UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 34-0451060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6035 Parkland Blvd., Cleveland, Ohio 44124-4141
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 896-3000
--------------
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __.
---
Number of Common Shares outstanding at December 31, 2001 117,159,213
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 1,437,330 $ 1,467,619 $ 2,913,197 $ 2,952,750
Cost of sales 1,203,893 1,152,364 2,401,518 2,311,393
-------------- -------------- -------------- --------------
Gross profit 233,437 315,255 511,679 641,357
Selling, general and
administrative expenses 164,883 169,596 330,298 332,037
Interest expense 21,555 25,607 42,009 46,775
Interest and other (income), net 11 (1,364) (106) (52,741)
-------------- -------------- -------------- --------------
Income before income taxes 46,988 121,416 139,478 315,286
Income taxes 17,926 43,102 49,835 111,926
-------------- -------------- -------------- --------------
Net income $ 29,062 $ 78,314 $ 89,643 $ 203,360
============== ============== ============== ==============
Earnings per share - Basic $ .25 $ .68 $ .78 $ 1.78
Earnings per share - Diluted $ .25 $ .68 $ .77 $ 1.77
Cash dividends per common share $ .18 $ .17 $ .36 $ .34
See accompanying notes to consolidated financial statements.
-2-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
December 31, June 30,
ASSETS 2001 2001
- ----------- ------------- -------------
Current assets:
Cash and cash equivalents $ 28,883 $ 23,565
Restricted investments 92,912 -
Accounts receivable, net 813,638 922,325
Inventories:
Finished products 585,443 495,704
Work in process 358,364 344,861
Raw materials 166,925 168,299
------------- -------------
1,110,732 1,008,864
Prepaid expenses 43,055 39,486
Deferred income taxes 101,303 91,439
Net assets held for sale - 110,683
------------- -------------
Total current assets 2,190,523 2,196,362
Plant and equipment 3,256,942 3,006,064
Less accumulated depreciation 1,555,017 1,457,376
------------- -------------
1,701,925 1,548,688
Goodwill 1,074,500 953,648
Intangible assets, net 25,678 8,584
Other assets 556,192 630,379
------------- -------------
Total assets $ 5,548,818 $ 5,337,661
============= =============
LIABILITIES
- -----------------
Current liabilities:
Notes payable $ 493,278 $ 546,502
Accounts payable, trade 336,454 367,806
Accrued liabilities 449,027 436,947
Accrued domestic and foreign taxes 60,605 61,874
------------- -------------
Total current liabilities 1,339,364 1,413,129
Long-term debt 1,063,061 857,078
Pensions and other postretirement benefits 216,093 318,527
Deferred income taxes 145,700 131,708
Other liabilities 199,556 88,304
------------- -------------
Total liabilities 2,963,774 2,808,746
SHAREHOLDERS' EQUITY
- ----------------------------
Serial preferred stock, $.50 par value;
authorized 3,000,000 shares; none issued -- --
Common stock, $.50 par value; authorized
600,000,000 shares; issued 117,469,894 shares at
December 31 and 117,409,197 shares at June 30 58,735 58,705
Additional capital 348,875 346,228
Retained earnings 2,474,709 2,426,496
Unearned compensation related to guarantee of ESOP debt (89,990) (96,398)
Deferred compensation related to stock options 2,347 2,347
Accumulated other comprehensive (loss) (198,312) (204,531)
------------- -------------
2,596,364 2,532,847
Less treasury shares, at cost:
310,681 shares at December 31
and 100,000 shares at June 30 (11,320) (3,932)
------------- -------------
Total shareholders' equity 2,585,044 2,528,915
------------- -------------
Total liabilities and shareholders' equity $ 5,548,818 $ 5,337,661
============= =============
See accompanying notes to consolidated financial statements.
-3-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000
- ------------------------------------ ---------- ----------
Net income $ 89,643 $ 203,360
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 115,677 102,695
Amortization 6,839 30,859
Deferred income taxes 1,991 17,560
Foreign currency transaction loss 2,513 2,497
Loss (gain) on sale of plant and equipment 556 (58,338)
Changes in assets and liabilities:
Restricted investments (14,392) -
Accounts receivable, net 209,974 25,243
Inventories (930) (51,803)
Prepaid expenses 11,694 6,808
Net assets held for sale 35,683 9,284
Other assets 16,318 (15,701)
Accounts payable, trade (73,345) (20,600)
Accrued payrolls and other compensation (48,271) (54,660)
Accrued domestic and foreign taxes (6,507) (20,083)
Other accrued liabilities (2,841) (18,153)
Pensions and other postretirement benefits (2,675) 8,921
Other liabilities 8,409 6,827
---------- ----------
Net cash provided by operating activities 350,336 174,716
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Acquisitions (less cash acquired of $343 in 2001 and $8,255 in 2000) (310,178) (485,235)
Capital expenditures (113,119) (169,573)
Proceeds from sale of plant and equipment 8,272 68,813
Other (22,448) 31,959
---------- ----------
Net cash used in investing activities (437,473) (554,036)
CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------
Net (payments for) proceeds from common share activity (4,710) 3,892
(Payments of) proceeds from notes payable, net (56,003) 205,824
Proceeds from long-term borrowings 208,989 271,942
Payments of long-term borrowings (11,770) (59,219)
Dividends (41,430) (38,731)
---------- ----------
Net cash provided by financing activities 95,076 383,708
Effect of exchange rate changes on cash (2,621) (1,319)
---------- ----------
Net increase in cash and cash equivalents 5,318 3,069
Cash and cash equivalents at beginning of year 23,565 68,460
---------- ----------
Cash and cash equivalents at end of period $ 28,883 $ 71,529
========== ==========
See accompanying notes to consolidated financial statements.
-4-
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION BY INDUSTRY
(Dollars in thousands)
(Unaudited)
The Company operates in two principal industry segments: Industrial and
Aerospace. The Industrial Segment is the largest and includes a significant
portion of International operations.
Industrial - This segment produces a broad range of motion control and fluid
systems and components used in all kinds of manufacturing, packaging,
processing, transportation, mobile construction, agricultural and military
machinery and equipment. Sales are made directly to major original equipment
manufacturers (OEMs) and through a broad distribution network to smaller OEMs
and the aftermarket.
Aerospace - This segment designs and manufactures products and provides
aftermarket support for commercial, military and general aviation aircraft,
missile and spacecraft markets. The Aerospace Segment provides a full range of
systems and components for hydraulic, pneumatic and fuel applications.
The Company also operates an Other Segment consisting of several business units
which produce motion-control and fluid power system components for use primarily
in the transportation industry, a business unit which designs and manufactures
custom-engineered buildings and beginning in fiscal 2002, a business unit which
develops and manufactures chemical car care and industrial products and related
service programs and a business unit which administers vehicle service contract
programs.
Business Segment Results by Industry
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- --------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales
Industrial:
North America $ 646,299 $ 738,005 $ 1,297,139 $ 1,508,110
International 290,446 313,255 586,737 621,339
Aerospace 288,312 294,425 600,812 564,813
Other 212,273 121,934 428,509 258,488
----------- ----------- ----------- -----------
Total $ 1,437,330 $ 1,467,619 $ 2,913,197 $ 2,952,750
=========== =========== =========== ===========
Segment operating income
Industrial:
North America $ 23,576 $ 95,060 $ 64,041 $ 201,999
International 8,235 21,004 28,063 45,268
Aerospace 46,446 51,097 103,338 95,373
Other 9,429 6,989 26,421 18,854
----------- ----------- ----------- -----------
Total segment operating income 87,686 174,150 221,863 361,494
Corporate general and
administrative expenses 15,674 20,346 32,613 37,730
----------- ----------- ----------- -----------
Income before interest expense
and other 72,012 153,804 189,250 323,764
Interest expense 21,555 25,607 42,009 46,775
Other expense (income) 3,469 6,781 7,763 (38,297)
----------- ----------- ----------- -----------
Income before income taxes $ 46,988 $ 121,416 $ 139,478 $ 315,286
=========== =========== =========== ===========
Note: In July 2001, the Company adopted SFAS No. 142. Therefore, future
amortization of goodwill has been discontinued. Income before income
taxes for the three months ended December 31, 2000 includes $13,854 of
goodwill amortization ($7,251 in Industrial North America; $2,921 in
Industrial International; $1,933 in Aerospace; $1,083 in Other; and
$666 in Other expense (income)). Income before income taxes for the six
months ended December 31, 2000 includes $28,563 of goodwill
amortization ($13,942 in Industrial North America; $5,846 in Industrial
International; $3,793 in Aerospace; $2,171 in Other; and $2,811 in
Other expense (income)).
-5-
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
_______________________
1. Management representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of December 31, 2001, the results of operations
for the three and six months ended December 31, 2001 and 2000 and cash
flows for the six months then ended.
2. Restricted investments
Restricted investments are funds held in a separate trust account to be
used primarily to pay claims related to various vehicle service contract
programs marketed by the extended care warranty businesses acquired as part
of Wynn's International. The funds in the trust account are managed by the
Company and are typically invested in money market accounts, commercial
paper and municipal securities which have maturities of three months or
less when purchased and are stated at cost, which approximates fair market
value. Any residual funds in the trust account and all investment income or
loss accrue to the benefit of the Company.
3. Earnings per share
The following table presents a reconciliation of the denominator of basic
and diluted earnings per share for the three and six months ended December
31, 2001 and 2000.
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- --------------------------
Numerator: 2001 2000 2001 2000.
---------- -------------------------------------------------------
Net income applicable
to common shares $ 29,062 $ 78,314 $ 89,643 $ 203,360
Denominator:
-----------
Basic - weighted average
common shares 115,010,099 114,007,029 115,088,506 113,968,357
Increase in weighted average
from dilutive effect of
exercise of stock options 608,871 824,110 597,328 728,203
------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 115,618,970 114,831,139 115,685,834 114,696,560
=======================================================
Basic earnings per share $ .25 $ .68 $ .78 $ 1.78
Diluted earnings per share $ .25 $ .68 $ .77 $ 1.77
-6-
4. Stock repurchase program
The Board of Directors has approved a program to repurchase the Company's
common stock on the open market, at prevailing prices. The repurchase is
primarily funded from operating cash flows and the shares are initially
held as treasury stock. During the three-month period ended December 31,
2001, the Company purchased 145,000 shares of its common stock at an
average price of $35.86 per share. Year-to-date, the Company has purchased
230,000 shares at an average price of $35.02 per share.
5. Comprehensive income
The Company's items of other comprehensive income (loss) are foreign
currency translation adjustments and unrealized gains (losses) on
marketable equity securities. Comprehensive income for the three and six
months ended December 31, 2001 and 2000 is as follows:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
------------------------------------------------
Net income $29,062 $78,314 $89,643 $203,360
Foreign currency
translation adjustments 238 260 11,124 (44,527)
Unrealized gains (losses) on marketable
equity securities 368 348 (4,905) 15,817
------------------------------------------------
Comprehensive income $29,668 $78,922 $95,862 $174,650
================================================
The unrealized gains (losses) on marketable equity securities is net of
taxes of $222 and $2,956 for the three and six months ended December 31,
2001, respectively, and $210 and $9,531 for the three and six months ended
December 31, 2000, respectively.
6. Gain on sale of real property
In fiscal 2001 the Company recorded a $55.5 million gain ($34.7 million
after-tax or $.30 per share) on the sale of real property. The gain is
reflected in the Consolidated Income Statement for the six months ended
December 31, 2000 in Interest and other (income), net.
7. Charges related to business realignment and equity investment adjustment
During the second quarter of fiscal 2002, the Company recorded a $7,335
charge ($4,804 after-tax or $.04 per share) for the costs to structure
appropriately its businesses to operate in their current economic
environment. The business realignment charge consists of severance costs of
$4,761 and $2,574 of costs relating to the consolidation of manufacturing
product lines. The severance portion of the charge is attributable to 236
employees in the Industrial Segment, 206 employees in the Aerospace Segment
and 18 employees in the Other Segment. Of the pre-tax amount, $3,890
relates to the Industrial Segment, $1,848 relates to the Aerospace Segment
and $1,597 relates to the Other Segment. As of December 30, 2001, the
Company had made a substantial portion of the severance payments with the
remaining payments expected to be made by December 31, 2002. Also in the
second quarter of fiscal 2002, the Company recorded a $4,973 charge ($4,973
after-tax or $.04 per share) related to an adjustment to fair market value
of an equity investment in a publicly traded Japanese company with whom the
Company has established an alliance.
-7-
During the first six months of fiscal 2002, the Company recorded charges of
$12,376 ($8,106 after-tax or $.07 per share) for business realignment
costs. Of the pre-tax amount, $7,207 relates to the Industrial Segment,
$3,055 relates to the Aerospace Segment and $2,114 relates to the Other
Segment.
The business realignment costs and equity investment adjustment are
presented in the Consolidated Statement of Income for the three and six
months ended December 31, 2001 as follows: $6,355 and $10,989,
respectively, in Cost of sales and $5,953 and $6,360, respectively, in
Selling, general and administrative expenses.
8. Goodwill and Intangible Assets
On July 1, 2001 the Company adopted the provisions of SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted
for by the purchase method and that certain acquired intangible assets be
recognized as assets apart from goodwill. No reclassification of intangible
assets apart from goodwill was necessary as a result of the adoption of
SFAS No. 142. SFAS No. 142 provides that goodwill should not be amortized
but should instead be tested for impairment annually at the reporting unit
level. In accordance with SFAS No. 142, the Company completed a
transitional goodwill impairment test which resulted in no impairment loss
being recognized. Goodwill amortization expense in the second quarter and
first six months of fiscal 2001 was $13,854 ($11,907 after-tax or $.10 per
share) and $28,563 ($24,548 after-tax or $.21 per share), respectively.
The following table reflects the consolidated results adjusted as though
the adoption of SFAS No. 142 occurred as of the beginning of the three and
six-month periods ended December 31, 2000:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
------------------------------------------------
Net income:
As reported $ 29,062 $ 78,314 $ 89,643 $ 203,360
Goodwill amortization 11,907 24,548
------------------------------------------------
Adjusted net income $ 29,062 $ 90,221 $ 89,643 $ 227,908
================================================
Basic earnings per share:
As reported $ 0.25 $ 0.68 $ 0.78 $ 1.78
Goodwill amortization 0.10 .21
------------------------------------------------
Adjusted basic earnings per share $ 0.25 $ 0.78 $ 0.78 $ 1.99
================================================
Diluted earnings per share:
As reported $ 0.25 $ 0.68 $ 0.77 $ 1.77
Goodwill amortization 0.10 .21
------------------------------------------------
Adjusted diluted earnings per share $ 0.25 $ 0.78 $ 0.77 $ 1.98
================================================
-8-
The changes in the carrying amount of goodwill for the six months ended
December 31, 2001 are as follows:
Industrial Aerospace Other
Segment Segment Segment Total
------------------------------------------------
Balance as of June 30, 2001 $ 769,675 $ 76,090 $107,883 $ 953,648
Acquisitions 29,410 42,779 72,189
Balance sheet reclassification 31,195 31,195
Goodwill adjustments and other 11,011 (100) 6,557 17,468
------------------------------------------------
Balance as of December 31, 2001 $ 810,096 $ 75,990 $188,414 $1,074,500
================================================
Balance sheet reclassification represents the change in balance sheet
presentation during the first quarter of fiscal 2002 for net assets held
for sale (see Note 10 for further discussion). Goodwill adjustments and
other primarily represent final adjustments to the purchase price
allocation for acquisitions completed within the last fiscal year and
foreign currency translation adjustments.
9. Acquisitions
On July 16, 2001 the Company completed the acquisition of Dana
Corporation's Chelsea Products Division (Chelsea). Chelsea is a supplier of
power take-offs and related auxiliary power devices for medium and heavy-
duty vocational equipment with annual sales of $67 million.
On August 31, 2001 the Company acquired the Aeroquip Air Conditioning and
Refrigeration (AC&R) business from Eaton Corporation. AC&R produces
mechanical controls and fluid systems for the residential and commercial
air conditioning and refrigeration markets with annual sales of $75
million.
On October 19, 2001 the Company acquired assets of the global fluid
management business of Dayco Industrial from MarkIV/BC Partners. With
annual revenues of $304 million, the Dayco assets acquired include
Imperial-Eastman products and a wide array of hydraulic and industrial hose
and connectors.
Total purchase price for these businesses was approximately $300 million in
cash. These acquisitions are being accounted for by the purchase method.
10. Net assets held for sale
At June 30, 2001, Net assets held for sale included the estimated net cash
proceeds and estimated net earnings during the holding period (including
incremental interest expense on debt incurred in the acquisition) of the
metal forming business, which was acquired as part of Commercial Intertech
in fiscal 2000, and the specialty chemical and warranty businesses, which
were acquired as part of Wynn's International in fiscal 2001.
During fiscal 2002, the Company completed the divestiture of the metal
forming business. No gain or loss was recognized on the transaction. In
July 2001 the one-year period during which the earnings of the specialty
chemical and warranty businesses were excluded from the Company's
Consolidated Statement of Income expired. Due to market conditions, the
Company decided to suspend its efforts to sell the specialty chemical and
warranty businesses. As such, the net assets of the specialty chemical and
warranty businesses are presented in the Consolidated Balance Sheet as of
December 31, 2001 in their respective individual line items and their
results of operations have been included in the Consolidated Statement of
Income of the Company beginning in July 2001. The specialty chemical and
warranty businesses are included in the Other Segment for segment reporting
purposes.
-9-
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001
AND COMPARABLE PERIODS ENDED DECEMBER 31, 2000
CONSOLIDATED STATEMENT OF INCOME
Net sales decreased 2.1 percent for the current quarter and 1.3 percent for the
first six months of fiscal 2002. Without acquisitions and the inclusion of the
results from businesses previously classified as assets held for sale, Net sales
decreased 13.9 percent for the current quarter of fiscal year 2002 and 12.6
percent for the first six months of fiscal 2002, primarily the result of lower
volume in the Industrial North American operations.
Income from operations was $68.6 million for the current quarter and $181.4
million for the first six months of fiscal 2002, a decrease from the comparable
year periods of 52.9 percent and 41.4 percent, respectively. Included in income
from operations for the current quarter and first six months of fiscal 2002 was
$12.3 million and $17.3 million, respectively, in business realignment charges
and an equity investment adjustment (see Note 7 on page 7 for further
discussion). Included in income from operations in the prior quarter and the
first six months of fiscal 2001 was $13.9 million and $28.6 million,
respectively, of goodwill amortization. Excluding the business realignment
charges, the equity investment adjustment, and goodwill amortization, income
from operations, as a percent of sales, decreased to 5.6 percent from 10.9
percent for the current quarter and decreased to 6.8 percent from 11.4 percent
for the first six months of fiscal 2002. Excluding the business realignment
charges, Cost of sales, as a percent of sales, increased to 83.3 percent from
78.5 percent for the current quarter and increased to 82.1 percent from 78.3
percent for the first six months of fiscal 2002. The lower margins reflect the
weakness experienced in the Industrial North American and International
operations, particularly in historically higher margin businesses, resulting in
the underabsorption of overhead costs. Partially offsetting the lower margins
for the first six months of fiscal 2002 were higher volume and margins
experienced in the Aerospace operations.
Selling, general and administrative expenses, as a percent of sales, declined to
11.5 percent of sales from 11.6 percent for the current quarter and increased to
11.3 percent from 11.2 percent for the first six months of fiscal 2002.
Excluding business realignment charges, the equity investment adjustment, and
goodwill amortization, Selling, general and administrative expenses, as a
percent of sales, increased to 11.1 percent of sales from 10.6 percent for the
current quarter and increased to 11.1 percent from 10.3 percent for the first
six months of fiscal 2002, primarily due to the lower sales volume as well as
the inclusion of businesses previously held for sale which have traditionally
experienced higher selling expenses.
Interest expense decreased 15.8 percent in the current quarter and 10.2 percent
for the first six months of fiscal 2002 primarily due to lower weighted-average
interest rates.
Interest and other (income), net for the first six months of fiscal 2001
included a $55.5 million gain on the sale of real property and $5.4 million of
certain asset impairments.
The effective tax rate increased to 38.1 percent for the current quarter,
compared to 35.5 percent in the prior quarter and increased to 35.7 percent for
the first six months of fiscal 2002, compared to 35.5 percent for the first six
months of fiscal 2001. The increase in the rate is due to the non-deductibility
of the above-mentioned equity investment adjustment partially offset by the
deductibility of certain goodwill amortization for tax purposes that is no
longer being amortized for financial reporting purposes due to the Company's
adoption of SFAS No. 142.
Net income decreased 62.9 percent in the current quarter and 55.9 percent for
the first six months of fiscal 2002, as compared to the prior year. As a
percent of sales, Net income decreased to 2.0 percent from 5.3 percent for the
current quarter and decreased to 3.1 percent from 6.9 percent for the first six
-10-
months of fiscal 2002. Excluding the business realignment charges, the equity
investment adjustment and goodwill amortization, Net income, as a percent of
sales, decreased to 2.7 percent from 6.2 percent for the current quarter and
decreased to 3.5 percent from 6.8 percent for the first six months of fiscal
2002.
Backlog was $1.90 billion at December 31, 2001 compared to $2.03 billion in the
prior year and $1.99 billion at June 30, 2001. The decrease in backlog reflects
lower order rates experienced across most markets in the Industrial North
American operations, as well as a decrease in Aerospace order rates.
RESULTS BY BUSINESS SEGMENT
INDUSTRIAL - The Industrial Segment operations had the following percentage
changes in Net sales in the current year when compared to the equivalent prior-
year period:
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
Industrial North America (12.4)% (14.0)%
Industrial International (7.3)% (5.6)%
Total Industrial (10.9)% (11.5)%
Without the effect of currency-rate changes, International sales would have
decreased 4.7 percent for the current quarter and 1.8 percent for the first six
months of fiscal 2002.
Without the effect of acquisitions completed within the past 12 months, the
percentage changes in Net sales would have been:
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
Industrial North America (21.9)% (22.8)%
Industrial International (9.6)% (8.4)%
Total Industrial (18.3)% (18.6)%
Excluding the effect of acquisitions, the decrease in Industrial North American
sales for both the current quarter and the first six months of fiscal 2002
reflects lower volume experienced across virtually all of the Industrial North
American markets, particularly in the factory automation, semiconductor
manufacturing and telecommunications markets. The decrease in Industrial
International sales for the current quarter and first six months of fiscal 2002
is attributed to lower volume across most markets in Europe, Latin America and
the Asia Pacific region.
Operating income for the Industrial segment decreased 72.6 percent for the
current quarter and 62.8 percent for the first six months of fiscal 2002.
Industrial North American operating income decreased 75.2 percent for the
current quarter and 68.3 percent for the first six months of fiscal 2002, and
Industrial International operating income decreased 60.8 percent for the current
quarter and 38.0 percent for the first six months of fiscal 2002. Included in
Industrial North American operating income for the current quarter and first six
months of fiscal 2002 was $2.5 million and $5.0 million, respectively, in
business realignment charges. Included in Industrial International operating
income for the current quarter and first six months of fiscal 2002 was $1.4
million and $2.2 million, respectively, in business realignment charges. The
business realignment charges were incurred as a result of actions the Company
took to structure appropriately the Industrial operations to operate in their
current economic environment and primarily consisted of severance costs and
costs relating to the consolidation of manufacturing product lines. In
addition, Industrial International operating income for the current quarter
included a $5.0 million charge related to an adjustment to the fair market value
of an equity investment in a publicly traded Japanese company with whom the
Company has established an alliance. See Note 7 on page 7 for further
discussion of the business realignment charges.
-11-
Included in Industrial North American operating income for the prior quarter and
first six months of fiscal 2001 was goodwill amortization of $7.3 million and
$13.9 million, respectively. Included in Industrial International operating
income for the prior quarter and first six months of fiscal 2001 was goodwill
amortization of $2.9 million and $5.8 million, respectively.
Excluding the business realignment charges and goodwill amortization, Industrial
North American operating income, as a percent of sales, decreased to 4.0 percent
from 13.9 percent for the current quarter and to 5.3 percent from 14.3 percent
for the first six months of fiscal 2002. The decline in Industrial North
American margins is primarily due to lower sales volume experienced across
virtually all markets, with a high concentration of the decline occurring in
historically higher margin businesses, which resulted in the underabsorption of
fixed overhead costs.
Excluding the business realignment charges, the equity investment adjustment and
goodwill amortization, Industrial International operating income, as a percent
of sales, decreased to 5.0 percent from 7.6 percent for the current quarter and
to 6.0 percent from 8.2 percent for first six months of fiscal 2002. The
decline in Industrial International margins is primarily due to the lower sales
volume experienced across most markets throughout Europe, Latin America and the
Asia Pacific region.
Total Industrial Segment backlog decreased 17.8 percent compared to December 31,
2000 and 5.5 percent since June 30, 2001, primarily due to lower order rates
within most Industrial markets.
For the remainder of fiscal 2002, the Company expects the Industrial North
American operations to experience similar overall business conditions as those
experienced in the first half of fiscal 2002. However, the Company anticipates
slight increases in both sales and margins in the third quarter of fiscal 2002
with further improvements from the third quarter levels anticipated in the
fourth quarter of fiscal 2002. Business conditions in the Company's Industrial
International operations are expected to stabilize at their current level for
the remainder of the fiscal year. The Company expects to continue to take the
necessary actions to structure appropriately the Industrial Segment operations
to operate in their current economic environment. Such actions may include the
necessity to record additional business realignment charges in the second half
of fiscal 2002.
AEROSPACE - Net sales of the Aerospace Segment decreased 2.1 percent for the
current quarter and increased 6.4 percent for the first six months of fiscal
2002. The decrease for the quarter was primarily due to a decline in both
commercial OEM and aftermarket volume, partially offset by an increase in
military sales. The sales increase for the first six months of fiscal 2002 is
primarily due to an increase in the level of commercial OEM and aftermarket and
military business. Operating income for the Aerospace Segment decreased 9.1
percent for the current quarter and increased 8.4 percent for the first six
months of fiscal 2002. Operating income for the current quarter and first six
months of fiscal 2002 includes $1.8 million and $3.1 million, respectively, in
business realignment charges consisting primarily of severance costs. Operating
income for the prior quarter and first six months of fiscal 2001 included $1.9
million and $3.8 million, respectively, in goodwill amortization. Excluding the
business realignment charges and goodwill amortization, operating income, as a
percent of sales, decreased to 16.8 percent from 18.0 percent for the current
quarter and increased slightly for the first six months of fiscal 2002. The
declining margins for the quarter were primarily due to a decrease in higher
margin commercial aftermarket sales as well as lower capacity utilization.
Backlog for the Aerospace Segment decreased 3.7 percent compared to December 31,
2000 and 7.8 percent since June 30, 2001. Backlog decreased primarily due to a
decrease in the level of commercial OEM and aftermarket orders, partially offset
by higher military order rates. For the remainder of fiscal 2002, commercial
OEM and aftermarket order rates are expected to be weak; however the extent of
the order weakness cannot be quantified at this time with any degree of
certainty. Order rates in the military market are expected to increase
marginally. The Company expects to continue to take the necessary actions to
structure appropriately the Aerospace operations to operate in their current
economic environment. Such actions may include the necessity to record
additional business realignment charges in the second half of fiscal 2002.
-12-
OTHER - Net sales of the Other Segment increased 74.1 percent for the current
quarter and 65.8 percent for the first six months of fiscal 2002. Without the
effect of acquisitions and the inclusion of the results from businesses
previously classified as assets held for sale (see Note 10 on page 9 for further
discussion), sales decreased 4.3 percent for the current quarter and 4.9 percent
for the first six months of fiscal 2002, reflecting the lower demand experienced
across virtually all businesses. Operating income increased 34.9 percent for
the current quarter and increased 40.1 percent for the first six months of
fiscal 2002. Operating income for the current quarter and first six months of
fiscal 2002 includes $1.6 million and $2.1 million, respectively, in business
realignment charges. Included in operating income for the prior quarter and
first six months of fiscal 2001 was $1.1 million and $2.2 million, respectively,
of goodwill amortization. Excluding the business realignment charges and
goodwill amortization, operating income, as a percent of sales, decreased to 5.2
percent from 6.6 percent for the current quarter and decreased to 6.7 percent
from 8.1 percent for the first six months of fiscal 2002. The decrease for the
quarter is primarily due to lower sales volume experienced across virtually all
markets resulting in the underabsorption of fixed overhead costs. The decrease
for the first six months is primarily due to lower capacity utilization and the
contribution of lower margins from recent acquisitions and businesses previously
classified as assets held for sale, which have not yet been fully integrated.
Backlog for the Other Segment increased 41.7 percent compared to a year ago and
increased 41.3 percent since June 30, 2001. Backlog increased primarily due to
acquisitions and the inclusion of backlog from businesses previously classified
as assets held for sale. The Company expects business conditions for the
balance of fiscal 2002 to be the same as those experienced in the first half of
fiscal 2002, with slight increases in both sales and margins. The Company
expects to continue to take the necessary actions to structure appropriately the
Other Segment operations to operate in their current economic environment. Such
actions may include the necessity to record additional business realignment
charges in the second half of fiscal 2002.
Corporate general and administrative expenses decreased to $15.7 million from
$20.3 million for the current quarter and decreased to $32.6 million from $37.7
million for the first six months of fiscal 2002. As a percent of sales,
corporate general and administrative expenses decreased to 1.1 percent from 1.4
percent for the current quarter and to 1.1 percent from 1.3 percent for the
first six months of fiscal 2002. The decrease in both the current quarter and
first six months of fiscal 2002 is the result of lower expenses associated with
incentive compensation plans.
Included in Other expense (income) (in the Business Segment Results by Industry)
for the first six months of fiscal 2001 was a $55.5 million gain on the sale of
real property and $7.7 million of certain asset impairments. In addition, the
prior quarter and the first six months of fiscal 2001 included goodwill
amortization of $0.7 million and $2.8 million, respectively.
BALANCE SHEET
Working capital increased to $851.2 million at December 31, 2001 from $783.2
million at June 30, 2001, while the ratio of current assets to current
liabilities increased to 1.64:1. The increase in working capital was primarily
due to an increase in Inventories, a decrease in Notes payable, and the
reclassification of Net assets held for sale into their respective individual
line items, partially offset by a decrease in Accounts receivable.
Restricted investments are funds held in a separate trust account to be used
primarily to pay claims related to various vehicle service contract programs
marketed by the extended care warranty businesses acquired as part of Wynn's
International. The corresponding reserve for estimated future warranty claims
to which the trust account relates is included in Accrued liabilities and Other
liabilities.
Accounts receivable decreased to $813.6 million at December 31, 2001 from $922.3
million at June 30, 2001, primarily as a result of lower sales partially offset
by acquisitions and the reclassification of businesses previously held for sale.
Days sales outstanding increased to 51 days at December 31,
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2001 from 49 days at June 30, 2001. Inventories increased $101.9 million since
June 30, 2001, primarily the result of acquisitions and the reclassification of
businesses previously held for sale, with months supply increasing to 3.8 at
December 31, 2001 compared to 3.3 at June 30, 2001.
Net assets held for sale at June 30, 2001 included the metal forming business,
which was acquired as part of Commercial Intertech in fiscal 2000, and the
specialty chemical and warranty businesses, which were acquired as part of
Wynn's International in fiscal 2001. During the first quarter of fiscal 2002,
the Company completed the divestiture of the metal forming business and
suspended its efforts to sell the specialty chemical and warranty businesses.
As such, the net assets of the specialty chemical and warranty businesses are
presented in the Consolidated Balance Sheet as of December 31, 2001 in their
respective individual line items.
Plant and equipment, net of accumulated depreciation, increased $153.2 million
since June 30, 2001, primarily as a result of acquisitions.
The increase in Goodwill since June 30, 2001 reflects the goodwill recognized
from fiscal 2002 acquisitions and the reclassification of businesses previously
held for sale. In July 2001, the Company adopted SFAS No. 142 and therefore,
future amortization of goodwill has been discontinued.
The debt to debt-equity ratio increased to 37.6 percent at December 31, 2001
compared to 35.7 percent as of June 30, 2001, primarily due to increased
borrowings to fund acquisitions.
Other liabilities increased $111.3 million since June 30, 2001, primarily the
result of the reclassification of businesses previously held for sale.
Due to the modest weakening of the dollar against certain currencies, foreign
currency translation adjustments resulted in an increase in net assets of $11.1
million during the first half of fiscal 2002. The translation adjustments
primarily affected Accounts receivable, Inventories, Goodwill, Plant and
equipment and Long-term debt.
STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $350.3 million for the six months
ended December 31, 2001, as compared to $174.7 million for the same six months
of 2000. The increase in net cash provided was primarily the result of activity
within the working capital items - Accounts receivable, Inventories, Net assets
held for sale and Accounts payable, trade - which provided cash of $171.4
million in fiscal 2002 compared to using cash of $37.9 million in fiscal 2001.
In addition, cash provided by operating activities excludes a Loss on sale of
plant and equipment of $0.6 million in fiscal 2002 compared to a (Gain) on sale
of plant and equipment $58.3 million in fiscal 2001 and Other assets provided
cash of $16.3 million in fiscal 2002 after using cash of $15.7 million in fiscal
2001. These providers of cash were partially offset by a decrease in Net income
of $113.7 million and a decrease in depreciation and amortization of $11.0
million.
Net cash used in investing activities decreased to $437.5 million for the first
half of fiscal 2002 compared to $554.0 million for the first half of fiscal 2001
primarily due to a decrease of $175.1 million in the amount spent on
acquisitions and a decrease in capital expenditures of $56.5 million, partially
offset by a decrease of $60.5 million in the proceeds received from the sale of
plant and equipment. Included in Other for fiscal year 2001 was an increase in
cash provided for long-term receivables.
Financing activities provided cash of $95.1 million for the six months ended
December 31, 2001 compared to providing cash of $383.7 million for the same
period of the prior year. The change resulted primarily from debt borrowings
providing cash of $141.2 million in fiscal 2002 compared to providing cash of
$418.5 million in the prior year. The decrease in debt borrowings in fiscal
2002 is primarily due to a lower level of acquisition activity.
-14-
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company enters into forward exchange contracts, costless collar contracts,
interest-rate swap agreements and cross-currency swap agreements to reduce its
exposure to fluctuations in related foreign currencies and interest rates.
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. 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 these arrangements as well as the market risk of
changes in near term interest rates is not material to the Company's financial
position, liquidity or results of operations.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q 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 the Company expects or
anticipates to occur in the future, including statements relating to growth,
operating margin performance, earnings per share or statements expressing
general opinions about future operating results or the markets in which the
Company does business, 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:
. Changes in business relationships with and purchases by or from major
customers or suppliers, including delays or cancellations in shipments,
. ability of suppliers to provide materials as needed,
. uncertainties surrounding timing, successful completion or integration of
acquisitions,
. competitive market conditions and resulting effects on sales and pricing,
. increases in raw-material and other production costs that cannot be recovered
in product pricing,
. threats associated with terrorism,
. difficulties in introducing new products and entering new markets, and
. uncertainties surrounding the global economy and global market conditions,
including any federal government policy to stimulate the economy, interest
rate levels and the potential devaluation of currencies.
Any forward-looking statements are 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.
-15-
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
------ -----------------------------------------
On October 24, 2001, the Registrant issued an aggregate of 3,167 shares of
Common Stock, $.50 par value, valued at $37.90 per share to certain of its non-
employee directors pursuant to the Registrant's Non-Employee Directors Stock
Plan in lieu of all or a portion of their respective annual retainers. These
transactions were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) of such Act for transactions not
involving a public offering based on the fact that the shares were issued to
accredited investors.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
(a) The Annual Meeting of the Shareholders of the Registrant was held
on October 24, 2001.
(b) Not applicable.
(c)(i) The Shareholders elected four directors to the three-year class
whose term of office will expire in 2004, as follows:
Votes For Votes Withheld
--------------- --------------
John G. Breen 104,661,700.807 1,516,553.427
Hector R. Ortino 104,708,476.367 1,469,777.867
Dennis W. Sullivan 104,656,126.940 1,522,127.294
Donald E. Washkewicz 104,774,514.419 1,403,739.815
(ii) The Shareholders approved the appointment of
PricewaterhouseCoopers LLP as independent certified public
accountants of the Company for the fiscal year ending June 30,
2002, as follows:
For 103,821,038.932
Against 1,735,206.334
Abstain 622,007.968
(d) Not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
(Registrant)
/s/ Michael J. Hiemstra
Michael J. Hiemstra
Executive Vice President - Finance and
Administration and Chief Financial Officer
Date: February 7, 2002
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