Exhibit (13)
Exhibit (13) to Report
On Form 10-K for Fiscal
Year Ended June 30, 2002
By Parker-Hannifin Corporation
Forward-Looking Statements
This Annual Report and other written reports and oral statements made from time
to time by the Company may contain "forward-looking statements," all of which
are subject to risks and uncertainties. All statements which address operating
performance, events or developments that 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:
. continuity of 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 benefits associated with business realignment
measures and other cost reduction programs,
. difficulties in introducing new products and entering new markets, and
. uncertainties surrounding the global economy and global market
conditions, interest rate levels and the potential devaluation of
currencies.
Any forward-looking statements are made based on known events and circumstances
at the time. The Company undertakes no obligation to update or publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date of this Report.
Page 13-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is designed to provide the reader of the
financial statements a narrative summary of the Company's results of operations
and financial condition. The discussion below is structured to separately
discuss each of the financial statements presented on pages 13-10 to 13-14. All
year references are to fiscal years.
Discussion of Consolidated Statement of Income
The Consolidated Statement of Income summarizes the Company's operating
performance over the last three fiscal years.
Net Sales of $6.15 billion for 2002 were 2.8 percent higher than the $5.98
billion for 2001. Without acquisitions completed in 2002, net sales declined 9.5
percent from 2001 reflecting the lower demand experienced across all of the
Company's operations during 2002 except in the Other Segment where sales grew a
modest 1.0 percent. The lower demand in 2002 resulted from recessionary business
conditions that were present throughout the year. In the Industrial North
American operations, lower demand was experienced across most markets, most
notably in semi-conductor manufacturing, heavy-duty trucks and factory
automation. Sales in the Industrial International operations were lower across
all businesses in Europe, Latin America and the Asia Pacific region. Currency
rate changes reduced volume increases within the Industrial International
operations by $26.7 million. The Aerospace operations experienced lower demand
in the commercial original equipment and aftermarket businesses.
Net Sales of $5.98 billion for 2001 were 11.0 percent higher than the $5.39
billion for 2000. Acquisitions completed in 2001 accounted for all of the
increase. Without acquisitions, the Industrial North American operations
experienced lower demand within most of their markets, particularly in
heavy-duty trucks, factory automation and machine tools. The Aerospace
operations experienced an increase in demand for regional jets as well as an
increase in commercial aircraft build rates. The Industrial International
operations experienced higher volume across all businesses in Europe, Latin
America and the Asia Pacific region. Currency rate changes reduced volume
increases within the Industrial International operations by $144.0 million.
The Company expects volume in the North American and European Industrial
operations to remain essentially at the same level experienced at the end of
2002 through the first half of fiscal 2003 with modest improvement in volume and
profit anticipated in the second half of fiscal 2003. Sales and profits in the
Asia Pacific region are anticipated to grow as business conditions improve and
the Company continues its efforts to expand its presence in this region. In
Latin America, sales and profits are anticipated to improve modestly; however
the economic uncertainty in this region, particularly in Argentina and Brazil,
may temper the extent of the growth. The Aerospace operations expect the
commercial OEM and aftermarket businesses to be depressed throughout 2003. The
defense business is projected to remain relatively constant. In 2003 the Company
anticipates recognizing an additional $23.0 million in business realignment
costs, primarily related to the Industrial Segment operations. These costs will
be incurred as a result of additional actions expected to take place in 2003 to
finalize business realignment plans commenced in 2002.
Gross profit margin as a percent of sales was 16.8 percent in 2002 compared to
20.9 percent in 2001 and 22.3 percent in 2000. The lower margins in 2002 reflect
lower sales volume experienced across all of the Company's operations and a
reduction in inventories in the Industrial operations, resulting in the
underabsorption of manufacturing costs, as well as the effect of business
realignment costs (see pages 13-3 to 13-5 for further discussion).
The lower margins in 2001 reflected lower volume experienced in the Industrial
North American operations, offset by strength experienced in the Aerospace
operations, as well as the effect of business realignment charges.
Selling, general and administrative expenses as a percent of sales decreased to
11.2 percent, from 11.4 percent in 2001, and increased from 10.7 percent in
2000. Effective July 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and ceased
amortizing goodwill as of that date. Excluding goodwill amortization, selling,
general and administrative expenses as a percent of sales would have been 10.4
percent in 2001 and 10.0 percent in 2000. Excluding goodwill amortization, the
increase in selling, general and administrative expenses as a percent of sales
in 2002 is a result of lower sales volume as well as business realignment
charges and an equity investment adjustment recorded in 2002 (see Notes 3 and 1
on pages 13-19 and 13-15, respectively, for further discussion).
Goodwill impairment loss of $39.5 million resulted from the Company's goodwill
impairment tests required to be performed under the provisions of SFAS No. 142.
See Note 7 on page 13-22 for further discussion.
Interest expense decreased by $7.9 million in 2002 after an increase of $31.2
million in 2001. The decrease in 2002 was primarily due to lower
weighted-average interest rates. The increase in 2001 was due to increased
borrowings to complete acquisitions.
Page 13-2
Interest and other (income), net was $2.5 million in 2002 compared to $4.8
million in 2001 and $4.1 million in 2000. Fiscal 2001 includes a $3.7 million
gain on the sale of marketable equity securities and $3.0 million of business
realignment charges.
Loss (gain) on disposal of assets was an $8.5 million loss in 2002, a $47.7
million gain in 2001 and a $5.6 million loss in 2000. The loss in 2002 includes
$9.4 million of certain asset impairments (see Note 3 on page 13-19 for further
discussion) offset by a $4.5 million gain on business divestitures. The gain in
2001 included a gain on the sale of real property offset by certain asset
impairments (see Note 3 on page 13-19 for further discussion). The loss in 2000
included $8.4 million of business realignment charges offset by $6.4 million of
income realized on the sale of real property.
Income taxes increased to an effective rate of 40.3 percent in 2002, compared to
35.5 percent in 2001 and 34.5 percent in 2000. The increase in the rate from
2001 to 2002 was primarily due to the nondeductibility of a substantial portion
of the goodwill impairment loss and the equity investment adjustment. The
increase in the rate from 2000 to 2001 was primarily the result of the
nondeductibility of goodwill acquired in recent acquisitions.
Extraordinary item - extinguishment of debt - In February 2001 the Company
redeemed all of its outstanding $100 million, 9.75 percent debentures due
2002-2021.
Net income of $130.2 million for 2002 was 61.8 percent lower than 2001. Net
income of $340.8 million for 2001 was 7.5 percent lower than 2000. Net income as
a percentage of sales was 2.1 percent in 2002, compared to 5.7 percent in 2001
and 6.8 percent in 2000. In addition to the individual income statement items
discussed above, net income in 2002 was adversely effected by an additional
expense of approximately $23.5 million related to domestic qualified defined
benefit plans. The increase in expense associated with the Company's domestic
qualified defined benefit plans results from a lower market value of plan
assets. Net income in 2003 is expected to be adversely effected by an additional
$23 million over the 2002 expense for domestic qualified defined benefit plans.
Other comprehensive income (loss) - Items included in other comprehensive income
(loss) include gains and losses that under generally accepted accounting
principles are recorded directly into stockholders' equity. The Company's items
of comprehensive income (loss) include foreign currency translation adjustments,
unrealized gains or losses on marketable equity securities and in 2002 included
a minimum pension liability. The effect of currency rate changes resulted in an
increase in shareholders' equity of $69.7 million in 2002 compared to decreases
of $89.7 million and $32.6 million in 2001 and 2000, respectively. The change in
2002 resulted primarily from a weaker U.S. dollar against the Euro. In 2002 a
minimum pension liability of $172.3 million ($107.6 after-tax) was recorded in
comprehensive income in accordance with the requirements of SFAS No. 87 (see
Note 10 on page 13-25 for further discussion).
Discussion of Business Segment Information
The Business Segment information presents sales, operating income and assets on
a basis that is consistent with the manner in which the Company's various
businesses are managed for internal review and decision-making. See Note 1 on
page 13-15 for a description of the Company's reportable business segments.
Industrial Segment
2002 2001 2000
- ---------------------------------------------
Operating income as a
percent of sales 4.8% 9.8% 12.7%
Return on average assets 5.3% 12.9% 17.7%
- ---------------------------------------------
Sales for the Industrial North American operations were $2.79 billion in 2002, a
5.1 percent decline from 2001, following an increase in 2001 of 18.3 percent
over 2000. Without acquisitions, 2002 sales would have declined 15.4 percent
from 2001 and 2001 sales would have declined 8.1 percent from 2000. Without
acquisitions, sales in 2002 reflect the continuation of the lower demand that
began in 2001 in virtually all markets. Markets affected more than others in
2002 included semi-conductor manufacturing, telecommunications, heavy-duty
trucks and factory automation. Sales in 2001 reflect lower demand within most of
the Industrial North American markets, particularly in the heavy-duty trucks,
agriculture, factory automation and machine tool markets. However, some overall
growth was experienced in the semi-conductor manufacturing, oil and gas and
petrochemical markets.
Industrial International sales in 2002 remained unchanged from 2001 at $1.28
billion, following an increase of 8.5 percent in 2001 over 2000. Without
acquisitions, 2002 sales would have declined 7.0 percent from 2001 and 2001
sales would have remained unchanged from 2000. Currency rates negatively
impacted sales in 2002 by $26.7 million and $144.0 million in 2001. Without the
effect of acquisitions and currency rates, sales declined in 2002 as a result of
lower volume experienced across virtually all of the Industrial International
businesses in Europe and the semi-conductor manufacturing businesses in the Asia
Pacific region. The increase in sales in 2001 reflects higher volume in
virtually all businesses in Europe, the Asia Pacific region and Latin America.
Page 13-3
Industrial North American operating income was $141.3 million, a decline of 56.2
percent from 2001, following a decline in 2001 of 14.9 percent from 2000. Income
from operations as a percent of sales was 5.1 percent in 2002 compared to 11.0
percent in 2001 and 15.3 percent in 2000. Operating income in 2002 and 2001
included $8.9 million and $13.2 million, respectively, in business realignment
charges taken in response to current economic conditions. The business
realignment charges consisted primarily of severance costs. Operating income in
2001 and 2000 included goodwill amortization of $31.1 million and $11.2 million,
respectively. Excluding the business realignment charges and goodwill
amortization, income from operations as a percent of sales was 5.4 percent in
2002 compared to 12.5 percent in 2001 and 15.7 percent in 2000. Margins in 2002
were adversely affected by manufacturing inefficiencies and the excess capacity
resulting from the lower sales volume experienced across virtually all markets,
with a significant decline in sales volume experienced by historically higher
margin businesses. The lower margins in 2001 reflected lower demand, which
resulted in the underabsorption of overhead costs, as well as pricing pressure
experienced throughout most of the Industrial North American markets. Current
year acquisitions, not yet fully integrated, also negatively impacted margins in
both 2002 and 2001.
Industrial International operating income was $55.7 million, a decline of 39.8
percent from 2001, following an increase of 9.8 percent in 2001 from 2000.
Income from operations as a percent of sales was 4.4 percent in 2002 compared to
7.3 percent in 2001 and 7.2 percent in 2000. Operating income in 2002 and 2001
included $9.7 million and $5.9 million, respectively, of business realignment
charges that were taken primarily to appropriately structure the European
operations. Also included in 2002 income from operations is a $5.0 million
charge related to an equity investment in a publicly traded Japanese company
with whom the Company has established an alliance. Operating income in 2001 and
2000 included goodwill amortization of $12.4 million and $11.3 million,
respectively. Excluding the business realignment charges, the equity investment
adjustment and goodwill amortization, income from operations as a percent of
sales was 5.5 percent in 2002 compared to 8.7 percent in 2001 and 8.1 percent in
2000. In 2002 lower margins were earned across most businesses in Europe and the
Asia Pacific region due to the lower sales volume and the resulting
underabsorption of overhead costs. The higher margins in 2001 were the result of
the higher volume and better capacity utilization experienced across most
International businesses partially offset by lower margins contributed by recent
acquisitions, not yet fully integrated.
Industrial Segment order rates were sequentially lower from 2001 levels in
virtually all markets. The Company expects order entry levels in the Industrial
North American operations to be relatively flat in the first half of fiscal 2003
with a pronounced increase in order rates anticipated to occur in the second
half of fiscal 2003. The improvement in order rates is expected to occur in the
semi-conductor manufacturing, agriculture, construction, heavy-duty trucks and
machine tool markets. Industrial European operations in 2003 are anticipated to
track closely with the Industrial North American operations with improvements in
profitability stemming from the business realignment actions taken in 2002. The
Asia Pacific region and Latin American operations are expected to continue to
improve as the Company continues to expand its operations into these markets.
The Latin American and Asia Pacific markets expected to improve in 2003 include
semi-conductor manufacturing, machine tools, construction and petrochemical. The
extent of any improvement in Latin America will be affected by the economic
uncertainties in Argentina and Brazil. The Company expects to record additional
business realignment costs of approximately $23 million in 2003 as part of the
finalization of the realignment actions commenced in 2002.
Backlog for the Industrial Segment was $688.8 million at June 30, 2002, compared
to $667.9 million at the end of 2001 and $650.8 million at the end of 2000. The
increase in backlog from 2001 to 2002 is attributable to acquisitions partially
offset by lower order rates experienced across most Industrial markets
throughout 2002. The modest increase in backlog in 2001 was due primarily to
acquisitions.
Assets for the Industrial Segment increased 11.5 percent in 2002 after an
increase of 22.1 percent in 2001. A decrease in property plant and equipment
resulting from depreciation exceeding capital expenditures and a reduction of
inventory in response to lower product demand was more than offset by the
addition of assets from acquisitions and the effect of currency fluctuations.
The increase in 2001 was primarily due to acquisitions partially offset by the
effect of currency fluctuations.
Aerospace Segment
2002 2001 2000
- ---------------------------------------------
Operating income as a
percent of sales 16.1% 18.2% 15.4%
Return on average assets 27.2% 30.8% 23.4%
- ---------------------------------------------
Page 13-4
Sales for the Aerospace operations were $1.17 billion in 2002, a 2.7 percent
decline from 2001, following an increase in 2001 of 5.9 percent over 2000. The
lower sales in 2002 reflect the slowdown in activity in both the commercial
original equipment and aftermarket businesses as commercial airline carriers
delayed shipments of new aircraft and required fewer replacement parts for
existing aircraft. Partially offsetting the sales decline was an increase in the
military original equipment and aftermarket businesses. The higher sales in 2001
resulted from the continued increase in regional jet build rates and
maintenance, repair and overhaul business as well as an increase in commercial
aircraft builds.
Aerospace operating income was $189.4 million in 2002, $218.9 million in 2001
and $175.7 million in 2000. Included in operating income in 2002 and 2000 were
$4.7 million and $4.4 million, respectively, in business realignment charges
primarily related to severance costs as the workforce was adjusted in response
to declining commercial aircraft orders. Operating income in 2001 and 2000 also
included goodwill amortization of $7.8 million and $7.7 million, respectively.
Excluding the business realignment charges and goodwill amortization, operating
income as a percent of sales, was 16.5 percent in 2002 compared to 18.8 percent
in 2001 and 16.5 percent in 2000. The lower margins in 2002 resulted from a
lower mix of higher margin aftermarket business as well as the overall lower
sales volume, resulting in lower capacity utilization. The increase in margins
in 2001 resulted from a higher mix of aftermarket business as well as an
increase in OEM volume.
Backlog at June 30, 2002 was $1.01 billion compared to $1.21 billion in 2001 and
$1.05 billion in 2000. The lower backlog in 2002 reflects the slowdown in order
rates in the commercial aircraft and regional jet market, particularly in the
latter part of 2002. The higher backlog in 2001 reflects an increase in
commercial aircraft build rates and orders in the regional jet market. The
downward trend in commercial order rates experienced in the latter part of 2002
is expected to continue throughout 2003 as commercial airline carriers continue
to delay orders for new aircraft. Order rates in the military market are
expected to remain steady in 2003.
Assets declined 4.4 percent in 2002 after remaining the same in 2001 from the
2000 level. The decline in 2002 was primarily due to a decline in accounts
receivable resulting from the lower sales volume. In 2001, an increase in net
plant and equipment and accounts receivable was offset by a decline in inventory
and net goodwill.
Other Segment
2002 2001 2000
- ---------------------------------------------
Operating income as a
percent of sales 6.0% 7.4% 8.0%
Return on average assets 11.3% 11.7% 15.0%
- ---------------------------------------------
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 2002, the Other Segment also included
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. These two business units were classified as
assets held for sale prior to 2002. In June 2002 the Company divested the
businesses which administer vehicle service contract programs and
product-related service programs.
Other Segment sales in 2002 were $905.5 million, a 62.6 percent increase from
2001, following a decline in 2001 of 4.8 percent from 2000. Acquisitions and the
inclusion of sales from businesses previously classified as assets held for sale
accounted for all of the sales increase from 2001 to 2002. Sales in 2001
reflected lower volume experienced in the automotive market. Operating income
increased 31.8 percent in 2002 following a decline in 2001 of 12.0 percent from
2000. Operating income in 2002 includes $4.7 million of business realignment
charges. Operating income included goodwill amortization of $4.3 million in both
2001 and 2000. Excluding the business realignment charges and goodwill
amortization, income from operations as a percent of sales was 6.6 percent in
2002 compared to 8.5 percent in 2001 and 8.8 percent in 2000. The decline in
margins in 2002 was attributable to recent acquisitions and businesses
previously classified as assets held for sale, which have not yet been fully
integrated, contributing lower margins. The decline in operating margins in 2001
was attributable to the lower volume and pricing pressure.
Backlog was $164.3 million at June 30, 2002, compared to $109.1 million at the
end of 2001 and $100.2 million at the end of 2000. The increase in 2002 is
attributable to acquisitions as well as an increase in order rates in the
automotive market. Order rates in the Other Segment in 2003 are anticipated to
track those of the Industrial Segment.
Assets increased 47.5 percent in 2002 after an increase of 22.9 percent in 2001.
The increase in assets in 2002 and 2001 was due to acquisitions and the
inclusion of assets from businesses previously classified as held for sale.
Corporate assets declined 20.3 percent in 2002 and declined 2.8 percent in 2001.
The 2001 amount included assets from businesses previously classified as held
for sale.
Page 13-5
Discussion of Consolidated Balance Sheet
The Consolidated Balance Sheet shows the Company's financial position at
year-end, compared with the previous year end. This statement provides
information to assist in assessing factors such as the Company's liquidity and
financial resources.
The effect of currency rate changes during the year caused a $69.7 million
increase in Shareholders' equity. These rate changes also caused significant
increases in accounts receivable, inventories, goodwill, plant and equipment,
accounts payable, various accrual accounts and long-term debt.
Working capital and the current ratio were as follows:
Working Capital (millions) 2002 2001
- --------------------------------------------
Current Assets $2,236 $2,196
Current Liabilities 1,360 1,413
Working Capital 876 783
Current Ratio 1.64 1.55
- --------------------------------------------
Accounts receivable are primarily receivables due from customers for sales of
product ($923.1 million at June 30, 2002, compared to $810.7 million at June 30,
2001). The current year increase in accounts receivable is primarily due to
acquisitions, partially offset by a decrease in volume experienced during the
second half of 2002 in the Aerospace operations. Days sales outstanding for the
Company increased to 50 days in 2002 from 49 days in 2001. The increase in the
allowance for doubtful accounts in 2002 is primarily due to receivables obtained
through acquisitions.
Inventories increased to $1,052.0 million at June 30, 2002, compared to $1,008.9
million a year ago. The increase was primarily due to acquisitions, partially
offset by a concerted effort to reduce inventory levels in the Industrial North
American operations. Days supply of inventory on hand decreased to 87 days in
2002 from 99 days in 2001.
Net assets held for sale in 2001 represents the estimated net cash proceeds and
estimated net earnings during the holding period of the metal forming business,
which was acquired as part of the Commercial Intertech transaction, and the
specialty chemical and warranty businesses, which were acquired as part of the
Wynn's transaction. In 2002 the Company completed the divestiture of the metal
forming business and the warranty businesses. During 2002, the net assets of the
specialty chemical business were reclassified into their respective individual
line items on the balance sheet.
Plant and equipment, net of accumulated depreciation, increased $148.3 million
in 2002 as a result of acquisitions, partially offset by depreciation expense
exceeding capital expenditures.
Investments and other assets increased $54.0 million in 2002 primarily due to a
net change in assets related to pension plans, including an intangible asset
relating to a minimum pension liability, as well as an initial investment in a
joint venture.
Goodwill increased $130.1 million in 2002 as a result of acquisitions. Effective
July 1, 2001 the Company adopted SFAS No. 142 and therefore further amortization
of goodwill has been discontinued.
Intangible assets, net consist primarily of patents, trademarks and engineering
drawings. Intangible assets, net increased $42.2 million in 2002 primarily due
to current-year acquisitions.
Notes payable and long-term debt payable within one year and Long-term debt -
see Cash Flows from Financing Activities discussion on page 13-7.
Accounts payable, trade increased $75.7 million in 2002 primarily due to
acquisitions.
Accrued payrolls and other compensation increased to $187.0 million in 2002 from
$173.6 million 2001 primarily as a result of increased headcount from
acquisitions.
Accrued domestic and foreign taxes decreased to $48.3 million in 2002 from $61.9
million in 2001 primarily due to lower taxable income in 2002.
Pensions and other postretirement benefits increased 59.6 percent in 2002. These
costs are explained further in Note 10 to the Consolidated Financial Statements.
Deferred income taxes decreased $54.8 million in 2002 primarily due to the tax
effect related to a minimum pension liability in 2002.
Other liabilities increased to $135.1 million in 2002 from $88.3 million in 2001
primarily due to the reclassification of net assets previously held for sale.
Common stock in treasury decreased to $3.6 million in 2002 from $3.9 million in
2001.
Page 13-6
Discussion of Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows reflects cash inflows and outflows from
the Company's operating, investing and financing activities.
Cash and cash equivalents increased $22.8 million in 2002 after decreasing $44.9
million in 2001.
Cash Flows From Operating Activities - The Company's largest source of cash
continues to be net cash provided by operating activities. Net cash provided by
operating activities in 2002 was $631.0 million compared to $532.2 million in
2001 and $538.0 million in 2000. The increase in net cash provided by operating
activities in 2002 is primarily due to an increase in working capital and an
increase in non-cash expenses, primarily related to goodwill and asset
impairments partially offset by a reduction in net income in 2002.
Cash Flows Used In Investing Activities - Net cash used in investing activities
was $608.7 million in 2002 compared to $819.8 million in 2001 and $579.7 million
in 2000. The significant decrease in the amount of cash used in investing
activities in 2002 is attributable to a reduction in acquisition activity as
well as a reduction in capital expenditures. The reduction of capital
expenditures in 2002 can be attributed to a decline in product demand, the
consolidation of manufacturing facilities and lean manufacturing initiatives.
The Company made a number of strategic acquisitions during 2002 but the size of
the acquired companies was substantially smaller than those acquired in 2001.
Refer to Note 2 on page 13-18 for a summary of net assets of acquired companies
at their respective acquisition dates.
Cash Flows From Financing Activities - Net cash used in investing activities was
$0.8 million in 2002 compared to providing cash of $244.1 million in 2001 and
$80.9 million in 2000. In 2002 the Company increased its outstanding borrowings
by a net total of $61.7 million compared to an increase of $308.1 million in
2001. The lower borrowing level in 2002 was due to the increase in cash flows
generated from operating activities as well as the decline in acquisition
activity and capital expenditure requirements.
During 2002 the Company issued $200 million of variable rate medium-term notes
due 2004 utilizing its shelf registration statement. The proceeds from this
issuance were used to reduce commercial paper note borrowings. The Company has
$1.0 billion available under its universal shelf registration statement as of
June 30, 2002. Securities that may be issued under this shelf registration
statement include debt securities, common stock, serial preferred stock,
depositary shares, warrants, stock purchase contracts and stock purchase units.
The Company's goal is to maintain no less than an "A" rating on senior debt to
ensure availability and reasonable cost of external funds. To meet this
objective, the Company has established a financial goal of maintaining a ratio
of debt to debt-equity of 34 to 37 percent.
Debt to Debt-Equity Ratio (millions) 2002 2001
- ------------------------------------------------------
Debt $1,506 $1,404
Debt & Equity 4,089 3,932
Ratio 36.8% 35.7%
- ------------------------------------------------------
Excluding the effect of the minimum pension liability on Shareholders' equity,
the debt to debt-equity ratio at June 30, 2002 was 35.9 percent.
Common share activity in 2002 primarily includes the exercise of stock options
and purchase of shares of the Company's common stock for treasury.
Dividends have been paid for 208 consecutive quarters, including a yearly
increase in dividends for the last 46 fiscal years. The current annual dividend
rate is $.72 per share.
As of June 30, 2002 the Company has committed lines of credit totaling $825
million through two multi-currency unsecured revolving credit agreements. The
credit agreements support the Company's commercial paper note program, which is
rated A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch, Inc. The
revolving credit agreements contain provisions that increase the facility fee of
the credit agreement in the event the Company's credit ratings are changed. A
credit rating change would not limit the Company's ability to the use the credit
agreements nor would it accelerate the repayment of any outstanding borrowings.
The Company seeks to minimize its total cost of borrowing and therefore uses its
commercial paper note program as its primary source of working capital
liquidity. The primary alternative source of borrowing for working capital
liquidity is the committed lines of credit which typically bear a higher cost of
borrowing.
The Company's revolving credit agreements and certain debt agreements contain
certain financial and other covenants, the violation of which would limit or
preclude the use of the agreements for future borrowings. The Company is in
compliance with all covenants and expects to remain in compliance during the
term of the agreements.
Page 13-7
Based upon the Company's past performance and current expectations, management
believes the cash flows generated from future operating activities should
provide adequate funds to support internal growth and continued improvements in
the Company's manufacturing facilities and equipment. The Company's worldwide
financial capabilities may be used to support planned growth as needed.
Cash Obligations - Under various agreements the Company is obligated to make
future cash payments in fixed amounts. These include payments under the
Company's long-term debt agreements and rent payments required under operating
lease agreements. The following table summarizes the Company's fixed cash
obligations as of June 30, 2002 over the next five fiscal years.
- ---------------------- ------- -------- ------- -------- -------
In thousands 2003 2004 2005 2006 2007
- ---------------------- ------- -------- ------- -------- -------
Long-term debt $19,810 $397,841 $15,863 $317,447 $37,471
Minimum lease payments 52,463 38,218 25,755 13,645 10,574
- ---------------------- ------- -------- ------- -------- -------
Total $72,273 $436,059 $41,618 $331,092 $48,045
- ---------------------- ------- -------- ------- -------- -------
Quantitative and Qualitative Disclosures About Market Risk
The Company enters into forward exchange contracts, costless collar contracts
and cross-currency swap agreements to reduce its exposure to fluctuations in
related foreign currencies. The total carrying and fair value of open contracts
and any risk to the Company as a result of these arrangements is not material to
the Company's financial position, liquidity or results of operations.
The Company's debt portfolio contains variable rate debt, inherently exposing
the Company to interest rate risk. The Company's objective is to maintain a
60/40 mix between fixed rate and variable rate debt thereby limiting its
exposure to changes in near term interest rates. In addition, the Company has
entered into an interest rate swap agreement for a $200 million notional
principal amount. The agreement is with a major financial institution and the
risk of loss is considered remote. The carrying value and fair value of the swap
agreement is not material to the Company's financial position, liquidity or
results of operations. A 100 basis point increase in near-term interest rates
would increase annual interest expense on variable rate debt by approximately
$6.0 million.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The policies discussed below are considered
by management to be more critical than other policies because their application
places the most significant demands on management's judgment.
Revenue recognition - Substantially all of the Industrial Segment and Other
Segment revenues are recognized when the risks and rewards of ownership and
title to the product has transferred to the customer. This generally takes place
at the time the product is shipped. The Aerospace Segment uses the percentage of
completion method to recognize a portion of its revenue. The percentage of
completion method requires the use of estimates of costs to complete long-term
contracts and for some contracts, includes estimating costs related to
aftermarket orders. The estimation of these costs requires substantial judgment
on the part of management due to the duration of the contracts as well as the
technical nature of the products involved. Adjustments to estimated costs are
made on a consistent basis and a contract reserve is established when the costs
to complete a contract exceed the contract revenues.
Impairment of Goodwill and Long-lived Assets- Goodwill is tested for impairment,
at the reporting unit level, on an annual basis and between annual tests
whenever events or circumstances indicate that the carrying value of a reporting
unit's goodwill may exceed its fair value. A discounted cash flow model is used
to estimate the fair value of a reporting unit. This model requires the use of
long-term planning forecasts and assumptions regarding industry specific
economic conditions that are outside the control of the Company. Long-lived
assets held for use are evaluated for impairment whenever events or
circumstances indicate that the undiscounted net cash flows to be generated by
their use and eventual disposition is less than their carrying value. The
long-term nature of these assets require the estimation of its cash inflows and
outflows several years into the future and only takes into consideration
technological advances known at the time of the impairment test.
Page 13-8
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined on the last-in, first-out basis for a majority of U.S. inventories
and on the first-in, first-out basis for the balance of the Company's
inventories. Inventories have been reduced by an allowance for excess and
obsolete inventories. The estimated allowance is based on management's review of
inventories on hand compared to estimated future usage and sales.
Pensions and Postretirement Benefits Other Than Pensions - The annual net
periodic expense and benefit obligations related to the Company's defined
benefit plans are determined on an actuarial basis. This determination requires
critical assumptions regarding the discount rate, long-term return on plan
assets, increases in compensation levels, amortization periods for actuarial
gains and losses and health care cost trends. The assumptions used are reviewed
periodically by management in consultation with the Company's outside actuary.
Changes in the assumptions to reflect actual experience could result in a
material change in the annual net periodic expense and benefit obligations
reported in the financial statements.
Other Loss Reserves - The Company has a number of loss exposures incurred in the
ordinary course of business such as environmental claims, product liability,
litigation, recoverability of deferred income tax benefits and accounts
receivable reserves. Establishing loss reserves for these matters requires
management's estimate and judgment with regards to risk exposure and ultimate
liability or realization. These loss reserves are reviewed periodically and
adjustments are made to reflect the most recent facts and circumstances.
Recently Issued Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting for obligations associated with the retirement of tangible
long-lived assets. SFAS No. 143 requires that the fair value of a liability for
an asset's retirement obligation be recognized in the period in which it is
incurred and capitalized as part of the carrying amount of the long-lived asset
and is effective for fiscal years beginning after June 15, 2002. In August 2001
the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
is effective for fiscal years beginning after December 15, 2001. In May 2002 the
FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
primarily requires that gains or losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria of APB Opinion
No. 30 and is effective for fiscal years beginning after May 15, 2002. In July
2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and is effective for exit or disposal activities initiated after
December 31, 2002. The implementation of these accounting pronouncements is not
expected to have a material effect on the Company's results of operations, cash
flows or financial position.
Page 13-9
Consolidated Statement of Income
For the years ended June 30,
------------------------------------
(Dollars in thousands, except per share amounts) 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Net sales $6,149,122 $5,979,604 $5,385,618
Cost of sales 5,116,570 4,728,156 4,186,850
- ----------------------------------------------------------------------------------------------
Gross profit 1,032,552 1,251,448 1,198,768
Selling, general and administrative expenses 686,485 679,963 575,906
Goodwill impairment loss (Note 7) 39,516
Interest expense 82,484 90,362 59,183
Interest and other (income), net (2,483) (4,800) (4,112)
Loss (gain) on disposal of assets 8,514 (47,673) 5,604
- ----------------------------------------------------------------------------------------------
Income before income taxes 218,036 533,596 562,187
Income taxes (Note 4) 87,886 189,426 193,955
- ----------------------------------------------------------------------------------------------
Income before extraordinary item 130,150 344,170 368,232
Extraordinary item - extinguishment of debt (Note 9) (3,378)
- ----------------------------------------------------------------------------------------------
Net income $ 130,150 $ 340,792 $ 368,232
- ----------------------------------------------------------------------------------------------
Earnings per share (Note 5)
Basic earnings per share before extraordinary item $ 1.13 $ 3.01 $ 3.34
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------
Basic earnings per share $ 1.13 $ 2.98 $ 3.34
- ----------------------------------------------------------------------------------------------
Diluted earnings per share before extraordinary item $ 1.12 $ 2.99 $ 3.31
Extraordinary item - extinguishment of debt (.03)
- ----------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.12 $ 2.96 $ 3.31
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Comprehensive Income
For the years ended June 30,
-------------------------------
(Dollars in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Net income $ 130,150 $340,792 $368,232
Other comprehensive income (loss), net of taxes (Note 11):
Foreign currency translation adjustment 69,673 (89,659) (32,600)
Minimum pension liability (107,563)
Net unrealized (loss) gain on marketable equity securities (5,076) 10,586
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 87,184 $261,719 $335,632
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Page 13-10
Business Segment Information
By Industry
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Net sales:
Industrial:
North America $2,792,315 $2,941,697 $2,486,372
International 1,278,694 1,275,516 1,175,880
Aerospace 1,172,608 1,205,624 1,138,328
Other 905,505 556,767 585,038
- --------------------------------------------------------------------------------------------------------------
$6,149,122 $5,979,604 $5,385,618
==============================================================================================================
Segment operating income (a):
Industrial:
North America $ 141,314 $ 322,786 $ 379,251
International 55,749 92,561 84,317
Aerospace 189,353 218,851 175,710
Other 54,643 41,451 47,084
- --------------------------------------------------------------------------------------------------------------
Total segment operating income 441,059 675,649 686,362
Corporate administration 73,335 85,738 58,210
- --------------------------------------------------------------------------------------------------------------
Income before interest expense and other 367,724 589,911 628,152
Interest expense 82,484 90,362 59,183
Other expense (income) 67,204 (34,047) 6,782
- --------------------------------------------------------------------------------------------------------------
Income before income taxes $ 218,036 $ 533,596 $ 562,187
==============================================================================================================
Pro forma segment operating income excluding goodwill amortization (b):
Industrial:
North America $ 141,314 $ 353,842 $ 390,458
International 55,749 104,930 95,665
Aerospace 189,353 226,651 183,370
Other 54,643 45,798 51,362
- --------------------------------------------------------------------------------------------------------------
Total segment operating income 441,059 731,221 720,855
Corporate administration 73,335 85,738 58,210
- --------------------------------------------------------------------------------------------------------------
Income before interest expense and other 367,724 645,483 662,645
Interest expense 82,484 90,362 59,183
Other expense (income) 67,204 (38,057) 4,801
- --------------------------------------------------------------------------------------------------------------
Income before income taxes $ 218,036 $ 593,178 $ 598,661
==============================================================================================================
Identifiable assets:
Industrial $3,932,864 $3,528,652 $2,889,895
Aerospace 679,371 710,555 709,731
Other 575,439 390,006 317,462
- --------------------------------------------------------------------------------------------------------------
5,187,674 4,629,213 3,917,088
Corporate (c) 564,909 708,448 729,211
- --------------------------------------------------------------------------------------------------------------
$5,752,583 $5,337,661 $4,646,299
==============================================================================================================
Property additions (d):
Industrial $ 295,139 $ 412,042 $ 307,360
Aerospace 20,266 37,152 20,720
Other 47,112 14,935 22,291
Corporate 4,679 12,030 --
- --------------------------------------------------------------------------------------------------------------
$ 367,196 $ 476,159 $ 350,371
==============================================================================================================
Depreciation:
Industrial $ 183,917 $ 160,577 $ 126,377
Aerospace 19,806 19,729 21,342
Other 21,926 16,262 15,701
Corporate 5,586 3,702 3,936
- --------------------------------------------------------------------------------------------------------------
$ 231,235 $ 200,270 $ 167,356
==============================================================================================================
Page 13-11
By Geographic Area (e)
(Dollars in thousands) 2002 2001 2000
- -------------------------------------------------------------
Net sales:
North America $4,567,370 $4,561,217 $4,075,865
International 1,581,752 1,418,387 1,309,753
- -------------------------------------------------------------
$6,149,122 $5,979,604 $5,385,618
=============================================================
Long-lived assets:
North America $1,249,767 $1,186,834 $ 969,788
International 447,198 361,854 371,127
- -------------------------------------------------------------
$1,696,965 $1,548,688 $1,340,915
=============================================================
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The accounting policies of the business segments are the same as those described
in the Significant Accounting Policies footnote except that the business segment
results are prepared on a management basis that is consistent with the manner in
which the Company disaggregates financial information for internal review and
decision-making.
(a) Income before income taxes for 2001 and 2000 includes goodwill amortization
of $59,582 ($31,056 in Industrial North America; $12,369 in Industrial
International; $7,800 in Aerospace; $4,347 in Other; and $4,010 in Other
expense (income)) and $36,474 ($11,207 in Industrial North America; $11,348
in Industrial International; $7,660 in Aerospace; $4,278 in Other; and
$1,981 in Other expense (income)), respectively.
(b) Amounts for 2001 and 2000 exclude goodwill amortization, reflecting the
Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
(c) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, benefit plan assets, headquarters
facilities, assets held for sale and the major portion of the Company's
domestic data processing equipment.
(d) Includes value of net plant and equipment at the date of acquisition of
acquired companies accounted for by the purchase method and the
reclassification of assets previously held for sale (2002 - $160,632; 2001
- $141,411; 2000 - $119,889).
(e) Net sales are attributed to countries based on the location of the selling
unit. North America includes the United States, Canada and Mexico. No
country other than the United States represents greater than 10% of
consolidated sales. Long-lived assets are comprised of property, plant and
equipment based on physical location.
Page 13-12
Consolidated Balance Sheet
June 30,
-----------------------
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 46,384 $ 23,565
Accounts receivable, less allowance for doubtful accounts
(2002 - $15,396; 2001 - $11,110) 1,006,313 922,325
Inventories (Notes 1 and 6):
Finished products 531,821 495,704
Work in process 353,410 344,861
Raw materials 166,737 168,299
- -------------------------------------------------------------------------------------------------------------
1,051,968 1,008,864
Prepaid expenses 48,532 39,486
Deferred income taxes (Notes 1 and 4) 82,421 91,439
Net assets held for sale (Note 2) -- 110,683
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 2,235,618 2,196,362
Plant and equipment (Note 1):
Land and land improvements 167,915 152,723
Buildings and building equipment 873,152 753,909
Machinery and equipment 2,245,295 1,975,996
Construction in progress 67,896 123,436
- -------------------------------------------------------------------------------------------------------------
3,354,258 3,006,064
Less accumulated depreciation 1,657,293 1,457,376
- -------------------------------------------------------------------------------------------------------------
1,696,965 1,548,688
Investments and other assets (Note 1) 675,877 621,904
Goodwill (Notes 1 and 7) 1,083,768 953,648
Intangible assets, net (Notes 1 and 7) 51,286 9,067
Deferred income taxes (Notes 1 and 4) 9,069 7,992
- -------------------------------------------------------------------------------------------------------------
Total Assets $5,752,583 $5,337,661
=============================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable and long-term debt payable within one year (Notes 8 and 9) $ 416,693 $ 546,502
Accounts payable, trade 443,525 367,806
Accrued payrolls and other compensation 187,037 173,556
Accrued domestic and foreign taxes 48,309 61,874
Other accrued liabilities 264,273 263,391
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,359,837 1,413,129
Long-term debt (Note 9) 1,088,883 857,078
Pensions and other postretirement benefits (Notes 1 and 10) 508,313 318,527
Deferred income taxes (Notes 1 and 4) 76,955 131,708
Other liabilities 135,079 88,304
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 3,169,067 2,808,746
- -------------------------------------------------------------------------------------------------------------
Shareholders' Equity (Note 11)
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
Common stock, $.50 par value, authorized 600,000,000 shares;
issued 118,124,294 shares in 2002 and 117,409,197 shares in 2001 at par value 59,062 58,705
Additional capital 378,918 346,228
Retained earnings 2,473,808 2,426,496
Unearned compensation related to ESOP (Note 9) (79,474) (96,398)
Deferred compensation related to stock options 2,347 2,347
Accumulated other comprehensive (loss) (247,497) (204,531)
- -------------------------------------------------------------------------------------------------------------
2,587,164 2,532,847
Common stock in treasury at cost: 100,130 shares in 2002 and 100,000 shares in 2001 (3,648) (3,932)
- -------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,583,516 2,528,915
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $5,752,583 $5,337,661
=============================================================================================================
The accompanying notes are an integral part of the financial statements.
Page 13-13
Consolidated Statement of Cash Flows
For the years ended June 30,
---------------------------------
(Dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 130,150 $ 340,792 $ 368,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 231,235 200,270 167,356
Amortization 50,363 64,257 39,052
Deferred income taxes 29,095 44,902 (11,867)
Foreign currency transaction loss 5,629 4,159 5,082
Loss (gain) on sale of plant and equipment 12,125 (55,914) (5,288)
Net effect of extraordinary loss 3,378
Changes in assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable 70,993 (6,725) (42,386)
Inventories 111,041 7,865 17,248
Prepaid expenses (4,458) 4,799 (7,881)
Assets held for sale 3,242 43,069
Other assets 2,702 (66,376) (53,105)
Accounts payable, trade (10,956) (43,697) 21,792
Accrued payrolls and other compensation (15,465) (13,586) 8,021
Accrued domestic and foreign taxes (25,356) (6,136) 30,124
Other accrued liabilities 13,038 (10,444) (7,533)
Pensions and other postretirement benefits (3,872) 18,501 3,642
Other liabilities 31,540 3,051 5,551
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 631,046 532,165 538,040
Cash Flows From Investing Activities
Acquisitions (less cash acquired of $3,118 in 2002, $10,143 in 2001
and $1,158 in 2000) (388,315) (583,254) (351,011)
Capital expenditures (206,564) (334,748) (230,482)
Proceeds from sale of plant and equipment 19,849 90,044 32,051
Proceeds from divestitures 3,222
Other (36,910) 8,130 (30,267)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (608,718) (819,828) (579,709)
Cash Flows From Financing Activities
Proceeds from common share activity 20,250 15,971 1,202
(Payments of) proceeds from notes payable, net (146,170) 197,324 272,440
Proceeds from long-term borrowings 235,794 304,172 12,600
(Payments of) long-term borrowings (27,913) (193,409) (130,419)
Dividends paid, net of tax benefit of ESOP shares (82,838) (79,921) (74,963)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (877) 244,137 80,860
Effect of exchange rate changes on cash 1,368 (1,369) (4,008)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22,819 (44,895) 35,183
Cash and cash equivalents at beginning of year 23,565 68,460 33,277
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 46,384 $ 23,565 $ 68,460
==========================================================================================================
Supplemental Data:
Cash paid during the year for:
Interest, net of capitalized interest $ 78,446 $ 84,183 $ 56,341
Income taxes 76,830 183,546 167,211
Non-cash investing activities:
Stock issued for acquisitions 13,081 184,263
==========================================================================================================
The accompanying notes are an integral part of the financial statements.
Page 13-14
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 1
Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are summarized below.
Nature of Operations - The Company is a leading worldwide full-line manufacturer
of motion control products, including fluid power systems, electromechanical
controls and related components. The Company evaluates performance based on
segment operating income before Corporate general and administrative expenses,
Interest expense and Income taxes.
The Company operates in two principal business segments: Industrial and
Aerospace. The Industrial Segment is an aggregation of several business units
which manufacture motion-control and fluid power system components for builders
and users of various types of manufacturing, packaging, processing,
transportation, agricultural, construction, and military machinery, vehicles and
equipment. Industrial Segment products are marketed primarily through field
sales employees and independent distributors. The North American Industrial
business represents the largest portion of the Company's manufacturing plants
and distribution networks and primarily services North America. The
International Industrial operations bring Parker products and services to
countries throughout Europe, Asia Pacific and Latin America.
The Aerospace Segment produces hydraulic, fuel and pneumatic systems and
components which are utilized on virtually every domestic commercial, military
and general aviation aircraft and also performs a vital role in naval vessels,
land-based weapons systems, satellites and space vehicles. This Segment serves
original equipment and maintenance, repair and overhaul customers worldwide.
Aerospace Segment products are marketed by field sales employees and are sold
directly to manufacturers and end users.
The Company also reports an Other Segment consisting of several business units
which manufacture 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. The products in this segment are marketed
primarily through field sales employees and independent distributors. The
business unit which administers vehicle service contract and product service
programs was divested in June 2002 (see Note 2 for further discussion).
See the table of Business Segment Information "By Industry" and "By Geographic
Area" on pages 13-11 and 13-12 for further disclosure of business segment
information.
There are no individual customers to whom sales are four percent or more of the
Company's consolidated sales. Due to the diverse group of customers throughout
the world the Company does not consider itself exposed to any concentration of
credit risks.
The Company manufactures and markets its products throughout the world. Although
certain risks and uncertainties exist, the diversity and breadth of the
Company's products and geographic operations mitigate significantly the risk
that adverse changes would materially affect the Company's operating results.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Basis of Consolidation - The consolidated financial statements include the
accounts of all domestic and foreign subsidiaries. All material intercompany
transactions and profits have been eliminated in the consolidated financial
statements. The Company does not have off-balance sheet arrangements with
unconsolidated special-purpose entities. Within the Business Segment
Information, intersegment and interarea sales are recorded at fair market value
and are immaterial in amount.
Page 13-15
Revenue Recognition - Revenue is recognized when the risks and rewards of
ownership and title to the product has transferred to the customer. The
Company's revenue recognition policies are in compliance with the SEC's Staff
Accounting Bulletin (SAB) No. 101. Shipping and handling costs billed to
customers are included in Net sales and the related costs in Cost of sales.
Cash - Cash equivalents consist of short-term highly liquid investments, with a
three-month or less maturity, carried at cost plus accrued interest, which are
readily convertible into cash.
Inventories - Inventories are stated at the lower of cost or market. The
majority of domestic inventories are valued by the last-in, first-out method and
the balance of the Company's inventories are valued by the first-in, first-out
method.
Long-term Contracts - The Company enters into long-term contracts for the
production of aerospace products and the manufacture of custom-engineered
buildings. For financial statement purposes, revenues are recognized using the
percentage-of-completion method. Unbilled costs on these contracts are included
in inventory. Progress payments are netted against the inventory balances.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Plant, Equipment and Depreciation - Plant and equipment are recorded at cost and
are depreciated principally using the straight-line method for financial
reporting purposes. Depreciation rates are based on estimated useful lives of
the assets, generally 40 years for buildings; 15 years for land improvements and
building equipment; 10 years for machinery; seven years for equipment; and three
to five years for vehicles and office equipment. Improvements which extend the
useful life of property are capitalized, and maintenance and repairs are
expensed. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the appropriate accounts and any gain
or loss is included in current income.
Investments and Other Assets - Investments in joint-venture companies in which
ownership is 50% or less and in which the Company does not have operating
control are stated at cost plus the Company's equity in undistributed earnings.
These investments and the related earnings are not material to the consolidated
financial statements. During 2002 the Company recorded a $4,973 charge ($.04 per
share) related to an equity investment adjustment in a publicly traded Japanese
company. The amount for 2002 includes an intangible asset recognized in
connection with an additional minimum pension liability.
Goodwill - On July 1, 2001 the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" and therefore ceased amortizing goodwill
as of that date. Prior to the adoption of SFAS No. 142, the Company amortized
goodwill, on a straight-line basis, over periods ranging from 15 years to 40
years. The Company conducts a formal impairment test of goodwill on an annual
basis and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying value.
Intangible Assets - Intangible assets primarily include patents, trademarks and
engineering drawings and are recorded at cost and amortized on a straight-line
method over their legal or estimated useful life.
Income Taxes - Income taxes are provided based upon income for financial
reporting purposes. Deferred income taxes arise from temporary differences in
the recognition of income and expense for tax purposes. Tax credits and similar
tax incentives are applied to reduce the provision for income taxes in the year
in which the credits arise.
Foreign Currency Translation - Assets and liabilities of most foreign
subsidiaries are translated at current exchange rates, and income and expenses
are translated using weighted average exchange rates. The effects of these
translation adjustments, as well as gains and losses from certain intercompany
transactions, are reported in the Accumulated other comprehensive (loss)
component of Shareholders' equity. Such adjustments will affect Net income only
upon sale or liquidation of the underlying foreign investments, which is not
contemplated at this time. Exchange gains and losses from transactions in a
currency other than the local currency of the entity involved, and translation
adjustments in countries with highly inflationary economies, are included in Net
income.
Financial Instruments - The Company's financial instruments consist primarily of
investments in cash, cash equivalents and long-term investments as well as
obligations under notes payable and long-term debt. The carrying values for Cash
and cash equivalents, Investments and other assets and Notes payable approximate
fair value. See Note 9 for fair value of long-term debt.
Page 13-16
The Company enters into forward exchange contracts (forward contracts), costless
collar contracts, and cross-currency swap agreements to reduce its exposure to
fluctuations in related foreign currencies. These contracts are with major
financial institutions and the risk of loss is considered remote. The Company
does not hold or issue derivative financial instruments for trading purposes.
Gains or losses on forward contracts that hedge specific transactions are
recognized in Net income, offsetting the underlying foreign currency gains or
losses. Gains or losses on costless collar contracts are recognized in Net
income when the spot rate of the contract falls outside the collar range.
Cross-currency swap agreements are recorded in Long-term debt as
dollar-denominated receivables with offsetting foreign-currency payables. If the
receivables more than offset the payables, the net difference is reclassified to
an asset. Gains or losses are accrued monthly as an adjustment to Net income,
offsetting the underlying foreign currency gains or losses. The differential
between interest to be received and interest to be paid is accrued monthly as an
adjustment to Interest expense.
The Company has entered into an interest rate swap agreement for a $200 million
notional principal amount. The swap agreement converts a portion of variable
rate debt to a fixed rate through 2004. The net payments or receipts under this
agreement are recognized as an adjustment to Interest expense. The agreement is
with a major financial institution and the risk of loss is considered remote.
In addition, the Company's foreign locations, in the ordinary course of
business, enter into financial guarantees, through financial institutions, which
enable customers to be reimbursed in the event of nonperformance by the Company.
The total carrying and fair value of open contracts and any risk to the Company
as a result of the above mentioned arrangements is not material.
Stock Options - The Company applies the intrinsic-value based method to account
for stock options granted to employees or outside Directors to purchase common
shares. The option price equals the market price of the underlying common shares
on the date of grant, therefore no compensation expense is recognized. See Note
12 for additional information on stock options.
Recent Accounting Pronouncements - In June 2001 the Financial Accounting
Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset's retirement obligation be recognized in the period in which it is
incurred and capitalized as part of the carrying amount of the long lived asset
and is effective for fiscal years beginning after June 15, 2002. In August 2001
the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
is effective for fiscal years beginning after December 15, 2001. In May 2002 the
FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
primarily requires that gains or losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria of APB Opinion
30 and is effective for fiscal years beginning after May 15, 2002. In July 2002
the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and is effective for exit or disposal activities initiated after
December 31, 2002. The implementation of these accounting pronouncements is not
expected to have a material effect on the Company's results of operations, cash
flows or financial position.
Reclassifications - Certain prior period amounts have been reclassified to
conform to the current year presentation.
Page 13-17
Note 2
Acquisitions and Net Assets Held for Sale and Divestitures
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
mobile equipment. 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. On October 19, 2001 the
Company acquired the assets of the global fluid management business of Dayco
Industrial from MarkIV/BC Partners. 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. On
May 23, 2002 the Company acquired the assets of Camfil Farr's Engine Air Filter
business (Farr). Farr produces air-intake filtration products for heavy-duty
off-road equipment, marine applications and power generation. Combined annual
sales for these operations, for their most recent fiscal year prior to
acquisition, were approximately $608 million. Total purchase price for these
businesses was approximately $367 million in cash and $13 million in common
stock.
On July 21, 2000 the Company completed the acquisition of Wynn's International,
Inc. (Wynn's). Wynn's is a leading manufacturer of precision-engineered sealing
media for the automotive, heavy-duty truck and aerospace markets. On September
29, 2000 the Company acquired the pneumatics business of Invensys plc, which
specializes in the design and production of equipment and controls for automated
processes. On April 30, 2001 the Company acquired the Miller Fluid Power and
Wilkerson businesses of CKD-Createc. Miller Fluid Power manufactures both
pneumatic and hydraulic cylinders and Wilkerson manufactures a complete line of
compressed air treatment and control products. Combined annual sales for these
operations, for their most recent fiscal year prior to acquisition, were
approximately $713 million. Total purchase price for these businesses was
approximately $506 million in cash and assumed debt of $65 million.
On February 3, 2000 the Company acquired the assets of Dana Corporation's Gresen
Hydraulics business, located in Minneapolis, Minnesota, Sarasota, Florida and
Cachoeirinha, R.S., Brazil, a manufacturer of a wide range of hydraulic pumps,
motors, cylinders, control valves, filters and electronic controls for on- and
off-highway vehicles. On April 11, 2000 the Company completed its merger with
Commercial Intertech Corp. of Youngstown, Ohio with the Company being the
surviving corporation. Commercial Intertech's hydraulics business manufactures
gear pumps and motors, control valves and telescopic cylinders for use on
heavy-duty mobile equipment. On May 30, 2000 the Company acquired the assets of
Whatman's Industrial Filtration Business, based in Haverill, Massachusetts and
Maidstone, United Kingdom, a manufacturer of high quality purification products
and gas generators for a variety of industrial applications. Combined annual
sales for these operations, for their most recent fiscal year prior to
acquisition, were approximately $716 million. Total purchase price for these
businesses was approximately $339 million in cash, 4.3 million shares of common
stock valued at $184 million and assumed debt of $104 million.
These acquisitions were accounted for by the purchase method, and results of
operations are included as of the respective dates of acquisition. The net
assets acquired from acquisitions discussed above and other acquisitions not
specifically discussed above in 2002, 2001 and 2000 are as follows:
Page 13-18
2002 2001 2000
- ---------------------------------------------------------------------
Assets acquired:
Accounts receivable $ 95,436 $ 87,514 $ 72,651
Inventories 101,917 67,904 90,319
Prepaid expenses 1,855 11,730 2,329
Assets held for sale 84,640 164,000
Deferred income taxes 8,713 10,029 27,814
Plant & equipment 151,116 141,411 119,889
Other assets 46,876 12,072 246,915
Goodwill 103,916 383,878 158,230
- ---------------------------------------------------------------------
509,829 799,178 882,147
- ---------------------------------------------------------------------
Liabilities and equity assumed:
Notes payable 9,099 20,926 2,433
Accounts payable 57,421 36,545 41,315
Accrued payrolls 17,483 20,587 18,345
Accrued taxes 638 (5,463) 102,473
Other accrued liabilities 12,462 73,996 56,432
Long-term debt 1,481 53,823 107,195
Pensions and other postretirement
benefits 9,849 2,483 22,964
Deferred income taxes 13,027
Unearned compensation (4,285)
- ---------------------------------------------------------------------
108,433 215,924 346,872
- ---------------------------------------------------------------------
Net assets acquired $401,396 $583,254 $535,275
=====================================================================
Net assets held for sale and divestitures - At June 30, 2001, Net assets held
for sale included the estimated net cash proceeds and estimated earnings during
the holding period 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.
In July 2001 the Company completed the divestiture of the metal forming business
and in June 2002 completed the divestiture of the business units which
administer vehicle service contract and product service programs. The
divestitures resulted in a gain of $4,464 million (no gain after-tax) which is
reflected in (Loss) gain on disposal of assets in the Consolidated Statement of
Income. The net assets of the specialty chemical business were reclassified into
their respective individual line items during fiscal 2002. The results of
operations of the divested businesses were part of the Other Segment for segment
reporting purposes and were immaterial to the consolidated results of operations
of the Company.
Note 3
Charges Related to Business Realignment and Gain on Sale of Real Property
In 2002 the Company recorded a $37,352 charge ($24,466 after-tax or $.21 per
share) related to costs of appropriately structuring its businesses in response
to current and anticipated economic conditions. The business realignment charge
consists of severance costs of $22,578 and $14,774 of costs relating to the
consolidation of manufacturing product lines, primarily asset impairments. The
severance costs are attributable to approximately 1,050 employees in the
Industrial Segment, 440 employees in the Aerospace Segment and 320 employees in
the Other segment. The majority of severance payments have been made with the
remaining payments to be made by the end of fiscal 2003. The asset impairment
portion relates to assets that are in the process of being disposed of and was
calculated as the amount by which the carrying value of the assets exceeded
their estimated selling price. Of the pre-tax amount, $28,002 relates to the
Industrial Segment, $4,667 relates to the Aerospace Segment and $4,683 relates
to the Other Segment. The business realignment charge is presented in the
Consolidated Statement of Income for 2002 in the following captions: $23,977 in
Cost of sales; $3,987 in Selling, general and administrative expenses; and
$9,388 in Loss (gain) on disposal of assets.
Page 13-19
In 2001 the Company recorded a $55,548 gain ($34,662 after-tax or $.30 per
share) realized on the sale of real property located in Southern California. The
property had served as a headquarters and manufacturing locale for the Company's
Aerospace Group and several of its divisions. Such operations have relocated to
other previously owned or leased facilities in the area. The Company does not
currently anticipate additional property sales of this magnitude occurring in
the future. The gain is reflected in the Consolidated Statement of Income in the
Loss (gain) on disposal of assets caption.
In 2001 the Company recorded a $28,724 charge ($18,474 after-tax or $.16 per
share) related to costs of appropriately structuring its businesses in response
to current economic conditions. The business realignment charge includes
severance costs and employee-related benefits of $17,673 and $11,051 of other
costs, primarily certain asset impairments. The severance costs and
employee-related benefits are attributable to approximately 1,436 employees in
the Industrial Segment and 27 employees in the Other Segment. All severance and
employee-related benefit payments were made in fiscal 2002. The asset impairment
portion represents the amount by which the carrying value of the assets exceeded
their estimated future undiscounted cash flows. The business realignment charge
is presented in the Consolidated Statement of Income for 2001 in the following
captions: $12,071 in Cost of sales; $6,691 in Selling, general and
administrative expenses; $3,009 in Interest and other (income), net; and $6,953
in Loss (gain) on disposal of assets.
In 2000 the Company recorded a $8,555 charge ($5,560 after-tax or $.05 per
share) related to the costs of appropriately structuring its businesses to
operate in their current economic environment. The charge primarily related to
severance costs attributable to approximately 250 employees in the Industrial
Segment. As of June 30, 2000, the Company had made all severance payments. A
change in the future utilization of long-lived assets at certain locations
triggered an impairment review of these long-lived assets during 2000. The
Company evaluated the recoverability of the long-lived assets and determined
that the estimated future undiscounted cash flows were below the carrying value
of these assets. Accordingly, the Company recorded a non-cash impairment loss of
$4,875 ($3,169 after-tax or $.03 per share). Of the pre-tax amount, $3,499
relates to the Aerospace Segment and $1,376 relates to the Industrial Segment.
The severance and impairment loss is presented in the Consolidated Statement of
Income for 2000 in the following captions: $2,552 in Cost of sales; $2,476 in
Selling, general and administrative expenses; and $8,402 in Loss (gain) on
disposal of assets.
Note 4
Income Taxes
Income taxes before extraordinary items include the following:
2002 2001 2000
- ---------------------------------------------------
Federal $32,728 $103,215 $140,663
Foreign 26,054 30,791 29,393
State and local 9 10,518 11,099
Deferred 29,095 44,902 12,800
- ---------------------------------------------------
$87,886 $189,426 $193,955
===================================================
A reconciliation of the Company's effective income tax rate to the statutory
Federal rate follows:
2002 2001 2000
- ---------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes .9 1.9 1.5
Export tax benefit (4.3) (2.4) (1.7)
Foreign tax rate difference (1.8) (1.1) (1.1)
Cash surrender of life insurance 2.2 .4 (.4)
Nondeductible goodwill 5.7 2.3 1.2
Other 2.6 (.6)
- ---------------------------------------------------------
Effective income tax rate 40.3% 35.5% 34.5%
=========================================================
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of assets and liabilities. The
differences comprising the net deferred taxes shown on the Consolidated Balance
Sheet at June 30 were as follows:
Page 13-20
2002 2001
- -----------------------------------------------------------
Postretirement benefits $ 60,672 $ (10,951)
Other liabilities and reserves 64,727 66,281
Long-term contracts 15,574 9,046
Operating loss carryforwards 71,221 54,452
Foreign tax credit carryforwards 5,200 8,171
Valuation allowance (62,559) (35,544)
Depreciation and amortization (153,633) (135,502)
Inventory 13,531 12,500
- -----------------------------------------------------------
Net deferred tax asset (liability) $ 14,733 $ (31,547)
===========================================================
Change in net deferred tax asset
(liability):
Provision for deferred tax $ (29,095) $ (44,902)
Items of other comprehensive
income (loss) 67,589 (7,528)
Acquisitions 7,786 18,704
- -----------------------------------------------------------
Total change in net deferred tax $ 46,280 $ (33,726)
===========================================================
At June 30, 2002, the Company recognized tax benefits of $71,221 resulting from
$319,948 in operating loss carryforwards. Some of the loss carryforwards can be
carried forward indefinitely and others can be carried forward from one to 19
years. A valuation allowance has been established due to the uncertainty of
realizing certain operating loss carryforwards. The recognition of any future
tax benefit resulting from the reduction of $35,763 of the valuation allowance
will reduce any goodwill related to the Commercial Intertech acquisition
remaining at the time of the reduction.
Provision has not been made for additional U.S. or foreign taxes on
undistributed earnings of certain international operations as those earnings
will continue to be reinvested. It is not practicable to estimate the additional
taxes, including applicable foreign withholding taxes, that might be payable on
the eventual remittance of such earnings.
Accumulated undistributed earnings of foreign operations reinvested in their
operations amounted to $267,093, $333,796 and $276,481, at June 30, 2002, 2001
and 2000, respectively.
Note 5
Earnings Per Share
Earnings per share have been computed according to SFAS No. 128, "Earnings per
Share." Basic earnings per share is computed using the weighted average number
of shares of common stock outstanding during the year.
Diluted earnings per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the year. Common
share equivalents represent the dilutive effect of outstanding stock options.
The computation of net income per share was as follows:
Page 13-21
2002 2001 2000
- -------------------------------------------------------------------------
Numerator:
Net income applicable
to common shares $ 130,150 $ 340,792 $ 368,232
=========================================================================
Denominator:
Basic - weighted average
common shares 115,408,872 114,304,977 110,330,711
Increase in weighted average
from dilutive effect of
exercise of stock options 651,847 759,470 913,921
- -------------------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 116,060,719 115,064,447 111,244,632
=========================================================================
Basic earnings per share $ 1.13 $ 2.98 $ 3.34
Diluted earnings per share $ 1.12 $ 2.96 $ 3.31
=========================================================================
Note 6
Inventories
Inventories valued on the last-in, first-out cost method were approximately 42%
in 2002 and 44% in 2001 of total inventories. The current cost of these
inventories exceeds their valuation determined on the LIFO basis by $151,329 in
2002 and $147,300 in 2001. Progress payments of $15,720 in 2002 and $18,969 in
2001 are netted against inventories.
Note 7
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 intangible assets be recognized as assets apart from
goodwill. 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 also completed an annual goodwill impairment test required by SFAS No.
142 as well as an additional goodwill impairment test conducted due to a change
in circumstances that indicated that the fair value of a reporting unit may be
lower than its carrying value . Goodwill impairment tests resulted in an
impairment charge of $39,516 million ($37,137 after-tax or $0.32 per share). Of
the impairment charge, $28,354 million was recorded in the Industrial Segment
and $11,162 million was recorded in the Other Segment. The Company used a
discounted cash flow analysis for purposes of estimating the fair value of a
reporting unit. The impairment charge primarily resulted from declining market
conditions and lower future growth potential relative to expectations at the
acquisition date for the reporting units involved.
The following reflects net income and earning per share adjusted as though the
adoption of SFAS No. 142 occurred as of the beginning of fiscal 2001 and 2000:
Net income 2002 2001 2000
- --------------------------------------------------------------------
As reported $130,150 $340,792 $368,232
Goodwill amortization 51,206 30,434
- --------------------------------------------------------------------
Adjusted net income $130,150 $391,998 $398,666
====================================================================
Page 13-22
Basic earnings per share
- --------------------------------------------------------------------
As reported $ 1.13 $ 2.98 $ 3.34
Goodwill amortization .44 .28
- --------------------------------------------------------------------
Adjusted basic earnings per share $ 1.13 $ 3.42 $ 3.62
====================================================================
Diluted earnings per share
- --------------------------------------------------------------------
As reported $ 1.12 $ 2.96 $ 3.31
Goodwill amortization .44 .27
- --------------------------------------------------------------------
Adjusted diluted earnings per share $ 1.12 $ 3.40 $ 3.58
====================================================================
The changes in the carrying amount of goodwill for the year ended June 30, 2002
are as follows:
Industrial Aerospace Other
Segment Segment Segment Total
- ----------------------------------------------------------------------
Balance June 30, 2001 $769,675 $76,090 $107,883 $ 953,648
Acquisitions 58,707 45,209 103,916
Balance sheet
reclassification 29,757 29,757
Impairment loss (28,354) (11,162) (39,516)
Goodwill adjustments
and other 29,016 126 6,821 35,963
- ----------------------------------------------------------------------
Balance June 30, 2002 $829,044 $76,216 $178,508 $1,083,768
======================================================================
"Balance sheet reclassification" represents the change in the balance sheet
presentation during fiscal 2002 for net assets held for sale. "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.
Intangible assets are amortized on a straight-line method over their legal or
estimated useful life. The following summarizes the gross carrying value and
accumulated amortization for each major category of intangible asset:
June 30, 2002 2001
- ----------------------------------------------------------------------------------------
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
- ----------------------------------------------------------------------------------------
Patents $22,356 $ 9,930 $10,731 $8,920
Trademarks 17,058 644
Engineering drawings and
other 24,576 2,130 7,732 476
- ----------------------------------------------------------------------------------------
Total $63,990 $12,704 $18,463 $9,396
========================================================================================
Total intangible amortization expense in 2002 and 2001 was $3,308 and $511,
respectively. The estimated amortization expense for the five years ending June
30, 2003 through 2007 are $6,165, $6,226, $5,147, $3,837 and $3,417,
respectively.
Page 13-23
Note 8
Financing Arrangements
The Company has committed lines of credit totaling $825,000 through two
multi-currency unsecured revolving credit agreements with a group of banks, of
which $456,850 was available at June 30, 2002. One agreement, totaling $325,000,
expires September 2002, and the other, totaling $500,000, expires September
2006. The interest on borrowings is based upon the terms of each specific
borrowing and is subject to market conditions. These agreements also require
facility fees of up to 9/100ths of one percent of the commitment per annum at
the Company's present rating level. Covenants in some of the agreements include
a limitation on the Company's ratio of debt to total capitalization. It is the
Company's policy to reduce the amount available for borrowing under the
revolving credit agreements, on a dollar for dollar basis, by the amount of
commercial paper notes outstanding.
The Company has other lines of credit, primarily short-term, aggregating
$200,647 from various foreign banks, of which $164,808 was available at June 30,
2002. Most of these agreements are renewed annually.
During fiscal 2002 the Company issued $200,000 of medium-term notes. As of June
30, 2002 the Company has $1,000,000 available under its universal shelf
registration statement.
The Company is authorized to sell up to $825,000 of short-term commercial paper
notes, rated A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch, Inc. At
June 30, 2002 there were $368,150 of commercial paper notes outstanding.
Commercial paper notes, along with short-term borrowings from foreign banks,
primarily make up the balance of Notes payable. The balance and weighted average
interest rate of the Notes payable at June 30, 2002 and 2001 were $396,883 and
3.4% and $526,809 and 5.9%, respectively.
Note 9
Debt
June 30, 2002 2001
- ---------------------------------------------------------------------------
Domestic:
Debentures
7.30%, due 2011 $ 100,000 $100,000
Fixed rate medium-term notes
5.65% to 7.39%, due 2004-2019 370,000 370,000
Variable rate medium-term notes
2.84%, due 2004 200,000
ESOP loan guarantee
6.34%, due 2009 77,354 88,595
Variable rate demand bonds
1.25% to 1.30%, due 2010-2025 20,035 20,035
Foreign:
Bank loans, including revolving credit
1.0% to 13.0%, due 2003-2019 23,655 17,032
Euro Notes
6.25%, due 2006 297,420 255,090
Other long-term debt, including capitalized leases 20,229 26,019
- ---------------------------------------------------------------------------
Total long-term debt 1,108,693 876,771
Less long-term debt payable within one year 19,810 19,693
- ---------------------------------------------------------------------------
Long-term debt, net $1,088,883 $857,078
===========================================================================
In 2002 the Company issued $200,000 of variable rate medium-term notes due 2004.
The Company used the proceeds from the issuance to repay a portion of its
outstanding commercial paper note borrowings. In 2001 the Company redeemed its
outstanding $100,000, 9.75% 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).
Commercial paper note borrowings were used to finance the redemption.
Page 13-24
Principal amounts of Long-term debt payable in the five years ending June 30,
2003 through 2007 are $19,810, $397,841, $15,863, $317,447 and $37,471,
respectively. The carrying value of the Company's Long-term debt (excluding
leases and cross-currency swaps) was $1,101,363 and $868,826 at June 30, 2002
and 2001, respectively, and was estimated to have a fair value of $1,144,466 and
$857,755, at June 30, 2002 and 2001, respectively. The estimated fair value of
the Long-term debt was estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rate for similar types of borrowing
arrangements. Some of the debt agreements include a limitation on the Company's
ratio of debt to tangible net worth.
ESOP loan guarantee - In 1999 the Company's Employee Stock Ownership Plan (ESOP)
was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to
purchase 3,055,413 shares of the Company's common stock from the Company's
treasury. The Company used the proceeds to pay down commercial paper note
borrowings. The loan is unconditionally guaranteed by the Company and therefore
the unpaid balance of the borrowing is reflected on the Consolidated Balance
Sheet as Long-term debt. A corresponding amount representing Unearned
compensation is recorded as a deduction from Shareholders' equity.
Lease Commitments - Future minimum rental commitments as of June 30, 2002, under
noncancelable operating leases, which expire at various dates, are as follows:
2003-$52,463; 2004-$38,218; 2005-$25,755; 2006-$13,645; 2007-$10,574 and after
2007-$26,672.
Rental expense in 2002, 2001 and 2000 was $61,528, $55,989 and $40,371,
respectively.
Note 10
Retirement Benefits
Pensions - The Company has noncontributory defined benefit pension plans
covering eligible employees, including certain employees in foreign countries.
Plans for most salaried employees provide pay-related benefits based on years of
service. Plans for hourly employees generally provide benefits based on
flat-dollar amounts and years of service. The Company also has contractual
arrangements with certain key employees which provide for supplemental
retirement benefits. In general, the Company's policy is to fund these plans
based on legal requirements, tax considerations, local practices and investment
opportunities. The Company also sponsors defined contribution plans and
participates in government-sponsored programs in certain foreign countries.
Pension cost (income) for all plans were $32,004, $(14,503) and $9,304 for 2002,
2001 and 2000, respectively. Pension cost (income) for all defined benefit plans
accounted for using SFAS No. 87, "Employers' Accounting for Pensions," were as
follows:
2002 2001 2000
- ---------------------------------------------------------------------------
Service cost $ 54,886 $ 43,382 $ 38,179
Interest cost 104,152 84,526 68,807
Expected return on plan assets (143,816) (146,908) (102,346)
Net amortization and deferral and other 10,107 1,837 (375)
- ---------------------------------------------------------------------------
Net periodic benefit cost (income) $ 25,329 $ (17,163) $ 4,265
===========================================================================
Change in benefit obligation 2002 2001
- ------------------------------------------------------------------------
Benefit obligation at beginning of year $1,476,445 $1,167,614
Service cost 54,886 43,382
Interest cost 104,152 84,526
Actuarial loss 13,077 27,695
Benefits paid (71,641) (57,031)
Plan amendments 44,460 62,258
Acquisitions 11,522 53,810
Liability transferred from other
postretirement benefits 3,784 117,645
Other 27,143 (23,454)
- ------------------------------------------------------------------------
Benefit obligation at end of year $1,663,828 $1,476,445
========================================================================
Page 13-25
Change in plan assets
- ------------------------------------------------------------------------
Fair value of plan assets at beginning of year $1,439,015 $1,582,085
Actual (loss) on plan assets (73,035) (136,584)
Employer contributions 17,450 14,523
Benefits paid (65,000) (51,495)
Acquisitions 2,026 47,442
Other 17,029 (16,956)
- ------------------------------------------------------------------------
Fair value of plan assets at end of year $1,337,485 $1,439,015
========================================================================
Funded status
- ------------------------------------------------------------------------
Plan assets (under) benefit obligation $ (326,343) $ (37,430)
Unrecognized net actuarial loss 368,421 138,787
Unrecognized prior service cost 118,753 82,867
Unrecognized initial net (asset) (2,566) (4,763)
- ------------------------------------------------------------------------
Net amount recognized $ 158,265 $ 179,461
========================================================================
Amounts recognized on the Consolidated
Balance Sheet
- ------------------------------------------------------------------------
Prepaid benefit cost $ 270,750 $ 362,136
Accrued benefit liability (400,104) (182,675)
Intangible asset 115,242
Accumulated other comprehensive loss 172,377
- ------------------------------------------------------------------------
Net amount recognized $ 158,265 $ 179,461
========================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $1,425,785, $1,262,038 and $1,107,169, respectively, at June
30, 2002, and $763,442, $646,434 and $531,724, respectively, at June 30, 2001.
The plans' assets consist primarily of listed common stocks and corporate and
government bonds. At June 30, 2002 and 2001, the plans' assets included Company
stock with market values of $56,345 and $44,520, respectively.
The assumptions used to measure the benefit obligations for the Company's
significant defined benefit plans are:
2002 2001
- -------------------------------------------------------------
U.S. defined benefit plans
Discount rate 7.25% 7.5%
Average increase in
compensation 4.9% 4.9%
Expected return on plan assets 9.5% 10%
Non-U.S. defined benefit plans
Discount rate 4.5 to 6.75% 4.75 to 7%
Average increase in compensation 3 to 4% 3 to 4%
Expected return on plan assets 5 to 8% 6 to 8.5%
- -------------------------------------------------------------
Employee Savings Plan - The Company sponsors an employee stock ownership plan
(ESOP) as part of its existing savings and investment 401(k) plan. The ESOP is
available to eligible domestic employees, including the participants of a
Commercial Intertech plan which was merged into the ESOP on December 31, 2001.
Parker Hannifin common stock is used to match contributions made by employees to
the ESOP up to a maximum of 4.0 percent of an employee's annual compensation.
Prior to May 1, 2001, the Company matched contributions made by employees to the
ESOP up to a maximum of 3.5 percent of annual compensation. A breakdown of
shares held by the ESOP is as follows:
Page 13-26
2002 2001 2000
- -------------------------------------------------------------------------
Allocated shares 9,023,664 8,882,757 8,660,550
Committed-to-be-released shares 77,038 77,038
Suspense shares 2,384,301 2,936,821 3,373,734
- -------------------------------------------------------------------------
Total shares held by the ESOP 11,407,965 11,896,616 12,111,322
=========================================================================
Fair value of suspense shares $ 113,946 $ 124,639 $ 115,550
=========================================================================
In 1999 the ESOP was leveraged and the loan was unconditionally guaranteed by
the Company. The Company's matching contribution and dividends on the shares
held by the ESOP are used to repay the loan, and shares are released from the
suspense account as the principal and interest are paid. A portion of the shares
in the ESOP suspense account are not considered outstanding for purposes of
earnings per share computations until they are released. Company contributions
to the ESOP, recorded as compensation and interest expense, were $38,449 in
2002, $32,086 in 2001 and $26,984 in 2000. Dividends earned by the suspense
shares and interest income within the ESOP totaled $1,965 in 2002, $2,264 in
2001 and $1,214 in 2000.
In addition to shares within the ESOP, as of June 30, 2002 employees have
elected to invest in 2,415,807 shares of common stock within the Company Stock
Fund of the Parker Retirement Savings Plan.
Other Postretirement Benefits - The Company provides postretirement medical and
life insurance benefits to certain retirees and eligible dependents. Most plans
are contributory, with retiree contributions adjusted annually. The plans are
unfunded and pay stated percentages of covered medically necessary expenses
incurred by retirees, after subtracting payments by Medicare or other providers
and after stated deductibles have been met. For most plans, the Company has
established cost maximums to more effectively control future medical costs. The
Company has reserved the right to change or eliminate these benefit plans.
Effective May 1, 2001 the Company amended its postretirement medical plan for
certain employees to make the plan fully employee paid and to provide employees
instead with supplements in the funded defined benefit pension plans. The
supplements were calculated to be in the aggregate at least equivalent to the
value provided by the Company paid portion of the retiree medical coverage. As
such, the benefit obligation as of May 1, 2001 related to the postretirement
medical coverage is now reflected as a benefit obligation of the defined pension
benefit plans.
Postretirement benefit cost included the following components:
2002 2001 2000
- ----------------------------------------------------------
Service cost $1,286 $ 4,690 $ 4,499
Interest cost 5,494 12,283 10,762
Net amortization and deferral (849) (3,047) (2,758)
- ----------------------------------------------------------
Net periodic benefit cost $5,931 $13,926 $12,503
==========================================================
Change in benefit obligation 2002 2001
- -----------------------------------------------------------------
Benefit obligation at beginning of year $ 82,945 $170,587
Service cost 1,286 4,690
Interest cost 5,494 12,283
Actuarial (gain) loss (582) 11,882
Benefits paid (7,373) (11,414)
Acquisitions and other (1,844) (5,478)
Liability transferred to defined
benefit pension plans (3,704) (99,605)
- -----------------------------------------------------------------
Benefit obligation at end of year $ 76,222 $ 82,945
=================================================================
Page 13-27
Funded status
- -----------------------------------------------------------------
Benefit obligation in excess of plan assets $(76,222) $(82,945)
Unrecognized net actuarial (gain) (2,765) (2,430)
Unrecognized prior service cost (5,123) (5,984)
- -----------------------------------------------------------------
Net amount recognized $(84,110) $(91,359)
=================================================================
Amounts recognized on the Consolidated
Balance Sheet:
- -----------------------------------------------------------------
Accrued benefit liability $(84,110) $(91,359)
- -----------------------------------------------------------------
The assumptions used to measure the postretirement benefit obligations are:
- --------------------------------------------------
2002 2001
- --------------------------------------------------
Discount rate 7.25% 7.5%
Current medical cost trend rate 8% 8.5%
Ultimate medical cost trend rate 5.5% 5.5%
Medical cost trend rate decreases to
ultimate in year 2007 2007
==================================================
A one percentage point change in assumed health care cost trend rates would have
the following effects:
1% Increase 1% Decrease
- -------------------------------------------------------------------
Effect on total of service and interest
cost components $ 687 $ (568)
Effect on postretirement benefit
obligation $6,989 $(5,909)
===================================================================
Other - The Company has established nonqualified deferred compensation programs
which permit officers, directors and certain management employees annually to
elect to defer a portion of their compensation, on a pre-tax basis, until their
retirement. The retirement benefit to be provided is based on the amount of
compensation deferred, Company match, and earnings on the deferrals. Deferred
compensation expense was $1,212, $3,217 and $17,157 in 2002, 2001 and 2000,
respectively.
The Company has invested in corporate-owned life insurance policies to assist in
funding these programs. The policies are held in a rabbi trust and are recorded
as assets of the Company.
Note 11
Shareholders' Equity
- --------------------------------------------------------------------------
Common Shares 2002 2001 2000
- --------------------------------------------------------------------------
Balance July 1 $58,705 $58,301 $55,973
Shares issued under stock incentive plans
(2002 - 450,314; 2001 - 807,293;
2000 - 331,421) 225 404 164
Shares issued for purchase acquisition 132 2,164
- --------------------------------------------------------------------------
Balance June 30 $59,062 $58,705 $58,301
==========================================================================
Page 13-28
Additional Capital
- --------------------------------------------------------------------------------------------------
Balance July 1 $ 346,228 $ 328,938 $ 132,227
Shares issued under stock
option plans 9,200 9,197 (2,137)
Tax benefit of stock option plans (81) 8,621 5,897
Shares issued for purchase acquisition 12,949 190,379
Restricted stock issued (surrendered) 761 (104)
Shares related to ESOP 9,861 (424) 2,572
- --------------------------------------------------------------------------------------------------
Balance June 30 $ 378,918 $ 346,228 $ 328,938
==================================================================================================
Retained Earnings
- --------------------------------------------------------------------------------------------------
Balance July 1 $2,426,496 $2,165,625 $1,872,356
Net income 130,150 340,792 368,232
Cash dividends paid on common shares,
net of tax benefit of ESOP shares (82,838) (79,921) (74,963)
- --------------------------------------------------------------------------------------------------
Balance June 30 $2,473,808 $2,426,496 $2,165,625
==================================================================================================
Unearned Compensation Related to ESOP
- --------------------------------------------------------------------------------------------------
Balance July 1 $ (96,398) $ (110,818) $ (112,000)
Unearned compensation
related to ESOP debt guarantee 16,924 14,420 13,747
ESOP shares related to acquisition (12,565)
- --------------------------------------------------------------------------------------------------
Balance June 30 $ (79,474) $ (96,398) $ (110,818)
==================================================================================================
Deferred Compensation Related to Stock Options
- --------------------------------------------------------------------------------------------------
Balance July 1 $ 2,347 $ 1,304 $
Deferred compensation
related to stock options 1,043 1,304
- --------------------------------------------------------------------------------------------------
Balance June 30 $ 2,347 $ 2,347 $ 1,304
==================================================================================================
Accumulated Other Comprehensive (Loss)
- --------------------------------------------------------------------------------------------------
Balance July 1 $ (204,531) $ (125,458) $ (92,858)
Foreign currency translation 69,673 (89,659) (32,600)
Unrealized (loss) gain on marketable
securities (net of tax of:
2002 - $3,059; 2001 - $7,768) (5,076) 12,919
Realized (gain) on marketable securities (net of tax of:
2001 - $1,406) (2,333)
Minimum pension liability (net
of tax of: 2002 - $64,814) (107,563)
- --------------------------------------------------------------------------------------------------
Balance June 30 $ (247,497) $ (204,531) $ (125,458)
==================================================================================================
Common Stock in Treasury
- --------------------------------------------------------------------------------------------------
Balance July 1 $ (3,932) $ (8,434) $ (1,836)
Shares purchased at cost
(2002 - 230,000;
2000 - 288,543) (8,054) (11,132)
Shares issued under stock option plans
(2002 - 233,244; 2001 - 82,047;
2000 - 122,957) 8,498 3,226 4,964
Shares issued for purchase acquisition (17)
Restricted stock (surrendered) issued (160) 1,276 (413)
- --------------------------------------------------------------------------------------------------
Balance June 30 $ (3,648) $ (3,932) $ (8,434)
==================================================================================================
Page 13-29
Shares surrendered upon exercise of stock options; 2002 - 381,779; 2001 -
269,771; 2000 - 235,386.
Share Repurchases - The Board of Directors has authorized the repurchase of a
total of 5.05 million of the Company's common shares. At June 30, 2002, the
remaining authorization to repurchase was 3.05 million shares. Repurchases are
made on the open market, at prevailing prices, and are funded from operating
cash flows. The shares are initially held as treasury stock.
Note 12
Stock Incentive Plans
Employees' Stock Options - The Company's incentive plan provides for the
granting of nonqualified options to officers and key employees to purchase
shares of common stock at a price not less than 100 percent of the fair market
value of the stock on the dates options are granted. Outstanding options
generally are exercisable either one or two years after the date of grant and
expire no more than ten years after grant.
The Company derives a tax deduction measured by the excess of the market value
over the option price at the date nonqualified options are exercised. The
related tax benefit is credited to Additional capital.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and makes no charges against capital with respect to
options granted. SFAS No. 123 does, however, require the disclosure of pro forma
information regarding Net Income and Earnings per share determined as if the
Company had accounted for its stock options under the fair value method. For
purposes of this pro forma disclosure the estimated fair value of the options is
amortized to expense over the options' vesting period.
2002 2001 2000
- ------------------------------------------------------------------
Net income: As reported $130,150 $340,792 $368,232
Pro forma $115,348 $329,776 $361,753
Earnings per share:
Basic As reported $ 1.13 $ 2.98 $ 3.34
Pro forma $ 1.00 $ 2.89 $ 3.28
Diluted As reported $ 1.12 $ 2.96 $ 3.31
Pro forma $ 0.99 $ 2.87 $ 3.25
==================================================================
The fair value for the significant options granted in 2002, 2001 and 2000 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Aug/01 Aug/00 Aug/99
- --------------------------------------------------------------
Risk-free interest rate 4.6% 6.1% 6.1%
Expected life of option 4.8 yrs 4.6 yrs 4.6 yrs
Expected dividend yield of stock 1.6% 1.6% 1.7%
Expected volatility of stock 36.6% 36.2% 33.8%
==============================================================
Page 13-30
Options exercisable and shares available for future grant on June 30:
2002 2001 2000
- --------------------------------------------------------------------------
Options exercisable 3,440,843 3,256,705 3,483,071
Weighted-average option price
per share of options exercisable $ 34.75 $ 30.40 $ 25.51
Weighted-average fair value of
options granted during the year $ 14.94 $ 12.44 $ 14.62
Shares available for grant 785,797 1,436,436 2,225,012
==========================================================================
On July 1, 2002, 2,950,604 shares are available for grant pursuant to the
Company's stock incentive plan.
A summary of the status and changes of shares subject to options and the related
average price per share follows:
Shares Subject Average Option
To Options Price Per Share
- ------------------------------------------------------------
Outstanding June 30, 2000 4,969,902 $30.03
- ------------------------------------------------------------
Granted 1,464,311 36.00
Exercised (1,159,111) 21.70
Canceled (81,886)
- ------------------------------------------------------------
Outstanding June 30, 2001 5,193,216 $33.33
- ------------------------------------------------------------
Granted 2,148,477 44.73
Exercised (1,041,931) 26.86
Canceled (77,852)
- ------------------------------------------------------------
Outstanding June 30, 2002 6,221,910 $38.29
============================================================
The range of exercise prices and the remaining contractual life of options as of
June 30, 2002 were:
- -----------------------------------------------------------------------
Range of exercise prices $12-$25 $26-$38 $41-$55
- -----------------------------------------------------------------------
Options outstanding:
Outstanding as of June 30, 2002 362,361 2,626,844 3,232,705
Weighted-average remaining
contractual life 2.8 yrs 6.7 yrs 8.2 yrs
Weighted-average exercise price $ 20.47 $ 32.89 $ 44.67
Options exercisable:
Outstanding as of June 30, 2002 362,361 1,975,504 1,102,978
Weighted-average remaining
contractual life 2.8 yrs 6.2 yrs 6.80 yrs
Weighted-average exercise price $ 20.47 $ 31.89 $ 44.56
=======================================================================
Restricted stock - Restricted stock was issued, under the Company's 1993 Stock
Incentive Program, to certain key employees under the Company's 1999-00-01,
1998-99-00 and 1997-98-99 Long Term Incentive Plans (LTIP). Value of the
payments was set at the market value of the Company's common stock on the date
of issuance. Shares were earned and awarded, and an estimated value was accrued,
based upon attainment of criteria specified in the LTIP over the cumulative
years of each 3-year Plan. Plan participants are entitled to cash dividends and
to vote their respective shares, but the shares are restricted as to
transferability for three years following issuance.
Restricted Shares for LTIP Plan 2002 2001 2000
- ----------------------------------------------------------------
Number of shares issued 17,206 26,976 8,023
Per share value on date of issuance $ 44.55 $ 39.32 $42.04
Total value $ 767 $ 1,061 $ 337
================================================================
Page 13-31
Under the Company's 2000-01-02 LTIP, a payout of 18,953 shares of restricted
stock, from the Company's 1993 Stock Incentive Program, will be issued to
certain key employees in 2003. The balance of the 2000-01-02 LTIP payout will be
made as deferred cash compensation or in cash if the participants are retired.
The total payout, valued at $3,510, has been accrued over the three years of the
plan.
In addition, non-employee members of the Board of Directors have been given the
opportunity to receive all or a portion of their fees in the form of restricted
stock. These shares vest ratably, on an annual basis, over the term of office of
the director. In 2002, 2001 and 2000, 3,167, 5,464 and 6,012 shares,
respectively, were issued in lieu of directors' fees.
Non-employee Directors' Stock Options - In August 1996, the Company adopted a
stock option plan for non-employee directors to purchase shares of common stock
at a price not less than 100 percent of the fair market value of the stock on
the date the options are granted. Outstanding options are exercisable either one
or two years after the date of grant and expire no more than ten years after
grant.
A summary of the status and changes of shares subject to options and the related
average price per share follows:
Shares Subject Average Option
To Options Price Per Share
- ------------------------------------------------------------
Outstanding June 30, 2000 31,150 $ 35.21
- ------------------------------------------------------------
Granted 9,900 35.94
Canceled (4,500)
- ------------------------------------------------------------
Outstanding June 30, 2001 36,550 $ 35.96
============================================================
Granted 11,163 46.63
Exercised (6,200) 33.83
- ------------------------------------------------------------
Outstanding June 30, 2002 41,513 $ 39.14
============================================================
As of June 30, 2002, 25,400 options were exercisable and 315,787 shares were
available for grant.
At June 30, 2002, the Company had 7,397,287 common shares reserved for issuance
in connection with its stock incentive plans.
Note 13
Shareholders' Protection Rights Agreement
The Board of Directors of the Company declared a dividend of one Right for each
share of Common Stock outstanding on February 17, 1997 in relation to the
Company's Shareholder Protection Rights Agreement. As of June 30, 2002,
118,024,164 shares of Common Stock were reserved for issuance under this
Agreement. Under certain conditions involving acquisition of or an offer for 15
percent or more of the Company's Common Stock, all holders of Rights, except an
acquiring entity, would be entitled to purchase, at an exercise price of $100, a
value of $200 of Common Stock of the Company or an acquiring entity, or at the
option of the Board, to exchange each Right for one share of Common Stock. The
Rights remain in existence until February 17, 2007, unless earlier redeemed (at
one cent per Right), exercised or exchanged under the terms of the agreement. In
the event of an unfriendly business combination attempt, the Rights will cause
substantial dilution to the person attempting the business combination. The
Rights should not interfere with any merger or other business combination that
is in the best interest of the Company and its shareholders since the Rights may
be redeemed.
Note 14
Research and Development
Research and development costs amounted to $109,090 in 2002, $115,004 in 2001
and $94,781 in 2000. Customer reimbursements included in the total cost for each
of the respective years were $13,517, $17,143 and $16,409. Costs include those
costs related to independent research and development as well as customer
reimbursed and unreimbursed development programs.
Page 13-32
Note 15
Contingencies
The Company is involved in various litigation arising in the normal course of
business, including proceedings based on product liability claims, workers'
compensation claims and alleged violations of various environmental laws. The
Company is self-insured in the U.S. for health care, workers' compensation,
general liability and product liability up to predetermined amounts, above which
third party insurance applies. The Company purchases third party product
liability insurance for products manufactured by its international operations
and for products that are used in aerospace applications. Management regularly
reviews the probable outcome of these proceedings, the expenses expected to be
incurred, the availability and limits of the insurance coverage, and the
established accruals for liabilities. While the outcome of pending proceedings
cannot be predicted with certainty, management believes that any liabilities
that may result from these proceedings will not have a material adverse effect
on the Company's liquidity, financial condition or results of operations.
Environmental - The Company is currently involved in environmental remediation
at 21 manufacturing facilities presently or formerly operated by the Company and
has been named as a "potentially responsible party," along with other companies,
at two off-site waste disposal facilities and one regional Superfund site.
As of June 30, 2002, the Company has a reserve of $13,391 for environmental
matters which are probable and reasonably estimable. This reserve is recorded
based upon the best estimate of costs to be incurred in light of the progress
made in determining the magnitude of remediation costs, the timing and extent of
remedial actions required by governmental authorities, and the amount of the
Company's liability in proportion to other responsible parties. This reserve is
net of $8,304 for discounting, at a four percent discount rate, a portion of the
costs at 12 locations to operate and maintain remediation treatment systems as
well as gauge treatment system effectiveness through monitoring and sampling
over periods ranging from five to 30 years. The Company also has an account
receivable, presented separately from the recorded liability on the Consolidated
Balance Sheet, of $139 for anticipated insurance recoveries.
The Company's estimated total liability for the above mentioned sites ranges
from a minimum of $13,391 to a maximum of $34,920. The actual costs to be
incurred by the Company will be dependent on final determination of remedial
action required, negotiations with federal and state agencies, changes in
regulatory requirements and technology innovation, the effectiveness of remedial
technologies employed, the ability of other responsible parties to pay, and any
insurance or third party recoveries.
Note 16
Quarterly Information (Unaudited)
2002 (a) 1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------
Net sales $1,475,867 $1,437,330 $1,578,332 $1,657,593 $6,149,122
Gross profit 278,242 233,437 269,087 251,786 1,032,552
Net income (loss) 60,581 29,062 52,357 (11,850) 130,150
Diluted earnings
(loss) per share .52 .25 .45 (.10) 1.12
=============================================================================================
2001 (b) (c) 1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------
Net sales $1,485,131 $1,467,619 $1,542,058 $1,484,796 $5,979,604
Gross profit 326,102 315,255 320,815 289,276 1,251,448
Income before extraordinary
Item 125,046 78,314 91,452 49,358 344,170
Net income 125,046 78,314 88,074 49,358 340,792
Diluted earnings per share
before extraordinary item 1.09 .68 .80 .42 2.99
Diluted earnings
per share 1.09 .68 .77 .42 2.96
=============================================================================================
Page 13-33
(a) Results for the first quarter include a $5,041 charge ($3,302 after-tax or
$.03 share) related primarily to business realignment costs. Results for
the second quarter include a $7,335 charge ($4,804 after-tax or $.04 per
share) related to business realignment costs and a $4,973 charge ($4,973
after-tax or $.04 per share) related to an equity investment adjustment.
Results for the third quarter include a $3,878 charge ($2,540 after-tax or
$.02 per share) related to business realignment costs. Results for the
fourth quarter include a $21,098 charge ($13,819 after-tax or $.12 per
share) related to business realignment costs and a $39,516 goodwill
impairment charge ($37,137 after-tax or $.32 per share).
(b) Results for the first quarter include a gain on the sale of real property
of $55,548 ($34,662 after-tax or $.30 per share) and a charge of $8,437
($5,815 after-tax or $.05 per share) primarily related to certain asset
impairments. Results for the fourth quarter include a charge of $28,008
($17,477 after-tax or $.15 per share) related primarily to business
realignment costs and certain corporate accruals.
(c) Results for each quarter include goodwill amortization as follows: $14,709
($12,641 after-tax, or $.11 per share) in the first quarter, $13,854
($11,907 after-tax, or $.10 per share) in the second quarter, $15,185
($13,050 after-tax or $.11 per share) in the third quarter, and $15,834
($13,608 after-tax, or $.12 per share) in the fourth quarter.
Note 17
Stock Prices and Dividends (Unaudited)
(In dollars) 1st 2nd 3rd 4th Full Year
- ----------------------------------------------------------------
2002 High $46.35 $47.31 $54.88 $51.89 $54.88
Low 30.40 33.60 43.65 44.27 30.40
Dividends .180 .180 .180 .180 .720
===============================================================
2001 High $39.69 $47.44 $46.75 $50.10 $50.10
Low 31.00 31.25 37.66 38.50 31.00
Dividends .170 .170 .180 .180 .700
- ---------------------------------------------------------------
2000 High $48.13 $51.44 $54.00 $48.31 $54.00
Low 43.13 41.19 33.94 34.25 33.94
Dividends .170 .170 .170 .170 .680
- ---------------------------------------------------------------
Common Stock Listing: New York Stock Exchange, Stock Symbol PH
Page 13-34
Report of Independent Accountants
To the Shareholders and Board of Directors
Parker Hannifin Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and 14(a)(2) on Page 19 present fairly, in all
material respects, the financial position of Parker Hannifin Corporation and its
subsidiaries at June 30, 2002 and 2001, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(1) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective July
1, 2001, the Company changed its method of accounting for goodwill and other
intangible assets to comply with the provisions of Financial Accounting Standard
No. 142, "Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
Cleveland, Ohio
July 26, 2002
Page 13-35
Report of Management
The Company's management is responsible for the integrity and accuracy of the
financial information contained in this annual report. Management believes that
the financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America appropriate in the
circumstances and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management makes
informed judgments and estimates where necessary to reflect the expected effects
of events and transactions that have not been completed.
Management is also responsible for maintaining an internal control system
designed to provide reasonable assurance at reasonable cost that assets are
safeguarded against loss or unauthorized use and that financial records are
adequate and can be relied upon to produce financial statements in accordance
with accounting principles generally accepted in the United States of America.
The system is supported by written policies and guidelines, by careful selection
and training of financial management personnel and by an internal audit staff
which coordinates its activities with the Company's independent accountants. To
foster a strong ethical climate, the Parker Hannifin Code of Ethics, which is
publicized throughout the Company, addresses, among other things, compliance
with all laws and accuracy and integrity of books and records. The Company
maintains a systematic program to assess compliance.
PricewaterhouseCoopers LLP, independent accountants, is retained to conduct an
audit of Parker Hannifin's consolidated financial statements in accordance with
auditing standards generally accepted in the United States of America and to
provide an independent assessment that helps ensure fair presentation of the
Company's consolidated financial position, results of operations and cash flows.
The Audit Committee of the Board of Directors is composed entirely of
independent outside directors. The Committee meets periodically with management,
internal auditors and the independent accountants to discuss internal accounting
controls and the quality of financial reporting. Financial management, as well
as the internal auditors and the independent accountants, have full and free
access to the Audit Committee.
/s/ Donald E. Washkewicz /s/ Michael J. Hiemstra
- ------------------------- ----------------------------
Donald E. Washkewicz Michael J. Hiemstra
President and Executive Vice President-
Chief Executive Officer Finance and Administration
and Chief Financial Officer
Page 13-36
Five-Year Financial Summary
(Amounts in thousands, except per share information) 2002 2001 (a) 2000 1999 1998 (a)
- --------------------------------------------------------------------------------------------------------------------
Net sales $6,149,122 $5,979,604 $5,385,618 $4,986,696 $4,658,229
Cost of sales 5,116,570 4,728,156 4,186,850 3,897,266 3,576,198
Selling, general and administrative expenses 686,485 679,963 575,906 550,681 532,134
Goodwill impairment loss 39,516
Interest expense 82,484 90,362 59,183 63,697 52,787
Income taxes 87,886 189,426 193,955 167,193 180,762
Income - continuing operations 130,150 344,170 368,232 310,501 323,226
Net income 130,150 340,792 368,232 310,501 319,551
Basic earnings per share - continuing operations 1.13 3.01 3.34 2.85 2.91
Diluted earnings per share - continuing operations 1.12 2.99 3.31 2.83 2.88
Basic earnings per share 1.13 2.98 3.34 2.85 2.88
Diluted earnings per share $ 1.12 $ 2.96 $ 3.31 $ 2.83 $ 2.85
Average number of shares outstanding - Basic 115,409 114,305 110,331 108,800 110,869
Average number of shares outstanding - Diluted 116,061 115,064 111,245 109,679 111,959
Cash dividends per share $ .720 $ .700 $ .680 $ .640 $ .600
Net income as a percent of net sales 2.1% 5.7% 6.8% 6.2% 6.9%
Return on average assets 2.3% 6.8% 8.8% 8.6% 9.8%
Return on average equity 5.1% 14.1% 17.7% 17.6% 19.8%
- --------------------------------------------------------------------------------------------------------------------
Book value per share $ 22.26 $ 21.99 $ 20.31 $ 17.03 $ 15.32
Working capital $ 875,781 $ 783,233 $ 966,810 $1,020,171 $ 791,305
Ratio of current assets to current liabilities 1.6 1.6 1.8 2.4 1.8
Plant and equipment, net $1,696,965 $1,548,688 $1,340,915 $1,200,869 $1,135,225
Total assets 5,752,583 5,337,661 4,646,299 3,705,888 3,524,821
Long-term debt 1,088,883 857,078 701,762 724,757 512,943
Shareholders' equity $2,583,516 $2,528,915 $2,309,458 $1,853,862 $1,683,450
Debt to debt-equity percent 36.8% 35.7% 31.0% 29.8% 31.6%
- --------------------------------------------------------------------------------------------------------------------
Depreciation $ 231,235 $ 200,270 $ 167,356 $ 164,577 $ 153,633
Capital expenditures $ 206,564 $ 334,748 $ 230,482 $ 230,122 $ 236,945
Number of employees 48,176 46,302 43,895 38,928 39,873
Number of shareholders 53,001 50,731 47,671 39,380 44,250
Number of shares outstanding at year-end 116,051 114,989 113,707 108,846 109,873
- --------------------------------------------------------------------------------------------------------------------
(a) Includes an extraordinary item for the early retirement of debt.
Page 13-37