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2000 Parker Hannifin Annual Report

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Parker Hannifin Corporation is an American manufacturer of motion and control technologies and systems, providing precise engineering solutions for a wide variety of commercial and industrial markets. The document outlines Parker's seven operating groups, their key markets, products, facilities and operations around the world. It also provides an overview of Parker's financial performance in recent years, showing consistent growth in net sales, income from operations, net income and cash flows.

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Parker Hannifin Corporation 6035 Parkland Boulevard Cleveland, Ohio 44124-4141 216.896.3000 www.parker.com ParkerHannifinCorporation2000AnnualReport Parker is On Operating Management Operating Group Group President Location AEROSPACE STEPHEN L. HAYES Parker Hannifin Corporation 14300 Alton Parkway Irvine, California 92618-1898 (949) 833-3000 AUTOMATION ROBERT W. BOND Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 CHRISTOPHER S.H. WILKINS Parker Hannifin plc European Operations Walkmill Lane Bridgtown, Cannock, Staffs WS1 13LR England (44) (1543) 456000 CLIMATE & LYNN M. CORTRIGHT Parker Hannifin Corporation INDUSTRIAL CONTROLS 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 FILTRATION JOHN K. OELSLAGER Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 FLUID CONNECTORS JOHN D. MYSLENSKI Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 PHILIP B. STAMP Parker Hannifin Corporation European Operations Parker House 55 Maylands Avenue Hemel Hempstead Herts, HP2 4SJ England (44) (1442) 238100 HYDRAULICS MARWAN M. KASHKOUSH Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 RODERICK B. CLOUSE Parker Hannifin Corporation European Operations Parker House 55 Maylands Avenue Hemel Hempstead Herts, HP2 4SJ England (44) (1442) 238100 INSTRUMENTATION THOMAS W. MACKIE Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 SEAL NICKOLAS W. VANDE STEEG Parker Hannifin Corporation 14300 Alton Parkway Irvine, California 92618-1898 (949) 833-3000 HEINZ DROXNER Parker Hannifin GmbH European Operations StuiFenstr. 55 Pleidelsheim, D-74385 Germany (49) (7144) 2060 ASIA PACIFIC JOSEPH J. VICIC Parker Hannifin Hong Kong Ltd. 8/F King Yip Plaza 9 Cheung Yee Street Cheung Sha Luan Kowloon, Hong Kong (852) 2 428-8008 LATIN AMERICAN A. RICARDO MACHADO Parker Hannifin Industria e Comercio Ltda. Av. Lucas Nogueira Garcez 2181 Jacarei, SP Brazil 12300-000 (55) (12) 354-5100 Pictured left to right: MARWAN M. KASHKOUSH President, Hydraulics Group ROBERT W. BOND President, Automation Group A. RICARDO MACHADO President, Latin American Group JOSEPH J. VICIC President, Asia Pacific Group NICKOLAS W. VANDE STEEG President, Seal Group Pictured left to right: JOHN D. MYSLENSKI President, Fluid Connectors Group STEPHEN L. HAYES President, Aerospace Group JOHN K. OELSLAGER President, Filtration Group THOMAS W. MACKIE President, Instrumentation Group LYNN M. CORTRIGHT President, Climate & Industrial Controls Group In Motion…In Control
Industrial & commercial refrigeration Supermarket refrigeration Appliances Residential air conditioning Fuel dispensing Process control Tire processing Food & beverage Mobile air conditioning Mobile & industrial gerotors Automotive Aerospace Mobile equipment Semiconductor Chemical processing Telecommunications Information technology Industrial Medical Industrial Process Mobile machinery Marine Aviation Environmental Semiconductor Pharmaceutical Pulp & paper Power generation Laboratory Power generation Oil & gas exploration Chemical and petrochemical processing Semiconductor manufacturing Process analytical applications Medical & bio/pharmaceutical Pulp & paper Thermostatic & electronic expansion valves Refrigeration & general- purpose solenoid valves Flo-raters & distributors Pressure regulators Filter dryers Accumulators & receivers Check & service valves Spun copper components Process control valves Gerotors Hose & hose assemblies Tube assemblies O-rings & molded shapes Hydraulic & pneumatic seals & packings Extruded & precision cut seals Metal/rubber combinations PTFE seals EMI shielding/grounding Thermal management materials Plastic/rubber combination seals Hydraulic, lubrication & coolant filters Process, chemical & microfiltration filters Compressed air & gas purification filters Lube oil & fuel filters Fuel-conditioning filters Fuel filters/water separators Cabin air filters Condition monitoring Aviation fuel filters Analytical gas generators Instrumentation fittings Ultra-high-purity fittings & gaskets Ball, plug, needle & check valves Diaphragm & bellow valves PFA & PTFE fittings, valves & pumps Regulators & transducers CGA, DIN, JIS & British Standard cylinder connections Miniature solenoid valves Multi-solenoid manifolds Quick connects & hose products Operates 21 manufacturing plants and 14 sales centers world- wide. Facilities in: United States Korea Canada Brazil Mexico Switzerland Italy Czech Republic Germany Japan United France Kingdom Operates 21 manufacturing plants, with more than 200 distributors worldwide. Joint ventures in Mexico and China. Facilities in: United States Germany Canada Italy Mexico Spain Denmark Czech Republic United Argentina Kingdom Brazil France Japan Operates 13 manufacturing facilities with a network of more than 500 distributors world- wide and technical assistance in every major industrial area. Facilities in: United States France United Germany Kingdom Korea Finland Australia Brazil Netherlands Operates 12 manufacturing plants and four sales offices, Company stores and customer service centers with more than 300 distributors worldwide. Facilities in: United States Canada United Kingdom France SEAL GROUP FILTRATION GROUP CLIMATE & INDUSTRIAL CONTROLS GROUP MARKETS Commercial transports Military aircraft and missiles Regional transports General aviation Business aircraft Helicopters Engines Power plants/power generation Construction machinery Automotive Agriculture Transportation Military Mobile machinery Natural resources Machine tools Construction machinery Aerial lifts Mobile machinery Farm machinery Automotive manufacturing Machine tools Plastic machinery Mining equipment Hoists & cranes Lawn & garden machinery Oil & gas machinery Industrial machinery Machine tools Conveyors Pulp & paper machinery Metalworking equipment Process control Printing machinery Medical instruments Semiconductor manufacturing Packaging machines PRODUCTS Flight control actuation Thrust-reverse actuation Electrohydraulic servovalves Utility hydraulic systems & components Pumps Fuel systems & components Pneumatic controls Heat exchangers Fluid metering delivery & atomization devices Wheels & brakes Rubber & thermoplastic hose Tube fittings & adapters Tubing & plastic fittings Brass fittings & valves Hose couplings Quick disconnects Check valves Expert systems Custom couplings & fittings Hydraulic cylinders Accumulators Rotary actuators Hydraulic valves Hydraulic motors & pumps Hydrostatic steering Power units Electrohydraulic systems Metering pumps Integrated hydraulic circuits Pneumatic valves Air preparation units Indexers, stepper & servo drives Multi-axis positioning tables Electric & pneumatic cylinders Structural extrusions Vacuum products Pneumatic logic Human/machine interface hardware & software FACILITIES Operates 34 facilities worldwide, in: United States Puerto Rico Germany Japan France Singapore United China Kingdom Korea Brazil Canada Malaysia Operates 55 plants and 40 Company-owned stocking facilities, with more than 2,500 distributors worldwide. Facilities in: United States Poland Canada Australia Mexico New Zealand Austria China United Brazil Kingdom South Africa France Thailand Germany Korea Netherlands Czech Republic Operates 66 manufacturing plants, 52 sales offices and ware- houses around the world, with more than 1,300 distributors worldwide. Facilities in: United States Germany Canada Sweden Mexico Italy Brazil Australia United New Zealand Kingdom Austria France Singapore Netherlands China Operates 31 manufacturing plants, 21 sales offices and 5 warehouses, with more than 1,000 distributors worldwide. Facilities in: United States Sweden Canada Brazil Mexico Netherlands United Belgium Kingdom Spain France Korea Germany PARKER AT-A-GLANCE A Summary of Parker’s Operating Groups, Markets, Facilities, and Products AEROSPACE GROUP HYDRAULICS GROUP AUTOMATION GROUP Shareholders’ Letter: Parker is ON, creating technological breakthroughs, serving diversified markets and aiming for new financial goals. 3 From sealing cell phones to provid- ing premier customer service, Parker is ON CALL everywhere around the world. 6 Whether it’s helping a plane land safely or a fire truck get to the scene quickly, Parker products and systems are hard at work getting the job done ON TIME. 8 INSTRUMENTATION GROUPFLUID CONNECTORS GROUP
No matter where you are, or what you need, Parker keeps your world on the move. Everyday, Parker systems solutions are keeping the world’s goods and services ON COURSE to their final destination. 10 Parker makes it possible ON PURPOSE with systems that improve the quality of life in a variety of applications at work, at home and at play. 12 Parker is ON STRATEGY with new systems capabilities, a management team with bench strength and increased financial goals. 14 Financial Review 17
The Year In Review 70 140 210 280 350 120 240 360 480 600 100 200 300 400 500 1000 2000 3000 4000 5000 6000 720 420 600 95 96 97 98 99 00 Net Sales Millions of Dollars 95 96 97 98 99 00 Income from Operations Millions of Dollars 95 96 97 98 99 00 Net Income Millions of Dollars 95 96 97 98 99 00 Cash Flows From Operating Activities Millions of Dollars For the years ended June 30, 2000 1999 1998 (in thousands, except per share data) OPERATING DATA Net sales $ 5,355,337 $ 4,958,800 $ 4,633,023 Income from operations 622,862 538,749 549,897 Net income 368,232 310,501 319,551 Cash flows from operating activities 538,040 459,097 320,599 PER SHARE DATA Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 Dividends .68 .64 .60 Book value 21.22 17.03 15.32 RATIOS Return on sales 6.9% 6.3% 6.9% Return on average assets 8.8 8.6 9.8 Return on average equity 17.7 17.6 19.8 Debt to debt-equity 31.0 29.8 31.6 OTHER Number of shareholders 47,671 39,380 44,250 Number of employees 43,895 38,928 39,873 Income from operations and Net income for 1998 include a non-cash, non-recurring pretax charge of $15.8 million or $12.0 million after tax ($.11 per share) for in-process R&D purchased as part of two acquisitions. The 1998 results also include a charge of $3.7 million ($.03 per share) for the early retirement of debt.
Your company is on the move. On the consolidation front, we are increasing market share among customers who want complete motion and control systems solutions, and broadening our product offering with strategic acquisitions and internal development. We are performing financially, expanding margins around the world, achieving returns well above our cost of capital, and raising the bar further with accelerated growth goals. We are growing globally, positioned for consistent, double-digit gains in our established core markets, and increasing sales and profits in areas of great promise for the future. To Our Shareholders Duane Collins (standing) and Don Washkewicz this year accepted new management roles. Collins, chief executive officer, was elected chairman of the board, and Washkewicz was appointed to the new position of president and chief operating officer. 3
4 PARKER IS ALL ABOUT THE FUTURE: Our technologies are paving the way for new breakthroughs in every aspect of life. Developments in communication, information technology, manufacturing and biomedical science demand well conceived “workhorses” and sophisticated controls to perform consistently: Faster. Smaller. Cleaner. Safer. More efficient. More precise. Parker people advance these causes every day, and our engineers have never had so many opportunities to go to work. A recent example is a new product developed by our Instrumentation Group’s Pneutronics Division: The world’s smallest valve (shown here actual size). This valve is used in medical devices to perform diagnostics and treatment for blood and kidney disorders. An engineering marvel, it operates at 30 psi. But the real source of pride in this innovation is that it makes in-home dialysis a reality for kidney patients, so they can receive treatments in the comfort of their own homes, with their families. ACQUISITIONS: This year, we welcomed new members to the Parker family from Commercial Intertech, Gresen, Whatman Industrial, Gummi Metall and Nylaflow. These businesses bring tremendous talent and together add $728 million in sales. They offer substantial benefits to the customers, shareholders and employees we serve: Commercial Intertech and Gresen, both leaders in hydraulics for the mobile market, bring product lines required to supply complete, engineered hydraulic systems for every kind of mobile machinery. Matched with the full complement of other Parker systems, including fluid connectors, seals, filtration and controls, these additions already are yielding new opportunities for value creation. And because we’ve moved quickly to integrate these businesses within our Hydraulics Group, we are well positioned to realize the earnings accretion planned for next year. The Whatman Industrial business, with products sold under the Balston brand, specializes in high-efficiency depth filtration and gas- separation membrane technology. It positions our Filtration Group with a much broader product offering than other major players in the compressed-air and gas-generation markets. Gummi Metall of Germany complements our Seal Group in Europe, offering compound sealing products in rubber-metal and rubber-plastic varieties. Nylaflow of the Netherlands produces thermoplastic pressure hose and tubing that strengthens our line of connector products in Europe. In July, we completed our cash tender offer acquiring Wynn’s International, a leader in sealing systems for mobile markets. Strategically and financially, the addition of Wynn’s further strengthens our Seal Group, which consistently achieves superior returns in all of its end markets. Wynn’s will add modestly to our fiscal year 2001 earnings, and moreover, presents considerable opportunities for global expansion given our established position. It is another significant step toward total systems capability. With 46 acquisitions in a seven-year period, we’re positioned for double-digit growth and have broadened our playing field to pursue new markets of opportunity. Financially, we remain in an excellent position to invest in product development and acquisition opportunities that fit our business model. You can expect us to continue to be a consolidator, but know that we’ll integrate every business we add with a disciplined focus on value creation, always building on our foundation of motion-control technologies. This is our core competency, and in it, we’re finding more opportunity yet to be realized. OUTLOOK: So, while we are doing all of the things you’d expect we should to keep driving profitability, the real rationale for your investment in Parker is where we’re going from here. In the near term, with rebounding global economies, semiconductors and telecommunications are momentum markets, and we’re seeing across-the-board strength in our industrial and mobile markets. Things are looking up in aerospace as well, since mounting demand for regional jets means bigger system wins for Parker in flight controls, fuel and onboard hydraulics. With 46 acquisitions in a seven-year period, we’ve ensured double-digit growth and broadened our playing field to pursue new markets of opportunity.
5 On the maintenance, repair and overhaul (MRO) side of our industrial business, there is significant growth potential. Traditionally, a customer’s worst predicament is downtime. We have a unique opportunity to take our trademark “premier customer service” to an even higher level, to keep customers in uptime, and improve their operating performance with better engineered systems, systems with integrated chips and electronic sensors that flag problems long before they become a point of breakdown. E-BUSINESS: Our strategy to do this takes a nontraditional view of the two most-asked questions in our industry: the role of distributors and the relevance of e-business. On the role of distributors, we don’t deny that their value in the supply chain is being challenged. But as we see it, the trend toward preventative maintenance and outsourcing redefines the role of distributors, so the real challenge is the shift from reactive to proactive service, adding value by offering total systems solutions. E-business, then, is an important catalyst to help our distributors achieve a higher value shift, from servicing orders to managing performance. We already have an extensive electronic enterprise architecture that, when made available to our distributors, provides the means for us to identify ways to optimize customers’ motion and control applications with systems designed to work together. This is the means to grow our MRO business, all to the benefit of our customers. And as much as we can use electronic intelligence to anticipate our customers’ needs, they still require technical assistance close to all of their operations. So the true measure of success in our e-business initiative hinges on the availability of engineer-technicians everywhere, and that’s the advantage of our distributor force. They extend our enterprise. On the buy side of our supply chain, we are building on our electronic enterprise capabilities to leverage company-wide purchasing, creating an e-procurement network to further bolster our buying power. While web-enabled processes are improving our cost structure and speed, they also are opening up new avenues to integrate transactions among Parker, our distributors and the many small and mid- size companies we serve, who are the vast majority of our customer base. When we help our customers win, we earn their trust and loyalty. The reputation of Parker may seem an intangible asset. But for all of us, its value is real — in every measure of success our customers achieve, in every increment of market share we gain, in our ability to remain an employer and partner of choice, and in the consistent performance we demonstrate. Last year, we said we would continue to grow your company with improved profitability and increasing financial strength. We achieved record results on all these measures. In the coming years, we intend to outperform the record returns of recent years. We’ve raised our financial goals (see page 16), and we’re committed to continue to meet and exceed them through time and the cycles that affect our markets. You may take this as an indication of the state of our business: Financially and operationally, Parker’s never been stronger. For this, we must thank our customers and the Parker employees who are delivering on our commitment to value creation, which, more than anything, underscores our appreciation for your investment in Parker. Please read on… DUANE E. COLLINS DONALD E. WASHKEWICZ Chairman of the Board and President and Chief Operating Officer Chief Executive Officer September 11, 2000
on call. 6 Crops everywhere in the world are planted, harvested and processed with machinery and equipment relying on Parker systems for precise motion and control. You can read all about it thanks to the Parker instrumentation & filtration components and systems used in mills producing millions of tons of paper per year. Fresh fruit and vegetables are increasingly available to consumers the world over thanks to Parker systems used in planting, harvesting, sorting and delivery.
The world is going wireless, and Parker seals are ensuring clearer calls in one out of every five cell phones produced today. When lives hang in the balance, Parker aerospace systems are on board enabling airborne rescuers to reach remote locations and transport patients for rapid treatment. Whether in warehouses, distribution centers or cargo holds, Parker components and systems are inside the equipment that is getting goods where they need to go. 7
Takeoffs, landings and our time in the air are made possible by Parker flight controls, hydraulics and fuel management systems. On the ground, Parker components are busy fueling planes and handling baggage. Freight is transported safely over highways and byways thanks to Parker components and systems. Our refrigeration and sealing systems keep refrigerated trucks cool for fresher, safer, longer-lasting food. The U.S. Postal Service delivers for you and Parker does, too. Parker’s automation equipment sorts, lifts and moves the mail. 8
on time. Both race cars and transport trucks rely on Parker products for dependable motion control systems. Parker has been on every Indianapolis 500 winner’s car for nearly three decades. When fire trucks and rescue vehicles are called to the scene, precision motion control is paramount. The world’s leading emergency equipment manufacturers rely on Parker for hydraulic system design and quality components. From space walks to shuttle missions to celestial explorations, Parker sealing systems and aerospace components are there helping scientists uncover the secrets of our universe. 9
10 The world is being electrified thanks to Parker instrumentation, filtration and gas turbine products used in the oil and gas exploration and power generation industries. Parker is making sure you don’t miss your favorite show. Parker automation systems are used in television production, and our seals are used in high definition TVs and VCRs. We’re helping you bring home the bacon. Parker components and systems are used in food processing, conveyor and packaging applications.
on course. 11 It’s smooth sailing with Parker precision-engineered hydraulic systems used to trim the sails. Shamu® takes center stage with the help of Parker’s rotary actuators used to open the gates between backstage and the performing arena. Infrastructure projects are booming as the world’s population demands an ever-higher standard of living. Parker components and systems are found in equipment turning these improvements into reality.
on purpose. 12 Kids and adults everywhere are using hand-held, portable electronics for both fun and work. Parker sealing systems prevent overheating, and eliminate interference among electronic devices. When we go off into the wild blue yonder, Parker systems are on board with flight controls, hydraulics, fuel management and sealing systems. Nothing is more important than your children’s health and safety. That’s why bus manufacturers choose Parker components for braking systems and Parker alternative fuel handling products for clean operation.
The world is getting smarter, and semiconductors are being imbedded into every device imaginable. Parker instrumentation products and systems are crucial to building the chips that are leading this Information Age revolution. Parker provides micro-products for a variety of biomedical applications including on-demand oxygen units and in-home kidney dialysis. These are smaller and more portable so patients can enjoy a higher quality of life. Riding the waves is made possible by Parker products used in the manufacturing and sealing of personal watercraft. In Hollywood, Parker hydraulics created waves on the set of Warner Bros.’ blockbuster movie The Perfect Storm.
14 TOTAL SYSTEMS – PREMIER CUSTOMER SERVICE GOING FORWARD: Parker business groups have always sought to answer challenges facing customers by engineering solutions to motion and control problems. We have competed successfully by helping our customers reduce their operating costs, by reducing complexity, speeding assembly, and improving performance of engineered systems for their equipment using our products. Now, we are launching a total systems strategy that raises that standard of service and our competitive advantage higher still. Total systems means just that – we will seek ways to integrate all appropriate products from every Parker business group as a complete, value-added system and make buying that system as easy for the customer as buying a single product. Increasingly, customers are demanding this type of “one stop” service, and Parker has anticipated their demand by developing an unparalleled range of motion and control products. We have the products and the engineering talent to put them to use. Our total systems strategy will fuse the two. TECHNOLOGY CENTERS: The concept of total systems centers is similar to the focused mobile and aerospace systems activity already in progress at Parker. Initially, we are targeting the industrial market for motion and control products. Parker’s unequalled range of motion and control products is the foundation of our industrial total systems centers, the first of which will open in North America this year, with others to follow in Europe, Latin America, and the Pacific Rim. The industrial market offers exceptional opportunity to apply products of more than one Parker group for motion and control solutions in industries including steel and chemical processing, packaging, forestry products such as paper and plywood, and almost any form of automated assembly, transfer, or production line. Parker designs and manufactures optimal systems using hoses, connectors, fittings, hydraulics, pneumatics, instrumentation, filters, electromechanical components, and seals typically required on most industrial machinery. No competitor has as broad a range of products. Systems design engineers at the centers will be chartered to use their expertise to draw from all of Parker’s products and business groups to produce value-added industrial motion and control systems that are entirely Parker. Working with customers to design complete systems will be their only business. Our experience creating systems vertically, within aerospace, mobile hydraulic, connector, seal and other business groups, demonstrates the value of this approach as both a customer benefit and competitive advantage. The broader based total systems approach, taking products from more than one business group and integrating them to suit a customer’s specific needs, holds even more exciting potential. The industrial technology centers will fully explore that potential by expanding the capabilities we can offer our industrial customers. Recognizing that our customers are outsourcing their engineering and reducing their supplier lists, this concerted corporate-wide effort to design and sell optimal systems from a single point of contact will further differentiate Parker as the premium motion and control supplier. The strategy will position us better than ever before to reduce our customers’ engineering burden; eliminate time wasted locating and purchasing individual system components; reduce overall costs; and improve operating efficiency with every total systems solution. Also, the technology centers will serve as system design repositories offering total systems solutions developed for industrial uses as packaged responses adaptable to other markets with similar motion and control system requirements. In addition, these systems will be available through a growing number of technology center- certified Parker distributors, offering systems solutions to customers of all sizes. on strategy. Parker designs and manufactures optimal systems using hoses, connectors, fittings, hydraulics, pneumatics, instrumentation, filters, electromechanical components, and seals typically required on most industrial machinery.
15 VALUE: We expect our systems strategy will help us to grow with our customers — providing them with everything they need in motion-control systems everywhere they need value-added solutions. Our growth will include added sales volume for every group drawn into the service of customers who previously may have viewed Parker as the manufacturer of a single product. And, as we add value for our customers derived from design engineering services, reduced costs of order processing, and improved manufacturing speed, we will achieve margins that recognize the value of engineered systems versus “parts” in the markets we serve. We believe that such recognition will result in growing the value of your investment in Parker. Making the most of our systems strategy is one of the goals of the management team. Several new management appointments were made this year (see sidebar at right). Their experience, skills, and leadership will foster the company-wide teamwork to advance this strategy, keeping Parker on the move. MANAGEMENT APPOINTMENTS: A strategy can only be as good as its execution, and Parker is fortunate to have the management depth needed to successfully achieve accelerated growth objectives adopted this year. In addition to CEO Duane Collins’ election as chairman of the board, Don Washkewicz was promoted to the new position of president and chief operating officer responsible for all of the company’s operations. Replacing Don as president of the Hydraulics Group is Marwan Kashkoush. In addition, Bob Bond was promoted as president of the Automation Group; John Oelslager was appointed president of the Filtration Group; and A. Ricardo Machado was named president of the Latin American Group. 2.00 2.50 3.00 1.50 $3.50 1995 1996 1997 1998 1999 2000 Parker Hannifin EPS Index Average EPS Source: First Call 3% 6% 9% 12% 1995 1996 1997 1998 1999 2000 Parker Hannifin S&P Diversified Manufacturers* PARKER’S RETURN ON AVERAGE ASSETS EXCEEDS PEER GROUP PARKER’S EPS GROWTH LEADS PEER GROUP As a measure of management discipline, Parker’s return on assets consistently outpaces its peers in the S&P index of diversified manufacturers. Since July 1, 1995, Parker has outperformed the S&P index of diversified manufacturers in earnings growth, shown here in a rolling comparison plotted to coincide with Parker’s fiscal year. * Given differences among the indexed companies’ fiscal closing dates, returns were calculated using the most recent SEC filings and annualized for 2000, while average assets reflect the average reported at year end and most recent SEC filings.
PARKER’S BEST IS YET TO COME: Building on years of consistent, solid performance, we recently committed to take the company’s growth higher, targeting double-digit sales and earnings growth as a sustainable measure for the coming years: We raised our five-year compound-sales-growth goal from 7.5 percent to 10 percent, with about two- thirds of that generated internally, and one-third from acquisitions. With rising sales, we’ll continue to drive profitability to a premium, focusing on achieving an economic profit well exceeding our cost of capital; a return on sales of six percent or better; return on average assets of at least 7.2 percent; and return on average equity at or above 14 percent. To make better use of our financial strength, we increased our target debt to debt-equity ratio from a range of 30 to 33 percent to a new target between 34 and 37 percent. Worldwide demand is at an all-time high in our markets, which are worth more than $48 billion, and still highly fragmented. In every part of our business, we are outpacing the growth of our markets, with plenty of room for improvement. Our charter is to drive for the number-one position in all of our core markets, progressing from a top-three position to market leadership in motion and control technologies. We see significant opportunities to gain further competitive market share on our product breadth, service strength, new product development and global presence. Geographic and product-line expansion remain ripe for development, and acquisitions will continue to be an important part of our growth strategy. We have both the cash generation capacity and the discipline to manage it conservatively — always — to achieve superior returns that offer near- and long-term value creation. 16 Michael J. Hiemstra, Vice President - Finance & Administration and Chief Financial Officer Accelerating Growth 0.40 0.50 0.60 0.70 18% OperatingMargin Net Assets/Sales 14% 10% Corporate Goal FY95 FY96 FY97 FY98 FY99 FY00 PERFORMANCE METRIC ASSURES VALUE CREATION Our return-minded economic profit measure ensures every division of Parker is managing for value creation, with common controls for effective asset utilization and margin realization.
Financial Review The Company’s management is responsible for the integrity and accuracy of the financial information contained in this annual report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and that the other information in this annual report is consistent with those statements. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. Management is also responsible for maintaining an internal control system designed to provide reasonable assurance at reasonable cost that assets are safeguarded against loss or unauthorized use and that financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States. The system is supported by written policies and guidelines, by careful selection and training of financial management personnel and by an internal audit staff which coordinates its activities with the Company’s independent accountants. To foster a strong ethical climate, the Parker Hannifin Code of Ethics is publicized throughout the Company. This addresses, among other things, compliance with all laws and accuracy and integrity of books and records. The Company maintains a systematic program to assess compliance. PricewaterhouseCoopers LLP, independent accountants, is retained to conduct an audit of Parker Hannifin’s consolidated financial statements in accordance with auditing standards generally accepted in the United States and to provide an independent assessment that helps ensure fair presentation of the Company’s consolidated financial position, results of operations and cash flows. The Audit Committee of the Board of Directors is composed entirely of independent outside directors. The Committee meets periodically with management, internal auditors and the independent accountants to discuss internal accounting controls and the quality of financial reporting. Financial management, as well as the internal auditors and the independent accountants, have full and free access to the Audit Committee. DUANE E. COLLINS, MICHAEL J. HIEMSTRA, Chairman of the Board Vice President – and Chief Executive Officer Finance and Administration and Chief Financial Officer Report of Management Consolidated Statements of Income and Comprehensive Income ...........................................................................19 Consolidated Balance Sheet............................................................................................................................................................................21 Consolidated Statement of Cash Flows...............................................................................................................................................23 Business Segment Information .....................................................................................................................................................................25 Notes to Financial Statements......................................................................................................................................................................26 Eleven-Year Financial Summary....................................................................................................................................................................36 5.0% 10.0% 15.0% 3.0% 6.0% 9.0% 4.0% 8.0% 12.0% 8.0% 16.0% 24.0% 10.0% 20.0% 30.0% 96 97 98 99 00 Five-Year Compound Sales Growth 96 97 98 99 00 Return on Sales 96 97 98 99 00 Return on Average Assets 96 97 98 99 00 Return on Average Equity Goal: 10% Goal: 6.0% Goal: 7.2% Goal: 14.0% 96 97 98 99 00 Dividend Payout Ratio Goal: 25%
M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Statement of Income The Consolidated Statement of Income summarizes the Company’s operating performance over the last three fiscal years. All year references are to fiscal years. Net Sales of $5.36 billion for 2000 were 8.0 percent higher than the $4.96 billion for 1999. Acquisitions completed in 2000 accounted for approximately two-fifths of this increase. The North American Industrial operations experienced higher demand within most of its markets, particularly in semiconductor manufacturing and telecommunications. The Aerospace operations experienced a slowdown in commercial aircraft build rates which was mitigated by an increase in demand for regional jets. The Industrial International operations were adversely affected by a struggling economy in Europe and Latin America in the first half of the year while higher volume was achieved in the Asia Pacific region. Currency rate changes reduced volume increases within the International operations by $104.9 million. Net Sales of $4.96 billion for 1999 were 7.0 percent higher than the $4.63 billion for 1998. Acquisitions completed in 1999 accounted for approximately one-half of this increase. The Aerospace operations experienced continued strong demand in commercial aircraft build rates while the Industrial operations experienced reduced order demand within most of its markets. Within the Industrial operations, the European markets weakened in the latter part of 1999 while the Latin American markets operated in a weak economy throughout most of 1999. The Company continued to penetrate markets in the Asia Pacific region. Volume increases within International operations were partially offset by currency rate changes. The Company expects the North American Industrial operations to continue to improve as record orders received in 2000 are converted to sales and recent acquisitions are integrated. The European and Latin American markets are anticipated to continue to improve while the Company expects to carry on its efforts to expand its infrastructure in the Asia Pacific region. The Aerospace operations expect the regional jet market to continue to improve while the commercial aviation OEM business is expected to decline. The defense business is projected to remain relatively constant. Gross profit margin was 22.4 percent in 2000 compared to 22.0 percent in 1999 and 23.4 percent in 1998. Cost of sales for 1998 included a non-cash, non-recurring charge of $15.8 million for in-process R&D purchased as part of two acquisitions. The increased margins in 2000 reflect higher volume experienced in the North American Industrial operations, offset by weakness experienced in the International Industrial operations as well as the effect of business realignment charges (see page 24 for further discussion). The margin decline in 1999 is primarily the result of the underabsorption of overhead costs and pricing pressure. In addition, gross margins were affected by recently acquired operations contributing lower margins. 18 Selling, general and administrative expenses as a percent of sales decreased to 10.8 percent, from 11.1 percent in 1999, and 11.5 percent in 1998. This decrease is the result of continuing a concerted effort to control the level of these expenses. Interest expense decreased by $4.5 million in 2000 after an increase of $10.9 million in 1999. The decline in 2000 was due to a lower average level of debt outstanding throughout the year as compared to 1999. The increase in 1999 was due to increased borrowings to complete acquisitions. Interest and other (income), net was $4.1 million in 2000 compared to $5.1 million in 1999 and $6.8 million in 1998. Fiscal 1999 included $1.7 million in interest income related to an IRS refund and fiscal 1998 included $3.8 million of interest income from a settlement with the IRS. Loss (gain) on disposal of assets was a $5.6 million loss in 2000, a $2.4 million loss in 1999 and a $.1 million gain in 1998. The loss in 2000 includes $8.4 million of business realignment charges offset by $6.4 million of income realized on the sale of real property. Income taxes decreased to an effective rate of 34.5 percent in 2000, compared to 35.0 percent in 1999 and 35.9 percent in 1998. The decrease in the rate from 1999 to 2000 was primarily the result of the utilization of foreign operating loss carryforwards and lower foreign taxes. The decrease in the rate from 1998 to 1999 was the result of increased tax benefits based on the export of products manufactured in the U.S. Extraordinary item - extinguishment of debt - On June 30, 1998 the Company called for redemption all of its outstanding $100 million, 10.375 percent debentures due 1999-2018. Net Income of $368.2 million for 2000 was 18.6 percent higher than 1999. Net income of $310.5 million for 1999 was 2.8 percent lower than 1998. Net income as a percentage of sales was 6.9 percent in 2000, compared to 6.3 percent in 1999 and 6.9 percent in 1998.
19 (Dollars in thousands, except per share amounts)Consolidated Statement of Income For the years ended June 30, 2000 1999 1998 Net Sales $ 5,355,337 $4,958,800 $ 4,633,023 Cost of sales 4,156,569 3,869,370 3,550,992 Gross profit 1,198,768 1,089,430 1,082,031 Selling, general and administrative expenses 575,906 550,681 532,134 Interest expense 59,183 63,697 52,787 Interest and other (income), net (4,112) (5,056) (6,783) Loss (gain) on disposal of assets 5,604 2,414 (95) Income before income taxes 562,187 477,694 503,988 Income taxes (Note 4) 193,955 167,193 180,762 Income before extraordinary item 368,232 310,501 323,226 Extraordinary item - extinguishment of debt (Note 8) (3,675) Net Income $ 368,232 $ 310,501 $ 319,551 Earnings per Share (Note 5) Basic earnings per share before extraordinary item $ 3.34 $ 2.85 $ 2.91 Extraordinary item – extinguishment of debt (.03) Basic earnings per share $ 3.34 $ 2.85 $ 2.88 Diluted earnings per share before extraordinary item $ 3.31 $ 2.83 $ 2.88 Extraordinary item – extinguishment of debt (.03) Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 The accompanying notes are an integral part of the financial statements. (Dollars in thousands)Consolidated Statement of Comprehensive Income For the years ended June 30, 2000 1999 1998 Net Income $ 368,232 $ 310,501 $ 319,551 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustment (32,600) (32,832) (32,681) Comprehensive Income $ 335,632 $ 277,669 $ 286,870 The accompanying notes are an integral part of the financial statements.
20 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Balance Sheet The Consolidated Balance Sheet shows the Company’s financial position at year end, compared with the previous year end. This statement provides information to assist in assessing factors such as the Company’s liquidity and financial resources. All year references are to fiscal years. The effect of currency rate changes during the year caused a $32.6 million decrease in Shareholders’ Equity. These rate changes also caused significant decreases in accounts receivable, inventories, goodwill, plant and equipment, accounts payable and various accrual accounts. Working capital and the current ratio were as follows: Working Capital (millions) 2000 1999 Current Assets $ 2,153 $ 1,775 Current Liabilities 1,186 755 Working Capital 967 1,020 Current Ratio 1.8 2.4 Accounts receivable are primarily receivables due from customers for sales of product ($777.1 million at June 30, 2000, compared to $684.2 million at June 30, 1999). The current year increase in accounts receivable is primarily due to acquisitions and increased volume. Days sales outstanding for the Company decreased to 45 days in 2000 from 47 days in 1999. An increase in the allowance for doubtful accounts in 2000 is primarily due to receivables obtained through acquisitions. Inventories increased to $974.2 million at June 30, 2000, compared to $915.1 million a year ago. The increase was primarily due to acquisitions partially offset by a decrease in inventory in the Aerospace operations where management focused on aligning inventory levels with current customer demand. Months supply of inventory on hand at June 30, 2000 decreased to 3.2 months from 3.5 months at June 30, 1999. Net assets held for sale represents the estimated net cash proceeds and estimated net earnings during the holding period of the metal forming and building systems businesses, which were acquired as part of the Commercial Intertech transaction. These businesses are expected to be sold in the first half of 2001. Plant and equipment, net of accumulated depreciation, increased $140.0 million in 2000 as a result of acquisitions and capital expenditures which exceeded annual depreciation. Investments and other assets increased $313.7 million in 2000 primarily as a result of increases in qualified benefit plan assets including those from acquisitions. Excess cost of investments over net assets acquired increased $129.3 million in 2000 as a result of acquisitions, partially offset by current year amortization. The additional excess cost of investments in 2000 is being amortized over 20 years. Notes payable and long-term debt payable within one year increased $274.7 million primarily due to an increase in commercial paper borrowings used to fund acquisitions. Accounts payable, trade increased $59.5 million in 2000 primarily due to acquisitions as well as higher balances in the North American Industrial operations due to higher production levels. Accrued payrolls and other compensation increased $24.1 million in 2000 primarily as a result of increased headcount from acquisitions and incentive plans which are based on sales and earnings. Accrued domestic and foreign taxes increased to $84.2 million in 2000 from $52.6 million in 1999 primarily due to acquisitions, as well as higher taxable income in 2000. Long-term debt decreased $23.0 million in 2000 compared to 1999. See the Cash Flows From Financing Activities section on page 22 for further discussion. The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. To meet this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-equity of 34 to 37 percent. Debt to Debt-Equity Ratio (millions) 2000 1999 Debt $ 1,037 $ 785 Debt & Equity 3,347 2,639 Ratio 31.0% 29.8% Excluding the effect of the ESOP loan guarantee on both Long-term debt and Shareholders’ Equity, the debt to debt-equity ratio at June 30, 2000 was 28.0 percent. In fiscal 2001 additional borrowings are not anticipated for the stock repurchase program, capital investments, or for working capital purposes. However, additional borrowings were utilized to fund the Wynn’s International acquisition. See the Subsequent Event footnote on page 35 for further discussion. These additional borrowings are expected to cause a temporary increase in the debt to debt-equity ratio above the financial goal noted above but the ratio is expected to return to the target range once proceeds from the sale of certain net assets held for sale are realized. Pensions and other postretirement benefits increased 8.4 percent in 2000. These costs are explained further in Note 9 to the Consolidated Financial Statements. Other liabilities increased to $71.1 million in 2000 from $65.3 million in 1999 primarily due to increases in deferred compensation plans. Common stock in treasury increased to $8.4 million in 2000 from $1.8 million in 1999 due to the repurchase of Company common shares in 2000. Quantitative and Qualitative Disclosures About Market Risk - The Company enters into forward exchange contracts, costless collar contracts and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. The total 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. See the Significant Accounting Policies footnote on page 27 for further discussion.
21 (Dollars in thousands)Consolidated Balance Sheet June 30, 2000 1999 Assets Current Assets Cash and cash equivalents $ 68,460 $ 33,277 Accounts receivable, less allowance for doubtful accounts (2000 - $10,420; 1999 - $9,397) 840,040 738,773 Inventories (Notes 1 and 6): Finished products 483,017 442,361 Work in process 344,804 347,376 Raw materials 146,375 125,393 974,196 915,130 Prepaid expenses 32,706 22,928 Deferred income taxes (Notes 1 and 4) 73,711 64,576 Net assets held for sale (Note 2) 164,000 Total Current Assets 2,153,113 1,774,684 Plant and equipment (Note 1): Land and land improvements 138,394 125,990 Buildings and building equipment 642,770 592,086 Machinery and equipment 1,825,889 1,678,956 Construction in progress 107,197 109,780 2,714,250 2,506,812 Less accumulated depreciation 1,373,335 1,305,943 1,340,915 1,200,869 Investments and other assets (Note 1) 574,241 260,495 Excess cost of investments over net assets acquired (Note 1) 570,740 441,489 Deferred income taxes (Notes 1 and 4) 7,290 28,351 Total Assets $ 4,646,299 $ 3,705,888 Liabilities and Shareholders’ Equity Current Liabilities Notes payable and long-term debt payable within one year (Notes 7 and 8) $ 335,298 $ 60,609 Accounts payable, trade 372,666 313,173 Accrued payrolls and other compensation 169,837 145,745 Accrued domestic and foreign taxes 84,208 52,584 Other accrued liabilities 224,294 182,402 Total Current Liabilities 1,186,303 754,513 Long-term debt (Note 8) 701,762 724,757 Pensions and other postretirement benefits (Notes 1 and 9) 299,741 276,637 Deferred income taxes (Notes 1 and 4) 77,939 30,800 Other liabilities 71,096 65,319 Total Liabilities 2,336,841 1,852,026 Shareholders’ Equity (Note 10) Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued Common stock, $.50 par value, authorized 600,000,000 shares; issued 116,602,195 shares in 2000 and 111,945,179 shares in 1999 at par value 58,301 55,973 Additional capital 328,938 132,227 Retained earnings 2,165,625 1,872,356 Unearned compensation related to ESOP (Note 8) (110,818) (112,000) Deferred compensation related to stock options 1,304 Accumulated other comprehensive income (loss) (125,458) (92,858) 2,317,892 1,855,698 Common stock in treasury at cost; 214,487 shares in 2000 and 43,836 shares in 1999 (8,434) (1,836) Total Shareholders’ Equity 2,309,458 1,853,862 Total Liabilities and Shareholders’ Equity $ 4,646,299 $ 3,705,888 The accompanying notes are an integral part of the financial statements.
22 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Cash Flows The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company’s operating, investing and financing activities. All year references are to fiscal years. Cash and cash equivalents increased $35.2 million in 2000 after increasing $2.8 million in 1999. Cash Flows From Operating Activities — The Company’s largest source of cash continues to be net cash provided by operating activities. Net cash provided by operating activities in 2000 was a record $538.0 million compared to $459.1 million in 1999. Net income in 2000 increased $57.7 million over 1999. Accounts payable provided cash of $21.8 million in 2000 compared to using cash of $33.1 million in 1999 and Accrued payrolls and other compensation provided cash of $8.0 million in 2000 after using cash of $21.9 million in 1999. These providers of cash in 2000 were partially offset by Deferred income taxes, which decreased $11.9 million in 2000 as opposed to increasing $5.7 million in 1999. Other liabilities provided cash of $5.6 million in 2000 after providing cash of $20.7 million in 1999. Inventories provided cash of $17.2 million in 2000 compared to providing cash of $30.6 million in 1999 and Accounts receivable used cash of $42.4 million in 2000 after using cash of $31.4 million in 1999. The net cash provided by operating activities in 1999 increased $138.5 million compared to 1998. This increase was principally due to Inventories providing cash of $30.6 million in 1999 compared to using cash of $185.6 million in 1998. Accrued domestic and foreign taxes provided cash of $22.1 million in 1999 after using cash of $15.3 million in 1998. Accounts receivable used cash of $31.4 million in 1999 after using cash of $71.0 million in 1998 and Other liabilities provided cash of $20.7 million compared to providing cash of $8.6 million in 1998. These providers of cash in 1999 were partially offset with cash used by Other assets of $57.0 million in 1999 after using cash of $31.6 million in 1998. Accounts payable used cash of $33.1 million in 1999 after providing cash of $52.9 million in 1998. Accrued payrolls and other compensation used cash of $21.9 million in 1999 after providing cash of $27.5 million in 1998. Cash Flows From Investing Activities — Net cash used in investing activities was $266.7 million higher in 2000 than 1999, primarily due to Acquisitions using $261.1 million more cash in 2000, partially offset by an increase of $25.7 million in proceeds received from the sale of plant and equipment in 2000. Included in Other is an increase in cash used for equity investments in 2000. Net cash used in investing activities was $146.1 million lower in 1999 than 1998, primarily due to Acquisitions using $143.1 million less cash in 1999. Also, Capital expenditures decreased by $6.8 million in 1999. To complete Acquisitions the Company utilized cash of $351.0 million and the issuance of common stock valued at $184.3 million in 2000; cash of $89.9 million in 1999; and cash of $233.0 million and treasury shares valued at $11.9 million in 1998. The net assets of the acquired companies at their respective acquisition dates consisted of the following: (in thousands) 2000 1999 1998 Assets acquired: Accounts receivable $ 72,651 $ 16,529 $ 39,286 Inventories 90,319 16,173 43,847 Prepaid expenses 2,329 2,509 1,393 Assets held for sale 164,000 Deferred income taxes 27,814 1,643 Plant & equipment 119,889 17,686 54,718 Other assets 246,915 3,783 3,762 Excess cost of investments over net assets acquired 158,230 84,589 162,680 882,147 141,269 307,329 Liabilities and equity assumed: Notes payable 2,433 10,433 8,690 Accounts payable 41,315 10,105 21,841 Accrued payrolls 18,345 6,828 4,418 Accrued taxes 102,473 (646) 2,840 Other accrued liabilities 56,432 3,535 11,421 Long-term debt 107,195 20,090 9,706 Pensions and other postretirement benefits 22,964 471 477 Other liabilities 588 3,033 Unearned compensation (4,285) 346,872 51,404 62,426 Net assets acquired $ 535,275 $ 89,865 $ 244,903 Cash Flows From Financing Activities — In 2000 the Company increased its outstanding borrowings by a net total of $154.6 million primarily to fund acquisitions. The majority of the funding occurred in the second half of 2000 and was accomplished through the issuance of commercial paper. In 1999 the Company decreased its outstanding borrowings by a net total of $148.4 million. This amount does not include the Company’s issuance of the ESOP debt guarantee of $112.0 million, which is reflected as a non-cash financing activity. The Company issued $225.0 million in medium-term notes during 1999. As of June 30, 1999, the Company paid down the majority of its commercial paper borrowings and selected notes payable attributable to the International operations with the major source of funding for the repayment coming from the proceeds received from the sale of treasury shares to the ESOP. Common share activity in 2000 includes the exercise of stock options and the repurchase of stock. During 2000 the Company purchased 267,200 shares for treasury. Dividends have been paid for 200 consecutive quarters, including a yearly increase in dividends for the last 44 fiscal years. The current annual dividend rate is $.68 per share. In summary, based upon the Company’s past performance and current expectations, management believes the cash flows generated from future operating activities should provide adequate funds to support internal growth and continued improvements in the Company’s manufacturing facilities and equipment. The Company’s worldwide financial capabilities may be used to support planned growth as needed.
23 (Dollars in thousands)Consolidated Statement of Cash Flows For the years ended June 30, 2000 1999 1998 Cash Flows From Operating Activities Net income $ 368,232 $ 310,501 $ 319,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 167,356 164,577 153,633 Amortization 39,052 37,469 29,046 Deferred income taxes (11,867) 5,718 7,680 Foreign currency transaction loss (gain) 5,082 (2,495) 3,697 (Gain) loss on sale of plant and equipment (5,288) 1,886 291 Write-off of purchased in-process research and development 15,800 Net effect of extraordinary loss 3,675 Changes in assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable (42,386) (31,396) (71,034) Inventories 17,248 30,606 (185,569) Prepaid expenses (7,881) 2,069 (3,473) Other assets (53,105) (56,957) (31,620) Accounts payable, trade 21,792 (33,075) 52,947 Accrued payrolls and other compensation 8,021 (21,892) 27,531 Accrued domestic and foreign taxes 30,124 22,091 (15,282) Other accrued liabilities (7,533) (3,935) (9,129) Pensions and other postretirement benefits 3,642 13,258 14,276 Other liabilities 5,551 20,672 8,579 Net cash provided by operating activities 538,040 459,097 320,599 Cash Flows From Investing Activities Acquisitions (less cash acquired of $1,158 in 2000, $2,609 in 1999 and $4,260 in 1998) (351,011) (89,865) (232,953) Capital expenditures (230,482) (230,122) (236,945) Proceeds from sale of plant and equipment 32,051 6,382 7,151 Other (30,267) 548 3,630 Net cash (used in) investing activities (579,709) (313,057) (459,117) Cash Flows From Financing Activities Proceeds from (payments for) common share activity 1,202 74,076 (96,887) Proceeds from (payments of) notes payable, net 272,440 (228,896) 190,865 Proceeds from long-term borrowings 12,600 232,886 87,085 (Payments of) long-term borrowings (130,419) (152,397) (13,054) Dividends paid, net of tax benefit of ESOP shares (74,963) (69,461) (66,501) Net cash provided by (used in) financing activities 80,860 (143,792) 101,508 Effect of exchange rate changes on cash (4,008) 541 (1,499) Net increase (decrease) in cash and cash equivalents 35,183 2,789 (38,509) Cash and cash equivalents at beginning of year 33,277 30,488 68,997 Cash and cash equivalents at end of year $ 68,460 $ 33,277 $ 30,488 Supplemental Data: Cash paid during the year for: Interest, net of capitalized interest $ 56,341 $ 62,997 $ 48,105 Income taxes 167,211 129,893 175,546 Non-cash investing activities: Stock issued for acquisitions 184,263 11,950 Non-cash financing activities: Capital lease obligations 7,346 ESOP debt guarantee 112,000 The accompanying notes are an integral part of the financial statements.
24 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Business Segment Information The Business Segment Information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company’s various businesses are managed for internal review and decision- making. All year references are to fiscal years. Industrial Segment 2000 1999 1998 Operating income as a percent of sales 12.1% 11.0% 12.6% Return on average assets 17.4% 16.0% 19.1% Sales for the Industrial North American operations increased to a record $2.94 billion in 2000, 14.7 percent over 1999, following 1999’s increase of 4.5 percent over 1998. Acquisitions accounted for one-third of the increase in 2000 and four-fifths of the increase in 1999. The increase in Industrial North American sales is attributable to higher volume across all businesses, particularly in the semiconductor manufacturing and telecommunications markets. Sales in 1999 reflected lower demand within most of the Industrial North American markets. International Industrial sales increased to $1.27 billion, 2.7 percent over 1999. Acquisitions accounted for all of the 2000 increase. Without the impact of changes in currency rates, sales for 2000 increased 11.1 percent, mostly attributable to higher volume in the Asia Pacific region as well as higher market demand in Europe and Latin America in the latter part of 2000. International Industrial sales in 1999 increased to $1.24 billion, 4.7 percent over 1998. Without the impact of changes in currency rates, volume for 1999 increased 5.8 percent. Acquisitions accounted for all of the 1999 increase. Industrial North American operating income increased 27.3 percent in 2000 after a decline of 8.4 percent in 1999. Income from operations as a percent of sales was 14.5 percent in 2000 compared to 13.1 percent in 1999 and 14.9 percent in 1998. The increased margins in 2000 reflect better capacity utilization as market demand improved. Recent acquisitions, not yet fully integrated, contributed slightly lower margins. Raw material prices decreased during the year. International operating income increased 2.2 percent in 2000 after a 1999 decrease of 11.4 percent. Operating income in 2000 includes $9.0 million in business realignment charges that were taken to appropriately structure the European operations to operate in their current economic environment. Excluding this charge, income as a percent of sales in 2000 was 7.3 percent compared to 6.6 percent in 1999 and 7.8 percent in 1998. The increased margins reflect higher volume in the Asia Pacific region and improved market conditions in Latin America. Margins also benefited from the improved European market demand in the second half of 2000 with the increased volume improving capacity utilization. The lower margins in 1999 resulted primarily from struggling European and Latin American economies. A significant upward trend in order rates was experienced in 2000 with orders in virtually all markets continuing on the upswing heading into fiscal 2001. It is unclear whether the sequential improvement in order rates can be sustained in 2001 as economic indicators for some North American markets are beginning to signal a slowdown in production. The Industrial European and Latin American operations are expected to experience modestly improving economies in 2001. Focused efforts will be made in 2001 to integrate acquisitions completed in 2000 as well as the recently completed Wynn’s International acquisition. The Company will also continue to monitor the European operations and take, where necessary, actions to manage these operations to ensure they are appropriately structured to operate in their current economic environment. Backlog for the Industrial Segment was $751.0 million at June 30, 2000, compared to $546.9 million at the end of 1999 and $585.2 million at the end of 1998. The higher backlog reflects the strong order rates experienced across all markets during the year as well as acquisitions. The decline in backlog in 1999 was due to the weakened demand experienced by the Industrial markets. Assets for the Industrial Segment increased 20.7 percent in 2000 after an increase of 3.4 percent in 1999. The increase in 2000 is primarily due to acquisitions. In 1999 an increase from acquisitions was partially offset by decreases in inventories and net goodwill as well as the effect of currency fluctuations. In both years net plant and equipment increased due to capital expenditures exceeding depreciation. Aerospace Segment 2000 1999 1998 Operating income as a percent of sales 15.4% 15.4% 16.1% Return on average assets 23.4% 23.1% 22.8% Sales declined 1.2 percent in 2000 after an increase of 16.1 percent in 1999. The lower sales resulted from the expected reduction in commercial aircraft builds partially offset by an increase in regional jet build rates and maintenance, repair and overhaul business. An increase in commercial aircraft build rates contributed to the higher volume in 1999. Operating income was $175.7 million in 2000, $177.2 million in 1999 and $159.6 million in 1998. Operating income in 2000 includes $4.4 million in business realignment charges that were taken in response to a decline in commercial aircraft orders. Excluding this charge, as a percent of sales, 2000 income was 15.8 percent compared to 15.4 percent in 1999 and 16.1 percent in 1998. An increase in margins from a higher mix of aftermarket business offset reduced margins from the lower volume, which resulted in lower capacity utilization. The 1999 decline in margins reflected a change in mix of sales from aftermarket to OEM. Backlog at June 30, 2000 was $1.05 billion compared to $1.08 billion in 1999 and $1.06 billion in 1998. The lower backlog reflects the decline in commercial aircraft build rates partially offset by an increase in orders in the regional jet market. This trend in order rates is expected to continue in 2001. Assets declined 10.0 percent in 2000 after a 6.0 percent increase in 1999. The decline in 2000 was primarily due to a reduction in inventory. In 1999, increases in customer receivables and property, plant and equipment were partially offset by a decrease in net goodwill.
25 (Dollars in thousands)Business Segment Information By Industry 2000 1999 1998 Net Sales: Industrial: North America $ 2,942,419 $2,565,154 $ 2,454,558 International 1,274,590 1,241,256 1,185,584 Aerospace 1,138,328 1,152,390 992,881 $ 5,355,337 $4,958,800 $ 4,633,023 Segment Operating Income: Industrial: North America $ 426,630 $ 335,259 $ 365,880 International 84,022 82,245 92,783 Aerospace 175,710 177,213 159,580 Total segment operating income 686,362 594,717 618,243 Corporate administration 58,210 54,176 61,829 Income before interest expense and other 628,152 540,541 556,414 Interest expense 59,183 63,697 52,787 Other 6,782 (850) (361) Income before income taxes $ 562,187 $ 477,694 $ 503,988 Identifiable Assets: Industrial $ 3,207,357 $2,657,146 $ 2,570,273 Aerospace 709,731 789,174 744,335 3,917,088 3,446,320 3,314,608 Corporate (a) 729,211 259,568 210,213 $ 4,646,299 $3,705,888 $ 3,524,821 Property Additions: (b) Industrial $ 329,651 $ 209,230 $ 245,995 Aerospace 20,720 36,993 33,733 Corporate 1,585 11,935 $ 350,371 $ 247,808 $ 291,663 Depreciation: Industrial $ 142,078 $ 140,914 $ 130,888 Aerospace 21,342 19,523 19,011 Corporate 3,936 4,140 3,734 $ 167,356 $ 164,577 $ 153,633 By Geographic Area (c) 2000 1999 1998 Net Sales: North America $ 4,054,367 $ 3,684,786 $ 3,425,704 International 1,300,970 1,274,014 1,207,319 $ 5,355,337 $4,958,800 $ 4,633,023 Long-lived Assets: North America $ 969,788 $ 873,222 $ 790,162 International 371,127 327,647 345,063 $ 1,340,915 $ 1,200,869 $ 1,135,225 The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a management basis that is consistent with the manner in which the Company disaggregates financial information for internal review and decision-making. (a) Corporate assets are principally cash and cash equivalents, domestic deferred income taxes, investments, benefit plan assets, headquarters facilities, assets held for sale and the major portion of the Company’s domestic data processing equipment. Corporate assets increased 180.9 percent in 2000 and 23.5 percent in 1999. The 2000 amount includes assets held for sale as separately identified on the Consolidated Balance Sheet. The increase in both years is due to increases in qualified and non- qualified benefit plan assets including those from acquisitions in 2000. (b) Includes value of net plant and equipment at the date of acquisition of acquired companies accounted for by the purchase method (2000 - $119,889; 1999 - $17,686; 1998 - $54,718). (c) Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10% of consolidated sales. Long-lived assets are comprised of property, plant and equipment based on physical location.
26 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Note 1 Significant Accounting Policies The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below. Nature of Operations — The Company is a leading worldwide producer of motion control products, including fluid power systems, electromechanical controls and related components. The Company evaluates performance based on segment operating income before Corporate general and administrative expenses, Interest expense and Income taxes. The Company operates in two principal business segments: Industrial and Aerospace. The Industrial Segment is an aggregation of several business units which produce motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military machinery, vehicles and equipment. Industrial Segment products are marketed primarily through field sales employees and independent distributors. The North American Industrial business represents the largest portion of the Company’s manufacturing plants and distribution networks and primarily services North America. The International Industrial operations bring Parker products and services to countries throughout Europe, Asia Pacific and Latin America. The Aerospace Segment produces hydraulic, pneumatic and fuel systems and components which are utilized on virtually every domestic commercial, military and general aviation aircraft. Its components also perform a vital role in naval vessels, land-based weapons systems, satellites and space vehicles. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Its products are marketed by field sales employees and are sold directly to the manufacturer and to the end user. There are no individual customers to whom sales are five percent or more of the Company’s consolidated sales. Due to the diverse group of customers throughout the world the Company does not consider itself exposed to any concentration of credit risks. The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company’s products and geographic operations mitigate significantly the risk that adverse changes would materially affect the Company’s operating results. Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Basis of Consolidation — The consolidated financial statements include the accounts of all domestic and foreign subsidiaries. All material intercompany transactions and profits have been eliminated in the consolidated financial statements. Within the Business Segment Information, intersegment and interarea sales are recorded at fair market value and are immaterial in amount. Revenue Recognition — Revenue is generally recognized when products are shipped. Cash — Cash equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash. Inventories — Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued by the last-in, first-out method and the balance of the Company’s inventories are valued by the first-in, first-out method. Long-term Contracts — The Company enters into long-term contracts for the production of aerospace products. For financial statement purposes, sales are recorded as deliveries are made (units of delivery method of percentage-of-completion). Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Plant, Equipment and Depreciation — Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings; 15 years for land improvements and building equipment; 10 years for machinery; and seven years for equipment. Improvements which extend the useful life of property are capitalized, and maintenance and repairs are expensed. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income. Investments and Other Assets — Investments in joint-venture companies in which ownership is 50% or less and in which the Company does not have operating control are stated at cost plus the Company’s equity in undistributed earnings. These investments and the related earnings are not material to the consolidated financial statements. Excess Cost of Investments — The excess cost of investments over net assets acquired is being amortized, on a straight-line basis, over periods ranging from 15 years to 40 years. Unamortized cost in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value. Income Taxes — Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise.
27 (Dollars in thousands, except per share amounts) Foreign Currency Translation — Assets and liabilities of most foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the Accumulated other comprehensive income (loss) component of Shareholders’ Equity. Such adjustments will affect Net Income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved, and translation adjustments in countries with highly inflationary economies, are included in income. Financial Instruments — The Company’s financial instruments consist primarily of investments in cash, cash equivalents and long-term investments as well as obligations under notes payable and long-term debt. The carrying values for Cash and cash equivalents, Investments and other assets and Notes payable approximate fair value. The Company enters into forward exchange contracts (forward contracts), costless collar contracts, and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The Company does not hold or issue derivative financial instruments for trading purposes. Gains or losses on forward contracts which hedge specific transactions are recognized in Net Income, offsetting the underlying foreign currency gains or losses. Gains or losses on costless collar contracts are recognized in Net Income when the spot rate of the contract falls outside the collar range. Cross-currency swap agreements are recorded in Long-term debt as dollar- denominated receivables with offsetting foreign-currency payables. If the receivables more than offset the payables, the net difference is reclassified to an asset. Gains or losses are accrued monthly as an adjustment to Net Income, offsetting the underlying foreign currency gains or losses. The differential between interest to be received and interest to be paid is accrued monthly as an adjustment to Interest expense. In addition, the Company’s foreign locations, in the ordinary course of business, enter into financial guarantees, through financial institutions, which enable customers to be reimbursed in the event of nonperformance by the Company. The total value of open contracts and any risk to the Company as a result of the above mentioned arrangements is not material. Stock Options — The Company applies the intrinsic-value based method to account for stock options granted to employees or outside Directors to purchase common shares. The option price equals the market price of the underlying common shares on the date of grant, therefore no compensation expense is recognized. Recently Issued Accounting Pronouncements — The Financial Accounting Standards Board (FASB) has issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This standard establishes a new model for accounting for derivatives and hedging activities. Due to the immaterial amount of derivative and hedging activity within the Company, application of this standard, required in the first quarter of 2001 as a result of the issuance of SFAS No. 137, is not expected to have a material impact on the results and financial position of the Company. Note 2 Acquisitions and Net Assets Held for Sale On February 3, 2000 the Company acquired the assets of Dana Corporation’s Gresen Hydraulics business, located in Minneapolis, Minnesota and Sarasota, Florida, a manufacturer of a wide range of hydraulic pumps, motors, cylinders, control valves, filters and electronic controls for on- and off-highway vehicles. On April 11, 2000 the Company completed its merger with Commercial Intertech Corp. of Youngstown, Ohio with the Company being the surviving corporation. Commercial Intertech’s hydraulics business manufactures gear pumps and motors, control valves and telescopic cylinders for use on heavy-duty mobile equipment. On May 30, 2000 the Company acquired the equity of Whatman’s Industrial Filtration Business, based in Haverill, Massachusetts and Maidstone, United Kingdom, a manufacturer of high quality purification products and gas generators for a variety of industrial applications. Combined annual sales for these operations, for their most recent fiscal year prior to acquisition, were approximately $716 million. Total purchase price for these businesses was approximately $339 million in cash, 4.3 million shares of common stock valued at $184 million and assumed debt of $104 million. The Company is currently soliciting offers for the purchase of Commercial Intertech’s building systems and metal forming businesses. These businesses are valued at the estimated net cash proceeds from their sale plus estimated net earnings during the holding period and are reflected as Net assets held for sale on the Consolidated Balance Sheet. On July 14, 1998 the Company acquired the equity of B.A.G. Acquisition Ltd., the parent company of Veriflo Corporation, a manufacturer of high-purity regulators and valves based in Richmond, California. On August 27, 1998 the Company acquired the equity of Fluid Power Systems, a manufacturer of hydraulic valves and electrohydraulic systems and controls located in Lincolnshire, Illinois. Combined annual sales for these operations, for their most recent fiscal year prior to acquisition, were approximately $107 million. Total purchase price for these businesses was approximately $85.2 million cash. On May 1, 1998 the Company acquired the equity of Extrudit Ltd., a tubing manufacturer located in Buxton, England. On April 30, 1998 the Company purchased the equity of UCC Securities Limited of Thetford, Norfolk, England, a manufacturer of technology-based hydraulic filtration products. On April 1, 1998 the Company acquired the equity of Sempress Pneumatics, a manufacturer of pneumatic cylinders and valves located near Rotterdam, the Netherlands. On March 31, 1998 the Company acquired the assets of Temeto AB located in Flen, Sweden, a distributor of hydraulic components. On March 26,
28 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 1998 the Company purchased the remaining 51% of two Korean joint ventures - HS Parker Company Ltd., in Yangsan, and the HS Parker Air Conditioning Components Company Ltd., in Chonan, manufacturers of hydraulic hose, fittings, hose assemblies and accumulators. On February 27, 1998 Computer Technology Corporation of Milford, Ohio, a manufacturer of man-machine interface solutions, was merged into the Company. On September 26, 1997 the Company acquired the assets of the Skinner solenoid valve division of Honeywell Inc. and the equity of Honeywell Lucifer, S.A. Skinner is headquartered in New Britain, Connecticut, and Lucifer is headquartered in Geneva, Switzerland. On August 4, 1997 the Company acquired the assets of EWAL Manufacturing of Belleville, New Jersey, a leading producer of precision fittings and valves. Combined annual sales for operations acquired in fiscal 1998, for their most recent fiscal year prior to acquisition, were approximately $243 million. Total purchase price for these businesses was approximately $236.5 million cash and 263,279 shares of common stock valued at $11.9 million. The purchase price allocations of Computer Technology Corporation and UCC Securities Limited, as determined by independent appraisal, included a $15.8 million asset for purchased in-process research and development. Generally accepted accounting principles do not allow the capitalization of R&D of this nature, therefore, a write-off of $15.8 million ($12.0 million after-tax or $.11 per share) is included in Cost of sales in 1998. These acquisitions were accounted for by the purchase method, and results are included as of the respective dates of acquisition. Note 3 Charges Related to Business Realignment In 2000 the Company recorded a $8,555 charge ($5,560 after-tax or $.05 per share) related to the costs of appropriately structuring its businesses to operate in their current economic environment. The charge primarily related to severance costs attributable to approximately 250 employees principally associated with the Industrial International operations. As of June 30, 2000, the Company has made substantially all severance payments. A change in the future utilization of long-lived assets at certain locations triggered an impairment review of these long-lived assets during 2000. The Company evaluated the recoverability of the long-lived assets and determined that the estimated future undiscounted cash flows were below the carrying value of these assets. Accordingly, the Company recorded a non-cash impairment loss of $4,875 ($3,169 after-tax or $.03 per share). Of the pre-tax amount, $3,499 relates to the Aerospace Segment and $1,376 relates to the Industrial Segment. The severance and impairment loss are presented in the income statement for 2000 in the following captions: $2,552 in Cost of sales; $2,476 in Selling, general and administrative expenses; and $8,402 in Loss (gain) on disposal of assets. Note 4 Income Taxes Income taxes include the following: 2000 1999 1998 Federal $140,663 $113,011 $129,462 Foreign 29,393 34,309 27,847 State and local 11,099 11,236 16,928 Deferred 12,800 8,637 6,525 $193,955 $167,193 $180,762 A reconciliation of the Company’s effective income tax rate to the statutory Federal rate follows: 2000 1999 1998 Statutory Federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 1.5 1.8 2.1 FSC income not taxed (1.7) (2.3) (1.7) Foreign tax rate difference (.6) 1.4 .2 Other .3 (.9) .3 Effective income tax rate 34.5% 35.0% 35.9% Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows: 2000 1999 Postretirement benefits $ 1,710 $ 74,238 Other liabilities and reserves 58,077 38,530 Long-term contracts 5,347 16,344 Operating loss carryforwards 45,182 4,719 Foreign tax credit carryforwards 3,356 2,264 Valuation allowance (26,887) (4,700) Depreciation (95,138) (77,871) Inventory 10,532 10,567 Net deferred tax asset $ 2,179 $ 64,091 Change in net deferred tax asset (liability): Provision for deferred tax $(12,800) $ (8,637) Translation adjustment 320 1,710 Acquisitions (49,432) (1,707) Total change in net deferred tax $(61,912) $ (8,634) At June 30, 2000, the Company has operating loss carryforwards of $45,182 for tax purposes, some of which can be carried forward indefinitely and others which can be carried forward from three to 20 years. A valuation allowance has been established due to the uncertainty of realizing certain foreign operating loss
29 (Dollars in thousands, except per share amounts) carryforwards. The increase in the valuation allowance in 2000 was attributable to the Commercial Intertech acquisition. The recognition of any future tax benefit resulting from the reduction of $24,703 of the valuation allowance will reduce any goodwill related to the Commercial Intertech acquisition remaining at the time of the reduction. Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings. Accumulated undistributed earnings of foreign operations reinvested in their operations amounted to $276,481, $205,756 and $153,831, at June 30, 2000, 1999 and 1998, respectively. Note 5 Earnings Per Share Earnings per share have been computed according to SFAS No. 128, “Earnings per Share.” Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed using the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock options. The computation of net income per share was as follows: 2000 1999 1998 Numerator: Net income applicable to common shares $ 368,232 $ 310,501 $ 319,551 Denominator: Basic – weighted average common shares 110,330,711 108,799,974 110,868,834 Increase in weighted average from dilutive effect of exercise of stock options 913,921 878,985 1,090,437 Diluted – weighted average common shares, assuming exercise of stock options 111,244,632 109,678,959 111,959,271 Basic earnings per share $ 3.34 $ 2.85 $ 2.88 Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 Note 6 Inventories Inventories valued on the last-in, first-out cost method are approximately 43% in 2000 and 34% in 1999 of total inventories. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $141,187 in 2000 and $138,197 in 1999. Progress payments of $20,279 in 2000 and $22,593 in 1999 are netted against inventories. Note 7 Financing Arrangements The Company has committed lines of credit totaling $650,865 through several multi-currency unsecured revolving credit agreements with a group of banks, of which $362,759 was available at June 30, 2000. The majority of these agreements expire October 2003. The interest on borrowings is based upon the terms of each specific borrowing and is subject to market conditions. The agreements also require facility fees of up to 8/100ths of one percent of the commitment per annum. Covenants in some of the agreements include a limitation on the Company’s ratio of debt to tangible net worth. The Company has other lines of credit, primarily short-term, aggregating $89,439 from various foreign banks, of which $73,430 was available at June 30, 2000. Most of these agreements are renewed annually. During fiscal 2000 the Company did not issue any medium-term notes leaving $530,000 available for issuance at June 30, 2000. The Company is authorized to sell up to $600,000 of short-term commercial paper notes, rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. At June 30, 2000 there were $235,800 of commercial paper notes outstanding which were supported by the available domestic lines of credit. Commercial paper, along with short-term borrowings from foreign banks, primarily make up the balance of Notes payable. The balance and weighted average interest rate of the Notes payable at June 30, 2000 and 1999 were $314,365 and 5.6% and $37,305 and 6.4%, respectively. Note 8 Debt June 30, 2000 1999 Domestic: Debentures 9.75%, due 2002-2021 $100,000 $ 100,000 7.3%, due 2011 100,000 100,000 Medium-term notes 5.65% to 7.39%, due 2004-2019 370,000 370,000 ESOP loan guarantee 6.34%, due 2009 99,741 112,000 Variable rate demand bonds 4.8% to 4.9%, due 2010-2025 20,035 20,035 Foreign: Bank loans, including revolving credit 1.5% to 12.0%, due 2001-2018 24,764 37,206 Other long-term debt, including capitalized leases 8,155 8,820 Total long-term debt 722,695 748,061 Less long-term debt payable within one year 20,933 23,304 Long-term debt, net $ 701,762 $ 724,757
30 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S On June 30, 1998, the Company called for redemption its outstanding $100,000, 10.375 percent debentures due 1999-2018. The after-tax extraordinary loss for this transaction, including an early-redemption premium and the write-off of deferred issuance costs, was $3,675 or $.03 per share. The retirement of the debt was financed on July 15, 1998, through the issuance of $100,000 of medium- term notes, due 2019, at an annual interest rate of 6.55 percent. Principal amounts of Long-term debt payable in the five years ending June 30, 2001 through 2005 are $20,933, $24,580, $22,781, $199,176 and $16,943, respectively. The carrying value of the Company’s Long-term debt (excluding leases and cross-currency swaps) was $714,540 and $739,241 at June 30, 2000 and 1999, respectively, and was estimated to have a fair value of $668,864 and $711,505, at June 30, 2000 and 1999, respectively. The estimated fair value of the Long-term debt was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. ESOP Loan Guarantee — In 1999 the Company’s Employee Stock Ownership Plan (ESOP) was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to purchase 3,055,413 shares of the Company’s common stock from the Company’s treasury. The Company used the proceeds to pay down commercial paper borrowings. The loan is unconditionally guaranteed by the Company and therefore the unpaid balance of the borrowing is reflected on the Consolidated Balance Sheet as Long-term debt. A corresponding amount representing Unearned compensation is recorded as a deduction from Shareholders’ Equity. Lease Commitments — Future minimum rental commitments as of June 30, 2000, under noncancelable operating leases, which expire at various dates, are as follows: 2001-$43,732; 2002-$31,663; 2003-$21,462; 2004- $12,726; 2005-$12,585 and after 2005-$30,832. Rental expense in 2000, 1999 and 1998 was $40,371, $42,280 and $37,065, respectively. Note 9 Retirement Benefits Pensions — The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. The Company also has contractual arrangements with certain key employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries. Pension costs for all plans were $9,304, $23,644 and $19,989 for 2000, 1999 and 1998, respectively. Pension costs for all defined benefit plans accounted for using SFAS No. 87, “Employers’ Accounting for Pensions,” are as follows: 2000 1999 1998 Service cost $ 38,179 $ 34,890 $ 28,190 Interest cost 68,807 63,257 57,892 Expected return on plan assets (102,346) (83,798) (68,463) Net amortization and deferral and other (375) 4,081 445 Net periodic benefit cost $ 4,265 $ 18,430 $ 18,064 Change in benefit obligation 2000 1999 Benefit obligation at beginning of year $ 962,663 $ 877,752 Service cost 38,179 34,890 Interest cost 68,807 63,257 Actuarial (gain) loss (11,812) 30,288 Benefits paid (42,659) (40,028) Acquisitions 157,189 Other (4,753) (3,496) Benefit obligation at end of year $ 1,167,614 $ 962,663 Change in plan assets Fair value of plan assets at beginning of year $ 1,099,989 $ 997,913 Actual return on plan assets 123,997 131,872 Employer contributions 14,295 12,255 Benefits paid (38,543) (36,253) Acquisitions 393,134 Other (10,787) (5,798) Fair value of plan assets at end of year $ 1,582,085 $1,099,989 Funded status Plan assets in excess of benefit obligation $ 414,471 $ 137,326 Unrecognized net actuarial (gain) (175,644) (144,706) Unrecognized prior service cost 27,683 23,259 Unrecognized initial net (asset) (7,173) (9,587) Net amount recognized $ 259,337 $ 6,292 Amounts recognized on the Consolidated Balance Sheet Prepaid benefit cost $ 355,922 $ 104,135 Accrued benefit liability (96,585) (97,843) Net amount recognized $ 259,337 $ 6,292 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $147,286, $124,354 and $37,208, respectively, at June 30, 2000, and $143,177, $122,411 and $28,331, respectively, at June 30, 1999.
31 (Dollars in thousands, except per share amounts) The plans’ assets consist primarily of listed common stocks, corporate and government bonds, and real estate investments. At June 30, 2000 and 1999, the plans’ assets included Company stock with market values of $18,203 and $24,314, respectively. The assumptions used to measure the benefit obligations and to compute the expected long-term return on assets for the Company’s significant defined benefit plans are: 2000 1999 1998 U.S. defined benefit plans Discount rate 7.5% 7.5% 7.5% Average increase in compensation 4.9% 4.9% 4.9% Expected long-term return on assets 10% 10% 9.5% Non-U.S. defined benefit plans Discount rate 4.75 to 7% 4.5 to 6.5% 4.5 to 7% Average increase in compensation 3 to 4% 1.5 to 4% 3 to 4.5% Expected long-term return on assets 6 to 8.5% 6 to 9% 5.5 to 9% Employee Savings Plan — The Company sponsors an employee stock ownership plan (ESOP) as part of its existing savings and investment 401(k) plan (the “Parker ESOP”), and as of April 11, 2000, assumed sponsorship of the Commercial Intertech ESOP (both plans collectively referred to as “ESOP’s”). The ESOP’s are available to eligible domestic employees. Parker Hannifin common stock is used to match contributions made by employees to the ESOP’s up to a maximum of 3.5 percent of an employee’s annual compensation. A breakdown of shares held by the ESOP’s is as follows: 2000 1999 1998 Allocated shares 8,660,550 7,866,152 7,631,677 Committed-to-be-released shares 77,038 Suspense shares 3,373,734 3,055,413 Total shares held by the ESOP’s 12,111,322 10,921,565 7,631,677 Fair value of suspense shares $ 115,550 $ 139,785 In 1999 the Parker ESOP was leveraged and the loan was unconditionally guaranteed by the Company. The Company’s matching contribution and dividends on the shares held by the Parker ESOP are used to repay the loan, and shares are released from the suspense account as the principal and interest are paid. Shares in the Parker ESOP suspense account are not considered outstanding for purposes of earnings per share computations until they are released. Company contributions to the ESOP’s, recorded as compensation and interest expense, were $26,984 in 2000, $24,319 in 1999 and $23,093 in 1998. Dividends earned by the suspense shares and interest income within the ESOP’s totaled $1,214 in 2000 and $519 in 1999. In addition to shares within the ESOP’s, as of June 30, 2000 employees have elected to invest in 3,614,913 shares of common stock within the Company Stock Fund of the Parker Retirement Savings Plan. Other Postretirement Benefits — The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change or eliminate these benefit plans. Postretirement benefit costs included the following components: 2000 1999 1998 Service cost $ 4,499 $ 4,301 $ 4,021 Interest cost 10,762 11,158 11,077 Net amortization and deferral (2,758) (1,683) (1,815) Net periodic benefit cost $ 12,503 $ 13,776 $ 13,283 Change in benefit obligation 2000 1999 Benefit obligation at beginning of year $ 155,282 $ 155,933 Service cost 4,499 4,301 Interest cost 10,762 11,158 Actuarial (gain) (13,838) (8,093) Benefits paid (7,923) (8,017) Acquisitions and other 21,805 Benefit obligation at end of year $ 170,587 $ 155,282 Funded status Benefit obligation in excess of plan assets $(170,587) $(155,282) Unrecognized net actuarial (gain) (22,472) (10,029) Unrecognized prior service cost (12,224) (13,679) Net amount recognized $(205,283) $(178,990) Amounts recognized on the Consolidated Balance Sheet Accrued benefit liability $(205,283) $(178,990) The assumptions used to measure the postretirement benefit obligations are: 2000 1999 1998 Discount rate 7.5% 7.5% 7.5% Current medical cost trend rate 9% 9.5% 10.25% Ultimate medical cost trend rate 5.5% 5.5% 6% Medical cost trend rate decreases to ultimate in year 2007 2007 2007
2000 Parker Hannifin Annual Report
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2000 Parker Hannifin Annual Report

  • 1. Parker Hannifin Corporation 6035 Parkland Boulevard Cleveland, Ohio 44124-4141 216.896.3000 www.parker.com ParkerHannifinCorporation2000AnnualReport Parker is On Operating Management Operating Group Group President Location AEROSPACE STEPHEN L. HAYES Parker Hannifin Corporation 14300 Alton Parkway Irvine, California 92618-1898 (949) 833-3000 AUTOMATION ROBERT W. BOND Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 CHRISTOPHER S.H. WILKINS Parker Hannifin plc European Operations Walkmill Lane Bridgtown, Cannock, Staffs WS1 13LR England (44) (1543) 456000 CLIMATE & LYNN M. CORTRIGHT Parker Hannifin Corporation INDUSTRIAL CONTROLS 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 FILTRATION JOHN K. OELSLAGER Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 FLUID CONNECTORS JOHN D. MYSLENSKI Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 PHILIP B. STAMP Parker Hannifin Corporation European Operations Parker House 55 Maylands Avenue Hemel Hempstead Herts, HP2 4SJ England (44) (1442) 238100 HYDRAULICS MARWAN M. KASHKOUSH Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 RODERICK B. CLOUSE Parker Hannifin Corporation European Operations Parker House 55 Maylands Avenue Hemel Hempstead Herts, HP2 4SJ England (44) (1442) 238100 INSTRUMENTATION THOMAS W. MACKIE Parker Hannifin Corporation 6035 Parkland Blvd. Cleveland, Ohio 44124-4141 (216) 896-3000 SEAL NICKOLAS W. VANDE STEEG Parker Hannifin Corporation 14300 Alton Parkway Irvine, California 92618-1898 (949) 833-3000 HEINZ DROXNER Parker Hannifin GmbH European Operations StuiFenstr. 55 Pleidelsheim, D-74385 Germany (49) (7144) 2060 ASIA PACIFIC JOSEPH J. VICIC Parker Hannifin Hong Kong Ltd. 8/F King Yip Plaza 9 Cheung Yee Street Cheung Sha Luan Kowloon, Hong Kong (852) 2 428-8008 LATIN AMERICAN A. RICARDO MACHADO Parker Hannifin Industria e Comercio Ltda. Av. Lucas Nogueira Garcez 2181 Jacarei, SP Brazil 12300-000 (55) (12) 354-5100 Pictured left to right: MARWAN M. KASHKOUSH President, Hydraulics Group ROBERT W. BOND President, Automation Group A. RICARDO MACHADO President, Latin American Group JOSEPH J. VICIC President, Asia Pacific Group NICKOLAS W. VANDE STEEG President, Seal Group Pictured left to right: JOHN D. MYSLENSKI President, Fluid Connectors Group STEPHEN L. HAYES President, Aerospace Group JOHN K. OELSLAGER President, Filtration Group THOMAS W. MACKIE President, Instrumentation Group LYNN M. CORTRIGHT President, Climate & Industrial Controls Group In Motion…In Control
  • 2. Industrial & commercial refrigeration Supermarket refrigeration Appliances Residential air conditioning Fuel dispensing Process control Tire processing Food & beverage Mobile air conditioning Mobile & industrial gerotors Automotive Aerospace Mobile equipment Semiconductor Chemical processing Telecommunications Information technology Industrial Medical Industrial Process Mobile machinery Marine Aviation Environmental Semiconductor Pharmaceutical Pulp & paper Power generation Laboratory Power generation Oil & gas exploration Chemical and petrochemical processing Semiconductor manufacturing Process analytical applications Medical & bio/pharmaceutical Pulp & paper Thermostatic & electronic expansion valves Refrigeration & general- purpose solenoid valves Flo-raters & distributors Pressure regulators Filter dryers Accumulators & receivers Check & service valves Spun copper components Process control valves Gerotors Hose & hose assemblies Tube assemblies O-rings & molded shapes Hydraulic & pneumatic seals & packings Extruded & precision cut seals Metal/rubber combinations PTFE seals EMI shielding/grounding Thermal management materials Plastic/rubber combination seals Hydraulic, lubrication & coolant filters Process, chemical & microfiltration filters Compressed air & gas purification filters Lube oil & fuel filters Fuel-conditioning filters Fuel filters/water separators Cabin air filters Condition monitoring Aviation fuel filters Analytical gas generators Instrumentation fittings Ultra-high-purity fittings & gaskets Ball, plug, needle & check valves Diaphragm & bellow valves PFA & PTFE fittings, valves & pumps Regulators & transducers CGA, DIN, JIS & British Standard cylinder connections Miniature solenoid valves Multi-solenoid manifolds Quick connects & hose products Operates 21 manufacturing plants and 14 sales centers world- wide. Facilities in: United States Korea Canada Brazil Mexico Switzerland Italy Czech Republic Germany Japan United France Kingdom Operates 21 manufacturing plants, with more than 200 distributors worldwide. Joint ventures in Mexico and China. Facilities in: United States Germany Canada Italy Mexico Spain Denmark Czech Republic United Argentina Kingdom Brazil France Japan Operates 13 manufacturing facilities with a network of more than 500 distributors world- wide and technical assistance in every major industrial area. Facilities in: United States France United Germany Kingdom Korea Finland Australia Brazil Netherlands Operates 12 manufacturing plants and four sales offices, Company stores and customer service centers with more than 300 distributors worldwide. Facilities in: United States Canada United Kingdom France SEAL GROUP FILTRATION GROUP CLIMATE & INDUSTRIAL CONTROLS GROUP MARKETS Commercial transports Military aircraft and missiles Regional transports General aviation Business aircraft Helicopters Engines Power plants/power generation Construction machinery Automotive Agriculture Transportation Military Mobile machinery Natural resources Machine tools Construction machinery Aerial lifts Mobile machinery Farm machinery Automotive manufacturing Machine tools Plastic machinery Mining equipment Hoists & cranes Lawn & garden machinery Oil & gas machinery Industrial machinery Machine tools Conveyors Pulp & paper machinery Metalworking equipment Process control Printing machinery Medical instruments Semiconductor manufacturing Packaging machines PRODUCTS Flight control actuation Thrust-reverse actuation Electrohydraulic servovalves Utility hydraulic systems & components Pumps Fuel systems & components Pneumatic controls Heat exchangers Fluid metering delivery & atomization devices Wheels & brakes Rubber & thermoplastic hose Tube fittings & adapters Tubing & plastic fittings Brass fittings & valves Hose couplings Quick disconnects Check valves Expert systems Custom couplings & fittings Hydraulic cylinders Accumulators Rotary actuators Hydraulic valves Hydraulic motors & pumps Hydrostatic steering Power units Electrohydraulic systems Metering pumps Integrated hydraulic circuits Pneumatic valves Air preparation units Indexers, stepper & servo drives Multi-axis positioning tables Electric & pneumatic cylinders Structural extrusions Vacuum products Pneumatic logic Human/machine interface hardware & software FACILITIES Operates 34 facilities worldwide, in: United States Puerto Rico Germany Japan France Singapore United China Kingdom Korea Brazil Canada Malaysia Operates 55 plants and 40 Company-owned stocking facilities, with more than 2,500 distributors worldwide. Facilities in: United States Poland Canada Australia Mexico New Zealand Austria China United Brazil Kingdom South Africa France Thailand Germany Korea Netherlands Czech Republic Operates 66 manufacturing plants, 52 sales offices and ware- houses around the world, with more than 1,300 distributors worldwide. Facilities in: United States Germany Canada Sweden Mexico Italy Brazil Australia United New Zealand Kingdom Austria France Singapore Netherlands China Operates 31 manufacturing plants, 21 sales offices and 5 warehouses, with more than 1,000 distributors worldwide. Facilities in: United States Sweden Canada Brazil Mexico Netherlands United Belgium Kingdom Spain France Korea Germany PARKER AT-A-GLANCE A Summary of Parker’s Operating Groups, Markets, Facilities, and Products AEROSPACE GROUP HYDRAULICS GROUP AUTOMATION GROUP Shareholders’ Letter: Parker is ON, creating technological breakthroughs, serving diversified markets and aiming for new financial goals. 3 From sealing cell phones to provid- ing premier customer service, Parker is ON CALL everywhere around the world. 6 Whether it’s helping a plane land safely or a fire truck get to the scene quickly, Parker products and systems are hard at work getting the job done ON TIME. 8 INSTRUMENTATION GROUPFLUID CONNECTORS GROUP
  • 3. No matter where you are, or what you need, Parker keeps your world on the move. Everyday, Parker systems solutions are keeping the world’s goods and services ON COURSE to their final destination. 10 Parker makes it possible ON PURPOSE with systems that improve the quality of life in a variety of applications at work, at home and at play. 12 Parker is ON STRATEGY with new systems capabilities, a management team with bench strength and increased financial goals. 14 Financial Review 17
  • 4. The Year In Review 70 140 210 280 350 120 240 360 480 600 100 200 300 400 500 1000 2000 3000 4000 5000 6000 720 420 600 95 96 97 98 99 00 Net Sales Millions of Dollars 95 96 97 98 99 00 Income from Operations Millions of Dollars 95 96 97 98 99 00 Net Income Millions of Dollars 95 96 97 98 99 00 Cash Flows From Operating Activities Millions of Dollars For the years ended June 30, 2000 1999 1998 (in thousands, except per share data) OPERATING DATA Net sales $ 5,355,337 $ 4,958,800 $ 4,633,023 Income from operations 622,862 538,749 549,897 Net income 368,232 310,501 319,551 Cash flows from operating activities 538,040 459,097 320,599 PER SHARE DATA Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 Dividends .68 .64 .60 Book value 21.22 17.03 15.32 RATIOS Return on sales 6.9% 6.3% 6.9% Return on average assets 8.8 8.6 9.8 Return on average equity 17.7 17.6 19.8 Debt to debt-equity 31.0 29.8 31.6 OTHER Number of shareholders 47,671 39,380 44,250 Number of employees 43,895 38,928 39,873 Income from operations and Net income for 1998 include a non-cash, non-recurring pretax charge of $15.8 million or $12.0 million after tax ($.11 per share) for in-process R&D purchased as part of two acquisitions. The 1998 results also include a charge of $3.7 million ($.03 per share) for the early retirement of debt.
  • 5. Your company is on the move. On the consolidation front, we are increasing market share among customers who want complete motion and control systems solutions, and broadening our product offering with strategic acquisitions and internal development. We are performing financially, expanding margins around the world, achieving returns well above our cost of capital, and raising the bar further with accelerated growth goals. We are growing globally, positioned for consistent, double-digit gains in our established core markets, and increasing sales and profits in areas of great promise for the future. To Our Shareholders Duane Collins (standing) and Don Washkewicz this year accepted new management roles. Collins, chief executive officer, was elected chairman of the board, and Washkewicz was appointed to the new position of president and chief operating officer. 3
  • 6. 4 PARKER IS ALL ABOUT THE FUTURE: Our technologies are paving the way for new breakthroughs in every aspect of life. Developments in communication, information technology, manufacturing and biomedical science demand well conceived “workhorses” and sophisticated controls to perform consistently: Faster. Smaller. Cleaner. Safer. More efficient. More precise. Parker people advance these causes every day, and our engineers have never had so many opportunities to go to work. A recent example is a new product developed by our Instrumentation Group’s Pneutronics Division: The world’s smallest valve (shown here actual size). This valve is used in medical devices to perform diagnostics and treatment for blood and kidney disorders. An engineering marvel, it operates at 30 psi. But the real source of pride in this innovation is that it makes in-home dialysis a reality for kidney patients, so they can receive treatments in the comfort of their own homes, with their families. ACQUISITIONS: This year, we welcomed new members to the Parker family from Commercial Intertech, Gresen, Whatman Industrial, Gummi Metall and Nylaflow. These businesses bring tremendous talent and together add $728 million in sales. They offer substantial benefits to the customers, shareholders and employees we serve: Commercial Intertech and Gresen, both leaders in hydraulics for the mobile market, bring product lines required to supply complete, engineered hydraulic systems for every kind of mobile machinery. Matched with the full complement of other Parker systems, including fluid connectors, seals, filtration and controls, these additions already are yielding new opportunities for value creation. And because we’ve moved quickly to integrate these businesses within our Hydraulics Group, we are well positioned to realize the earnings accretion planned for next year. The Whatman Industrial business, with products sold under the Balston brand, specializes in high-efficiency depth filtration and gas- separation membrane technology. It positions our Filtration Group with a much broader product offering than other major players in the compressed-air and gas-generation markets. Gummi Metall of Germany complements our Seal Group in Europe, offering compound sealing products in rubber-metal and rubber-plastic varieties. Nylaflow of the Netherlands produces thermoplastic pressure hose and tubing that strengthens our line of connector products in Europe. In July, we completed our cash tender offer acquiring Wynn’s International, a leader in sealing systems for mobile markets. Strategically and financially, the addition of Wynn’s further strengthens our Seal Group, which consistently achieves superior returns in all of its end markets. Wynn’s will add modestly to our fiscal year 2001 earnings, and moreover, presents considerable opportunities for global expansion given our established position. It is another significant step toward total systems capability. With 46 acquisitions in a seven-year period, we’re positioned for double-digit growth and have broadened our playing field to pursue new markets of opportunity. Financially, we remain in an excellent position to invest in product development and acquisition opportunities that fit our business model. You can expect us to continue to be a consolidator, but know that we’ll integrate every business we add with a disciplined focus on value creation, always building on our foundation of motion-control technologies. This is our core competency, and in it, we’re finding more opportunity yet to be realized. OUTLOOK: So, while we are doing all of the things you’d expect we should to keep driving profitability, the real rationale for your investment in Parker is where we’re going from here. In the near term, with rebounding global economies, semiconductors and telecommunications are momentum markets, and we’re seeing across-the-board strength in our industrial and mobile markets. Things are looking up in aerospace as well, since mounting demand for regional jets means bigger system wins for Parker in flight controls, fuel and onboard hydraulics. With 46 acquisitions in a seven-year period, we’ve ensured double-digit growth and broadened our playing field to pursue new markets of opportunity.
  • 7. 5 On the maintenance, repair and overhaul (MRO) side of our industrial business, there is significant growth potential. Traditionally, a customer’s worst predicament is downtime. We have a unique opportunity to take our trademark “premier customer service” to an even higher level, to keep customers in uptime, and improve their operating performance with better engineered systems, systems with integrated chips and electronic sensors that flag problems long before they become a point of breakdown. E-BUSINESS: Our strategy to do this takes a nontraditional view of the two most-asked questions in our industry: the role of distributors and the relevance of e-business. On the role of distributors, we don’t deny that their value in the supply chain is being challenged. But as we see it, the trend toward preventative maintenance and outsourcing redefines the role of distributors, so the real challenge is the shift from reactive to proactive service, adding value by offering total systems solutions. E-business, then, is an important catalyst to help our distributors achieve a higher value shift, from servicing orders to managing performance. We already have an extensive electronic enterprise architecture that, when made available to our distributors, provides the means for us to identify ways to optimize customers’ motion and control applications with systems designed to work together. This is the means to grow our MRO business, all to the benefit of our customers. And as much as we can use electronic intelligence to anticipate our customers’ needs, they still require technical assistance close to all of their operations. So the true measure of success in our e-business initiative hinges on the availability of engineer-technicians everywhere, and that’s the advantage of our distributor force. They extend our enterprise. On the buy side of our supply chain, we are building on our electronic enterprise capabilities to leverage company-wide purchasing, creating an e-procurement network to further bolster our buying power. While web-enabled processes are improving our cost structure and speed, they also are opening up new avenues to integrate transactions among Parker, our distributors and the many small and mid- size companies we serve, who are the vast majority of our customer base. When we help our customers win, we earn their trust and loyalty. The reputation of Parker may seem an intangible asset. But for all of us, its value is real — in every measure of success our customers achieve, in every increment of market share we gain, in our ability to remain an employer and partner of choice, and in the consistent performance we demonstrate. Last year, we said we would continue to grow your company with improved profitability and increasing financial strength. We achieved record results on all these measures. In the coming years, we intend to outperform the record returns of recent years. We’ve raised our financial goals (see page 16), and we’re committed to continue to meet and exceed them through time and the cycles that affect our markets. You may take this as an indication of the state of our business: Financially and operationally, Parker’s never been stronger. For this, we must thank our customers and the Parker employees who are delivering on our commitment to value creation, which, more than anything, underscores our appreciation for your investment in Parker. Please read on… DUANE E. COLLINS DONALD E. WASHKEWICZ Chairman of the Board and President and Chief Operating Officer Chief Executive Officer September 11, 2000
  • 8. on call. 6 Crops everywhere in the world are planted, harvested and processed with machinery and equipment relying on Parker systems for precise motion and control. You can read all about it thanks to the Parker instrumentation & filtration components and systems used in mills producing millions of tons of paper per year. Fresh fruit and vegetables are increasingly available to consumers the world over thanks to Parker systems used in planting, harvesting, sorting and delivery.
  • 9. The world is going wireless, and Parker seals are ensuring clearer calls in one out of every five cell phones produced today. When lives hang in the balance, Parker aerospace systems are on board enabling airborne rescuers to reach remote locations and transport patients for rapid treatment. Whether in warehouses, distribution centers or cargo holds, Parker components and systems are inside the equipment that is getting goods where they need to go. 7
  • 10. Takeoffs, landings and our time in the air are made possible by Parker flight controls, hydraulics and fuel management systems. On the ground, Parker components are busy fueling planes and handling baggage. Freight is transported safely over highways and byways thanks to Parker components and systems. Our refrigeration and sealing systems keep refrigerated trucks cool for fresher, safer, longer-lasting food. The U.S. Postal Service delivers for you and Parker does, too. Parker’s automation equipment sorts, lifts and moves the mail. 8
  • 11. on time. Both race cars and transport trucks rely on Parker products for dependable motion control systems. Parker has been on every Indianapolis 500 winner’s car for nearly three decades. When fire trucks and rescue vehicles are called to the scene, precision motion control is paramount. The world’s leading emergency equipment manufacturers rely on Parker for hydraulic system design and quality components. From space walks to shuttle missions to celestial explorations, Parker sealing systems and aerospace components are there helping scientists uncover the secrets of our universe. 9
  • 12. 10 The world is being electrified thanks to Parker instrumentation, filtration and gas turbine products used in the oil and gas exploration and power generation industries. Parker is making sure you don’t miss your favorite show. Parker automation systems are used in television production, and our seals are used in high definition TVs and VCRs. We’re helping you bring home the bacon. Parker components and systems are used in food processing, conveyor and packaging applications.
  • 13. on course. 11 It’s smooth sailing with Parker precision-engineered hydraulic systems used to trim the sails. Shamu® takes center stage with the help of Parker’s rotary actuators used to open the gates between backstage and the performing arena. Infrastructure projects are booming as the world’s population demands an ever-higher standard of living. Parker components and systems are found in equipment turning these improvements into reality.
  • 14. on purpose. 12 Kids and adults everywhere are using hand-held, portable electronics for both fun and work. Parker sealing systems prevent overheating, and eliminate interference among electronic devices. When we go off into the wild blue yonder, Parker systems are on board with flight controls, hydraulics, fuel management and sealing systems. Nothing is more important than your children’s health and safety. That’s why bus manufacturers choose Parker components for braking systems and Parker alternative fuel handling products for clean operation.
  • 15. The world is getting smarter, and semiconductors are being imbedded into every device imaginable. Parker instrumentation products and systems are crucial to building the chips that are leading this Information Age revolution. Parker provides micro-products for a variety of biomedical applications including on-demand oxygen units and in-home kidney dialysis. These are smaller and more portable so patients can enjoy a higher quality of life. Riding the waves is made possible by Parker products used in the manufacturing and sealing of personal watercraft. In Hollywood, Parker hydraulics created waves on the set of Warner Bros.’ blockbuster movie The Perfect Storm.
  • 16. 14 TOTAL SYSTEMS – PREMIER CUSTOMER SERVICE GOING FORWARD: Parker business groups have always sought to answer challenges facing customers by engineering solutions to motion and control problems. We have competed successfully by helping our customers reduce their operating costs, by reducing complexity, speeding assembly, and improving performance of engineered systems for their equipment using our products. Now, we are launching a total systems strategy that raises that standard of service and our competitive advantage higher still. Total systems means just that – we will seek ways to integrate all appropriate products from every Parker business group as a complete, value-added system and make buying that system as easy for the customer as buying a single product. Increasingly, customers are demanding this type of “one stop” service, and Parker has anticipated their demand by developing an unparalleled range of motion and control products. We have the products and the engineering talent to put them to use. Our total systems strategy will fuse the two. TECHNOLOGY CENTERS: The concept of total systems centers is similar to the focused mobile and aerospace systems activity already in progress at Parker. Initially, we are targeting the industrial market for motion and control products. Parker’s unequalled range of motion and control products is the foundation of our industrial total systems centers, the first of which will open in North America this year, with others to follow in Europe, Latin America, and the Pacific Rim. The industrial market offers exceptional opportunity to apply products of more than one Parker group for motion and control solutions in industries including steel and chemical processing, packaging, forestry products such as paper and plywood, and almost any form of automated assembly, transfer, or production line. Parker designs and manufactures optimal systems using hoses, connectors, fittings, hydraulics, pneumatics, instrumentation, filters, electromechanical components, and seals typically required on most industrial machinery. No competitor has as broad a range of products. Systems design engineers at the centers will be chartered to use their expertise to draw from all of Parker’s products and business groups to produce value-added industrial motion and control systems that are entirely Parker. Working with customers to design complete systems will be their only business. Our experience creating systems vertically, within aerospace, mobile hydraulic, connector, seal and other business groups, demonstrates the value of this approach as both a customer benefit and competitive advantage. The broader based total systems approach, taking products from more than one business group and integrating them to suit a customer’s specific needs, holds even more exciting potential. The industrial technology centers will fully explore that potential by expanding the capabilities we can offer our industrial customers. Recognizing that our customers are outsourcing their engineering and reducing their supplier lists, this concerted corporate-wide effort to design and sell optimal systems from a single point of contact will further differentiate Parker as the premium motion and control supplier. The strategy will position us better than ever before to reduce our customers’ engineering burden; eliminate time wasted locating and purchasing individual system components; reduce overall costs; and improve operating efficiency with every total systems solution. Also, the technology centers will serve as system design repositories offering total systems solutions developed for industrial uses as packaged responses adaptable to other markets with similar motion and control system requirements. In addition, these systems will be available through a growing number of technology center- certified Parker distributors, offering systems solutions to customers of all sizes. on strategy. Parker designs and manufactures optimal systems using hoses, connectors, fittings, hydraulics, pneumatics, instrumentation, filters, electromechanical components, and seals typically required on most industrial machinery.
  • 17. 15 VALUE: We expect our systems strategy will help us to grow with our customers — providing them with everything they need in motion-control systems everywhere they need value-added solutions. Our growth will include added sales volume for every group drawn into the service of customers who previously may have viewed Parker as the manufacturer of a single product. And, as we add value for our customers derived from design engineering services, reduced costs of order processing, and improved manufacturing speed, we will achieve margins that recognize the value of engineered systems versus “parts” in the markets we serve. We believe that such recognition will result in growing the value of your investment in Parker. Making the most of our systems strategy is one of the goals of the management team. Several new management appointments were made this year (see sidebar at right). Their experience, skills, and leadership will foster the company-wide teamwork to advance this strategy, keeping Parker on the move. MANAGEMENT APPOINTMENTS: A strategy can only be as good as its execution, and Parker is fortunate to have the management depth needed to successfully achieve accelerated growth objectives adopted this year. In addition to CEO Duane Collins’ election as chairman of the board, Don Washkewicz was promoted to the new position of president and chief operating officer responsible for all of the company’s operations. Replacing Don as president of the Hydraulics Group is Marwan Kashkoush. In addition, Bob Bond was promoted as president of the Automation Group; John Oelslager was appointed president of the Filtration Group; and A. Ricardo Machado was named president of the Latin American Group. 2.00 2.50 3.00 1.50 $3.50 1995 1996 1997 1998 1999 2000 Parker Hannifin EPS Index Average EPS Source: First Call 3% 6% 9% 12% 1995 1996 1997 1998 1999 2000 Parker Hannifin S&P Diversified Manufacturers* PARKER’S RETURN ON AVERAGE ASSETS EXCEEDS PEER GROUP PARKER’S EPS GROWTH LEADS PEER GROUP As a measure of management discipline, Parker’s return on assets consistently outpaces its peers in the S&P index of diversified manufacturers. Since July 1, 1995, Parker has outperformed the S&P index of diversified manufacturers in earnings growth, shown here in a rolling comparison plotted to coincide with Parker’s fiscal year. * Given differences among the indexed companies’ fiscal closing dates, returns were calculated using the most recent SEC filings and annualized for 2000, while average assets reflect the average reported at year end and most recent SEC filings.
  • 18. PARKER’S BEST IS YET TO COME: Building on years of consistent, solid performance, we recently committed to take the company’s growth higher, targeting double-digit sales and earnings growth as a sustainable measure for the coming years: We raised our five-year compound-sales-growth goal from 7.5 percent to 10 percent, with about two- thirds of that generated internally, and one-third from acquisitions. With rising sales, we’ll continue to drive profitability to a premium, focusing on achieving an economic profit well exceeding our cost of capital; a return on sales of six percent or better; return on average assets of at least 7.2 percent; and return on average equity at or above 14 percent. To make better use of our financial strength, we increased our target debt to debt-equity ratio from a range of 30 to 33 percent to a new target between 34 and 37 percent. Worldwide demand is at an all-time high in our markets, which are worth more than $48 billion, and still highly fragmented. In every part of our business, we are outpacing the growth of our markets, with plenty of room for improvement. Our charter is to drive for the number-one position in all of our core markets, progressing from a top-three position to market leadership in motion and control technologies. We see significant opportunities to gain further competitive market share on our product breadth, service strength, new product development and global presence. Geographic and product-line expansion remain ripe for development, and acquisitions will continue to be an important part of our growth strategy. We have both the cash generation capacity and the discipline to manage it conservatively — always — to achieve superior returns that offer near- and long-term value creation. 16 Michael J. Hiemstra, Vice President - Finance & Administration and Chief Financial Officer Accelerating Growth 0.40 0.50 0.60 0.70 18% OperatingMargin Net Assets/Sales 14% 10% Corporate Goal FY95 FY96 FY97 FY98 FY99 FY00 PERFORMANCE METRIC ASSURES VALUE CREATION Our return-minded economic profit measure ensures every division of Parker is managing for value creation, with common controls for effective asset utilization and margin realization.
  • 19. Financial Review The Company’s management is responsible for the integrity and accuracy of the financial information contained in this annual report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and that the other information in this annual report is consistent with those statements. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. Management is also responsible for maintaining an internal control system designed to provide reasonable assurance at reasonable cost that assets are safeguarded against loss or unauthorized use and that financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States. The system is supported by written policies and guidelines, by careful selection and training of financial management personnel and by an internal audit staff which coordinates its activities with the Company’s independent accountants. To foster a strong ethical climate, the Parker Hannifin Code of Ethics is publicized throughout the Company. This addresses, among other things, compliance with all laws and accuracy and integrity of books and records. The Company maintains a systematic program to assess compliance. PricewaterhouseCoopers LLP, independent accountants, is retained to conduct an audit of Parker Hannifin’s consolidated financial statements in accordance with auditing standards generally accepted in the United States and to provide an independent assessment that helps ensure fair presentation of the Company’s consolidated financial position, results of operations and cash flows. The Audit Committee of the Board of Directors is composed entirely of independent outside directors. The Committee meets periodically with management, internal auditors and the independent accountants to discuss internal accounting controls and the quality of financial reporting. Financial management, as well as the internal auditors and the independent accountants, have full and free access to the Audit Committee. DUANE E. COLLINS, MICHAEL J. HIEMSTRA, Chairman of the Board Vice President – and Chief Executive Officer Finance and Administration and Chief Financial Officer Report of Management Consolidated Statements of Income and Comprehensive Income ...........................................................................19 Consolidated Balance Sheet............................................................................................................................................................................21 Consolidated Statement of Cash Flows...............................................................................................................................................23 Business Segment Information .....................................................................................................................................................................25 Notes to Financial Statements......................................................................................................................................................................26 Eleven-Year Financial Summary....................................................................................................................................................................36 5.0% 10.0% 15.0% 3.0% 6.0% 9.0% 4.0% 8.0% 12.0% 8.0% 16.0% 24.0% 10.0% 20.0% 30.0% 96 97 98 99 00 Five-Year Compound Sales Growth 96 97 98 99 00 Return on Sales 96 97 98 99 00 Return on Average Assets 96 97 98 99 00 Return on Average Equity Goal: 10% Goal: 6.0% Goal: 7.2% Goal: 14.0% 96 97 98 99 00 Dividend Payout Ratio Goal: 25%
  • 20. M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Statement of Income The Consolidated Statement of Income summarizes the Company’s operating performance over the last three fiscal years. All year references are to fiscal years. Net Sales of $5.36 billion for 2000 were 8.0 percent higher than the $4.96 billion for 1999. Acquisitions completed in 2000 accounted for approximately two-fifths of this increase. The North American Industrial operations experienced higher demand within most of its markets, particularly in semiconductor manufacturing and telecommunications. The Aerospace operations experienced a slowdown in commercial aircraft build rates which was mitigated by an increase in demand for regional jets. The Industrial International operations were adversely affected by a struggling economy in Europe and Latin America in the first half of the year while higher volume was achieved in the Asia Pacific region. Currency rate changes reduced volume increases within the International operations by $104.9 million. Net Sales of $4.96 billion for 1999 were 7.0 percent higher than the $4.63 billion for 1998. Acquisitions completed in 1999 accounted for approximately one-half of this increase. The Aerospace operations experienced continued strong demand in commercial aircraft build rates while the Industrial operations experienced reduced order demand within most of its markets. Within the Industrial operations, the European markets weakened in the latter part of 1999 while the Latin American markets operated in a weak economy throughout most of 1999. The Company continued to penetrate markets in the Asia Pacific region. Volume increases within International operations were partially offset by currency rate changes. The Company expects the North American Industrial operations to continue to improve as record orders received in 2000 are converted to sales and recent acquisitions are integrated. The European and Latin American markets are anticipated to continue to improve while the Company expects to carry on its efforts to expand its infrastructure in the Asia Pacific region. The Aerospace operations expect the regional jet market to continue to improve while the commercial aviation OEM business is expected to decline. The defense business is projected to remain relatively constant. Gross profit margin was 22.4 percent in 2000 compared to 22.0 percent in 1999 and 23.4 percent in 1998. Cost of sales for 1998 included a non-cash, non-recurring charge of $15.8 million for in-process R&D purchased as part of two acquisitions. The increased margins in 2000 reflect higher volume experienced in the North American Industrial operations, offset by weakness experienced in the International Industrial operations as well as the effect of business realignment charges (see page 24 for further discussion). The margin decline in 1999 is primarily the result of the underabsorption of overhead costs and pricing pressure. In addition, gross margins were affected by recently acquired operations contributing lower margins. 18 Selling, general and administrative expenses as a percent of sales decreased to 10.8 percent, from 11.1 percent in 1999, and 11.5 percent in 1998. This decrease is the result of continuing a concerted effort to control the level of these expenses. Interest expense decreased by $4.5 million in 2000 after an increase of $10.9 million in 1999. The decline in 2000 was due to a lower average level of debt outstanding throughout the year as compared to 1999. The increase in 1999 was due to increased borrowings to complete acquisitions. Interest and other (income), net was $4.1 million in 2000 compared to $5.1 million in 1999 and $6.8 million in 1998. Fiscal 1999 included $1.7 million in interest income related to an IRS refund and fiscal 1998 included $3.8 million of interest income from a settlement with the IRS. Loss (gain) on disposal of assets was a $5.6 million loss in 2000, a $2.4 million loss in 1999 and a $.1 million gain in 1998. The loss in 2000 includes $8.4 million of business realignment charges offset by $6.4 million of income realized on the sale of real property. Income taxes decreased to an effective rate of 34.5 percent in 2000, compared to 35.0 percent in 1999 and 35.9 percent in 1998. The decrease in the rate from 1999 to 2000 was primarily the result of the utilization of foreign operating loss carryforwards and lower foreign taxes. The decrease in the rate from 1998 to 1999 was the result of increased tax benefits based on the export of products manufactured in the U.S. Extraordinary item - extinguishment of debt - On June 30, 1998 the Company called for redemption all of its outstanding $100 million, 10.375 percent debentures due 1999-2018. Net Income of $368.2 million for 2000 was 18.6 percent higher than 1999. Net income of $310.5 million for 1999 was 2.8 percent lower than 1998. Net income as a percentage of sales was 6.9 percent in 2000, compared to 6.3 percent in 1999 and 6.9 percent in 1998.
  • 21. 19 (Dollars in thousands, except per share amounts)Consolidated Statement of Income For the years ended June 30, 2000 1999 1998 Net Sales $ 5,355,337 $4,958,800 $ 4,633,023 Cost of sales 4,156,569 3,869,370 3,550,992 Gross profit 1,198,768 1,089,430 1,082,031 Selling, general and administrative expenses 575,906 550,681 532,134 Interest expense 59,183 63,697 52,787 Interest and other (income), net (4,112) (5,056) (6,783) Loss (gain) on disposal of assets 5,604 2,414 (95) Income before income taxes 562,187 477,694 503,988 Income taxes (Note 4) 193,955 167,193 180,762 Income before extraordinary item 368,232 310,501 323,226 Extraordinary item - extinguishment of debt (Note 8) (3,675) Net Income $ 368,232 $ 310,501 $ 319,551 Earnings per Share (Note 5) Basic earnings per share before extraordinary item $ 3.34 $ 2.85 $ 2.91 Extraordinary item – extinguishment of debt (.03) Basic earnings per share $ 3.34 $ 2.85 $ 2.88 Diluted earnings per share before extraordinary item $ 3.31 $ 2.83 $ 2.88 Extraordinary item – extinguishment of debt (.03) Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 The accompanying notes are an integral part of the financial statements. (Dollars in thousands)Consolidated Statement of Comprehensive Income For the years ended June 30, 2000 1999 1998 Net Income $ 368,232 $ 310,501 $ 319,551 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustment (32,600) (32,832) (32,681) Comprehensive Income $ 335,632 $ 277,669 $ 286,870 The accompanying notes are an integral part of the financial statements.
  • 22. 20 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Balance Sheet The Consolidated Balance Sheet shows the Company’s financial position at year end, compared with the previous year end. This statement provides information to assist in assessing factors such as the Company’s liquidity and financial resources. All year references are to fiscal years. The effect of currency rate changes during the year caused a $32.6 million decrease in Shareholders’ Equity. These rate changes also caused significant decreases in accounts receivable, inventories, goodwill, plant and equipment, accounts payable and various accrual accounts. Working capital and the current ratio were as follows: Working Capital (millions) 2000 1999 Current Assets $ 2,153 $ 1,775 Current Liabilities 1,186 755 Working Capital 967 1,020 Current Ratio 1.8 2.4 Accounts receivable are primarily receivables due from customers for sales of product ($777.1 million at June 30, 2000, compared to $684.2 million at June 30, 1999). The current year increase in accounts receivable is primarily due to acquisitions and increased volume. Days sales outstanding for the Company decreased to 45 days in 2000 from 47 days in 1999. An increase in the allowance for doubtful accounts in 2000 is primarily due to receivables obtained through acquisitions. Inventories increased to $974.2 million at June 30, 2000, compared to $915.1 million a year ago. The increase was primarily due to acquisitions partially offset by a decrease in inventory in the Aerospace operations where management focused on aligning inventory levels with current customer demand. Months supply of inventory on hand at June 30, 2000 decreased to 3.2 months from 3.5 months at June 30, 1999. Net assets held for sale represents the estimated net cash proceeds and estimated net earnings during the holding period of the metal forming and building systems businesses, which were acquired as part of the Commercial Intertech transaction. These businesses are expected to be sold in the first half of 2001. Plant and equipment, net of accumulated depreciation, increased $140.0 million in 2000 as a result of acquisitions and capital expenditures which exceeded annual depreciation. Investments and other assets increased $313.7 million in 2000 primarily as a result of increases in qualified benefit plan assets including those from acquisitions. Excess cost of investments over net assets acquired increased $129.3 million in 2000 as a result of acquisitions, partially offset by current year amortization. The additional excess cost of investments in 2000 is being amortized over 20 years. Notes payable and long-term debt payable within one year increased $274.7 million primarily due to an increase in commercial paper borrowings used to fund acquisitions. Accounts payable, trade increased $59.5 million in 2000 primarily due to acquisitions as well as higher balances in the North American Industrial operations due to higher production levels. Accrued payrolls and other compensation increased $24.1 million in 2000 primarily as a result of increased headcount from acquisitions and incentive plans which are based on sales and earnings. Accrued domestic and foreign taxes increased to $84.2 million in 2000 from $52.6 million in 1999 primarily due to acquisitions, as well as higher taxable income in 2000. Long-term debt decreased $23.0 million in 2000 compared to 1999. See the Cash Flows From Financing Activities section on page 22 for further discussion. The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. To meet this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-equity of 34 to 37 percent. Debt to Debt-Equity Ratio (millions) 2000 1999 Debt $ 1,037 $ 785 Debt & Equity 3,347 2,639 Ratio 31.0% 29.8% Excluding the effect of the ESOP loan guarantee on both Long-term debt and Shareholders’ Equity, the debt to debt-equity ratio at June 30, 2000 was 28.0 percent. In fiscal 2001 additional borrowings are not anticipated for the stock repurchase program, capital investments, or for working capital purposes. However, additional borrowings were utilized to fund the Wynn’s International acquisition. See the Subsequent Event footnote on page 35 for further discussion. These additional borrowings are expected to cause a temporary increase in the debt to debt-equity ratio above the financial goal noted above but the ratio is expected to return to the target range once proceeds from the sale of certain net assets held for sale are realized. Pensions and other postretirement benefits increased 8.4 percent in 2000. These costs are explained further in Note 9 to the Consolidated Financial Statements. Other liabilities increased to $71.1 million in 2000 from $65.3 million in 1999 primarily due to increases in deferred compensation plans. Common stock in treasury increased to $8.4 million in 2000 from $1.8 million in 1999 due to the repurchase of Company common shares in 2000. Quantitative and Qualitative Disclosures About Market Risk - The Company enters into forward exchange contracts, costless collar contracts and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. The total 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. See the Significant Accounting Policies footnote on page 27 for further discussion.
  • 23. 21 (Dollars in thousands)Consolidated Balance Sheet June 30, 2000 1999 Assets Current Assets Cash and cash equivalents $ 68,460 $ 33,277 Accounts receivable, less allowance for doubtful accounts (2000 - $10,420; 1999 - $9,397) 840,040 738,773 Inventories (Notes 1 and 6): Finished products 483,017 442,361 Work in process 344,804 347,376 Raw materials 146,375 125,393 974,196 915,130 Prepaid expenses 32,706 22,928 Deferred income taxes (Notes 1 and 4) 73,711 64,576 Net assets held for sale (Note 2) 164,000 Total Current Assets 2,153,113 1,774,684 Plant and equipment (Note 1): Land and land improvements 138,394 125,990 Buildings and building equipment 642,770 592,086 Machinery and equipment 1,825,889 1,678,956 Construction in progress 107,197 109,780 2,714,250 2,506,812 Less accumulated depreciation 1,373,335 1,305,943 1,340,915 1,200,869 Investments and other assets (Note 1) 574,241 260,495 Excess cost of investments over net assets acquired (Note 1) 570,740 441,489 Deferred income taxes (Notes 1 and 4) 7,290 28,351 Total Assets $ 4,646,299 $ 3,705,888 Liabilities and Shareholders’ Equity Current Liabilities Notes payable and long-term debt payable within one year (Notes 7 and 8) $ 335,298 $ 60,609 Accounts payable, trade 372,666 313,173 Accrued payrolls and other compensation 169,837 145,745 Accrued domestic and foreign taxes 84,208 52,584 Other accrued liabilities 224,294 182,402 Total Current Liabilities 1,186,303 754,513 Long-term debt (Note 8) 701,762 724,757 Pensions and other postretirement benefits (Notes 1 and 9) 299,741 276,637 Deferred income taxes (Notes 1 and 4) 77,939 30,800 Other liabilities 71,096 65,319 Total Liabilities 2,336,841 1,852,026 Shareholders’ Equity (Note 10) Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued Common stock, $.50 par value, authorized 600,000,000 shares; issued 116,602,195 shares in 2000 and 111,945,179 shares in 1999 at par value 58,301 55,973 Additional capital 328,938 132,227 Retained earnings 2,165,625 1,872,356 Unearned compensation related to ESOP (Note 8) (110,818) (112,000) Deferred compensation related to stock options 1,304 Accumulated other comprehensive income (loss) (125,458) (92,858) 2,317,892 1,855,698 Common stock in treasury at cost; 214,487 shares in 2000 and 43,836 shares in 1999 (8,434) (1,836) Total Shareholders’ Equity 2,309,458 1,853,862 Total Liabilities and Shareholders’ Equity $ 4,646,299 $ 3,705,888 The accompanying notes are an integral part of the financial statements.
  • 24. 22 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Cash Flows The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company’s operating, investing and financing activities. All year references are to fiscal years. Cash and cash equivalents increased $35.2 million in 2000 after increasing $2.8 million in 1999. Cash Flows From Operating Activities — The Company’s largest source of cash continues to be net cash provided by operating activities. Net cash provided by operating activities in 2000 was a record $538.0 million compared to $459.1 million in 1999. Net income in 2000 increased $57.7 million over 1999. Accounts payable provided cash of $21.8 million in 2000 compared to using cash of $33.1 million in 1999 and Accrued payrolls and other compensation provided cash of $8.0 million in 2000 after using cash of $21.9 million in 1999. These providers of cash in 2000 were partially offset by Deferred income taxes, which decreased $11.9 million in 2000 as opposed to increasing $5.7 million in 1999. Other liabilities provided cash of $5.6 million in 2000 after providing cash of $20.7 million in 1999. Inventories provided cash of $17.2 million in 2000 compared to providing cash of $30.6 million in 1999 and Accounts receivable used cash of $42.4 million in 2000 after using cash of $31.4 million in 1999. The net cash provided by operating activities in 1999 increased $138.5 million compared to 1998. This increase was principally due to Inventories providing cash of $30.6 million in 1999 compared to using cash of $185.6 million in 1998. Accrued domestic and foreign taxes provided cash of $22.1 million in 1999 after using cash of $15.3 million in 1998. Accounts receivable used cash of $31.4 million in 1999 after using cash of $71.0 million in 1998 and Other liabilities provided cash of $20.7 million compared to providing cash of $8.6 million in 1998. These providers of cash in 1999 were partially offset with cash used by Other assets of $57.0 million in 1999 after using cash of $31.6 million in 1998. Accounts payable used cash of $33.1 million in 1999 after providing cash of $52.9 million in 1998. Accrued payrolls and other compensation used cash of $21.9 million in 1999 after providing cash of $27.5 million in 1998. Cash Flows From Investing Activities — Net cash used in investing activities was $266.7 million higher in 2000 than 1999, primarily due to Acquisitions using $261.1 million more cash in 2000, partially offset by an increase of $25.7 million in proceeds received from the sale of plant and equipment in 2000. Included in Other is an increase in cash used for equity investments in 2000. Net cash used in investing activities was $146.1 million lower in 1999 than 1998, primarily due to Acquisitions using $143.1 million less cash in 1999. Also, Capital expenditures decreased by $6.8 million in 1999. To complete Acquisitions the Company utilized cash of $351.0 million and the issuance of common stock valued at $184.3 million in 2000; cash of $89.9 million in 1999; and cash of $233.0 million and treasury shares valued at $11.9 million in 1998. The net assets of the acquired companies at their respective acquisition dates consisted of the following: (in thousands) 2000 1999 1998 Assets acquired: Accounts receivable $ 72,651 $ 16,529 $ 39,286 Inventories 90,319 16,173 43,847 Prepaid expenses 2,329 2,509 1,393 Assets held for sale 164,000 Deferred income taxes 27,814 1,643 Plant & equipment 119,889 17,686 54,718 Other assets 246,915 3,783 3,762 Excess cost of investments over net assets acquired 158,230 84,589 162,680 882,147 141,269 307,329 Liabilities and equity assumed: Notes payable 2,433 10,433 8,690 Accounts payable 41,315 10,105 21,841 Accrued payrolls 18,345 6,828 4,418 Accrued taxes 102,473 (646) 2,840 Other accrued liabilities 56,432 3,535 11,421 Long-term debt 107,195 20,090 9,706 Pensions and other postretirement benefits 22,964 471 477 Other liabilities 588 3,033 Unearned compensation (4,285) 346,872 51,404 62,426 Net assets acquired $ 535,275 $ 89,865 $ 244,903 Cash Flows From Financing Activities — In 2000 the Company increased its outstanding borrowings by a net total of $154.6 million primarily to fund acquisitions. The majority of the funding occurred in the second half of 2000 and was accomplished through the issuance of commercial paper. In 1999 the Company decreased its outstanding borrowings by a net total of $148.4 million. This amount does not include the Company’s issuance of the ESOP debt guarantee of $112.0 million, which is reflected as a non-cash financing activity. The Company issued $225.0 million in medium-term notes during 1999. As of June 30, 1999, the Company paid down the majority of its commercial paper borrowings and selected notes payable attributable to the International operations with the major source of funding for the repayment coming from the proceeds received from the sale of treasury shares to the ESOP. Common share activity in 2000 includes the exercise of stock options and the repurchase of stock. During 2000 the Company purchased 267,200 shares for treasury. Dividends have been paid for 200 consecutive quarters, including a yearly increase in dividends for the last 44 fiscal years. The current annual dividend rate is $.68 per share. In summary, based upon the Company’s past performance and current expectations, management believes the cash flows generated from future operating activities should provide adequate funds to support internal growth and continued improvements in the Company’s manufacturing facilities and equipment. The Company’s worldwide financial capabilities may be used to support planned growth as needed.
  • 25. 23 (Dollars in thousands)Consolidated Statement of Cash Flows For the years ended June 30, 2000 1999 1998 Cash Flows From Operating Activities Net income $ 368,232 $ 310,501 $ 319,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 167,356 164,577 153,633 Amortization 39,052 37,469 29,046 Deferred income taxes (11,867) 5,718 7,680 Foreign currency transaction loss (gain) 5,082 (2,495) 3,697 (Gain) loss on sale of plant and equipment (5,288) 1,886 291 Write-off of purchased in-process research and development 15,800 Net effect of extraordinary loss 3,675 Changes in assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable (42,386) (31,396) (71,034) Inventories 17,248 30,606 (185,569) Prepaid expenses (7,881) 2,069 (3,473) Other assets (53,105) (56,957) (31,620) Accounts payable, trade 21,792 (33,075) 52,947 Accrued payrolls and other compensation 8,021 (21,892) 27,531 Accrued domestic and foreign taxes 30,124 22,091 (15,282) Other accrued liabilities (7,533) (3,935) (9,129) Pensions and other postretirement benefits 3,642 13,258 14,276 Other liabilities 5,551 20,672 8,579 Net cash provided by operating activities 538,040 459,097 320,599 Cash Flows From Investing Activities Acquisitions (less cash acquired of $1,158 in 2000, $2,609 in 1999 and $4,260 in 1998) (351,011) (89,865) (232,953) Capital expenditures (230,482) (230,122) (236,945) Proceeds from sale of plant and equipment 32,051 6,382 7,151 Other (30,267) 548 3,630 Net cash (used in) investing activities (579,709) (313,057) (459,117) Cash Flows From Financing Activities Proceeds from (payments for) common share activity 1,202 74,076 (96,887) Proceeds from (payments of) notes payable, net 272,440 (228,896) 190,865 Proceeds from long-term borrowings 12,600 232,886 87,085 (Payments of) long-term borrowings (130,419) (152,397) (13,054) Dividends paid, net of tax benefit of ESOP shares (74,963) (69,461) (66,501) Net cash provided by (used in) financing activities 80,860 (143,792) 101,508 Effect of exchange rate changes on cash (4,008) 541 (1,499) Net increase (decrease) in cash and cash equivalents 35,183 2,789 (38,509) Cash and cash equivalents at beginning of year 33,277 30,488 68,997 Cash and cash equivalents at end of year $ 68,460 $ 33,277 $ 30,488 Supplemental Data: Cash paid during the year for: Interest, net of capitalized interest $ 56,341 $ 62,997 $ 48,105 Income taxes 167,211 129,893 175,546 Non-cash investing activities: Stock issued for acquisitions 184,263 11,950 Non-cash financing activities: Capital lease obligations 7,346 ESOP debt guarantee 112,000 The accompanying notes are an integral part of the financial statements.
  • 26. 24 M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S A N D F I N A N C I A L S TAT E M E N T S Discussion of Business Segment Information The Business Segment Information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company’s various businesses are managed for internal review and decision- making. All year references are to fiscal years. Industrial Segment 2000 1999 1998 Operating income as a percent of sales 12.1% 11.0% 12.6% Return on average assets 17.4% 16.0% 19.1% Sales for the Industrial North American operations increased to a record $2.94 billion in 2000, 14.7 percent over 1999, following 1999’s increase of 4.5 percent over 1998. Acquisitions accounted for one-third of the increase in 2000 and four-fifths of the increase in 1999. The increase in Industrial North American sales is attributable to higher volume across all businesses, particularly in the semiconductor manufacturing and telecommunications markets. Sales in 1999 reflected lower demand within most of the Industrial North American markets. International Industrial sales increased to $1.27 billion, 2.7 percent over 1999. Acquisitions accounted for all of the 2000 increase. Without the impact of changes in currency rates, sales for 2000 increased 11.1 percent, mostly attributable to higher volume in the Asia Pacific region as well as higher market demand in Europe and Latin America in the latter part of 2000. International Industrial sales in 1999 increased to $1.24 billion, 4.7 percent over 1998. Without the impact of changes in currency rates, volume for 1999 increased 5.8 percent. Acquisitions accounted for all of the 1999 increase. Industrial North American operating income increased 27.3 percent in 2000 after a decline of 8.4 percent in 1999. Income from operations as a percent of sales was 14.5 percent in 2000 compared to 13.1 percent in 1999 and 14.9 percent in 1998. The increased margins in 2000 reflect better capacity utilization as market demand improved. Recent acquisitions, not yet fully integrated, contributed slightly lower margins. Raw material prices decreased during the year. International operating income increased 2.2 percent in 2000 after a 1999 decrease of 11.4 percent. Operating income in 2000 includes $9.0 million in business realignment charges that were taken to appropriately structure the European operations to operate in their current economic environment. Excluding this charge, income as a percent of sales in 2000 was 7.3 percent compared to 6.6 percent in 1999 and 7.8 percent in 1998. The increased margins reflect higher volume in the Asia Pacific region and improved market conditions in Latin America. Margins also benefited from the improved European market demand in the second half of 2000 with the increased volume improving capacity utilization. The lower margins in 1999 resulted primarily from struggling European and Latin American economies. A significant upward trend in order rates was experienced in 2000 with orders in virtually all markets continuing on the upswing heading into fiscal 2001. It is unclear whether the sequential improvement in order rates can be sustained in 2001 as economic indicators for some North American markets are beginning to signal a slowdown in production. The Industrial European and Latin American operations are expected to experience modestly improving economies in 2001. Focused efforts will be made in 2001 to integrate acquisitions completed in 2000 as well as the recently completed Wynn’s International acquisition. The Company will also continue to monitor the European operations and take, where necessary, actions to manage these operations to ensure they are appropriately structured to operate in their current economic environment. Backlog for the Industrial Segment was $751.0 million at June 30, 2000, compared to $546.9 million at the end of 1999 and $585.2 million at the end of 1998. The higher backlog reflects the strong order rates experienced across all markets during the year as well as acquisitions. The decline in backlog in 1999 was due to the weakened demand experienced by the Industrial markets. Assets for the Industrial Segment increased 20.7 percent in 2000 after an increase of 3.4 percent in 1999. The increase in 2000 is primarily due to acquisitions. In 1999 an increase from acquisitions was partially offset by decreases in inventories and net goodwill as well as the effect of currency fluctuations. In both years net plant and equipment increased due to capital expenditures exceeding depreciation. Aerospace Segment 2000 1999 1998 Operating income as a percent of sales 15.4% 15.4% 16.1% Return on average assets 23.4% 23.1% 22.8% Sales declined 1.2 percent in 2000 after an increase of 16.1 percent in 1999. The lower sales resulted from the expected reduction in commercial aircraft builds partially offset by an increase in regional jet build rates and maintenance, repair and overhaul business. An increase in commercial aircraft build rates contributed to the higher volume in 1999. Operating income was $175.7 million in 2000, $177.2 million in 1999 and $159.6 million in 1998. Operating income in 2000 includes $4.4 million in business realignment charges that were taken in response to a decline in commercial aircraft orders. Excluding this charge, as a percent of sales, 2000 income was 15.8 percent compared to 15.4 percent in 1999 and 16.1 percent in 1998. An increase in margins from a higher mix of aftermarket business offset reduced margins from the lower volume, which resulted in lower capacity utilization. The 1999 decline in margins reflected a change in mix of sales from aftermarket to OEM. Backlog at June 30, 2000 was $1.05 billion compared to $1.08 billion in 1999 and $1.06 billion in 1998. The lower backlog reflects the decline in commercial aircraft build rates partially offset by an increase in orders in the regional jet market. This trend in order rates is expected to continue in 2001. Assets declined 10.0 percent in 2000 after a 6.0 percent increase in 1999. The decline in 2000 was primarily due to a reduction in inventory. In 1999, increases in customer receivables and property, plant and equipment were partially offset by a decrease in net goodwill.
  • 27. 25 (Dollars in thousands)Business Segment Information By Industry 2000 1999 1998 Net Sales: Industrial: North America $ 2,942,419 $2,565,154 $ 2,454,558 International 1,274,590 1,241,256 1,185,584 Aerospace 1,138,328 1,152,390 992,881 $ 5,355,337 $4,958,800 $ 4,633,023 Segment Operating Income: Industrial: North America $ 426,630 $ 335,259 $ 365,880 International 84,022 82,245 92,783 Aerospace 175,710 177,213 159,580 Total segment operating income 686,362 594,717 618,243 Corporate administration 58,210 54,176 61,829 Income before interest expense and other 628,152 540,541 556,414 Interest expense 59,183 63,697 52,787 Other 6,782 (850) (361) Income before income taxes $ 562,187 $ 477,694 $ 503,988 Identifiable Assets: Industrial $ 3,207,357 $2,657,146 $ 2,570,273 Aerospace 709,731 789,174 744,335 3,917,088 3,446,320 3,314,608 Corporate (a) 729,211 259,568 210,213 $ 4,646,299 $3,705,888 $ 3,524,821 Property Additions: (b) Industrial $ 329,651 $ 209,230 $ 245,995 Aerospace 20,720 36,993 33,733 Corporate 1,585 11,935 $ 350,371 $ 247,808 $ 291,663 Depreciation: Industrial $ 142,078 $ 140,914 $ 130,888 Aerospace 21,342 19,523 19,011 Corporate 3,936 4,140 3,734 $ 167,356 $ 164,577 $ 153,633 By Geographic Area (c) 2000 1999 1998 Net Sales: North America $ 4,054,367 $ 3,684,786 $ 3,425,704 International 1,300,970 1,274,014 1,207,319 $ 5,355,337 $4,958,800 $ 4,633,023 Long-lived Assets: North America $ 969,788 $ 873,222 $ 790,162 International 371,127 327,647 345,063 $ 1,340,915 $ 1,200,869 $ 1,135,225 The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a management basis that is consistent with the manner in which the Company disaggregates financial information for internal review and decision-making. (a) Corporate assets are principally cash and cash equivalents, domestic deferred income taxes, investments, benefit plan assets, headquarters facilities, assets held for sale and the major portion of the Company’s domestic data processing equipment. Corporate assets increased 180.9 percent in 2000 and 23.5 percent in 1999. The 2000 amount includes assets held for sale as separately identified on the Consolidated Balance Sheet. The increase in both years is due to increases in qualified and non- qualified benefit plan assets including those from acquisitions in 2000. (b) Includes value of net plant and equipment at the date of acquisition of acquired companies accounted for by the purchase method (2000 - $119,889; 1999 - $17,686; 1998 - $54,718). (c) Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10% of consolidated sales. Long-lived assets are comprised of property, plant and equipment based on physical location.
  • 28. 26 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Note 1 Significant Accounting Policies The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below. Nature of Operations — The Company is a leading worldwide producer of motion control products, including fluid power systems, electromechanical controls and related components. The Company evaluates performance based on segment operating income before Corporate general and administrative expenses, Interest expense and Income taxes. The Company operates in two principal business segments: Industrial and Aerospace. The Industrial Segment is an aggregation of several business units which produce motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military machinery, vehicles and equipment. Industrial Segment products are marketed primarily through field sales employees and independent distributors. The North American Industrial business represents the largest portion of the Company’s manufacturing plants and distribution networks and primarily services North America. The International Industrial operations bring Parker products and services to countries throughout Europe, Asia Pacific and Latin America. The Aerospace Segment produces hydraulic, pneumatic and fuel systems and components which are utilized on virtually every domestic commercial, military and general aviation aircraft. Its components also perform a vital role in naval vessels, land-based weapons systems, satellites and space vehicles. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Its products are marketed by field sales employees and are sold directly to the manufacturer and to the end user. There are no individual customers to whom sales are five percent or more of the Company’s consolidated sales. Due to the diverse group of customers throughout the world the Company does not consider itself exposed to any concentration of credit risks. The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company’s products and geographic operations mitigate significantly the risk that adverse changes would materially affect the Company’s operating results. Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Basis of Consolidation — The consolidated financial statements include the accounts of all domestic and foreign subsidiaries. All material intercompany transactions and profits have been eliminated in the consolidated financial statements. Within the Business Segment Information, intersegment and interarea sales are recorded at fair market value and are immaterial in amount. Revenue Recognition — Revenue is generally recognized when products are shipped. Cash — Cash equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash. Inventories — Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued by the last-in, first-out method and the balance of the Company’s inventories are valued by the first-in, first-out method. Long-term Contracts — The Company enters into long-term contracts for the production of aerospace products. For financial statement purposes, sales are recorded as deliveries are made (units of delivery method of percentage-of-completion). Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Plant, Equipment and Depreciation — Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings; 15 years for land improvements and building equipment; 10 years for machinery; and seven years for equipment. Improvements which extend the useful life of property are capitalized, and maintenance and repairs are expensed. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income. Investments and Other Assets — Investments in joint-venture companies in which ownership is 50% or less and in which the Company does not have operating control are stated at cost plus the Company’s equity in undistributed earnings. These investments and the related earnings are not material to the consolidated financial statements. Excess Cost of Investments — The excess cost of investments over net assets acquired is being amortized, on a straight-line basis, over periods ranging from 15 years to 40 years. Unamortized cost in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value. Income Taxes — Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise.
  • 29. 27 (Dollars in thousands, except per share amounts) Foreign Currency Translation — Assets and liabilities of most foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the Accumulated other comprehensive income (loss) component of Shareholders’ Equity. Such adjustments will affect Net Income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved, and translation adjustments in countries with highly inflationary economies, are included in income. Financial Instruments — The Company’s financial instruments consist primarily of investments in cash, cash equivalents and long-term investments as well as obligations under notes payable and long-term debt. The carrying values for Cash and cash equivalents, Investments and other assets and Notes payable approximate fair value. The Company enters into forward exchange contracts (forward contracts), costless collar contracts, and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The Company does not hold or issue derivative financial instruments for trading purposes. Gains or losses on forward contracts which hedge specific transactions are recognized in Net Income, offsetting the underlying foreign currency gains or losses. Gains or losses on costless collar contracts are recognized in Net Income when the spot rate of the contract falls outside the collar range. Cross-currency swap agreements are recorded in Long-term debt as dollar- denominated receivables with offsetting foreign-currency payables. If the receivables more than offset the payables, the net difference is reclassified to an asset. Gains or losses are accrued monthly as an adjustment to Net Income, offsetting the underlying foreign currency gains or losses. The differential between interest to be received and interest to be paid is accrued monthly as an adjustment to Interest expense. In addition, the Company’s foreign locations, in the ordinary course of business, enter into financial guarantees, through financial institutions, which enable customers to be reimbursed in the event of nonperformance by the Company. The total value of open contracts and any risk to the Company as a result of the above mentioned arrangements is not material. Stock Options — The Company applies the intrinsic-value based method to account for stock options granted to employees or outside Directors to purchase common shares. The option price equals the market price of the underlying common shares on the date of grant, therefore no compensation expense is recognized. Recently Issued Accounting Pronouncements — The Financial Accounting Standards Board (FASB) has issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This standard establishes a new model for accounting for derivatives and hedging activities. Due to the immaterial amount of derivative and hedging activity within the Company, application of this standard, required in the first quarter of 2001 as a result of the issuance of SFAS No. 137, is not expected to have a material impact on the results and financial position of the Company. Note 2 Acquisitions and Net Assets Held for Sale On February 3, 2000 the Company acquired the assets of Dana Corporation’s Gresen Hydraulics business, located in Minneapolis, Minnesota and Sarasota, Florida, a manufacturer of a wide range of hydraulic pumps, motors, cylinders, control valves, filters and electronic controls for on- and off-highway vehicles. On April 11, 2000 the Company completed its merger with Commercial Intertech Corp. of Youngstown, Ohio with the Company being the surviving corporation. Commercial Intertech’s hydraulics business manufactures gear pumps and motors, control valves and telescopic cylinders for use on heavy-duty mobile equipment. On May 30, 2000 the Company acquired the equity of Whatman’s Industrial Filtration Business, based in Haverill, Massachusetts and Maidstone, United Kingdom, a manufacturer of high quality purification products and gas generators for a variety of industrial applications. Combined annual sales for these operations, for their most recent fiscal year prior to acquisition, were approximately $716 million. Total purchase price for these businesses was approximately $339 million in cash, 4.3 million shares of common stock valued at $184 million and assumed debt of $104 million. The Company is currently soliciting offers for the purchase of Commercial Intertech’s building systems and metal forming businesses. These businesses are valued at the estimated net cash proceeds from their sale plus estimated net earnings during the holding period and are reflected as Net assets held for sale on the Consolidated Balance Sheet. On July 14, 1998 the Company acquired the equity of B.A.G. Acquisition Ltd., the parent company of Veriflo Corporation, a manufacturer of high-purity regulators and valves based in Richmond, California. On August 27, 1998 the Company acquired the equity of Fluid Power Systems, a manufacturer of hydraulic valves and electrohydraulic systems and controls located in Lincolnshire, Illinois. Combined annual sales for these operations, for their most recent fiscal year prior to acquisition, were approximately $107 million. Total purchase price for these businesses was approximately $85.2 million cash. On May 1, 1998 the Company acquired the equity of Extrudit Ltd., a tubing manufacturer located in Buxton, England. On April 30, 1998 the Company purchased the equity of UCC Securities Limited of Thetford, Norfolk, England, a manufacturer of technology-based hydraulic filtration products. On April 1, 1998 the Company acquired the equity of Sempress Pneumatics, a manufacturer of pneumatic cylinders and valves located near Rotterdam, the Netherlands. On March 31, 1998 the Company acquired the assets of Temeto AB located in Flen, Sweden, a distributor of hydraulic components. On March 26,
  • 30. 28 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 1998 the Company purchased the remaining 51% of two Korean joint ventures - HS Parker Company Ltd., in Yangsan, and the HS Parker Air Conditioning Components Company Ltd., in Chonan, manufacturers of hydraulic hose, fittings, hose assemblies and accumulators. On February 27, 1998 Computer Technology Corporation of Milford, Ohio, a manufacturer of man-machine interface solutions, was merged into the Company. On September 26, 1997 the Company acquired the assets of the Skinner solenoid valve division of Honeywell Inc. and the equity of Honeywell Lucifer, S.A. Skinner is headquartered in New Britain, Connecticut, and Lucifer is headquartered in Geneva, Switzerland. On August 4, 1997 the Company acquired the assets of EWAL Manufacturing of Belleville, New Jersey, a leading producer of precision fittings and valves. Combined annual sales for operations acquired in fiscal 1998, for their most recent fiscal year prior to acquisition, were approximately $243 million. Total purchase price for these businesses was approximately $236.5 million cash and 263,279 shares of common stock valued at $11.9 million. The purchase price allocations of Computer Technology Corporation and UCC Securities Limited, as determined by independent appraisal, included a $15.8 million asset for purchased in-process research and development. Generally accepted accounting principles do not allow the capitalization of R&D of this nature, therefore, a write-off of $15.8 million ($12.0 million after-tax or $.11 per share) is included in Cost of sales in 1998. These acquisitions were accounted for by the purchase method, and results are included as of the respective dates of acquisition. Note 3 Charges Related to Business Realignment In 2000 the Company recorded a $8,555 charge ($5,560 after-tax or $.05 per share) related to the costs of appropriately structuring its businesses to operate in their current economic environment. The charge primarily related to severance costs attributable to approximately 250 employees principally associated with the Industrial International operations. As of June 30, 2000, the Company has made substantially all severance payments. A change in the future utilization of long-lived assets at certain locations triggered an impairment review of these long-lived assets during 2000. The Company evaluated the recoverability of the long-lived assets and determined that the estimated future undiscounted cash flows were below the carrying value of these assets. Accordingly, the Company recorded a non-cash impairment loss of $4,875 ($3,169 after-tax or $.03 per share). Of the pre-tax amount, $3,499 relates to the Aerospace Segment and $1,376 relates to the Industrial Segment. The severance and impairment loss are presented in the income statement for 2000 in the following captions: $2,552 in Cost of sales; $2,476 in Selling, general and administrative expenses; and $8,402 in Loss (gain) on disposal of assets. Note 4 Income Taxes Income taxes include the following: 2000 1999 1998 Federal $140,663 $113,011 $129,462 Foreign 29,393 34,309 27,847 State and local 11,099 11,236 16,928 Deferred 12,800 8,637 6,525 $193,955 $167,193 $180,762 A reconciliation of the Company’s effective income tax rate to the statutory Federal rate follows: 2000 1999 1998 Statutory Federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 1.5 1.8 2.1 FSC income not taxed (1.7) (2.3) (1.7) Foreign tax rate difference (.6) 1.4 .2 Other .3 (.9) .3 Effective income tax rate 34.5% 35.0% 35.9% Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows: 2000 1999 Postretirement benefits $ 1,710 $ 74,238 Other liabilities and reserves 58,077 38,530 Long-term contracts 5,347 16,344 Operating loss carryforwards 45,182 4,719 Foreign tax credit carryforwards 3,356 2,264 Valuation allowance (26,887) (4,700) Depreciation (95,138) (77,871) Inventory 10,532 10,567 Net deferred tax asset $ 2,179 $ 64,091 Change in net deferred tax asset (liability): Provision for deferred tax $(12,800) $ (8,637) Translation adjustment 320 1,710 Acquisitions (49,432) (1,707) Total change in net deferred tax $(61,912) $ (8,634) At June 30, 2000, the Company has operating loss carryforwards of $45,182 for tax purposes, some of which can be carried forward indefinitely and others which can be carried forward from three to 20 years. A valuation allowance has been established due to the uncertainty of realizing certain foreign operating loss
  • 31. 29 (Dollars in thousands, except per share amounts) carryforwards. The increase in the valuation allowance in 2000 was attributable to the Commercial Intertech acquisition. The recognition of any future tax benefit resulting from the reduction of $24,703 of the valuation allowance will reduce any goodwill related to the Commercial Intertech acquisition remaining at the time of the reduction. Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings. Accumulated undistributed earnings of foreign operations reinvested in their operations amounted to $276,481, $205,756 and $153,831, at June 30, 2000, 1999 and 1998, respectively. Note 5 Earnings Per Share Earnings per share have been computed according to SFAS No. 128, “Earnings per Share.” Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed using the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock options. The computation of net income per share was as follows: 2000 1999 1998 Numerator: Net income applicable to common shares $ 368,232 $ 310,501 $ 319,551 Denominator: Basic – weighted average common shares 110,330,711 108,799,974 110,868,834 Increase in weighted average from dilutive effect of exercise of stock options 913,921 878,985 1,090,437 Diluted – weighted average common shares, assuming exercise of stock options 111,244,632 109,678,959 111,959,271 Basic earnings per share $ 3.34 $ 2.85 $ 2.88 Diluted earnings per share $ 3.31 $ 2.83 $ 2.85 Note 6 Inventories Inventories valued on the last-in, first-out cost method are approximately 43% in 2000 and 34% in 1999 of total inventories. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $141,187 in 2000 and $138,197 in 1999. Progress payments of $20,279 in 2000 and $22,593 in 1999 are netted against inventories. Note 7 Financing Arrangements The Company has committed lines of credit totaling $650,865 through several multi-currency unsecured revolving credit agreements with a group of banks, of which $362,759 was available at June 30, 2000. The majority of these agreements expire October 2003. The interest on borrowings is based upon the terms of each specific borrowing and is subject to market conditions. The agreements also require facility fees of up to 8/100ths of one percent of the commitment per annum. Covenants in some of the agreements include a limitation on the Company’s ratio of debt to tangible net worth. The Company has other lines of credit, primarily short-term, aggregating $89,439 from various foreign banks, of which $73,430 was available at June 30, 2000. Most of these agreements are renewed annually. During fiscal 2000 the Company did not issue any medium-term notes leaving $530,000 available for issuance at June 30, 2000. The Company is authorized to sell up to $600,000 of short-term commercial paper notes, rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. At June 30, 2000 there were $235,800 of commercial paper notes outstanding which were supported by the available domestic lines of credit. Commercial paper, along with short-term borrowings from foreign banks, primarily make up the balance of Notes payable. The balance and weighted average interest rate of the Notes payable at June 30, 2000 and 1999 were $314,365 and 5.6% and $37,305 and 6.4%, respectively. Note 8 Debt June 30, 2000 1999 Domestic: Debentures 9.75%, due 2002-2021 $100,000 $ 100,000 7.3%, due 2011 100,000 100,000 Medium-term notes 5.65% to 7.39%, due 2004-2019 370,000 370,000 ESOP loan guarantee 6.34%, due 2009 99,741 112,000 Variable rate demand bonds 4.8% to 4.9%, due 2010-2025 20,035 20,035 Foreign: Bank loans, including revolving credit 1.5% to 12.0%, due 2001-2018 24,764 37,206 Other long-term debt, including capitalized leases 8,155 8,820 Total long-term debt 722,695 748,061 Less long-term debt payable within one year 20,933 23,304 Long-term debt, net $ 701,762 $ 724,757
  • 32. 30 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S On June 30, 1998, the Company called for redemption its outstanding $100,000, 10.375 percent debentures due 1999-2018. The after-tax extraordinary loss for this transaction, including an early-redemption premium and the write-off of deferred issuance costs, was $3,675 or $.03 per share. The retirement of the debt was financed on July 15, 1998, through the issuance of $100,000 of medium- term notes, due 2019, at an annual interest rate of 6.55 percent. Principal amounts of Long-term debt payable in the five years ending June 30, 2001 through 2005 are $20,933, $24,580, $22,781, $199,176 and $16,943, respectively. The carrying value of the Company’s Long-term debt (excluding leases and cross-currency swaps) was $714,540 and $739,241 at June 30, 2000 and 1999, respectively, and was estimated to have a fair value of $668,864 and $711,505, at June 30, 2000 and 1999, respectively. The estimated fair value of the Long-term debt was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. ESOP Loan Guarantee — In 1999 the Company’s Employee Stock Ownership Plan (ESOP) was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to purchase 3,055,413 shares of the Company’s common stock from the Company’s treasury. The Company used the proceeds to pay down commercial paper borrowings. The loan is unconditionally guaranteed by the Company and therefore the unpaid balance of the borrowing is reflected on the Consolidated Balance Sheet as Long-term debt. A corresponding amount representing Unearned compensation is recorded as a deduction from Shareholders’ Equity. Lease Commitments — Future minimum rental commitments as of June 30, 2000, under noncancelable operating leases, which expire at various dates, are as follows: 2001-$43,732; 2002-$31,663; 2003-$21,462; 2004- $12,726; 2005-$12,585 and after 2005-$30,832. Rental expense in 2000, 1999 and 1998 was $40,371, $42,280 and $37,065, respectively. Note 9 Retirement Benefits Pensions — The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. The Company also has contractual arrangements with certain key employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries. Pension costs for all plans were $9,304, $23,644 and $19,989 for 2000, 1999 and 1998, respectively. Pension costs for all defined benefit plans accounted for using SFAS No. 87, “Employers’ Accounting for Pensions,” are as follows: 2000 1999 1998 Service cost $ 38,179 $ 34,890 $ 28,190 Interest cost 68,807 63,257 57,892 Expected return on plan assets (102,346) (83,798) (68,463) Net amortization and deferral and other (375) 4,081 445 Net periodic benefit cost $ 4,265 $ 18,430 $ 18,064 Change in benefit obligation 2000 1999 Benefit obligation at beginning of year $ 962,663 $ 877,752 Service cost 38,179 34,890 Interest cost 68,807 63,257 Actuarial (gain) loss (11,812) 30,288 Benefits paid (42,659) (40,028) Acquisitions 157,189 Other (4,753) (3,496) Benefit obligation at end of year $ 1,167,614 $ 962,663 Change in plan assets Fair value of plan assets at beginning of year $ 1,099,989 $ 997,913 Actual return on plan assets 123,997 131,872 Employer contributions 14,295 12,255 Benefits paid (38,543) (36,253) Acquisitions 393,134 Other (10,787) (5,798) Fair value of plan assets at end of year $ 1,582,085 $1,099,989 Funded status Plan assets in excess of benefit obligation $ 414,471 $ 137,326 Unrecognized net actuarial (gain) (175,644) (144,706) Unrecognized prior service cost 27,683 23,259 Unrecognized initial net (asset) (7,173) (9,587) Net amount recognized $ 259,337 $ 6,292 Amounts recognized on the Consolidated Balance Sheet Prepaid benefit cost $ 355,922 $ 104,135 Accrued benefit liability (96,585) (97,843) Net amount recognized $ 259,337 $ 6,292 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $147,286, $124,354 and $37,208, respectively, at June 30, 2000, and $143,177, $122,411 and $28,331, respectively, at June 30, 1999.
  • 33. 31 (Dollars in thousands, except per share amounts) The plans’ assets consist primarily of listed common stocks, corporate and government bonds, and real estate investments. At June 30, 2000 and 1999, the plans’ assets included Company stock with market values of $18,203 and $24,314, respectively. The assumptions used to measure the benefit obligations and to compute the expected long-term return on assets for the Company’s significant defined benefit plans are: 2000 1999 1998 U.S. defined benefit plans Discount rate 7.5% 7.5% 7.5% Average increase in compensation 4.9% 4.9% 4.9% Expected long-term return on assets 10% 10% 9.5% Non-U.S. defined benefit plans Discount rate 4.75 to 7% 4.5 to 6.5% 4.5 to 7% Average increase in compensation 3 to 4% 1.5 to 4% 3 to 4.5% Expected long-term return on assets 6 to 8.5% 6 to 9% 5.5 to 9% Employee Savings Plan — The Company sponsors an employee stock ownership plan (ESOP) as part of its existing savings and investment 401(k) plan (the “Parker ESOP”), and as of April 11, 2000, assumed sponsorship of the Commercial Intertech ESOP (both plans collectively referred to as “ESOP’s”). The ESOP’s are available to eligible domestic employees. Parker Hannifin common stock is used to match contributions made by employees to the ESOP’s up to a maximum of 3.5 percent of an employee’s annual compensation. A breakdown of shares held by the ESOP’s is as follows: 2000 1999 1998 Allocated shares 8,660,550 7,866,152 7,631,677 Committed-to-be-released shares 77,038 Suspense shares 3,373,734 3,055,413 Total shares held by the ESOP’s 12,111,322 10,921,565 7,631,677 Fair value of suspense shares $ 115,550 $ 139,785 In 1999 the Parker ESOP was leveraged and the loan was unconditionally guaranteed by the Company. The Company’s matching contribution and dividends on the shares held by the Parker ESOP are used to repay the loan, and shares are released from the suspense account as the principal and interest are paid. Shares in the Parker ESOP suspense account are not considered outstanding for purposes of earnings per share computations until they are released. Company contributions to the ESOP’s, recorded as compensation and interest expense, were $26,984 in 2000, $24,319 in 1999 and $23,093 in 1998. Dividends earned by the suspense shares and interest income within the ESOP’s totaled $1,214 in 2000 and $519 in 1999. In addition to shares within the ESOP’s, as of June 30, 2000 employees have elected to invest in 3,614,913 shares of common stock within the Company Stock Fund of the Parker Retirement Savings Plan. Other Postretirement Benefits — The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change or eliminate these benefit plans. Postretirement benefit costs included the following components: 2000 1999 1998 Service cost $ 4,499 $ 4,301 $ 4,021 Interest cost 10,762 11,158 11,077 Net amortization and deferral (2,758) (1,683) (1,815) Net periodic benefit cost $ 12,503 $ 13,776 $ 13,283 Change in benefit obligation 2000 1999 Benefit obligation at beginning of year $ 155,282 $ 155,933 Service cost 4,499 4,301 Interest cost 10,762 11,158 Actuarial (gain) (13,838) (8,093) Benefits paid (7,923) (8,017) Acquisitions and other 21,805 Benefit obligation at end of year $ 170,587 $ 155,282 Funded status Benefit obligation in excess of plan assets $(170,587) $(155,282) Unrecognized net actuarial (gain) (22,472) (10,029) Unrecognized prior service cost (12,224) (13,679) Net amount recognized $(205,283) $(178,990) Amounts recognized on the Consolidated Balance Sheet Accrued benefit liability $(205,283) $(178,990) The assumptions used to measure the postretirement benefit obligations are: 2000 1999 1998 Discount rate 7.5% 7.5% 7.5% Current medical cost trend rate 9% 9.5% 10.25% Ultimate medical cost trend rate 5.5% 5.5% 6% Medical cost trend rate decreases to ultimate in year 2007 2007 2007