UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0451060
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(State or other jurisdiction (IRS Employer
of 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 the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No __.
-
Number of Common Shares outstanding at March 31, 2002 117,706,908
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- -------------- -------------
Net sales $ 1,578,332 $ 1,542,058 $ 4,491,529 $ 4,494,808
Cost of sales 1,309,245 1,221,243 3,710,763 3,532,636
------------ ------------ ------------- -------------
Gross profit 269,087 320,815 780,766 962,172
Selling, general and
administrative expenses 171,764 159,580 502,062 491,617
Interest expense 20,924 24,243 62,933 71,018
Interest and other (income), net (161) (4,794) (267) (57,535)
------------ ------------ ------------- ------------
Income before income taxes 76,560 141,786 216,038 457,072
Income taxes 24,203 50,334 74,038 162,260
------------ ------------ ------------- ------------
Income before extraordinary items 52,357 91,452 142,000 294,812
Extraordinary item - extinguishment of debt - (3,378) - (3,378)
------------ ------------ ------------- ------------
Net income $ 52,357 $ 88,074 $ 142,000 $ 291,434
============ ============ ============= ============
Basic earnings per share before
extraordinary item $ 0.45 $ 0.80 $ 1.23 $ 2.58
Extraordinary item - extinguishment of debt - (0.03) - (0.03)
------------ ------------ ------------- ------------
Basic earnings per share $ 0.45 $ 0.77 $ 1.23 $ 2.55
------------ ------------ ------------- ------------
Diluted earnings per share before
extraordinary item $ 0.45 $ 0.80 $ 1.23 $ 2.57
Extraordinary item - extinguishment of debt - (0.03) - (0.03)
------------ ------------ ------------- ------------
Diluted earnings per share $ 0.45 $ 0.77 $ 1.23 $ 2.54
------------ ------------ ------------- ------------
Cash dividends per common share $ .18 $ .18 $ .54 $ .52
See accompanying notes to consolidated financial statements.
-2-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
March 31, June 30,
ASSETS 2002 2001
- ---------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 31,917 $ 23,565
Restricted investments 98,850 -
Accounts receivable, net 981,972 922,325
Inventories:
Finished products 555,763 495,704
Work in process 345,708 344,861
Raw materials 168,816 168,299
------------ ------------
1,070,287 1,008,864
Prepaid expenses 42,248 39,486
Deferred income taxes 98,682 91,439
Net assets held for sale - 110,683
------------ ------------
Total current assets 2,323,956 2,196,362
Plant and equipment 3,266,538 3,006,064
Less accumulated depreciation 1,582,770 1,457,376
------------ ------------
1,683,768 1,548,688
Goodwill 1,099,413 953,648
Intangible assets, net 43,734 8,584
Other assets 604,146 630,379
------------ ------------
Total assets $ 5,755,017 $ 5,337,661
============ ============
LIABILITIES
- ---------------------
Current liabilities:
Notes payable $ 547,764 $ 546,502
Accounts payable, trade 378,951 367,806
Accrued liabilities 483,631 436,947
Accrued domestic and foreign taxes 73,263 61,874
------------ ------------
Total current liabilities 1,483,609 1,413,129
Long-term debt 1,052,174 857,078
Pensions and other postretirement benefits 209,134 318,527
Deferred income taxes 147,726 131,708
Other liabilities 236,145 88,304
------------ ------------
Total liabilities 3,128,788 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 117,809,075 shares at
March 31 and 117,409,197 shares at June 30 58,905 58,705
Additional capital 349,748 346,228
Retained earnings 2,506,438 2,426,496
Unearned compensation related to guarantee of ESOP debt (82,067) (96,398)
Deferred compensation related to stock options 2,347 2,347
Accumulated other comprehensive (loss) (205,420) (204,531)
------------ ------------
2,629,951 2,532,847
Less treasury shares, at cost:
102,167 shares at March 31
and 100,000 shares at June 30 (3,722) (3,932)
------------ ------------
Total shareholders' equity 2,626,229 2,528,915
------------ ------------
Total liabilities and shareholders' equity $ 5,755,017 $ 5,337,661
============ ============
See accompanying notes to consolidated financial statements.
-3-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
March 31,
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
- ------------------------------------ ---------- ----------
Net income $ 142,000 $ 291,434
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 172,181 154,215
Amortization 8,776 46,570
Deferred income taxes 6,699 24,144
Foreign currency transaction loss 4,418 3,807
Loss (gain) on sale of plant and equipment 859 (57,412)
Net effect of extraordinary loss - 3,378
Changes in assets and liabilities:
Restricted investments (20,330) -
Accounts receivable, net 85,374 (4,979)
Inventories 59,839 (9,914)
Prepaid expenses 13,135 4,859
Net assets held for sale 35,683 33,197
Other assets (2,522) (39,297)
Accounts payable, trade (64,941) (64,042)
Accrued payrolls and other compensation (22,891) (32,461)
Accrued domestic and foreign taxes 6,097 (14,753)
Other accrued liabilities (2,813) (50,478)
Pensions and other postretirement benefits (8,507) 9,886
Other liabilities 44,927 10,138
---------- ----------
Net cash provided by operating activities 457,984 308,292
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Acquisitions (less cash acquired of $3,117 in 2002 and $8,256 in 2001) (383,144) (512,716)
Capital expenditures (157,452) (263,812)
Proceeds from sale of plant and equipment 12,262 76,496
Other (50,722) 29,141
---------- ----------
Net cash used in investing activities (579,056) (670,891)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from common share activity 3,930 9,824
(Payments of) proceeds from notes payable, net (8,547) 278,565
Proceeds from long-term borrowings 208,531 290,908
Payments of long-term borrowings (9,852) (178,257)
Dividends (62,058) (59,298)
---------- ----------
Net cash provided by financing activities 132,004 341,742
Effect of exchange rate changes on cash (2,580) (2,394)
---------- ----------
Net increase (decrease) in cash and cash equivalents 8,352 (23,251)
Cash and cash equivalents at beginning of year 23,565 68,460
---------- ----------
Cash and cash equivalents at end of period $ 31,917 $ 45,209
========== ==========
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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales
Industrial:
North America $ 726,808 $ 742,468 $ 2,023,947 $ 2,250,578
International 325,754 343,060 912,491 964,399
Aerospace 284,989 317,446 885,801 882,259
Other 240,781 139,084 669,290 397,572
------------ ------------ ------------ ------------
Total $ 1,578,332 $ 1,542,058 $ 4,491,529 $ 4,494,808
============ ============ ============ ============
Segment operating income
Industrial:
North America $ 38,090 $ 82,797 $ 102,131 $ 284,796
International 17,125 32,538 45,188 77,806
Aerospace 48,682 62,490 152,020 157,863
Other 18,358 11,609 44,779 30,463
------------ ------------ ------------ ------------
Total segment operating income 122,255 189,434 344,118 550,928
Corporate general and
administrative expenses 17,550 18,038 50,163 55,768
------------ ------------ ------------ ------------
Income before interest expense
and other 104,705 171,396 293,955 495,160
Interest expense 20,924 24,243 62,933 71,018
Other expense (income) 7,221 5,367 14,984 (32,930)
------------ ------------ ------------ ------------
Income before income taxes $ 76,560 $ 141,786 $ 216,038 $ 457,072
============ ============ ============ ============
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 March 31, 2001 includes $15,185 of
goodwill amortization ($8,132 in Industrial North America; $3,253 in
Industrial International; $2,056 in Aerospace; $1,081 in Other; and
$663 in Other expense (income)). Income before income taxes for the
nine months ended March 31, 2001 includes $43,748 of goodwill
amortization ($22,074 in Industrial North America; $9,099 in Industrial
International; $5,849 in Aerospace; $3,252 in Other; and $3,474 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 March 31, 2002, the results of operations for
the three and nine months ended March 31, 2002 and 2001 and cash flows for
the nine 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 nine months ended March
31, 2002 and 2001.
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------------------------------------------
Numerator: 2002 2001 2002 2001
---------- ------------------------------------------------------------------
Net income applicable
to common shares $ 52,357 $ 88,074 $ 142,000 $ 291,434
Denominator:
-----------
Basic - weighted average
common shares 115,503,613 114,439,369 115,226,875 114,125,361
Increase in weighted average
from dilutive effect of
exercise of stock options 778,462 810,101 657,706 755,502
------------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 116,282,075 115,249,470 115,884,581 114,880,863
==================================================================
Basic earnings per share $ .45 $ .77 $ 1.23 $ 2.55
Diluted earnings per share $ .45 $ .77 $ 1.23 $ 2.54
-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. There were no share repurchases during the
three-month period ended March 31, 2002. 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 nine
months ended March 31, 2002 and 2001 is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -------------------------
2002 2001 2002 2001
-----------------------------------------------------------
Net income $ 52,357 $ 88,074 $ 142,000 $ 291,434
Foreign currency
translation adjustments (8,645) (38,641) 2,479 (83,168)
Unrealized gain (loss) on
marketable equity securities 1,537 (4,016) (3,368) 11,801
Realized (gain) on marketable
securities included in net
income (2,333) (2,333)
-----------------------------------------------------------
Comprehensive income $ 45,249 $ 43,084 $ 141,111 $ 217,734
===========================================================
The unrealized gain (loss) on marketable equity securities is net of taxes
of $926 and $(2,029) for the three and nine months ended March 31, 2002,
respectively, and $(2,420) and $7,111 for the three and nine months ended
March 31, 2001, respectively. Realized (gain) on marketable securities is
net of taxes of $1,406 for both the three and nine months ended March 31,
2001.
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 nine months ended
March 31, 2001 in Interest and other (income), net.
-7-
7. Charges related to business realignment and equity investment adjustment
During the third quarter of fiscal 2002, the Company recorded a $3,878
charge ($2,540 after-tax or $.02 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
$2,824 and $1,054 of costs relating to the consolidation of manufacturing
product lines. Of the pre-tax amount, $2,778 relates to the Industrial
Segment, $492 relates to the Aerospace Segment and $608 relates to the
Other Segment. The severance portion of the charge is attributable to 178
employees in the Industrial Segment, 52 employees in the Aerospace Segment
and 105 employees in the Other Segment. As of March 31, 2002, the Company
had made about half of the severance payments with the remaining payments
expected to be made by March 31, 2003.
During the first nine months of fiscal 2002, the Company recorded charges
of $16,254 ($10,646 after-tax or $.09 per share) for business realignment
costs. Of the pre-tax amount, $9,985 relates to the Industrial Segment,
$3,547 relates to the Aerospace Segment and $2,722 relates to the Other
Segment. Also during the first nine months 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.
The charges related to business realignment actions and the equity
investment adjustment are presented in the Consolidated Statement of Income
for the three and nine months ended March 31, 2002 as follows: $3,530 and
$14,519, respectively, in Cost of sales and $348 and $6,708, 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. The Company is currently conducting its annual goodwill
impairment test and it is unknown at this time whether an impairment loss
will be required to be recognized. Goodwill amortization expense in the
third quarter and first nine months of fiscal 2001 was $15,185 ($13,050
after-tax or $.11 per share) and $43,748 ($37,598 after-tax or $.32 per
share), respectively.
-8-
8. Goodwill and intangible assets, continued
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
nine-month periods ended March 31, 2001:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ------------------------
2002 2001 2002 2001
-----------------------------------------------------
Net income:
As reported $ 52,357 $ 88,074 $ 142,000 $ 291,434
Goodwill amortization 13,050 37,598
-----------------------------------------------------
Adjusted net income $ 52,357 $ 101,124 $ 142,000 $ 329,032
=====================================================
Basic earnings per share:
As reported $ 0.45 $ 0.77 $ 1.23 $ 2.55
Goodwill amortization 0.11 .32
-----------------------------------------------------
Adjusted basic earnings per share $ 0.45 $ 0.88 $ 1.23 $ 2.87
=====================================================
Diluted earnings per share:
As reported $ 0.45 $ 0.77 $ 1.23 $ 2.54
Goodwill amortization 0.11 .32
-----------------------------------------------------
Adjusted diluted earnings per share $ 0.45 $ 0.88 $ 1.23 $ 2.86
=====================================================
The changes in the carrying amount of goodwill for the nine months ended
March 31, 2002 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 55,878 42,779 98,657
Balance sheet reclassification 29,757 29,757
Goodwill adjustments and other 10,186 (121) 7,286 17,351
-------------------------------------------------
Balance as of March 31, 2002 $ 835,739 $ 75,969 $ 187,705 $ 1,099,413
=================================================
"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-
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.
On February 1, 2002 the Company completed its acquisition of ITR SpA, a
subsidiary of the SAIAG Group. ITR is a manufacturer of hoses, fittings and
rubber compounds for hydraulic, industrial and oil and gas applications
with annual revenues of $147 million.
Total purchase price for these businesses was approximately $368 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
March 31, 2002 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.
11. Extraordinary item - extinguishment of debt
In third quarter of fiscal 2001 the Company redeemed its outstanding $100
million, 9.75 percent debentures due 2002-2021. The extraordinary loss for
this transaction, including an early-redemption premium and the write-off
of deferred issuance costs, was $5,413 ($3,378 after-tax or $.03 per
share).
-10-
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2002
AND COMPARABLE PERIODS ENDED MARCH 31, 2001
CONSOLIDATED STATEMENT OF INCOME
Net sales increased 2.4 percent for the current quarter and remained essentially
the same for the first nine months of fiscal 2002. Without acquisitions and the
inclusion of the results from businesses previously classified as assets held
for sale, Net sales decreased 11.9 percent for the current quarter and 12.4
percent for the first nine months of fiscal 2002, primarily the result of lower
volume in the Industrial North American and International operations. Lower
volume in the Aerospace operations also contributed to the sales decline in the
current quarter.
Income from operations was $97.3 million for the current quarter and $278.7
million for the first nine months of fiscal 2002, a decrease from the comparable
year periods of 39.6 percent and 40.8 percent, respectively. Cost of sales, as a
percent of sales, increased to 83.0 percent from 79.2 percent for the current
quarter and increased to 82.6 percent from 78.6 percent for the first nine
months. Included in income from operations for the current quarter and first
nine months of fiscal 2002 was $3.9 million and $16.2 million, respectively, in
business realignment charges. Income from operations for the first nine months
of fiscal 2002 also includes a charge of $5.0 million related to an equity
investment adjustment (see Note 7 on page 8 for further discussion). Included in
income from operations in the prior quarter and the first nine months of fiscal
2001 was $15.2 million and $43.7 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 6.4 percent from 11.4 percent for the current quarter and decreased
to 6.7 percent from 11.5 percent for the first nine months. Excluding the
business realignment charges, Cost of sales, as a percent of sales, increased to
82.7 percent from 79.2 percent for the current quarter and increased to 82.3
percent from 78.6 percent for the first nine months. The lower margins for the
current quarter and first nine months reflect the weakness experienced in the
Industrial North American and International operations, particularly in
historically higher margin businesses, resulting in manufacturing
inefficiencies. Lower margins for the current quarter were also experienced in
the Aerospace operations as a result of a change in product mix.
Selling, general and administrative expenses, as a percent of sales, increased
to 10.9 percent of sales from 10.3 percent for the current quarter and increased
to 11.2 percent from 10.9 percent for the first nine months. Excluding business
realignment charges, the equity investment adjustment, and goodwill
amortization, Selling, general and administrative expenses, as a percent of
sales, increased to 10.9 percent of sales from 9.4 percent for the current
quarter and increased to 11.0 percent from 9.9 percent for the first nine
months, 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 13.7 percent in the current quarter and 11.4 percent
for the first nine months of fiscal 2002 primarily due to lower weighted-average
interest rates.
Interest and other (income), net for the first nine months of fiscal 2001
included a $55.5 million gain on the sale of real property and $5.4 million of
certain asset impairments.
In the prior year quarter the Company redeemed $100 million, 9.75 percent
debentures due 2002-2021 resulting in an after-tax extraordinary loss of $3.4
million or $.03 per share.
-11-
The effective tax rate declined to 34.3 percent for the first nine months of
fiscal 2002, compared to 35.5 percent in the prior-year first nine months. The
decrease in the rate is primarily due to the utilization of foreign tax credits
and 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 in the first quarter of fiscal 2002. Partially
offsetting the decline in the tax rate was the non-deductibility of the equity
investment adjustment.
Net income decreased 40.6 percent in the current quarter and 51.3 percent for
the first nine months of fiscal 2002, as compared to the prior year. As a
percent of sales, Net income decreased to 3.3 percent from 5.7 percent for the
current quarter and decreased to 3.2 percent from 6.5 percent for the first nine
months. Excluding the business realignment charges, the equity investment
adjustment and goodwill amortization, Net income, as a percent of sales,
decreased to 3.5 percent from 6.6 percent for the current quarter and decreased
to 3.5 percent from 6.7 percent for the first nine months.
Backlog was $1.93 billion at March 31, 2002 compared to $2.01 billion in the
prior year and $1.99 billion at June 30, 2001. The decrease in backlog reflects
lower order rates in the Aerospace operations, as well as lower order rates
experienced across most markets in the Industrial North American operations.
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 March 31,
-----------------------
Three Months Nine Months
------------ -----------
Industrial North America (2.1)% (10.1)%
Industrial International (5.0)% (5.4)%
Total Industrial (3.0)% (8.7)%
Without the effect of currency-rate changes, International sales would have been
flat for the current quarter and would have decreased 1.0 percent for the first
nine 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 March 31,
-----------------------
Three Months Nine Months
------------ -----------
Industrial North America (14.0)% (19.9)%
Industrial International (14.9)% (10.7)%
Total Industrial (14.3)% (17.1)%
Excluding the effect of acquisitions, the decrease in Industrial North American
sales for both the current quarter and the first nine 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 nine months of fiscal 2002
is attributed to lower volume across most International markets, particularly
those in Europe.
Operating income for the Industrial segment decreased 52.1 percent for the
current quarter and 59.4 percent for the first nine months of fiscal 2002.
Industrial North American operating income decreased 54.0 percent for the
current quarter and 64.1 percent for the first nine months of fiscal 2002, and
Industrial International operating income decreased 47.4 percent for the current
quarter and 41.9 percent for the first nine months of fiscal 2002. Included in
Industrial North American operating income for the current quarter and first
nine months of fiscal 2002 was $1.3 million and $6.3 million, respectively, in
business realignment charges. Included in Industrial International operating
income for the current quarter and first nine months of fiscal 2002 was $1.5
million and $3.6 million, respectively, in
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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 first nine months of fiscal 2002 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 8 for further discussion of the business
realignment charges.
Included in Industrial North American operating income for the prior quarter and
first nine months of fiscal 2001 was goodwill amortization of $8.1 million and
$22.1 million, respectively. Included in Industrial International operating
income for the prior quarter and first nine months of fiscal 2001 was goodwill
amortization of $3.3 million and $9.1 million, respectively.
Excluding the business realignment charges and goodwill amortization, Industrial
North American operating income, as a percent of sales, decreased to 5.4 percent
from 12.2 percent for the current quarter and to 5.4 percent from 13.7 percent
for the first nine months. 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 5.7 percent from 10.4 percent for the current quarter and
to 5.9 percent from 9.0 percent for first nine months. The decline in Industrial
International margins is primarily due to the lower sales volume experienced
across most markets throughout Europe and the Asia Pacific region.
Total Industrial Segment backlog decreased 6.2 percent compared to March 31,
2001 and remained the same as June 30, 2001. Without acquisitions, total
Industrial Segment backlog decreased 12.5 percent compared to March 31, 2001 and
decreased 6.3 percent since June 30, 2001, primarily due to lower order rates
within most Industrial markets.
For the remainder of the fiscal year, the Company expects the Industrial North
American operations to begin to experience an improvement in overall business
conditions; however the extent and pace of the improvement is expected to vary
by market. The Company anticipates slight increases from the current quarter
level in both sales and margins in the fourth quarter of fiscal 2002 with
further improvements anticipated in fiscal 2003. 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 is currently
reviewing the operating units of the Industrial Segment as part of its annual
planning process, the intent of which is to ensure that assets are contributing
to long-term growth. This review may result in the necessity to record
additional business realignment charges in the fourth quarter of fiscal 2002 but
the amount of such charges, if any, is not currently quantifiable.
AEROSPACE - Net sales of the Aerospace Segment decreased 10.2 percent for the
current quarter and were essentially flat for the first nine 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 flat sales level for the first nine months reflects the
magnitude of the slowdown experienced in the current quarter in both the
commercial OEM and aftermarket businesses. Operating income for the Aerospace
Segment decreased 22.1 percent for the current quarter and 3.7 percent for the
first nine months of fiscal 2002. Operating income, as a percent of sales,
decreased to 17.1 percent from 19.7 percent for the current quarter and
decreased to 17.2 percent from 17.9 percent for the first nine months. Operating
income for the current quarter and first nine months of fiscal 2002 includes
$0.5 million and $3.5 million, respectively, in business realignment charges
consisting primarily of severance costs. Operating income for the prior quarter
and first nine months of fiscal 2001 included $2.1 million and $5.8 million,
respectively, in goodwill amortization. Excluding the business realignment
charges and goodwill amortization, operating income, as a percent of sales,
decreased to 17.3 percent from 20.3 percent for the current quarter and
decreased to 17.6 from 18.6 percent for the first nine
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months. The declining margins were primarily due to a decrease in higher margin
commercial OEM and aftermarket sales as well as lower capacity utilization.
Backlog for the Aerospace Segment decreased 8.3 percent compared to March 31,
2001 and 9.3 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, a continuation
of the weakness in order rates in the commercial OEM and aftermarket businesses
is expected. While the extent of the order weakness cannot be quantified with
any degree of certainty, recent indicators suggest that the decline in order
rates will accelerate in the short term. Order rates in the military market are
expected to increase marginally.
OTHER - The Other Segment consists of several business units which produce
motion-control and fluid power system components for use primarily in the
transportation industry and a business unit which designs and manufactures
custom-engineered buildings. Beginning in fiscal 2002, this Segment also
includes a business unit that develops and manufactures chemical car care and
industrial products and related service programs and a business unit that
administers vehicle service contract programs.
Net sales of the Other Segment increased 73.1 percent for the current quarter
and 68.3 percent for the first nine 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 increased 3.2 percent for the current quarter and declined
2.0 percent for the first nine months of fiscal 2002. The increase in sales for
the current quarter reflects the higher volume experienced in the automotive
market while the decrease in sales for the first nine months of fiscal 2002
reflects the lower demand experienced across virtually all businesses. Operating
income increased 58.1 percent for the current quarter and increased 47.0 percent
for the first nine months of fiscal 2002. Operating income for the current
quarter and first nine months of fiscal 2002 includes $0.6 million and $2.7
million, respectively, in business realignment charges. Included in operating
income for the prior quarter and first nine months of fiscal 2001 was $1.1
million and $3.3 million, respectively, of goodwill amortization. Excluding the
business realignment charges and goodwill amortization, operating income, as a
percent of sales, decreased to 7.9 percent from 9.1 percent for the current
quarter and decreased to 7.1 percent from 8.5 percent for the first nine months.
The decline in margins for the current quarter and first nine months of fiscal
2002 reflect the lower sales volume experienced across virtually all markets
resulting in the underabsorption of fixed overhead costs as well as 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 49.5 percent compared to a year ago and
increased 52.4 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 nine months of
fiscal 2002, with slight increases in both sales and margins. The Company will
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 fourth quarter of fiscal 2002 but the amount of such charges, if
any, is not currently quantifiable. As part of these actions, the Company is
currently reviewing the business model in use by the business unit that
administers vehicle service contract programs and the reinsurance program
related to claims on certain vehicle extended warranty contracts. It is unknown
at this time what adjustment, if any, will be required to the warranty contract
reserves or the receivable from the reinsurance provider.
Corporate general and administrative expenses decreased to $17.6 million from
$18.0 million for the current quarter and decreased to $50.2 million from $55.8
million for the first nine months. As a percent of sales, corporate general and
administrative expenses decreased to 1.1 percent from 1.2 percent for the
current quarter and first nine months. The decrease is the result of lower
expenses associated with incentive compensation plans.
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Included in Other expense (income) (in the Business Segment Results by Industry)
for the first nine 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 nine months of fiscal 2001 included goodwill
amortization of $0.7 million and $3.5 million, respectively.
BALANCE SHEET
Working capital increased to $840.3 million at March 31, 2002 from $783.2
million at June 30, 2001, while the ratio of current assets to current
liabilities increased to 1.57:1. The increase in working capital was primarily
due to an increase in Inventories and Accounts receivable and the
reclassification of Net assets held for sale into their respective individual
line items.
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 increased to $982.0 million at March 31, 2002 from $922.3
million at June 30, 2001, primarily as a result of acquisitions and the
reclassification of businesses previously held for sale, partially offset by
lower sales. Days sales outstanding at March 31, 2002 remained at 49 days.
Inventories increased $61.4 million since June 30, 2001, primarily the result of
acquisitions and the reclassification of businesses previously held for sale,
with months supply remaining the same.
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 March 31, 2002 in their
respective individual line items.
Plant and equipment, net of accumulated depreciation, increased $135.1 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 37.9 percent at March 31, 2002
compared to 35.7 percent as of June 30, 2001, primarily due to increased
borrowings to fund acquisitions.
Other liabilities increased $147.8 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 $2.5
million during the first nine months of fiscal 2002. The translation adjustments
primarily affected Goodwill, Plant and equipment and Long-term debt.
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STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $458.0 million for the nine months
ended March 31, 2002, as compared to $308.3 million for the same nine months of
2001. The increase in net cash provided was primarily the result of activity
within the working capital items - Accounts receivable, Inventories and Other
accrued liabilities - which provided cash of $142.4 million in fiscal 2002
compared to using cash of $65.4 million in fiscal 2001. In addition, cash
provided by operating activities excludes a Loss on sale of plant and equipment
of $0.9 million in fiscal 2002 compared to a (Gain) on sale of plant and
equipment of $57.4 million in fiscal 2001, Other assets used cash of $2.5
million in fiscal 2002 after using cash of $39.3 million in fiscal 2001, and
Other liabilities provided cash of $44.9 million in fiscal 2002 compared to
providing cash of $10.1 million in fiscal 2001. These providers of cash were
partially offset by a decrease in Net income of $149.4 million and a decrease in
depreciation and amortization of $19.8 million.
Net cash used in investing activities decreased to $579.1 million for the first
nine months of fiscal 2002 compared to $670.9 million for the first nine months
of fiscal 2001 primarily due to a decrease of $129.6 million in the amount spent
on acquisitions and a decrease in capital expenditures of $106.4 million,
partially offset by a decrease of $64.2 million in the proceeds received from
the sale of plant and equipment. Included in Other was an increase in cash used
for equity investments in fiscal 2002, and an increase in cash provided for
long-term receivables in fiscal 2001.
Financing activities provided cash of $132.0 million for the nine months ended
March 31, 2002 compared to providing cash of $341.7 million for the same period
of the prior year. The change resulted primarily from debt borrowings providing
cash of $190.1 million in fiscal 2002 compared to providing cash of $391.2
million in the prior year. The decrease in debt borrowings in fiscal 2002 is
primarily due to a lower level of acquisition activity.
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.
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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,
... ability to achieve anticipated benefits associated with business
realignment measures,
... 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.
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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: April 23, 2002
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