Exhibit (13)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Excerpts from Annual Report to Shareholders for the fiscal year ended June 30,
1998.
*Numbered in accordance with Item 601 of Regulation S-K.
FORWARD-LOOKING STATEMENTS
This Annual Report and other written reports and oral statements made from
time to time by the Company may contain "forward-looking statements", all
of which are subject to risks and uncertainties. All statements which address
operating performance, events or developments that we expect or anticipate
will occur in the future, including statements relating to growth, operating
margin performance, earnings per share or statements expressing general
opinions about future operating results, are forward-looking statements.
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other
factors, many of which are outside the Company's control, that could cause
actual results to differ materially from such statements. Such factors
include:
* continuity of business relationships with and purchases by major
customers, including among others, orders and delivery schedules for
aircraft components,
* ability of suppliers to provide materials as needed,
* uncertainties surrounding timing, successful completion or integration
of acquisitions,
* competitive pressure on sales and pricing,
* increases in material and other production costs which cannot be
recovered in product pricing,
* uncertainties surrounding the year 2000 issues and the new Euro
currency,
* difficulties in introducing new products and entering new markets, and
* uncertainties surrounding the global economy and global market
conditions, including among others, the economy of the Asia Pacific
region and the potential devaluation of currencies.
Any forward-looking statements are made based on known events and
circumstances at the time. 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 Report.
Page 13-1
DISCUSSION OF STATEMENT OF INCOME
THE CONSOLIDATED STATEMENT OF INCOME summarizes the Company's operating
performance over the last three years.
NET SALES of $4.63 billion for 1998 were 13.2 percent higher than the
$4.09 billion for 1997. Acquisitions accounted for approximately one-fifth of
this increase. The Industrial operations experienced continued strong order
demand within the heavy-duty truck, construction equipment, factory
automation, telecommunications and refrigeration markets. The European
operations continued to grow and the Company continued to penetrate markets
in Asia Pacific and Latin American regions. Volume increases within
International operations were partially offset by currency rate changes. The
Aerospace operations experienced strong demand within the commercial
transport, business jet and general aviation markets.
Net sales for 1997 were 14.1 percent higher than the $3.59 billion sales
in 1996. Acquisitions accounted for more than half of this increase. North
American Industrial operations achieved strong order demand, especially
within the factory automation, machine tool, and agricultural and
construction equipment markets. There was also increased demand for sealing
products, and light-truck and automotive products. International Industrial
operations' results were relatively flat, with Europe experiencing a soft
economy for most of the year. Volume increases were partially offset by
currency rate changes. The Aerospace operations achieved the majority of the
sales growth as demand was strong within the OEM commercial and general
aviation industries and the maintenance, repair and overhaul business.
The Company is anticipating moderate growth for the next year as growth in
Industrial markets within North America is expected to be less than the
current pace. European markets are expected to continue to improve and the
Company expects to increase market penetration in Latin America. The
Aerospace operations expect some moderation in the recent robust growth
within the commercial aviation OEM, and repair and overhaul businesses. A
strong backlog and participation on nearly every currently flown aircraft
provide a very positive outlook.
GROSS PROFIT MARGIN was 23.4 percent in 1998. Cost of sales for 1998
includes a non-cash, non-recurring charge of $15.8 million for in-process R&D
purchased as part of two acquisitions. Before these charges, the gross
profit margin for 1998 was 23.7 percent, compared to 22.9 percent in 1997 and
23.1 percent in 1996. The improvement in 1998 is primarily the result of
better absorption of fixed costs due to higher volume and the benefits of
continued integration of prior-year acquisitions. The improvement was
partially offset by recently acquired operations contributing lower margins,
as their integration continues. In addition, gross margins were affected by
the Asian financial crisis and the depressed worldwide semiconductor market.
The decrease in gross profit margin in 1997 was due to newly acquired
operations contributing lower margins. In addition, weak demand throughout
Europe in 1997 resulted in lower capacity utilization and reduced gross
profit for the International operations. Partially offsetting these declines,
the higher volume in 1997 improved capacity utilization and provided higher
margins for most of the North American Industrial and Aerospace operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of sales
decreased to 11.5 percent, from 11.6 percent in 1997, and 11.9 percent in
1996. As volume increased these expenses remained relatively unchanged,
Page 13-2
except for increased costs from acquisitions, incentive programs and
initiatives to enter new markets.
INTEREST EXPENSE increased by $6.1 million in 1998 and $10.0 million in
1997 due to increased borrowings to complete acquisitions.
INTEREST AND OTHER INCOME, NET was $6.8 million in 1998 compared to $5.6
million in 1997. Fiscal 1998 income included $3.8 million of interest from a
settlement with the IRS. Fiscal 1996 income of $8.5 million included income
received from several minor Corporate investments.
GAIN (LOSS) ON DISPOSAL OF ASSETS was less than $.1 million in 1998, a
$3.0 million gain in 1997 and a $2.0 million loss in 1996. The 1997 gain
includes $17.1 million income from the sale of real estate in California.
This income was substantially offset by $13.3 million accrued for exit costs
and charges for impaired assets related to the relocation of the corporate
headquarters.
INCOME TAXES increased to an effective rate of 35.9 percent in 1998,
compared to 35.5 percent in 1997. The rate in 1996 was 36.0 percent. The
increased 1998 rate is the result of receiving no tax benefit for one of the
R&D charges. The reduction in the rate for 1997, as compared to 1996, is the
result of increased tax benefits based on the export of products manufactured
in the U.S.
EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT - On June 30, 1998 the Company
called for redemption all of its outstanding $100 million, 10.375 percent
debentures due 1999-2018.
NET INCOME of $319.6 million for 1998 was 16.6 percent higher than 1997.
Before the 1998 extraordinary item - extinguishment of debt, income increased
17.9 percent over 1997. Net income of $274.0 million for 1997 was 14.3
percent higher than 1996. Net income as a percentage of sales, before the
extraordinary item, was 7.0 percent in 1998, compared to 6.7 percent in 1997
and 1996.
YEAR 2000 CONSIDERATIONS - The Company has been taking actions to assure
that its computerized products and systems and all external interfaces are
Year 2000 compliant. The Company expects to have all internal standard
application systems compliant by July 1999 by modifying present systems,
installing new systems and monitoring third-party interfaces. The cost for
these actions is not material to the Company's results of operations.
In addition, the Company is currently contacting its key suppliers,
customers, distributors and financial service providers regarding their Year
2000 status and anticipates this survey will be substantially complete by
January 1999. If it is determined any key third party may not be prepared,
the Company will develop an alternative contingency plan.
While management does not expect that the consequences of any unsuccessful
modifications would significantly affect the financial position, liquidity,
or results of operations of the Company, there can be no assurance that
failure to be fully compliant by 2000 would not have an impact on the
Company.
EURO PREPARATIONS - The Company is in the process of upgrading its systems
to accommodate the Euro currency by January 1, 1999. The cost of this upgrade
is immaterial to the Company's financial results. Although difficult to
predict, any competitive implications and any impact on existing financial
instruments are also expected to be immaterial to the Company's results of
operations, financial position or liquidity.
Page 13-3
DISCUSSION OF 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.
The effect of currency rate changes during the year caused a $32.7 million
decrease in the Foreign currency translation adjustments equity account.
These rate changes also caused significant decreases in accounts receivable,
inventories, goodwill and plant and equipment, as well as significant
decreases in accounts payable and the various accrual accounts.
Working capital and the current ratio were as follows:
Working Capital (millions) 1998 1997
_________________________________________________
Current Assets $ 1,780 $ 1,500
Current Liabilities 989 716
Working Capital 791 784
Current Ratio 1.8 2.1
=================================================
ACCOUNTS RECEIVABLE are primarily due from customers for sales of product
($642.3 million at June 30, 1998, compared to $554.5 million at June 30,
1997). The current year increase in accounts receivable is primarily due to
acquisitions and increased volume. Days sales outstanding for the Company
increased slightly from 1997. An increase in the allowance for doubtful
accounts in 1998 is primarily due to receivables obtained through
acquisitions.
INVENTORIES increased to $944.3 million at June 30, 1998, compared to
$727.8 million a year ago, partially due to acquisitions and increased
volume. Additional increases occurred, primarily within work in process and
finished goods, in order to improve customer service response time. Months
supply of inventory on hand at June 30, 1998 increased to 3.7 months from 3.4
months at June 30, 1997.
PLANT AND EQUIPMENT, net of accumulated depreciation, increased $114.5
million in 1998 as a result of acquisitions and capital expenditures which
exceeded annual depreciation.
INVESTMENTS AND OTHER ASSETS increased $20.5 million in 1998 primarily as
a result of increases in pension assets and the cash surrender value of
corporate-owned life insurance contracts, partially offset by a reduction in
investments due to the acquisition and consolidation of two joint ventures.
EXCESS COST OF INVESTMENTS OVER NET ASSETS ACQUIRED increased $114.4
million in 1998 as a result of acquisitions, partially offset by currency
rate fluctuations and amortization. The additional excess cost of investments
in 1998 is being amortized over 15 years.
NOTES PAYABLE AND LONG-TERM DEBT PAYABLE WITHIN ONE YEAR increased $195.7
million due to increased investment in commercial paper and the currently
payable $100 million 10.375% debentures called for redemption in June 1998.
ACCOUNTS PAYABLE, TRADE increased $71.4 million in 1998 due to the timing
of payments, acquisitions and the increased volume. The majority of the
increase was within North American Industrial operations.
ACCRUED PAYROLLS AND OTHER COMPENSATION increased $19.4 million in 1998
Page 13-4
primarily as a result of increased headcount and incentive plans which are
based on sales and earnings.
ACCRUED DOMESTIC AND FOREIGN TAXES decreased to $34.4 million in 1998 from
$51.4 million in 1997 primarily due to higher estimated income tax payments
made in 1998.
LONG-TERM DEBT increased $80.1 million in 1998 primarily due to increased
borrowings to fund acquisitions. See the Cash Flows From Financing Activities
section on page 13-7 for further discussion.
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. To meet
this objective, the Company has established a financial goal of maintaining a
ratio of debt to debt-equity of 30 to 33 percent.
Debt to Debt-Equity Ratio (millions) 1998 1997
_________________________________________________________
Debt $ 778 $ 503
Debt & Equity 2,462 2,050
Ratio 31.6% 24.5%
=========================================================
In fiscal 1999 additional borrowings are not anticipated for the stock
repurchase program, capital investments, or for working capital purposes, but
may be utilized for acquisitions.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS increased 5.1 percent in 1998.
These costs are explained further in Note 8 to the Consolidated Financial
Statements.
OTHER LIABILITIES increased to $44.2 million in 1998 from $24.0 million in
1997 primarily due to increases in deferred compensation plans.
DISCUSSION OF CASH FLOWS
THE CONSOLIDATED STATEMENT OF CASH FLOWS reflects cash inflows and outflows
from the Company's operating, investing and financing activities.
Cash and cash equivalents decreased $38.5 million in 1998 after
increasing $5.0 million in 1997.
CASH FLOWS FROM OPERATING ACTIVITIES -- The Company's largest source of
cash continues to be net cash provided by operating activities. Net cash
provided by operating activities in 1998 was $320.6 million compared to
$392.3 million in 1997. This decrease of $71.7 million is principally due to
Inventories using cash of $185.6 million in 1998 compared to $27.0 million
in 1997. Other accrued liabilities used cash of $9.1 million in 1998
compared to providing cash of $16.0 million in 1997. Accrued domestic and
foreign taxes also used cash in 1998 of $15.3 million after providing cash
of $4.3 million in 1997. These uses of cash in 1998 were partially offset
with cash provided by an increase of $45.5 million in Net income in 1998 and
a $52.9 million increase in Accounts payable in 1998 compared to an increase
of $31.7 million in 1997. In addition, the 1998 write-off of purchased in-
process R&D of $15.8 million was a non-cash charge added back to Net income
to reconcile to the net cash provided by operating activities.
The net cash provided by operating activities in 1997 increased $54.3
million compared to 1996. This increase is principally the result of an
Page 13-5
increase of $34.4 million in Net income and the non-cash expenses of
Depreciation and Amortization increasing $28.5 million. Accounts receivable
used cash of $76.1 million in 1997 as a result of increased volume, compared
to providing cash of $8.7 million in 1996. Inventories also used cash of
$27.0 million in 1997, an increase of $12.0 million compared to the cash
used in 1996. Partially offsetting these uses of cash, Accounts payable,
trade provided cash of $31.7 million in 1997 compared to using cash of $15.5
million in 1996. Increases in Other accrued liabilities also provided cash
of $16.0 million in 1997 compared to using cash of $31.8 million in 1996.
CASH FLOWS FROM INVESTING ACTIVITIES -- Net cash used in investing
activities was $264.4 million greater in 1998 than 1997, primarily due to
Acquisitions using $201.5 million more cash in 1998. Also, Capital
expenditures increased $47.8 million in 1998. These investments to support
growth and efficient manufacturing technology demonstrate the Company's
commitment to improving shareholder value.
Net cash used in investing activities for 1997 was $359.8 million lower
than in 1996 primarily due to less cash used for Acquisitions. The most
significant use of cash in 1997 was Capital expenditures, which at $189.2
million was $12.5 million less than the previous year.
To complete Acquisitions the Company utilized cash of $233.0 million and
treasury shares valued at $11.9 million in 1998; cash of $31.5 million in
1997; and cash of $359.4 million and treasury shares valued at $6.2 million
in 1996. The net assets of the acquired companies at their respective
acquisition dates consisted of the following:
(In thousands) 1998 1997 1996
____________________________________________________________________
Assets acquired:
Accounts receivable $ 39,286 $ 4,549 $ 70,916
Inventories 43,847 13,410 77,582
Prepaid expenses 1,393 247 1,459
Deferred income taxes 1,643 1,576 18,942
Plant & equipment 54,718 15,283 124,222
Other assets 3,762 (1,121) 23,515
Excess cost of investments
over net assets acquired 162,680 11,596 223,873
____________________________________________________________________
307,329 45,540 540,509
____________________________________________________________________
Page 13-6
Liabilities assumed:
Notes payable 8,690 2,050 13,256
Accounts payable 21,841 2,418 26,880
Accrued payrolls 4,418 471 10,377
Accrued taxes 2,840 941 11,620
Other accrued liabilities 11,421 4,582 47,820
Long-term debt 9,706 2,454 8,235
Pensions and other
postretirement benefits 477 1,163 49,798
Other liabilities 3,033 6,900
____________________________________________________________________
62,426 14,079 174,886
____________________________________________________________________
Net assets acquired $ 244,903 $ 31,461 $ 365,623
====================================================================
CASH FLOWS FROM FINANCING ACTIVITIES -- In 1998 the Company increased its
outstanding borrowings by a net total of $264.9 million primarily to fund
acquisitions. The majority of the funding was through the issuance of
commercial paper. Additional funds were obtained through the issuance of $50
million of medium-term notes in December 1997. In July 1998 the Company
issued another $100 million of medium-term notes.
In 1997 the Company decreased its outstanding borrowings by a net total
of $121.3 million. As of June 30, 1997, the Company paid off all commercial
paper and selected notes payable attributable to the International
operations.
Common share activity includes the repurchase of stock and the exercise
of stock options. During 1998 the Company purchased 2,522,971 shares for
treasury. In July 1998, the Board of Directors of the Company increased the
authorization for future repurchases to 5.05 million shares.
Dividends have been paid for 192 consecutive quarters, including a yearly
increase in dividends for the last 42 fiscal years. The current annual
dividend rate is $.60 per share.
In summary, based upon the Company's past performance and current
expectations, management believes the cash flows generated from future
operating activities, combined with the Company's worldwide financial
capabilities, will provide adequate funds to support planned growth and
continued improvements in the Company's manufacturing facilities and
equipment.
DISCUSSION OF BUSINESS SEGMENT INFORMATION
THE BUSINESS SEGMENT INFORMATION presents sales, operating income and assets
by the principal industries and geographic areas in which the Company's
various businesses operate.
Page 13-7
INDUSTRIAL SEGMENT
1998 1997 1996
______________________________________________________________
Operating income as a percent of sales 12.4% 12.5% 12.4%
Return on average assets 19.1% 18.7% 18.3%
______________________________________________________________
Sales for the Industrial North American operations increased to $2.48
billion in 1998, 15.0 percent over 1997, following 1997's increase of 9.1
percent over 1996. Nearly one-fifth of the increase in both years was due to
acquisitions. The growth in 1998 was spread among numerous markets, but
primarily was the result of growth in the light and heavy-duty truck,
construction equipment, telecommunications, factory automation, machine tool
and refrigeration markets.
Recent order entry indicates continuing, but moderate growth for the North
American operations for 1999. In addition to this growth, the Company expects
to increase sales through acquisitions.
International Industrial sales increased to a record $1.16 billion, 8.2
percent over 1997. Without the impact of changes in currency rates, volume
for 1998 increased over 17 percent. Acquisitions contributed over half of the
1998 increase. European markets experienced steady growth during the year.
The Company also continued to penetrate markets in Asia Pacific and Latin
American regions. Further advances within these regions are planned for 1999
in addition to the continuing growth anticipated for Europe.
International sales for 1997 increased 8.5 percent over 1996. Without the
impact of changes in currency rates, volume for 1997 increased nearly 15
percent. Net of the currency impact, acquisitions accounted for a majority
of the increase. Demand in Europe was relatively weak for the majority of
1997 with some improvement occurring in the fourth quarter. Latin America
made an impressive recovery during the year with strength returning in
Brazilian markets. Asia Pacific also contributed to the growth in 1997.
Backlog for the Industrial Segment was $585.2 million at June 30, 1998,
compared to $510.8 million at the end of the prior period. Acquisitions
contributed over one-third of this increase. The remaining increase was due
to volume growth, primarily within North America. The 1997 increase over
backlog of $464.6 million at June 30, 1996 was also due to increased volume
within the North American operations, as well as acquisitions.
Industrial North American operating income, before a $5.2 million R&D
charge in 1998, increased 13.2 percent in 1998 and 11.4 percent in 1997, with
Income from operations as a percent of sales at 15.1 percent in 1998, before
the R&D charge, compared to 15.3 percent in 1997 and 15.0 percent in 1996.
Pricing pressures were experienced throughout most of the Industrial markets.
Recently purchased acquisitions, not yet fully integrated, contributed lower
margins. On the other hand, previous years' acquisitions, now fully
integrated, were able to contribute higher margins, partially offsetting the
decline in Income from operations as a percent of sales. Raw material prices
remained relatively stable during the year.
International Income from operations, before a $10.6 million R&D charge in
1998, increased 27.1 percent in 1998 after a 1997 increase of 2.7 percent
over 1996. Income as a percent of sales, before the R&D charge, increased to
8.1 percent after a decrease to 6.9 percent in 1997 from 7.3 percent in 1996.
Page 13-8
The European Industrial markets performed well during 1998. Increased volume
improved capacity utilization and previous acquisitions became integrated,
resulting in improved margins. Recent acquisitions, with lower margins,
partially offset these improvements. The Company's direct exposure to Asia
Pacific is immaterial, but due to the current financial crisis, extreme
pricing pressures were realized in the semiconductor markets, having an
indirect effect on the Company.
Operating income for 1997 was affected by acquisitions which contributed
lower operating margins primarily within International, but also within North
America, because of integration costs incurred without the benefit of
synergies yet to be realized.
Assets for the Industrial segment increased 17.9 percent in 1998 after
only a slight increase in 1997. The increase in 1998 is primarily due to
acquisitions and increases in inventories, partially offset by currency
fluctuations. In 1997 currency fluctuations offset increases from
acquisitions and increases in accounts receivable and inventories. In both
years net plant and equipment increased due to capital expenditures exceeding
depreciation.
AEROSPACE SEGMENT
1998 1997 1996
______________________________________________________________
Operating income as a percent of sales 16.0% 12.7% 13.7%
Return on average assets 22.5% 17.7% 19.2%
______________________________________________________________
Sales increased 15.1 percent in 1998 and 38.8 percent in 1997. Increased
commercial aircraft deliveries and continued penetration of the commercial
repair and overhaul businesses contributed to the higher volume in 1998. Over
one-half of the 1997 increase was due to an acquisition. Aerospace markets
experienced strong growth during both 1998 and 1997. Gains were primarily
within the commercial-transport original equipment market as the military
market remained relatively flat for the past several years.
Backlog at June 30, 1998 was $1.06 billion compared to $976.2 million in
1997 and $866.3 million in 1996, reflecting the strong growth of the
commercial aircraft market.
Operating income increased 45.3 percent in 1998 and 28.3 percent in 1997.
As a percent of sales 1998 income was 16.0 percent compared to 12.7 percent
in 1997 and 13.7 percent in 1996. Current year margins benefited from
improved capacity utilization due to higher volume and a more favorable
product mix. The 1997 decline in margins was primarily the result of lower
margins contributed by the Abex operations which were still in the
integration phase. Increases to long-term contract reserves also impacted the
1997 margins.
Assets increased 19.9 percent in 1998 after an 8.0 percent increase in
1997. For both periods the increases were primarily in customer receivables,
inventories and property, plant and equipment, partially offset by a decrease
in net goodwill.
Page 13-9
CORPORATE ASSETS increased 5.5 percent in 1998 after a 33.2 percent
increase in 1997. The increase in 1998 is primarily due to capital additions.
The 1997 increase was the result of the construction of a new corporate
headquarters, a net receivable resulting from two currency hedges and an
increase in short-term investments.
Page 13-10
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
For the years ended June 30, 1998 1997 1996
NET SALES $ 4,633,023 $ 4,091,081 $ 3,586,448
Cost of sales 3,550,992 3,152,988 2,756,343
___________ ___________ ___________
Gross profit 1,082,031 938,093 830,105
Selling, general and administrative expenses 532,134 475,180 425,449
___________ ___________ ___________
INCOME FROM OPERATIONS 549,897 462,913 404,656
Other income (deductions):
Interest expense (52,787) (46,659) (36,667)
Interest and other income, net 6,783 5,623 8,537
Gain (loss) on disposal of assets 95 2,990 (2,047)
___________ ___________ ___________
(45,909) (38,046) (30,177)
___________ ___________ ___________
Income before income taxes 503,988 424,867 374,479
Income taxes (Note 3) 180,762 150,828 134,812
___________ ___________ ___________
Income before extraordinary item 323,226 274,039 239,667
Extraordinary item - extinguishment of debt (Note 7) (3,675)
___________ ___________ ___________
NET INCOME $ 319,551 $ 274,039 $ 239,667
=========== =========== ===========
EARNINGS PER SHARE (Note 4)
Basic earnings per share before extraordinary item $ 2.91 $ 2.46 $ 2.15
Extraordinary item - extinguishment of debt (.03)
___________ ___________ ___________
Basic earnings per share $ 2.88 $ 2.46 $ 2.15
=========== =========== ===========
Diluted earnings per share before extraordinary item $ 2.88 $ 2.44 $ 2.14
Extraordinary item - extinguishment of debt (.03)
___________ ___________ ___________
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
Page 13-11
QUARTERLY INFORMATION
(Dollars in thousands, except per share amounts)
1998 (a)(b) 1st 2nd 3rd 4th Total
______________________________________________________________________________________________________
Net sales $ 1,083,169 $ 1,114,948 $ 1,196,548 $ 1,238,358 $ 4,633,023
Gross profit 256,030 252,739 284,226 289,036 1,082,031
Income before extraordinary item 78,261 71,314 83,225 90,426 323,226
Net income 78,261 71,314 83,225 86,751 319,551
Diluted earnings per share before
extraordinary item .70 .63 .75 .80 2.88
Diluted earnings per share .70 .63 .75 .77 2.85
======================================================================================================
1997 (a) 1st 2nd 3rd 4th Total
______________________________________________________________________________________________________
Net sales $ 959,328 $ 969,587 $ 1,047,100 $ 1,115,066 $ 4,091,081
Gross profit 204,830 208,264 246,522 278,477 938,093
Net income 51,105 52,564 77,964 92,406 274,039
Diluted earnings per share .45 .47 .70 .82 2.44
======================================================================================================
(a) Quarterly Information is unaudited.
(b) Results for the third and fourth quarters include a non-cash, non-
recurring pretax charge of $5.2 million and $10.6 million, respectively,
for in-process R&D purchased as part of two acquisitions. The after-tax
impact was $5.2 million ($.05 per share) and $6.8 million ($.06 per
share), respectively.
Page 13-12
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, 1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,488 $ 68,997
Accounts receivable, less allowance
for doubtful accounts
(1998 - $9,004; 1997 - $5,904) 699,179 601,724
Inventories (Notes 1 and 5):
Finished products 416,034 317,494
Work in process 392,880 304,743
Raw materials 135,357 105,610
___________ ___________
944,271 727,847
Prepaid expenses 22,035 17,366
Deferred income taxes (Notes 1 and 3) 84,102 83,627
___________ ___________
TOTAL CURRENT ASSETS 1,780,075 1,499,561
Plant and equipment (Note 1):
Land and land improvements 113,774 96,995
Buildings and building equipment 552,177 486,655
Machinery and equipment 1,560,016 1,443,820
Construction in progress 119,142 111,121
___________ ___________
2,345,109 2,138,591
Less accumulated depreciation 1,209,884 1,117,848
___________ ___________
1,135,225 1,020,743
Investments and other assets (Note 1) 194,632 174,142
Excess cost of investments over
net assets acquired (Note 1) 399,681 285,264
Deferred income taxes (Notes 1 and 3) 15,208 19,236
___________ ___________
TOTAL ASSETS $ 3,524,821 $ 2,998,946
=========== ===========
Page 13-13
LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES
Notes payable and long-term debt
payable within one year (Notes 6 and 7) $ 265,485 $ 69,738
Accounts payable, trade 338,249 266,848
Accrued payrolls and other compensation 163,879 144,481
Accrued domestic and foreign taxes 34,374 51,374
Other accrued liabilities 186,783 183,570
___________ ___________
TOTAL CURRENT LIABILITIES 988,770 716,011
Long-term debt (Note 7) 512,943 432,885
Pensions and other postretirement
benefits (Notes 1 and 8) 265,675 252,709
Deferred income taxes (Notes 1 and 3) 29,739 26,007
Other liabilities 44,244 24,033
___________ ___________
TOTAL LIABILITIES 1,841,371 1,451,645
___________ ___________
SHAREHOLDERS' EQUITY (Note 9)
Serial preferred stock, $.50 par value,
authorized 3,000,000 shares; none issued
Common stock, $.50 par value,
authorized 600,000,000 shares; issued
111,812,025 shares in 1998 and
111,809,085 shares in 1997 at par value 55,906 55,905
Additional capital 139,726 150,702
Retained earnings 1,631,316 1,378,297
Foreign currency translation adjustments (60,026) (27,345)
___________ ___________
1,766,922 1,557,559
Common stock in treasury at cost;
1,938,762 shares in 1998 and
282,915 shares in 1997 (83,472) (10,258)
___________ ___________
TOTAL SHAREHOLDERS' EQUITY 1,683,450 1,547,301
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,524,821 $ 2,998,946
=========== ===========
The accompanying notes are an integral part of the financial statements.
Page 13-14
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the years ended June 30, 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 319,551 $ 274,039 $ 239,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 153,633 146,253 126,544
Amortization 29,046 23,580 14,819
Deferred income taxes 7,680 (1,269) (3,691)
Foreign currency transaction loss 3,697 1,947 1,733
Loss (gain) on sale of plant and equipment 291 (9,811) 3,506
Write-off of purchased in-process research
and development 15,800
Net effect of extraordinary loss 3,675
Changes in assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable (71,034) (76,081) 8,723
Inventories (185,569) (27,007) (15,046)
Prepaid expenses (3,473) (1,234) (157)
Other assets (31,620) (26,130) (20,444)
Accounts payable, trade 52,947 31,672 (15,503)
Accrued payrolls and other compensation 27,531 23,929 11,586
Accrued domestic and foreign taxes (15,282) 4,282 (3,589)
Other accrued liabilities (9,129) 16,026 (31,800)
Pensions and other postretirement benefits 14,276 6,823 19,404
Other liabilities 8,579 5,291 2,229
_________ _________ _________
Net cash provided by operating activities 320,599 392,310 337,981
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $4,260 in 1998,
$1,394 in 1997 and $20,479 in 1996) (232,953) (31,461) (359,447)
Capital expenditures (236,945) (189,201) (201,693)
Proceeds from sale of plant and equipment 7,151 11,307 9,387
Other 3,630 14,624 (2,812)
_________ _________ _________
Net cash (used in) investing activities (459,117) (194,731) (554,565)
Page 13-15
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments for) common share activity (96,887) (10,184) (1,209)
Proceeds from (payments of) notes payable, net 190,865 (100,655) 81,194
Proceeds from long-term borrowings 87,085 9,390 201,724
(Payments of) long-term borrowings (13,054) (30,059) (9,696)
Dividends paid, net of tax benefit of ESOP shares (66,501) (56,570) (53,325)
_________ _________ _________
Net cash provided by (used in)
financing activities 101,508 (188,078) 218,688
Effect of exchange rate changes on cash (1,499) (4,457) (1,981)
_________ _________ _________
Net (decrease) increase in cash and cash equivalents (38,509) 5,044 123
Cash and cash equivalents at beginning of year 68,997 63,953 63,830
_________ _________ _________
Cash and cash equivalents at end of year $ 30,488 $ 68,997 $ 63,953
========= ========= =========
Supplemental Data:
Cash paid during the year for:
Interest, net of capitalized interest $ 48,105 $ 46,812 $ 35,554
Income taxes 175,546 145,663 135,380
Non-cash investing activities:
Treasury stock issued for acquisitions 11,950 6,176
Non-cash financing activities:
Principal reduction of ESOP debt guarantee 13,468
The accompanying notes are an integral part of the financial statements.
Page 13-16
BUSINESS SEGMENT INFORMATION - BY INDUSTRY
(Dollars in thousands)
1998 1997 1996
NET SALES, including intersegment sales:
Industrial:
North America $ 2,480,231 $ 2,156,043 $ 1,976,351
International 1,161,530 1,073,201 989,359
Aerospace 992,994 862,659 621,465
Intersegment sales (1,732) (822) (727)
___________ ___________ ___________
$ 4,633,023 $ 4,091,081 $ 3,586,448
=========== =========== ===========
INCOME FROM OPERATIONS before corporate
general and administrative expenses:
Industrial:
North America $ 368,314 $ 329,967 $ 296,081
International 83,534 74,058 72,093
Aerospace 159,067 109,470 85,329
___________ ___________ ___________
610,915 513,495 453,503
Corporate general and
administrative expenses 61,018 50,582 48,847
___________ ___________ ___________
Income from operations 549,897 462,913 404,656
Other deductions 45,909 38,046 30,177
___________ ___________ ___________
Income before income taxes $ 503,988 $ 424,867 $ 374,479
=========== =========== ===========
IDENTIFIABLE ASSETS:
Industrial $ 2,555,500 $ 2,167,820 $ 2,150,506
Aerospace 771,488 643,694 595,865
___________ ___________ ___________
3,326,988 2,811,514 2,746,371
Corporate assets (a) 197,833 187,432 140,753
___________ ___________ ___________
$ 3,524,821 $ 2,998,946 $ 2,887,124
=========== =========== ===========
PROPERTY ADDITIONS: (b)
Industrial $ 245,995 $ 173,635 $ 259,356
Aerospace 33,733 20,608 63,437
Corporate (c) 11,935 32,078 3,122
___________ ___________ ___________
$ 291,663 $ 226,321 $ 325,915
=========== =========== ===========
Page 13-17
DEPRECIATION:
Industrial $ 129,183 $ 119,948 $ 106,553
Aerospace 17,191 19,517 17,267
Corporate 7,259 6,788 2,724
___________ ___________ ___________
$ 153,633 $ 146,253 $ 126,544
=========== =========== ===========
(a) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, headquarters facilities, idle
facilities held for sale and the major portion of the Company's
domestic data processing equipment.
(b) Includes value of net plant and equipment at the date of acquisition of
acquired companies accounted for by the purchase method
(1998 - $54,718; 1997 - $15,283; 1996 - $124,222).
(c) Fiscal 1997 includes $21,837 for real estate acquired in a tax-free
exchange of property.
Page 13-18
BUSINESS SEGMENT INFORMATION - BY GEOGRAPHIC AREA
(Dollars in thousands)
1998 1997 1996
NET SALES, including interarea sales:
North America $ 3,549,425 $ 3,062,947 $ 2,669,201
Europe 1,071,554 1,055,401 918,493
All Other 199,796 190,584 155,963
Interarea (187,752) (217,851) (157,209)
___________ ___________ ___________
$ 4,633,023 $ 4,091,081 $ 3,586,448
=========== =========== ===========
INCOME FROM OPERATIONS before corporate
general and administrative expenses:
North America $ 515,073 $ 429,432 $ 381,154
Europe 84,944 70,926 63,083
All Other 10,898 13,137 9,266
___________ ___________ ___________
610,915 513,495 453,503
Corporate general and
administrative expenses 61,018 50,582 48,847
___________ ___________ ___________
Income from operations $ 549,897 $ 462,913 $ 404,656
=========== =========== ===========
IDENTIFIABLE ASSETS:
North America $ 2,199,948 $ 1,808,154 $ 1,678,680
Europe 947,880 859,774 933,201
All Other 179,160 143,586 134,490
___________ ___________ ___________
3,326,988 2,811,514 2,746,371
Corporate assets (a) 197,833 187,432 140,753
___________ ___________ ___________
$ 3,524,821 $ 2,998,946 $ 2,887,124
=========== =========== ===========
(a) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, headquarters facilities, idle
facilities held for sale and the major portion of the Company's
domestic data processing equipment.
Page 13-19
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 producer of
motion control products, including fluid power systems, electromechanical
controls and related components. The Company operates in two principal
business segments: Industrial and Aerospace. The Industrial Segment
produces motion-control and fluid power system components for builders
and users of various types of manufacturing, packaging, processing,
transportation, agricultural, construction, and military machinery,
vehicles and equipment. Industrial Segment products are marketed primarily
through field sales employees and more than 7,500 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 bring Parker
products and services to countries throughout Europe, Asia Pacific and Latin
America.
The Aerospace Segment produces hydraulic, pneumatic and fuel systems and
components which are utilized on virtually every domestic commercial, military
and general aviation aircraft. Its components also perform a vital role in
naval vessels, land-based weapons systems, satellites and space vehicles. This
Segment serves original equipment and maintenance, repair and overhaul
customers worldwide. Its products are marketed by field sales employees and
are sold directly to the manufacturer and to the end user.
There are no individual customers to whom sales are 6 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 in any event would materially affect the Company's
operating results.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 domestic and foreign subsidiaries. All material intercompany
transactions and profits have been eliminated in the consolidated financial
statements. Within the Business Segment Information, intersegment and
interarea sales are recorded at fair market value.
CASH - Cash equivalents consist of short-term highly liquid investments,
Page 13-20
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.
LONG-TERM CONTRACTS - The Company enters into long-term contracts for the
production of aerospace products. For financial statement purposes, sales are
recorded as deliveries are made (units of delivery method of percentage-of-
completion). 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. 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 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.
EXCESS COST OF INVESTMENTS - The excess cost of investments over net assets
acquired is being amortized, on a straight-line basis, primarily over 15 years
and not exceeding 40 years. Unamortized cost in excess of associated expected
operating cash flows is considered to be impaired and is written down to fair
value.
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.
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 a separate 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 income.
Page 13-21
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. The carrying
values for Cash and cash equivalents, Investments and other assets and Notes
payable approximate fair value.
The Company enters into forward exchange contracts (forward contracts) and
cross-currency swap agreements 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 which hedge dividends from
consolidated subsidiaries are accrued in Shareholders' equity. Gains or losses
on forward contracts which hedge specific transactions are recognized in Net
income, offsetting the underlying foreign currency gains or losses.
Cross-currency swap agreements are recorded in Long-term debt as dollar-
denominated receivables with offsetting foreign-currency payables. If the
receivables more than offset the payables, the net difference is reclassified
to an asset. Gains or losses are accrued monthly as an adjustment to Net
income, offsetting the underlying foreign currency gains or losses. The
differential between interest to be received and interest to be paid is
accrued monthly as an adjustment to Interest expense.
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 value of open contracts and any risk to the Company as a result
of the above mentioned arrangements is not material.
STOCK OPTIONS - The Company applies the intrinsic-value based method to
account for stock options granted to employees or outside Directors to
purchase common shares. The option price equals the market price of the
underlying common shares on the date of grant, therefore no compensation
expense is recognized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - The Financial Accounting
Standards Board (FASB) has issued Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires an
additional disclosure for comprehensive income. It will not change Net income
or Shareholders' equity. The Company must adopt SFAS No. 130 in the first
quarter of 1999.
The FASB has also issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This standard requires segment
information to be disclosed based upon how management internally evaluates the
operating performance of its business units. Application of this standard,
required by year-end 1999, is not expected to result in materially different
disclosures for the Company.
The FASB has also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard establishes a new model
for accounting for derivatives and hedging activities. Due to the immaterial
amount of derivative and hedging activity within the Company, application of
this standard, required in the first quarter of 2000, is not expected to have
a material impact on results.
Page 13-22
In March 1998 the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 requires expenses incurred
during the application development stage of a software implementation project
to be capitalized and amortized over the useful life of the project.
Application of this standard, required beginning with the first quarter of
2000, is not expected to have a material impact on the results of the Company.
2. ACQUISITIONS AND
WRITE-OFFS OF PURCHASED IN-PROCESS RESEARCH & DEVELOPMENT
On May 1, 1998 the Company acquired the equity of Extrudit Ltd., a tubing
manufacturer located in Buxton, England. On April 30, 1998 the Company
purchased the equity of UCC Securities Limited of Thetford, Norfolk, England,
a manufacturer of technology-based hydraulic filtration products. On April 1,
1998 the Company acquired the equity of Sempress Pneumatics, a manufacturer
of pneumatic cylinders and valves located near Rotterdam, the Netherlands. On
March 31, 1998 the Company acquired the assets of Temeto AB located in Flen,
Sweden, a distributor of hydraulic components. On March 26, 1998 the Company
purchased the remaining 51% of two Korean joint ventures - HS Parker Company
Ltd., in Yangsan, and the HS Parker Air Conditioning Components Company Ltd.,
in Chonan, manufacturers of hydraulic hose, fittings, hose assemblies and
accumulators. On February 27, 1998 Computer Technology Corporation of Milford,
Ohio, a manufacturer of human-machine interface solutions, was merged into the
Company. On September 26, 1997 the Company acquired the assets of the Skinner
solenoid valve division of Honeywell Inc. and the equity of Honeywell Lucifer,
S.A. Skinner is headquartered in New Britain, Connecticut, and Lucifer is
headquartered in Geneva, Switzerland. On August 4, 1997 the Company acquired
the assets of EWAL Manufacturing of Belleville, New Jersey, a leading producer
of precision fittings and valves. Combined annual sales for operations
acquired in fiscal 1998, for their most recent fiscal year prior to
acquisition, were approximately $243 million. Total purchase price for these
businesses was approximately $236.5 million cash and 263,279 shares of common
stock valued at $11.9 million.
The purchase price allocations of Computer Technology Corporation and UCC
Securities Limited, as determined by independent appraisal, included a $15.8
million asset for purchased in-process research and development. Generally
accepted accounting principles do no allow the capitalization of R&D of this
nature, therefore, a write-off of $15.8 million ($12.0 million after tax or
$.11 per share) is included in Cost of sales in 1998.
On June 4, 1997 the Company acquired the remaining 50 percent of SAES-
Parker UHP Components Corp., a manufacturer of valves for ultra-pure gas used
in semiconductor manufacturing. On February 3, 1997 the Company purchased
Hydroflex S.A. de C.V., a leading Mexican manufacturer of hydraulic hose,
fittings and adapters located in Toluca, Mexico. On September 5, 1996 the
Company purchased the assets of the industrial hydraulic product line of
Hydraulik-Ring AG, of Nurtingen, Germany. Total purchase price for these
businesses was approximately $29.3 million cash. Combined annual sales for
these operations, for their most recent fiscal year prior to acquisition, were
approximately $52 million.
Effective April 15, 1996 the Company acquired the aerospace assets of the
Page 13-23
Abex NWL Division of Pneumo Abex Corporation, a major international producer
of aerospace hydraulic and electromechanical actuation equipment, engine
thrust-reverser actuators, hydraulic pumps, and electrohydraulic servovalves
headquartered in Kalamazoo, Michigan, for approximately $201 million cash. On
February 29, 1996 the Company acquired VOAC Hydraulics AB, a worldwide leader
in manufacturing mobile hydraulic equipment located in Boras, Sweden for
approximately $163 million cash. Sales by these operations for their most
recent fiscal year prior to acquisition approximated $366 million.
In June 1996 the Company acquired the remaining 60 percent of Schrader
Bellows Parker, S.A. de C.V., a Mexico City-based manufacturer of pneumatic
and hydraulic products. On August 4, 1995 the Company purchased inventory and
machinery from Teledyne Fluid Systems consisting of the Republic Valve product
line, the Sprague double-diaphragm pump line and the Sprague airborne
accumulator product line. On July 31, 1995 the Company purchased the assets of
General Valve Corp. of Fairfield, New Jersey, a leading producer of miniature
solenoid valves for high-technology applications. Total purchase price for
these businesses was approximately $9.2 million cash and 228,000 shares of
common stock valued at $6.2 million. Sales by these operations for their most
recent fiscal year prior to acquisition approximated $24.8 million.
These acquisitions were accounted for by the purchase method, and results
are included as of the respective dates of acquisition.
3. INCOME TAXES
Income taxes include the following:
1998 1997 1996
__________________________________________________
Federal $ 129,462 $ 113,819 $ 95,127
Foreign 27,847 27,411 29,635
State and local 16,928 13,587 14,897
Deferred 6,525 (3,989) (4,847)
__________________________________________________
$ 180,762 $ 150,828 $ 134,812
==================================================
A reconciliation of the Company's effective income tax rate to the
statutory Federal rate follows:
1998 1997 1996
__________________________________________________________
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 2.1 2.0 2.3
FSC income not taxed (1.7) (1.8) (1.1)
Foreign tax rate difference .3 .3 .7
Recognized loss carryforwards (.1) (.6) (1.1)
Other .3 .6 .2
__________________________________________________________
Effective income tax rate 35.9% 35.5% 36.0%
==========================================================
Page 13-24
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:
1998 1997
_____________________________________________________________________
Postretirement benefits $ 63,277 $ 48,320
Other liabilities and reserves 52,430 63,700
Long-term contracts 14,816 16,349
Operating loss carryforwards 9,440 23,286
Foreign tax credit carryforwards 3,773 1,405
Valuation allowance (1,591) (1,768)
Depreciation (80,508) (84,853)
Inventory 11,088 11,852
_____________________________________________________________________
Net deferred tax asset (liability) $ 72,725 $ 78,291
=====================================================================
Change in net deferred tax asset (liability):
Provision for deferred tax $ (6,525) $ 3,989
Translation adjustment 175 (2,932)
Acquisitions 784 (2,418)
_____________________________________________________________________
Total change in net deferred tax $ (5,566) $ (1,361)
=====================================================================
The classifications of deferred tax balances for 1997 have been revised to
be consistent with 1998.
At June 30, 1998, foreign subsidiaries had benefits for operating loss
carryforwards of $11,624 for tax and $13,215 for financial reporting, most of
which can be carried forward indefinitely. Use of operating loss carryforwards
and currency adjustments reduced the valuation allowance.
Non-current deferred income tax assets include a $7,529 tax benefit for the
net operating loss carryforwards of the Company's German operations. The
Company has not provided a valuation allowance that would be required under
SFAS No. 109 if it is more likely that these benefits would not be realized.
Although future events cannot be predicted with certainty, management
continues to believe these benefits will be realized because the tax loss
carryforward period is unlimited and the Company's German operations are
currently profitable.
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.
4. EARNINGS PER SHARE
Earnings per share have been computed according to SFAS No. 128, "Earnings
per Share". Basic earnings per share is computed using the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
Page 13-25
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 options. The computation of
net income per share was as follows:
1998 1997 1996
_______________________________________________________________________
Numerator:
Net income applicable
to common shares $ 319,551 $ 274,039 $ 239,667
=======================================================================
Denominator:
Basic - weighted average
common shares 110,868,834 111,601,484 111,260,717
Increase in weighted average
from dilutive effect of
exercise of stock options 1,090,437 916,569 928,000
_______________________________________________________________________
Diluted - weighted average
common shares, assuming
exercise of stock options 111,959,271 112,518,053 112,188,717
=======================================================================
Basic earnings per share $ 2.88 $ 2.46 $ 2.15
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14
=======================================================================
5. INVENTORIES
Inventories valued on the last-in, first-out cost method are approximately 36%
of total inventories in 1998 and 1997. The current cost of these inventories
exceeds their valuation determined on the LIFO basis by $139,011 in 1998 and
$140,364 in 1997. Progress payments of $23,454 in 1998 and $20,728 in 1997 are
netted against inventories.
6. FINANCING ARRANGEMENTS
The Company has committed lines of credit totaling $450,000 through several
multi-currency unsecured revolving credit agreements with a group of banks, of
which $226,525 was available at June 30, 1998. The majority of these
agreements expire October 2002. The interest on borrowings is based upon the
terms of each specific borrowing and is subject to market conditions. The
agreements also require facility fees of up to 8/100ths of one percent of the
commitment per annum. Covenants in some of the agreements include a limitation
on the Company's ratio of secured debt to net tangible assets.
The Company has other lines of credit, primarily short-term, aggregating
$108,584, from various foreign banks, of which $72,013 was available at June
30, 1998. Most of these agreements are renewed annually.
During March 1998 the Company registered additional medium-term notes
bringing the total available for issuance to $755,000 at June 30, 1998.
Page 13-26
Subsequently, in July 1998, the Company issued $100,000 of these medium-term
notes.
The Company is authorized to sell up to $400,000 of short-term commercial
paper notes, rated A-1 by Standard & Poor's, P-1 by Moody's and D-1 by Duff &
Phelps. At June 30, 1998 there were $191,250 of commercial paper notes
outstanding which were supported by the available domestic lines of credit. Of
the total commercial paper, $100,000 has been classified in the Balance Sheet
as Long-term debt, as further discussed in Note 7. There were no commercial
paper notes outstanding at June 30, 1997.
Commercial paper, along with short-term borrowings from foreign banks,
primarily make up the balance of Notes payable. The balance and weighted
average interest rate of the Notes payable at June 30, 1998 and 1997 were
$155,259 and 6.1%, and $58,945 and 5.7%, respectively.
7. DEBT
June 30, 1998 1997
________________________________________________________________________
Domestic:
Debentures and notes
9.75%, due 2002-2021 $ 100,000 $ 100,000
7.3%, due 2011 100,000 100,000
10.375%, due 1999-2018 100,000 100,000
9.6%, due 1998 1,714
Medium-term notes
6.35% to 7.39%, due 2004-2010 145,000 95,000
Commercial paper 100,000
Variable rate demand bonds
3.85% to 3.95%, due 2010-2025 20,035 20,035
Foreign:
Bank loans, including revolving credit
1.0% to 17.25%, due 1999-2018 54,653 25,704
Other long-term debt, including capitalized leases 3,481 1,225
________________________________________________________________________
Total long-term debt 623,169 443,678
Less long-term debt payable within one year 110,226 10,793
________________________________________________________________________
Long-term debt, net $ 512,943 $ 432,885
========================================================================
On June 30, 1998, the Company called for redemption its outstanding
$100,000, 10.375 percent debentures due 1999-2018. The after-tax extraordinary
loss for this transaction, including an early-redemption premium and the
write-off of deferred issuance costs, was $3,675 or $.03 per share. As a
result of the call, these debentures have been reclassified to long-term debt
payable within one year. The retirement of the debt was financed on July 15,
1998, through the issuance of $100,000 of medium term notes, due 2018, at an
annual interest rate of 6.55 percent. As of June 30, 1998, $100,000 of
commercial paper was classified as long-term debt, recognizing management's
intentions.
Principal amounts of long-term debt payable in the five years ending June
Page 13-27
30, 1999 through 2003 are $10,226, $20,217, $16,598, $19,917, and $19,825,
respectively. The carrying value of the Company's long-term debt (excluding
leases and cross-currency swaps) was $519,688 and $443,673 at June 30, 1998
and 1997, respectively, and was estimated to have a fair value of $545,140 and
$454,689, at June 30, 1998 and 1997, respectively. The estimated 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.
LEASE COMMITMENTS -- Future minimum rental commitments as of June 30, 1998,
under noncancelable operating leases, which expire at various dates, are as
follows: 1999-$46,175; 2000-$25,390; 2001-$14,531; 2002-$7,066; 2003-
$5,414 and after 2003-$24,278.
Rental expense in 1998, 1997 and 1996 was $37,065, $33,305, and $29,899,
respectively.
8. 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 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.
Pension costs for all plans were $19,989, $22,773 and $22,514 for 1998,
1997 and 1996, respectively. Pension costs for all defined benefit plans
accounted for using SFAS No. 87, Employers' Accounting for Pensions, are as
follows:
1998 1997 1996
______________________________________________________________________
Service cost-benefits earned
during the period $ 28,190 $ 23,715 $ 20,731
Interest cost on projected benefit
obligation 57,892 52,726 44,384
Actual return on assets (161,737) (89,614) (74,926)
Net amortization and deferral 93,719 33,703 30,111
______________________________________________________________________
Net periodic pension costs $ 18,064 $ 20,530 $ 20,300
======================================================================
The following tables set forth the funded status of all the plans accounted
for under SFAS No. 87 and the amounts recognized in the Company's consolidated
balance sheet:
Page 13-28
Assets Exceed Accumulated Benefits
1998 1997
____________________________________________________________________________
Actuarial present value of benefit obligations:
Vested benefit obligation $ (608,260) $ (493,681)
============================================================================
Accumulated benefit obligation $ (634,207) $ (510,385)
============================================================================
Projected benefit obligation $ (745,036) $ (593,241)
Plan assets at fair value 974,131 749,386
____________________________________________________________________________
Projected benefit obligation less than plan assets 229,095 156,145
Unrecognized net (gain) or loss (135,827) (61,122)
Unrecognized prior service cost 18,160 15,198
Unrecognized net (asset) obligation (13,310) (16,848)
____________________________________________________________________________
Prepaid pension cost (pension liability)
recognized $ 98,118 $ 93,373
============================================================================
Accumulated Benefits Exceed Assets
1998 1997
____________________________________________________________________________
Actuarial present value of benefit obligations:
Vested benefit obligation $ (101,464) $ (79,521)
============================================================================
Accumulated benefit obligation $ (112,916) $ (95,707)
============================================================================
Projected benefit obligation $ (132,716) $ (121,458)
Plan assets at fair value 23,782 18,301
____________________________________________________________________________
Projected benefit obligation in excess of
plan assets (108,934) (103,157)
Unrecognized net (gain) or loss 10,218 6,000
Unrecognized prior service cost 4,466 4,714
Unrecognized net (asset) obligation 579 1,794
____________________________________________________________________________
Prepaid pension cost (pension liability)
recognized $ (93,671) $ (90,649)
============================================================================
The majority of the underfunded plans relate to foreign and supplemental
executive plans.
The plans' assets consist primarily of listed common stocks, corporate and
government bonds, and real estate investments. At June 30, 1998 and 1997, the
plans' assets included Company stock with market values of $20,262 and
$21,502, respectively.
Page 13-29
The assumptions used to measure the benefit obligations and to compute the
expected long-term return on assets for the Company's significant defined
benefit plans are:
1998 1997 1996
_________________________________________________________________________
U.S. defined benefit plans
Discount rate 7.5% 8% 8%
Average increase in compensation 4.9% 5% 5%
Expected long-term return on assets 9.5% 9% 9%
_________________________________________________________________________
Non-U.S. defined benefit plans
Discount rate 4.5 to 7% 7 to 8% 7 to 8%
Average increase in compensation 3 to 4.5% 3.5 to 6% 4.5 to 6%
Expected long-term return on assets 5.5 to 9% 7 to 9% 7 to 9%
=========================================================================
EMPLOYEE SAVINGS PLAN -- The Company sponsors an employee stock ownership
plan (ESOP) as part of its existing savings and investment 401(k) plan, which
is available to eligible domestic employees. Parker-Hannifin Common Stock is
used to match contributions made by employees to the savings plan up to a
maximum of 5 percent of an employee's annual compensation. A breakdown of
shares held by the ESOP is as follows:
1998 1997 1996
________________________________________________________________________
Allocated shares 7,631,677 7,460,378 6,934,194
Committed to be released 60,231
________________________________________________________________________
Total shares held by the ESOP 7,631,677 7,460,378 6,994,425
========================================================================
Through June 30, 1996 the ESOP was leveraged and the loan was
unconditionally guaranteed by the Company. Company contributions to the ESOP,
recorded as compensation and interest expense, were $23,093 in 1998, $21,235
in 1997 and $18,626 in 1996. The interest expense portion (interest on ESOP
debt) was $856 in 1996. Dividends earned by the unallocated shares and
interest income within the ESOP, totalling $218 in 1996, were used to service
the ESOP debt. ESOP shares are considered outstanding for purposes of earnings
per share computations.
In addition to shares within the ESOP, as of June 30, 1998 employees have
elected to invest in 3,011,654 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
Page 13-30
benefit plans. Postretirement benefit costs included the following components:
1998 1997 1996
___________________________________________________________________________
Service cost-benefits attributed to
service during the period $ 4,021 $ 3,296 $ 3,515
Interest cost on accumulated
postretirement benefit obligations 11,077 11,316 11,126
Net amortization and deferral (1,815) (830) (708)
___________________________________________________________________________
Net periodic postretirement benefit costs $ 13,283 $ 13,782 $ 13,933
===========================================================================
The following table reconciles the plans' combined funded status to amounts
recognized in the Company's consolidated balance sheet:
1998 1997
_______________________________________________________________________________
Accumulated postretirement benefit obligation:
Retirees $ (62,204) $ (78,114)
Fully eligible active plan participants (38,798) (31,019)
Other active plan participants (54,931) (40,741)
Unrecognized (gain) loss (2,251) (15,918)
Unrecognized prior service cost (15,046) 131
_______________________________________________________________________________
Accrued postretirement benefit costs $ (173,230) $ (165,661)
===============================================================================
The assumptions used to measure the post-retirement benefit obligations are:
1998 1997 1996
________________________________________________________________________
Discount rate 7.5% 8% 8%
Current medical cost trend rate 10.25% 10.5% 10.75%
Ultimate medical cost trend rate 6% 6% 6%
Medical cost trend rate decreases to
ultimate in year 2007 2007 2007
Effect of a 1% increase in the medical
cost trend rate:
Increase in benefit obligation $ 8,194 $ 8,161 $ 9,382
Increase in annual retiree medical cost $ 658 $ 772 $ 568
__________________________________________________________________
OTHER -- The Company has established nonqualified deferred compensation
programs which permit officers, directors and certain management employees to
annually 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 $20,426, $4,862 and $4,129 in 1998, 1997 and
1996, respectively.
The Company has invested in corporate-owned life insurance policies to
Page 13-31
assist in funding these programs. The cash surrender values of these policies
are maintained in an irrevocable rabbi trust and are recorded as assets of the
Company.
9. SHAREHOLDERS' EQUITY
COMMON SHARES 1998 1997 1996
______________________________________________________________________________
Balance July 1 $ 55,905 $ 55,719 $ 55,502
Shares issued under stock option
plans (1998 - 3,650; 1997 -
432,096; 1996 - 513,836) 1 139 189
Shares issued as restricted stock 47 28
______________________________________________________________________________
Balance June 30 $ 55,906 $ 55,905 $ 55,719
==============================================================================
ADDITIONAL CAPITAL
______________________________________________________________________________
Balance July 1 $ 150,702 $ 146,686 $ 139,953
Net (decrease) increase for treasury
or common shares issued
under stock option plans (11,481) 1,684 5,481
Shares issued for purchase acquisition 478 (176)
Shares issued as restricted stock 27 2,332 1,428
______________________________________________________________________________
Balance June 30 $ 139,726 $ 150,702 $ 146,686
==============================================================================
RETAINED EARNINGS
______________________________________________________________________________
Balance July 1 $ 1,378,297 $ 1,160,828 $ 974,486
Net income 319,551 274,039 239,667
Cash dividends paid on common shares,
net of tax benefit of ESOP shares (66,501) (56,570) (53,325)
Cash payments for stock split
fractional shares (31)
______________________________________________________________________________
Balance June 30 $ 1,631,316 $ 1,378,297 $ 1,160,828
==============================================================================
TRANSLATION ADJUSTMENTS
______________________________________________________________________________
Balance July 1 $ (27,345) $ 20,725 $ 35,041
Translation adjustments (Note 12) (32,681) (48,070) (14,316)
______________________________________________________________________________
Balance June 30 $ (60,026) $ (27,345) $ 20,725
==============================================================================
Page 13-32
COMMON STOCK IN TREASURY
______________________________________________________________________________
Balance July 1 $ (10,258) $ -- $ --
Shares purchased at cost
(1998 - 2,522,971; 1997 - 576,021;
1996 - 247,500) (109,645) (18,690) (6,703)
Shares issued under stock option plans
(1998 - 559,668; 1997 - 223,184) 23,187 6,676
Shares issued for purchase acquisition 11,471 6,176
Shares issued as restricted stock 1,773 1,756 527
______________________________________________________________________________
Balance June 30 $ (83,472) $ (10,258) $ --
==============================================================================
Shares surrendered upon exercise of stock options; 1998 - 159,869; 1997 -
153,770; 1996 - 136,686.
SHARE REPURCHASES - In July 1998 the Board of Directors authorized the
repurchase of an additional 4.0 million shares of its common stock, extending
the initial repurchase plan started in August 1990. This increased the total
number of shares authorized for repurchase to 5.05 million. Repurchases are
made on the open market, at prevailing prices, and are funded from operating
cash flows. The shares are initially held as treasury stock.
10. STOCK INCENTIVE PLANS
EMPLOYEES' STOCK OPTIONS -- The Company's stock option and stock incentive
plans provide for the granting of nonqualified options to officers and key
employees to purchase shares of common stock at a price not less than 100
percent of the fair market value of the stock on the dates options are
granted. Outstanding options generally are exercisable one year after the date
of grant and expire no more than ten years after grant.
The Company derives a tax deduction measured by the excess of the market
value over the option price at the date nonqualified options are exercised.
The related tax benefit is credited to additional capital.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and makes no charges against capital with respect
to options granted. SFAS No. 123 does, however, require the disclosure of pro
forma information regarding Net Income and Earnings per share determined as if
the Company had accounted for its stock options under the fair value method.
For purposes of this pro forma disclosure the estimated fair value of the
options is amortized to expense over the options' vesting period.
Page 13-33
1998 1997 1996
_____________________________________________________________
Net income: As reported $ 319,551 $ 274,039 $ 239,667
Pro forma $ 315,567 $ 270,758 $ 238,330
Earnings per share:
Basic As reported $ 2.88 $ 2.46 $ 2.15
Pro forma $ 2.85 $ 2.43 $ 2.14
Diluted As reported $ 2.85 $ 2.44 $ 2.14
Pro forma $ 2.82 $ 2.41 $ 2.12
=============================================================
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to 1996, the above pro forma effect may not be
representative of that to be expected in future years.
The fair value for all options granted in 1998, 1997 and 1996 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Aug/97 Jan/97 Aug/96 Aug/95
______________________________________________________________________
Risk-free interest rate 5.6% 6.3% 6.4% 6.4%
Expected life of option 5 yrs 5 yrs 5 yrs 5 yrs
Expected dividend yield of stock 2.3% 2.6% 2.6% 3.0%
Expected volatility of stock 26.9% 26.5% 26.2% 25.2%
======================================================================
Options exercisable and shares available for future grant on June 30:
1998 1997 1996
_______________________________________________________________________
Options exercisable 3,476,016 2,905,887 3,195,767
Weighted-average option price
per share of options exercisable $ 20.57 $ 16.41 $ 14.90
Weighted-average fair value of
options granted during the year $ 11.43 $ 7.30 $ 6.44
Shares available for grant 3,256,232 3,304,627 3,295,347
=======================================================================
Page 13-34
A summary of the status and changes of shares subject to options and the
related average price per share follows:
Shares Subject Average Option
To Options Price Per Share
______________________________________________________________
Outstanding June 30, 1996 3,578,492 $ 16.09
______________________________________________________________
Granted 1,351,500 27.37
Exercised (655,280) 14.48
Canceled (50,625)
______________________________________________________________
Outstanding June 30, 1997 4,224,087 $ 19.82
______________________________________________________________
Granted 190,815 43.04
Exercised (721,687) 19.83
Canceled (31,409)
______________________________________________________________
Outstanding June 30, 1998 3,661,806 $ 21.71
==============================================================
The range of exercise prices and the remaining contractual life of options
as of June 30, 1998 were:
_____________________________________________________________________
Range of exercise prices $12-$19 $20-$29 $43-$44
_____________________________________________________________________
Options outstanding:
Outstanding as of June 30, 1998 1,390,268 2,085,748 185,790
Weighted-average remaining
contractual life 3.8 yrs 7.8 yrs 9.1 yrs
Weighted-average exercise price $ 13.54 $ 25.26 $ 43.05
Options exercisable:
Outstanding as of June 30, 1998 1,390,268 2,085,748
Weighted-average remaining
contractual life 3.8 yrs 7.8 yrs
Weighted-average exercise price $ 13.54 $ 25.26
======================================================================
RESTRICTED STOCK -- Restricted stock was issued, under the Company's 1993
Stock Incentive Program, to certain key employees under the Company's 1995-96-
97, 1994-95-96 and 1993-94-95 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 the 3-year Plans. 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.
Page 13-35
Restricted Shares for LTIP Plan 1998 1997 1996
__________________________________________________________________
Number of shares issued 39,619 152,916 73,361
Per share value on date of issuance $ 40.00 $ 25.36 $ 26.05
Total value $ 1,585 $ 3,878 $ 1,911
==================================================================
Under the Company's 1996-97-98 LTIP, a payout of 15,774 shares of
restricted stock, from the Company's 1993 Stock Incentive Program, will be
issued to certain key employees in 1999. The balance of the 1996-97-98 LTIP
payout will be made as deferred cash compensation, as individually elected by
the participants. The total payout, valued at $6,359, has been accrued over
the three years of the plan.
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 1998, 1997 and 1996, 4,558, 9,923 and 3,243
shares were issued, respectively, in lieu of directors' fees.
NON-EMPLOYEE DIRECTORS' STOCK OPTIONS -- In August 1996, the Company
adopted a stock option plan for non-employee directors to purchase shares of
common stock at a price not less than 100 percent of the fair market value of
the stock on the dates options are granted. All outstanding options are
exercisable one year after the date of grant and expire no more than ten years
after grant.
A summary of the status and changes of shares subject to options and the
related average price per share follows:
Shares Subject Average Option
To Options Price Per Share
______________________________________________________________
Outstanding June 30, 1997 14,250 $ 24.85
______________________________________________________________
Granted 8,250 42.96
Exercised (1,500) 24.67
______________________________________________________________
Outstanding June 30, 1998 21,000 $ 31.97
==============================================================
As of June 30, 1998, 12,750 options were exercisable and 352,500 shares
were available for grant.
At June 30, 1998, the Company had 7,344,328 common shares reserved for
issuance in connection with its stock incentive plans.
11. SHAREHOLDERS' PROTECTION RIGHTS AGREEMENT
The Board of Directors of the Company declared a dividend of one Right for
each share of Common Stock outstanding on February 17, 1997 in relation to the
Company's Shareholder Protection Rights Agreement. As of June 30, 1998,
109,873,263 shares of Common Stock 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 Stock, all holders of Rights,
Page 13-36
except an acquiring entity, would be entitled to purchase, at an exercise
price of $100, a value of $200 of Common Stock of the Company or an acquiring
entity, or at the option of the Board, to exchange each Right for one share of
Common Stock. The Rights remain in existence until February 17, 2007, unless
earlier redeemed (at one cent per Right), exercised or exchanged under the
terms of the agreement. In the event of an unfriendly business combination
attempt, the Rights will cause substantial dilution to the person attempting
the merger. The Rights should not interfere with any business combination
that is in the best interest of the Company and its shareholders since the
Rights may be redeemed.
12. FOREIGN OPERATIONS
The Company's major foreign operations are located in Germany, the United
Kingdom, France, Sweden, and Italy. Their business activities are conducted
principally in their local currency. Net transaction and translation
adjustments reduced Net income in 1998 and 1997 by $2,284 and $1,267,
respectively, and increased Net income in 1996 by $873.
Net sales, Income before income taxes and Net income include the following
amounts from foreign operations:
1998 1997 1996
_____________________________________________________________________
Net sales $ 1,340,080 $ 1,234,669 $ 1,085,676
_____________________________________________________________________
Income before income taxes 101,307 85,234 70,118
_____________________________________________________________________
Net income 57,651 50,067 42,563
=====================================================================
Net assets of foreign operations at June 30, 1998 and 1997 amounted to
$806,596 and $734,820, respectively.
Accumulated undistributed earnings of foreign operations reinvested in
their operations amounted to $153,831, $121,871 and $103,059, at June 30,
1998, 1997 and 1996, respectively.
13. RESEARCH AND DEVELOPMENT
Research and development costs amounted to $83,117 in 1998, $103,155 in 1997,
and $91,706 in 1996. Customer reimbursements included in the total cost for
each of the respective years were $15,753, $35,986 and $33,018. Costs include
those costs related to independent research and development as well as
customer reimbursed and unreimbursed development programs.
14. 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 U.S. for health care, workers' compensation,
Page 13-37
general liability and product liability up to predetermined amounts, above
which third party insurance applies. The Company purchases third party product
liability insurance for products manufactured by its international operations
and for products that are used in aerospace applications. 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 uninsured liabilities. While the outcome of pending
proceedings cannot be predicted with certainty, management believes that any
liabilities that may result from these proceedings are not reasonably likely
to have a material effect on the Company's liquidity, financial condition or
results of operations.
ENVIRONMENTAL - The Company is currently involved in environmental
remediation at 19 manufacturing facilities presently or formerly operated by
the Company and has been named as a "potentially responsible party", along
with other companies, at 11 off-site waste disposal facilities.
As of June 30, 1998, the Company has a reserve of $8,640 for environmental
matters which are probable and reasonably estimable. This reserve is recorded
based upon the best estimate of net 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, the
amount of the Company's liability in proportion to other responsible parties
and any recoveries receivable. This reserve is net of $555 for discounting, at
a 7.5% annual rate, a portion of the costs at 7 locations for established
treatment procedures required over periods ranging from 3 to 16 years. The
Company also has an account receivable of $490 for anticipated insurance
recoveries.
The Company's estimated total liability for the above mentioned sites
ranges from a minimum of $8,226 to a maximum of $20,610. 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 recoveries.
Page 13-38
Report of Management
The Company's management is responsible for the integrity and accuracy of
the financial information contained in this annual report. Management
believes that the financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances
and that the other information in this annual report is consistent with
those statements. In preparing the financial statements, management makes
informed judgments and estimates where necessary to reflect the expected
effects of events and transactions that have not been completed.
Management is also responsible for maintaining an internal control system
designed to provide reasonable assurance at reasonable cost that assets are
safeguarded against loss or unauthorized use and that financial records are
adequate and can be relied upon to produce financial statements in
accordance with generally accepted accounting principles. The system is
supported by written policies and guidelines, by careful selection and
training of financial management personnel and by an internal audit staff
which coordinates its activities with the Company's independent accountants.
To foster a strong ethical climate, the Parker Hannifin Code of Ethics is
publicized throughout the Company. This addresses, among other things,
compliance with all laws and accuracy and integrity of books and records.
The Company maintains a systematic program to assess compliance.
PricewaterhouseCoopers LLP, independent accountants, are retained to
conduct an audit of Parker Hannifin's consolidated financial statements in
accordance with generally accepted auditing standards and to provide an
independent assessment that helps ensure fair presentation of the Company's
consolidated financial position, results of operations and cash flows.
The Audit Committee of the Board of Directors is composed entirely of
outside directors. The Committee meets periodically with management,
internal auditors and the independent accountants to discuss internal
accounting controls and the quality of financial reporting. Financial
management, as well as the internal auditors and the independent
accountants, have full and free access to the Audit Committee.
Duane E. Collins Michael J. Hiemstra
Duane E. Collins Michael J. Hiemstra
President and Vice President -
Chief Executive Officer Finance and Administration
and Chief Financial Officer
Page 13-39
Report of Independent Accountants
To the Shareholders and Board of Directors
Parker Hannifin Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows present fairly, in all
material respects, the financial position of Parker Hannifin Corporation
and its subsidiaries at June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio
July 30, 1998
Page 13-40
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands,
except per share information)
1998 (a) 1997 1996 1995 1994 (a)
___________________________________________________________________________________________________________________
Net sales $ 4,633,023 $ 4,091,081 $ 3,586,448 $ 3,214,370 $ 2,576,337
Cost of sales 3,550,992 3,152,988 2,756,343 2,448,264 2,053,376
Selling, general and administrative expenses 532,134 475,180 425,449 384,581 302,668
Non-recurring charges - Restructuring &
Asset impairment 54,256
Interest expense 52,787 46,659 36,667 30,922 37,832
Income taxes 180,762 150,828 134,812 130,169 60,274
Income - continuing operations 323,226 274,039 239,667 218,238 52,175
Net income 319,551 274,039 239,667 218,238 47,652
Basic earnings per share -
continuing operations 2.91 2.46 2.15 1.97 .48
Diluted earnings per share -
continuing operations 2.88 2.44 2.14 1.96 .48
Basic earnings per share 2.88 2.46 2.15 1.97 .43
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14 $ 1.96 $ .43
Average number of shares outstanding - Basic 110,869 111,602 111,261 110,576 109,661
Average number of shares outstanding - Diluted 111,959 112,518 112,189 111,149 110,270
Cash dividends per share $ .600 $ .506 $ .480 $ .453 $ .436
Net income as a percent of net sales 6.9% 6.7% 6.7% 6.8% 1.8%
Return on average assets 9.8% 9.3% 9.2% 10.3% 2.5%
Return on average equity 19.8% 18.7% 18.6% 20.2% 5.0%
___________________________________________________________________________________________________________________
Book value per share $ 15.32 $ 13.87 $ 12.42 $ 10.73 $ 8.78
Working capital $ 791,305 $ 783,550 $ 635,242 $ 593,761 $ 526,864
Ratio of current assets to current liabilities 1.8 2.1 1.8 1.9 2.0
Plant and equipment, net $ 1,135,225 $ 1,020,743 $ 991,777 $ 815,771 $ 717,300
Total assets 3,524,821 2,998,946 2,887,124 2,302,209 1,925,744
Long-term debt 512,943 432,885 439,797 237,157 257,259
Shareholders' equity $ 1,683,450 $ 1,547,301 $ 1,383,958 $ 1,191,514 $ 966,351
Debt to debt-equity percent 31.6% 24.5% 30.7% 21.9% 22.7%
___________________________________________________________________________________________________________________
Depreciation $ 153,633 $ 146,253 $ 126,544 $ 110,527 $ 106,546
Capital expenditures $ 236,945 $ 189,201 $ 201,693 $ 151,963 $ 99,914
Number of employees 39,873 34,927 33,289 30,590 26,730
Number of shareholders 44,250 43,014 35,403 35,629 29,625
Number of shares outstanding at year-end 109,873 111,527 111,438 111,003 110,115
___________________________________________________________________________________________________________________
(a) Includes an extraordinary item for the early retirement of debt.
Page 13-41