SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File No. 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-0451060
(State of Incorporation) (I.R.S. Employer
Identification No.)
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Shares, $.50 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of August 31, 1998, excluding, for purposes of this
computation, only stock holdings of the Registrant's Directors and Officers.
$3,078,571,850.
The number of Common Shares outstanding on August 31, 1998 was 109,307,965.
Portions of the following documents are incorporated by reference:
(1) Annual Report to Shareholders of the Company for the fiscal year ended
June 30,1998. Incorporated by reference into Parts I, II and IV hereof.
(2) Definitive Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders. Incorporated by reference into Part III hereof.
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PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 1998
PART I
ITEM 1. BUSINESS. Parker-Hannifin Corporation is a leading worldwide
full-line manufacturer of motion control products, including fluid power
systems, electromechanical controls and related components. Fluid power
involves the transfer and control of power through the medium of liquid, gas or
air, in hydraulic, pneumatic and vacuum applications. Fluid power systems move
and position materials, control machines, vehicles and equipment and improve
industrial efficiency and productivity. Components of a simple fluid power
system include a pump which generates pressure, valves which control the
fluid's flow, an actuator which translates the pressure in the fluid into
mechanical energy, a filter to remove contaminants and numerous hoses,
couplings, fittings and seals. Electromechanical control involves the use of
electronic components and systems to control motion and precisely locate or
vary speed in automation applications. In addition to motion control products,
the Company also is a leading worldwide producer of fluid purification, fluid
flow, process instrumentation, air conditioning, refrigeration, and
electromagnetic shielding and thermal management products.
The Company was incorporated in Ohio in 1938. Its principal executive
offices are located at 6035 Parkland Boulevard, Mayfield Heights, Ohio 44124-
4141, telephone (216) 896-3000. As used in this Report, unless the context
otherwise requires, the term "Company" or "Parker" refers to Parker-Hannifin
Corporation and its subsidiaries.
The Company's manufacturing, service, distribution and administrative
facilities are located in 36 states, Puerto Rico and worldwide in 37 foreign
countries. Its motion control technology is used in the products of its two
business Segments: Industrial and Aerospace. The products are sold as original
and replacement equipment through product and distribution centers worldwide.
The Company markets its products through its direct-sales employees and more
than 7,500 independent distributors. Parker products are supplied to
approximately 400,000 customers in virtually every significant manufacturing,
transportation and processing industry. For the fiscal year ended June 30,
1998, net sales were $4,633,023,000; Industrial Segment products accounted for
79% of net sales and Aerospace Segment products for 21%.
MARKETS
Motion control systems are used throughout industry in applications
which include moving of materials, controlling machines, vehicles and equipment
and positioning materials during the manufacturing process. Motion control
systems contribute to the efficient use of energy and improve industrial
productivity.
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The approximately 400,000 customers who purchase the Company's parts
are found throughout virtually every significant manufacturing, transportation
and processing industry. No customer accounted for more than 6% of the
Company's total net sales for the fiscal year.
The major markets for products of the Fluid Connectors, Hydraulics,
Automation and Seal Groups of the Industrial Segment are agricultural
machinery, automotive, construction equipment, electronic equipment, fabricated
metals, food production, industrial machinery, lumber and paper, machine tools,
marine, medical equipment, mining, mobile equipment, chemicals, robotics, semi-
conductor equipment, textiles, transportation and every other major production
and processing industry. Products manufactured by the Industrial Segment's
Climate and Industrial Controls Group are utilized principally in automotive
and industrial mobile air conditioning systems, industrial refrigeration
systems and home and commercial air conditioning equipment. The major markets
for products manufactured by the Instrumentation Group of the Industrial
Segment are power generation, oil and gas exploration, petrochemical and
chemical processing, pulp and paper, semi-conductor manufacturing, medical and
analytical applications. The major markets for products of the Filtration
Group of the Industrial Segment are industrial machinery, mobile equipment,
process equipment, marine, aviation, environmental and semi-conductor
manufacturing. Sales of Industrial Segment products are made to original
equipment manufacturers and their replacement markets.
Aerospace Segment sales are made primarily to the commercial, military
and general aviation markets and are made to original equipment manufacturers
and to end users for maintenance, repair and overhaul.
PRINCIPAL PRODUCTS, METHODS OF DISTRIBUTION AND COMPETITIVE CONDITIONS
INDUSTRIAL SEGMENT. The product lines of the Company's Industrial
Segment cover most of the components of motion control systems. The Fluid
Connectors Group manufactures connectors, including tube fittings and hose
fittings, valves, hoses and couplers which control, transmit and contain fluid.
The Hydraulics Group produces hydraulic components and systems for builders and
users of industrial and mobile machinery and equipment, such as cylinders,
accumulators, rotary actuators, valves, motors and pumps, hydrostatic steering
units, power units, integrated hydraulic circuits, electrohydraulic systems and
metering pumps. The Automation Group supplies pneumatic and electromechanical
components and systems, including pneumatic valves, air preparation units,
indexers, stepper and servo drives, multi-axis positioning tables, electric and
pneumatic cylinders, structural extrusions, vacuum products, pneumatic logic
and human/machine interface hardware and software. The Climate and Industrial
Controls Group manufactures components for use in industrial, residential and
automotive air conditioning and refrigeration systems and other automotive
applications, including pressure regulators, solenoid valves, expansion valves,
filter-dryers, gerotors and hose assemblies. The Seal Group manufactures
sealing devices, including o-rings and o-seals, gaskets and packings which
insure leak-proof connections and electromagnetic interference shielding and
thermal management products. The Filtration Group manufactures filters to
monitor and to remove contaminants from fuel, air, oil, water and other fluids
and gases, including hydraulic, lubrication and coolant filters; process,
chemical and
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microfiltration filters; compressed air and gas purification filters; lube oil
and fuel filters; fuel conditioning filters; fuel filters/water separators;
cabin air filters and condition monitoring devices. The Instrumentation Group
manufactures high quality critical flow components for process instrumentation,
ultra-high-purity, medical and analytical applications, including
instrumentation and ultra-high-purity tube fittings, ball, plug and needle
valves, packless ultra-high-purity valves, Teflon(r) fittings, valves and spray
guns, miniature solenoid valves, multi-solenoid manifolds, regulators,
transducers, quick connects, hose products and cylinder connections.
Industrial Segment products include both standard items which are
produced in large quantities and custom units which are engineered and produced
to original equipment manufacturers' specifications for application to a
particular end product. Both standard and custom products are also used in the
replacement of original motion control system components. Industrial Segment
products are marketed primarily through field sales employees and more than
7,500 independent distributors.
AEROSPACE SEGMENT. The principal products of the Company's Aerospace
Segment are hydraulic, fuel and pneumatic systems and components that are used
on most commercial and military airframe and engine programs in production in
the Western world today.
The Aerospace Segment offers complete hydraulic systems, as well as
components that include hydraulic, electrohydraulic and electromechanical
systems used for precise control of aircraft rudders, elevators, ailerons and
other aerodynamic control surfaces and utility hydraulic components such as
reservoirs, accumulators, selector valves, electrohydraulic servovalves,
thrust-reverser actuators, engine-driven pumps, nosewheel steering systems,
electromechanical actuators, engine controls and electronic controllers. The
Aerospace Segment also designs and manufactures aircraft wheels and brakes for
the general aviation and military markets.
The Aerospace fuel product line includes complete fuel systems as well
as components such as fuel transfer and pressurization controls, in-flight
refueling systems, fuel pumps and valves, fuel measurement and management
systems and center of gravity controls, engine fuel injection atomization
nozzles and augmentor controls, and electronic monitoring computers.
Pneumatic components include bleed air control systems, pressure
regulators, low-pressure pneumatic controls, heat transfer systems, engine
start systems, engine bleed control and anti-ice systems, and electronic
control and monitoring computers.
Aerospace Segment products are marketed by the Company's regional sales
organization and are sold directly to manufacturers and end users.
COMPETITION. All aspects of the Company's business are highly
competitive. No single manufacturer competes with respect to all products
manufactured and sold by the Company and the degree of competition varies with
different products. In the Industrial Segment, the Company competes on the
basis of product quality and innovation, customer service, its manufacturing
and distribution capability, and
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competitive price. The Company believes that, in most of its major product
markets, it is one of the principal suppliers of motion control systems and
components.
In the Aerospace Segment, the Company has developed alliances with key
customers based on Parker's advanced technological and engineering
capabilities, superior performance in quality, delivery, and service, and price
competitiveness, which has enabled Parker to obtain significant original
equipment business on new aircraft programs for its fluid control systems and
components and, thereby, to obtain the follow-on repair and replacement
business for these programs. The Company believes that it is one of the
primary suppliers in the aerospace marketplace.
RESEARCH AND PRODUCT DEVELOPMENT
The Company continually researches the feasibility of new products
through its development laboratories and testing facilities in many of its
worldwide manufacturing locations. Its research and product development staff
includes chemists, mechanical, electronic and electrical engineers and
physicists.
Research and development costs relating to the development of new
products or services and the improvement of existing products or services
amounted to $83,117,000 in fiscal 1998, $103,155,000 in fiscal 1997 and
$91,706,000 in fiscal 1996. Reimbursements of customer-sponsored research
included in the total cost for each of the respective years were $15,753,000,
$35,986,000, and $33,018,000.
PATENTS, TRADEMARKS, LICENSES
The Company owns a number of patents, trademarks and licenses related
to its products and has exclusive and non-exclusive rights under patents owned
by others. In addition, patent applications on certain products are now
pending, although there can be no assurance that patents will be issued. The
Company is not dependent to any material extent on any single patent or group
of patents.
BACKLOG AND SEASONAL NATURE OF BUSINESS
The Company's backlog at June 30, 1998 was approximately $1,649,377,000
and at June 30, 1997 was approximately $1,486,981,000. Approximately 75% of
the Company's backlog at June 30, 1998 is scheduled for delivery in the
succeeding twelve months. The Company's business generally is not seasonal in
nature.
ENVIRONMENTAL REGULATION
The Company is subject to federal, state and local laws and regulations
designed to protect the environment and to regulate the discharge of materials
into the environment. Among other environmental laws, the Company is subject
to the federal "Superfund" law, under which the Company has been designated as
a "potentially responsible party" and may be liable for cleanup costs
associated with various waste sites, some of which are on the U.S.
Environmental Protection Agency Superfund priority list. The Company believes
that its policies, practices and procedures are properly designed to prevent
unreasonable risk of environmental damage and the consequent financial
liability to the Company. Compliance with
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environmental laws and regulations requires continuing management effort and
expenditures by the Company. Compliance with environmental laws and
regulations has not had in the past, and, the Company believes, will not have
in the future, material effects on the capital expenditures, earnings, or
competitive position of the Company. The information set forth in Footnote 14
to the Financial Statements contained on page 37 of the Company's Annual Report
to Shareholders for the fiscal year ended June 30, 1998 ("Annual Report"), as
specifically excerpted on pages 13-37 and 13-38 of Exhibit 13 hereto, is
incorporated herein by reference.
ENERGY MATTERS AND SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's primary energy source for each of its business segments
is electric power. While the Company cannot predict future costs of such
electric power, the primary source for production of the required electric
power will be coal from substantial, proven coal reserves available to electric
utilities. The Company is subject to governmental regulations in regard to
energy supplies both in the United States and elsewhere. To date the Company
has not experienced any significant disruptions of its operations due to energy
curtailments.
Steel, brass, aluminum and elastomeric materials are the principal raw
materials used by the Company. These materials are available from numerous
sources in quantities sufficient to meet the requirements of the Company.
EMPLOYEES
The Company employed 39,873 persons as of June 30, 1998, of whom 14,322
were employed by foreign subsidiaries.
BUSINESS SEGMENT INFORMATION
The net sales, income from operations before corporate general and
administrative expenses and identifiable assets by business segment and by
geographic area for the past three fiscal years, as set forth on page 29 of the
Annual Report and specifically excerpted on pages 13-17 to 13-19 of Exhibit 13
hereto, is incorporated herein by reference.
ITEM 1A. EXECUTIVE OFFICERS OF THE COMPANY
The Company's Executive Officers are as follows:
Officer
Name Position Since(1) Age
Duane E. Collins President, Chief Executive Officer, 1983 62
Member of Office of the President
and Director
Dennis W. Sullivan Executive Vice President, Member of 1978 59
Office of the President and Director
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Lawrence M. Zeno Vice President and Member of Office 1993 56
of the President
Paul L. Carson Vice President - Information 1993 62
Services
Daniel T. Garey Vice President - Human Resources 1995 55
Stephen L. Hayes Vice President and President, 1993 57
Aerospace
Michael J. Hiemstra Vice President - Finance and 1987 51
Administration and
Chief Financial Officer
John D. Myslenski Vice President and President, 1997 47
Fluid Connectors
John K. Oelslager Vice President and President, 1997 55
Automation
Thomas A. Piraino, Jr. Vice President, General Counsel 1998 49
and Secretary
Nickolas W. Vande Steeg Vice President and President, Seal 1995 55
Donald E. Washkewicz Vice President and President, 1997 48
Hydraulics
William D. Wilkerson Vice President - Technical Director 1987 62
Harold C. Gueritey, Jr. Controller 1980 59
Timothy K. Pistell Treasurer 1993 51
(1) Officers of Parker-Hannifin serve for a term of office from the date
of election to the next organizational meeting of the Board of
Directors and until their respective successors are elected, except
in the case of death, resignation or removal. Messrs. Collins,
Hayes, Hiemstra, Pistell, Wilkerson and Gueritey have served in the
executive capacities indicated above during the past five years.
Mr. Sullivan was elected as Executive Vice President in 1981 and a
Member of the Office of the President in April 1996.
Mr. Zeno was elected as a Vice President in October 1993 and a Member
of the Office of the President in July 1997. He was President of the Motion
and Control Group (formerly the Fluidpower Group) from January 1994 to June
1997 and was Vice President-Operations of the Motion and Control Group from
July 1988 to December 1993.
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Mr. Carson was elected as a Vice President in October 1993. He was
Vice President of Management Information Systems from July 1, 1983 to October
1993.
Mr. Garey was elected as a Vice President effective in January 1995.
He was Group Vice President Human Resources of the Motion and Control Group
(formerly the Fluidpower Group) from July 1982 to December 1994.
Mr. Myslenski was elected as a Vice President in October 1997 and
named President of the Fluid Connectors Group in July 1997. He was Vice
President Operations of the Fluid Connectors Group from March 1989 to June
1997.
Mr. Oelslager was elected as a Vice President in October 1997 and
named President of the Automation Group in July 1997. He was Vice President
Operations of the Motion and Control Group from July 1995 to June 1997; and
General Manager of the Cylinder Division from July 1993 to July 1995.
Mr. Piraino was elected as Vice President, General Counsel and
Secretary in July 1998. He was Vice President-Law from July 1990 to June 1998.
Mr. Vande Steeg was elected as Vice President effective in September
1995. He has been President of the Seal Group since May 1986.
Mr. Washkewicz was elected as a Vice President and named President of
the Hydraulics Group in October 1997. He was Vice President Operations of the
Fluid Connectors Group from October 1994 to October 1997; and was a General
Manager of the Parflex Division from July 1982 to September 1994.
ITEM 2. PROPERTIES. The following table sets forth the principal
plants and other materially important properties of the Company and its
subsidiaries. The leased properties are indicated with an asterisk. A "(1)"
indicates that the property is occupied by the Company's Industrial Segment and
a "(2)" indicates properties occupied by the Aerospace Segment.
UNITED STATES
State City
Alabama Boaz(1)
Decatur(1)
Huntsville(1)
Jacksonville(1)
Arizona Glendale(2)
Tolleson(2)
Tucson*(1)
Arkansas Siloam Springs(1)
Trumann(1)
California Irvine(1)(2)
Lakewood*(2)
Long Beach*(2)
Modesto(1)
Newbury Park*(1)
Richmond(1)
Rohnert Park(1)
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State City
San Diego(1)
San Luis Obispo*(1)
Connecticut New Britain(1)
Florida Longwood(1)
Miami*(1)
Georgia Dublin(2)
Idaho Boise*(1)
Illinois Broadview(1)
Des Plaines(1)
Hampshire(1)
Lincolnshire*(1)
Rockford(1)
Indiana Albion(1)
Ashley(1)
Ft. Wayne(1)
Lebanon(1)
Tell City(1)
Iowa Red Oak(1)
Kansas Manhattan(1)
Kentucky Berea(1)
Lexington(1)
Louisiana Harvey*(1)
Maine Portland(1)
Massachusetts Ayre(2)
Woburn(1)
Michigan Kalamazoo(2)
Lakeview(1)
Otsego(1)
Oxford(1)
Richland(1)
Troy*(1)
Minnesota Golden Valley(1)
Mississippi Batesville(1)
Booneville(1)
Madison(1)
Missouri Kennett(1)
Nebraska Lincoln(1)
Nevada Carson City(1)
New Hampshire Hollis*(1)
Hudson(1)
Portsmouth*(1)
New Jersey Belleville*(1)
Fairfield*(1)
New York Clyde(2)
Lyons(1)
Smithtown(2)
North Carolina Forest City(1)
Hillsborough(1)
Mooresville(1)
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State City
Sanford(1)
Wake Forest*(1)
Ohio Akron(1)
Andover(2)
Avon(2)
Brookville(1)
Columbus(1)
Cuyahoga Falls*(1)
Eastlake(1)
Eaton(1)
Elyria(1)(2)
Forest(2)
Green Camp(1)
Kent(1)
Lewisburg(1)
Mayfield Heights(1)(2)
Mentor(2)
Metamora(1)
Milford*(1)
Ravenna(1)
St. Marys(1)
Wadsworth(1)
Wickliffe(1)
Oklahoma Henryetta*(1)
Oregon Eugene(1)
Pennsylvania Canton(1)
Harrison City(1)
Reading(1)
South Carolina Beaufort(2)
Inman(1)
Spartanburg(1)
Tennessee Greenfield(1)
Greenville(1)
Memphis*(1)
Texas Cleburne(1)
Ft. Worth(1)
Mansfield(1)
Utah Ogden(2)
Salt Lake City(1)
Washington Seattle*(1)
Wisconsin Butler*(1)
Chetek(1)
Grantsburg(1)
Mauston(1)
Territory City
Puerto Rico Ponce*(2)
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FOREIGN COUNTRIES
Country City
Argentina Buenos Aires(1)
Australia Castle Hill(1)
Wodonga(1)
Austria Wiener Neustadt(1)
Belgium Brussels*(1)
Brazil Jacarei(1)
Sao Paulo(1)
Canada Grimsby(1)
Owen Sound(1)
Czech Republic Chomutov*(1)
Prague*(1)
Sadska*(1)
Denmark Espergarde(1)
Ishoj(1)
England Barnstaple(1)
Buxton(1)
Cannock(1)
Derby(1)
Dewsbury(1)
Hemel Hempstead(1)
Littlehampton(1)
Marlow*(1)
Morley(1)
Ossett(1)
Poole*(1)
Rotherham(1)
Thetford(1)
Watford(1)
Finland Hyrynsalmi*(1)
Urjala(1)
Vantaa(1)
France Annemasse(1)
Contamine(1)
Evreux(1)
Pontarlier(1)
Wissembourg(1)
Germany Berlin*(1)
Bielefeld(1)
Bietigheim-Bissingen(1)
Chemnitz*(1)
Cologne(1)
Erfurt(1)
Hochmossingen(1)
Kaarst(1)
Lampertheim(1)
Mainz-Kastel(2)
Mucke(1)
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FOREIGN COUNTRIES
Country City
Offenburg*(1)
Pleidelsheim(1)
Queckborn(1)
Velbert*(1)
Greece Athens*(1)
Hong Kong Hong Kong*(1)
Hungary Budapest*(1)
India Bombay*(1)
Italy Adro(1)
Arsago Seprio(1)
Corsico(1)
Gessate(1)
Japan Yokohama(1)(2)
Jordan Amman*(1)
Malaysia Selangor*(1)
Mexico Matamoros(1)
Monterrey(1)
Naucalpan*(1)
Tijuana(1)
Toluca(1)
Netherlands Hendrik-Ido-Ambacht(1)
Hoogezand(1)
Oldenzaal(1)
New Zealand Mt. Wellington(1)
Norway Langhus(1)
Peoples Republic of China Beijing*(1)(2)
Shanghai*(1)
Philippines Manila*(1)
Poland Warsaw*(1)
Wroclaw*(1)
Russia Moscow*(1)
Singapore Singapore*(1)(2)
South Africa Kempton Park(1)
South Korea Chonan(1)
Seoul*(1)
Yangsan(1)
Spain Madrid*(1)
Sweden Boras(1)
Falkoping(1)
Flen(1)
Spanga(1)
Trollhatten(1)
Ulricehamn(1)
Switzerland Geneva(1)
Taiwan Taipei*(1)
Thailand Bangkok*(1)
Venezuela Caracas*(1)
Puerto Ordaz*(1)
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The Company believes that its properties have been adequately
maintained, are in good condition generally and are suitable and adequate for
its business as presently conducted. The extent of utilization of the
Company's properties varies among its plants and from time to time. Additional
capacity has been added as the Company expands through business combinations.
The Company's material manufacturing facilities remain capable of handling
additional volume increases.
ITEM 3. LEGAL PROCEEDINGS. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not
applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. As of August 31, 1998, the approximate number of
shareholders of record of the Company was 4,647 and the approximate number of
beneficial owners was 44,250. The Company's common shares are traded on the
New York Stock Exchange ("NYSE"). Set forth below is a quarterly summary of
the high and low sales prices on the NYSE for the Company's common shares and
dividends declared for the two most recent fiscal years:
FISCAL YEAR 1ST 2ND 3RD 4TH FULL YEAR
1998 High $ 48-7/8 $ 51-1/4 $ 52-5/8 $ 52-3/8 $ 52-5/8
Low 39-1/4 39-13/16 41-1/2 36-15/16 36-15/16
Dividends .150 .150 .150 .150 .600
1997 High $ 29-3/8 $ 28-1/4 $ 30-7/8 $ 41 $ 41
Low 22-1/4 24-1/8 24-7/8 27 22-1/4
Dividends .120 .120 .133 .133 .506
ITEM 6. SELECTED FINANCIAL DATA. The information set forth on pages
38 and 39 of the Annual Report, as specifically excerpted on page 13-41 of
Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. The information set forth on pages 21, 22, 24, 26
and 28 of the Annual Report, as specifically excerpted on pages 13-1 to 13-10
of Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company enters into forward exchange contracts and cross-currency swap
agreements to reduce its exposure to fluctuations in related foreign
currencies. These contracts are with major financial institutions and the risk
of loss is considered remote. The Company does not hold or issue derivative
financial instruments for trading purposes. In addition, the Company's foreign
locations, in the ordinary course of business, enter into financial guarantees,
through financial institutions, which enable customers to be reimbursed in the
event of non-performance by the Company. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information
set forth on pages 20, 21, 23, 25, 27 and 29 to 37 of the Annual Report, as
specifically excerpted on pages 13-11 to 13-40 of Exhibit 13 hereto, is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required as to the Directors of the Company is contained on pages 1
to 3 of the Company's definitive Proxy Statement dated September 28, 1998 (the
"Proxy Statement") under the caption "Election of Directors." The foregoing
information is incorporated herein by reference. Information as to the
executive officers of the Company is included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the
caption "Compensation of Directors" on pages 3 and 4 of the Proxy Statement and
under the caption "Executive Compensation" on pages 7 to 10 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. The information set forth under the caption ""Change in Control"
Severance Agreements with Officers" on pages 10 and 11 of the Proxy Statement
and under the caption "Principal Shareholders of the Corporation" on page 12 of
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not
applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. The following are filed as part of this report:
1. Financial Statements and Schedules
The financial statements and schedule listed in the
accompanying Index to Consolidated Financial Statements
and Schedules are filed or incorporated by reference as
part of this Report.
2. Exhibits
The exhibits listed in the accompanying Exhibit Index and
required by Item 601 of Regulation S-K (numbered in
accordance with Item 601 of Regulation S-K) are filed or
incorporated by reference as part of this Report.
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b. 1. The Registrant filed a report on Form 8-K on April 6,
1998, in order to file certain Exhibits to its
Registration Statement on Form S-3 (File No. 333-47955),
which was declared effective on March 23, 1998.
2. The Registrant filed a report on Form 8-K on July 9, 1998
with respect to the computation of the ratio of earnings
to fixed charges.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
Michael J. Hiemstra
Michael J. Hiemstra
Vice President - Finance and Administration
and Chief Financial Officer
September 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
Signature and Title
PATRICK S. PARKER, Chairman of the Board of Directors;
DUANE E. COLLINS, President, Chief Executive Officer
and Director; HAROLD C. GUERITEY, JR., Controller and
Principal Accounting Officer; JOHN G. BREEN, Director;
PAUL C. ELY, JR., Director; ALLEN H. FORD, Director;
PETER W. LIKINS, Director; HECTOR R. ORTINO, Director;
PAUL G. SCHLOEMER, Director; WOLFGANG R. SCHMITT, Director;
DEBRA L. STARNES, Director; STEPHANIE A. STREETER, Director;
and DENNIS W. SULLIVAN, Director.
Date: September 15, 1998
Michael J. Hiemstra
Michael J. Hiemstra, Vice President - Finance and
Administration, Principal Financial Officer and
Attorney-in-Fact
<PAGE>
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PARKER-HANNIFIN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Reference
Excerpt from Annual
Form 10-K Report as set forth
Annual Report in Exhibit 13
(Page) (Page)
Data incorporated by reference from the
Annual Report as specifically excerpted
in Exhibit 13 hereto:
Report of Independent Accountants --- 13-40
Consolidated Statement of Income for the
years ended June 30, 1998, 1997 and 1996 --- 13-11
Consolidated Balance Sheet at June 30, 1998
and 1997 --- 13-13 and 13-14
Consolidated Statement of Cash Flows for
the years ended June 30, 1998, 1997
and 1996 --- 13-15 and 13-16
Notes to Consolidated Financial Statements --- 13-20 to 13-38
Report of Independent Accountants on the
Financial Statement Schedule F-2 ---
Schedule:
II - Valuation and Qualifying Accounts F-3 ---
Individual financial statements and related applicable schedules for the
Registrant (separately) have been omitted because the Registrant is primarily
an operating company and its subsidiaries are considered to be totally-held.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Parker-Hannifin Corporation
Our audits of the consolidated financial statements referred to in our report
dated July 30, 1998 included in the 1998 Annual Report to Shareholders of
Parker-Hannifin Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(1) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Cleveland, Ohio
July 30, 1998
F-2
<PAGE>
PARKER-HANNIFIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1997 and 1998
(Dollars in Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Other Balance
Beginning Costs and (Deductions)/ At End
Description Of Period Expenses Additions (A) Of Period
----------- --------- ---------- ------------- ---------
Allowance for doubtful accounts:
- --------------------------------
Year ended June 30, 1996 $ 6,613 $ 2,158 $ (2,326) $ 6,445
Year ended June 30, 1997 6,445 1,288 (1,829) 5,904
Year ended June 30, 1998 5,904 2,267 833 9,004
(A) Net balance of deductions due to uncollectible accounts charged off
and additions due to acquisitions or recoveries.
F-3
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit
(3) Articles of Incorporation and By-Laws
(3)(a) Amended Articles of Incorporation(A).
(3)(b) Code of Regulations, as amended(B).
(4) Instruments Defining Rights of Security Holders:
(4)(a) Rights Agreement, dated January 31, 1997, between the
Registrant and Wachovia National Bank, as successor to
Key Bank National Association(C).
The Registrant is a party to other instruments, copies
of which will be furnished to the Commission upon
request, defining the rights of holders of its long-
term debt identified in Note 7 of the Notes to
Consolidated Financial Statements appearing on page 33
of the Annual Report as specifically excerpted on pages
13-27 and 13-28 of Exhibit 13 hereto, which Note is
incorporated herein by reference.
(10) Material Contracts:
(10)(a) Form of Change in Control Severance Agreement entered
into by the Registrant and certain executive officers,
dated as of August 15, 1996(D).*
(10)(b) Parker-Hannifin Corporation Change in Control Severance
Plan, as amended(E).*
(10)(c) Form of Indemnification Agreement entered into by the
Registrant and its directors and certain executive
officers (F).
(10)(d) Parker-Hannifin Corporation Supplemental Executive
Retirement Benefits Program (August 15, 1996
Restatement)(G).*
(10)(e) Parker-Hannifin Corporation 1987 Employees Stock Option
Plan, as amended(H).*
(10)(f) Parker-Hannifin Corporation 1990 Employees Stock Option
Plan, as amended(I).*
(10)(g) Parker-Hannifin Corporation 1993 Stock Incentive
Program, as amended(J).*
<PAGE>
Exhibit No. Description of Exhibit
(10)(h) Parker-Hannifin Corporation 1998 Target Incentive Bonus
Plan Description (K).*
(10)(i) Parker-Hannifin Corporation 1999 Target Incentive Bonus
Plan Description.*
(10)(j) Parker-Hannifin Corporation 1996-97-98 Long Term
Incentive Plan Description, as amended(L).*
(10)(k) Parker-Hannifin Corporation 1997-98-99 Long Term
Incentive Plan Description, as amended(M).*
(10)(l) Parker-Hannifin Corporation 1998-99-00 Long Term
Incentive Plan Description(N).*
(10)(m) Parker-Hannifin Corporation 1999-00-01 Long Term
Incentive Plan Description.*
(10)(n) Parker-Hannifin Corporation Savings Restoration Plan,
as amended(O).*
(10)(o) Parker-Hannifin Corporation Pension Restoration Plan,
as amended(P).*
(10)(p) Parker-Hannifin Corporation Executive Deferral Plan, as
amended.*
(10)(q) Parker-Hannifin Corporation Volume Incentive Plan(Q).*
(10)(r) Parker-Hannifin Corporation Non-Employee Directors'
Stock Plan, as amended(R).*
(10)(s) Parker-Hannifin Corporation Non-Employee Directors
Stock Option Plan(S).*
(10)(t) Parker-Hannifin Corporation Deferred Compensation Plan
for Directors, as amended(T).*
(10)(u) Parker-Hannifin Corporation Stock Option Deferral
Plan.*
(11) Computation of Common Shares Outstanding and Earnings
Per Share is incorporated by reference to Note 4 of the
Notes to Consolidated Financial Statements appearing on
pages 32 and 33 of the Annual Report as specifically
excerpted on pages 13-25 and 13-26 of Exhibit 13 hereto
(12) Computation of Ratio of Earnings to Fixed Charges as of
June 30, 1998.
<PAGE>
Exhibit No. Description of Exhibit
(13) Excerpts from Annual Report to Shareholders for the
fiscal year ended June 30,1998 which are incorporated
herein by reference thereto.
(21) List of subsidiaries of the Registrant.
(23) Consent of Independent Accountants
(24) Power of Attorney
(27) Financial Data Schedule
*Management contracts or compensatory plans or arrangements.
___________
(A) Incorporated by reference to Exhibit 3 to the
Registrant's Report on Form 10-Q for the quarterly
period ended September 30, 1997.
(B) Incorporated by reference to Exhibits to the
Registrant's Registration Statement on Form S-8
(No. 33-53193) filed with the Commission on
April 20, 1994.
(C) Incorporated by reference to Exhibit 4.1 to the
Registrant's Report on Form 8-K filed with the
Commission on February 4, 1997.
(D) Incorporated by reference to Exhibit 10(a) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(E) Incorporated by reference to Exhibit 10(b) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(F) Incorporated by reference to Exhibit 10(f) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1994.
(G) Incorporated by reference to Exhibit 10(e) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(H) Incorporated by reference to Exhibit 10(f) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(I) Incorporated by reference to Exhibit 10(g) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
<PAGE>
(J) Incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10-Q for the quarterly
period ended September 30, 1997.
(K) Incorporated by reference to Exhibit 10(i) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1997.
(L) Incorporated by reference to Exhibit 10(m) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(M) Incorporated by reference to Exhibit 10(n) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(N) Incorporated by reference to Exhibit 10(m) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1997.
(O) Incorporated by reference to Exhibit 10(o) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(P) Incorporated by reference to Exhibit 10(p) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(Q) Incorporated by reference to Exhibit 10(r) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(R) Incorporated by reference to Exhibit 10(s) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(S) Incorporated by reference to Exhibit 10(t) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
(T) Incorporated by reference to Exhibit 10(u) to the
Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1996.
Shareholders may request a copy of any of the exhibits to this Annual Report on
Form 10-K by writing to the Secretary, Parker-Hannifin Corporation, 6035
Parkland Boulevard, Cleveland, Ohio 44124-4141.
Exhibit (10)(i)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Parker-Hannifin Corporation 1999 Target Incentive
Bonus Plan Description
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
PARKER-HANNIFIN CORPORATION 1999 TARGET INCENTIVE BONUS PLAN
A. Payments earned under the Bonus Plan depend upon the Company's
performance against a pre-tax return on average assets (ROAA) schedule
which is based upon the Fiscal Year 1999 operating plan.
B. The payout under the Plan ranges from 15% to 150% of each participant's
target award, with 100% payout set at achievement of fiscal year 1999
planned ROAA.
C. Any payout pursuant to the Plan that will result in the exceedance of
the $1 million cap on the tax deductibility of executive compensation
will be deferred until such time in the earliest subsequent fiscal year
that such cap will not be exceeded.
D. Participants: All of the executive officers of the Company, plus Group
Presidents who are not executive officers.
E. Fiscal year 1999 Planned ROAA: 15.4%
ROAA Payout Schedule
--------------------
FY99 Percentage of Target
ROAA Award Paid*
---- --------------------
< 3.2% 0%
3.2% 30%
5.2% 40%
7.0% 50%
8.8% 60%
10.5% 70%
11.0% 73%
12.2% 80%
13.8% 90%
15.4% 100%
16.3% 113%
17.1% 125%
17.9% 138%
18.7% 150%
* Fiscal year 1999 ROAA less than 11.0% will reduce the amount paid by 50%.
F. ROAA will not include the impact of:
1. Environmental costs in excess of planned amounts
2. Acquisitions/divestitures
3. Currency gains or losses
Exhibit (10)(m)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Parker-Hannifin Corporation 1999-00-01 Long Term
Incentive Plan Description
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
PARKER-HANNIFIN CORPORATION
1999-00-01
LONG TERM INCENTIVE PLAN
The purpose of the Plan is to provide a long-term incentive portion of bonus
compensation. The Plan's focus is on return on equity. It balances a
competitive base salary pay structure, an annual cash bonus compensation based
on a return on average assets, and a stock option plan with ten-year exercise
rights. The return on equity objective is a key financial goal and
comprehends return on sales at the net income level and asset utilization.
The participants in this Plan are limited to Corporate Officers and Group
Presidents. They clearly can affect broadly the overall financial performance
of the company.
The key elements of Parker-Hannifin's Plan are as follows:
Participation
Those key executives having a critical impact on the long term performance of
the Company selected by the Chief Executive Officer and approved by the
Compensation and Management Development Committee of the Board.
Performance Period
Three-year average Return on Equity with the grant to cover FY 99, 00 and 01.
Size of Awards
Commensurate with bonus compensation and stock option level of participants as
determined by the CEO with approval of the Compensation and Management
Development Committee.
Form of Awards
Awards will be expressed as a certain number of shares of Parker stock
calculated by dividing the dollar equivalent of the award by the
June 30, 1998 Parker stock price.
Performance Objective
The Return on Equity objective is 14%.
Value Range
Actual value of the payments under the Plan will be within a range of 25% to
200% of target value based on performance against the objective.
Performance Range
For performance below a threshold of 8% ROE objective, no payment will be
made. For performance between 8% and 20% ROE, payments will be earned between
25% and 200% of the target value on a proportional basis above and below the
target value. The Plan is capped at 200%.
Payment
Payments earned under the Plan will be paid at the end of the three-year
performance period. Payment will be made in restricted stock of the
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Corporation unless the participant is retired at the time of payment or has
previously elected a cash payment to be deferred under the Corporation's
Executive Deferral Plan. The value of the cash payment in lieu of restricted
shares is determined based upon the share price of Parker-Hannifin's Common
Shares on June 30, 2001. The restricted shares would be subject to a vesting
schedule and such other terms and conditions determined by the Compensation
Committee at the time of issuance. Any payout pursuant to this plan that will
result in the exceedance of the $1 million cap on the tax deductibility of
executive compensation will be deferred until such time in the earliest
subsequent fiscal year that such cap will not be exceeded.
Termination of Employment
If a participant dies, retires (with consent of the Compensation and
Management Development Committee if earlier than age 65) or is disabled during
the performance period, he/she will receive a pro rata portion of the award
payable upon completion of the performance period. A participant who resigns
or is otherwise terminated during the performance period forfeits the award.
Performance Schedule
The Plan performance schedule, based on the three-year simple average of
annual report return on average equity, is as follows:
Return on Equity
____________________________________________________________
<8.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
_____ ____ _____ _____ _____ _____ _____ _____
Payout % 0 25 50 75 100 133 167 200
Change in Control
In the event of a "Change in Control" of the Corporation (as defined below),
the payout under the Plan will be accelerated to fifteen (15) days
after the Change in Control. The amount of the payout will be in cash and
will be the greater of the target award or the amount the payout would have
been had ROE during the Performance Period to the end of the fiscal quarter
immediately preceding the date of the Change in Control continued throughout
the Performance Period. The cash amount of such payout will be based upon
the closing New York Stock Exchange stock price of the Corporation's Common
Shares on the first day of the Performance Period or the date of the Change
in Control, whichever is greater. If the Participant will reach age 65 prior
to the end of the Performance Period, the payout in the event of a Change in
Control will be reduced on a pro rata basis.
"Change in Control" means the occurrence of one of the following events:
(i) any "person" (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of Parker-Hannifin Corporation (the "Company") representing 20% or
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<PAGE>
more of the combined voting power of the Company's then outstanding securities
eligible to vote for the election of the Board of Directors of the Company
(the "Board") (the "Company's Voting Securities"); provided, however, that the
event described in this paragraph shall not be deemed to be a Change in
Control by virtue of any of the following situations: (A) an acquisition by
the Company or any corporation or entity in which the Company has a direct or
indirect ownership interest of 50% or more of the total combined voting power
of the then outstanding securities of such corporation or other entity (a
"Subsidiary"); (B) an acquisition by any employee benefit plan sponsored or
maintained by the Company or any Subsidiary; (C) an acquisition by any
underwriter temporarily holding securities pursuant to an offering of such
securities; (D) a Non-Control Transaction (as defined in paragraph (iii)); (E)
as pertains to a Plan participant (the "Executive"), any acquisition by the
Executive or any group of persons (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Exchange Act) including the Executive (or any entity in which
the Executive or a group of persons including the Executive, directly or
indirectly, holds a majority of the voting power of such entity's outstanding
voting interests); or (F) the acquisition of Company Voting Securities from
the Company, if a majority of the Board approves a resolution providing
expressly that the acquisition pursuant to this clause (F) does not constitute
a Change in Control under this paragraph (i);
(ii) individuals who, at the beginning of any period of twenty-four
(24) consecutive months, constitute the Board (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof; provided, that (A)
any person becoming a director subsequent to the beginning of such twenty-four
(24) month period, whose election, or nomination for election, by the
Company's shareholders was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board who are then on the Board (either by a
specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this paragraph (ii), considered as though
such person were a member of the Incumbent Board; provided, however, that no
individual initially elected or nominated as a director of the Company as a
result of an actual or threatened election contest with respect to directors
or any other actual or threatened solicitation of proxies or consents by or
on behalf of any person other than the Board shall be deemed to be a member
of the Incumbent Board;
(iii) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization of the Company or any Subsidiary that
requires the approval of the Company's shareholders, whether for such
transaction or the issuance of securities in connection with the transaction
or otherwise (a "Business Combination"), unless (A) immediately following such
Business Combination: (1) more than 50% of the total voting power of the
corporation resulting from such Business Combination (the "Surviving
Corporation") or, if applicable, the ultimate parent corporation which
directly or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving Corporation (the
"Parent Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to the Business Combination (or, if applicable,
shares into which such Company Voting Securities were converted pursuant to
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<PAGE>
such Business Combination), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business
Combination, (2) no person (other than any employee benefit plan sponsored or
maintained by the Surviving Corporation or the Parent Corporation) is or
becomes the beneficial owner, directly or indirectly, of 20% or more of the
total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation), and (3) at least a majority of the members of the
board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), following the Business Combination,
were members of the Incumbent Board at the time of the Board's approval of the
execution of the initial agreement providing for such Business Combination
(a "Non-Control Transaction") or (B) the Business Combination is effected by
means of the acquisition of Company Voting Securities from the Company, and a
majority of the Board approves a resolution providing expressly that such
Business Combination does not constitute a Change in Control under this
paragraph (iii); or
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than 20%
of the Company Voting Securities as a result of the acquisition of Company
Voting Securities by the Company which, by reducing the number of Company
Voting Securities outstanding, increases the percentage of shares beneficially
owned by such person; provided, that if a Change in Control would occur as a
result of such an acquisition by the Company (if not for the operation of this
sentence), and after the Company's acquisition such person becomes the
beneficial owner of additional Company Voting Securities that increases the
percentage of outstanding Company Voting Securities beneficially owned by such
person, a Change in Control shall then occur.
Notwithstanding anything in this Plan to the contrary, if the Executive's
employment is terminated prior to a Change in Control, and the Executive
reasonably demonstrates that such termination was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change in Control, (a "Third Party"), then for all purposes of this
Plan, the date immediately prior to the date of such termination of employment
shall be deemed to be the date of a Change in Control for such Executive.
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Exhibit (10)(p)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Parker-Hannifin Corporation Executive Deferral Plan,
as amended
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
PARKER-HANNIFIN CORPORATION
EXECUTIVE DEFERRAL PLAN
<PAGE>
PARKER-HANNlFlN CORPORATION
EXECUTIVE DEFERRAL PLAN
WHEREAS, the Parker-Hannifin Corporation Executive Deferral Plan (the
"Plan") was originally established as of October 1, 1994, for the purpose of
attracting high quality executives and promoting in its executives increased
efficiency and an interest in the successful operation of the Company by
offering a deferral opportunity to accumulate capital on favorable economic
terms; and
WHEREAS, pursuant to the authority granted in Article 14 of the Plan,
Parker-Hannifin Corporation (the "Company"), has the authority to amend the
Plan; and
WHEREAS, the Plan has been amended from time to time; and
WHEREAS, the Company now desires to amend the Plan in order to provide
for the automatic deferral of amounts that are not paid to certain
participants by reason of Section 162(m) of the Code;
NOW, THEREFORE, the Plan is hereby amended and restated as of January 1,
1998 to read as follows:
ARTICLE 1
DEFINITIONS
1.1 ACCOUNT shall mean the sum of the Annual Deferral Account and all
LTI Deferral Accounts (vested and unvested).
1.2 ADMINISTRATOR shall mean the Company or, if applicable, the committee
appointed by the Board of Directors of the Company to administer the Plan
pursuant to Article 12 of the Plan.
1.3 ANNUAL DEFERRAL shall mean the amount of Compensation which the
Participant elects to defer for a Plan Year pursuant to Articles 2 and 3 of
the Plan.
1.4 ANNUAL DEFERRAL ACCOUNT shall mean the notional account established
with respect to a Participant's Annual Deferrals and Automatic Deferrals for
recordkeeping purposes pursuant to Article 4 of the Plan.
1.5 AUTOMATIC DEFERRAL shall mean any amount automatically deferred to
this Plan pursuant to Section 3.4 of this Plan.
1.6 BENEFICIARY shall mean the person or persons or entity designated as
such in accordance with Article 13 of the Plan.
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1.7 BOARD shall mean the Board of Directors of the Company.
1.8 BONUSES shall mean amounts paid in cash to the Participant by the
Company in the form of annual and other regular periodic bonuses before
reductions for deferrals under this Plan, the Savings Plan or the Savings
Restoration Plan. "Annual and other regular periodic bonuses" shall include
amounts payable under the Company's Return on Net Assets Plan (RONA) and the
Target Incentive Program, but shall exclude any payments under any long-term
incentive program, any volume incentive or similar bonus program, and any
other extraordinary bonus or incentive program.
1.9 CHANGE IN CONTROL shall mean any of the following events have
occurred:
(i) any "person" (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities eligible to vote for the
election of the Board (the "Company Voting Securities"); provided, however,
that the event described in this paragraph shall not be deemed to be a Change
in Control by virtue of any of the following situations: (A) an acquisition
by the Company or any Subsidiary; (B) an acquisition by any employee benefit
plan sponsored or maintained by the Company or any Subsidiary; (C) an
acquisition by any underwriter temporarily holding securities pursuant to an
offering of such securities; (D) a Non-Control Transaction (as defined in
paragraph (iii)); (E) as pertains to a Participant, any acquisition by the
Participant or any group of persons (within the meaning of Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) including the Participant (or any entity in
which the Participant or a group of persons including the Participant,
directly or indirectly, holds a majority of the voting power of such entity's
outstanding voting interests); or (F) the acquisition of Company Voting
Securities from the Company, if a majority of the Board approves a resolution
providing expressly that the acquisition pursuant to this clause (F) does not
constitute a Change in Control under this paragraph (i);
(ii) individuals who, at the beginning of any period of twenty-four (24)
consecutive months, constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof; provided, that (A) any
person becoming a director subsequent to the beginning of such twenty-four
(24) month period, whose election, or nomination for election, by the
Company's shareholders was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board who are then on the Board (either by
a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this paragraph (ii), considered as
though such person were a member of the Incumbent Board; provided, however,
that no individual initially elected or nominated as a director of the Company
as a result of an actual or threatened election contest with respect to
directors or any other actual or threatened solicitation of proxies or
consents by or on behalf of any person other than the Board shall be deemed to
be a member of the Incumbent Board;
3
<PAGE>
(iii) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization of the Company or any Subsidiary that
requires the approval of the Company's stockholders, whether for such
transaction or the issuance of securities in connection with the transaction
or otherwise (a "Business Combination"), unless (A) immediately following such
Business Combination: (1) more than 50% of the total voting power of the
corporation resulting from such Business Combination (the "Surviving
Corporation") or, if applicable, the ultimate parent corporation which
directly or indirectly has beneficial ownership of 100% of the voting
securities eligible to e1ect directors of the Surviving Corporation (the
"Parent Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to the Business Combination (or, if applicable,
shares into which such Company Voting Securities were converted pursuant to
such Business Combination), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business
Combination, (2) no person (other than any employee benefit plan sponsored or
maintained by the Surviving Corporation or the Parent Corporation) is or
becomes the beneficial owner, directly or indirectly, of 20% or more of the
total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation), and (3) at least a majority of the members of the
board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), following the Business Combination,
were members of the Incumbent Board at the time of the Board's approval of the
execution of the initial agreement providing for such Business Combination (a
"Non-Control Transaction") or (B) the Business Combination is effected by
means of the acquisition of Company Voting Securities from the Company, and a
majority of the Board approves a resolution providing expressly that such
Business Combination does not constitute a Change in Control under this
paragraph (iii); or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than 20%
of the Company Voting Securities as a result of the acquisition of Company
Voting Securities by the Company which, by reducing the number of Company
Voting Securities outstanding, increases the percentage of shares beneficially
owned by such person; provided, that if a Change in Control would occur as a
result of such an acquisition by the Company (if not for the operation of this
sentence), and after the Company's acquisition such person becomes the
beneficial owner of additional Company Voting Securities that increases the
percentage of outstanding Company Voting Securities beneficially owned by such
person, a Change in Control shall then occur.
Notwithstanding anything in this Plan to the contrary, if the
Participant's employment is terminated prior to a Change in Control, and the
Participant reasonably demonstrates that such termination was at the request
of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party"), then for all
purposes of this Plan, the date immediately prior to the date of such
termination of employment shall be deemed to be the date of a Change in
Control for such Participant.
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1.10 CODE shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.11 COMPENSATION shall mean the sum of the Participant's base salary
and anticipated Bonuses for a Plan Year before reductions for deferrals under
this Plan, the Savings Plan, the Savings Restoration Plan, or the Benefits
Plus Program.
1.12 CREDITING RATE shall mean any notional gains or losses equal to
those generated as if the Participant's Account balance had been invested in
one or more of the investment portfolios designated as available by the
Administrator, less separate account fees and less applicable administrative
charges determined annually by the Administrator.
The allocation of a Participant's Account shall be determined by the
Participant among one or more of the available portfolios. The gains or losses
shall be credited based upon the daily unit values for the portfolio(s)
selected by the Participant. The rules and procedures for allocating the
Account balance among the portfolios shall be determined by the Administrator.
Notwithstanding the method of calculating the Crediting Rate, the Company
shall be under no obligation to purchase any investments designated by the
Participant.
1.13 DISABILITY shall mean any long term disability as defined under the
Company's long term disability plan. The Administrator, in its complete and
sole discretion, shall determine a Participant's Disability. The Administrator
may require that the Participant submit to an examination on an annual basis,
at the expense of the Company, by a competent physician or medical clinic
selected by the Administrator to confirm Disability. On the basis of such
medical evidence, the determination of the Administrator as to whether or not
a condition of Disability exists or continues shall be conclusive.
1.14 EARLY RETIREMENT DATE shall mean age 55 with ten or more years of
employment with the Company; provided, however, that any Early Retirement
prior to age 60 must be with the consent of the Compensation Committee of the
Board.
1.15 ELIGIBLE EXECUTIVE shall mean a key employee of the Company or any
of its subsidiaries who: (a) is designated by the Administrator as eligible to
participate in the Plan (subject to the restriction in Sections 9.2, 10.3 and
11.2 of the Plan); and (b) qualifies as a member of the "select group of
management or highly compensated employees" under ERISA.
1.16 ERISA shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.17 FINANCIAL HARDSHIP shall mean an unexpected need for cash arising
from an illness, casualty loss, sudden financial reversal, or other such
unforeseeable occurrence as determined by the Administrator. Cash needs
arising from foreseeable events such as the purchase of a residence or
education expenses for children shall not, alone, be considered a Financial
Hardship.
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1.18 FIXED CREDITING RATE shall mean an effective annual yield equal to
ninety percent (90%) of the sixty (60) month rolling average of the Ten-Year
United States Treasury Note as determined by the Administrator on September 30
of the preceding year. Notwithstanding the preceding sentence, with respect
to the first Plan Year, the Fixed Crediting Rate shall be determined as of
September 30, 1994.
1.19 IN-SERVICE DISTRIBUTION shall mean a distribution elected by the
Participant pursuant to Article 10 of the Plan.
1.20 LTI PAYMENT shall mean the amount that would otherwise be payable
to an Eligible Executive for a Plan Year under any long-term incentive program
of the Company.
1.21 LTI DEFERRAL shall mean the amount of any LTI Payment which the
Participant elects to defer with respect to a Plan Year pursuant to Articles 2
and 3 of the Plan.
1.22 LTI DEFERRAL ACCOUNT shall mean the one or more notional accounts
established with respect to a Participant's LTI Deferrals for recordkeeping
purposes pursuant to Article 4 of the Plan.
1.23 NORMAL RETIREMENT DATE shall mean the date on which a Participant
attains age 65.
1.24 PARTICIPANT shall mean an Eligible Executive who has elected to
participate and has completed a Participation Agreement pursuant to Article 2
of the Plan.
1.25 PARTICIPATION AGREEMENT shall mean the Participant's written
election to participate in the Plan.
1.26 PLAN YEAR shall mean the calendar year.
1.27 RETIREMENT shall mean a termination of employment following Normal
or Early Retirement Date.
1.28 SALARY shall mean the Participant's annual basic rate of pay from
the Company (excluding Bonuses, commissions and other non-regular forms of
compensation) before reductions for deferrals under this Plan, the Savings
Plan or the Savings Restoration Plan.
1.27 SAVINGS PLAN shall mean The Parker Retirement Savings Plan as it
currently exists and as it may subsequently be amended.
1.28 SAVINGS RESTORATION PLAN shall mean the Parker-Hannifin Corporation
Savings Restoration Plan as it currently exists and as it may subsequently be
amended.
1.29 SCHEDULED WITHDRAWAL shall mean a distribution of all or a portion
of the entire vested amount credited to the Participant's Account requested by
the Participant pursuant to the provisions of Article 10 of the Plan.
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1.30 SUBSIDIARY shall mean any corporation or other entity in which the
Company has a direct or indirect ownership interest of 50% or more of the
total combined voting power of the then outstanding securities or interests of
such corporation or other entity.
1.31 TERMINATION OF EMPLOYMENT shall mean the Participant's employment
with the Company ceases for any reason whatsoever, whether voluntary or
involuntary, other than Retirement or death.
1.32 UNSCHEDULED WITHDRAWAL shall mean a distribution of all or a
portion of the entire amount credited to the Participant's Account requested
by the Participant pursuant to the provisions of Article 10 of the Plan.
1.33 VALUATION DATE shall mean the end of the month in which the
Retirement, Termination of Employment, or death occurs, except in the event of
an election to delay retirement benefits under Article 5, in which case the
Valuation Date shall mean the November 30 of the year preceding commencement
of benefit payments.
ARTICLE 2
PARTICIPATION
2.1 PARTICIPATION AGREEMENT/DEFERRALS.
(a) An Eligible Executive shall become a Participant in the Plan on the
first day of the Plan Year following appointment as an Eligible Executive and
submission to the Administrator of an Annual Participation Agreement. To be
effective, the Eligible Executive must submit the Annual Participation
Agreement to the Administrator during the enrollment period designated by the
Administrator. In the Annual Participation Agreement, and subject to the
restrictions in Article 3, the Eligible Executive shall designate the Annual
Deferral for the covered Plan Year.
(b) In addition, an Eligible Executive shall become a Participant
automatically as of the date Automatic Deferrals are credited to his Account
pursuant to Section 3.4.
(c) With respect to those Participants who are eligible for an LTI
Payment, the Administrator shall provide for a separate enrollment period and
separate LTI Participation Agreements each year under which the Participant
may designate any LTI Deferrals for a specified Plan Year.
2.2 CONTINUATION OF PARTICIPATION. An Eligible Executive who has become
a Participant in the Plan shall continue as a Participant in the Plan even
though such executive ceases to be an Eligible Executive. However, a
Participant shall not be eligible to elect a new Annual Deferral or LTI
Deferral unless the Participant is an Eligible Executive for the Plan Year for
which the election is made.
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ARTICLE 3
EXECUTIVE DEFERRALS
3.1 DEFERRAL COMMITMENT.
(a) A Participant may elect in the Annual Participation Agreement to
defer an amount equal to a specified dollar amount of Salary and a specified
dollar amount or percentage of Bonuses to be earned by such Participant during
the next Plan Year.
(b) A Participant may elect in the LTI Participation Agreement to defer
an amount equal to a specified dollar amount or a percentage of LTI Payment
that may be payable to the Participant in the next Plan Year.
(c) Annual Deferrals and LTI Deferrals under this Plan shall be
irrevocable.
3.2 MINIMUM ANNUAL DEFERRAL.
(a) The Annual Deferral for a Plan Year must equal at least five
thousand dollars ($5,000), from either Salary or Bonuses or a combination of
Salary and Bonuses.
(b) The LTI Deferral for a Plan Year must equal at least five thousand
dollars ($5,000).
(c) Where a Participant elects to defer a specified percentage of
Salary, Bonuses, and/or LTI Payment, the determination of whether the Annual
Deferral or LTI Deferral is at least five thousand dollars ($5,000) shall be
made by multiplying the applicable elected percentages of Salary, Bonuses,
and/or LTI Payment to be deferred by the Participant's anticipated Salary,
Bonuses, and/or LTI Payment in the Plan Year immediately preceding the Plan
Year for which the Deferral is being made. The Administrator may, in its sole
discretion, permit Participants to elect to defer amounts in the form of a
percentage based on anticipated future Salary, Bonuses, and/or LTI Payments.
3.3 MAXIMUM DEFERRAL COMMITMENT.
(a) The Annual Deferral for any Plan Year may not exceed 20% of Salary
plus 75% of Bonuses; provided, that the Annual Deferral may not reduce the
Participant's income to an amount below the old age, survivor, and disability
insurance wage base under Social Security.
(b) The LTI Deferral for a Plan Year may be 100% of the LTI Payment.
(c) Notwithstanding the foregoing, the Administrator may reduce the
amount of an Annual Deferral and/or an LTI Deferral to the extent necessary to
insure the Participant will have sufficient earnings from the Company from
which to take any taxes required to be withheld from the Participant's
earnings under federal, state or local law.
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3.4 AUTOMATIC DEFERRALS. An amount equal to any Compensation that is
not paid to an Eligible Executive because it cannot be deducted by the Company
by reason of Section 162(m) of the Code shall be deemed to have been deferred
under this Plan.
3.5 VESTING. Subject to Section 11.3:
(a) The Participant's right to the value of his Annual Deferral
Account, as adjusted for gains and losses, shall be 100% vested at all times.
(b) The Participant's right to the value of each LTI Deferral Account,
as adjusted for gains and losses, shall be 100% vested as of the third June 30
following the time the LTI Deferral Account is established; provided, however,
that the Participant shall be fully vested in all LTI Deferrals as of the
time: (1) he reaches age 65; (2) he retires prior to age 60 with permission of
the Compensation Committee of the Board; (3) he retires due to Disability; (4)
he dies; (5) there is a Change in Control; or (6) the Plan terminates.
ARTICLE 4
ACCOUNTS
4.1 ACCOUNTS. Solely for recordkeeping purposes, the Company shall
maintain for each Participant one Annual Deferral Account for all Annual
Deferrals and all Automatic Deferrals, and shall maintain for each Participant
a separate LTI Deferral Account with respect to each LTI Deferral made by the
Participant.
4.2 TIMING OF CREDITS--PRE-TERMINATION. Each Plan Year, the Company
shall credit to the Annual Deferral Account a Participant's Annual Deferrals
and any Automatic Deferrals as of the time the deferrals would otherwise have
been paid to the Participant but for the Annual Deferral election or the
operation of Section 162(m) of the Code, and shall credit to a separate LTI
Deferral Account a Participant's LTI Deferral as of the time the deferrals
would otherwise have been paid to the Participant but for the LTI Deferral
election. The Company shall also credit gains or losses to the Participant's
Account each calendar quarter as of the relevant Valuation Date, using the
Crediting Rate(s) in effect at such time as elected by the Participant.
4.3 MID-YEAR TERMINATIONS. If a Participant's Termination of Employment
occurs other than at the end of a Plan Year, the Company shall credit gains or
losses to the Participant's Account from the first day of such Plan Year to
the relevant Valuation Date.
4.4 STATEMENT OF ACCOUNTS. The Administrator shall provide periodically
to each Participant a statement setting forth the balance of the Annual
Deferral Account and each LTI Deferral Account maintained for such
Participant.
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ARTICLE 5
RETIREMENT BENEFITS
5.1 AMOUNT. Upon Retirement, the Company shall pay to the Participant a
retirement benefit in the form provided in Section 5.2 of the Plan, based on
the balance of the Participant's Account as of the Valuation Date. If paid as
a lump sum, the retirement benefit shall be equal to such balance. If paid in
installments, the installments shall be paid in amounts that will annually
amortize such balance with earnings and losses credited at the Crediting Rate
over the period of time benefits are to be paid; provided, however, that in
the last year of payment, earnings and losses shall be credited at the Fixed
Crediting Rate as in effect on the Valuation Date immediately preceding the
final year of payment.
5.2 FORM OF RETIREMENT BENEFITS. The retirement benefit shall be paid
monthly over a period of one hundred eighty (180) months. Notwithstanding
anything herein to the contrary, the Participant may elect in the
Participation Agreement to have the retirement benefit paid in a lump sum or
in installments paid monthly over a period of sixty (60) or one hundred twenty
(120) months. Payment shall be made or shall begin as of the first day of the
calendar quarter next following the date sixty (60) days after the
Participant's Retirement unless the Participant elects in the Participation
Agreement for payments to begin on January l of a later year. However, in all
events payments shall commence on or before the earlier of the date the
retired Participant attains age seventy (70) or the January 1 five years after
Retirement. Except as provided under Section 9.2, Participants may elect an
alternative form of payout as available under this Section 5.2 by written
election filed with the Administrator; provided, however, that if the
Participant files the election less than thirteen (13) months prior to the
date of retirement, the Annual Deferral Account and each LTI Deferral Account
shall be reduced by ten percent (10%).
5.3 SMALL BENEFIT EXCEPTION. Notwithstanding any of the foregoing, if
the sum of all benefits payable to the Participant is less than or equal to
ten thousand dollars ($10,000), the Company may, in its sole discretion, elect
to pay such benefits in a single lump sum. Furthermore, if any installment
payments would be less than $1,000, the Company may shorten the elected
payment period in whole year increments to insure that each payment is at
least $1,000.
ARTICLE 6
TERMINATION BENEFITS
6.1 AMOUNT. As of the first day of the calendar quarter beginning at
least sixty (60) days after Termination of Employment, the Company shall pay
to the Participant a termination benefit equal to the balance as of the
Valuation Date of the Annual Deferral Account and each LTI Deferral Account in
which he is vested under Section 3.4(b).
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6.2 FORM OF TERMINATION BENEFITS. The Company shall pay the termination
benefits in a single lump sum; provided, however, that except following a
Change in Control the Company may, in its sole discretion, elect to pay the
termination benefits over a period of three (3) years in monthly installments,
in which event the Company shall credit interest on the unpaid vested balance
of the Account after the Valuation Date at the Fixed Crediting Rate in effect
at the time of Termination of Employment.
ARTICLE 7
SURVIVOR BENEFITS
7.1 PRE-COMMENCEMENT SURVIVOR BENEFIT. If the Participant dies prior to
the time installment payments have commenced, the Company shall pay to the
Participant's Beneficiary within ninety (90) days after the Participant's
death a benefit equal to the balance of the Participant's Account as of the
Valuation Date.
7.2 POST-COMMENCEMENT SURVIVOR BENEFIT. If the Participant dies after
the time installment payments have commenced, the Company shall pay to the
Participant's Beneficiary an amount equal to the remaining benefits payable to
the Participant under the Plan over the same period such benefits would have
been paid to the Participant, in which event the Company shall credit interest
on the unpaid balance of the Account at the Fixed Crediting Rate in effect at
the date of the Participant's death.
7.3 SMALL BENEFIT PAYMENT. Notwithstanding any of the foregoing, in the
event the sum of all benefits payable to the Beneficiary is less than or equal
to ten thousand dollars ($10,000), the Company may, in its sole discretion,
elect to pay such benefits in a single lump sum.
ARTICLE 8
DISABILITY
If a Participant suffers a Disability, the Company shall pay the balance
of the Participant's Account as of the Valuation Date to the Participant in
accordance with Article 5 as if the date of the Participant's Termination of
Employment for Disability were the Participant's Normal Retirement Date.
ARTICLE 9
CHANGE IN CONTROL
9.1 ELECTION.
(a) At the time the Participant is completing his initial Participation
Agreement, the Participant may elect that, if a Change in Control occurs, the
Participant (or after the Participant's death the Participant's Beneficiary)
shall receive a lump sum payment of the balance of the
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Account within thirty (30) days after the Change of Control. In the event such
a distribution is made, the Participant shall receive an additional adjustment
payment calculated in accordance with the formula set forth in Exhibit A
hereto. Such balance shall be determined as of the end of the month sixty (60)
days prior to the month in which the Change in Control occurs.
(b) In addition to any other amounts payable hereunder, in the event it
shall be determined that any payment, distribution or acceleration of vesting
of any benefit hereunder would be subject to the excise tax imposed by
Section 4999 of the Code, or any successor provision, or any interest or
penalties are incurred by the Participant with respect to such excise tax,
then the Participant shall be entitled to receive an additional "gross-up
payment" calculated as set forth in the change in control severance agreement
in effect between the Company and the Participant as of the date of the Change
in Control; provided, however, that if the Participant does not have a change
in control severance agreement, the payment under this Section shall be
determined in accordance with the calculation set forth in the most recent
change in control severance agreement entered into by the Company and any
executive of the Company; provided, further, that there shall be no
duplication of such additional payment under this Plan and any change in
control severance agreement.
9.2 BENEFIT REDUCTION ON WITHDRAWAL. If a Participant has not made the
election described in Section 9.1 above and, within thirty (30) days after a
Change of Control, the Participant (or Beneficiary) elects under Section 10.2
to receive a distribution of the balance of the Account, the lump sum payment
(including the additional adjustment payment) otherwise provided under Section
9.1(a) shall be reduced by an amount equal to five percent (5%) of the total
balance of the Account (instead of the ten percent (10%) reduction otherwise
provided for in Section 10.3). If a Participant e1ects such a withdrawal, any
on-going Annual Deferral shall cease, any election of an LTI Deferral that
otherwise would be effective before the first day of the Plan Year beginning
one full Plan Year after such withdrawal shall not be effective, and the
Participant may not again be designated as an Eligible Executive until one
entire Plan Year following the Plan Year in which such withdrawal was made has
elapsed.
ARTICLE 10
SCHEDULED AND UNSCHEDULED WITHDRAWALS, FINANCIAL HARDSHIP DISTRIBUTIONS
10.1 PAYMENT OF SCHEDULED WITHDRAWAL. No later than the last day of
March of the Plan Year designated in the initial Annual Participation
Agreement for a Scheduled Withdrawal (which date shall be no sooner than the
January 1 following 5 years of participation), the Company shall pay to the
Participant, in a lump sum or four approximately equal annual installments,
all or a portion of the vested balance in the Participant's Annual Deferral
and/or his LTI Deferral Account as of the December 31 preceding the time
payment is made or commences.
10.2 UNSCHEDULED WITHDRAWAL. A Participant (or Beneficiary if the
Participant is deceased) may request an Unscheduled Withdrawal of all or any
portion of the vested balance credited to the Participant's Account, which
shall be paid in a single lump sum; provided, however, (i) that the minimum
withdrawal shall be twenty-five percent (25%) of the vested Account balance,
and (ii) that an election to withdraw seventy-five percent (75%) or more of
the
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vested Account balance shall be deemed to be an election to withdraw the
entire vested Account balance.
10.3 UNSCHEDULED WITHDRAWAL PENALTY. There shall be a penalty deducted
from the Account prior to an Unscheduled Withdrawal equal to ten percent (10%)
of the Unscheduled Withdrawal, which shall be ratably allocated among the
Participant's Annual Deferral Account and each of his vested LTI Deferral
Accounts. If a Participant elects such a withdrawal, any on-going Annual
Deferral shall cease, any election of an LTI Deferral that otherwise would be
effective before the first day of the Plan Year beginning one full Plan Year
after such withdrawal shall not be effective, and the Participant may not
again be designated as an Eligible Executive until one entire Plan Year
following the Plan Year in which such withdrawal was made has elapsed.
10.4 FINANCIAL HARDSHIP DISTRIBUTION. Upon a finding that the
Participant or the Beneficiary has suffered a Financial Hardship, the
Administrator may in its sole discretion, permit the Participant to request
distribution of a portion or all of his vested benefits under the Plan in the
amount reasonably necessary to alleviate such Financial Hardship. If a
distribution is to be made to a Participant on account of Financial Hardship,
any on-going Annual Deferrals shall cease, any election of an LTI Deferral
that otherwise would be effective before the first day of the Plan Year
beginning one full Plan Year after such withdrawal shall not be effective, and
the Participant may not again be designated as an Eligible Executive until one
entire Plan Year following the Plan Year in which such withdrawal was made has
elapsed.
10.5 SMALL BENEFIT EXCEPTION. Notwithstanding any of the foregoing, if
the sum of all vested benefits payable to the Participant or Beneficiary who
has requested any withdrawal under this Article 10 is less than or equal to
ten thousand dollars ($10,000), the Company may, in its sole discretion, elect
to pay out the entire vested Account balance (reduced, if applicable, by the
ten percent (10%) penalty) in a single lump sum.
10.6 LIMIT ON WITHDRAWALS. Notwithstanding any of the foregoing, no
Eligible Executive in a position described in Section 162(m)(3) of the Code
(or who the Company reasonably believes will be in such a position) shall be
permitted to take any distribution for the Plan in any year in which he is in
or is believed to be a position described in Section 162(m)(3) of the Code.
ARTICLE 11
CONDITIONS RELATED TO BENEFITS
11.1 NONASSIGNABILITY. The benefits provided under the Plan may not be
alienated, assigned, transferred, pledged or hypothecated by or to any person
or entity, at any time or in any manner whatsoever. These benefits shall be
exempt from the claims of creditors of any Participant or other claimants and
from all orders, decrees, levies, garnishment or executions against any
Participant to the fullest extent allowed by law.
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11.2 NO RIGHT TO COMPANY ASSETS. The benefits paid under the Plan shall
be paid from the general funds of the Company, and the Participants and any
Beneficiaries shall be no more than unsecured general creditors of the Company
with no special or prior right to any assets of the Company for payment of any
obligations hereunder.
11.3 PROTECTIVE PROVISIONS. The Participant shall cooperate with the
Company by furnishing any and all information requested by the Administrator,
in order to facilitate the payment of benefits hereunder, taking such physical
examinations as the Administrator may deem necessary and taking such other
actions as may be requested by the Administrator. If the Participant refuses
to cooperate, the Company shall have no further obligation to the Participant
under the Plan. In the event of a Participant's suicide during the first two
(2) years of participation in the Plan, or if the Participant makes any
material misstatement of information or nondisclosure of medical history, then
no benefits shall be payable to the Participant or the Participant's
Beneficiary or estate under the Plan beyond the sum of the Participant's
Annual Deferrals and LTI Deferrals.
11.4 WITHHOLDING. The Participant or the Beneficiary shall make
appropriate arrangements with the Company for satisfaction of any federal,
state or local income tax withholding requirements and Social Security or
other employee tax requirements applicable to the payment of benefits under
the Plan. If no other arrangements are made, the Company may provide, at its
discretion, for such withholding and tax payments as may be required.
ARTICLE 12
ADMINISTRATION OF PLAN
The Company shall administer the Plan, provided, however, that the
Company may elect by action of its Board of Directors to appoint a committee
of three (3) or more individuals to administer the Plan. All references to the
Administrator herein shall refer to the Company or, if such committee has been
appointed, the committee.
The Administrator shall administer the Plan and interpret, construe and
apply its provisions in accordance with its terms. The Administrator shall
further establish, adopt or revise such rules and regulations as it may deem
necessary or advisable for the administration of the Plan. All decisions of
the Administrator shall be final and binding. The individuals serving on the
committee shall, except as prohibited by law, be indemnified and held harmless
by the Company from any and all liabilities, costs, and expenses (including
legal fees), to the extent not covered by liability insurance arising out of
any action taken by any member of the committee with respect to the Plan,
unless such liability arises from the individual's own gross negligence or
willful misconduct.
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ARTICLE 13
BENEFICIARY DESIGNATION
The Participant shall have the right, at any time, to designate any
person or persons as Beneficiary (both primary and contingent) to whom payment
under the Plan shall be made in the event of the Participant's death. The
Beneficiary designation shall be effective when it is submitted in writing to
the Administrator during the Participant's lifetime on a form prescribed by
the Administrator.
The submission of a new Beneficiary designation shall cancel all prior
Beneficiary designations. Any finalized divorce or marriage of a Participant
subsequent to the date of a Beneficiary designation shall revoke such
designation, unless in the case of divorce the previous spouse was not
designated as Beneficiary and unless in the case of marriage the Participant's
new spouse has previously been designated as Beneficiary. The spouse of a
married Participant shall consent to any designation of a Beneficiary other
than the spouse, and the spouse's consent shall be witnessed by a notary
public.
If a Participant fails to designate a Beneficiary as provided above, or
if the Beneficiary designation is revoked by marriage, divorce, or otherwise
without execution of a new designation, or if every person designated as
Beneficiary predeceases the Participant or dies prior to complete distribution
of the Participant's benefits, then the Administrator shall direct the
distribution of such benefits to the Participant's estate.
ARTICLE 14
AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN. Except as provided in Section 14.3, the Company
may at any time amend the Plan in whole or in part, provided, however, that
such amendment: (a) shall not decrease the balance of the Participant's
Account at the time of such amendment; and (b) shall not retroactively
decrease the applicable Crediting Rate of the Plan prior to the time of such
amendment. The Company may amend the Crediting Rate or Fixed Crediting Rate of
the Plan prospectively, in which case, the Company shall notify the
Participant of such amendment in writing within thirty (30) days after such
amendment.
14.2 TERMINATION OF PLAN. Except as provided in Section 14.3, the
Company may at any time terminate the Plan. If the Company terminates the
Plan, the date of such termination shall be treated as the date of Retirement
or Termination of Employment for the purpose of calculating Plan benefits, and
the Company shall pay to the Participant the benefits the Participant is
entitled to receive under the Plan in monthly installments over a thirty-six
(36) month period. Interest at the Fixed Crediting Rate will be credited to
the Participant's Account prospectively commencing as of the date of the
Plan's termination and continuing until distribution under this Section is
completed.
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14.3 AMENDMENT OR TERMINATION AFTER CHANGE IN CONTROL. Notwithstanding
the foregoing, the Company shall not amend or terminate the Plan without the
prior written consent of affected Participants for a period of two calendar
years following a Change in Control and shall not thereafter amend or
terminate the Plan in any manner which affects any Participant (or
Beneficiary) who commences receiving payment of benefits under the Plan prior
to the end of such two year period following a Change in Control.
14.4 COMPANY ACTION. Except as provided in Section 14.3 or 14.5, the
Company's power to amend or terminate the Plan shall be exercisable by the
Company's Board of Directors or by the committee or individual authorized by
the Company's Board of Directors to exercise such powers.
14.5 CONSTRUCTIVE RECEIPT TERMINATION. In the event the Administrator
determines that amounts deferred under the Plan have been constructively
received by Participants and must be recognized as income for federal income
tax purposes, the Plan shall terminate and distributions shall be made to
Participants in accordance with the Provisions of Section 14.2 or as may be
determined by the Administrator. The determination of the Administrator under
this Section shall be binding and conclusive.
ARTICLE 15
MISCELLANEOUS
15.1 SUCCESSORS OF THE COMPANY. The rights and obligations of the
Company under the Plan shall inure to the benefit of, and shall be binding
upon, the successors and assigns of the Company.
15.2 ERISA PLAN. The Plan is intended to be an unfunded plan maintained
primarily to provide deferred compensation benefits for "a select group of
management or highly compensated employees" within the meaning of Sections
201, 301 and 401 of ERISA and therefore to be exempt from Parts 2, 3 and 4 of
Title I of ERISA.
15.3 TRUST. The Company shall be responsible for the payment of all
benefits under the Plan. At its discretion, the Company may establish one or
more grantor trusts for the purpose of providing for payment of benefits under
the Plan. Such trust or trusts may be irrevocable, but the assets thereof
shall be subject to the claims of the Company's creditors. Benefits paid to
the Participant from any such trust shall be considered paid by the Company
for purposes of meeting the obligations of the Company under the Plan.
15.4 EMPLOYMENT NOT GUARANTEED. Nothing contained in the Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Participant any right to continued employment with the Company.
15.5 GENDER, SINGULAR AND PLURAL. All pronouns and variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the
identity of the person or persons
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may require. As the context may require, the singular may be read as the
plural and the plural as the singular.
15.6 CAPTIONS. The captions of the articles and sections of the Plan
are for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
15.7 VALIDITY. If any provision of the Plan is held invalid, void or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of the Plan.
15.8 WAIVER OF BREACH. The waiver by the Company of any breach of any
provision of the Plan by the Participant shall not operate or be construed as
a waiver of any subsequent breach by the Participant.
15.9 APPLICABLE LAW. The Plan shall be governed and construed in
accordance with the laws of Ohio except where the laws of Ohio are preempted
by ERISA.
15.10 NOTICE. Any notice or filing required or permitted to be given to
the Company under the Plan shall be sufficient if in writing and hand-
delivered, or sent by first class mail to the principal office of the Company,
directed to the attention of the Administrator. Such notice shall be deemed
given as of the date of delivery, or, if delivery is made by mail, as of the
date shown on the postmark.
ARTICLE 16
CLAIMS AND REVIEW PROCEDURES
16.1 CLAIMS PROCEDURE. The Company shall notify a Participant in
writing, within ninety (90) days after his or her written application for
benefits, of his or her eligibility or noneligibility for benefits under the
Plan. If the Company determines that a Participant is not eligible for
benefits or full benefits, the notice shall set forth: (a) the specific
reasons for such denial; (b) a specific reference to the provisions of the
Plan on which the denial is based; (c) a description of any additional
information or material necessary for the claimant to perfect his or her
claim, and a description of why it is needed; and (d) an explanation of the
Plan's claims review procedure and other appropriate information as to the
steps to be taken if the Participant wishes to have the claim reviewed. If
the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Participant
of the special circumstances and the date by which a decision is expected to
be made, and may extend the time for up to an additional ninety-day period.
16.2 REVIEW PROCEDURE. If a Participant is determined by the Company
not to be eligible for benefits, or if the Participant believes that he or she
is entitled to greater or different benefits, the Participant shall have the
opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which
the Participant believes entitle him or her to benefits or to greater or
different benefits. Within sixty (60) days after receipt by the Company of the
petition, the Company shall afford the Participant (and
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counsel, if any) an opportunity to present his or her position to the Company
orally or in writing, and the Participant (or counsel) shall have the right to
review the pertinent documents. The Company shall notify the Participant of
its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Participant and the specific provisions of the Plan on which the decision is
based. If, because of the need for a hearing, the sixty-day period is not
sufficient, the decision may be deferred for up to another sixty-day period at
the election of the Company, but notice of this deferral shall be given to the
Participant. In the event of the death of the Participant, the same
procedures shall apply to the Participant's beneficiaries.
PARKER-HANNIFIN CORPORATION
Dated: ____________________ By: ______________________________________
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EXHIBIT A
The purpose of the adjustment payment to be added to the distribution made
pursuant to Section 9.1(a) (the "Make Whole Amount") is to offset the
Participant's inability to defer until retirement or later the payment of
taxes on the amounts deferred and the earnings and interest that would have
otherwise accrued between the date of the Change in Control and the date on
which the Participant elected to commence receipt of his Account (the
"Commencement Date") under the Plan.
The Make Whole Amount shall be calculated as follows:
1. The Participant's Account balance under the Plan as of the date of the
Change in Control (exclusive of Automatic Deferrals) (the "EDP Amount")
will be projected forward to the Commencement Date at an assumed tax-
deferred annual earnings rate equal to the Moody's Seasoned Baa
Corporate Bond Yield Average for the last twelve full calendar months
prior to the Change in Control (the "Moody's Rate") (such projected
amount shall be known as the "Projected Balance"). The Projected Balance
will then be converted into annual installment benefit payments based
upon the Participant's elected form of retirement payments under the
Plan, assuming continued tax-deferred earnings on the undistributed
balance at the Moody's Rate (the "Projected Annual Payouts"). The
Projected Annual Payouts will then be reduced for assumed income taxes
at the highest applicable federal, state and local marginal rates of
taxation in effect in the Participant's taxing jurisdiction(s) for the
calendar year in which the Make Whole Amount is paid (the "Tax Rate").
The after-tax Projected Annual Payouts will be known as the "After-Tax
Projected Benefits".
2. The term "Made Whole Amount", as used herein, shall mean the EDP Amount
plus the Make Whole Amount. The Make Whole Amount is the amount which,
when added to the EDP Amount, will yield After-Tax Annuity Benefits (as
hereinafter defined) equal to the After-Tax Projected Benefits, based on
the following assumptions:
a. The Made Whole Amount will be taxed at the Tax Rate upon receipt
by the Participant.
b. The after-tax Made Whole Amount will be deemed to be invested by
the Participant in a tax-deferred annuity that is structured to make payments
beginning on the Commencement Date in the same form as elected by the
Participant under the Plan (the "Annuity").
c. The Annuity will accrue interest at the Moody's Rate, less 80
basis points (i.e., 0.80%).
d. Annual Annuity payments will be taxed at the Tax Rate (after
taking into account the annuity exclusion ratio), yielding "After-Tax Annuity
Benefits".
19
Exhibit (10)(u)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Parker-Hannifin Corporation Stock Option Deferral Plan
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
PARKER-HANNIFIN CORPORATION
STOCK OPTION DEFERRAL PLAN
<PAGE>
PARKER-HANNlFlN CORPORATION
STOCK OPTION DEFERRAL PLAN
Parker-Hannifin Corporation, an Ohio corporation (the "Company"), hereby
establishes this Stock Option Deferral Plan (the "Plan"), effective July 10,
1998, for the purpose of attracting high quality executives and promoting in
its executives increased efficiency and an interest in the successful
operation of the Company by offering a deferral opportunity to accumulate
capital on favorable economic terms.
ARTICLE 1
DEFINITIONS
1.1 ACCOUNT shall mean the notional account established with respect
to a Participant's Stock Option Deferrals for recordkeeping purposes pursuant
to Article 4 of the Plan.
1.2 ADMINISTRATOR shall mean the Company or, if applicable, the
committee appointed by the Board to administer the Plan pursuant to Article 11
of the Plan.
1.3 BENEFICIARY shall mean the person or persons or entity designated
as such in accordance with Article 12 of the Plan.
1.4 BOARD shall mean the Board of Directors of the Company.
1.5 CHANGE IN CONTROL shall mean any of the following events have
occurred:
(i) any "person" (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities eligible to vote for the
election of the Board (the "Company Voting Securities"); provided, however,
that the event described in this paragraph shall not be deemed to be a Change
in Control by virtue of any of the following situations: (A) an acquisition
by the Company or any Subsidiary; (B) an acquisition by any employee benefit
plan sponsored or maintained by the Company or any Subsidiary; (C) an
acquisition by any underwriter temporarily holding securities pursuant to an
offering of such securities; (D) a Non-Control Transaction (as defined in
paragraph (iii)); (E) as pertains to a Participant, any acquisition by the
Participant or any group of persons (within the meaning of Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) including the Participant (or any entity in
which the Participant or a group of persons including the Participant,
directly or indirectly, holds a majority of the voting power of such entity's
outstanding voting interests); or (F) the acquisition of Company Voting
Securities from the Company, if a majority of the Board approves a
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resolution providing expressly that the acquisition pursuant to this clause
(F) does not constitute a Change in Control under this paragraph (i);
(ii) individuals who, at the beginning of any period of twenty-four
(24) consecutive months, constitute the Board (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof; provided, that (A)
any person becoming a director subsequent to the beginning of such twenty-four
(24) month period, whose election, or nomination for election, by the
Company's shareholders was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board who are then on the Board (either by
a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this paragraph (ii), considered as
though such person were a member of the Incumbent Board; provided, however,
that no individual initially elected or nominated as a director of the Company
as a result of an actual or threatened election contest with respect to
directors or any other actual or threatened solicitation of proxies or
consents by or on behalf of any person other than the Board shall be deemed to
be a member of the Incumbent Board;
(iii) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization of the Company or any Subsidiary that
requires the approval of the Company's stockholders, whether for such
transaction or the issuance of securities in connection with the transaction
or otherwise (a "Business Combination"), unless (A) immediately following such
Business Combination: (1) more than 50% of the total voting power of the
corporation resulting from such Business Combination (the "Surviving
Corporation") or, if applicable, the ultimate parent corporation which
directly or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving Corporation (the
"Parent Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to the Business Combination (or, if applicable,
shares into which such Company Voting Securities were converted pursuant to
such Business Combination), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business
Combination, (2) no person (other than any employee benefit plan sponsored or
maintained by the Surviving Corporation or the Parent Corporation) is or
becomes the beneficial owner, directly or indirectly, of 20% or more of the
total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation), and (3) at least a majority of the members of the
board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), following the Business Combination,
were members of the Incumbent Board at the time of the Board's approval of the
execution of the initial agreement providing for such Business Combination (a
"Non-Control Transaction") or (B) the Business Combination is effected by
means of the acquisition of Company Voting Securities from the Company, and a
majority of the Board approves a resolution providing expressly that such
Business Combination does not constitute a Change in Control under this
paragraph (iii); or
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(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any person acquires beneficial ownership of more than
20% of the Company Voting Securities as a result of the acquisition of Company
Voting Securities by the Company which, by reducing the number of Company
Voting Securities outstanding, increases the percentage of shares beneficially
owned by such person; provided, that if a Change in Control would occur as a
result of such an acquisition by the Company (if not for the operation of this
sentence), and after the Company's acquisition such person becomes the
beneficial owner of additional Company Voting Securities that increases the
percentage of outstanding Company Voting Securities beneficially owned by such
person, a Change in Control shall then occur.
Notwithstanding anything in this Plan to the contrary, if the
Participant's employment is terminated prior to a Change in Control, and the
Participant reasonably demonstrates that such termination was at the request
of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party"), then for all
purposes of this Plan, the date immediately prior to the date of such
termination of employment shall be deemed to be the date of a Change in
Control for such Participant.
1.5 CODE shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.6 DEFERRAL ELECTION shall mean an election to defer part or all of
the Gains on one or more Options.
1.7 DEFERRED OPTION shall mean an Option with respect to which a
Participant has made a Deferral Election.
1.8 DISABILITY shall mean any long term disability as defined under
the Company's long term disability plan. The Administrator, in its complete
and sole discretion, shall determine a Participant's Disability. The
Administrator may require that the Participant submit to an examination on an
annual basis, at the expense of the Company, by a competent physician or
medical clinic selected by the Administrator to confirm Disability. On the
basis of such medical evidence, the determination of the Administrator as to
whether or not a condition of Disability exists or continues shall be
conclusive.
1.9 EARLY RETIREMENT DATE shall mean age 55 with ten or more years of
employment with the Company.
1.10 ELIGIBLE EXECUTIVE shall mean a key employee of the Company or
any of its subsidiaries who: (a) is designated by the Administrator as
eligible to participate in the Plan; and (b) qualifies as a member of the
"select group of management or highly compensated employees" under ERISA.
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1.11 ERISA shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.12 EXERCISE shall mean an election to exercise part or all of any
Deferred Option.
1.13 GAINS shall mean the difference between the exercise price under
the Option and the Market Value of the Stock.
1.14 MARKET VALUE shall mean the New York Stock Exchange closing price
of the Stock on the day preceding any Exercise.
1.15 NORMAL RETIREMENT DATE shall mean the date on which a Participant
attains age 65.
1.16 OPTION shall mean one or more non-qualified stock options issued
to a Participant under any stock incentive plan of the Company.
1.17 PARTICIPANT shall mean an Eligible Executive who has elected to
participate and has made a Deferral Election under the Plan.
1.18 PLAN YEAR shall mean the calendar year, except that the first Plan
Year shall be the year commencing July 10, 1998 and ending December 31, 1998.
1.19 RETIREMENT shall mean a termination of employment following Normal
or Early Retirement Date.
1.20 STOCK shall mean Parker Hannifin common stock.
1.21 STOCK OPTION DEFERRALS shall mean the sum of the Gains deferred
under this Plan which are converted to phantom shares of Stock and are
credited to the Participant's Account in accordance with Articles 3 and 4 of
this Plan.
1.22 SUBSIDIARY shall mean any corporation or other entity in which the
Company has a direct or indirect ownership interest of 50% or more of the
total combined voting power of the then outstanding securities or interests of
such corporation or other entity.
1.23 TERMINATION OF EMPLOYMENT shall mean the Participant's employment
with the Company ceases for any reason whatsoever, whether voluntary or
involuntary, other than Retirement, Disability or death.
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ARTICLE 2
PARTICIPATION
2.1 PARTICIPATION. An Eligible Executive shall become a Participant in
the Plan at the time he makes a Deferral Election. In the Deferral Election,
the Participant shall designate the Option(s) to which the Election relates
and the portion of the Gains to be deferred.
2.2 CONTINUATION OF PARTICIPATION. An Eligible Executive who has
elected to participate in the Plan by making a Deferral Election shall
continue as a Participant in the Plan for purposes of such Deferral Election
even though he ceases to be an Eligible Executive if he continues to be an
employee of the Company or if his employment is terminated by reason of
Retirement. However, a Participant shall not be eligible to make a new
Deferral Election unless the Participant is an Eligible Executive at the time
the Election is made. Any outstanding Deferral Elections made by a
Participant whose employment terminates for any reason other than Retirement
(including death) shall be deemed void at the time the Participant's
employment terminates.
ARTICLE 3
STOCK OPTION DEFERRALS
3.1 DEFERRAL ELECTION.
(a) A Participant may elect to defer an amount equal to any part or
all of the Gains that would otherwise be realized upon exercise of an Option.
(b) A Deferral Election under this Plan shall be irrevocable.
3.2 VESTING. The Participant's right to the value of his Account, as
adjusted for gains and losses, shall be 100% vested at all times.
3.3 EXERCISE. At any time during the period beginning at least six
(6) months after the time a Participant has made a Deferral Election, and
ending at the expiration of the Deferred Option to which the Election relates,
a Participant may elect to exercise part or all of the Deferred Option. Any
Exercise must utilize an actual or constructive stock-for-stock method of
payment and any Stock used in such Exercise must have been owned by the
Participant for at least six (6) months prior to the Exercise. If a
Participant has not made a Deferral Election with respect to all Options which
were granted on the same date, and if he is not exercising all Options
available under said grant then the Options exercised shall be deemed to be
Options as to which the Deferral Election relates, until the entire amount of
Options with respect to which a Deferral Election was made shall have been
exercised.
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ARTICLE 4
ACCOUNTS
4.1 ACCOUNTS. Solely for recordkeeping purposes, the Company shall
maintain for each Participant one Account for all Stock Option Deferrals.
4.2 CREDITS TO ACCOUNT. Upon Exercise, there shall be credited to a
Participant's Account a number of phantom shares of Stock equal to the value
of the Gains that otherwise would have been realized at such time if not for
the Deferral Election divided by the Market Value of the Stock.
4.3 STATEMENT OF ACCOUNTS. As of each December 31, the Administrator
shall provide each Participant with a statement setting forth the number of
phantom shares credited to the Participant's Account, the value of such
phantom shares at the time originally credited to the Account and the value of
such phantom shares based on the value of Stock as of the close of business on
such December 31.
ARTICLE 5
RETIREMENT BENEFITS
5.1 AMOUNT. Upon Retirement, the Company shall pay to the Participant
a benefit in the form of Stock, the number of shares of which shall be equal
to the number of phantom shares credited to the Participant's Account on the
date of Retirement.
5.2 FORM OF RETIREMENT BENEFITS. The Retirement benefit shall be paid
in quarterly installments over a period of fifteen (15) years, with the
initial installments being a number of shares of Stock equal to the number of
phantom shares in the Participant's Account as of the date of Retirement
divided by 60. If the Participant exercises a Deferred Option after
Retirement, his Account shall be credited with phantom shares in accordance
with Section 4.2. In such a case, the number of shares of Stock to be
distributed in each installment payment shall be readjusted as of the
following January 1, based on the number of phantom shares credited to the
Participant's Account as of the immediately preceding December 31. Any
partial shares in such installment shall be rounded up to the nearest share
and paid with the installment. Notwithstanding anything herein to the
contrary, the Participant may elect at the time he makes his initialed
Deferral Election to have the Retirement benefit paid in a lump sum or in
installments paid quarterly over a period of five (5) or ten (10) years.
Payment shall be made or shall begin as of the first day of the calendar
quarter next following the date sixty (60) days after the Participant's
Retirement unless the Participant elects at the time he makes his initial
Deferral Election for payments to begin on January l of a later year. However,
in all events payments shall commence on or before the earlier of the date the
retired Participant attains age seventy (70) or the January 1 five years after
Retirement. Except as provided under Section 9.1, Participants may elect an
alternative form or date of payout as available under this Section 5.2 by
written election filed with the Administrator;
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provided, however, that if the Participant files the election less than
thirteen (13) months prior to the date of retirement, the Account shall be
reduced by ten percent (10%).
5.3 SMALL BENEFIT EXCEPTION. Notwithstanding any of the foregoing, if
the number of shares of Stock payable to the Participant is less than or equal
to five hundred (500) shares, the Company shall pay such benefits in a single
lump sum.
ARTICLE 6
TERMINATION BENEFITS
As of the first day of the calendar quarter beginning at least sixty
(60) days after Termination of Employment, the Company shall pay to the
Participant in a single lump sum a termination benefit in Stock, the number of
shares of which shall be equal to the number of phantom shares credited to the
Participant's Account on the date of Termination of Employment.
ARTICLE 7
SURVIVOR BENEFITS
7.1 PRE-COMMENCEMENT SURVIVOR BENEFIT. If the Participant dies prior
to the time installment payments have commenced, the Company shall pay to the
Participant's Beneficiary within ninety (90) days after the Participant's
death a benefit in Stock, the number of shares of which shall be equal to the
number of phantom shares credited to the Participant's Account as of the date
of death.
7.2 POST-COMMENCEMENT SURVIVOR BENEFIT. If the Participant dies after
the time installment payments have commenced, the Company shall pay to the
Participant's Beneficiary the remaining installments at the time and in the
manner such payments would have been made to the Participant.
7.3 SMALL BENEFIT PAYMENT. Notwithstanding any of the foregoing, in
the event the number of shares of Stock payable to the Beneficiary is less
than or equal to five hundred (500) shares, the Company shall pay such
benefits in a single lump sum.
ARTICLE 8
DISABILITY
If a Participant suffers a Disability, the Company shall pay to the
Participant a number of shares of Stock equal to the number of phantom shares
credited to the Participant's Account as of the date his employment terminates
for Disability. The form of payment shall be determined in
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accordance with Section 5.2 and 5.3 as if the date the Participant's
employment terminates for Disability were the Participant's Normal Retirement
Date.
ARTICLE 9
CHANGE IN CONTROL
9.1 PAYMENT UPON CHANGE IN CONTROL. If a Change in Control occurs, the
Participant (or after the Participant's death the Participant's Beneficiary)
shall receive in a lump sum payment within thirty (30) days after the Change
of Control a number of shares of Stock equal to the number of phantom shares
credited to the Participant's Account as of the date of the Change in Control.
9.2 "GROSS-UP" PAYMENT. In addition to any other amounts payable
hereunder, in the event it shall be determined that any payment, distribution
or acceleration of vesting of any benefit hereunder would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, or any successor provision, or any interest or penalties are incurred
by the Participant with respect to such excise tax, then the Participant shall
be entitled to receive an additional "gross-up payment" calculated as set
forth in the change in control severance agreement in effect between the
Company and the Participant as of the date of the Change in Control; provided,
however, that if the Participant does not have a change in control severance
agreement, the payment under this Section shall be determined in accordance
with the calculation set forth in the most recent change in control severance
agreement entered into by the Company and any executive of the Company;
provided, further, that there shall be no duplication of such additional
payment under this Plan and any change in control severance agreement.
ARTICLE 10
CONDITIONS RELATED TO BENEFITS
10.1 NONASSIGNABILITY. The benefits provided under the Plan may not be
alienated, assigned, transferred, pledged or hypothecated by or to any person
or entity, at any time or any manner whatsoever. These benefits shall be
exempt from the claims of creditors of any Participant or other claimants and
from all orders, decrees, levies, garnishment or executions against any
Participant to the fullest extent allowed by law.
10.2 NO RIGHT TO COMPANY ASSETS. The benefits paid under the Plan shall
be paid from the general funds of the Company, and the Participant and any
Beneficiary shall be no more than unsecured general creditors of the Company
with no special or prior right to any assets of the Company for payment of any
obligations hereunder.
10.3 PROTECTIVE PROVISIONS. The Participant shall cooperate with the
Company by furnishing any and all information requested by the Administrator,
in order to facilitate the payment of benefits hereunder, taking such physical
examinations as the Administrator may deem necessary and taking such other
actions as may be requested by the Administrator. If the
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Participant refuses to cooperate, the Company shall have no further obligation
to the Participant under the Plan.
10.4 WITHHOLDING. The Participant or the Beneficiary shall make
appropriate arrangements with the Company for satisfaction of any federal,
state or local income tax withholding requirements and Social Security or
other employee tax requirements applicable to the payment of benefits under
the Plan. If no other arrangements are made, the Company may provide, at its
discretion, for such withholding and tax payments as may be required.
ARTICLE 11
ADMINISTRATION OF PLAN
The Company shall administer the Plan, provided, however, that the
Company may elect by action of its Board of Directors to appoint a committee
of three (3) or more individuals to administer the Plan. All references to the
Administrator herein shall refer to the Company or, if such committee has been
appointed, the committee.
The Administrator shall administer the Plan and interpret, construe and
apply its provisions in accordance with its terms. The Administrator shall
further establish, adopt or revise such rules and regulations as it may deem
necessary or advisable for the administration of the Plan. All decisions of
the Administrator shall be final and binding. The individuals serving on the
committee shall, except as prohibited by law, be indemnified and held harmless
by the Company from any and all liabilities, costs, and expenses (including
legal fees), to the extent not covered by liability insurance arising out of
any action taken by any member of the committee with respect to the Plan,
unless such liability arises from the individual's own gross negligence or
willful misconduct.
ARTICLE 12
BENEFICIARY DESIGNATION
The Participant shall have the right, at any time, to designate any
person or persons as Beneficiary (both primary and contingent) to whom payment
under the Plan shall be made in the event of the Participant's death. The
Beneficiary designation shall be effective when it is submitted in writing to
the Administrator during the Participant's lifetime on a form prescribed by
the Administrator.
The submission of a new Beneficiary designation shall cancel all prior
Beneficiary designations. Any finalized divorce or marriage of a Participant
subsequent to the date of a Beneficiary designation shall revoke such
designation, unless in the case of divorce the previous spouse was not
designated as Beneficiary and unless in the case of marriage the Participant's
new spouse has previously been designated as Beneficiary. The spouse of a
married Participant shall consent to any designation of a Beneficiary other
than the spouse, and the spouse's consent shall be witnessed by a notary
public.
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If a Participant fails to designate a Beneficiary as provided above, or
if the Beneficiary designation is revoked by marriage, divorce, or otherwise
without execution of a new designation, or if every person designated as
Beneficiary predeceases the Participant or dies prior to complete distribution
of the Participant's benefits, then the Administrator shall direct the
distribution of such benefits to the Participant's estate.
ARTICLE 13
AMENDMENT AND TERMINATION OF PLAN
13.1 AMENDMENT OF PLAN. The Company may at any time amend the Plan in
whole or in part, provided, however, that such amendment shall not decrease
the number of phantom shares credited to the Participant's Account at the time
of such amendment.
13.2 TERMINATION OF PLAN. The Company may at any time terminate the
Plan. If the Company terminates the Plan, the date of such termination shall
be treated as the date of Termination of Employment for the purpose of
calculating Plan benefits, and the Company shall pay to the Participant in a
lump sum a number of shares of Stock equal to the number of phantom shares
credited to the Participant's Account as of the date of Plan termination.
13.3 COMPANY ACTION. Except as provided in Section 13.4, the Company's
power to amend or terminate the Plan shall be exercisable by the Company's
Board of Directors or by the committee or individual authorized by the
Company's Board of Directors to exercise such powers.
13.4 CONSTRUCTIVE RECEIPT TERMINATION. In the event the Administrator
determines that amounts deferred under the Plan have been constructively
received by Participants and must be recognized as income for federal income
tax purposes, the Plan shall terminate and distributions shall be made to
Participants in accordance with the provisions of Section 13.2 or as may be
determined by the Administrator. The determination of the Administrator under
this Section shall be binding and conclusive.
ARTICLE 14
MISCELLANEOUS
14.1 SUCCESSORS OF THE COMPANY. The rights and obligations of the
Company under the Plan shall inure to the benefit of, and shall be binding
upon, the successors and assigns of the Company.
14.2 ERISA PLAN. The Plan is intended to be an unfunded plan maintained
primarily to provide deferred compensation benefits for "a select group of
management or highly
11
<PAGE>
compensated employees" within the meaning of Sections 201, 301 and 401 of
ERISA and therefore to be exempt from Parts 2, 3 and 4 of Title I of ERISA.
14.3 TRUST. The Company shall be responsible for the payment of all
benefits under the Plan. At its discretion, the Company may establish one or
more grantor trusts for the purpose of providing for payment of benefits under
the Plan. Such trust or trusts may be irrevocable, but the assets thereof
shall be subject to the claims of the Company's creditors. Benefits paid to
the Participant from any such trust shall be considered paid by the Company
for purposes of meeting the obligations of the Company under the Plan.
14.4 EMPLOYMENT NOT GUARANTEED. Nothing contained in the Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Participant any right to continued employment with the Company.
14.5 GENDER, SINGULAR AND PLURAL. All pronouns and variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the
identity of the person or persons may require. As the context may require, the
singular may be read as the plural and the plural as the singular.
14.6 CAPTIONS. The captions of the articles and sections of the Plan
are for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
14.7 VALIDITY. If any provision of the Plan is held invalid, void or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of the Plan.
14.8 WAIVER OF BREACH. The waiver by the Company of any breach of any
provision of the Plan by the Participant shall not operate or be construed as
a waiver of any subsequent breach by the Participant.
14.9 APPLICABLE LAW. The Plan shall be governed and construed in
accordance with the laws of Ohio except where the laws of Ohio are preempted
by ERISA.
14.10 NOTICE. Any notice or filing required or permitted to be given to
the Company under the Plan shall be sufficient if in writing and hand-
delivered, or sent by first class mail to the principal office of the Company,
directed to the attention of the Administrator. Such notice shall be deemed
given as of the date of delivery, or, if delivery is made by mail, as of the
date shown on the postmark.
ARTICLE 15
CLAIMS AND REVIEW PROCEDURES
15.1 CLAIMS PROCEDURE. The Company shall notify a Participant in
writing, within ninety (90) days after his or her written application for
benefits, of his or her eligibility or noneligibility for benefits under the
Plan. If the Company determines that a Participant is not
12
<PAGE>
eligible for benefits or full benefits, the notice shall set forth: (a) the
specific reasons for such denial; (b) a specific reference to the provisions
of the Plan on which the denial is based; (c) a description of any additional
information or material necessary for the claimant to perfect his or her
claim, and a description of why it is needed; and (d) an explanation of the
Plan's claims review procedure and other appropriate information as to the
steps to be taken if the Participant wishes to have the claim reviewed. If
the Company determines that there are special circumstances requiring
additional time to make a decision, the Company shall notify the Participant
of the special circumstances and the date by which a decision is expected to
be made, and may extend the time for up to an additional ninety-day period.
15.2 REVIEW PROCEDURE. If a Participant is determined by the Company
not to be eligible for benefits, or if the Participant believes that he or she
is entitled to greater or different benefits, the Participant shall have the
opportunity to have such claim reviewed by the Company by filing a petition
for review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which
the Participant believes entitle him or her to benefits or to greater or
different benefits. Within sixty (60) days after receipt by the Company of the
petition, the Company shall afford the Participant (and counsel, if any) an
opportunity to present his or her position to the Company orally or in
writing, and the Participant (or counsel) shall have the right to review the
pertinent documents. The Company shall notify the Participant of its decision
in writing within the sixty-day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the Participant
and the specific provisions of the Plan on which the decision is based. If,
because of the need for a hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day period at the election of
the Company, but notice of this deferral shall be given to the Participant.
In the event of the death of the Participant, the same procedures shall apply
to the Participant's beneficiaries.
13
<PAGE>
Exhibit (12)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Computation of Ratio of Earnings to Fixed Charges
as of June 30, 1998
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
PARKER-HANNIFIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
Fiscal Year Ended June 30,
1998 1997 1996 1995 1994
_________________________________________________________
EARNINGS
________
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes $ 503,988 $ 424,867 $ 374,479 $ 348,407 $ 112,449
Add:
Interest on indebtedness,
exclusive of interest capitalized
in accordance with FASB #34 and
interest on ESOP loan guarantee 52,463 46,373 35,665 28,884 34,687
Amortization of deferred loan costs 324 286 146 128 297
Portion of rents representative of
interest factor 12,355 11,102 9,966 8,791 7,157
Equity share of losses of companies
for which debt obligations are
not guaranteed 583 1,327 513 392 1,359
Amortization of previously
capitalized interest 296 220 219 216 217
_________________________________________________________
Income as adjusted $ 570,009 $ 484,175 $ 420,988 $ 386,818 $ 156,166
=========================================================
FIXED CHARGES
_____________
Interest on indebtedness,
exclusive of interest capitalized
in accordance with FASB #34 and
interest on ESOP loan guarantee $ 52,463 $ 46,373 $ 35,665 $ 28,884 $ 34,687
Capitalized interest 1,372 272 538 283 298
Amortization of deferred loan costs 324 286 146 128 297
Portion of rents representative of
interest factor 12,355 11,102 9,966 8,791 7,157
_________________________________________________________
Fixed charges $ 66,514 $ 58,033 $ 46,315 $ 38,086 $ 42,439
=========================================================
RATIO OF EARNINGS TO FIXED CHARGES 8.57x 8.34x 9.09x 10.16x 3.68x
__________________________________
</TABLE>
Exhibit (13)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Excerpts from Annual Report to Shareholders for the fiscal year ended June 30,
1998.
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Annual Report and other written reports and oral statements made from
time to time by the Company may contain "forward-looking statements", all
of which are subject to risks and uncertainties. All statements which address
operating performance, events or developments that we expect or anticipate
will occur in the future, including statements relating to growth, operating
margin performance, earnings per share or statements expressing general
opinions about future operating results, are forward-looking statements.
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other
factors, many of which are outside the Company's control, that could cause
actual results to differ materially from such statements. Such factors
include:
* continuity of business relationships with and purchases by major
customers, including among others, orders and delivery schedules for
aircraft components,
* ability of suppliers to provide materials as needed,
* uncertainties surrounding timing, successful completion or integration
of acquisitions,
* competitive pressure on sales and pricing,
* increases in material and other production costs which cannot be
recovered in product pricing,
* uncertainties surrounding the year 2000 issues and the new Euro
currency,
* difficulties in introducing new products and entering new markets, and
* uncertainties surrounding the global economy and global market
conditions, including among others, the economy of the Asia Pacific
region and the potential devaluation of currencies.
Any forward-looking statements are made based on known events and
circumstances at the time. The Company undertakes no obligation to update or
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date of this Report.
Page 13-1
<PAGE>
DISCUSSION OF STATEMENT OF INCOME
THE CONSOLIDATED STATEMENT OF INCOME summarizes the Company's operating
performance over the last three years.
NET SALES of $4.63 billion for 1998 were 13.2 percent higher than the
$4.09 billion for 1997. Acquisitions accounted for approximately one-fifth of
this increase. The Industrial operations experienced continued strong order
demand within the heavy-duty truck, construction equipment, factory
automation, telecommunications and refrigeration markets. The European
operations continued to grow and the Company continued to penetrate markets
in Asia Pacific and Latin American regions. Volume increases within
International operations were partially offset by currency rate changes. The
Aerospace operations experienced strong demand within the commercial
transport, business jet and general aviation markets.
Net sales for 1997 were 14.1 percent higher than the $3.59 billion sales
in 1996. Acquisitions accounted for more than half of this increase. North
American Industrial operations achieved strong order demand, especially
within the factory automation, machine tool, and agricultural and
construction equipment markets. There was also increased demand for sealing
products, and light-truck and automotive products. International Industrial
operations' results were relatively flat, with Europe experiencing a soft
economy for most of the year. Volume increases were partially offset by
currency rate changes. The Aerospace operations achieved the majority of the
sales growth as demand was strong within the OEM commercial and general
aviation industries and the maintenance, repair and overhaul business.
The Company is anticipating moderate growth for the next year as growth in
Industrial markets within North America is expected to be less than the
current pace. European markets are expected to continue to improve and the
Company expects to increase market penetration in Latin America. The
Aerospace operations expect some moderation in the recent robust growth
within the commercial aviation OEM, and repair and overhaul businesses. A
strong backlog and participation on nearly every currently flown aircraft
provide a very positive outlook.
GROSS PROFIT MARGIN was 23.4 percent in 1998. Cost of sales for 1998
includes a non-cash, non-recurring charge of $15.8 million for in-process R&D
purchased as part of two acquisitions. Before these charges, the gross
profit margin for 1998 was 23.7 percent, compared to 22.9 percent in 1997 and
23.1 percent in 1996. The improvement in 1998 is primarily the result of
better absorption of fixed costs due to higher volume and the benefits of
continued integration of prior-year acquisitions. The improvement was
partially offset by recently acquired operations contributing lower margins,
as their integration continues. In addition, gross margins were affected by
the Asian financial crisis and the depressed worldwide semiconductor market.
The decrease in gross profit margin in 1997 was due to newly acquired
operations contributing lower margins. In addition, weak demand throughout
Europe in 1997 resulted in lower capacity utilization and reduced gross
profit for the International operations. Partially offsetting these declines,
the higher volume in 1997 improved capacity utilization and provided higher
margins for most of the North American Industrial and Aerospace operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of sales
decreased to 11.5 percent, from 11.6 percent in 1997, and 11.9 percent in
1996. As volume increased these expenses remained relatively unchanged,
Page 13-2
<PAGE>
except for increased costs from acquisitions, incentive programs and
initiatives to enter new markets.
INTEREST EXPENSE increased by $6.1 million in 1998 and $10.0 million in
1997 due to increased borrowings to complete acquisitions.
INTEREST AND OTHER INCOME, NET was $6.8 million in 1998 compared to $5.6
million in 1997. Fiscal 1998 income included $3.8 million of interest from a
settlement with the IRS. Fiscal 1996 income of $8.5 million included income
received from several minor Corporate investments.
GAIN (LOSS) ON DISPOSAL OF ASSETS was less than $.1 million in 1998, a
$3.0 million gain in 1997 and a $2.0 million loss in 1996. The 1997 gain
includes $17.1 million income from the sale of real estate in California.
This income was substantially offset by $13.3 million accrued for exit costs
and charges for impaired assets related to the relocation of the corporate
headquarters.
INCOME TAXES increased to an effective rate of 35.9 percent in 1998,
compared to 35.5 percent in 1997. The rate in 1996 was 36.0 percent. The
increased 1998 rate is the result of receiving no tax benefit for one of the
R&D charges. The reduction in the rate for 1997, as compared to 1996, is 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 $319.6 million for 1998 was 16.6 percent higher than 1997.
Before the 1998 extraordinary item - extinguishment of debt, income increased
17.9 percent over 1997. Net income of $274.0 million for 1997 was 14.3
percent higher than 1996. Net income as a percentage of sales, before the
extraordinary item, was 7.0 percent in 1998, compared to 6.7 percent in 1997
and 1996.
YEAR 2000 CONSIDERATIONS - The Company has been taking actions to assure
that its computerized products and systems and all external interfaces are
Year 2000 compliant. The Company expects to have all internal standard
application systems compliant by July 1999 by modifying present systems,
installing new systems and monitoring third-party interfaces. The cost for
these actions is not material to the Company's results of operations.
In addition, the Company is currently contacting its key suppliers,
customers, distributors and financial service providers regarding their Year
2000 status and anticipates this survey will be substantially complete by
January 1999. If it is determined any key third party may not be prepared,
the Company will develop an alternative contingency plan.
While management does not expect that the consequences of any unsuccessful
modifications would significantly affect the financial position, liquidity,
or results of operations of the Company, there can be no assurance that
failure to be fully compliant by 2000 would not have an impact on the
Company.
EURO PREPARATIONS - The Company is in the process of upgrading its systems
to accommodate the Euro currency by January 1, 1999. The cost of this upgrade
is immaterial to the Company's financial results. Although difficult to
predict, any competitive implications and any impact on existing financial
instruments are also expected to be immaterial to the Company's results of
operations, financial position or liquidity.
Page 13-3
<PAGE>
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.
The effect of currency rate changes during the year caused a $32.7 million
decrease in the Foreign currency translation adjustments equity account.
These rate changes also caused significant decreases in accounts receivable,
inventories, goodwill and plant and equipment, as well as significant
decreases in accounts payable and the various accrual accounts.
Working capital and the current ratio were as follows:
Working Capital (millions) 1998 1997
_________________________________________________
Current Assets $ 1,780 $ 1,500
Current Liabilities 989 716
Working Capital 791 784
Current Ratio 1.8 2.1
=================================================
ACCOUNTS RECEIVABLE are primarily due from customers for sales of product
($642.3 million at June 30, 1998, compared to $554.5 million at June 30,
1997). The current year increase in accounts receivable is primarily due to
acquisitions and increased volume. Days sales outstanding for the Company
increased slightly from 1997. An increase in the allowance for doubtful
accounts in 1998 is primarily due to receivables obtained through
acquisitions.
INVENTORIES increased to $944.3 million at June 30, 1998, compared to
$727.8 million a year ago, partially due to acquisitions and increased
volume. Additional increases occurred, primarily within work in process and
finished goods, in order to improve customer service response time. Months
supply of inventory on hand at June 30, 1998 increased to 3.7 months from 3.4
months at June 30, 1997.
PLANT AND EQUIPMENT, net of accumulated depreciation, increased $114.5
million in 1998 as a result of acquisitions and capital expenditures which
exceeded annual depreciation.
INVESTMENTS AND OTHER ASSETS increased $20.5 million in 1998 primarily as
a result of increases in pension assets and the cash surrender value of
corporate-owned life insurance contracts, partially offset by a reduction in
investments due to the acquisition and consolidation of two joint ventures.
EXCESS COST OF INVESTMENTS OVER NET ASSETS ACQUIRED increased $114.4
million in 1998 as a result of acquisitions, partially offset by currency
rate fluctuations and amortization. The additional excess cost of investments
in 1998 is being amortized over 15 years.
NOTES PAYABLE AND LONG-TERM DEBT PAYABLE WITHIN ONE YEAR increased $195.7
million due to increased investment in commercial paper and the currently
payable $100 million 10.375% debentures called for redemption in June 1998.
ACCOUNTS PAYABLE, TRADE increased $71.4 million in 1998 due to the timing
of payments, acquisitions and the increased volume. The majority of the
increase was within North American Industrial operations.
ACCRUED PAYROLLS AND OTHER COMPENSATION increased $19.4 million in 1998
Page 13-4
<PAGE>
primarily as a result of increased headcount and incentive plans which are
based on sales and earnings.
ACCRUED DOMESTIC AND FOREIGN TAXES decreased to $34.4 million in 1998 from
$51.4 million in 1997 primarily due to higher estimated income tax payments
made in 1998.
LONG-TERM DEBT increased $80.1 million in 1998 primarily due to increased
borrowings to fund acquisitions. See the Cash Flows From Financing Activities
section on page 13-7 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 30 to 33 percent.
Debt to Debt-Equity Ratio (millions) 1998 1997
_________________________________________________________
Debt $ 778 $ 503
Debt & Equity 2,462 2,050
Ratio 31.6% 24.5%
=========================================================
In fiscal 1999 additional borrowings are not anticipated for the stock
repurchase program, capital investments, or for working capital purposes, but
may be utilized for acquisitions.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS increased 5.1 percent in 1998.
These costs are explained further in Note 8 to the Consolidated Financial
Statements.
OTHER LIABILITIES increased to $44.2 million in 1998 from $24.0 million in
1997 primarily due to increases in deferred compensation plans.
DISCUSSION OF CASH FLOWS
THE CONSOLIDATED STATEMENT OF CASH FLOWS reflects cash inflows and outflows
from the Company's operating, investing and financing activities.
Cash and cash equivalents decreased $38.5 million in 1998 after
increasing $5.0 million in 1997.
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 1998 was $320.6 million compared to
$392.3 million in 1997. This decrease of $71.7 million is principally due to
Inventories using cash of $185.6 million in 1998 compared to $27.0 million
in 1997. Other accrued liabilities used cash of $9.1 million in 1998
compared to providing cash of $16.0 million in 1997. Accrued domestic and
foreign taxes also used cash in 1998 of $15.3 million after providing cash
of $4.3 million in 1997. These uses of cash in 1998 were partially offset
with cash provided by an increase of $45.5 million in Net income in 1998 and
a $52.9 million increase in Accounts payable in 1998 compared to an increase
of $31.7 million in 1997. In addition, the 1998 write-off of purchased in-
process R&D of $15.8 million was a non-cash charge added back to Net income
to reconcile to the net cash provided by operating activities.
The net cash provided by operating activities in 1997 increased $54.3
million compared to 1996. This increase is principally the result of an
Page 13-5
<PAGE>
increase of $34.4 million in Net income and the non-cash expenses of
Depreciation and Amortization increasing $28.5 million. Accounts receivable
used cash of $76.1 million in 1997 as a result of increased volume, compared
to providing cash of $8.7 million in 1996. Inventories also used cash of
$27.0 million in 1997, an increase of $12.0 million compared to the cash
used in 1996. Partially offsetting these uses of cash, Accounts payable,
trade provided cash of $31.7 million in 1997 compared to using cash of $15.5
million in 1996. Increases in Other accrued liabilities also provided cash
of $16.0 million in 1997 compared to using cash of $31.8 million in 1996.
CASH FLOWS FROM INVESTING ACTIVITIES -- Net cash used in investing
activities was $264.4 million greater in 1998 than 1997, primarily due to
Acquisitions using $201.5 million more cash in 1998. Also, Capital
expenditures increased $47.8 million in 1998. These investments to support
growth and efficient manufacturing technology demonstrate the Company's
commitment to improving shareholder value.
Net cash used in investing activities for 1997 was $359.8 million lower
than in 1996 primarily due to less cash used for Acquisitions. The most
significant use of cash in 1997 was Capital expenditures, which at $189.2
million was $12.5 million less than the previous year.
To complete Acquisitions the Company utilized cash of $233.0 million and
treasury shares valued at $11.9 million in 1998; cash of $31.5 million in
1997; and cash of $359.4 million and treasury shares valued at $6.2 million
in 1996. The net assets of the acquired companies at their respective
acquisition dates consisted of the following:
(In thousands) 1998 1997 1996
____________________________________________________________________
Assets acquired:
Accounts receivable $ 39,286 $ 4,549 $ 70,916
Inventories 43,847 13,410 77,582
Prepaid expenses 1,393 247 1,459
Deferred income taxes 1,643 1,576 18,942
Plant & equipment 54,718 15,283 124,222
Other assets 3,762 (1,121) 23,515
Excess cost of investments
over net assets acquired 162,680 11,596 223,873
____________________________________________________________________
307,329 45,540 540,509
____________________________________________________________________
Page 13-6
<PAGE>
Liabilities assumed:
Notes payable 8,690 2,050 13,256
Accounts payable 21,841 2,418 26,880
Accrued payrolls 4,418 471 10,377
Accrued taxes 2,840 941 11,620
Other accrued liabilities 11,421 4,582 47,820
Long-term debt 9,706 2,454 8,235
Pensions and other
postretirement benefits 477 1,163 49,798
Other liabilities 3,033 6,900
____________________________________________________________________
62,426 14,079 174,886
____________________________________________________________________
Net assets acquired $ 244,903 $ 31,461 $ 365,623
====================================================================
CASH FLOWS FROM FINANCING ACTIVITIES -- In 1998 the Company increased its
outstanding borrowings by a net total of $264.9 million primarily to fund
acquisitions. The majority of the funding was through the issuance of
commercial paper. Additional funds were obtained through the issuance of $50
million of medium-term notes in December 1997. In July 1998 the Company
issued another $100 million of medium-term notes.
In 1997 the Company decreased its outstanding borrowings by a net total
of $121.3 million. As of June 30, 1997, the Company paid off all commercial
paper and selected notes payable attributable to the International
operations.
Common share activity includes the repurchase of stock and the exercise
of stock options. During 1998 the Company purchased 2,522,971 shares for
treasury. In July 1998, the Board of Directors of the Company increased the
authorization for future repurchases to 5.05 million shares.
Dividends have been paid for 192 consecutive quarters, including a yearly
increase in dividends for the last 42 fiscal years. The current annual
dividend rate is $.60 per share.
In summary, based upon the Company's past performance and current
expectations, management believes the cash flows generated from future
operating activities, combined with the Company's worldwide financial
capabilities, will provide adequate funds to support planned growth and
continued improvements in the Company's manufacturing facilities and
equipment.
DISCUSSION OF BUSINESS SEGMENT INFORMATION
THE BUSINESS SEGMENT INFORMATION presents sales, operating income and assets
by the principal industries and geographic areas in which the Company's
various businesses operate.
Page 13-7
<PAGE>
INDUSTRIAL SEGMENT
1998 1997 1996
______________________________________________________________
Operating income as a percent of sales 12.4% 12.5% 12.4%
Return on average assets 19.1% 18.7% 18.3%
______________________________________________________________
Sales for the Industrial North American operations increased to $2.48
billion in 1998, 15.0 percent over 1997, following 1997's increase of 9.1
percent over 1996. Nearly one-fifth of the increase in both years was due to
acquisitions. The growth in 1998 was spread among numerous markets, but
primarily was the result of growth in the light and heavy-duty truck,
construction equipment, telecommunications, factory automation, machine tool
and refrigeration markets.
Recent order entry indicates continuing, but moderate growth for the North
American operations for 1999. In addition to this growth, the Company expects
to increase sales through acquisitions.
International Industrial sales increased to a record $1.16 billion, 8.2
percent over 1997. Without the impact of changes in currency rates, volume
for 1998 increased over 17 percent. Acquisitions contributed over half of the
1998 increase. European markets experienced steady growth during the year.
The Company also continued to penetrate markets in Asia Pacific and Latin
American regions. Further advances within these regions are planned for 1999
in addition to the continuing growth anticipated for Europe.
International sales for 1997 increased 8.5 percent over 1996. Without the
impact of changes in currency rates, volume for 1997 increased nearly 15
percent. Net of the currency impact, acquisitions accounted for a majority
of the increase. Demand in Europe was relatively weak for the majority of
1997 with some improvement occurring in the fourth quarter. Latin America
made an impressive recovery during the year with strength returning in
Brazilian markets. Asia Pacific also contributed to the growth in 1997.
Backlog for the Industrial Segment was $585.2 million at June 30, 1998,
compared to $510.8 million at the end of the prior period. Acquisitions
contributed over one-third of this increase. The remaining increase was due
to volume growth, primarily within North America. The 1997 increase over
backlog of $464.6 million at June 30, 1996 was also due to increased volume
within the North American operations, as well as acquisitions.
Industrial North American operating income, before a $5.2 million R&D
charge in 1998, increased 13.2 percent in 1998 and 11.4 percent in 1997, with
Income from operations as a percent of sales at 15.1 percent in 1998, before
the R&D charge, compared to 15.3 percent in 1997 and 15.0 percent in 1996.
Pricing pressures were experienced throughout most of the Industrial markets.
Recently purchased acquisitions, not yet fully integrated, contributed lower
margins. On the other hand, previous years' acquisitions, now fully
integrated, were able to contribute higher margins, partially offsetting the
decline in Income from operations as a percent of sales. Raw material prices
remained relatively stable during the year.
International Income from operations, before a $10.6 million R&D charge in
1998, increased 27.1 percent in 1998 after a 1997 increase of 2.7 percent
over 1996. Income as a percent of sales, before the R&D charge, increased to
8.1 percent after a decrease to 6.9 percent in 1997 from 7.3 percent in 1996.
Page 13-8
<PAGE>
The European Industrial markets performed well during 1998. Increased volume
improved capacity utilization and previous acquisitions became integrated,
resulting in improved margins. Recent acquisitions, with lower margins,
partially offset these improvements. The Company's direct exposure to Asia
Pacific is immaterial, but due to the current financial crisis, extreme
pricing pressures were realized in the semiconductor markets, having an
indirect effect on the Company.
Operating income for 1997 was affected by acquisitions which contributed
lower operating margins primarily within International, but also within North
America, because of integration costs incurred without the benefit of
synergies yet to be realized.
Assets for the Industrial segment increased 17.9 percent in 1998 after
only a slight increase in 1997. The increase in 1998 is primarily due to
acquisitions and increases in inventories, partially offset by currency
fluctuations. In 1997 currency fluctuations offset increases from
acquisitions and increases in accounts receivable and inventories. In both
years net plant and equipment increased due to capital expenditures exceeding
depreciation.
AEROSPACE SEGMENT
1998 1997 1996
______________________________________________________________
Operating income as a percent of sales 16.0% 12.7% 13.7%
Return on average assets 22.5% 17.7% 19.2%
______________________________________________________________
Sales increased 15.1 percent in 1998 and 38.8 percent in 1997. Increased
commercial aircraft deliveries and continued penetration of the commercial
repair and overhaul businesses contributed to the higher volume in 1998. Over
one-half of the 1997 increase was due to an acquisition. Aerospace markets
experienced strong growth during both 1998 and 1997. Gains were primarily
within the commercial-transport original equipment market as the military
market remained relatively flat for the past several years.
Backlog at June 30, 1998 was $1.06 billion compared to $976.2 million in
1997 and $866.3 million in 1996, reflecting the strong growth of the
commercial aircraft market.
Operating income increased 45.3 percent in 1998 and 28.3 percent in 1997.
As a percent of sales 1998 income was 16.0 percent compared to 12.7 percent
in 1997 and 13.7 percent in 1996. Current year margins benefited from
improved capacity utilization due to higher volume and a more favorable
product mix. The 1997 decline in margins was primarily the result of lower
margins contributed by the Abex operations which were still in the
integration phase. Increases to long-term contract reserves also impacted the
1997 margins.
Assets increased 19.9 percent in 1998 after an 8.0 percent increase in
1997. For both periods the increases were primarily in customer receivables,
inventories and property, plant and equipment, partially offset by a decrease
in net goodwill.
Page 13-9
<PAGE>
CORPORATE ASSETS increased 5.5 percent in 1998 after a 33.2 percent
increase in 1997. The increase in 1998 is primarily due to capital additions.
The 1997 increase was the result of the construction of a new corporate
headquarters, a net receivable resulting from two currency hedges and an
increase in short-term investments.
Page 13-10
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended June 30, 1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 4,633,023 $ 4,091,081 $ 3,586,448
Cost of sales 3,550,992 3,152,988 2,756,343
___________ ___________ ___________
Gross profit 1,082,031 938,093 830,105
Selling, general and administrative expenses 532,134 475,180 425,449
___________ ___________ ___________
INCOME FROM OPERATIONS 549,897 462,913 404,656
Other income (deductions):
Interest expense (52,787) (46,659) (36,667)
Interest and other income, net 6,783 5,623 8,537
Gain (loss) on disposal of assets 95 2,990 (2,047)
___________ ___________ ___________
(45,909) (38,046) (30,177)
___________ ___________ ___________
Income before income taxes 503,988 424,867 374,479
Income taxes (Note 3) 180,762 150,828 134,812
___________ ___________ ___________
Income before extraordinary item 323,226 274,039 239,667
Extraordinary item - extinguishment of debt (Note 7) (3,675)
___________ ___________ ___________
NET INCOME $ 319,551 $ 274,039 $ 239,667
=========== =========== ===========
EARNINGS PER SHARE (Note 4)
Basic earnings per share before extraordinary item $ 2.91 $ 2.46 $ 2.15
Extraordinary item - extinguishment of debt (.03)
___________ ___________ ___________
Basic earnings per share $ 2.88 $ 2.46 $ 2.15
=========== =========== ===========
Diluted earnings per share before extraordinary item $ 2.88 $ 2.44 $ 2.14
Extraordinary item - extinguishment of debt (.03)
___________ ___________ ___________
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 13-11
<PAGE>
QUARTERLY INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 (a)(b) 1st 2nd 3rd 4th Total
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net sales $ 1,083,169 $ 1,114,948 $ 1,196,548 $ 1,238,358 $ 4,633,023
Gross profit 256,030 252,739 284,226 289,036 1,082,031
Income before extraordinary item 78,261 71,314 83,225 90,426 323,226
Net income 78,261 71,314 83,225 86,751 319,551
Diluted earnings per share before
extraordinary item .70 .63 .75 .80 2.88
Diluted earnings per share .70 .63 .75 .77 2.85
======================================================================================================
1997 (a) 1st 2nd 3rd 4th Total
______________________________________________________________________________________________________
Net sales $ 959,328 $ 969,587 $ 1,047,100 $ 1,115,066 $ 4,091,081
Gross profit 204,830 208,264 246,522 278,477 938,093
Net income 51,105 52,564 77,964 92,406 274,039
Diluted earnings per share .45 .47 .70 .82 2.44
======================================================================================================
<FN>
(a) Quarterly Information is unaudited.
(b) Results for the third and fourth quarters include a non-cash, non-
recurring pretax charge of $5.2 million and $10.6 million, respectively,
for in-process R&D purchased as part of two acquisitions. The after-tax
impact was $5.2 million ($.05 per share) and $6.8 million ($.06 per
share), respectively.
</FN>
</TABLE>
Page 13-12
<PAGE>
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, 1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,488 $ 68,997
Accounts receivable, less allowance
for doubtful accounts
(1998 - $9,004; 1997 - $5,904) 699,179 601,724
Inventories (Notes 1 and 5):
Finished products 416,034 317,494
Work in process 392,880 304,743
Raw materials 135,357 105,610
___________ ___________
944,271 727,847
Prepaid expenses 22,035 17,366
Deferred income taxes (Notes 1 and 3) 84,102 83,627
___________ ___________
TOTAL CURRENT ASSETS 1,780,075 1,499,561
Plant and equipment (Note 1):
Land and land improvements 113,774 96,995
Buildings and building equipment 552,177 486,655
Machinery and equipment 1,560,016 1,443,820
Construction in progress 119,142 111,121
___________ ___________
2,345,109 2,138,591
Less accumulated depreciation 1,209,884 1,117,848
___________ ___________
1,135,225 1,020,743
Investments and other assets (Note 1) 194,632 174,142
Excess cost of investments over
net assets acquired (Note 1) 399,681 285,264
Deferred income taxes (Notes 1 and 3) 15,208 19,236
___________ ___________
TOTAL ASSETS $ 3,524,821 $ 2,998,946
=========== ===========
Page 13-13
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES
Notes payable and long-term debt
payable within one year (Notes 6 and 7) $ 265,485 $ 69,738
Accounts payable, trade 338,249 266,848
Accrued payrolls and other compensation 163,879 144,481
Accrued domestic and foreign taxes 34,374 51,374
Other accrued liabilities 186,783 183,570
___________ ___________
TOTAL CURRENT LIABILITIES 988,770 716,011
Long-term debt (Note 7) 512,943 432,885
Pensions and other postretirement
benefits (Notes 1 and 8) 265,675 252,709
Deferred income taxes (Notes 1 and 3) 29,739 26,007
Other liabilities 44,244 24,033
___________ ___________
TOTAL LIABILITIES 1,841,371 1,451,645
___________ ___________
SHAREHOLDERS' EQUITY (Note 9)
Serial preferred stock, $.50 par value,
authorized 3,000,000 shares; none issued
Common stock, $.50 par value,
authorized 600,000,000 shares; issued
111,812,025 shares in 1998 and
111,809,085 shares in 1997 at par value 55,906 55,905
Additional capital 139,726 150,702
Retained earnings 1,631,316 1,378,297
Foreign currency translation adjustments (60,026) (27,345)
___________ ___________
1,766,922 1,557,559
Common stock in treasury at cost;
1,938,762 shares in 1998 and
282,915 shares in 1997 (83,472) (10,258)
___________ ___________
TOTAL SHAREHOLDERS' EQUITY 1,683,450 1,547,301
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,524,821 $ 2,998,946
=========== ===========
The accompanying notes are an integral part of the financial statements.
Page 13-14
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended June 30, 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 319,551 $ 274,039 $ 239,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 153,633 146,253 126,544
Amortization 29,046 23,580 14,819
Deferred income taxes 7,680 (1,269) (3,691)
Foreign currency transaction loss 3,697 1,947 1,733
Loss (gain) on sale of plant and equipment 291 (9,811) 3,506
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 (71,034) (76,081) 8,723
Inventories (185,569) (27,007) (15,046)
Prepaid expenses (3,473) (1,234) (157)
Other assets (31,620) (26,130) (20,444)
Accounts payable, trade 52,947 31,672 (15,503)
Accrued payrolls and other compensation 27,531 23,929 11,586
Accrued domestic and foreign taxes (15,282) 4,282 (3,589)
Other accrued liabilities (9,129) 16,026 (31,800)
Pensions and other postretirement benefits 14,276 6,823 19,404
Other liabilities 8,579 5,291 2,229
_________ _________ _________
Net cash provided by operating activities 320,599 392,310 337,981
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $4,260 in 1998,
$1,394 in 1997 and $20,479 in 1996) (232,953) (31,461) (359,447)
Capital expenditures (236,945) (189,201) (201,693)
Proceeds from sale of plant and equipment 7,151 11,307 9,387
Other 3,630 14,624 (2,812)
_________ _________ _________
Net cash (used in) investing activities (459,117) (194,731) (554,565)
Page 13-15
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments for) common share activity (96,887) (10,184) (1,209)
Proceeds from (payments of) notes payable, net 190,865 (100,655) 81,194
Proceeds from long-term borrowings 87,085 9,390 201,724
(Payments of) long-term borrowings (13,054) (30,059) (9,696)
Dividends paid, net of tax benefit of ESOP shares (66,501) (56,570) (53,325)
_________ _________ _________
Net cash provided by (used in)
financing activities 101,508 (188,078) 218,688
Effect of exchange rate changes on cash (1,499) (4,457) (1,981)
_________ _________ _________
Net (decrease) increase in cash and cash equivalents (38,509) 5,044 123
Cash and cash equivalents at beginning of year 68,997 63,953 63,830
_________ _________ _________
Cash and cash equivalents at end of year $ 30,488 $ 68,997 $ 63,953
========= ========= =========
Supplemental Data:
Cash paid during the year for:
Interest, net of capitalized interest $ 48,105 $ 46,812 $ 35,554
Income taxes 175,546 145,663 135,380
Non-cash investing activities:
Treasury stock issued for acquisitions 11,950 6,176
Non-cash financing activities:
Principal reduction of ESOP debt guarantee 13,468
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 13-16
<PAGE>
BUSINESS SEGMENT INFORMATION - BY INDUSTRY
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES, including intersegment sales:
Industrial:
North America $ 2,480,231 $ 2,156,043 $ 1,976,351
International 1,161,530 1,073,201 989,359
Aerospace 992,994 862,659 621,465
Intersegment sales (1,732) (822) (727)
___________ ___________ ___________
$ 4,633,023 $ 4,091,081 $ 3,586,448
=========== =========== ===========
INCOME FROM OPERATIONS before corporate
general and administrative expenses:
Industrial:
North America $ 368,314 $ 329,967 $ 296,081
International 83,534 74,058 72,093
Aerospace 159,067 109,470 85,329
___________ ___________ ___________
610,915 513,495 453,503
Corporate general and
administrative expenses 61,018 50,582 48,847
___________ ___________ ___________
Income from operations 549,897 462,913 404,656
Other deductions 45,909 38,046 30,177
___________ ___________ ___________
Income before income taxes $ 503,988 $ 424,867 $ 374,479
=========== =========== ===========
IDENTIFIABLE ASSETS:
Industrial $ 2,555,500 $ 2,167,820 $ 2,150,506
Aerospace 771,488 643,694 595,865
___________ ___________ ___________
3,326,988 2,811,514 2,746,371
Corporate assets (a) 197,833 187,432 140,753
___________ ___________ ___________
$ 3,524,821 $ 2,998,946 $ 2,887,124
=========== =========== ===========
PROPERTY ADDITIONS: (b)
Industrial $ 245,995 $ 173,635 $ 259,356
Aerospace 33,733 20,608 63,437
Corporate (c) 11,935 32,078 3,122
___________ ___________ ___________
$ 291,663 $ 226,321 $ 325,915
=========== =========== ===========
Page 13-17
<PAGE>
DEPRECIATION:
Industrial $ 129,183 $ 119,948 $ 106,553
Aerospace 17,191 19,517 17,267
Corporate 7,259 6,788 2,724
___________ ___________ ___________
$ 153,633 $ 146,253 $ 126,544
=========== =========== ===========
<FN>
(a) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, headquarters facilities, idle
facilities held for sale and the major portion of the Company's
domestic data processing equipment.
(b) Includes value of net plant and equipment at the date of acquisition of
acquired companies accounted for by the purchase method
(1998 - $54,718; 1997 - $15,283; 1996 - $124,222).
(c) Fiscal 1997 includes $21,837 for real estate acquired in a tax-free
exchange of property.
</FN>
</TABLE>
Page 13-18
<PAGE>
BUSINESS SEGMENT INFORMATION - BY GEOGRAPHIC AREA
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES, including interarea sales:
North America $ 3,549,425 $ 3,062,947 $ 2,669,201
Europe 1,071,554 1,055,401 918,493
All Other 199,796 190,584 155,963
Interarea (187,752) (217,851) (157,209)
___________ ___________ ___________
$ 4,633,023 $ 4,091,081 $ 3,586,448
=========== =========== ===========
INCOME FROM OPERATIONS before corporate
general and administrative expenses:
North America $ 515,073 $ 429,432 $ 381,154
Europe 84,944 70,926 63,083
All Other 10,898 13,137 9,266
___________ ___________ ___________
610,915 513,495 453,503
Corporate general and
administrative expenses 61,018 50,582 48,847
___________ ___________ ___________
Income from operations $ 549,897 $ 462,913 $ 404,656
=========== =========== ===========
IDENTIFIABLE ASSETS:
North America $ 2,199,948 $ 1,808,154 $ 1,678,680
Europe 947,880 859,774 933,201
All Other 179,160 143,586 134,490
___________ ___________ ___________
3,326,988 2,811,514 2,746,371
Corporate assets (a) 197,833 187,432 140,753
___________ ___________ ___________
$ 3,524,821 $ 2,998,946 $ 2,887,124
=========== =========== ===========
<FN>
(a) Corporate assets are principally cash and cash equivalents, domestic
deferred income taxes, investments, headquarters facilities, idle
facilities held for sale and the major portion of the Company's
domestic data processing equipment.
</FN>
</TABLE>
Page 13-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 operates in two principal
business segments: Industrial and Aerospace. The Industrial Segment
produces 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 more than 7,500 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 6 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 in any event 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.
CASH - Cash equivalents consist of short-term highly liquid investments,
Page 13-20
<PAGE>
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. 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 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, primarily over 15 years
and not exceeding 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.
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 a separate 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.
Page 13-21
<PAGE>
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) 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 dividends from
consolidated subsidiaries are accrued in Shareholders' equity. Gains or losses
on forward contracts which hedge specific transactions are recognized in Net
income, offsetting the underlying foreign currency gains or losses.
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 Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires an
additional disclosure for comprehensive income. It will not change Net income
or Shareholders' equity. The Company must adopt SFAS No. 130 in the first
quarter of 1999.
The FASB has also issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This standard requires segment
information to be disclosed based upon how management internally evaluates the
operating performance of its business units. Application of this standard,
required by year-end 1999, is not expected to result in materially different
disclosures for the Company.
The FASB has also 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 2000, is not expected to have
a material impact on results.
Page 13-22
<PAGE>
In March 1998 the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 requires expenses incurred
during the application development stage of a software implementation project
to be capitalized and amortized over the useful life of the project.
Application of this standard, required beginning with the first quarter of
2000, is not expected to have a material impact on the results of the Company.
2. ACQUISITIONS AND
WRITE-OFFS OF PURCHASED IN-PROCESS RESEARCH & DEVELOPMENT
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, 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 human-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 no 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.
On June 4, 1997 the Company acquired the remaining 50 percent of SAES-
Parker UHP Components Corp., a manufacturer of valves for ultra-pure gas used
in semiconductor manufacturing. On February 3, 1997 the Company purchased
Hydroflex S.A. de C.V., a leading Mexican manufacturer of hydraulic hose,
fittings and adapters located in Toluca, Mexico. On September 5, 1996 the
Company purchased the assets of the industrial hydraulic product line of
Hydraulik-Ring AG, of Nurtingen, Germany. Total purchase price for these
businesses was approximately $29.3 million cash. Combined annual sales for
these operations, for their most recent fiscal year prior to acquisition, were
approximately $52 million.
Effective April 15, 1996 the Company acquired the aerospace assets of the
Page 13-23
<PAGE>
Abex NWL Division of Pneumo Abex Corporation, a major international producer
of aerospace hydraulic and electromechanical actuation equipment, engine
thrust-reverser actuators, hydraulic pumps, and electrohydraulic servovalves
headquartered in Kalamazoo, Michigan, for approximately $201 million cash. On
February 29, 1996 the Company acquired VOAC Hydraulics AB, a worldwide leader
in manufacturing mobile hydraulic equipment located in Boras, Sweden for
approximately $163 million cash. Sales by these operations for their most
recent fiscal year prior to acquisition approximated $366 million.
In June 1996 the Company acquired the remaining 60 percent of Schrader
Bellows Parker, S.A. de C.V., a Mexico City-based manufacturer of pneumatic
and hydraulic products. On August 4, 1995 the Company purchased inventory and
machinery from Teledyne Fluid Systems consisting of the Republic Valve product
line, the Sprague double-diaphragm pump line and the Sprague airborne
accumulator product line. On July 31, 1995 the Company purchased the assets of
General Valve Corp. of Fairfield, New Jersey, a leading producer of miniature
solenoid valves for high-technology applications. Total purchase price for
these businesses was approximately $9.2 million cash and 228,000 shares of
common stock valued at $6.2 million. Sales by these operations for their most
recent fiscal year prior to acquisition approximated $24.8 million.
These acquisitions were accounted for by the purchase method, and results
are included as of the respective dates of acquisition.
3. INCOME TAXES
Income taxes include the following:
1998 1997 1996
__________________________________________________
Federal $ 129,462 $ 113,819 $ 95,127
Foreign 27,847 27,411 29,635
State and local 16,928 13,587 14,897
Deferred 6,525 (3,989) (4,847)
__________________________________________________
$ 180,762 $ 150,828 $ 134,812
==================================================
A reconciliation of the Company's effective income tax rate to the
statutory Federal rate follows:
1998 1997 1996
__________________________________________________________
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 2.1 2.0 2.3
FSC income not taxed (1.7) (1.8) (1.1)
Foreign tax rate difference .3 .3 .7
Recognized loss carryforwards (.1) (.6) (1.1)
Other .3 .6 .2
__________________________________________________________
Effective income tax rate 35.9% 35.5% 36.0%
==========================================================
Page 13-24
<PAGE>
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:
1998 1997
_____________________________________________________________________
Postretirement benefits $ 63,277 $ 48,320
Other liabilities and reserves 52,430 63,700
Long-term contracts 14,816 16,349
Operating loss carryforwards 9,440 23,286
Foreign tax credit carryforwards 3,773 1,405
Valuation allowance (1,591) (1,768)
Depreciation (80,508) (84,853)
Inventory 11,088 11,852
_____________________________________________________________________
Net deferred tax asset (liability) $ 72,725 $ 78,291
=====================================================================
Change in net deferred tax asset (liability):
Provision for deferred tax $ (6,525) $ 3,989
Translation adjustment 175 (2,932)
Acquisitions 784 (2,418)
_____________________________________________________________________
Total change in net deferred tax $ (5,566) $ (1,361)
=====================================================================
The classifications of deferred tax balances for 1997 have been revised to
be consistent with 1998.
At June 30, 1998, foreign subsidiaries had benefits for operating loss
carryforwards of $11,624 for tax and $13,215 for financial reporting, most of
which can be carried forward indefinitely. Use of operating loss carryforwards
and currency adjustments reduced the valuation allowance.
Non-current deferred income tax assets include a $7,529 tax benefit for the
net operating loss carryforwards of the Company's German operations. The
Company has not provided a valuation allowance that would be required under
SFAS No. 109 if it is more likely that these benefits would not be realized.
Although future events cannot be predicted with certainty, management
continues to believe these benefits will be realized because the tax loss
carryforward period is unlimited and the Company's German operations are
currently profitable.
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.
4. 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
Page 13-25
<PAGE>
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:
1998 1997 1996
_______________________________________________________________________
Numerator:
Net income applicable
to common shares $ 319,551 $ 274,039 $ 239,667
=======================================================================
Denominator:
Basic - weighted average
common shares 110,868,834 111,601,484 111,260,717
Increase in weighted average
from dilutive effect of
exercise of stock options 1,090,437 916,569 928,000
_______________________________________________________________________
Diluted - weighted average
common shares, assuming
exercise of stock options 111,959,271 112,518,053 112,188,717
=======================================================================
Basic earnings per share $ 2.88 $ 2.46 $ 2.15
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14
=======================================================================
5. INVENTORIES
Inventories valued on the last-in, first-out cost method are approximately 36%
of total inventories in 1998 and 1997. The current cost of these inventories
exceeds their valuation determined on the LIFO basis by $139,011 in 1998 and
$140,364 in 1997. Progress payments of $23,454 in 1998 and $20,728 in 1997 are
netted against inventories.
6. FINANCING ARRANGEMENTS
The Company has committed lines of credit totaling $450,000 through several
multi-currency unsecured revolving credit agreements with a group of banks, of
which $226,525 was available at June 30, 1998. The majority of these
agreements expire October 2002. 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 secured debt to net tangible assets.
The Company has other lines of credit, primarily short-term, aggregating
$108,584, from various foreign banks, of which $72,013 was available at June
30, 1998. Most of these agreements are renewed annually.
During March 1998 the Company registered additional medium-term notes
bringing the total available for issuance to $755,000 at June 30, 1998.
Page 13-26
<PAGE>
Subsequently, in July 1998, the Company issued $100,000 of these medium-term
notes.
The Company is authorized to sell up to $400,000 of short-term commercial
paper notes, rated A-1 by Standard & Poor's, P-1 by Moody's and D-1 by Duff &
Phelps. At June 30, 1998 there were $191,250 of commercial paper notes
outstanding which were supported by the available domestic lines of credit. Of
the total commercial paper, $100,000 has been classified in the Balance Sheet
as Long-term debt, as further discussed in Note 7. There were no commercial
paper notes outstanding at June 30, 1997.
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, 1998 and 1997 were
$155,259 and 6.1%, and $58,945 and 5.7%, respectively.
7. DEBT
June 30, 1998 1997
________________________________________________________________________
Domestic:
Debentures and notes
9.75%, due 2002-2021 $ 100,000 $ 100,000
7.3%, due 2011 100,000 100,000
10.375%, due 1999-2018 100,000 100,000
9.6%, due 1998 1,714
Medium-term notes
6.35% to 7.39%, due 2004-2010 145,000 95,000
Commercial paper 100,000
Variable rate demand bonds
3.85% to 3.95%, due 2010-2025 20,035 20,035
Foreign:
Bank loans, including revolving credit
1.0% to 17.25%, due 1999-2018 54,653 25,704
Other long-term debt, including capitalized leases 3,481 1,225
________________________________________________________________________
Total long-term debt 623,169 443,678
Less long-term debt payable within one year 110,226 10,793
________________________________________________________________________
Long-term debt, net $ 512,943 $ 432,885
========================================================================
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. As a
result of the call, these debentures have been reclassified to long-term debt
payable within one year. The retirement of the debt was financed on July 15,
1998, through the issuance of $100,000 of medium term notes, due 2018, at an
annual interest rate of 6.55 percent. As of June 30, 1998, $100,000 of
commercial paper was classified as long-term debt, recognizing management's
intentions.
Principal amounts of long-term debt payable in the five years ending June
Page 13-27
<PAGE>
30, 1999 through 2003 are $10,226, $20,217, $16,598, $19,917, and $19,825,
respectively. The carrying value of the Company's long-term debt (excluding
leases and cross-currency swaps) was $519,688 and $443,673 at June 30, 1998
and 1997, respectively, and was estimated to have a fair value of $545,140 and
$454,689, at June 30, 1998 and 1997, 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.
LEASE COMMITMENTS -- Future minimum rental commitments as of June 30, 1998,
under noncancelable operating leases, which expire at various dates, are as
follows: 1999-$46,175; 2000-$25,390; 2001-$14,531; 2002-$7,066; 2003-
$5,414 and after 2003-$24,278.
Rental expense in 1998, 1997 and 1996 was $37,065, $33,305, and $29,899,
respectively.
8. 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 $19,989, $22,773 and $22,514 for 1998,
1997 and 1996, respectively. Pension costs for all defined benefit plans
accounted for using SFAS No. 87, Employers' Accounting for Pensions, are as
follows:
1998 1997 1996
______________________________________________________________________
Service cost-benefits earned
during the period $ 28,190 $ 23,715 $ 20,731
Interest cost on projected benefit
obligation 57,892 52,726 44,384
Actual return on assets (161,737) (89,614) (74,926)
Net amortization and deferral 93,719 33,703 30,111
______________________________________________________________________
Net periodic pension costs $ 18,064 $ 20,530 $ 20,300
======================================================================
The following tables set forth the funded status of all the plans accounted
for under SFAS No. 87 and the amounts recognized in the Company's consolidated
balance sheet:
Page 13-28
<PAGE>
Assets Exceed Accumulated Benefits
1998 1997
____________________________________________________________________________
Actuarial present value of benefit obligations:
Vested benefit obligation $ (608,260) $ (493,681)
============================================================================
Accumulated benefit obligation $ (634,207) $ (510,385)
============================================================================
Projected benefit obligation $ (745,036) $ (593,241)
Plan assets at fair value 974,131 749,386
____________________________________________________________________________
Projected benefit obligation less than plan assets 229,095 156,145
Unrecognized net (gain) or loss (135,827) (61,122)
Unrecognized prior service cost 18,160 15,198
Unrecognized net (asset) obligation (13,310) (16,848)
____________________________________________________________________________
Prepaid pension cost (pension liability)
recognized $ 98,118 $ 93,373
============================================================================
Accumulated Benefits Exceed Assets
1998 1997
____________________________________________________________________________
Actuarial present value of benefit obligations:
Vested benefit obligation $ (101,464) $ (79,521)
============================================================================
Accumulated benefit obligation $ (112,916) $ (95,707)
============================================================================
Projected benefit obligation $ (132,716) $ (121,458)
Plan assets at fair value 23,782 18,301
____________________________________________________________________________
Projected benefit obligation in excess of
plan assets (108,934) (103,157)
Unrecognized net (gain) or loss 10,218 6,000
Unrecognized prior service cost 4,466 4,714
Unrecognized net (asset) obligation 579 1,794
____________________________________________________________________________
Prepaid pension cost (pension liability)
recognized $ (93,671) $ (90,649)
============================================================================
The majority of the underfunded plans relate to foreign and supplemental
executive plans.
The plans' assets consist primarily of listed common stocks, corporate and
government bonds, and real estate investments. At June 30, 1998 and 1997, the
plans' assets included Company stock with market values of $20,262 and
$21,502, respectively.
Page 13-29
<PAGE>
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:
1998 1997 1996
_________________________________________________________________________
U.S. defined benefit plans
Discount rate 7.5% 8% 8%
Average increase in compensation 4.9% 5% 5%
Expected long-term return on assets 9.5% 9% 9%
_________________________________________________________________________
Non-U.S. defined benefit plans
Discount rate 4.5 to 7% 7 to 8% 7 to 8%
Average increase in compensation 3 to 4.5% 3.5 to 6% 4.5 to 6%
Expected long-term return on assets 5.5 to 9% 7 to 9% 7 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, which
is available to eligible domestic employees. Parker-Hannifin Common Stock is
used to match contributions made by employees to the savings plan up to a
maximum of 5 percent of an employee's annual compensation. A breakdown of
shares held by the ESOP is as follows:
1998 1997 1996
________________________________________________________________________
Allocated shares 7,631,677 7,460,378 6,934,194
Committed to be released 60,231
________________________________________________________________________
Total shares held by the ESOP 7,631,677 7,460,378 6,994,425
========================================================================
Through June 30, 1996 the ESOP was leveraged and the loan was
unconditionally guaranteed by the Company. Company contributions to the ESOP,
recorded as compensation and interest expense, were $23,093 in 1998, $21,235
in 1997 and $18,626 in 1996. The interest expense portion (interest on ESOP
debt) was $856 in 1996. Dividends earned by the unallocated shares and
interest income within the ESOP, totalling $218 in 1996, were used to service
the ESOP debt. ESOP shares are considered outstanding for purposes of earnings
per share computations.
In addition to shares within the ESOP, as of June 30, 1998 employees have
elected to invest in 3,011,654 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
Page 13-30
<PAGE>
benefit plans. Postretirement benefit costs included the following components:
1998 1997 1996
___________________________________________________________________________
Service cost-benefits attributed to
service during the period $ 4,021 $ 3,296 $ 3,515
Interest cost on accumulated
postretirement benefit obligations 11,077 11,316 11,126
Net amortization and deferral (1,815) (830) (708)
___________________________________________________________________________
Net periodic postretirement benefit costs $ 13,283 $ 13,782 $ 13,933
===========================================================================
The following table reconciles the plans' combined funded status to amounts
recognized in the Company's consolidated balance sheet:
1998 1997
_______________________________________________________________________________
Accumulated postretirement benefit obligation:
Retirees $ (62,204) $ (78,114)
Fully eligible active plan participants (38,798) (31,019)
Other active plan participants (54,931) (40,741)
Unrecognized (gain) loss (2,251) (15,918)
Unrecognized prior service cost (15,046) 131
_______________________________________________________________________________
Accrued postretirement benefit costs $ (173,230) $ (165,661)
===============================================================================
The assumptions used to measure the post-retirement benefit obligations are:
1998 1997 1996
________________________________________________________________________
Discount rate 7.5% 8% 8%
Current medical cost trend rate 10.25% 10.5% 10.75%
Ultimate medical cost trend rate 6% 6% 6%
Medical cost trend rate decreases to
ultimate in year 2007 2007 2007
Effect of a 1% increase in the medical
cost trend rate:
Increase in benefit obligation $ 8,194 $ 8,161 $ 9,382
Increase in annual retiree medical cost $ 658 $ 772 $ 568
__________________________________________________________________
OTHER -- The Company has established nonqualified deferred compensation
programs which permit officers, directors and certain management employees to
annually elect to defer a portion of their compensation, on a pre-tax basis,
until their retirement. The retirement benefit to be provided is based on the
amount of compensation deferred, Company match, and earnings on the deferrals.
Deferred compensation expense was $20,426, $4,862 and $4,129 in 1998, 1997 and
1996, respectively.
The Company has invested in corporate-owned life insurance policies to
Page 13-31
<PAGE>
assist in funding these programs. The cash surrender values of these policies
are maintained in an irrevocable rabbi trust and are recorded as assets of the
Company.
9. SHAREHOLDERS' EQUITY
COMMON SHARES 1998 1997 1996
______________________________________________________________________________
Balance July 1 $ 55,905 $ 55,719 $ 55,502
Shares issued under stock option
plans (1998 - 3,650; 1997 -
432,096; 1996 - 513,836) 1 139 189
Shares issued as restricted stock 47 28
______________________________________________________________________________
Balance June 30 $ 55,906 $ 55,905 $ 55,719
==============================================================================
ADDITIONAL CAPITAL
______________________________________________________________________________
Balance July 1 $ 150,702 $ 146,686 $ 139,953
Net (decrease) increase for treasury
or common shares issued
under stock option plans (11,481) 1,684 5,481
Shares issued for purchase acquisition 478 (176)
Shares issued as restricted stock 27 2,332 1,428
______________________________________________________________________________
Balance June 30 $ 139,726 $ 150,702 $ 146,686
==============================================================================
RETAINED EARNINGS
______________________________________________________________________________
Balance July 1 $ 1,378,297 $ 1,160,828 $ 974,486
Net income 319,551 274,039 239,667
Cash dividends paid on common shares,
net of tax benefit of ESOP shares (66,501) (56,570) (53,325)
Cash payments for stock split
fractional shares (31)
______________________________________________________________________________
Balance June 30 $ 1,631,316 $ 1,378,297 $ 1,160,828
==============================================================================
TRANSLATION ADJUSTMENTS
______________________________________________________________________________
Balance July 1 $ (27,345) $ 20,725 $ 35,041
Translation adjustments (Note 12) (32,681) (48,070) (14,316)
______________________________________________________________________________
Balance June 30 $ (60,026) $ (27,345) $ 20,725
==============================================================================
Page 13-32
<PAGE>
COMMON STOCK IN TREASURY
______________________________________________________________________________
Balance July 1 $ (10,258) $ -- $ --
Shares purchased at cost
(1998 - 2,522,971; 1997 - 576,021;
1996 - 247,500) (109,645) (18,690) (6,703)
Shares issued under stock option plans
(1998 - 559,668; 1997 - 223,184) 23,187 6,676
Shares issued for purchase acquisition 11,471 6,176
Shares issued as restricted stock 1,773 1,756 527
______________________________________________________________________________
Balance June 30 $ (83,472) $ (10,258) $ --
==============================================================================
Shares surrendered upon exercise of stock options; 1998 - 159,869; 1997 -
153,770; 1996 - 136,686.
SHARE REPURCHASES - In July 1998 the Board of Directors authorized the
repurchase of an additional 4.0 million shares of its common stock, extending
the initial repurchase plan started in August 1990. This increased the total
number of shares authorized for repurchase to 5.05 million. Repurchases are
made on the open market, at prevailing prices, and are funded from operating
cash flows. The shares are initially held as treasury stock.
10. STOCK INCENTIVE PLANS
EMPLOYEES' STOCK OPTIONS -- The Company's stock option and stock incentive
plans provide for the granting of nonqualified options to officers and key
employees to purchase shares of common stock at a price not less than 100
percent of the fair market value of the stock on the dates options are
granted. Outstanding options generally are exercisable one year after the date
of grant and expire no more than ten years after grant.
The Company derives a tax deduction measured by the excess of the market
value over the option price at the date nonqualified options are exercised.
The related tax benefit is credited to additional capital.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and makes no charges against capital with respect
to options granted. SFAS No. 123 does, however, require the disclosure of pro
forma information regarding Net Income and Earnings per share determined as if
the Company had accounted for its stock options under the fair value method.
For purposes of this pro forma disclosure the estimated fair value of the
options is amortized to expense over the options' vesting period.
Page 13-33
<PAGE>
1998 1997 1996
_____________________________________________________________
Net income: As reported $ 319,551 $ 274,039 $ 239,667
Pro forma $ 315,567 $ 270,758 $ 238,330
Earnings per share:
Basic As reported $ 2.88 $ 2.46 $ 2.15
Pro forma $ 2.85 $ 2.43 $ 2.14
Diluted As reported $ 2.85 $ 2.44 $ 2.14
Pro forma $ 2.82 $ 2.41 $ 2.12
=============================================================
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to 1996, the above pro forma effect may not be
representative of that to be expected in future years.
The fair value for all options granted in 1998, 1997 and 1996 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Aug/97 Jan/97 Aug/96 Aug/95
______________________________________________________________________
Risk-free interest rate 5.6% 6.3% 6.4% 6.4%
Expected life of option 5 yrs 5 yrs 5 yrs 5 yrs
Expected dividend yield of stock 2.3% 2.6% 2.6% 3.0%
Expected volatility of stock 26.9% 26.5% 26.2% 25.2%
======================================================================
Options exercisable and shares available for future grant on June 30:
1998 1997 1996
_______________________________________________________________________
Options exercisable 3,476,016 2,905,887 3,195,767
Weighted-average option price
per share of options exercisable $ 20.57 $ 16.41 $ 14.90
Weighted-average fair value of
options granted during the year $ 11.43 $ 7.30 $ 6.44
Shares available for grant 3,256,232 3,304,627 3,295,347
=======================================================================
Page 13-34
<PAGE>
A summary of the status and changes of shares subject to options and the
related average price per share follows:
Shares Subject Average Option
To Options Price Per Share
______________________________________________________________
Outstanding June 30, 1996 3,578,492 $ 16.09
______________________________________________________________
Granted 1,351,500 27.37
Exercised (655,280) 14.48
Canceled (50,625)
______________________________________________________________
Outstanding June 30, 1997 4,224,087 $ 19.82
______________________________________________________________
Granted 190,815 43.04
Exercised (721,687) 19.83
Canceled (31,409)
______________________________________________________________
Outstanding June 30, 1998 3,661,806 $ 21.71
==============================================================
The range of exercise prices and the remaining contractual life of options
as of June 30, 1998 were:
_____________________________________________________________________
Range of exercise prices $12-$19 $20-$29 $43-$44
_____________________________________________________________________
Options outstanding:
Outstanding as of June 30, 1998 1,390,268 2,085,748 185,790
Weighted-average remaining
contractual life 3.8 yrs 7.8 yrs 9.1 yrs
Weighted-average exercise price $ 13.54 $ 25.26 $ 43.05
Options exercisable:
Outstanding as of June 30, 1998 1,390,268 2,085,748
Weighted-average remaining
contractual life 3.8 yrs 7.8 yrs
Weighted-average exercise price $ 13.54 $ 25.26
======================================================================
RESTRICTED STOCK -- Restricted stock was issued, under the Company's 1993
Stock Incentive Program, to certain key employees under the Company's 1995-96-
97, 1994-95-96 and 1993-94-95 Long Term Incentive Plans (LTIP). Value of the
payments was set at the market value of the Company's common stock on the date
of issuance. Shares were earned and awarded, and an estimated value was
accrued, based upon attainment of criteria specified in the LTIP over the
cumulative years of the 3-year Plans. Plan participants are entitled to cash
dividends and to vote their respective shares, but the shares are restricted
as to transferability for three years following issuance.
Page 13-35
<PAGE>
Restricted Shares for LTIP Plan 1998 1997 1996
__________________________________________________________________
Number of shares issued 39,619 152,916 73,361
Per share value on date of issuance $ 40.00 $ 25.36 $ 26.05
Total value $ 1,585 $ 3,878 $ 1,911
==================================================================
Under the Company's 1996-97-98 LTIP, a payout of 15,774 shares of
restricted stock, from the Company's 1993 Stock Incentive Program, will be
issued to certain key employees in 1999. The balance of the 1996-97-98 LTIP
payout will be made as deferred cash compensation, as individually elected by
the participants. The total payout, valued at $6,359, has been accrued over
the three years of the plan.
In addition, non-employee members of the Board of Directors have been given
the opportunity to receive all or a portion of their fees in the form of
restricted stock. These shares vest ratably, on an annual basis, over the
term of office of the director. In 1998, 1997 and 1996, 4,558, 9,923 and 3,243
shares were issued, respectively, in lieu of directors' fees.
NON-EMPLOYEE DIRECTORS' STOCK OPTIONS -- In August 1996, the Company
adopted a stock option plan for non-employee directors to purchase shares of
common stock at a price not less than 100 percent of the fair market value of
the stock on the dates options are granted. All outstanding options are
exercisable one year after the date of grant and expire no more than ten years
after grant.
A summary of the status and changes of shares subject to options and the
related average price per share follows:
Shares Subject Average Option
To Options Price Per Share
______________________________________________________________
Outstanding June 30, 1997 14,250 $ 24.85
______________________________________________________________
Granted 8,250 42.96
Exercised (1,500) 24.67
______________________________________________________________
Outstanding June 30, 1998 21,000 $ 31.97
==============================================================
As of June 30, 1998, 12,750 options were exercisable and 352,500 shares
were available for grant.
At June 30, 1998, the Company had 7,344,328 common shares reserved for
issuance in connection with its stock incentive plans.
11. SHAREHOLDERS' PROTECTION RIGHTS AGREEMENT
The Board of Directors of the Company declared a dividend of one Right for
each share of Common Stock outstanding on February 17, 1997 in relation to the
Company's Shareholder Protection Rights Agreement. As of June 30, 1998,
109,873,263 shares of Common Stock were reserved for issuance under this
Agreement. Under certain conditions involving acquisition of or an offer for
15 percent or more of the Company's Common Stock, all holders of Rights,
Page 13-36
<PAGE>
except an acquiring entity, would be entitled to purchase, at an exercise
price of $100, a value of $200 of Common Stock of the Company or an acquiring
entity, or at the option of the Board, to exchange each Right for one share of
Common Stock. The Rights remain in existence until February 17, 2007, unless
earlier redeemed (at one cent per Right), exercised or exchanged under the
terms of the agreement. In the event of an unfriendly business combination
attempt, the Rights will cause substantial dilution to the person attempting
the merger. The Rights should not interfere with any business combination
that is in the best interest of the Company and its shareholders since the
Rights may be redeemed.
12. FOREIGN OPERATIONS
The Company's major foreign operations are located in Germany, the United
Kingdom, France, Sweden, and Italy. Their business activities are conducted
principally in their local currency. Net transaction and translation
adjustments reduced Net income in 1998 and 1997 by $2,284 and $1,267,
respectively, and increased Net income in 1996 by $873.
Net sales, Income before income taxes and Net income include the following
amounts from foreign operations:
1998 1997 1996
_____________________________________________________________________
Net sales $ 1,340,080 $ 1,234,669 $ 1,085,676
_____________________________________________________________________
Income before income taxes 101,307 85,234 70,118
_____________________________________________________________________
Net income 57,651 50,067 42,563
=====================================================================
Net assets of foreign operations at June 30, 1998 and 1997 amounted to
$806,596 and $734,820, respectively.
Accumulated undistributed earnings of foreign operations reinvested in
their operations amounted to $153,831, $121,871 and $103,059, at June 30,
1998, 1997 and 1996, respectively.
13. RESEARCH AND DEVELOPMENT
Research and development costs amounted to $83,117 in 1998, $103,155 in 1997,
and $91,706 in 1996. Customer reimbursements included in the total cost for
each of the respective years were $15,753, $35,986 and $33,018. Costs include
those costs related to independent research and development as well as
customer reimbursed and unreimbursed development programs.
14. CONTINGENCIES
The Company is involved in various litigation arising in the normal course of
business, including proceedings based on product liability claims, workers'
compensation claims and alleged violations of various environmental laws. The
Company is self-insured in the U.S. for health care, workers' compensation,
Page 13-37
<PAGE>
general liability and product liability up to predetermined amounts, above
which third party insurance applies. The Company purchases third party product
liability insurance for products manufactured by its international operations
and for products that are used in aerospace applications. Management regularly
reviews the probable outcome of these proceedings, the expenses expected to be
incurred, the availability and limits of the insurance coverage, and the
established accruals for uninsured liabilities. While the outcome of pending
proceedings cannot be predicted with certainty, management believes that any
liabilities that may result from these proceedings are not reasonably likely
to have a material effect on the Company's liquidity, financial condition or
results of operations.
ENVIRONMENTAL - The Company is currently involved in environmental
remediation at 19 manufacturing facilities presently or formerly operated by
the Company and has been named as a "potentially responsible party", along
with other companies, at 11 off-site waste disposal facilities.
As of June 30, 1998, the Company has a reserve of $8,640 for environmental
matters which are probable and reasonably estimable. This reserve is recorded
based upon the best estimate of net costs to be incurred in light of the
progress made in determining the magnitude of remediation costs, the timing
and extent of remedial actions required by governmental authorities, the
amount of the Company's liability in proportion to other responsible parties
and any recoveries receivable. This reserve is net of $555 for discounting, at
a 7.5% annual rate, a portion of the costs at 7 locations for established
treatment procedures required over periods ranging from 3 to 16 years. The
Company also has an account receivable of $490 for anticipated insurance
recoveries.
The Company's estimated total liability for the above mentioned sites
ranges from a minimum of $8,226 to a maximum of $20,610. The actual costs to
be incurred by the Company will be dependent on final delineation of
contamination, final determination of remedial action required, negotiations
with federal and state agencies with respect to cleanup levels, changes in
regulatory requirements, innovations in investigatory and remedial technology,
effectiveness of remedial technologies employed, the ultimate ability to pay
of the other responsible parties, and any insurance recoveries.
Page 13-38
<PAGE>
Report of Management
The Company's management is responsible for the integrity and accuracy of
the financial information contained in this annual report. Management
believes that the financial statements have been prepared in conformity with
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 generally accepted accounting principles. 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, are retained to
conduct an audit of Parker Hannifin's consolidated financial statements in
accordance with generally accepted auditing standards 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
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
Duane E. Collins Michael J. Hiemstra
President and Vice President -
Chief Executive Officer Finance and Administration
and Chief Financial Officer
Page 13-39
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
Parker Hannifin Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows present fairly, in all
material respects, the financial position of Parker Hannifin Corporation
and its subsidiaries at June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio
July 30, 1998
Page 13-40
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(Amounts in thousands,
except per share information)
1998 (a) 1997 1996 1995 1994 (a)
___________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net sales $ 4,633,023 $ 4,091,081 $ 3,586,448 $ 3,214,370 $ 2,576,337
Cost of sales 3,550,992 3,152,988 2,756,343 2,448,264 2,053,376
Selling, general and administrative expenses 532,134 475,180 425,449 384,581 302,668
Non-recurring charges - Restructuring &
Asset impairment 54,256
Interest expense 52,787 46,659 36,667 30,922 37,832
Income taxes 180,762 150,828 134,812 130,169 60,274
Income - continuing operations 323,226 274,039 239,667 218,238 52,175
Net income 319,551 274,039 239,667 218,238 47,652
Basic earnings per share -
continuing operations 2.91 2.46 2.15 1.97 .48
Diluted earnings per share -
continuing operations 2.88 2.44 2.14 1.96 .48
Basic earnings per share 2.88 2.46 2.15 1.97 .43
Diluted earnings per share $ 2.85 $ 2.44 $ 2.14 $ 1.96 $ .43
Average number of shares outstanding - Basic 110,869 111,602 111,261 110,576 109,661
Average number of shares outstanding - Diluted 111,959 112,518 112,189 111,149 110,270
Cash dividends per share $ .600 $ .506 $ .480 $ .453 $ .436
Net income as a percent of net sales 6.9% 6.7% 6.7% 6.8% 1.8%
Return on average assets 9.8% 9.3% 9.2% 10.3% 2.5%
Return on average equity 19.8% 18.7% 18.6% 20.2% 5.0%
___________________________________________________________________________________________________________________
Book value per share $ 15.32 $ 13.87 $ 12.42 $ 10.73 $ 8.78
Working capital $ 791,305 $ 783,550 $ 635,242 $ 593,761 $ 526,864
Ratio of current assets to current liabilities 1.8 2.1 1.8 1.9 2.0
Plant and equipment, net $ 1,135,225 $ 1,020,743 $ 991,777 $ 815,771 $ 717,300
Total assets 3,524,821 2,998,946 2,887,124 2,302,209 1,925,744
Long-term debt 512,943 432,885 439,797 237,157 257,259
Shareholders' equity $ 1,683,450 $ 1,547,301 $ 1,383,958 $ 1,191,514 $ 966,351
Debt to debt-equity percent 31.6% 24.5% 30.7% 21.9% 22.7%
___________________________________________________________________________________________________________________
Depreciation $ 153,633 $ 146,253 $ 126,544 $ 110,527 $ 106,546
Capital expenditures $ 236,945 $ 189,201 $ 201,693 $ 151,963 $ 99,914
Number of employees 39,873 34,927 33,289 30,590 26,730
Number of shareholders 44,250 43,014 35,403 35,629 29,625
Number of shares outstanding at year-end 109,873 111,527 111,438 111,003 110,115
___________________________________________________________________________________________________________________
<FN>
(a) Includes an extraordinary item for the early retirement of debt.
</FN>
</TABLE>
Page 13-41
<PAGE>
Exhibit (21)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
The Company has the following subsidiaries:
Domestic Subsidiaries
Percentage
Name Incorporated Owned(1)
B.A.G. Acquisition Limited California 100
iPower Distribution Group Inc. Ohio 100
Fluid Power Industries, Inc. Delaware 100
Parker AIP Corp. Delaware 100
Parker de Puerto Rico, Inc. Delaware 100
Parker Finance Corp. Delaware 100(2)
Parker-Hannifin Asia Pacific Co., Ltd. Delaware 100(3)
Parker-Hannifin International Corp. Delaware 100
Parker Intangibles Inc. Delaware 100
Parker Properties Inc. Delaware 100
Parker Services Inc. Delaware 100
Sierra Manufacturing Company Nevada 100(4)
Travel 17325 Inc. Delaware 100
UCC, Inc. Michigan 100(5)
Veriflo Corporation California 100(6)
Foreign Subsidiaries
Acadia International Insurance Limited Ireland 100
Alenco (Holdings) Ltd. United Kingdom 100(3)
Beheermaatschappij Sempress B.V. Netherlands 100(7)
Brownsville Rubber Co., S.A. de C.V. Mexico 100
Extrudit Limited United Kingdom 100(8)
Fluid Power Industries Ltd. United Kingdom 100(9)
Parker Automotive de Mexico S.A. de C.V. Mexico 100
Parker Enzed (Australia) Pty. Ltd. Australia 100(10)
Parker Enzed (N.Z.) Limited New Zealand 100(3)
Parker Enzed Equipment (Australia) Pty. Ltd. Australia 100(10)
Parker Enzed Technologies Pty. Ltd. Australia 100(10)
Parker Ermeto GesmbH Austria 100(11)
Parker Fluid Connectors S.A. de C.V. Mexico 100(12)
Parker Hannifin (1997) Co., Ltd. Thailand 100(13)
Parker Hannifin (Australia) Pty. Ltd. Australia 100(3)
Parker Hannifin (Canada) Inc. Canada 100(3)
Parker Hannifin (Espana) SA Spain 100(3)
Parker Hannifin (N.Z.) Limited New Zealand 100
Parker Hannifin (Thailand) Co., Ltd. Thailand 100
Parker Hannifin (UK) Ltd. United Kingdom 100(3)
Parker Hannifin A/S Norway 100(14)
Parker Hannifin AB Sweden 100
Parker Hannifin AG Switzerland 100(11)
Parker Hannifin Argentina SAIC Argentina 100
<PAGE>
Parker Hannifin B.V. Netherlands 100(15)
Parker Hannifin Climate & Industrial
Controls, Ltd. Korea 100
Parker Hannifin Connectors Ltd. Korea 100
Parker Hannifin de Venezuela, S.A. Venezuela 100(3)
Parker Hannifin Denmark A/S Denmark 100
Parker Hannifin Finance B.V. Netherlands 100(7)
Parker Hannifin Foreign Sales Corp. Guam 100(3)
Parker Hannifin GmbH Germany 100(3)
Parker Hannifin Hong Kong Limited Hong Kong 100(16)
Parker Hannifin Industria e Comercio Ltda. Brazil 100(17)
Parker Hannifin Japan Ltd. Japan 100
Parker Hannifin Korea Ltd. Korea 100(3)
Parker Hannifin Motion & Control
(Shanghai) Co. Ltd. China 100
Parker Hannifin Oy Finland 100
Parker Hannifin Pension Trustees Ltd. United Kingdom 100(18)
Parker Hannifin plc United Kingdom 100(14)
Parker Hannifin S.A. France 100
Parker Hannifin S.p.A. Italy 100
Parker Hannifin Sp. z.o.o. Poland 100
Parker Hannifin Taiwan Ltd. Taiwan 100
Parker Hannifin Verwaltungs GmbH Germany 100(11)
Parker Jinyoung Ltd. Korea 100(3)
Parker Lucifer S.A. Switzerland 100
Parker Seal de Baja S.A. de C.V. Mexico 100
Parker Seals S.p.A. Italy 100(19)
Parker Sempress B.V. Netherlands 100(20)
Parker Sistemas de Automatizacion S.A. de C.V. Mexico 100
Parker Zenith S.A. de C.V. Mexico 100(12)
Parker-Hannifin (Africa) Proprietary Limited South Africa 100
Parker-Hannifin India Private Ltd. India 100
Parker-Hannifin N.V. S.A. Belgium 100(7)
Parker-Hannifin s.r.o. Czech Republic 100
Parker-Hannifin Singapore Pte. Ltd. Singapore 100
P-H do Brasil Comercial Ltda. Brazil 100(3)
PH Finance Ltd. United Kingdom 100
Schrader Bellows Parker,S.A. de C.V. Mexico 100(12)
Sempress Pneumatic S.L. Spain 100(21)
Sempress Pneumatiek N.V. Belgium 100(22)
Sempress Pneumatik GmbH Germany 100(11)
Sempress S.A.R.L. France 100(23)
UCC Australia Pty. Ltd. Australia 100(10)
UCC Corporation Switzerland 100(24)
UCC Corporation & Co. GmbH Germany 100(11)
UCC France S.A.R.L. France 100(25)
UCC International Group Ltd. United Kingdom 100(26)
UCC International Ltd. United Kingdom 100(24)
UCC Properties Ltd. United Kingdom 100(26)
UCC Securities Ltd. United Kingdom 100(8)
VOAC Hydraulics S.A. Spain 100(21)
<PAGE>
______________
(1) Excludes directors' qualifying shares
(2) Owned 100% by Parker de Puerto Rico, Inc.
(3) Owned 100% by Parker-Hannifin International Corp.
(4) Owned 100% by Veriflo Corporation
(5) Owned 100% by UCC Corporation
(6) Owned 100% by B.A.G. Acquisition Limited
(7) Owned 100% by Parker Hannifin B.V.
(8) Owned 100% by Parker Hannifin (UK) Limited
(9) Owned 100% by Fluid Power Industries, Inc.
(10) Owned 100% by Parker-Hannifin (Australia) Pty. Ltd.
(11) Owned 100% by Parker Hannifin GmbH
(12) Owned 100% by Parker Sistemas de Automatizacion S.A. de C.V.
(13) Owned 51% by Parker Hannifin (Thailand) Co., Ltd. and 49% by Parker-
Hannifin Corporation
(14) Owned 100% by Alenco (Holdings) Ltd.
(15) Owned 77.5% by Parker Hannifin International Corp. and 22.5% by
Parker AIP Corp.
(16) Owned 99.99% by Parker-Hannifin Corporation and .01% by Parker-
Hannifin International Corp.
(17) Owned 37.5% by P-H do Brasil Comercial Ltda. and 62.5% by Parker-
Hannifin International Corp.
(18) Owned 100% by Parker Hannifin plc
(19) Owned 100% by Parker-Hannifin S.p.A.
(20) Owned 100% by Beheermaatschappij Sempress B.V.
(21) Owned 100% by Parker Hannifin (Espana) S.A.
(22) Owned 100% by Parker Hannifin N.V. S.A.
(23) Owned 100% by Parker Hannifin S.A.
(24) Owned 100% by UCC International Group Ltd.
(25) Owned 75% by UCC Corporation and 25% by Parker Hannifin S.A.
(26) Owned 100% by UCC Securities Ltd.
All of the foregoing subsidiaries are included in the Company's
consolidated financial statements. In addition to the foregoing, the Company
owns three inactive or name holding companies.
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
Exhibit (23)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Consent of Independent Accountants
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Parker-Hannifin Corporation on Forms S-3 (File Nos. 333-47955 and 333-02761)
and Forms S-8 (File Nos. 33-53193, 33-43938 and 2-66732) of our reports dated
July 30, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Parker-Hannifin Corporation as of June 30,
1998 and 1997, and for the years ended June 30, 1998, 1997, and 1996, which
reports are incorporated by reference or, in the case of the supplemental
schedule report, included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Cleveland, Ohio
September 15, 1998
Exhibit (24)* to Report
on Form 10-K for Fiscal
Year Ended June 30, 1998
by Parker-Hannifin Corporation
Power of Attorney
*Numbered in accordance with Item 601 of Regulation S-K.
<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Re: Parker-Hannifin Corporation
Commission File No. 1-4982
Annual Report on Form 10-K
Authorized Representatives
Gentlemen:
Parker-Hannifin Corporation (the "Company") is the issuer of Securities
registered under Section 12(b) of the Securities Exchange Act of 1934 (the
"Act"). Each of the persons signing his name below confirms, as of the date
appearing opposite his signature, that each of the following "Authorized
Representatives" is authorized on his behalf to sign and to submit to the
Securities and Exchange Commission Annual Reports on Form 10-K and amendments
thereto as required by the Act:
Authorized Representatives
Duane E. Collins
Michael J. Hiemstra
Dennis W. Sullivan
Thomas A. Piraino, Jr.
Each person so signing also confirms the authority of each of the Authorized
Representatives named above to do and perform, on his behalf, any and all acts
and things requisite or necessary to assure compliance by the signing person
with the Form 10-K filing requirements. The authority confirmed herein shall
remain in effect as to each person signing his name below until such time as
the Commission shall receive from such person a written communication
terminating or modifying the authority.
Date Date
P. S. Parker 9/15/98 Hector R. Ortino 9/15/98
P. S. Parker, Chairman of H. R. Ortino, Director
the Board of Directors
D. E. Collins 9/8/98
D. E. Collins, Principal
Executive Officer and Director
M. J. Hiemstra 9/15/98 P. G. Schloemer 9/15/98
M. J. Hiemstra, Principal P. G. Schloemer, Director
Financial Officer
H. C. Gueritey, Jr. 9/15/98 Wolfgang R. Schmitt 9/15/98
H. C. Gueritey, Jr., W. R. Schmitt, Director
Principal Accounting Officer
J. G. Breen 9/15/98 D. L. Starnes 9/15/98
J. G. Breen, Director D. L. Starnes, Director
Paul C. Ely, Jr. 9/15/98 Stephanie Streeter 9/15/98
P. C. Ely, Jr., Director S. A. Streeter, Director
Allan H. Ford 9/8/98 D. W. Sullivan 9/7/98
A. H. Ford, Director D. W. Sullivan, Director
P. W. Likins 9/8/98
P. W. Likins, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-K FOR ITS FISCAL YEAR
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 30,488
<SECURITIES> 0
<RECEIVABLES> 642,320
<ALLOWANCES> 9,004
<INVENTORY> 944,271
<CURRENT-ASSETS> 1,780,075
<PP&E> 2,345,109
<DEPRECIATION> 1,209,884
<TOTAL-ASSETS> 3,524,821
<CURRENT-LIABILITIES> 988,770
<BONDS> 623,169
<COMMON> 55,906
0
0
<OTHER-SE> 1,627,544
<TOTAL-LIABILITY-AND-EQUITY> 3,524,821
<SALES> 4,633,023
<TOTAL-REVENUES> 4,633,023
<CGS> 3,550,992
<TOTAL-COSTS> 3,550,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,267
<INTEREST-EXPENSE> 52,787
<INCOME-PRETAX> 503,988
<INCOME-TAX> 180,762
<INCOME-CONTINUING> 323,226
<DISCONTINUED> 0
<EXTRAORDINARY> (3,675)
<CHANGES> 0
<NET-INCOME> 319,551
<EPS-PRIMARY> 2.88
<EPS-DILUTED> 2.85
</TABLE>
