increased 8.4 percent compared to a 24.0 percent increase in sales from 2005 to 2006. The increase in sales in 2007 was primarily due to acquisitions, which accounted for almost 70 percent of the increase. The increase in sales in 2006 was primarily due to acquisitions, which accounted for about one-half of the sales increase, as well as higher end-user demand in the residential air conditioning market, which was driven by energy efficiency legislation. The lower margins in 2007 were primarily due to product mix, increased raw material costs as well as costs incurred to integrate recent acquisitions. The lower margins in 2006 were primarily due to manufacturing inefficiencies related to plant relocations and integration costs related to acquisitions. Operating income in 2006 included $3.6 million of business realignment charges.
The Company anticipates sales in 2008 to remain at or be slightly higher than in 2007 and operating margins in 2008 to be in a range of 7.8 percent to 8.2 percent.
The increase in assets in 2007 and 2006 was primarily due to acquisitions and an increase in inventory partially offset by a decline in property, plant and equipment. The increase in 2006 was also due to an increase in accounts receivable.
Corporate assets decreased 64.7 percent in 2007 and 42.2 percent in 2006. The fluctuation in 2007 is primarily due to a decrease in prepaid pension cost resulting from the adoption of a new accounting pronouncement and a decrease in cash. The fluctuation in 2006 is primarily due to a decrease in cash partially offset by an increase in investments and a decrease in inventory reserves.
Discussion of Consolidated Balance Sheet
The Consolidated Balance Sheet shows the Company’s financial position at year-end, compared with the previous year-end. This statement provides information to assist in assessing factors such as the Company’s liquidity and financial resources.
| (millions) |
2007 | 2006 | ||||
| Accounts receivable |
$ | 1,738 | $ | 1,592 | ||
| Inventories |
1,266 | 1,183 | ||||
| Plant and equipment, net |
1,736 | 1,694 | ||||
| Investments and other assets |
469 | 859 | ||||
| Goodwill |
2,254 | 2,010 | ||||
| Intangible assets, net |
596 | 471 | ||||
| Accounts payable, trade |
789 | 771 | ||||
| Shareholders’ equity |
4,712 | 4,241 | ||||
| Working capital |
$ | 1,461 | $ | 1,458 | ||
| Current ratio |
1.76 | 1.87 | ||||
Accounts receivable are primarily receivables due from customers for sales of product ($1,560.2 million at June 30, 2007 and $1,475.9 million at June 30, 2006). The current-year increase in accounts receivable is primarily due to acquisitions as well as a higher level of sales experienced in the latter part of the current fiscal year as compared to fiscal 2006. Days sales outstanding relating to trade receivables for the Company decreased to 49 days in 2007 from 51 days in 2006.
Inventories increased primarily due to acquisitions. Days supply of inventory on hand increased to 62 days in 2007 from 60 days in 2006.
Plant and equipment, net of accumulated depreciation, increased in 2007 primarily due to plant and equipment acquired in current-year acquisitions partially offset by depreciation expense exceeding capital expenditures.
Goodwill increased primarily as a result of current-year acquisitions.
Intangible assets, net consist primarily of patents, trademarks and customer lists. Intangible assets, net increased primarily due to current-year acquisitions.
Investments and other assets decreased due to the effect of the adoption of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” as discussed in Note 1 to the Consolidated Financial Statements.
Accounts payable, trade increased slightly due to acquisitions.
13 - 7
Accrued payrolls and other compensation increased to $376.7 million from $297.0 million primarily due to higher incentive compensation accruals and acquisitions.
Accrued domestic and foreign taxes increased to $152.7 million in 2007 from $140.4 million in 2006 primarily due to higher taxable income in 2007.
Pensions and other postretirement benefits decreased $457.1 million in 2007. The change in this amount is explained further in Note 10 to the Consolidated Financial Statements.
Net deferred income taxes increased $34 million over the prior year and are discussed further in Note 4 to the Consolidated Financial Statements.
Shareholders’ equity—The change in shareholders’ equity is explained in Note 12 to the Consolidated Financial Statements.
Discussion of Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company’s operating, investing and financing activities.
A summary of cash flows follows:
| (millions) |
2007 | 2006 | 2005 | |||||||||
| Cash provided by (used in): |
||||||||||||
| Operating activities |
$ | 955 | $ | 955 | $ | 853 | ||||||
| Investing activities |
(579 | ) | (921 | ) | (565 | ) | ||||||
| Financing activities |
(379 | ) | (194 | ) | (138 | ) | ||||||
| Effect of exchange rates |
4 | (4 | ) | 2 | ||||||||
| Net increase (decrease) in cash and cash equivalents |
$ | 1 | $ | (164 | ) | $ | 152 | |||||
Cash Flows From Operating Activities—Cash provided by operating activities in 2007 was comparable to the prior year. The current-year increase in net income was primarily offset by cash used to fund the Company’s qualified defined benefit plans. Cash flow from working capital items decreased in 2007 primarily due to an increase in cash flow used by inventories, accounts payable, trade and accrued domestic and foreign taxes offset by a decrease in cash flow used by accounts receivable and an increase in cash flow provided by accrued payrolls and other compensation.
Cash Flows Used In Investing Activities—The decrease in the amount of cash used in investing activities in 2007 is primarily due to a decrease in acquisition activity partially offset by the absence of proceeds from the sale of businesses. Refer to Note 2 to the Consolidated Financial Statements for a summary of net assets of acquired companies at their respective acquisition dates.
Cash Flows From Financing Activities—The increase in cash used in financing activities from the prior year is due to common share activity which used cash of $364.3 million in 2007 compared to providing cash of $16.9 million in 2006. Common share activity primarily involves the exercise of stock options and the repurchase of shares of the Company’s common stock for treasury. The change in common share activity in 2007 is primarily due to a higher level of repurchases of the Company’s common stock for treasury during 2007 as compared to 2006. In August 2007, the Company entered into an accelerated stock repurchase agreement. See Notes 8 and 11 to the Consolidated Financial Statements for further discussion.
Dividends have been paid for 228 consecutive quarters, including a yearly increase in dividends for the last 51 fiscal years. The current expected annual dividend rate, before giving effect to the stock split authorized in August 2007, is $1.26 per share.
13 - 8
The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. As one means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-equity of no more than 37 percent.
| Debt to Debt-Equity Ratio (dollars in millions) |
2007 | 2006 | ||||||
| Debt |
$ | 1,285 | $ | 1,132 | ||||
| Debt & Equity |
5,997 | 5,373 | ||||||
| Ratio |
21.4 | % | 21.1 | % | ||||
The Company has the availability to issue securities under its universal shelf registration statement. Securities that may be issued under this shelf registration statement include debt securities, common stock, serial preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
As of June 30, 2007, the Company has a line of credit totaling $1,025 million through a multi-currency revolving credit agreement with a group of banks. The Company has the right, no more than once a year, to increase the facility amount, in minimum increments of $25 million up to a maximum facility amount of $1,250 million. The credit agreement expires October 2011, however the Company has the right to request a one-year extension of the expiration date on an annual basis. The credit agreement supports the Company’s commercial paper note program, which is rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. These ratings are considered investment grade. The revolving credit agreement contains provisions that increase the facility fee of the credit agreement in the event the Company’s credit ratings are lowered. A lowering of the Company’s credit ratings would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
The Company seeks to minimize its total cost of borrowing and therefore uses its commercial paper note program as its primary source of working capital liquidity. The primary alternative source of borrowing for working capital liquidity is the committed line of credit, which typically bears a higher cost of borrowing.
The Company’s credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. At the Company’s present rating level, the most restrictive financial covenant provides that the ratio of secured debt to net tangible assets be less than 10 percent. As of June 30, 2007, the ratio of secured debt to net tangible assets was less than one percent. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.
Based upon the Company’s past performance and current expectations, management believes the cash flows generated from future operating activities should provide adequate funds to support internal growth and continued improvements in the Company’s manufacturing facilities and equipment. The Company’s worldwide financial capabilities may be used to support planned growth, dividend payments and share repurchases, as needed. The Company regularly considers acquisition opportunities and additional borrowings may be used to finance acquisitions completed in 2008.
Contractual Obligations—The following table summarizes the Company’s fixed contractual obligations.
| In thousands |
Payments due by period | ||||||||||||||
| Contractual obligations |
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years | ||||||||||
| Long-term debt (Note 9) |
$ | 1,148,935 | $ | 59,019 | $ | 59,709 | $ | 419,867 | $ | 610,340 | |||||
| Interest on long-term debt |
312,828 | 50,405 | 93,301 | 79,451 | 89,671 | ||||||||||
| Operating leases (Note 9) |
222,022 | 64,385 | 75,733 | 30,527 | 51,377 | ||||||||||
| Retirement benefits (Note 10) |
1,601,580 | 160,316 | 260,339 | 293,908 | 887,017 | ||||||||||
| Total |
$ | 3,285,365 | $ | 334,125 | $ | 489,082 | $ | 823,753 | $ | 1,638,405 | |||||
13 - 9
Quantitative and Qualitative Disclosures About Market Risk
The Company enters into forward exchange contracts and costless collar contracts to reduce its exposure to fluctuations in related foreign currencies. The total carrying amount and fair value of open contracts and any risk to the Company as a result of these arrangements is not material to the Company’s financial position, liquidity or results of operations.
The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company’s objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 2007 by approximately $2.1 million.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management’s judgment.
Revenue Recognition—Substantially all of the Industrial Segment and Climate & Industrial Controls Segment revenues are recognized when the risks and rewards of ownership and title to the product have transferred to the customer. This generally takes place at the time the product is shipped. The Aerospace Segment uses the percentage of completion, units of delivery method to recognize a portion of its revenue. The percentage of completion method requires the use of estimates of costs to complete long-term contracts and for some contracts includes estimating costs related to aftermarket orders. The estimation of these costs requires substantial judgment on the part of management due to the duration of the contracts as well as the technical nature of the products involved. Adjustments to estimated costs are made on a consistent basis and a contract reserve is established when the costs to complete a contract exceed the contract revenues.
Impairment of Goodwill and Long-lived Assets—Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. A discounted cash flow model is used to estimate the fair value of a reporting unit. This model requires the use of long-term planning forecasts and assumptions regarding industry specific economic conditions that are outside the control of the Company. Long-lived assets held for use are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use and eventual disposition is less than their carrying value. The long-term nature of these assets requires the estimation of its cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test.
Inventories—Inventories are valued at the lower of cost or market. Cost is determined on the last-in, first-out basis for a majority of U.S. inventories and on the first-in, first-out basis for the balance of the Company’s inventories. Inventories have been reduced by an allowance for obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales. Changes in the allowance have not had a material effect on the Company’s results of operations, financial position or cash flows.
13 - 10
Pensions and Postretirement Benefits Other Than Pensions—The annual net periodic expense and benefit obligations related to the Company’s defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term return on plan assets, increases in compensation levels, amortization periods for actuarial gains and losses and health care cost trends. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plan’s measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements. For the Company’s domestic defined benefit plans, a one-half percentage point change in the assumed long-term rate of return on plan assets is estimated to have an $8 million effect on pension expense and a one-half percentage point decrease in the discount rate is estimated to increase pension expense by $14 million. As of June 30, 2007, $267.6 million of past years’ net actuarial losses related to the Company’s domestic qualified defined benefit plans have yet to be amortized. These losses will generally be amortized over approximately 11 years and will negatively affect earnings in the future. Actuarial gains experienced in future years will help reduce the effect of the actuarial loss amortization.
Further information on pensions and postretirement benefits other than pensions is provided in Note 10 to the Consolidated Financial Statements.
Stock-Based Compensation—The computation of the expense associated with stock-based compensation requires the use of a valuation model. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options and stock appreciation rights. The Black-Scholes model requires assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend ratio. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility, future dividend payments and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.
Other Loss Reserves—The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability, litigation, recoverability of deferred income tax benefits and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss reserves are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.
13 - 11
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet finalized the effect on the Company’s financial position or results of operations of complying with the provisions of FIN 48 but does not anticipate the effect to be material.
In August 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the effect on the Company’s financial position or results of operations of complying with the provisions of Statement No. 157.
In February 2007, the FASB issued FASB Statement No. 159, “Fair Value Option for Financial Assets and Financial Liabilities.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined whether it will elect to measure any of its financial assets and financial liabilities at fair value as permitted by Statement No. 159.
13 - 12
Consolidated Statement of Income
| For the years ended June 30, | |||||||||||
| (Dollars in thousands, except per share amounts) |
2007 | 2006 | 2005 | ||||||||
| Net Sales |
$ | 10,718,059 | $ | 9,385,888 | $ | 8,068,805 | |||||
| Cost of sales |
8,272,949 | 7,367,618 | 6,391,477 | ||||||||
| Gross profit |
2,445,110 | 2,018,270 | 1,677,328 | ||||||||
| Selling, general and administrative expenses |
1,226,861 | 1,036,646 | 860,278 | ||||||||
| Interest expense |
83,414 | 75,763 | 66,869 | ||||||||
| Other (income) expense, net |
(7,183 | ) | (9,393 | ) | 8,040 | ||||||
| (Gain) loss on disposal of assets |
(17,264 | ) | 15,296 | 3,870 | |||||||
| Income from continuing operations before income taxes |
1,159,282 | 899,958 | 738,271 | ||||||||
| Income taxes (Note 4) |
329,236 | 261,682 | 205,105 | ||||||||
| Income from continuing operations |
830,046 | 638,276 | 533,166 | ||||||||
| Income from discontinued operations (Note 2) |
34,891 | 71,526 | |||||||||
| Net Income |
$ | 830,046 | $ | 673,167 | $ | 604,692 | |||||
| Earnings per Share (Note 5) |
|||||||||||
| Basic earnings per share |
|||||||||||
| Income from continuing operations |
$ | 7.13 | $ | 5.35 | $ | 4.49 | |||||
| Income from discontinued operations |
0.30 | 0.60 | |||||||||
| Net income per share |
$ | 7.13 | $ | 5.65 | $ | 5.09 | |||||
| Diluted earnings per share |
|||||||||||
| Income from continuing operations |
$ | 7.01 | $ | 5.28 | $ | 4.43 | |||||
| Income from discontinued operations |
0.29 | 0.59 | |||||||||
| Net income per share |
$ | 7.01 | $ | 5.57 | $ | 5.02 | |||||
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Comprehensive Income
| For the years ended June 30, | |||||||||||
| (Dollars in thousands) |
2007 | 2006 | 2005 | ||||||||
| Net Income |
$ | 830,046 | $ | 673,167 | $ | 604,692 | |||||
| Other comprehensive income (loss), net of taxes (Note 11): |
|||||||||||
| Foreign currency translation adjustment |
119,582 | 103,842 | 13,138 | ||||||||
| Minimum pension liability |
221,546 | 167,008 | (154,377 | ) | |||||||
| (Loss) on marketable equity securities |
(26 | ) | (10,697 | ) | |||||||
| Cash flow hedging gain (loss) |
236 | 5,321 | (7,318 | ) | |||||||
| Comprehensive Income |
$ | 1,171,410 | $ | 949,312 | $ | 445,438 | |||||
The accompanying notes are an integral part of the financial statements.
13 - 13
Business Segment Information
By Industry
| (Dollars in thousands) |
2007 | 2006 | 2005 | ||||||
| Net Sales: |
|||||||||
| Industrial: |
|||||||||
| North America |
$ | 4,063,889 | $ | 3,993,370 | $ | 3,516,627 | |||
| International |
3,900,628 | 2,902,508 | 2,398,439 | ||||||
| Aerospace |
1,685,431 | 1,504,922 | 1,359,431 | ||||||
| Climate & Industrial Controls |
1,068,111 | 985,088 | 794,308 | ||||||
| $ | 10,718,059 | $ | 9,385,888 | $ | 8,068,805 | ||||
| Segment Operating Income: |
|||||||||
| Industrial: |
|||||||||
| North America |
$ | 598,405 | $ | 597,204 | $ | 468,213 | |||
| International |
533,136 | 353,760 | 267,207 | ||||||
| Aerospace |
269,931 | 221,005 | 199,187 | ||||||
| Climate & Industrial Controls |
82,316 | 83,256 | 74,843 | ||||||
| Total segment operating income |
1,483,788 | 1,255,225 | 1,009,450 | ||||||
| Corporate administration |
179,077 | 133,695 | 111,615 | ||||||
| Income from continuing operations before interest expense and other |
1,304,711 | 1,121,530 | 897,835 | ||||||
| Interest expense |
83,414 | 75,763 | 66,869 | ||||||
| Other expense |
62,015 | 145,809 | 92,695 | ||||||
| Income from continuing operations before income taxes |
$ | 1,159,282 | $ | 899,958 | $ | 738,271 | |||
| Identifiable Assets: |
|||||||||
| Industrial |
$ | 6,669,184 | $ | 6,153,559 | $ | 4,713,574 | |||
| Aerospace |
778,777 | 748,213 | 658,394 | ||||||
| Climate & Industrial Controls |
831,482 | 812,218 | 695,641 | ||||||
| 8,279,443 | 7,713,990 | 6,067,609 | |||||||
| Corporate (a) |
161,970 | 459,442 | 793,094 | ||||||
| $ | 8,441,413 | $ | 8,173,432 | $ | 6,860,703 | ||||
| Property Additions (b): |
|||||||||
| Industrial |
$ | 203,448 | $ | 292,671 | $ | 196,394 | |||
| Aerospace |
21,343 | 18,827 | 12,919 | ||||||
| Climate & Industrial Controls |
17,170 | 41,459 | 40,050 | ||||||
| Corporate |
27,324 | 24,959 | 9,900 | ||||||
| $ | 269,285 | $ | 377,916 | $ | 259,263 | ||||
| Depreciation: |
|||||||||
| Industrial |
$ | 196,377 | $ | 196,751 | $ | 198,247 | |||
| Aerospace |
20,480 | 20,412 | 20,777 | ||||||
| Climate & Industrial Controls |
22,546 | 23,625 | 19,954 | ||||||
| Corporate |
5,655 | 4,893 | 6,228 | ||||||
| $ | 245,058 | $ | 245,681 | $ | 245,206 | ||||
13 - 14
By Geographic Area (c)
| (Dollars in thousands) |
2007 | 2006 | 2005 | ||||||
| Net Sales: |
|||||||||
| North America |
$ | 6,483,168 | $ | 6,219,054 | $ | 5,455,466 | |||
| International |
4,234,891 | 3,166,834 | 2,613,339 | ||||||
| $ | 10,718,059 | $ | 9,385,888 | $ | 8,068,805 | ||||
| Long-Lived Assets: |
|||||||||
| North America |
$ | 962,047 | $ | 978,028 | $ | 1,027,376 | |||
| International |
774,325 | 715,766 | 553,972 | ||||||
| $ | 1,736,372 | $ | 1,693,794 | $ | 1,581,348 | ||||
The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a basis that is consistent with the manner in which the Company’s management disaggregates financial information for internal review and decision-making.
| (a) | Corporate assets are principally cash and cash equivalents, domestic deferred income taxes, investments, benefit plan assets, headquarters facilities, assets held for sale and the major portion of the Company’s domestic data processing equipment. |
| (b) | Includes the value of net plant and equipment at the date of acquisition of acquired companies accounted for by the purchase method (2007 – $31,458; 2006 – $179,803; 2005 – $104,358). |
| (c) | Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10% of consolidated sales. Long-lived assets are comprised of plant and equipment based on physical location. |
13 - 15
Consolidated Balance Sheet
| June 30, | ||||||||
| (Dollars in thousands) |
2007 | 2006 | ||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 172,706 | $ | 171,553 | ||||
| Accounts receivable, less allowance for doubtful accounts (2007 – $11,655; 2006 – $12,332) |
1,737,748 | 1,592,323 | ||||||
| Inventories (Notes 1 and 6): |
||||||||
| Finished products |
518,901 | 520,159 | ||||||
| Work in process |
581,745 | 494,469 | ||||||
| Raw materials |
165,156 | 168,250 | ||||||
| 1,265,802 | 1,182,878 | |||||||
| Prepaid expenses |
69,655 | 64,238 | ||||||
| Deferred income taxes (Notes 1 and 4) |
140,264 | 127,986 | ||||||
| Total Current Assets |
3,386,175 | 3,138,978 | ||||||
| Plant and equipment (Note 1): |
||||||||
| Land and land improvements |
258,121 | 212,750 | ||||||
| Buildings and building equipment |
1,189,679 | 1,116,634 | ||||||
| Machinery and equipment |
2,753,531 | 2,702,389 | ||||||
| Construction in progress |
76,449 | 54,594 | ||||||
| 4,277,780 | 4,086,367 | |||||||
| Less accumulated depreciation |
2,541,408 | 2,392,573 | ||||||
| 1,736,372 | 1,693,794 | |||||||
| Investments and other assets (Note 1) |
469,190 | 859,107 | ||||||
| Goodwill (Notes 1 and 7) |
2,254,069 | 2,010,458 | ||||||
| Intangible assets, net (Notes 1 and 7) |
595,607 | 471,095 | ||||||
| Total Assets |
$ | 8,441,413 | $ | 8,173,432 | ||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current Liabilities |
||||||||
| Notes payable and long-term debt payable within one year (Notes 8 and 9) |
$ | 195,384 | $ | 72,039 | ||||
| Accounts payable, trade |
788,560 | 770,665 | ||||||
| Accrued payrolls and other compensation |
376,678 | 297,071 | ||||||
| Accrued domestic and foreign taxes |
152,739 | 140,387 | ||||||
| Other accrued liabilities |
411,884 | 400,943 | ||||||
| Total Current Liabilities |
1,925,245 | 1,681,105 | ||||||
| Long-term debt (Note 9) |
1,089,916 | 1,059,461 | ||||||
| Pensions and other postretirement benefits (Note 10) |
354,398 | 811,479 | ||||||
| Deferred income taxes (Notes 1 and 4) |
114,219 | 118,544 | ||||||
| Other liabilities |
245,970 | 261,640 | ||||||
| Total Liabilities |
3,729,748 | 3,932,229 | ||||||
| Shareholders’ Equity (Note 11) |
||||||||
| Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued |
||||||||
| Common stock, $.50 par value, authorized 600,000,000 shares; issued 120,683,890 shares in 2007 and 2006 at par value |
60,342 | 60,342 | ||||||
| Additional capital |
512,239 | 510,869 | ||||||
| Retained earnings |
4,625,195 | 3,916,412 | ||||||
| Unearned compensation related to ESOP (Note 9) |
(15,192 | ) | (25,809 | ) | ||||
| Deferred compensation related to stock options |
2,269 | 2,347 | ||||||
| Accumulated other comprehensive (loss) |
(112,621 | ) | (194,819 | ) | ||||
| 5,072,232 | 4,269,342 | |||||||
| Common stock in treasury at cost: 4,524,670 shares in 2007 and 368,695 shares in 2006 |
(360,567 | ) | (28,139 | ) | ||||
| Total Shareholders’ Equity |
4,711,665 | 4,241,203 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 8,441,413 | $ | 8,173,432 | ||||
The accompanying notes are an integral part of the financial statements.
13 - 16
Consolidated Statement of Cash Flows
| For the years ended June 30, | ||||||||||||
| (Dollars in thousands) |
2007 | 2006 | 2005 | |||||||||
| Cash Flows From Operating Activities |
||||||||||||
| Net income |
$ | 830,046 | $ | 673,167 | $ | 604,692 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
| Net (income) from discontinued operations |
(34,891 | ) | (71,526 | ) | ||||||||
| Depreciation |
245,058 | 245,681 | 245,206 | |||||||||
| Amortization |
49,508 | 35,290 | 17,484 | |||||||||
| Stock-based compensation |
33,203 | 33,448 | ||||||||||
| Deferred income taxes |
(28,652 | ) | (50,548 | ) | 16,102 | |||||||
| Foreign currency transaction (gain) loss |
(18,644 | ) | 8,216 | 9,092 | ||||||||
| (Gain) loss on sale of plant and equipment |
(17,264 | ) | 5,438 | 3,870 | ||||||||
| Loss on divestiture of businesses |
9,858 | |||||||||||
| Changes in assets and liabilities, net of effects from acquisitions and divestitures: |
||||||||||||
| Accounts receivable |
(54,701 | ) | (109,978 | ) | (6,540 | ) | ||||||
| Inventories |
(15,018 | ) | 17,498 | 17,083 | ||||||||
| Prepaid expenses |
(7,078 | ) | (2,037 | ) | (2,736 | ) | ||||||
| Other assets |
(129,814 | ) | (29,419 | ) | (13,607 | ) | ||||||
| Accounts payable, trade |
(16,944 | ) | 56,202 | 37,611 | ||||||||
| Accrued payrolls and other compensation |
59,846 | 17,783 | 23,387 | |||||||||
| Accrued domestic and foreign taxes |
9,135 | 70,451 | (4,781 | ) | ||||||||
| Other accrued liabilities |
4,496 | (2,781 | ) | (13,999 | ) | |||||||
| Pensions and other postretirement benefits |
7,180 | 9,470 | (1,971 | ) | ||||||||
| Other liabilities |
4,650 | 5,050 | 4,997 | |||||||||
| Discontinued operations |
(3,259 | ) | (10,858 | ) | ||||||||
| Net cash provided by operating activities |
955,007 | 954,639 | 853,506 | |||||||||
| Cash Flows From Investing Activities |
||||||||||||
| Acquisitions (less cash acquired of $15,591 in 2007, $42,429 in 2006, and $21,720 in 2005) |
(378,639 | ) | (835,981 | ) | (558,569 | ) | ||||||
| Capital expenditures |
(237,827 | ) | (198,113 | ) | (154,905 | ) | ||||||
| Proceeds from sale of plant and equipment |
45,826 | 41,098 | 20,284 | |||||||||
| Proceeds from sale of businesses |
92,715 | 120,000 | ||||||||||
| Other |
(9,121 | ) | (20,862 | ) | 10,223 | |||||||
| Discontinued operations |
(100 | ) | (2,416 | ) | ||||||||
| Net cash (used in) investing activities |
(579,761 | ) | (921,243 | ) | (565,383 | ) | ||||||
| Cash Flows From Financing Activities |
||||||||||||
| (Payments for) proceeds from common share activity, net |
(364,339 | ) | 16,931 | (23,724 | ) | |||||||
| Proceeds from (payments of) notes payable, net |
111,300 | (8,262 | ) | (16,927 | ) | |||||||
| Proceeds from long-term borrowings |
52,278 | 495,796 | 1,094 | |||||||||
| (Payments of) long-term borrowings |
(56,505 | ) | (589,014 | ) | (5,369 | ) | ||||||
| Dividends paid, net of tax benefit of ESOP shares |
(121,263 | ) | (109,643 | ) | (92,612 | ) | ||||||
| Net cash (used in) financing activities |
(378,529 | ) | (194,192 | ) | (137,538 | ) | ||||||
| Effect of exchange rate changes on cash |
4,436 | (3,731 | ) | 1,648 | ||||||||
| Net increase (decrease) in cash and cash equivalents |
1,153 | (164,527 | ) | 152,233 | ||||||||
| Cash and cash equivalents at beginning of year |
171,553 | 336,080 | 183,847 | |||||||||
| Cash and cash equivalents at end of year |
$ | 172,706 | $ | 171,553 | $ | 336,080 | ||||||
| Supplemental Data: |
||||||||||||
| Cash paid during the year for: |
||||||||||||
| Interest, net of capitalized interest |
$ | 81,489 | $ | 72,183 | $ | 66,827 | ||||||
| Income taxes |
304,540 | 165,180 | 186,853 | |||||||||
The accompanying notes are an integral part of the financial statements.
13 - 17
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Significant Accounting Policies
The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below.
Nature of Operations—The Company is a leading worldwide diversified manufacturer of motion control technologies and systems, providing precision engineered solutions for a wide variety of commercial, mobile, industrial and aerospace markets. The Company evaluates performance based on segment operating income before Corporate general and administrative expenses, Interest expense and Income taxes.
The Company operates in three business segments: Industrial, Aerospace and Climate & Industrial Controls. The Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Industrial Segment products are marketed primarily through field sales employees and independent distributors. The North American Industrial business represents the largest portion of the Company’s manufacturing plants and distribution networks and primarily services North America. The International Industrial operations provide Parker products and services to countries throughout Europe, Asia Pacific and Latin America.
The Aerospace Segment produces hydraulic, fuel and pneumatic systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and also performs a vital role in naval vessels and land-based weapons systems. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Aerospace Segment products are marketed by field sales employees and are sold directly to manufacturers and end users.
The Climate & Industrial Controls Segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries. The products in the Climate & Industrial Controls Segment are marketed primarily through field sales employees and independent distributors.
See the table of Business Segment Information “By Industry” and “By Geographic Area” on pages 13-14 and 13-15 for further disclosure of business segment information.
There are no individual customers to whom sales are three percent or more of the Company’s consolidated sales. Due to the diverse group of customers throughout the world the Company does not consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company’s products and geographic operations mitigate significantly the risk that adverse changes would materially affect the Company’s operating results.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation—The consolidated financial statements include the accounts of all majority-owned domestic and foreign subsidiaries. All material intercompany transactions and profits have been eliminated in the consolidated financial statements. The Company does not have off-balance sheet arrangements. Within the Business Segment Information, intersegment and interarea sales are recorded at fair market value and are immaterial in amount.
Revenue Recognition—Revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the customer. The Company’s revenue recognition policies are in compliance with the SEC’s Staff Accounting Bulletin (SAB) No. 104. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of sales.
Cash—Cash equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash.
Inventories—Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued by the last-in, first-out method and the balance of the Company’s inventories are valued by the first-in, first-out method.
13 - 18
Long-term Contracts—The Company enters into long-term contracts for the production of aerospace products. For financial statement purposes, revenues are recognized using the percentage-of-completion method. The extent of progress toward completion is measured using the units-of-delivery method. Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Plant, Equipment and Depreciation—Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings, 15 years for land improvements and building equipment, seven to 10 years for machinery and equipment, and three to five years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income.
Investments and Other Assets—Investments in joint-venture companies in which ownership is 50% or less and in which the Company does not have operating control are stated at cost plus the Company’s equity in undistributed earnings. These investments and the related earnings are not material to the consolidated financial statements. During 2005 the Company recorded a charge of $8,766 ($.05 per share) related to a real estate investment. Investments and other assets include a prepaid pension cost at June 30, 2006 of $344,987 and an intangible asset recognized in connection with an additional minimum pension liability of $86,071 at June 30, 2006.
Goodwill—The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets—Intangible assets primarily include patents, trademarks and customer lists and are recorded at cost and amortized on a straight-line method. Patents are amortized over their remaining legal life. Trademarks are amortized over the estimated time period over which an economic benefit is expected to be received. Customer lists are amortized over a period based on historical customer attrition rates.
Income Taxes—Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise.
Product Warranty—In the ordinary course of business the Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual at June 30, 2007 and 2006 is immaterial to the financial position of the Company and the change in the accrual during 2007, 2006 and 2005 was immaterial to the Company’s results of operations and cash flows.
Foreign Currency Translation—Assets and liabilities of most foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the Accumulated other comprehensive (loss) component of Shareholders’ equity. Such adjustments will affect Net income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved, and translation adjustments in countries with highly inflationary economies, are included in Net income.
Financial Instruments—The Company’s financial instruments consist primarily of investments in cash, cash equivalents and long-term investments as well as obligations under notes payable and long-term debt. Due to their short-term nature, the carrying values for Cash and cash equivalents, Investments and other assets and Notes payable approximate fair value. See Note 9 for fair value of long-term debt.
The Company enters into forward exchange contracts (forward contracts) and costless collar contracts to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The Company does not hold or issue derivative financial instruments for trading purposes.
Gains or losses on forward contracts that hedge specific transactions are recognized in Net income, offsetting the underlying foreign currency gains or losses. Gains or losses on costless collar contracts are recognized in Net income when the spot rate of the contract falls outside the collar range.
13 - 19
In addition, the Company’s foreign locations in the ordinary course of business enter into financial guarantees through financial institutions which enable customers to be reimbursed in the event of nonperformance by the Company.
The total carrying amount and fair value of open forward exchange and costless collar contracts and any risk to the Company as a result of the arrangements described above is not material.
Stock Awards—On July 1, 2005, the Company adopted the provisions of FASB Statement No. 123 (revised 2004) and elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. Prior to the adoption of FASB Statement No. 123 (revised 2004), the Company used the intrinsic-value based method to account for stock awards and made no charges against earnings with respect to awards granted. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested stock awards using the non-substantive vesting period approach:
| 2005 | |||
| Net income, as reported |
$ | 604,692 | |
| Add: Stock-based employee compensation included in reported net income, net of tax |
10,139 | ||
| Deduct: Total stock-based employee compensation expense determined under fair value method, net of tax |
28,609 | ||
| Pro forma net income |
$ | 586,222 | |
| Earnings per share: |
|||
| Basic: |
|||
| as reported |
$ | 5.09 | |
| pro forma |
$ | 4.93 | |
| Diluted: |
|||
| as reported |
$ | 5.02 | |
| pro forma |
$ | 4.87 | |
Recent Accounting Pronouncements—In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Statement No. 158 amends FASB Statements No. 87, 88, 106 and 132R. Statement No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Statement No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial condition. The measurement date provision of Statement No. 158 is effective for the Company for the fiscal year ending June 30, 2009. The funded status recognition provision was adopted by the Company as of June 30, 2007 and had the following effects on the individual line items on the Consolidated Balance Sheet:
| Before Application of Statement No. 158 |
Statement No. 158 Adjustments |
After Application of Statement No. 158 |
|||||||||
| Investments and other assets |
$ | 906,516 | $ | (437,326 | ) | $ | 469,190 | ||||
| Total assets |
8,878,739 | (437,326 | ) | 8,441,413 | |||||||
| Pensions and other postretirement benefits |
375,847 | (21,449 | ) | 354,398 | |||||||
| Deferred income taxes |
270,930 | (156,711 | ) | 114,219 | |||||||
| Total liabilities |
3,907,908 | (178,160 | ) | 3,729,748 | |||||||
| Accumulated other comprehensive income (loss) |
146,545 | (259,166 | ) | (112,621 | ) | ||||||
| Total Shareholders’ Equity |
4,970,831 | (259,166 | ) | 4,711,665 | |||||||
13 - 20
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet finalized the effect on the Company’s financial position or results of operations of complying with the provisions of FIN 48 but does not anticipate the effect to be material.
In August 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the effect on the Company’s financial position or results of operations of complying with the provisions of Statement No. 157.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined whether it will elect to measure any of its financial assets and financial liabilities at fair value as permitted by Statement No. 159.
Reclassifications and Revisions—Certain prior period amounts have been reclassified to conform to the current-year presentation.
2. Acquisitions and Divestitures
Acquisitions—In April 2007, the Company acquired Rectus AG, a manufacturer of quick disconnect couplings and related products for pneumatic, hydraulic, medical, and chemical processing applications. Aggregate incremental annual sales for this business and 10 other businesses acquired during fiscal 2007, for their most recent fiscal year prior to acquisition, were approximately $260 million. Total purchase price for all acquisitions acquired during fiscal 2007 was approximately $394 million in cash and $15 million in assumed debt.
In August 2005, the Company acquired SSD, a manufacturer of AC and DC drives, as well as servo drives, motors and systems for leading original equipment manufacturers, end users, and integrators in automated industrial process applications. In November 2005, the Company completed its purchase of domnick hunter group, plc. The domnick hunter group specializes in the design and manufacture of filtration, separation, and purification products and technologies for a wide range of markets. In December 2005, the Company completed its acquisition of Kenmore International, a manufacturer and distributor of components for global refrigeration and air conditioning markets. Aggregate annual sales for these and 10 other businesses acquired during fiscal 2006, for their most recent fiscal year prior to acquisition, were approximately $983 million. Total purchase price for all acquisitions acquired during fiscal 2006 was approximately $878 million in cash and $231 million in assumed debt.
In October 2004, the Company completed the acquisition of the Sporlan Valve Company (Sporlan). Sporlan is a manufacturer of refrigeration and air conditioning components, controls and systems. In November 2004, the Company acquired Acadia Elastomers Corporation, a producer of sealing solutions. Annual sales for these businesses and eight other businesses acquired during fiscal 2005, for their most recent fiscal year prior to acquisition, were approximately $410 million. Total purchase price for all businesses acquired during fiscal 2005 was approximately $580 million in cash and $15 million in assumed debt.
The results of operations for all acquisitions are included as of the respective dates of acquisition. The initial purchase price allocation and any subsequent purchase price adjustments for acquisitions in 2007, 2006 and 2005 are presented below. Some of the 2007 purchase price allocations are preliminary and may require subsequent adjustment.
13 - 21
| 2007 | 2006 | 2005 | ||||||||
| Assets acquired: |
||||||||||
| Accounts receivable |
$ | 47,534 | $ | 223,658 | $ | 51,333 | ||||
| Inventories |
36,654 | 161,434 | 58,513 | |||||||
| Prepaid expenses |
(3,604 | ) | 11,561 | 2,703 | ||||||
| Deferred income taxes |
9,066 | 4,780 | 1,919 | |||||||
| Plant and equipment |
31,458 | 179,803 | 104,358 | |||||||
| Intangible and other assets |
164,318 | 257,062 | 154,674 | |||||||
| Goodwill |
182,740 | 597,205 | 274,995 | |||||||
| 468,166 | 1,435,503 | 648,495 | ||||||||
| Liabilities assumed: |
||||||||||
| Notes payable |
5,231 | 1,674 | 8,819 | |||||||
| Accounts payable |
21,265 | 132,733 | 26,301 | |||||||
| Accrued payrolls |
13,410 | 10,954 | 8,209 | |||||||
| Accrued taxes |
1,537 | 10,268 | 433 | |||||||
| Other accrued liabilities |
(10,440 | ) | 76,321 | 15,127 | ||||||
| Long-term debt |
9,954 | 229,463 | 6,415 | |||||||
| Pensions and other postretirement benefits |
(6,951 | ) | 16,833 | 7,239 | ||||||
| Deferred income taxes |
41,905 | 67,644 | 17,383 | |||||||
| Other liabilities |
13,616 | 53,632 | ||||||||
| 89,527 | 599,522 | 89,926 | ||||||||
| Net assets acquired |
$ | 378,639 | $ | 835,981 | $ | 558,569 | ||||
Divestitures—In August 2005, the Company divested a business unit which manufactured custom-engineered buildings. In December 2004, the Company divested a business unit which developed and manufactured chemical car care products and maintenance equipment. These businesses were part of the Other Segment for segment reporting purposes. The following results of operations for these business units have been presented as discontinued operations for all periods presented:
| 2006 | 2005 | |||||
| Net sales |
$ | 21,672 | $ | 201,776 | ||
| Earnings before income taxes |
1,517 | 24,538 | ||||
| Net income |
1,131 | 18,979 | ||||
| Gain on disposal, net of taxes |
$ | 33,760 | $ | 52,547 | ||
The gain on disposal is net of taxes of $4,602 in 2006 and $16,914 in 2005.
In December 2005, the Company completed the divestiture of its Thermoplastics division. Thermoplastics was part of the Industrial Segment for segment reporting purposes. The divestiture resulted in a loss of $11,018 ($9,770 after-tax or $.08 per share) in 2006 and is reflected in (Gain) loss on disposal of assets in the Consolidated Statement of Income. The results of operations and net assets of the divested business were immaterial to the consolidated results of operations and financial position of the Company.
13 - 22
3. Charges Related to Business Realignment
In 2007, the Company recorded a $19,402 charge ($11,977 after-tax or $.09 per share) for the costs to structure its businesses in light of current and anticipated customer demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital. The charge primarily related to severance costs, attributable to approximately 735 employees in the Industrial Segment, 25 employees in the Aerospace Segment and 15 employees in the Climate & Industrial Controls Segment as well as costs related to the consolidation of manufacturing product lines. A portion of the severance costs have been paid with the remaining payments expected to be made by June 30, 2008. Of the pre-tax amount, $18,688 relates to the Industrial Segment, $384 relates to the Aerospace Segment and $330 relates to the Climate & Industrial Controls Segment. The business realignment costs are presented in the Consolidated Statement of Income for 2007 in the following captions: $15,016 in Cost of sales and $4,386 in Selling, general and administrative expenses.
In 2006, the Company recorded a $19,367 charge ($12,042 after-tax or $.10 per share) for the costs to structure its businesses in light of current and anticipated customer demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital. The charge primarily related to severance costs attributable to approximately 690 employees in the Industrial Segment, 5 employees in the Aerospace Segment and 340 employees in the Climate & Industrial Controls Segment. All required severance payments have been made. Of the pre-tax amount, $15,673 relates to the Industrial Segment, $73 relates to the Aerospace Segment and $3,621 relates to the Climate & Industrial Controls Segment. The business realignment costs are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for 2006. In 2006, the Company recorded a $4,793 charge resulting from the pending sale of plant and equipment at facilities that have been closed. This charge is presented in the (Gain) loss on disposal of assets caption in the Consolidated Statement of Income for 2006.
In 2005, the Company recorded a $14,263 charge ($8,900 after-tax or $.08 per share) for the costs to structure its businesses in light of current and anticipated customer demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital. The charge primarily related to severance costs attributable to approximately 600 employees in the Industrial Segment. All required severance payments have been made. The business realignment costs are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for 2005. A significant portion of the 2005 charge relates to the closure of a manufacturing facility in Hilden, Germany. The facility was acquired as part of the Denison International acquisition. The decision to close the facility resulted from the completion of the Company’s acquisition integration analysis.
4. Income Taxes
Income from continuing operations before income taxes was derived from the following sources:
| 2007 | 2006 | 2005 | |||||||
| United States |
$ | 581,191 | $ | 528,084 | $ | 439,717 | |||
| Foreign |
578,091 | 371,874 | 298,554 | ||||||
| $ | 1,159,282 | $ | 899,958 | $ | 738,271 | ||||
13- 23
Income taxes include the following:
| 2007 | 2006 | 2005 | |||||||||
| Federal |
$ | 203,387 | $ | 178,162 | $ | 108,182 | |||||
| Foreign |
135,001 | 112,968 | 75,447 | ||||||||
| State and local |
19,500 | 21,100 | 5,374 | ||||||||
| Deferred |
(28,652 | ) | (50,548 | ) | 16,102 | ||||||
| $ | 329,236 | $ | 261,682 | $ | 205,105 | ||||||
A reconciliation of the Company’s effective income tax rate to the statutory Federal rate follows:
| 2007 | 2006 | 2005 | |||||||
| Statutory Federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
| State and local income taxes |
1.0 | 1.9 | .6 | ||||||
| Export tax benefit |
(.5 | ) | (.9 | ) | (1.3 | ) | |||
| Foreign tax rate difference |
(5.1 | ) | (5.0 | ) | (3.5 | ) | |||
| Cash surrender of life insurance |
(.8 | ) | (.5 | ) | (.4 | ) | |||
| Research tax credit |
(1.4 | ) | (.5 | ) | (2.6 | ) | |||
| Other |
.2 | (.9 | ) | ||||||
| Effective income tax rate |
28.4 | % | 29.1 | % | 27.8 | % | |||
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows:
| 2007 | 2006 | |||||||
| Postretirement benefits |
$ | 188,613 | $ | 145,712 | ||||
| Other liabilities and reserves |
92,544 | 86,431 | ||||||
| Long-term contracts |
8,253 | 9,813 | ||||||
| Stock-based compensation |
20,705 | 11,171 | ||||||
| Operating loss carryforwards |
42,299 | 31,297 | ||||||
| Foreign tax credit carryforwards |
7,887 | 9,634 | ||||||
| Unrealized currency exchange gains and losses |
19,017 | 13,807 | ||||||
| Valuation allowance |
(28,896 | ) | (7,391 | ) | ||||
| Depreciation and amortization |
(304,195 | ) | (287,933 | ) | ||||
| Inventory |
18,491 | 18,156 | ||||||
| Net deferred tax asset |
$ | 64,718 | $ | 30,697 | ||||
| Change in net deferred tax asset: |
||||||||
| Provision for deferred tax |
$ | 28,652 | $ | 50,548 | ||||
| Items of other comprehensive income (loss) |
28,194 | (69,191 | ) | |||||
| Acquisitions and other |
(22,825 | ) | (77,646 | ) | ||||
| Total change in net deferred tax |
$ | 34,021 | $ | (96,289 | ) | |||
13 - 24
At June 30, 2007, the Company has recorded deferred tax assets of $42,299 resulting from $131,781 in loss carryforwards. A valuation allowance has been established due to the uncertainty of realizing certain operating and merger loss carryforwards, a foreign capital loss carryforward, and certain deferred tax assets associated with other liabilities and reserves. The foreign capital loss carryforward and some of the operating and merger loss carryforwards can be carried forward indefinitely; others can be carried forward from one to 19 years. The increase in the valuation allowance in 2007 was primarily due to an increase in operating and merger losses in certain foreign jurisdictions and a foreign capital loss.
Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings.
Accumulated undistributed earnings of foreign operations reinvested in their operations amounted to $948,867, $670,672 and $546,740, at June 30, 2007, 2006 and 2005, respectively.
5. Earnings Per Share
Earnings per share have been computed according to FASB Statement No. 128, “Earnings per Share.” Basic earnings per share is computed using the weighted average number of shares of common shares outstanding during the year. Diluted earnings per share is computed using the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock-based awards. The computation of income from continuing operations per share was as follows:
| 2007 | 2006 | 2005 | |||||||
| Numerator: |
|||||||||
| Income from continuing operations |
$ | 830,046 | $ | 638,276 | $ | 533,166 | |||
| Denominator: |
|||||||||
| Basic—weighted average common shares |
116,428,885 | 119,211,192 | 118,794,564 | ||||||
| Increase in weighted average from dilutive effect of exercise of stock-based awards |
1,901,042 | 1,672,990 | 1,654,442 | ||||||
| Diluted—weighted average common shares, assuming exercise of stock-based awards |
118,329,927 | 120,884,182 | 120,449,006 | ||||||
| Basic earnings per share from continuing operations |
$ | 7.13 | $ | 5.35 | $ | 4.49 | |||
| Diluted earnings per share from continuing operations |
$ | 7.01 | $ | 5.28 | $ | 4.43 | |||
For 2007, 2006 and 2005, 1.7 million, 1.9 million, and 0.2 million common shares, respectively, subject to stock-based awards were excluded from the computation of diluted earnings per share from continuing operations because the effect of their exercise would be anti-dilutive.
13 - 25
6. Inventories
Inventories valued on the last-in, first-out cost method were approximately 31% and 34%, respectively, of total inventories in 2007 and 2006. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $209,923 in 2007 and $193,270 in 2006. Progress payments of $25,874 in 2007 and $20,743 in 2006 are netted against inventories.
7. Goodwill and Intangible Assets
The Company conducts an annual impairment test as required by FASB Statement No. 142. The Company uses a discounted cash flow analysis for purposes of estimating the fair value of a reporting unit. The annual impairment tests performed in 2007, 2006, and 2005 resulted in no impairment loss being recognized.
The changes in the carrying amount of goodwill for the year ended June 30, 2007 are as follows:
| Industrial Segment |
Aerospace Segment |
Climate & Industrial Controls Segment |
Total | |||||||||||
| Balance June 30, 2006 |
$ | 1,625,983 | $ | 87,543 | $ | 296,932 | $ | 2,010,458 | ||||||
| Acquisitions |
167,516 | 15,224 | 182,740 | |||||||||||
| Foreign currency translation |
60,042 | 19 | 4,400 | 64,461 | ||||||||||
| Goodwill adjustments |
3,300 | 159 | (7,049 | ) | (3,590 | ) | ||||||||
| Balance June 30, 2007 |
$ | 1,856,841 | $ | 87,721 | $ | 309,507 | $ | 2,254,069 | ||||||
“Goodwill adjustments” primarily represent adjustments to the purchase price allocation during the twelve-month period subsequent to the acquisition date and primarily involves the valuation of property, plant and equipment and intangible assets.
Intangible assets are amortized on a straight-line method over their legal or estimated useful life. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible asset:
| June 30, |
2007 | 2006 | ||||||||||
| Gross carrying amount |
Accumulated amortization |
Gross carrying amount |
Accumulated amortization | |||||||||
| Patents |
$ | 85,255 | $ | 29,149 | $ | 66,767 | $ | 22,289 | ||||
| Trademarks |
193,595 | 27,110 | 133,576 | 13,289 | ||||||||
| Customer lists and other |
446,273 | 73,257 | 351,366 | 45,036 | ||||||||
| Total |
$ | 725,123 | $ | 129,516 | $ | 551,709 | $ | 80,614 | ||||
Total intangible amortization expense in 2007, 2006 and 2005 was $45,842, $33,544 and $15,857, respectively. The estimated amortization expense for the five years ending June 30, 2008 through 2012 is $47,644, $46,029, $45,601, $44,704 and $43,200, respectively.
13 - 26
8. Financing Arrangements
The Company has a line of credit totaling $1,025,000 through a multi-currency revolving credit agreement with a group of banks, of which $896,200 was available at June 30, 2007. The Company has the right, no more than once a year, to increase the facility amount, in minimum increments of $25 million up to a maximum of $1,250,000. The credit agreement expires October 2011, however, the Company has the right to request a one-year extension of the expiration date on an annual basis. A portion of the credit agreement supports the Company’s commercial paper note program, which is rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. These ratings are considered investment grade. The interest on borrowings is based upon the terms of each specific borrowing and is subject to market conditions. The revolving credit agreement requires a facility fee of up to 5/100ths of one percent of the commitment per annum at the Company’s present rating level. The revolving credit agreement contains provisions that increase the facility fee of the credit agreement in the event the Company’s credit ratings are lowered. A lowering of the Company’s credit ratings would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
The Company’s revolving credit agreement and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the agreement for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. At the Company’s present rating level, the most restrictive covenant provides that the ratio of secured debt to net tangible assets be less than 10 percent. As of June 30, 2007, the ratio of secured debt to net tangible assets was less than one percent. The Company is in compliance with all covenants.
Notes payable is comprised of short-term lines of credit and borrowings from foreign banks. At June 30, 2007, the Company had $357,333 in lines of credit from various foreign banks, of which $348,201 was available. Most of these agreements are renewed annually. The balance and weighted average interest rate of the Notes payable at June 30, 2007 and 2006 were $136,365 and 5.4% and $6,056 and 5.2%, respectively.
The Company is authorized to sell up to $1,025,000 of short-term commercial paper notes, rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. At June 30, 2007 and 2006, there were no commercial paper notes outstanding. In connection with an accelerated stock repurchase agreement, the Company borrowed $500 million through the issuance of commercial paper notes in August 2007.
13- 27
9. Debt
| June 30, |
2007 | 2006 | ||||
| Domestic: |
||||||
| Debentures |
||||||
| 7.30%, due 2011 |
$ | 100,000 | $ | 100,000 | ||
| Fixed rate medium-term notes |
||||||
| 6.55% to 7.39%, due 2008-2019 |
170,000 | 195,000 | ||||
| Fixed rate senior notes |
||||||
| 4.88%, due 2013 |
225,000 | 225,000 | ||||
| ESOP loan guarantee |
||||||
| 6.34%, due 2009 |
18,725 | 30,878 | ||||
| Variable rate demand bonds |
||||||
| 3.87%, due 2010-2025 |
20,035 | 20,035 | ||||
| Foreign: |
||||||
| Bank loans, including revolving credit |
||||||
| 1% to 10%, due 2008-2017 |
14,246 | 24,087 | ||||
| Euro Bonds |
||||||
| 3.5%, due 2011 |
270,700 | 255,840 | ||||
| 4.125%, due 2016 |
270,700 | 255,840 | ||||
| Japanese Yen credit facility |
||||||
| Libor plus 20 bps, due 2012 |
48,732 | |||||
| Other long-term debt, including capitalized leases |
10,797 | 18,764 | ||||
| Total long-term debt |
1,148,935 | 1,125,444 | ||||
| Less long-term debt payable within one year |
59,019 | 65,983 | ||||
| Long-term debt, net |
$ | 1,089,916 | $ | 1,059,461 | ||
During 2007, the Company entered into a five-year Japanese Yen (JPY) 6 billion credit facility. The credit facility bears interest of LIBOR plus 20 basis points and any borrowings are due to be repaid in March 2012. The Company borrowed the full JPY 6 billion and used the funds to reduce the level of the Company’s commercial paper borrowings.
Principal amounts of Long-term debt payable in the five years ending June 30, 2008 through 2012 are $59,019, $13,034, $46,675, $370,967 and $48,900, respectively. The carrying value of the Company’s Long-term debt (excluding leases) was $1,147,064 and $1,123,234 at June 30, 2007 and 2006, respectively, and was estimated to have a fair value of $1,086,766 and $1,060,512, at June 30, 2007 and 2006, respectively. The fair value of the Long-term debt was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. At the Company’s present rating level, some of the debt agreements include a limitation on the Company’s ratio of secured debt to net tangible assets.
ESOP Loan Guarantee—In 1999 the Company’s Employee Stock Ownership Plan (ESOP) was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to purchase 3,055,413 shares of the Company’s common stock from the Company’s treasury. The loan is unconditionally guaranteed by the Company and therefore the unpaid balance of the borrowing is reflected on the Consolidated Balance Sheet as Long-term debt. A corresponding amount representing Unearned compensation is recorded as a deduction from Shareholders’ equity.
Lease Commitments—Future minimum rental commitments as of June 30, 2007, under noncancelable operating leases, which expire at various dates, are as follows: 2008- $64,385; 2009- $46,048; 2010- $29,685; 2011- $18,204; 2012- $12,323 and after 2012- $51,377.
Rental expense in 2007, 2006 and 2005 was $86,999, $76,828 and $64,521, respectively.
13 - 28
10. Retirement Benefits
Pensions—The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. The Company uses a June 30 measurement date for a majority of its pension plans. The Company also has contractual arrangements with certain key employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries.
Prior to the adoption of FASB Statement No. 158, accounting rules required that the Company recognize a liability if the accumulated benefit obligation exceeded the fair value of plan assets. The net of tax effect of recording the minimum pension liability on shareholders’ equity was an increase of $221,546 and $167,008 in 2007 and 2006, respectively and a decrease of $154,377 in 2005.
A summary of the Company’s defined benefit pension plans follows:
| Benefit cost | 2007 | 2006 | 2005 | |||||||||
| Service cost |
$ | 79,136 | $ | 79,376 | $ | 64,901 | ||||||
| Interest cost |
151,030 | 134,489 | 129,609 | |||||||||
| Expected return on plan assets |
(175,170 | ) | (148,300 | ) | (134,397 | ) | ||||||
| Net amortization and deferral and other |
70,976 | 88,909 | 58,274 | |||||||||
| Net periodic benefit cost |
$ | 125,972 | $ | 154,474 | $ | 118,387 | ||||||
| Change in benefit obligation | 2007 | 2006 | ||||||
| Benefit obligation at beginning of year |
$ | 2,660,150 | $ | 2,593,744 | ||||
| Service cost |
79,136 | 79,376 | ||||||
| Interest cost |
151,030 | 134,489 | ||||||
| Actuarial (gain) |
(105,183 | ) | (112,959 | ) | ||||
| Benefits paid |
(126,933 | ) | (105,825 | ) | ||||
| Plan amendments |
9,617 | 6,833 | ||||||
| Acquisitions |
28,019 | 28,729 | ||||||
| Foreign currency translation and other |
47,494 | 35,763 | ||||||
| Benefit obligation at end of year |
$ | 2,743,330 | $ | 2,660,150 | ||||
Change in plan assets
| Fair value of plan assets at beginning of year |
$ | 2,048,338 | $ | 1,749,810 | ||||
| Actual gain on plan assets |
311,390 | 225,987 | ||||||
| Employer contributions |
207,331 | 121,193 | ||||||
| Benefits paid |
(122,378 | ) | (95,715 | ) | ||||
| Acquisitions |
17,601 | 19,489 | ||||||
| Foreign currency translation and other |
38,137 | 27,574 | ||||||
| Fair value of plan assets at end of year |
$ | 2,500,419 | $ | 2,048,338 | ||||
Funded status
| Plan assets (under) benefit obligation |
$ | (242,911 | ) | $ | (611,812 | ) | ||
| Unrecognized net actuarial loss |
723,281 | |||||||
| Unrecognized prior service cost |
84,776 | |||||||
| Unrecognized initial net (asset) |
(180 | ) | ||||||
| Net amount recognized |
$ | (242,911 | ) | $ | 196,065 | |||
13 - 29
Amounts recognized on the Consolidated
| Balance Sheet | 2007 | 2006 | ||||||
| Investments and other assets |
$ | 11,808 | $ | 431,058 | ||||
| Other accrued liabilties |
(10,863 | ) | ||||||
| Pensions and other postretirement benefits |
(243,856 | ) | (680,326 | ) | ||||
| Accumulated other comprehensive loss |
445,333 | |||||||
| Net amount recognized |
$ | (242,911 | ) | $ | 196,065 | |||
|
Amounts recognized in Accumulated |
||||||||
| Other Comprehensive (Loss) | 2007 | |||||||
| Net actuarial loss |
$ | 435,401 | ||||||
| Prior service cost |
82,157 | |||||||
| Transition asset |
(160 | ) | ||||||
| Amount recognized |
$ | 517,398 | ||||||
The presentation of the amounts recognized on the Consolidated Balance Sheet and in Accumulated Other Comprehensive (Loss) is before the effect of income taxes.
The estimated amount of net actuarial loss, prior service cost and transition asset that will be amortized from accumulated other comprehensive (loss) into net periodic benefit pension cost in 2008 is $35,887, $12,501 and $66, respectively
The accumulated benefit obligation for all defined benefit plans was $2,463,208 and $2,389,579 at June 30, 2007 and 2006, respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $834,143, $760,428 and $589,471, respectively, at June 30, 2007, and $2,612,299, $2,348,100 and $1,998,469, respectively, at June 30, 2006.
The Company expects to contribute approximately $36 million to its defined benefit pension plans in 2008. Estimated future benefit payments in the five years ending June 30, 2008 through 2012 are $117,250, $119,919, $126,579, $135,586 and $143,932, respectively and $850,652 in the aggregate for the five years ending June 30, 2013 through June 30, 2017.
The assumptions used to measure net periodic benefit cost for the Company’s significant defined benefit plans are:
| 2007 | 2006 | 2005 | |||||||
| U.S. defined benefit plans Discount rate |
6.0 | % | 5.25 | % | 6.25 | % | |||
| Average increase in compensation |
4.7 | % | 4.7 | % | 4.9 | % | |||
| Expected return on plan assets |
8.75 | % | 8.75 | % | 8.25 | % | |||
| Non-U.S. defined benefit plans |
|||||||||
| Discount rate |
2.25 to 6.0 | % | 2 to 5.5 | % | 2 to 6.25 | % | |||
| Average increase in compensation |
1 to 4.25 | % | 1 to 4 | % | 1 to 4 | % | |||
| Expected return on plan assets |
1 to 7.75 | % | 1 to 7.75 | % | 1 to 7.75 | % | |||
13 - 30
The assumptions used to measure the benefit obligation for the Company’s significant defined benefit plans are:
| 2007 | 2006 | |||||
| U.S. defined benefit plans |
||||||
| Discount rate |
6.30 | % | 6.0 | % | ||
| Average increase in compensation |
4.7 | % | 4.7 | % | ||
| Non-U.S. defined benefit plans |
||||||
| Discount rate |
2.25 to 6.3 | % | 2.25 to 5.5 | % | ||
| Average increase in compensation |
1 to 4.25 | % | 1 to 4.25 | % | ||
The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same estimated time period that benefit payments will be required to be made. The expected return on plan assets assumption is based on the weighted-average expected return of the various asset classes in the plans’ portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:
| 2007 | 2006 | |||||
| Equity securities |
66 | % | 66 | % | ||
| Debt securities |
28 | % | 31 | % | ||
| Other |
6 | % | 3 | % | ||
| 100 | % | 100 | % | |||
The investment strategy for the defined benefit pension plan assets focuses on achieving prudent actuarial funding ratios while maintaining acceptable levels of risk. This strategy requires an investment portfolio that is broadly diversified across various asset classes and investment managers. The current weighted-average target asset allocation is 62% equity securities, 33% debt securities and 5% other. At June 30, 2007 and 2006, the plans’ assets included Company stock with market values of $117,395 and $93,043, respectively.
Employee Savings Plan—The Company sponsors an employee stock ownership plan (ESOP) as part of its existing savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Parker Hannifin common stock is used to match contributions made by employees to the ESOP up to a maximum of 4.0 percent of an employee’s annual compensation. A breakdown of shares held by the ESOP is as follows:
| 2007 | 2006 | 2005 | |||||||
| Allocated shares |
7,745,486 | 8,280,848 | 9,558,612 | ||||||
| Suspense shares |
414,432 | 704,094 | 1,004,423 | ||||||
| Total shares held by the ESOP |
8,159,918 | 8,984,942 | 10,563,035 | ||||||
| Fair value of suspense shares |
$ | 40,577 | $ | 54,638 | $ | 62,284 | |||
In 1999, the ESOP was leveraged and the loan was unconditionally guaranteed by the Company. The Company’s matching contribution and dividends on the shares held by the ESOP are used to repay the loan, and shares are released from the suspense account as the principal and interest are paid. The unreleased portion of the shares in the ESOP suspense account is not considered outstanding for purposes of earnings per share computations. Company contributions to the ESOP, recorded as compensation and interest expense, were $51,647 in 2007, $47,533 in 2006 and $40,396 in 2005. Dividends earned by the suspense shares and interest income within the ESOP totaled $1,031 in 2007, $1,017 in 2006 and $962 in 2005.
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The Company has a retirement income account (RIA) within the employee savings plan. The RIA replaces the defined benefit pension plan for employees hired after April 1, 2004 at locations that previously offered a salary-based formula under the pension plan. Existing employees at April 1, 2004 who were already under the salary-based formula in the pension plan were given the choice to stay in the defined benefit pension plan or participate in the RIA. The Company makes a contribution to the participant’s RIA account each year, the amount of which is based on the participant’s age and years of service. Participants do not contribute to the RIA. Company contributions to the RIA were $9,145 in 2007, $6,479 in 2006 and $2,258 in 2005.
In addition to shares within the ESOP, as of June 30, 2007 employees have elected to invest in 1,942,756 shares of common stock within the Company Stock Fund of the Parker Retirement Savings Plan.
Other Postretirement Benefits—The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change or eliminate these benefit plans.
Certain employees are covered under benefit provisions that include prescription drug coverage for Medicare eligible retirees. The impact of the subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on the Company’s other postretirement benefits was immaterial.
A summary of the Company’s other postretirement benefit plans follows:
| Benefit cost | 2007 | 2006 | 2005 | |||||||
| Service cost |
$ | 1,656 | $ | 2,059 | $ | 1,885 | ||||
| Interest cost |
5,699 | 5,559 | 6,301 | |||||||
| Net amortization and deferral |
(579 | ) | 261 | 71 | ||||||
| Net periodic benefit cost |
$ | 6,776 | $ | 7,879 | $ | 8,257 | ||||
| Change in benefit obligation | 2007 | 2006 | ||||||
| Benefit obligation at beginning of year |
$ | 101,245 | $ | 119,969 | ||||
| Service cost |
1,656 | 2,059 | ||||||
| Interest cost |
5,699 | 5,559 | ||||||
| Actuarial (gain) |
(5,223 | ) | (17,763 | ) | ||||
| Benefits paid |
(7,086 | ) | (6,816 | ) | ||||
| Acquisitions and other |
(1,763 | ) | ||||||
| Benefit obligation at end of year |
$ | 96,291 | $ | 101,245 | ||||
Funded status
| Benefit obligation in excess of plan assets |
$ | (96,291 | ) | $ | (101,245 | ) | ||
| Unrecognized net actuarial loss |
9,773 | |||||||
| Unrecognized prior service (credit) |
(3,788 | ) | ||||||
| Net amount recognized |
$ | (96,291 | ) | $ | (95,260 | ) | ||
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| Amounts recognized on the Consolidated Balance Sheet: |
2007 | 2006 | ||||||
| Pensions and other postretirement benefits |
$ | (96,291 | ) | $ | (95,260 | ) | ||
| Amounts recognized in Accumulated Other Comprehensive (Loss) |
||||||||
| Net actuarial loss |
$ | 4,387 | ||||||
| Prior service (credit) |
(3,046 | ) | ||||||
| Amount recognized |
$ | 1,341 | ||||||
The amount of prior service (credit) that will be amortized from accumulated other comprehensive (loss) into net periodic postretirement cost in 2008 is $742.
The assumptions used to measure the net periodic benefit cost for postretirement benefit obligations are:
| 2007 | 2006 | 2005 | |||||||
| Discount rate |
6.0 | % | 5.25 | % | 6.25 | % | |||
| Current medical cost trend rate |
10.2 | % | 10.4 | % | 9.8 | % | |||
| Ultimate medical cost trend rate |
5 | % | 5 | % | 5 | % | |||
| Medical cost trend rate decreases to ultimate in year |
2014 | 2014 | 2012 | ||||||
The discount rate assumption used to measure the benefit obligation was 6.23% in 2007 and 6.0% in 2006.
Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2008 through 2012 are $7,066, $6,861, $6,980, $7,191 and $7,199, respectively, and $36,365 in the aggregate for the five years ending June 30, 2013 through June 30, 2017.
A one percentage point change in assumed health care cost trend rates would have the following effects:
| 1% Increase | 1% Decrease | ||||||
| Effect on total of service and interest cost components |
$ | 786 | $ | (636 | ) | ||
| Effect on postretirement benefit obligation |
$ | 8,502 | $ | (7,467 | ) | ||
Other—The Company has established nonqualified deferred compensation programs, which permit officers, directors and certain management employees annually to elect to defer a portion of their compensation, on a pre-tax basis, until their retirement. The retirement benefit to be provided is based on the amount of compensation deferred, Company match, and earnings on the deferrals. Deferred compensation expense was $34,284, $18,965 and $13,622 in 2007, 2006 and 2005, respectively.
The Company has invested in corporate-owned life insurance policies to assist in meeting the obligation under these programs. The policies are held in a rabbi trust and are recorded as assets of the Company.
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11. Shareholders’ Equity
| Common Shares | 2007 | 2006 | 2005 | |||||||||
| Balance July 1 |
$ | 60,342 | $ | 60,219 | $ | 59,856 | ||||||
| Shares issued under stock incentive plans ( 2006 – 246,615; 2005 – 726,224) |
123 | 363 | ||||||||||
| Balance June 30 |
$ | 60,342 | $ | 60,342 | $ | 60,219 | ||||||
| Additional Capital | ||||||||||||
| Balance July 1 |
$ | 510,869 | $ | 478,219 | $ | 451,891 | ||||||
| Stock option exercise activity |
(70,432 | ) | (32,243 | ) | 1,385 | |||||||
| Stock-based compensation expense |
33,203 | 33,448 | ||||||||||
| Tax benefit of equity awards |
26,547 | 20,406 | 16,520 | |||||||||
| Restricted stock (surrendered) issued |
(260 | ) | 603 | 214 | ||||||||
| Shares related to ESOP |
12,340 | 10,436 | 8,209 | |||||||||
| Deferred compensation |
(28 | ) | ||||||||||
| Balance June 30 |
$ | 512,239 | $ | 510,869 | $ | 478,219 | ||||||
| Retained Earnings | ||||||||||||
| Balance July 1 |
$ | 3,916,412 | $ | 3,352,888 | $ | 2,840,787 | ||||||
| Net income |
830,046 | 673,167 | 604,692 | |||||||||
| Cash dividends paid on common shares, net of tax benefits |
(121,263 | ) | (109,643 | ) | (92,591 | ) | ||||||
| Balance June 30 |
$ | 4,625,195 | $ | 3,916,412 | $ | 3,352,888 | ||||||
| Unearned Compensation Related to ESOP | ||||||||||||
| Balance July 1 |
$ | (25,809 | ) | $ | (36,818 | ) | $ | (48,868 | ) | |||
| Unearned compensation related to ESOP debt guarantee |
10,617 | 11,009 | 12,050 | |||||||||
| Balance June 30 |
$ | (15,192 | ) | $ | (25,809 | ) | $ | (36,818 | ) | |||
| Deferred Compensation Related to Stock Options |
||||||||||||
| Balance July 1 |
$ | 2,347 | $ | 2,347 | $ | 2,347 | ||||||
| Deferred compensation |
(78 | ) | ||||||||||
| Balance June 30 |
$ | 2,269 | $ | 2,347 | $ | 2,347 | ||||||
| Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| Balance July 1 |
$ | (194,819 | ) | $ | (470,964 | ) | $ | (311,710 | ) | |||
| Foreign currency translation |
119,582 | 103,842 | 13,138 | |||||||||
| Net unrealized gain (loss) |
5,153 | (18,024 | ) | |||||||||
| Net realized loss |
236 | 142 | 9 | |||||||||
| Minimum pension liability prior to adoption of FAS 158 |
221,546 | 167,008 | (154,377 | ) | ||||||||
| Adjustment recognized upon adoption of FAS 158 |
(259,166 | ) | ||||||||||
| Balance June 30 |
$ | (112,621 | ) | $ | (194,819 | ) | $ | (470,964 | ) | |||
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Common Stock in Treasury
| 2007 | 2006 | 2005 | ||||||||||
| Balance July 1 |
$ | (28,139 | ) | $ | (45,744 | ) | $ | (11,849 | ) | |||
| Shares purchased at cost (2007 – 5,449,327; 2006 – 742,100; 2005 – 1,000,000) |
(433,049 | ) | (52,409 | ) | (61,781 | ) | ||||||
| Shares issued under stock incentive plans (2007 – 1,072,316; 2006 – 979,464; 2005 – 413,582) |
83,844 | 61,530 | 23,779 | |||||||||
| Restricted stock issued |
16,670 | 8,484 | 4,107 | |||||||||
| Deferred compensation |
107 | |||||||||||
| Balance June 30 |
$ | (360,567 | ) | $ | (28,139 | ) | $ | (45,744 | ) | |||
Foreign currency translation is net of tax of $8,841, $47,864, and $8,080 in 2007, 2006 and 2005, respectively. Included in the 2006 tax amount for foreign currency translation is $38.8 million related to prior year deferred taxes associated with the retirement of the Euro Notes in November 2005. Net unrealized gain (loss) is net of tax of $3,101 and $10,861 in 2006 and 2005, respectively. Net realized loss is net of tax of $148, $107 and $7 in 2007, 2006 and 2005, respectively. Minimum pension liability is net of tax of $131,065, $110,068 and $93,127 in 2007, 2006 and 2005, respectively. Adjustment recognized upon adoption of FAS 158 is net of tax of $156,711 in 2007.
Shares surrendered upon exercise of stock options: 2007 – 795,194; 2006 – 680,110; 2005 – 655,385
Share Repurchases—The Company is authorized to repurchase an amount of common shares each fiscal year equal to the greater of 5 million shares or five percent of the shares outstanding as of the end of the prior fiscal year. The Company repurchased 5,449,327 shares at an average price of $79.47 per share during the fiscal year ended June 30, 2007. Repurchases are funded primarily from operating cash flows, and the shares are initially held as treasury stock. In August 2007, the Company’s Board of Directors authorized the accelerated purchase of $500 million of the Company’s common shares. This authorization is in addition to the Company’s previously announced share repurchase program. The Company has entered into an agreement with Morgan Stanley whereby the Company will purchase an initial number of common shares in exchange for $500 million. Morgan Stanley will purchase an equivalent number of the Company’s common shares in the open market over a period of up to four months, and at the end of that period, additional shares may be delivered to the Company based on the volume-weighted average price of the Company’s common shares during the same period, subject to a cap and a floor as determined according to the terms of agreement.
12. Stock Incentive Plans
Stock-Based Awards—The Company’s stock incentive plans provide for the granting of nonqualified options and stock appreciation rights (SARs) to officers and key employees of the Company. The nonqualified options allow the recipient to purchase shares of common stock at a price not less than 100 percent of the fair market value of the stock on the date the stock-based awards are granted. Outstanding options and SARs are exercisable primarily from two to three years after the date of grant and expire no more than ten years after grant. The Company satisfies stock option and SAR exercises by issuing common shares out of treasury, which have been repurchased pursuant to the Company’s share repurchase program described in Note 11, or through the issuance of previously unissued common shares.
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On July 1, 2005, the Company adopted the provisions of FASB Statement No. 123 (revised 2004) and elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. Prior to the adoption of FASB Statement No. 123 (revised 2004), the Company used the intrinsic-value based method to account for stock-based awards and made no charges against earnings with respect to awards granted as the grant price equaled the market price of the underlying common shares on the date of grant.
During 2007 and 2006, the Company recognized stock-based compensation expense of $33,203 ($21,280 after-tax or $.18 per basic and diluted share) and $33,448 ($21,766 after-tax or $.18 per basic and diluted share), respectively.
The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards are exercised. The related tax benefit is credited to Additional capital as the Company is currently in a windfall tax benefit position.
The fair values for the significant stock-based awards granted in 2007, 2006 and 2005 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
| 2007 | 2006 | 2005 | ||||||||||
| Risk-free interest rate |
4.7 | % | 4.2 | % | 3.5 | % | ||||||
| Expected life of award |
5.1 yrs | 5.4 yrs | 4.2 yrs | |||||||||
| Expected dividend yield of stock |
1.5 | % | 1.6 | % | 1.7 | % | ||||||
| Expected volatility of stock |
30.2 | % | 33.1 | % | 32.7 | % | ||||||
| Weighted average fair value |
$ | 23.24 | $ | 21.29 | $ | 14.97 | ||||||
The expected life of the award was derived by referring to actual exercise experience. The expected volatility of stock was derived by referring to changes in the Company’s historical common stock prices over a timeframe similar to the expected life of the award. The Company has no reason to believe that future stock volatility is likely to materially differ from historical volatility.
Stock-based award activity during 2007 is as follows (aggregate intrinsic value in millions):
| Number Of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual term |
Aggregate Intrinsic Value | ||||||||
| Outstanding June 30, 2006 |
7,860,451 | $ | 50.24 | ||||||||
| Granted |
1,978,724 | 76.86 | |||||||||
| Exercised |
(1,867,840 | ) | 45.87 | ||||||||
| Canceled |
(43,857 | ) | 70.47 | ||||||||
| Outstanding June 30, 2007 |
7,927,478 | $ | 57.80 | 6.7 years | $ | 317.3 | |||||
| Exercisable June 30, 2007 |
5,060,220 | $ | 49.02 | 5.6 years | $ | 247.4 | |||||
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A summary of the status and changes of shares subject to stock-based awards and the related average price per share follows:
| Number of Shares |
Weighted-average Grant date Fair Value | |||||
| Nonvested June 30, 2006 |
2,350,894 | $ | 19.11 | |||
| Granted |
1,978,724 | 23.24 | ||||
| Vested |
(1,424,369 | ) | 17.94 | |||
| Canceled |
(37,991 | ) | 21.42 | |||
| Nonvested June 30, 2007 |
2,867,258 | $ | 22.51 | |||
At June 30, 2007, $25,862 of expense with respect to nonvested stock-based awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 18 months. The total fair value of shares vested during 2007, 2006 and 2005 was $25,554, $29,784 and $31,597, respectively.
Information related to stock-based awards exercised during 2007, 2006 and 2005 is as follows:
| 2007 | 2006 | 2005 | |||||||
| Net cash proceeds |
$ | 40,265 | $ | 52,879 | $ | 37,453 | |||
| Intrinsic value |
81,844 | 47,401 | 51,387 | ||||||
| Income tax benefit |
23,441 | 20,516 | 16,391 | ||||||
Restricted Stock—Restricted stock was issued under the Company’s 2003 Stock Incentive Program to certain key employees under the Company’s 2004-05-06, 2003-04-05 and 2002-03-04 Long Term Incentive Plans (LTIP). Value of the payments was set at the market value of the Company’s common stock on the date of issuance. Shares were earned and awarded, and an estimated value was accrued, based upon attainment of criteria specified in the LTIP over the cumulative years of each 3-year Plan. Plan participants are entitled to cash dividends and to vote their respective shares, but the shares are restricted as to transferability for three years following issuance.
| Restricted Shares for LTIP Plan |
2007 | 2006 | 2005 | ||||||
| Number of shares issued |
212,220 | 136,922 | 66,393 | ||||||
| Average share value on date of issuance |
$ | 74.63 | $ | 65.65 | $ | 60.52 | |||
| Total value |
$ | 15,838 | $ | 8,989 | $ | 4,018 | |||
Under the Company’s 2005-06-07 LTIP a payout of shares of restricted stock from the Company’s 2003 Stock Incentive Program will be issued to certain key employees in 2008. The balance of the 2005-06-07 LTIP payout will be made as deferred cash compensation (if elected by the participant) or in cash. The total payout, valued at $28,425, has been accrued over the three years of the plan.
In 2007, 9,000 shares of restricted stock were issued to certain non-employee members of the Board of Directors. These shares are restricted to transferability for three years following issuance. In addition, non-employee members of the Board of Directors have been given the opportunity to receive all or a portion of their fees in the form of restricted stock. These shares vest ratably, on an annual basis, over the term of office of the director. In 2007, 2006 and 2005, 9,663, 6,778 and 3,132 shares, respectively, were issued in lieu of directors’ fees. During 2006, 2,442 shares of the restricted stock were surrendered upon the death of a director.
At June 30, 2007, the Company had 14,496,162 common shares reserved for issuance in connection with its stock incentive plans.
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13. Shareholders’ Protection Rights Agreement
On January 25, 2007, the Board of Directors of the Company declared a dividend of one Shareholders’ Right for each common share outstanding on February 17, 2007 in relation to the Company’s Shareholders Protection Rights Agreement. As of June 30, 2007, 116,159,220 common shares were reserved for issuance under this Agreement. Under certain conditions involving acquisition of, or an offer for, 15 percent or more of the Company’s common shares, all holders of Shareholders’ Rights would be entitled to purchase one common share at an exercise price currently set at $240. In addition, in certain circumstances, all holders of Shareholders’ Rights (other than the acquiring entity) would be entitled to purchase a number of common shares equal to twice the exercise price, or at the option of the Board, to exchange each Shareholders’ Right for one common share. The Shareholders’ Rights remain in existence until February 17, 2017, unless extended by the Board of Directors or earlier redeemed (at one cent per Shareholders’ Right), exercised or exchanged under the terms of the agreement. In the event of an unfriendly business combination attempt, the Shareholders’ Rights will cause substantial dilution to the person attempting the business combination. The Shareholders’ Rights should not interfere with any merger or other business combination that is in the best interest of the Company and its shareholders since the Shareholders’ Rights may be redeemed.
14. Research and Development
Research and development costs amounted to $253,091 in 2007, $203,702 in 2006 and $164,229 in 2005. These amounts include both costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Costs incurred in connection with research and development contracts amounted to $40,894 in 2007, $37,532 in 2006 and $34,757 in 2005. These costs are included in the total research and development cost for each of the respective years.
15. Contingencies
The Company is involved in various litigation arising in the normal course of business, including proceedings based on product liability claims, workers’ compensation claims and alleged violations of various environmental laws. The Company is self-insured in the United States for health care, workers’ compensation, general liability and product liability up to predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities. While the outcome of pending proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these proceedings will not have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
On April 27, 2007, a grand jury in the Southern District of Florida issued a subpoena to the Company’s subsidiary, Parker ITR. The subpoena requires the production of documents, in particular documents related to communications with competitors and customers related to Parker ITR’s marine oil and gas hose business. The Company is responding to this subpoena. On May 7, 2007, the Japan Fair Trade Commission (JFTC) requested that Parker ITR appoint an agent related to an investigation of marine hose suppliers. Parker ITR appointed such an agent by power of attorney. Parker ITR has also been required to submit a report to the JFTC on specific topics. The Company and Parker ITR continue to cooperate with the JFTC. On May 15, 2007, the European Commission issued a Request for Information to the Company and its subsidiary, Parker ITR. After the Company and Parker ITR filed a response, the European Commission requested additional information. The Company and Parker ITR continue to cooperate with the European Commission. In addition, there are currently four class action lawsuits pending in the Southern District of Florida and one in the Southern District of New York alleging that the Company, Parker ITR and a number of other defendants engaged in violations of Section 1 of the Sherman Act. The class action complaints allege that Parker ITR and other defendants, for a period of at least eight years, conspired with competitors in unreasonable restraint of trade to artificially raise, fix, maintain or stabilize prices, rig bids and allocate markets and customers for marine oil and gas hose in the United States. In three cases, a summons has been issued for Parker ITR, but service has not yet been effected. The Company, which is only named in one case in the Southern District of Florida, was served on July 13, 2007 and had filed its answer denying the allegations. At the current stage of the investigations and lawsuits, the Company is unable to reasonably estimate the potential loss or range of loss, if any, arising from such investigations and lawsuits.
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Environmental—The Company is currently responsible for environmental remediation at 34 manufacturing facilities presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other companies, at one off-site waste disposal facility and three regional sites.
As of June 30, 2007, the Company has a reserve of $17,833 for environmental matters, which are probable and reasonably estimable. This reserve is recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties. This reserve is net of $2,555 for discounting, primarily at a 4.5 percent discount rate, a portion of the costs at 32 locations to operate and maintain remediation treatment systems as well as gauge treatment system effectiveness through monitoring and sampling over periods up to 30 years.
The Company’s estimated total liability for the above mentioned sites ranges from a minimum of $17,833 to a maximum of $73,148. The largest range for any one site is approximately $7.9 million. The actual costs to be incurred by the Company will be dependent on final determination of remedial action required, negotiations with federal and state agencies, changes in regulatory requirements and technology innovation, the effectiveness of remedial technologies employed, the ability of other responsible parties to pay, and any insurance or third party recoveries.
16. Stock Split
On August 16, 2007, the Company’s Board of Directors authorized a 3-shares-for-2 split of the Company’s common shares, payable on October 1, 2007 to shareholders of record as of September 17, 2007. The share numbers and per share amounts disclosed in the Consolidated Financial Statements and Notes to the Consolidated Financial Statements have not been retroactively adjusted to give effect to the stock split. Presented below are unaudited pro forma basic and diluted earnings per amounts after giving effect for the stock split:
| (Unaudited) |
2007 | 2006 | 2005 | ||||||
| Pro forma basic earnings per share |
|||||||||
| Income from continuing operations |
$ | 4.75 | $ | 3.57 | $ | 2.99 | |||
| Discontinued operations |
.19 | .40 | |||||||
| Basic earnings per share |
$ | 4.75 | $ | 3.76 | $ | 3.39 | |||
| Pro forma diluted earnings per share |
|||||||||
| Income from continuing operations |
$ | 4.68 | $ | 3.52 | $ | 2.95 | |||
| Discontinued operations |
.19 | .40 | |||||||
| Diluted earnings per share |
$ | 4.68 | $ | 3.71 | $ | 3.35 | |||
The unaudited pro forma impact of the stock split on the balance sheet at June 30, 2007 is an increase in Common shares by $30 million with an offsetting reduction to Additional capital.
17. Quarterly Information (Unaudited)
| 2007 |
1st | 2nd | 3rd | 4th | Total | ||||||||||
| Net sales |
$ | 2,551,573 | $ | 2,511,152 | $ | 2,780,969 | $ | 2,874,365 | $ | 10,718,059 | |||||
| Gross profit |
604,215 | 573,145 | 617,141 | 650,609 | 2,445,110 | ||||||||||
| Net income |
210,584 | 192,967 | 209,309 | 217,186 | 830,046 | ||||||||||
| Diluted earnings per share |
1.75 | 1.64 | 1.78 | 1.84 | 7.01 | ||||||||||