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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 34-0451060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6035 Parkland Blvd., Cleveland, Ohio 44124-4141
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 896-3000
--------------
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __.
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Number of Common Shares outstanding at September 30, 2002 118,037,791
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
-----------------------------
2002 2001
------------ ------------
Net sales $ 1,585,904 $ 1,475,867
Cost of sales 1,299,890 1,197,625
------------ ------------
Gross profit 286,014 278,242
Selling, general and administrative expenses 176,255 165,415
Interest expense 19,694 20,454
Interest and other (income) expense, net (1,626) (117)
------------ ------------
Income before income taxes 91,691 92,490
Income taxes 30,716 31,909
------------ ------------
Net income $ 60,975 $ 60,581
============ ============
Earnings per share - basic $ .52 $ .53
Earnings per share - diluted $ .52 $ .52
Cash dividends per common share $ .18 $ .18
See accompanying notes to consolidated financial statements.
-2-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
September 30, June 30,
ASSETS 2002 2002
- ---------------- -------------- --------------
Current assets:
Cash and cash equivalents $ 45,730 $ 46,384
Accounts receivable, net 945,861 1,006,313
Inventories:
Finished products 507,905 531,821
Work in process 383,495 353,410
Raw materials 154,942 166,737
-------------- --------------
1,046,342 1,051,968
Prepaid expenses 44,998 48,532
Deferred income taxes 80,386 82,421
-------------- --------------
Total current assets 2,163,317 2,235,618
Plant and equipment 3,387,886 3,354,258
Less accumulated depreciation 1,705,928 1,657,293
-------------- --------------
1,681,958 1,696,965
Goodwill 1,063,925 1,083,768
Intangible assets, net 58,487 51,286
Other assets 658,730 684,946
-------------- --------------
Total assets $ 5,626,417 $ 5,752,583
============== ==============
LIABILITIES
- ----------------
Current liabilities:
Notes payable $ 453,130 $ 416,693
Accounts payable, trade 413,912 443,525
Accrued liabilities 418,725 451,310
Accrued domestic and foreign taxes 51,372 48,309
-------------- --------------
Total current liabilities 1,337,139 1,359,837
Long-term debt 955,312 1,088,883
Pensions and other postretirement benefits 502,289 508,313
Deferred income taxes 89,603 76,955
Other liabilities 128,916 135,079
-------------- --------------
Total liabilities 3,013,259 3,169,067
SHAREHOLDERS' EQUITY
- ----------------------
Serial preferred stock, $.50 par value;
authorized 3,000,000 shares; none issued -- --
Common stock, $.50 par value; authorized
600,000,000 shares; issued 118,155,629 shares at
September 30 and 118,124,294 shares at June 30 59,078 59,062
Additional capital 380,445 378,918
Retained earnings 2,513,941 2,473,808
Unearned compensation related to guarantee of ESOP debt (73,034) (79,474)
Deferred compensation related to stock options 2,347 2,347
Accumulated other comprehensive (loss) (265,273) (247,497)
-------------- --------------
2,617,504 2,587,164
Less treasury shares, at cost:
117,838 shares at September 30
and 100,130 shares at June 30 (4,346) (3,648)
-------------- --------------
Total shareholders' equity 2,613,158 2,583,516
-------------- --------------
Total liabilities and shareholders' equity $ 5,626,417 $ 5,752,583
============== ==============
See accompanying notes to consolidated financial statements.
-3-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
September 30,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 60,975 $ 60,581
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 60,902 59,159
Amortization 3,171 2,604
Deferred income taxes 11,726 (8,750)
Foreign currency transaction loss 3,757 1,342
Loss (gain) on sale of plant and equipment 82 (104)
Changes in assets and liabilities:
Accounts receivable 55,260 68,870
Inventories 1,373 2,522
Prepaid expenses 3,879 10,168
Net assets held for sale 27,211
Other assets 23,554 14,331
Accounts payable, trade (29,811) (10,427)
Accrued payrolls and other compensation (35,900) (43,599)
Accrued domestic and foreign taxes 11,266 14,485
Other accrued liabilities (7,949) 7,537
Pensions and other postretirement benefits (5,978) (4,492)
Other liabilities (11,154) 1,659
------------ ------------
Net cash provided by operating activities 145,153 203,097
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Acquisitions (less acquired cash of $8 in 2002) (1,987) (135,545)
Capital expenditures (38,614) (59,296)
Proceeds from sale of plant and equipment 2,216 5,679
Other 2,717 (15,391)
------------ ------------
Net cash (used in) investing activities (35,668) (204,553)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from (payments for) common share activity 845 (149)
(Payments of) proceeds from notes payable, net (89,639) 33,838
Proceeds from long-term borrowings 10 5,842
Payments of long-term borrowings (585) (3,837)
Dividends (20,842) (20,731)
------------ ------------
Net cash (used in) provided by financing activities (110,211) 14,963
Effect of exchange rate changes on cash 72 (1,688)
------------ ------------
Net (decrease) increase in cash and cash equivalents (654) 11,819
Cash and cash equivalents at beginning of year 46,384 23,565
------------ ------------
Cash and cash equivalents at end of period $ 45,730 $ 35,384
============ ============
See accompanying notes to consolidated financial statements.
-4-
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION BY INDUSTRY
(Dollars in thousands)
(Unaudited)
The Company operates in two principal industry segments: Industrial and
Aerospace. The Industrial Segment is the largest and includes a significant
portion of International operations.
Industrial - This segment produces a broad range of motion control and fluid
systems and components used in all kinds of manufacturing, packaging,
processing, transportation, mobile construction, agricultural and military
machinery and equipment. Sales are made directly to major original equipment
manufacturers (OEMs) and through a broad distribution network to smaller OEMs
and the aftermarket.
Aerospace - This segment designs and manufactures products and provides
aftermarket support for commercial, military and general aviation aircraft,
missile and spacecraft markets. The Aerospace Segment provides a full range of
systems and components for hydraulic, pneumatic and fuel applications.
The Company also reports an Other Segment consisting of several business units
which produce motion-control and fluid power control components for use
primarily in the transportation industry and refrigeration and air conditioning
industry, a business unit which designs and manufactures custom-engineered
buildings and a business unit which develops and manufactures chemical car care
and industrial products. In June 2002, the Company divested the businesses which
were part of the Other Segment which adminsters vehicle service contract
programs and product-related service programs. Net sales and segment operating
income of the divested businesses for the three months ended September 30, 2001
were $26,528 and $1,858, respectively.
Business Segment Results by Industry
Three Months Ended
September 30,
-------------------------------
2002 2001
------------ ------------
Net sales
Industrial:
North America $ 727,577 $ 650,840
International 365,659 296,291
Aerospace 277,321 312,500
Other 215,347 216,236
------------ ------------
Total $ 1,585,904 $ 1,475,867
============ ============
Segment operating income
Industrial:
North America $ 51,045 $ 40,465
International 26,646 19,828
Aerospace 42,533 56,892
Other 18,844 16,992
------------ ------------
Total segment operating income 139,068 134,177
Corporate general and administrative expenses 20,098 16,939
------------ ------------
Income before interest expense and other 118,970 117,238
Interest expense 19,694 20,454
Other expense (income) 7,585 4,294
------------ ------------
Income before income taxes $ 91,691 $ 92,490
============ ============
-5-
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
-----------------------
1. Management representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of September 30, 2002, the results of operations for the three months ended
September 30, 2002 and 2001 and cash flows for the three months then ended.
2. Adoption of new accounting pronouncements
Effective July 1, 2002 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations," SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," and SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." The implementation of these accounting
pronouncements did not have a material effect on the Company's results of
operations, financial position or cash flows.
3. Earnings per share
The following table presents a reconciliation of the numerator and
denominator of basic and diluted earnings per share for the three months
ended September 30, 2002 and 2001.
Three Months Ended
September 30,
-----------------------------
2002 2001
-----------------------------
Numerator:
----------
Net income applicable
to common shares $ 60,975 $ 60,581
Denominator:
------------
Basic - weighted average
common shares 116,232,630 115,166,914
Increase in weighted average
from dilutive effect of
exercise of stock options 375,105 585,784
-----------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 116,607,735 115,752,698
=============================
Basic earnings per share $ .52 $ .53
Diluted earnings per share $ .52 $ .52
At September 30, 2002 and 2001, 5.64 million and 4.72 million of common
shares, respectively, subject to stock options were excluded from the
computation of diluted earnings per share because the effect of their
exercise would be anti-dilutive.
-6-
4. Stock repurchase program
The Board of Directors has approved a program to repurchase the Company's
common stock on the open market, at prevailing prices. The repurchase is
primarily funded from operating cash flows and the shares are initially
held as treasury stock. During the three-month period ended September 30,
2002 the Company purchased 15,000 shares of its common stock at an average
price of $37.84 per share.
5. Comprehensive income
The Company's items of other comprehensive income (loss) are foreign
currency translation adjustments and unrealized gains (losses) on
marketable securities. Comprehensive income for the three months ended
September 30, 2002 and 2001 was as follows:
Three Months Ended
September 30,
-----------------------------
2002 2001
-----------------------------
Net income $ 60,975 $ 60,581
Foreign currency
translation adjustments (17,916) 10,886
Unrealized gain (loss) on marketable
securities (net of taxes of $85
in 2002 and $3,177 in 2001) 140 (5,273)
-----------------------------
Comprehensive income $ 43,199 $ 66,194
=============================
6. Business realignment charges
During the first quarter of fiscal 2003, the Company recorded a $2,394
charge ($1,699 after-tax or $.01 per share) for the costs of appropriately
structuring its businesses to operate in their current economic
environment. The charge primarily relates to severance costs attributable
to 123 employees in the Industrial Segment. As of September 30, 2002, the
Company has made the majority of severance payments with the remaining
payments expected to be made by June 30, 2003. The business realignment
costs are presented in the Consolidated Statement of Income for the three
months ended September 30, 2002 as follows: $1,539 in Cost of sales and
$855 in Selling, general and administrative expenses.
During the first quarter of fiscal 2002, the Company recorded a $5,041
charge ($3,302 after-tax or $.03 per share) for the costs of appropriately
structuring its businesses to operate in their then current economic
environment. The charge primarily related to severance costs attributable
to 288 employees in the Industrial Segment, 139 employees in the Aerospace
Segment and 8 employees in the Other Segment. All severance payments have
been made. Of the pre-tax amount, $3,317 related to the Industrial Segment,
$1,207 related to the Aerospace Segment and $517 related to the Other
Segment. The business realignment costs are presented in the Consolidated
Statement of Income for the three months ended September 30, 2001 as
follows: $4,634 in Cost of sales and $407 in Selling, general and
administrative expenses.
-7-
7. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the three months ended
September 30, 2002 are as follows:
Industrial Aerospace Other
Segment Segment Segment Total
--------------------------------------------------
Balance as of June 30, 2002 $829,044 $76,216 $178,508 $1,083,768
Goodwill adjustments and other (20,946) (40) 1,143 (19,843)
--------------------------------------------------
Balance as of September 30, 2002 $808,098 $76,176 $179,651 $1,063,925
==================================================
"Goodwill adjustments and other" represents final adjustments to the
purchase price allocation for acquisitions completed within the last twelve
months and foreign currency translation adjustments.
Intangible assets are amortized on the straight-line method over their
legal or estimated useful lives. The following summarizes the gross
carrying value and accumulated amortization for each major category of
intangible assets:
September 30, 2002 June 30, 2002
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------------------------------
Patents $ 22,355 $ 10,280 $ 22,356 $ 9,930
Trademarks 19,482 900 17,058 644
Engineering drawings and other 31,091 3,261 24,576 2,130
----------------------------------------------------------------
Total $ 72,928 $ 14,441 $ 63,990 $ 12,704
================================================================
Total intangible amortization expense for the three months ended September
30, 2002 was $2,012. The estimated amortization expense for the five years
ending June 30, 2003 through 2007 is $7,250, $7,567, $6,475, $5,165 and
$4,765, respectively.
-8-
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 2001
CONSOLIDATED STATEMENT OF INCOME
Net sales for the first quarter of fiscal 2003 were $1,585.9 million, a 7.5
percent increase over prior-year first quarter sales of $1,475.9 million.
Without acquisitions, net sales decreased slightly, primarily the result of
lower volume in the Aerospace Segment offsetting an increase in volume in the
Industrial Segment.
Income from operations in the current quarter was $109.8 million, a 2.7 percent
decrease over the prior-year quarter income from operations of $112.8 million.
As a percent of sales, current-year operating income decreased to 6.9 percent
from 7.7 percent in the prior year. Cost of sales, as a percent of sales,
increased to 82.0 percent from 81.1 percent. Included in current-year and
prior-year income from operations was $2.4 million and $5.0 million,
respectively, in business realignment charges (see Note 6 on page 7 for further
discussion). Excluding the business realignment charges, current-year operating
income, as a percent of sales, decreased to 7.1 percent from 8.0 percent in the
prior year. Excluding the business realignment charges, cost of sales, as a
percent of sales, increased to 81.9 percent from 80.8 percent. The decreasing
margins reflect the lower volume in the Aerospace Segment partially offset by
higher volume and operating efficiencies experienced in the Industrial Segment.
Selling, general and administrative expenses, as a percent of sales, were 11.1
percent compared to 11.2 percent in the prior year.
Interest expense for the current-year quarter decreased 3.7 percent due
primarily to lower weighted-average interest rates.
The effective tax rate decreased to 33.5 percent for the current-year quarter,
compared to 34.5 percent in the prior-year quarter. The decrease in the rate is
primarily due to a lower foreign tax rate.
Net income for the quarter was $61.0 million compared to $60.6 million in the
prior year. Net income decreased to 3.8 percent of sales compared to 4.1 percent
in the prior-year. Net income in the current year quarter was adversely affected
by an additional expense of approximately $6.4 million related to domestic
qualified defined benefit plans, resulting primarily from the lower market value
of plan assets.
Backlog decreased to $1.81 billion at September 30, 2002 compared to $1.91
billion in the prior year and $1.86 billion at June 30, 2002. The decrease in
backlog reflects shipments exceeding new order rates across most markets in the
Industrial North American operations as well as a decrease in Aerospace order
rates.
RESULTS BY BUSINESS SEGMENT
INDUSTRIAL - Net sales of the Industrial Segment increased 15.4 percent to
$1,093.2 million compared to $947.1 million in the first quarter of fiscal 2002.
Industrial North American sales increased 11.8 percent and Industrial
International sales increased 23.4 percent. Without the effect of currency rate
changes, International sales would have increased 17.4 percent. Without the
effect of acquisitions, North American sales increased 2.6 percent, and
International sales increased 10.6 percent. The increase in Industrial North
American sales reflects higher end-user demand experienced across most of the
Industrial North American markets, particularly in the agriculture, construction
and semi-conductor manufacturing markets. The increase in International
Industrial sales is attributed to higher volume
-9-
across most markets in Europe and the Asia Pacific region partially offset by
lower demand in Latin America.
Operating income for the Industrial Segment increased 28.9 percent to $77.7
million compared to $60.3 million in the prior year with Industrial North
American operating income increasing 26.1 percent and Industrial International
operating income increasing 34.4 percent. Included in Industrial North American
current-year and prior-year operating income was $0.9 million and $2.5 million,
respectively, of business realignment charges and included in Industrial
International current-year and prior-year operating income was $1.1 million and
$0.8 million, respectively, of business realignment charges. These charges were
made as a result of actions the Company took to appropriately structure the
Industrial operations to operate in their current economic environment and
primarily consisted of severance costs and costs relating to the consolidation
of manufacturing product lines. Excluding the business realignment charges,
Industrial North American operating income increased 20.8 percent from the prior
year and Industrial International operating income increased 34.7 percent from
the prior year.
Excluding business realignment charges, North American operating income, as a
percent of sales, increased to 7.1 percent from 6.6 percent and Industrial
International operating income, as a percent of sales, increased to 7.6 percent
from 7.0 percent. The increase in Industrial North American margins is primarily
due to higher sales volume experienced across most markets particularly in the
construction, agriculture and semiconductor manufacturing markets as well as
improved operating efficiencies. The increase in Industrial International
margins is primarily due to the higher sales volume experienced across most
European markets as well as improved operating efficiencies in Europe.
Industrial Segment backlog increased 2.0 percent compared to a year ago, and
decreased 7.3 percent since June 30, 2002. Without acquisitions, Industrial
Segment backlog decreased 3.0 percent from a year ago. The decline in backlog
since June 30, 2002 is primarily due to shipments exceeding new order rates
within most Industrial markets.
The volatility of the global economy has made it difficult to assess the
business conditions that are likely to be experienced by the Industrial Segment
operations for the remainder of fiscal year 2003. At the present time, business
conditions are expected to be the same as those experienced in the first quarter
with a more pronounced improvement in business conditions anticipated in the
second half of the fiscal year. The second half improvement assumes the
Industrial Segment markets experience an increase in current end-user demand,
particularly in the heavy-duty truck, machine tool, semi-conductor manufacturing
and agriculture markets. The economic uncertainties in Europe and Latin America
may mitigate the anticipated growth in the Industrial International operations.
The Company expects to continue to take the necessary actions to appropriately
structure the Industrial Segment operations to operate in their current economic
environment. Such actions may include the necessity to record additional
business realignment charges in fiscal 2003.
AEROSPACE - Net sales of the Aerospace Segment decreased 11.3 percent to $277.3
million compared to $312.5 million in the prior year. Operating income decreased
25.2 percent to $42.5 million compared to $56.9 million in the prior year.
Operating income for the current-year quarter and prior-year quarter includes
$0.4 million and $1.2 million, respectively, in business realignment charges.
These business realignment charges relate primarily to severance costs.
Excluding the business realignment charges, operating income, as a percent of
sales, decreased to 15.5 percent from 18.6 percent primarily due to lower sales
in the commercial OEM and aftermarket businesses partially offset by an increase
in volume in military business.
Backlog for the Aerospace Segment decreased 12.8 percent compared to a year ago
and remained essentially unchanged since June 30, 2002. The decline in backlog
from a year ago is primarily due to a decline in both commercial OEM and
aftermarket order rates, partially offset by an increase in military order
rates. For the remainder of the fiscal year, the Company expects further
slowdowns in commercial OEM and aftermarket orders. However, an increase in
orders is anticipated in the military and defense market.
-10-
OTHER - Net sales of the Other Segment for the current-year quarter were $215.3
million compared to $216.2 million in the prior year. Without the effect of
acquisitions and the divestiture of the businesses which administer vehicle
service contract programs and product-related service programs, sales increased
3.1 percent as a result of higher demand in the automotive and refrigeration and
air conditioning markets. Operating income increased 10.9 percent to $18.8
million compared to $17.0 million in the prior year. Included in the prior-year
operating income was $1.9 million of income associated with the divested
businesses and $0.5 million in business realignment charges. Excluding the
operating income from the divested businesses and the business realignment
charges, operating income, as a percent of sales, increased to 8.8 percent from
8.2 percent primarily due to the higher sales volume.
Backlog for the Other Segment increased 38.7 percent compared to a year ago and
decreased 7.5 percent since June 30, 2002. The increase in backlog from a year
ago is primarily due to an increase in orders by the businesses that produce
motion-control and fluid control system components for use primarily in the
transportation industry and refrigeration and air conditioning industry. The
decline in backlog from June 30, 2002 is due to a slowdown in order rates from
major original equipment manufacturers. For the remainder of fiscal year 2003,
business conditions are expected to track those of the Industrial Segment.
Corporate general and administrative expenses increased to $20.1 million for
fiscal 2003 compared to $16.9 million in the prior year. As a percent of sales,
corporate general and administrative expenses for the current-year quarter
increased slightly to 1.3 percent compared to 1.1 percent in the prior year.
Included in Other expense (income) (in the Business Segment Results by Industry)
in fiscal 2003 are currency transaction losses of $4.7 million compared to $2.3
million in fiscal 2002.
BALANCE SHEET
Working capital declined to $826.2 million at September 30, 2002 from $875.8
million at June 30, 2002, with the ratio of current assets to current
liabilities remaining constant at 1.6:1. The working capital decrease was
primarily due to a decrease in Accounts receivable and an increase in Notes
payable, partially offset by a decrease in Accounts payable, trade and Accrued
liabilities.
Accounts receivable decreased to $945.9 million at September 30, 2002 from
$1,006.3 million at June 30, 2002, primarily due to a concerted effort to
collect outstanding receivables. Days sales outstanding remained constant at 50
days during the quarter. Inventories decreased $5.6 million since June 30, 2002,
with days supply increasing slightly.
Plant and equipment, net of accumulated depreciation, decreased $15.0 million
since June 30, 2002, primarily as a result of depreciation exceeding capital
expenditures.
The decrease in Goodwill since June 30, 2002 reflects final purchase price
adjustments to the purchase price allocation for acquisitions completed within
the last twelve months.
Other assets decreased $26.2 million since June 30, 2002, primarily as a result
of decreases in qualified benefit plan assets and other investment assets.
Accounts payable, trade decreased to $413.9 million at September 30, 2002 from
$443.5 million at June 30, 2002, with the reduction occurring consistently
throughout the operations.
Accrued liabilities decreased $32.6 million since June 30, 2002 primarily as a
result of lower incentive compensation accruals.
Due to the strength of the dollar, foreign currency translation adjustments
resulted in a decrease in net assets of $17.9 million during the first quarter
of fiscal 2003. The translation adjustments primarily affected Accounts
receivable, Inventories, Plant and equipment and Goodwill.
-11-
STATEMENT OF CASH FLOWS
Cash and cash equivalents decreased $0.7 million for the first three months of
fiscal 2003 after increasing $11.8 million during the same period of fiscal
2002.
Net cash provided by operating activities was $145.2 million for the three
months ended September 30, 2002 compared to $203.1 million for the same three
months of 2001. The decrease in net cash provided by operating activities in
2002 is primarily due to a decrease in working capital, partially offset by an
increase in deferred income taxes.
Net cash used in investing activities was $35.7 million for the first three
months of fiscal 2003 compared to $204.6 million for fiscal 2002. The
significant decrease in the amount of cash used in investing activities in 2003
is attributable to a reduction in acquisition activity and capital expenditures.
The reduction of capital expenditures in 2003 can be attributed to a decline in
product demand, the consolidation of manufacturing facilities and lean
manufacturing initiatives.
Net cash used in financing activities was $110.2 million in fiscal 2003 compared
to providing cash of $15.0 million in fiscal 2002. In fiscal 2003 the Company
decreased its outstanding borrowings by a net total of $90.2 million compared to
an increase of $35.8 million in fiscal 2002. The decrease in the borrowing level
in 2003 was due to the decline in acquisition activity and capital expenditure
requirements.
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. The debt to debt-equity ratio at
September 30, 2002 decreased to 35.0 percent compared to 36.8 percent as of June
30, 2002.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. These contracts are with major financial
institutions and the risk of loss is considered remote. The Company does not
hold or issue derivative financial instruments for trading purposes. In
addition, the Company's foreign locations, in the ordinary course of business,
enter into financial guarantees through financial institutions which enable
customers to be reimbursed in the event of nonperformance by the Company. The
total 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.
-12-
FORWARD-LOOKING STATEMENTS
Forward-looking statements contained in this Report on Form 10-Q and other
written reports and oral statements are made based on known events and
circumstances at the time of release, and as such, are subject in the future to
unforeseen uncertainties and risks. All statements regarding future performance,
earnings projections, events or developments are forward-looking statements. It
is possible that the Company's future performance and earnings projections may
differ materially from current expectations, depending on economic conditions
within both the industrial and aerospace markets, and the Company's ability to
achieve anticipated benefits associated with announced realignment activities
and strategic initiatives to improve operating margins. Among other factors
which may affect future performance are:
.. changes in business relationships with and purchases by or from major
customers or suppliers, including delays or cancellations in shipments,
.. uncertainties surrounding timing, successful completion or integration of
acquisitions,
.. threats associated with and efforts to combat terrorism,
.. competitive market conditions and resulting effects on sales and pricing,
.. increases in raw-material costs that cannot be recovered in product pricing,
and
.. global economic factors, including currency exchange rates, difficulties
entering new markets and general economic conditions such as interest rates.
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.
CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and principal financial officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) within 90 days prior to the filing date of this
Form 10-Q. Based on this evaluation, the principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures are effective.
The Company periodically conducts an evaluation, under the supervision and with
the participation of the Company's management, including the Company's principal
executive officer and principal financial officer as well as the Company's Audit
Committee and independent auditors, of its internal controls and procedures.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the most recent evaluation.
-13-
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are furnished as exhibits and are numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 10(a) Form of Executive Life Insurance Agreement entered into
by the Registrant and certain executives (including executive officers), as
restated.
Exhibit 10(b) Parker-Hannifin Corporation Savings Restoration Plan, as
restated.
Exhibit 10(c) Parker-Hannifin Corporation Executive Deferral Plan, as
restated.
(b) The Registrant filed a report on Form 8-K on August 14, 2002 to file
under Item 9 the:
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 with respect to the Registrant's Form 10-K for the fiscal year ended
June 30, 2002; and
Statement Under Oath of Principal Executive Officer and Principal
Financial Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings in accordance with the order issued by the Securities and
Exchange Commission dated June 27, 2002 under Section 21(a)(1) of the
Securities Exchange Act of 1934.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
(Registrant)
/s/ Michael J. Hiemstra
Michael J. Hiemstra
Executive Vice President - Finance and
Administration and Chief Financial Officer
Date: October 31, 2002
-14-
CERTIFICATIONS
I, Donald E. Washkewicz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parker-Hannifin
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002
/s/ Donald E. Washkewicz
Donald E. Washkewicz
President and Chief Executive Officer
-15-
I, Michael J. Hiemstra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parker-Hannifin
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002
/s/ Michael J. Hiemstra
Michael J. Hiemstra
Executive Vice President - Finance and
Administration and Chief Financial Officer
-16-
EXHIBIT INDEX
Exhibit No. Description of Exhibit
10(a) Form of Executive Life Insurance Agreement entered
into by the Registrant and certain executives
(including executive officers), as restated
10(b) Parker-Hannifin Corporation Savings Restoration
Plan, as restated
10(c) Parker-Hannifin Corporation Executive Deferral
Plan, as restated