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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 December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0451060
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(State or other jurisdiction 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 __.
---
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes X No __.
---
Number of Common Shares outstanding at December 31, 2002 118,115,070
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 1,517,201 $ 1,437,330 $ 3,103,105 $ 2,913,197
Cost of sales 1,258,827 1,203,893 2,558,717 2,401,518
----------- ----------- ----------- -----------
Gross profit 258,374 233,437 544,388 511,679
Selling, general and
administrative expenses 177,142 164,883 353,397 330,298
Interest expense 19,356 21,555 39,050 42,009
Interest and other expense, net 3,830 11 2,204 (106)
----------- ----------- ----------- -----------
Income before income taxes 58,046 46,988 149,737 139,478
Income taxes 20,494 17,926 51,210 49,835
----------- ----------- ----------- -----------
Net income $ 37,552 $ 29,062 $ 98,527 $ 89,643
=========== =========== =========== ===========
Earnings per share - Basic $ .33 $ .25 $ .85 $ .78
Earnings per share - Diluted $ .32 $ .25 $ .84 $ .77
Cash dividends per common share $ .18 $ .18 $ .36 $ .36
See accompanying notes to consolidated financial statements.
-2-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
December 31, June 30,
ASSETS 2002 2002
- --------------- ----------- -----------
Current assets:
Cash and cash equivalents $ 35,365 $ 46,384
Accounts receivable, net 898,888 1,006,313
Inventories:
Finished products 534,144 531,821
Work in process 386,932 353,410
Raw materials 137,503 166,737
----------- -----------
1,058,579 1,051,968
Prepaid expenses 41,298 48,532
Deferred income taxes 87,483 82,421
----------- -----------
Total current assets 2,121,613 2,235,618
Plant and equipment 3,446,055 3,354,258
Less accumulated depreciation 1,771,218 1,657,293
----------- -----------
1,674,837 1,696,965
Goodwill 1,079,808 1,083,768
Intangible assets, net 56,780 51,286
Other assets 658,182 684,946
----------- -----------
Total assets $ 5,591,220 $ 5,752,583
=========== ===========
LIABILITIES
- --------------------------
Current liabilities:
Notes payable $ 580,816 $ 416,693
Accounts payable, trade 371,835 443,525
Accrued liabilities 409,126 451,310
Accrued domestic and foreign taxes 54,899 48,309
----------- -----------
Total current liabilities 1,416,676 1,359,837
Long-term debt 773,733 1,088,883
Pensions and other postretirement benefits 510,206 508,313
Deferred income taxes 90,629 76,955
Other liabilities 128,850 135,079
----------- -----------
Total liabilities 2,920,094 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 118,220,974 shares at
December 31 and 118,124,294 shares at June 30 59,110 59,062
Additional capital 381,349 378,918
Retained earnings 2,530,640 2,473,808
Unearned compensation related to guarantee of ESOP debt (72,862) (79,474)
Deferred compensation related to stock options 2,347 2,347
Accumulated other comprehensive (loss) (225,552) (247,497)
----------- -----------
2,675,032 2,587,164
Less treasury shares, at cost:
105,904 shares at December 31
and 100,130 shares at June 30 (3,906) (3,648)
----------- -----------
Total shareholders' equity 2,671,126 2,583,516
----------- -----------
Total liabilities and shareholders' equity $ 5,591,220 $ 5,752,583
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
- ------------------------------------ --------- ---------
Net income $ 98,527 $ 89,643
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 122,822 115,677
Amortization 7,005 6,839
Deferred income taxes 5,867 1,991
Foreign currency transaction loss 3,480 2,513
Loss on sale of plant and equipment 2,117 556
Changes in assets and liabilities:
Accounts receivable, net 124,103 209,974
Inventories 8,323 (930)
Prepaid expenses 8,352 11,694
Net assets held for sale 21,291
Other assets 26,884 16,318
Accounts payable, trade (79,875) (73,345)
Accrued payrolls and other compensation (40,231) (48,271)
Accrued domestic and foreign taxes 14,248 (6,507)
Other accrued liabilities (23,727) (2,841)
Pensions and other postretirement benefits (1,576) (2,675)
Other liabilities (15,870) 8,409
--------- ---------
Net cash provided by operating activities 260,449 350,336
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Acquisitions (less cash acquired of $8 in 2002 and $343 in 2001) (1,999) (310,178)
Capital expenditures (79,053) (113,119)
Proceeds from sale of plant and equipment 8,129 8,272
Other 2,273 (22,448)
--------- ---------
Net cash used in investing activities (70,650) (437,473)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from (payments for) common share activity 2,222 (4,710)
Payments of notes payable, net (160,350) (56,003)
Proceeds from long-term borrowings 1,755 208,989
Payments of long-term borrowings (4,049) (11,770)
Dividends (41,696) (41,430)
--------- ---------
Net cash (used in) provided by financing activities (202,118) 95,076
Effect of exchange rate changes on cash 1,300 (2,621)
--------- ---------
Net (decrease) increase in cash and cash equivalents (11,019) 5,318
Cash and cash equivalents at beginning of year 46,384 23,565
--------- ---------
Cash and cash equivalents at end of period $ 35,365 $ 28,883
========= =========
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 adminstered vehicle service contract
programs and product-related service programs. Net sales and segment operating
income of the divested businesses for the three months ended December 31, 2001
were $28,509 and $2,013, respectively. Net sales and segment operating income of
the divested businesses for the six months ended December 31, 2001 were $55,029
and $3,870, respectively.
Business Segment Results by Industry
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales
Industrial:
North America $ 669,905 $ 646,299 $1,397,482 $1,297,139
International 373,921 290,446 739,580 586,737
Aerospace 275,400 288,312 552,721 600,812
Other 197,975 212,273 413,322 428,509
---------- ---------- ---------- ----------
Total $1,517,201 $1,437,330 $3,103,105 $2,913,197
========== ========== ========== ==========
Segment operating income
Industrial:
North America $ 27,423 $ 23,576 $ 78,468 $ 64,041
International 22,321 13,207 48,967 33,035
Aerospace 42,651 46,446 85,184 103,338
Other 12,445 9,429 31,289 26,421
---------- ---------- ---------- ----------
Total segment operating income 104,840 92,658 243,908 226,835
Corporate general and
administrative expenses 19,395 15,674 39,493 32,613
---------- ---------- ---------- ----------
Income before interest expense
and other 85,445 76,984 204,415 194,222
Interest expense 19,356 21,555 39,050 42,009
Other expense 8,043 8,441 15,628 12,735
---------- ---------- ---------- ----------
Income before income taxes $ 58,046 $ 46,988 $ 149,737 $ 139,478
========== ========== ========== ==========
-5-
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
-----------------------
1. Management representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of December 31, 2002, the results of operations
for the three and six months ended December 31, 2002 and 2001 and cash
flows for the six months then ended. Certain prior period amounts have been
reclassified to conform to the current period presentation.
2. 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.
In December 2002 the Company adopted the provisions of FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." The
implementation of this accounting pronouncement did not have a material
effect on the Company's results of operations, financial position or cash
flows.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure requirements of
SFAS No. 123. The transition provisions of this Statement are effective for
fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods beginning
after December 15, 2002. The Company currently plans to continue to apply
the intrinsic-value based method to account for stock options and will
comply with the new disclosure requirements beginning with the third
quarter of fiscal 2003.
3. Product warranty
In the ordinary course of business, the Company warrants its products
against defect in design, materials and workmanship over various time
periods. The warranty accrual as of December 31, 2002 and June 30, 2002 is
immaterial to the financial position of the Company and the change in the
accrual for the current quarter and first six months of fiscal 2003 is
immaterial to the Company's results of operations and cash flows.
-6-
4. Earnings per share
The following table presents a reconciliation of the denominator of basic
and diluted earnings per share for the three and six months ended December
31, 2002 and 2001.
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- --------------------------
Numerator: 2002 2001 2002 2001
---------- ------------------------------------------------------------
Net income applicable
to common shares $ 37,552 $ 29,062 $ 98,527 $ 89,643
Denominator:
------------
Basic - weighted average
common shares 116,279,317 115,010,099 116,255,974 115,088,506
Increase in weighted average
from dilutive effect of
exercise of stock options 839,229 608,871 607,167 597,328
------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 117,118,546 115,618,970 116,863,141 115,685,834
============================================================
Basic earnings per share $ .33 $ .25 $ .85 $ .78
Diluted earnings per share $ .32 $ .25 $ .84 $ .77
For the three months ended December 31, 2002 and 2001, 1,066,302 and
2,677,047 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. For the six months ended December 31, 2002
and 2001, 2,558,178 and 2,793,884 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.
5. Stock repurchase program
The Board of Directors has approved a program to repurchase the Company's
common stock on the open market, at prevailing prices. The repurchase is
primarily funded from operating cash flows and the shares are initially
held as treasury stock. There were no share repurchases during the
three-month period ended December 31, 2002. Year-to-date, the Company has
purchased 15,000 shares at an average price of $37.84 per share.
-7-
6. Comprehensive income
The Company's items of other comprehensive income (loss) are foreign
currency translation adjustments and unrealized gains (losses) on
marketable equity securities. Comprehensive income for the three and six
months ended December 31, 2002 and 2001 was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2002 2001 2002 2001
--------------------------------------------------------
Net income $ 37,552 $ 29,062 $ 98,527 $ 89,643
Foreign currency
translation adjustments 40,791 238 22,875 11,124
Unrealized gains (losses) on marketable
equity securities (1,070) 368 (930) (4,905)
--------------------------------------------------------
Comprehensive income $ 77,273 $ 29,668 $ 120,472 $ 95,862
========================================================
The unrealized gains (losses) on marketable equity securities is net of
taxes of $645 and $560 for the three and six months ended December 31,
2002, respectively, and $222 and $2,956 for the three and six months ended
December 31, 2001, respectively.
7. Charges related to business realignment and equity investment adjustment
During the second quarter of fiscal 2003, the Company recorded a $5,057
charge ($3,363 after-tax or $.03 per share) for the costs to structure its
businesses to operate in their current economic environment. The charge
primarily relates to severance costs attributable to 288 people in the
Industrial Segment. As of December 31, 2002, the Company has made a
significant portion of the severance payments with the remaining payments
expected to be made by June 30, 2003. Also in the second quarter of fiscal
2003, the Company recorded a $2,246 charge ($2,246 after-tax or $.02 per
share) related to an adjustment to fair market value of an equity
investment in a publicly traded Japanese company with whom the Company has
established an alliance.
During the first six months of fiscal 2003 the Company recorded charges of
$7,132 ($4,743 after-tax or $.04 per share) for business realignment costs
primarily related to the Industrial Segment. The business realignment costs
and equity investment adjustment are presented in the Consolidated
Statement of Income for the three and six months ended December 31, 2002 as
follows: $4,692 and $6,231, respectively, in Cost of sales and $2,611 and
$3,147, respectively, in Selling, general and administrative expenses.
During the second quarter of fiscal 2002, the Company recorded a $7,335
charge ($4,804 after-tax or $.04 per share) for the costs to structure
appropriately its businesses to operate in their then current economic
environment. The business realignment charge consisted of $4,761 of
severance costs and $2,574 of costs relating to the consolidation of
manufacturing product lines. The severance portion of the charge was
attributable to 236 employees in the Industrial Segment, 206 employees in
the Aerospace Segment and 18 employees in the Other Segment. Of the pre-tax
amount, $3,890 related to the Industrial Segment, $1,848 related to the
Aerospace Segment and $1,597 related to the Other Segment. All severance
payments have been made. Also in the second quarter of fiscal 2002, the
Company recorded a $4,973 charge ($4,973 after-tax or $.04 per share)
related to an adjustment to fair market value of an equity investment in a
publicly traded Japanese company with whom the Company has established an
alliance.
-8-
7. Charges related to business realignment and equity investment adjustment,
continued
During the first six months of fiscal 2002, the Company recorded charges of
$12,376 ($8,106 after-tax or $.07 per share) for business realignment
costs. Of the pre-tax amount, $7,207 related to the Industrial Segment,
$3,055 related to the Aerospace Segment and $2,114 related to the Other
Segment. The business realignment costs and equity investment adjustment
are presented in the Consolidated Statement of Income for the three and six
months ended December 31, 2001 as follows: $6,355 and $10,989,
respectively, in Cost of sales and $5,953 and $6,360, respectively, in
Selling, general and administrative expenses.
8. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the six months ended
December 31, 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
Acquisitions 3,472 3,472
Goodwill adjustments and other (13,475) 30 6,013 (7,432)
-------------------------------------------------
Balance as of December 31, 2002 $ 819,041 $ 76,246 $ 184,521 $ 1,079,808
=================================================
"Goodwill adjustments and other" primarily represent 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:
December 31, 2002 June 30, 2002
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------------------------------------------------------
Patents $ 22,714 $ 10,935 $ 22,356 $ 9,930
Trademarks 20,164 1,166 17,058 644
Engineering drawings and other 30,203 4,200 24,576 2,130
---------------------------------------------------------------
Total $ 73,081 $ 16,301 $ 63,990 $ 12,704
===============================================================
Total intangible amortization expense for the six months ended December 31,
2002 was $3,150. The estimated amortization expense for the five years
ending June 30, 2003 through 2007 is $7,477, $7,524, $6,432, $5,122 and
$4,722, respectively.
-9-
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
AND COMPARABLE PERIODS ENDED DECEMBER 31, 2001
CONSOLIDATED STATEMENT OF INCOME
Net sales increased 5.6 percent for the current quarter and 6.5 percent for the
first six months of fiscal 2003. Without the effects of acquisitions and
divestitures, Net sales increased 2.9 percent for the current quarter and 2.1
percent for the first six months of fiscal 2003, primarily the result of higher
sales in the Industrial International operations with currency-rate changes
accounting for a significant portion of the increase.
Income from operations was $81.2 million for the current quarter and $191.0
million for the first six months of fiscal 2003, an increase from the comparable
prior year periods of 18.5 percent and 5.3 percent, respectively. As a percent
of sales, income from operations for the current quarter was 5.4 percent
compared to 4.8 percent for the prior-year quarter and 6.2 percent for both the
first six months of fiscal 2003 and 2002. Included in income from operations are
business realignment charges and an equity investment adjustment of $7.3 million
and $9.4 million for the current quarter and first six months of fiscal 2003,
respectively, and $12.3 million and $17.3 million, respectively, for the
prior-year quarter and first six months of fiscal 2002 (see Note 7 on page 8 for
further discussion). Excluding the business realignment charges and equity
method investment adjustment, income from operations, as a percent of sales, was
5.8 percent and 6.5 percent for the current quarter and first six months of
fiscal 2003, respectively, compared to 5.6 percent and 6.8 percent for the
prior-year quarter and first six months of fiscal 2002, respectively. For the
current quarter, higher margins in the Industrial and Other Segments were
partially offset by lower margins in the Aerospace operations. For the first
half of the fiscal year, lower margins earned in the Aerospace operations more
than offset the margin improvements experienced in the Industrial operations and
Other Segment businesses.
Selling, general and administrative expenses, as a percent of sales, increased
to 11.7 percent from 11.5 percent for the current quarter and increased to 11.4
percent from 11.3 percent for the first six months of fiscal 2003. Excluding
business realignment charges and equity investment adjustment, Selling, general
and administrative expenses, as a percent of sales, increased to 11.5 percent
from 11.1 percent for the current quarter and increased to 11.3 percent from
11.1 percent for the first six months of fiscal 2003. The higher selling,
general and administrative expenses were primarily due to an increase in
expenses associated with employee health and welfare benefits.
Interest expense decreased 10.2 percent in the current quarter and 7.0 percent
for the first six months of fiscal 2003 primarily due to lower weighted-average
interest rates and lower average debt outstanding.
Interest and other expense, net for the current quarter and first six months of
fiscal 2003 includes losses resulting from the sale of fixed assets in the
ordinary course of business at levels higher than in the comparable prior
periods.
The effective tax rate decreased to 35.3 percent for the current quarter
compared to 38.1 percent in the prior-year quarter and decreased to 34.2 percent
for the first six months of fiscal 2003, compared to 35.7 percent for the first
six months of fiscal 2002. The decrease in the rates from the comparable prior
periods is due to a lower foreign tax rate. The higher rate in the current year
quarter as compared to the rate for the first six months of fiscal 2003 is
primarily due to the non-deductibility of the above-mentioned equity investment
adjustment.
-10-
Net income increased 29.2 percent in the current quarter and 9.9 percent for the
first six months of fiscal 2003, as compared to the prior year comparable
periods. As a percent of sales, Net income increased to 2.5 percent from 2.0
percent for the current quarter and increased to 3.2 percent from 3.1 percent
for the first six months of fiscal 2003. Excluding the business realignment
charges and the equity investment adjustment, Net income, as a percent of sales,
increased slightly to 2.8 percent from 2.7 percent for the current quarter and
decreased slightly to 3.4 percent from 3.5 percent for the first six months of
fiscal 2003. Net income in the current quarter and first six months of fiscal
2003 were adversely affected by an additional expense of approximately $1.7
million and $8.2 million, respectively, related to domestic qualified benefit
plans, resulting primarily from the lower market value of plan assets.
Backlog was $1.85 billion at December 31, 2002 compared to $1.90 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 of the Company's businesses.
RESULTS BY BUSINESS SEGMENT
INDUSTRIAL - The Industrial Segment operations experienced the following
percentage increases in Net sales in the current year compared to the equivalent
prior-year period:
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
Industrial North America 3.7% 7.7%
Industrial International 28.7% 26.0%
Total Industrial 11.4% 13.4%
Without the effect of currency-rate changes, International sales would have
increased 20.2 percent for the current quarter and 18.8 percent for the first
six months of fiscal 2003.
Without the effect of acquisitions completed within the past 12 months, the
percentage changes in Net sales would have been:
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
Industrial North America (0.2)% 1.2%
Industrial International 14.0% 12.3%
Total Industrial 4.2% 4.6%
Excluding the effect of acquisitions, Industrial North American sales for the
second quarter remained flat as increased end-user demand experienced in the
factory automation and oil and gas markets was offset by lower demand in the
agriculture and transportation markets. The slight increase in Industrial North
American sales for the first six months of fiscal 2003 is attributable to
increased end-user demand experienced in the semi-conductor manufacturing and
construction markets in early fiscal 2003. Excluding acquisitions and
currency-rate changes, sales in the Industrial International businesses for the
current quarter and first six months of fiscal 2003 increased as a result of
higher demand across most businesses in the Asia Pacific region and Latin
America, while sales in the European businesses were flat.
Operating income for the Industrial segment increased 35.2 percent for the
current quarter and 31.3 percent for the first six months of fiscal 2003.
Industrial North American operating income increased 16.3 percent for the
current quarter and 22.5 percent for the first six months of fiscal 2003, and
Industrial International operating income increased 69.0 percent for the current
quarter and 48.2 percent for the first six months of fiscal 2003. Industrial
North American operating income, as a percent of sales, increased to 4.1 percent
from 3.6 percent for the current quarter and increased to 5.6 percent from 4.9
percent for the first six months of fiscal 2003. Industrial International
operating income, as a percent of sales, increased to 6.0 percent from 4.5
percent for the current quarter and increased to 6.6 percent from 5.6 percent
for the first six months of fiscal 2003.
-11-
Included in Industrial North American operating income are business realignment
charges of $2.1 million and $3.0 million in the current quarter and first six
months of fiscal 2003, respectively, and $2.5 million and $5.0 million in the
prior-year quarter and first six months of fiscal 2002, respectively. Excluding
business realignment charges, Industrial North American operating income, as a
percent of sales, increased to 4.4 percent from 4.0 percent for the current
quarter and increased to 5.8 percent from 5.3 percent for the first six months
of fiscal 2003. Included in Industrial International operating income are
business realignment charges of $2.2 million and $3.0 million in the current
quarter and first six months of fiscal 2003, respectively, and $1.4 million and
$2.2 million in the prior-year quarter and first six months of fiscal 2002,
respectively. Excluding business realignment charges, Industrial International
operating income, as a percent of sales, increased to 6.5 percent from 5.0
percent for the current quarter and increased to 7.0 percent from 6.0 percent
for the first six months of fiscal 2003. The business realignment charges
resulted from actions the Company took to structure the Industrial operations to
operate in their economic environment and primarily consisted of severance costs
and costs relating to the consolidation of manufacturing product lines.
The increase in Industrial North American margins was primarily due to product
mix and operating efficiencies. Although overall Industrial North American sales
volume was flat, an increase in sales was experienced in higher margin
businesses in the current quarter and first six months of fiscal 2003. The
increase in Industrial International margins was due to the higher volume in the
Asia Pacific region and Latin America, especially in higher margin businesses,
as well as operating efficiencies experienced in most of the European
businesses.
Total Industrial Segment backlog remained unchanged from December 31, 2001 and
decreased 8.0 percent since June 30, 2002. Without acquisitions, Industrial
Segment backlog decreased 3.1 percent from a year ago. The decline in backlog is
primarily due to shipments exceeding new order rates within most industrial
markets.
The volatility of the global economy and the uncertainty of near-term U.S.
military actions makes it difficult to assess the business conditions likely to
be experienced by the Industrial Segment for the remainder of fiscal 2003. At
the present time, the Company expects the Industrial North American operations
to experience similar overall business conditions as those experienced in the
first half of fiscal 2003. Business conditions in the Company's Industrial
International operations are expected to stabilize at the current quarter level
for the remainder of the fiscal year. The Company expects to continue to take
the necessary actions to structure appropriately the Industrial Segment
operations to operate in their economic environment. Such actions may include
the necessity to record additional business realignment charges in the second
half of fiscal 2003.
AEROSPACE - Net sales of the Aerospace Segment decreased 4.5 percent for the
current quarter and 8.0 percent for the first six months of fiscal 2003. The
decrease in sales was primarily due to a decline in both commercial OEM and
aftermarket volume, partially offset by an increase in military volume.
Operating income for the Aerospace Segment decreased 8.2 percent for the current
quarter and 17.6 percent for the first six months of fiscal 2003. Operating
income, as a percent of sales, declined to 15.5 percent from 16.1 percent for
the current quarter and declined to 15.4 percent from 17.2 percent for the first
six months of fiscal 2003. Included in Aerospace operating income are business
realignment charges of $0.5 million and $0.9 million in the current quarter and
first six months of fiscal 2003, respectively, and $1.8 million and $3.1 million
in the prior-year quarter and first six months of fiscal 2002, respectively.
Excluding the business realignment charges, Aerospace operating income, as a
percent of sales, decreased to 15.7 percent from 16.8 percent for the current
quarter and decreased to 15.6 percent from 17.7 percent for the first six months
of fiscal 2003. Lower margins were 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 4.7 percent compared to December 31,
2001 and increased 5.1 percent since June 30, 2002. The increase in backlog
since June 30, 2002 is primarily due to higher military order rates. For the
remainder of fiscal 2003, commercial OEM and aftermarket order rates are
expected to stabilize at the current quarter level while order rates in the
military and defense market are expected to increase marginally.
-12-
OTHER - Net sales of the Other Segment decreased 6.7 percent for the current
quarter and 3.5 percent for the first six months of fiscal 2003. Without the
effect of acquisitions and the prior-year divestiture of the businesses which
administered vehicle service contract programs and product-related service
programs, sales increased 7.7 percent for the current quarter and 5.4 percent
for the first six months of fiscal 2003. The increase in sales is a result of
higher demand in the automotive and refrigeration and air conditioning markets.
Operating income increased 32.0 percent for the current quarter and 18.4 percent
for the first six months of fiscal 2003. Operating income, as a percent of
sales, increased to 6.3 percent from 4.4 percent for the current quarter and
increased to 7.6 percent from 6.2 percent for the first six months of fiscal
2003. Included in operating income are business realignment charges of $0.3
million in the current quarter and first six months of fiscal 2003, and $1.6
million and $2.1 million in the prior-year quarter and first six months of
fiscal 2002, respectively. Operating income for the prior-year quarter and first
six months of fiscal 2002 includes $2.0 million and $3.9 million, respectively,
of income from the divested businesses. Excluding the business realignment
charges and income from divested businesses, operating income, as a percent of
sales, increased to 6.4 percent from 4.9 percent for the current quarter and
increased to 7.6 percent from 6.6 percent for the first six months of fiscal
2003, primarily due to the higher sales volume.
Backlog for the Other Segment increased 3.0 percent compared to a year ago and
decreased 3.3 percent since June 30, 2002. The increase in backlog from a year
ago is primarily due to an increase in orders in the transportation and
refrigeration and air conditioning markets. The decline in backlog from June 30,
2002 is primarily due to a slowdown in order rates from major original equipment
manufacturers. For the remainder of fiscal 2003, business conditions in the
Other Segment are expected to be similar to those of the Industrial North
American operations.
Corporate general and administrative expenses increased to $19.4 million from
$15.7 million for the current quarter and increased to $39.5 million from $32.6
million for the first six months of fiscal 2003. As a percent of sales,
corporate general and administrative expenses increased slightly to 1.3 percent
from 1.1 percent for the current quarter and first six months of fiscal 2003.
Other expense (in the Business Segment Results by Industry) includes a charge of
$2.2 million for the current quarter and first six months of fiscal 2003, and
$5.0 million for the prior-year quarter and first six months of fiscal 2002
related to an adjustment to the fair market value of an equity investment in a
publicly-traded Japanese company with whom the Company has established an
alliance.
BALANCE SHEET
Working capital declined to $704.9 million at December 31, 2002 from $875.8
million at June 30, 2002, with the ratio of current assets to current
liabilities decreasing to 1.5:1. The decrease in working capital was primarily
due to an increase in Notes payable and a decrease in Accounts receivable,
partially offset by a decrease in Accounts payable, trade and Accrued
liabilities.
Accounts receivable decreased to $898.9 million at December 31, 2002 from
$1,006.3 million at June 30, 2002 with days sales outstanding remaining at 55
days since June 30, 2002. Inventories increased $6.6 million since June 30,
2002, with days supply increasing to 92 days from 87 days at June 30, 2002.
Plant and equipment, net of accumulated depreciation, decreased $22.1 million
since June 30, 2002, primarily as a result of depreciation exceeding capital
expenditures.
The decrease in Goodwill since June 30, 2002 primarily reflects final purchase
price adjustments to the purchase price allocation for acquisitions completed
within the last twelve months.
Other assets decreased $26.8 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 $371.8 million at December 31, 2002 from
$443.5 million at June 30, 2002, as purchasing levels throughout the Company's
operations were lower during the latter part of the current quarter.
Accrued liabilities decreased $42.2 million since June 30, 2002 primarily as a
result of lower incentive compensation accruals.
-13-
Due to the weakening of the dollar against certain currencies, foreign currency
translation adjustments resulted in an increase in net assets of $22.9 million
during the first half of fiscal 2003. The translation adjustments primarily
affected Accounts receivable, Inventories, Goodwill, Plant and equipment and
Long-term debt.
STATEMENT OF CASH FLOWS
Cash and cash equivalents decreased $11.0 million for the first six months of
fiscal 2003 after increasing $5.3 million during the same period of fiscal 2002.
Net cash provided by operating activities was $260.4 million for the six months
ended December 31, 2002 compared to $350.3 million for the same six months of
2001. The decrease in net cash provided by operating activities in 2002 was
primarily the result of lower cash flows provided by working capital items,
particularly Accounts receivable, partially offset by an increase in Net income.
Net cash used in investing activities was $70.7 million for the first half of
fiscal 2003 compared to $437.5 million for the first half of 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 the
consolidation of manufacturing facilities, lean manufacturing initiatives, and a
decline in product demand.
Net cash used in financing activities was $202.1 million in fiscal 2003 compared
to providing cash of $95.1 million in fiscal 2002. In fiscal 2003 the Company
decreased its outstanding borrowings by a net total of $162.6 million compared
to an increase of $141.2 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
December 31, 2002 decreased to 33.6 percent compared to 36.8 percent as of June
30, 2002.
The Company expects to make a contribution of approximately $116 million to its
qualified defined benefit plans during the third quarter of fiscal 2003, the
vast majority of which will be contributed to the North American plans. The
Company anticipates funding this contribution using its commercial paper note
program.
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 contract 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.
-14-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002 the Financial Accounting Standards Board (FASB) issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123. The transition provisions of
this Statement are effective for fiscal years ending after December 15, 2002,
and the disclosure requirements of the Statement are effective for interim
periods beginning after December 15, 2002. The Company currently plans to
continue to apply the intrinsic-value based method to account for stock options
and will comply with the new disclosure requirements beginning with the third
quarter of fiscal 2003.
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 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.
-15-
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On October 29, 2002, the Registrant issued an aggregate of 11,934 shares of
Common Stock, $.50 par value, valued at $43.585 per share to certain of its
non-employee directors pursuant to the Registrant's Non-Employee Directors Stock
Plan in lieu of all or a portion of their respective annual retainers. These
transactions were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) of such Act for transactions not
involving a public offering based on the fact that the shares were issued to
accredited investors.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the Shareholders of the Registrant was held
on October 23, 2002.
(b) Not applicable.
(c)(i) The Shareholders elected four directors to the three-year class
whose term of office will expire in 2005, as follows:
Votes For Votes Withheld
-------------- ----------------
William E. Kassling 88,874,262.799 7,371,947.098
Peter W. Likins 85,475,470.870 10,770,739.027
Wolfgang R. Schmitt 88,752,137.706 7,494,072.191
Debra L. Starnes 89,477,633.351 6,768,576.546
(ii) The Shareholders approved the appointment of PricewaterhouseCoopers
LLP as independent certified public accountants of the Company for
the fiscal year ending June 30, 2003, as follows:
For 86,942,406.803
Against 8,640,583.949
Abstain 633,219.145
(d) Not applicable.
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) Cancellation Agreement dated November 1, 2002 between
the Registrant, Michael J. Hiemstra and the
Irrevocable Trust Creating Vested Trusts for Children
of M. J. Hiemstra dated August 16, 1999.
(b) No reports on Form 8-K have been filed during the quarter for which
this Report is filed.
-16-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
(Registrant)
/s/ Michael J. Hiemstra
-----------------------
Michael J. Hiemstra
Executive Vice President - Finance and
Administration and Chief Financial Officer
Date: February 4, 2003
-17-
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 function):
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 or not 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: February 4, 2003
/s/ Donald E. Washkewicz
------------------------
Donald E. Washkewicz
President and Chief Executive Officer
-18-
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 function):
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 or not 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: February 4, 2003
/s/ Michael J. Hiemstra
-----------------------
Michael J. Hiemstra
Executive Vice President - Finance and
Administration and Chief Financial Officer
-19-
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10(a) Cancellation Agreement dated November 1, 2002 between the
Registrant, Michael J. Hiemstra and the Irrevocable Trust
Creating Vested Trusts for Children of M. J. Hiemstra dated
August 16, 1999.