<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0451060
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(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
6035 Parkland Blvd., Cleveland, Ohio 44124-4141
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 896-3000
-------------
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- -----
Number of Common Shares outstanding at December 31, 1999 112,086,749
<PAGE> 2
PART I - FINANCIAL INFORMATION
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,239,207 $ 1,199,021 $ 2,481,500 $ 2,417,745
Cost of sales 971,298 943,167 1,947,919 1,890,474
----------- ----------- ----------- -----------
Gross profit 267,909 255,854 533,581 527,271
Selling, general and
administrative expenses 140,157 141,370 278,305 275,528
Interest expense 14,028 17,341 28,571 33,416
Interest and other (income)
expense, net (724) 333 (100) 406
----------- ----------- ----------- -----------
Income before income taxes 114,448 96,810 226,805 217,921
Income taxes 39,485 33,278 78,248 76,272
----------- ----------- ----------- -----------
Net income $ 74,963 $ 63,532 $ 148,557 $ 141,649
=========== =========== =========== ===========
Earnings per share - Basic $ .69 $ .59 $ 1.36 $ 1.30
Earnings per share - Diluted $ .68 $ .58 $ 1.35 $ 1.29
Cash dividends per common share $ .17 $ .15 $ .34 $ .30
</TABLE>
-2-
See accompanying notes to consolidated financial statements.
<PAGE> 3
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 1999
- ------------------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,353 $ 33,277
Accounts receivable, net 692,357 738,773
Inventories:
Finished products 488,875 442,361
Work in process 302,534 347,376
Raw materials 123,628 125,393
----------- -----------
915,037 915,130
Prepaid expenses 19,021 22,928
Deferred income taxes 66,722 64,576
----------- -----------
Total current assets 1,767,490 1,774,684
Plant and equipment 2,572,878 2,506,812
Less accumulated depreciation 1,358,676 1,305,943
----------- -----------
1,214,202 1,200,869
Other assets 740,719 730,335
----------- -----------
Total assets $ 3,722,411 $ 3,705,888
=========== ===========
LIABILITIES
- ---------------------
Current liabilities:
Notes payable $ 61,123 $ 60,609
Accounts payable, trade 253,798 313,173
Accrued liabilities 299,742 328,147
Accrued domestic and foreign taxes 39,130 52,584
----------- -----------
Total current liabilities 653,793 754,513
Long-term debt 713,592 724,757
Pensions and other postretirement benefits 279,760 276,637
Deferred income taxes 31,247 30,800
Other liabilities 75,075 65,319
----------- -----------
Total liabilities 1,753,467 1,852,026
SHAREHOLDERS' EQUITY
- ----------------------------
Serial preferred stock, $.50 par value;
authorized 3,000,000 shares; none issued -- --
Common stock, $.50 par value; authorized
600,000,000 shares; issued 112,130,445 shares at
December 31 and 111,945,179 shares at June 30 56,065 55,973
Additional capital 134,536 132,227
Retained earnings 1,983,832 1,872,356
Unearned compensation related to guarantee of ESOP debt (105,035) (112,000)
Deferred compensation related to stock options 1,304
Accumulated other comprehensive income (99,865) (92,858)
----------- -----------
1,970,837 1,855,698
Common stock in treasury at cost;
43,696 shares at December 31 and
43,836 shares at June 30 (1,893) (1,836)
----------- -----------
Total shareholders' equity 1,968,944 1,853,862
----------- -----------
Total liabilities and shareholders' equity $ 3,722,411 $ 3,705,888
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
- ------------------------------------ --------- ---------
<S> <C> <C>
Net income $ 148,557 $ 141,649
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 88,019 85,636
Amortization 18,943 19,146
Deferred income taxes (3,019) (4,454)
Foreign currency transaction loss (gain) 3,443 (3,752)
(Gain) loss on sale of plant and equipment (6,955) 794
Changes in assets and liabilities:
Accounts receivable, net 44,321 68,054
Inventories 657 (39,916)
Prepaid expenses 3,904 5,430
Other assets 2,541 (15,381)
Accounts payable, trade (59,077) (69,408)
Accrued payrolls and other compensation (34,371) (58,234)
Accrued domestic and foreign taxes (12,640) (5,990)
Other accrued liabilities 4,978 (15,494)
Pensions and other postretirement benefits 4,245 10,116
Other liabilities 9,706 4,649
--------- ---------
Net cash provided by operating activities 213,252 122,845
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------
Acquisitions (less cash acquired of $2,609 in 1998) (5,711) (89,865)
Capital expenditures (114,114) (114,650)
Proceeds from sale of plant and equipment 20,203 2,364
Other (30,100) 1,045
--------- ---------
Net cash used in investing activities (129,722) (201,106)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from (payments for) common share activity 3,649 (47,863)
(Payments for) proceeds from notes payable, net (523) 75,569
Proceeds from long-term borrowings 3,692 206,621
Payments of long-term borrowings (8,867) (115,895)
Dividends (37,081) (32,700)
--------- ---------
Net cash (used in) provided by
financing activities (39,130) 85,732
Effect of exchange rate changes on cash (3,324) 1,981
--------- ---------
Net increase in cash and cash equivalents 41,076 9,452
Cash and cash equivalents at beginning of year 33,277 30,488
--------- ---------
Cash and cash equivalents at end of period $ 74,353 $ 39,940
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION BY INDUSTRY
(Dollars in thousands)
(Unaudited)
Parker operates in two industry segments: Industrial and Aerospace. The
Industrial Segment is the largest and includes a significant portion of
International operations.
Industrial - This segment produces a broad range of motion control and fluid
systems and components used in all kinds of manufacturing, packaging,
processing, transportation, mobile construction, agricultural and military
machinery and equipment. Sales are made directly to major original equipment
manufacturers (OEMs) and through a broad distribution network to smaller OEMs
and the aftermarket.
Aerospace - This segment designs and manufactures products and provides
aftermarket support for commercial, military and general aviation aircraft,
missile and spacecraft markets. The Aerospace Segment provides a full range of
systems and components for hydraulic, pneumatic and fuel applications.
Results by Business Segment:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales
Industrial:
North America $ 658,542 $ 603,874 $1,326,211 $1,225,469
International 303,918 316,902 602,381 632,132
Aerospace 276,747 278,245 552,908 560,144
---------- ---------- ---------- ----------
Total $1,239,207 $1,199,021 $2,481,500 $2,417,745
========== ========== ========== ==========
Segment operating income
Industrial:
North America $ 87,200 $ 67,170 $ 180,883 $ 149,325
International 21,787 21,315 32,999 48,137
Aerospace 36,939 41,937 71,987 85,776
---------- ---------- ---------- ----------
Total segment operating income 145,926 130,422 285,869 283,238
Corporate general and
administrative expenses 14,087 15,337 28,200 27,632
---------- ---------- ---------- ----------
Income before interest expense
and other 131,839 115,085 257,669 255,606
Interest expense 14,028 17,341 28,571 33,416
Other 3,363 934 2,293 4,269
---------- ---------- ---------- ----------
Income before income taxes $ 114,448 $ 96,810 $ 226,805 $ 217,921
========== ========== ========== ==========
</TABLE>
-5-
<PAGE> 6
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
_______________________
1. Management Representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals except as discussed in Note 2) necessary to present
fairly the financial position as of December 31, 1999, the results of
operations for the three and six months ended December 31, 1999 and
1998 and cash flows for the six months then ended.
2. Charges related to business realignment
During the first quarter of fiscal 2000 the Company recorded a $8,555
charge ($5,560 after-tax or $.05 per share) related to the costs of
appropriately structuring its businesses to operate in their current
economic environment. The charge primarily relates to severance costs
attributable to approximately 260 employees principally associated with
the Industrial International operations. As of December 31, 1999, the
Company had made severance payments of $2,035 to approximately 130
employees. The remaining severance payments are expected to be made by
the end of fiscal 2000.
A change in the future utilization of long-lived assets at certain
locations triggered an impairment review of these long-lived assets
during the first quarter of fiscal 2000. The Company evaluated the
recoverability of the long-lived assets and determined that the
estimated future undiscounted cash flows were below the carrying value
of these assets. Accordingly, the Company recorded a non-cash
impairment loss of $4,875 ($3,169 after-tax or $.03 per share). Of the
pre-tax amount, $3,499 relates to the Aerospace segment and $1,376
relates to the Industrial segment.
The severance costs and impairment loss are presented in the Income
statement for the six months ended December 31, 1999 in the following
captions: $2,552 in Cost of sales; $2,476 in Selling, general and
administrative expenses; and $8,402 in Interest and other (income)
expense, net.
Also recorded in the first quarter of fiscal 2000, was a gain of $6,423
($4,175 after-tax or $.04 per share) realized primarily on the sale of
real property. The gain is reflected in the Income statement for the
six months ended December 31, 1999 in the Interest and other (income)
expense, net caption.
-6-
<PAGE> 7
3. Earnings per share
The following table presents a reconciliation of the numerator and
denominator of basic and diluted earnings per share for the three and
six months ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
NUMERATOR: 1999 1998 1999 1998.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income applicable
to common shares $ 74,963 $ 63,532 $ 148,557 $ 141,649
DENOMINATOR:
Basic - weighted average
common shares 109,188,711 108,541,603 109,129,000 108,953,828
Increase in weighted average
from dilutive effect of
exercise of stock options 1,017,243 880,609 1,021,338 821,286
------------------------------------------------------------------
Diluted - weighted average
common shares, assuming
exercise of stock options 110,205,954 109,422,212 110,150,338 109,775,114
==================================================================
Basic earnings per share $ .69 $ .59 $ 1.36 $ 1.30
Diluted earnings per share $ .68 $ .58 $ 1.35 $ 1.29
</TABLE>
4. Stock repurchase program
The Board of Directors has approved a program to repurchase the
Company's common stock on the open market, at prevailing prices. The
repurchase is primarily funded from operating cash flows and the shares
are initially held as treasury stock. The Company did not purchase any
shares of its common stock during the three-month and six-month periods
ended December 31, 1999.
5. Comprehensive income
The Company's only item of other comprehensive income is foreign
currency translation adjustments recorded in shareholders' equity.
Comprehensive income for the three and six months ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 74,963 $ 63,532 $ 148,557 $ 141,649
Foreign currency
translation adjustments (20,753) (508) (7,007) 24,691
---------------------------------------------------------
Comprehensive income $ 54,210 $ 63,024 $ 141,550 $ 166,340
==========================================================
</TABLE>
-7-
<PAGE> 8
6. Subsequent events
On January 17, 2000, the Company and Commercial Intertech Corp.
announced that their Boards of Directors had unanimously approved a
definitive agreement pursuant to which Commercial Intertech will merge
into the Company, with the Company as the surviving corporation, in a
cash and stock transaction with an equity value of approximately $366
million. In addition, the Company will assume approximately $107
million of Commercial Intertech debt.
Under the terms of the merger agreement, the Company will acquire all
outstanding common stock of Commercial Intertech for $20.00 per share
in exchange for Company common stock, subject to a collar. Commercial
Intertech shareholders will receive the Company's common stock based
on an exchange ratio that will be determined based on the average
closing price of Company common stock for the 20 trading-day period
ending five trading days immediately preceding the closing date of the
merger. Commercial Intertech shareholders may elect to receive $20.00
per share in cash, subject to the limitation that no more than 49
percent of the total merger consideration is paid in cash.
The merger is anticipated to close during the Company's quarter ending
June 30, 2000. The Company plans to account for the transaction using
the purchase method of accounting.
On February 3, 2000, the Company announced their agreement to acquire
the assets of Dana Corporation's Gresen Hydraulic business for
approximately $112 million cash. Gresen manufactures a wide range of
hydraulic pumps, motors, cylinders, control valves, filters and
electronic controls for on- and off-highway vehicles and had prior-year
annual sales of approximately $128 million.
- 8 -
<PAGE> 9
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999
AND COMPARABLE PERIODS ENDED DECEMBER 31, 1998
CONSOLIDATED STATEMENT OF INCOME
Net sales increased 3.4 percent for the second quarter of fiscal 2000 and 2.6
percent for the six-month period ended December 31, 1999. Without acquisitions,
the increases would have been 3.2 percent and 2.0 percent, respectively.
Excluding acquisitions, these increases primarily result from higher volume in
the North American Industrial operations.
Income from operations was $127.8 million for the current second quarter and
$255.3 million for the current six months, an increase of 11.6 percent and 1.4
percent, respectively. As a percent of sales, Income from operations increased
to 10.3 percent from 9.5 percent for the quarter and declined to 10.3 percent
from 10.4 percent for the six months. Cost of sales as a percent of sales
declined to 78.4 percent from 78.7 percent for the quarter and increased to
78.5 percent from 78.2 percent for the six months. The increased margins in the
second quarter are primarily the result of higher volume experienced in the
North American Industrial operations, partially offset by lower volume and mix
of original-equipment programs in the Aerospace operations. The declining
margins for the six months reflect the weakness experienced in the
International Industrial and Aerospace operations as well as the effect of
business realignment charges recorded in fiscal 2000 (as discussed in more
detail below). Selling, general and administrative expenses, as a percent of
sales, decreased to 11.3 percent of sales from 11.8 percent for the quarter and
to 11.2 percent from 11.4 percent for the six months.
Interest expense decreased $3.3 million for the quarter ended December 31, 1999
and $4.8 million for the six-month period ended December 31, 1999 due to lower
average debt outstanding in both the current year quarter and six months.
Interest and other (income) expense, net for six months includes $6.4 million in
gains primarily from the sale of real property and $8.4 million of asset
impairment losses and other plant closure costs.
Net income increased 18.0 percent for the quarter, and 4.9 percent for the six
months, as compared to the prior year. As a percent of sales, Net income
increased to 6.0 percent from 5.3 percent for the quarter and to 6.0 percent
from 5.9 percent for the six months.
Backlog was $1.65 billion at December 31, 1999 compared to $1.61 billion in the
prior year and $1.63 billion at June 30, 1999. The increase in the level of
backlog reflects an improvement in orders in the North American Industrial
operations.
-9-
<PAGE> 10
RESULTS BY BUSINESS SEGMENT
INDUSTRIAL - The Industrial Segment operations had the following changes in Net
sales in the current year when compared to the equivalent prior-year period:
<TABLE>
<CAPTION>
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
<S> <C> <C>
Industrial North America 9.1 % 8.2 %
Industrial International (4.1) % (4.7) %
Total Industrial 4.5 % 3.8 %
</TABLE>
Without the effect of currency-rate changes, International sales would have
increased 6.2 percent for the quarter and 3.3 percent for the six months.
Without the effect of acquisitions completed within the past 12 months, the
changes in Net sales would have been:
<TABLE>
<CAPTION>
Period ending December 31,
--------------------------
Three Months Six Months
------------ ----------
<S> <C> <C>
Industrial North America 9.1 % 7.3 %
Industrial International (4.7) % (5.5) %
Total Industrial 4.3 % 2.9 %
</TABLE>
The increase in Industrial North American sales is attributed to higher volume,
particularly in the semiconductor manufacturing and telecommunications markets.
International Industrial sales were affected by the struggling industrial
economy in Europe and Latin America while Asia Pacific sales were higher.
Operating income for the Industrial segment increased 23.2 percent for the
quarter and 8.3 percent for the six months. Industrial North American operating
income increased 29.8 percent for the quarter and 21.1 percent for the six
months. Industrial North American operating income, as a percent of sales,
increased to 13.2 percent from 11.1 percent for the quarter and to 13.6 percent
from 12.2 percent for the six months as margins benefited from the higher sales
volume.
Industrial International operating income increased 2.2 percent for the quarter
and decreased 31.4 percent for the six months. Included in the International
Industrial operating income for the current year six-month period was $9.0
million in business realignment charges. These charges were made as a result of
actions the Company took to appropriately structure the European operations to
operate in their current environment. Without the business realignment charges,
International Industrial operating income decreased 12.8 percent for the current
year first six months compared to the prior year six months. Excluding the
business realignment charges, Industrial International operating income, as a
percent of sales, increased to 7.2 percent from 6.7 percent for the quarter and
decreased to 7.0 percent from 7.6 percent for the six months. The increase in
margins for the current quarter is a result of the higher sales volume
(excluding currency) while the six month margins reflect the weakness in the
European operations.
Total Industrial Segment backlog increased 4.4 percent compared to December 31,
1998 and 11.0 percent since June 30, 1999 driven primarily from an increase in
order rates in the North American Industrial operations.
Order demand for much of fiscal 2000 has been improving across virtually all of
the Industrial operations. While this upward trend is expected to continue
generally, a slight downward trend in order rates in the heavy-duty truck market
is expected for the balance of fiscal 2000. The weakness in the European
operations experienced in the first half of fiscal 2000 has moderated and are
expected to continue to improve over the balance of fiscal 2000.
-10-
<PAGE> 11
AEROSPACE - Aerospace Net sales declined slightly for the quarter and 1.3
percent for the six months due to lower volume in the large aircraft business.
Operating income for the Aerospace Segment declined 11.9 percent for the quarter
and 16.1 percent for the six-month period. Included in the Aerospace operating
income for current year six-month period was $4.4 million in business
realignment charges. These charges were a result of the actions the Company took
to resize the business in response to a decline in OEM orders. Excluding the
business realignment charges, operating income, as a percent of sales, decreased
to 13.3 percent from 15.1 percent for the quarter and to 13.8 percent from 15.3
percent for the six-month period reflecting the lower volume, a mix of
original-equipment programs, as well as lower capacity utilization.
Backlog for the Aerospace Segment remained essentially the same from December
31, 1998 and decreased 3.6 percent since June 30, 1999. The decline in backlog
compared to June 30, 1999 reflects the expected slowdown in OEM order rates. The
Company anticipates further inventory reductions for the balance of the fiscal
year in anticipation of softer commercial aviation sales.
Corporate general and administrative expenses decreased to $14.1 million from
$15.3 million for the quarter and increased to $28.2 million from $27.6 million
for the six months. The lower expense in the quarter is a result of reduced
expenses associated with non-qualified benefit plans.
Other (in the Results by Business Segment) increased $2.4 million for the
quarter as a result of currency transaction losses and decreased $2.0 million
for the six months primarily as a result of gains from the sale of real property
as discussed in the Consolidated Statement of Income section, partially offset
by currency transaction losses.
BALANCE SHEET
Working capital increased to $1,113.7 million at December 31, 1999 from $1,020.2
million at June 30, 1999 with the ratio of current assets to current liabilities
increasing to 2.7 to 1. The increase was primarily due to an increase in Cash
and decreases in Accounts payable and Accrued liabilities, partially offset by a
decrease in Accounts receivable.
Accounts receivable were lower by $46.4 million on December 31, 1999 compared to
June 30, 1999 primarily due to the holiday induced lower level of sales in
December. Days sales outstanding have increased to 49 days at December 31, 1999
from 47 days at June 30, 1999. Inventories remained flat since June 30, 1999
while months supply declined slightly.
Accounts payable, trade decreased $59.4 million since June 30, 1999 with the
reduction occurring consistently throughout the operations. A portion of the
decrease was the result of lower production during the holidays.
Accrued liabilities decreased $28.4 million since June 30, 1999 primarily as a
result of lower incentive compensation and payroll accruals occurring throughout
most of the operations.
The debt to debt-equity ratio decreased to 28.2 percent at December 31, 1999
from 29.8 percent at June 30, 1999 primarily due to a decrease in Long-term
debt.
Due to the strength of the dollar, foreign currency translation adjustments
resulted in a decrease in net assets of $7.0 million during the first half of
fiscal 2000. The translation adjustments primarily affected Accounts receivable,
Inventories and Notes payable.
-11-
<PAGE> 12
STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $213.3 million for the six months
ended December 31, 1999, as compared to $122.8 million for the same six months
of 1998. The increase in net cash provided was primarily the result of activity
within the working capital items - Inventories, Accounts receivable, Accrued
payrolls and Other accrued liabilities - which provided cash of $15.6 million in
fiscal 2000 compared to using cash of $45.6 million in fiscal 1999. In addition,
activity in Other assets provided cash of $2.5 million in the current year
compared to using cash of $15.4 million in the prior year.
Net cash used in investing activities declined to $129.7 million for fiscal 2000
compared to $201.1 million for fiscal 1999 primarily due to a reduction in the
amount spent on acquisitions and an increase in the proceeds received from the
sale of plant and equipment. Included in Other is an increase in cash used for
equity investments in fiscal 2000.
Financing activities used cash of $39.1 million for the six months ended
December 31, 1999 compared to providing cash of $85.7 million for the same
period in 1998. The change resulted primarily from net debt borrowings using
cash of $5.7 million in fiscal 2000 compared to providing cash of $166.3 million
in the prior year, partially offset by common stock activity providing cash of
$3.6 million in the current year versus using cash of $47.9 million, primarily
for the repurchase of shares, in the prior year.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
nonperformance 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.
YEAR 2000 CONSIDERATONS
The Company took action to assure that its computerized products and systems and
all external interfaces were Year 2000 compliant. These actions were part of a
formal information technology initiative which the Company began several years
ago. The Company has not experienced any business interruptions as a result of
the Year 2000.
In addition, the Company contacted its key suppliers, customers, distributors
and financial service providers regarding their Year 2000 status. Follow-up
inquiries and audits indicated that substantially all key third parties would be
year 2000 compliant on a timely basis. The Company is unaware of any key
suppliers, customers, distributors or financial service providers who have
experienced problems regarding their Year 2000 compliance.
While there have been no known adverse consequences of any unsuccessful
modifications significantly affecting the financial position, liquidity, or
results of operations of the Company, there can be no assurance that any unknown
unsuccessful modifications would not have an adverse impact on the Company.
-12-
<PAGE> 13
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q 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 or 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,
- difficulties in introducing new products and entering new markets, and
- uncertainties surrounding the global economy and global market
conditions, including among others, the potential devaluation of
currencies.
Any forward-looking statements are 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.
-13-
<PAGE> 14
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
During the quarter ended December 31, 1999, in reliance upon Section
4(2) of the Securities Act of 1933, as amended, the Registrant issued the
following shares of Common Stock, $.50 par value:
(a) 6,012 shares valued at $44.90625 per share pursuant to the
Registrant's Non-Employee Directors Stock Plan in lieu of fees; and
(b) 1,054 shares upon exercise of stock options granted under the
Registrant's Non-Employee Directors Stock Option Plan in exchange for an
average option exercise price of $30.952. The option price was paid by
previously owned shares as permitted under the Non-Employee Directors Stock
Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are furnished as exhibits and are numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 10(a) - Exchange Agreement entered into as of October 29, 1999
between the Registrant and Michael J. Hiemstra
including an Executive Estate Protection Plan
comprised of the Executive Estate Protection
Agreement among the Registrant, Michael J. Hiemstra,
and the Irrevocable Trust Creating Vested Trusts for
Children of Michael J. Hiemstra dated August 16, 1999
(the "Trust") and the Collateral Assignment between
the Trust and the Registrant.
Exhibit 27 - Financial Data Schedule
(b) The Registrant filed a report on Form 8-K on January 19, 2000 to
file the press release issued by the Registrant announcing that the Registrant
entered into an Agreement and Plan of Merger with Commercial Intertech Corp.
whereby Commercial Intertech Corp. will be merged with and into the Registrant,
with the Registrant as the surviving corporation and to file the Agreement and
Plan of Merger.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARKER-HANNIFIN CORPORATION
(Registrant)
/s/ Michael J. Hiemstra
Michael J. Hiemstra
Vice President - Finance and Administration
and Chief Financial Officer
Date: February 4, 2000
- 14 -
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10(a) Exchange Agreement entered into as of
October 29, 1999 between the Registrant and
Michael J. Hiemstra including an Executive
Estate Protection Plan comprised of the
Executive Estate Protection Agreement among
the Registrant, Michael J. Hiemstra, and the
Irrevocable Trust Creating Vested Trusts for
Children of Michael J. Hiemstra dated August
16, 1999 (the "Trust") and the Collateral
Assignment between the Trust and the
Registrant.
27 Financial Data Schedule
- 15 -
<PAGE> 1
EXHIBIT 10(a)
EXCHANGE AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into as of October 29, 1999 between
Parker-Hannifin Corporation (the "Employer") and Michael J. Hiemstra (the
"Participant").
RECITALS
A. The Employer has offered the Participant certain benefits under an
Executive Estate Protection Plan in exchange for a portion of the
Participant's future compensation.
B. The Participant desires to surrender a portion of his future
compensation in order to participate in the Executive Estate Protection
Plan.
AGREEMENT
NOW THEREFORE, it is mutually agreed that:
1. REDUCTION IN FUTURE COMPENSATION.
a. SURRENDER. In consideration of the Employer's agreement to be
bound by the terms of the Executive Estate Protection Plan
Document (defined below), the Participant agrees to the
irrevocable surrender of future base pay (the "Surrendered
Compensation") in the amount of $4,166.67 per month (the
"Monthly Surrenders") beginning with the month of November,
1999 and ending with the month of October, 2006 (the
"Surrender Term"). The Participant acknowledges that he shall
have no further rights or claims of any sort whatsoever to the
Surrendered Compensation.
b. SHORTFALL. In the event the employment of the Participant is
terminated prior to October 31, 2006 for any reason other than
Termination for Cause or the death of the Participant (but
only if the Participant is the Decedent), the Corporation
shall be entitled to reduce any cash compensation or other
non-qualified benefits payable to the Participant, or his
representatives, heirs or beneficiaries (including without
limitation benefits payable under the Employer's Supplemental
Executive Retirement Program, Savings Restoration Plan or
Executive Deferral Plan) by an amount equal to the sum of the
Monthly Surrenders remaining in the Surrender Term (the
"Mandatory Benefit Reduction"); provided, however, to the
extent any Mandatory Benefit Reduction is imposed by the
Employer on any payment earlier than the corresponding Monthly
Surrender would have been made by the Participant, the amount
of the Mandatory Benefit Reduction shall be reduced to the
present value of such Monthly Surrender calculated by using a
4.52% discount rate.
2. EXECUTIVE ESTATE PROTECTION. The Employer has provided the Participant
with an Executive Estate Protection Plan, comprised of that certain
Executive Estate Protection Plan Agreement by and between the Employer,
the Participant and the Irrevocable Trust Creating Vested Trusts for
Children of M. J. Hiemstra dated August 16, 1999, attached hereto as
Exhibit A, and the "as sold" illustration of an Executive Estate
Protection Plan Insurance Policy as issued by John Hancock Life
Insurance Company, dated October 20, 1999 (together, the
1
<PAGE> 2
"Executive Estate Protection Plan Document"). By his signature below,
the Participant acknowledges that he has received a copy of the
Executive Estate Protection Plan Document. The parties to this
Agreement agree to and shall be bound by, and have the benefit of, each
and every provision of the Executive Estate Protection Plan Document as
set forth in the Executive Estate Protection Plan Agreement. This
Agreement and the Executive Estate Protection Plan Document,
collectively, shall be considered one complete contract between the
parties.
3. EFFECT ON EXECUTIVE DEFERRAL PLAN. The Participant hereby agrees that
the amount of any Surrendered Compensation hereunder shall reduce the
maximum amount which the Participant is entitled to elect to defer
under the Employer's Executive Deferral Plan.
4. EFFECT ON BONUS AND OTHER BENEFITS. The Employer hereby agrees that the
amount of any Surrendered Compensation hereunder shall be included in
Participant's base pay for the purpose of determining the amount of
bonus payable to the Participant under the Employer's RONA plan and for
the purpose of determining the Participant's benefits under the
Employer's Executive Life Insurance Plan and Supplemental Executive
Retirement Program. The Participant hereby agrees that the amount of
any Surrendered Compensation hereunder shall not be included in base
pay for the purpose of determining allowable deferrals under the
Employer's Retirement Savings Plan, Savings Restoration Plan and
Executive Deferral Plan nor for the purpose of determining benefits
payable under the Employer's Retirement Plan.
5. CHANGE IN CONTROL. Employer intends to seek the approval of its Board
of Directors to fund all payments required by the Employer under the
Executive Estate Protection Plan in an irrevocable grantor trust in the
event of a Change in Control of the Employer (as such term is defined
in the Change in Control Severance Agreement between the Employer and
the Participant dated August 16, 1996).
6. RATING. Employer acknowledges that Participant has entered into an
Underwriting Agreement with the Insurer which requires a rating
analysis to be performed on the Participant and his wife on the second
anniversary of the Policy, if requested by the Participant. In the
event such rating analysis by the Insurer results in the willingness of
the Insurer to increase the Owner's Death Benefit under the Policy, the
Employer agrees, at the election of the Participant, to meet in good
faith with Participant to re-negotiate the terms of the Executive
Estate Protection Plan, provided said renegotiation shall not result in
an increase of the after-tax present value cost to the Employer of the
Executive Estate Protection Plan.
7. ACKNOWLEDGMENT. The Participant hereby acknowledges that he has read
and understands this Agreement and the Executive Estate Protection Plan
Document.
8. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of,
and be binding upon, the Employer and its successors and assigns, and
the Participant and his assignees, devisees and heirs.
2
<PAGE> 3
9. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Ohio, as in effect at the time of the
execution of this Agreement.
10. DEFINED TERMS. Initially capitalized terms used but not defined herein
shall have the meaning ascribed to them in the Executive Estate
Protection Plan Document.
IN WITNESS WHEREOF, the Participant has signed and the Employer has
accepted this Agreement as of the date first written above.
/s/ Michael J. Hiemstra
Michael J. Hiemstra
PARKER-HANNIFIN CORPORATION
By: /s/ Duane E. Collins
Duane E. Collins
President and Chief Executive Officer
3
<PAGE> 4
EXECUTIVE ESTATE PROTECTION AGREEMENT
This Executive Estate Protection Agreement ("Agreement") is made as of
October 29, 1999, among Parker-Hannifin Corporation, an Ohio corporation, (the
"Corporation"), Michael J. Hiemstra (the "Participant") and the Irrevocable
Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16,
1999 ( the "Owner").
RECITALS
A. The Participant desires to insure his life and his wife's life for the
benefit and protection of the Participant's family or other beneficiary
under the Policy (as defined below);
B. The Corporation desires to help the Participant provide life insurance
for the benefit and protection of his family or beneficiary by
providing funds from time to time to pay the premiums due on the Policy
in accordance with this Agreement; and
C. The Owner desires to assign certain rights and interests in the Policy
to the Corporation, to the extent provided herein, as security for
repayment of certain funds provided by the Corporation for the
acquisition and/or maintenance of the Policy.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual agreements and
covenants set forth below, the parties to this Agreement agree as follows:
1. DEFINITIONS. For purposes of this Agreement, unless otherwise clearly
apparent from the context, the following phrases or terms shall have
the following indicated meanings:
(a) "Aggregate Premiums Paid" shall mean, at any time, an amount
equal to the cumulative premiums paid by the Corporation on
the Policy.
(b) "Cash Surrender Value" shall mean an amount that equals, at
any specified time, the cash surrender value as determined
under the terms of the Policy.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Collateral Assignment" shall mean an assignment made by the
Owner in favor of the Corporation in a form attached to this
Agreement as Exhibit 1.
(e) "Collateral Interest" shall mean the Corporation's interest in
the Policy, which shall equal, at any time, the lesser of
Aggregate Premiums Paid or Cash Surrender Value, and which
shall be repaid to the Corporation in accordance with Section
6 below.
(f) "Corporation's Death Benefit" shall mean the portion of the
Policy's death benefit equal to Aggregate Premiums Paid plus
an amount equal to the cumulative premiums paid by the Owner
on the policy pursuant to Section 3(b) hereof.
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<PAGE> 5
(g) "Decedent" shall mean the second to die of the Participant and
his wife.
(h) "Designated Beneficiary" shall mean the beneficiary designated
under the Policy.
(i) "Economic Income" shall mean an amount equal to the value of
the "economic benefit" derived by the Participant from the
Policy's life insurance protection, as determined for Federal
income tax purposes under the Code. Economic Income shall
include any increase in economic benefit attributable to the
death of the first to die under the Policy.
(j) "Insurer(s)" shall mean John Hancock Life Insurance Company.
(k) "Investment Elections" shall mean any elections which the
Owner has under the Policy to invest the Cash Surrender Value.
(l) "Owner" shall mean the Irrevocable Trust Creating Vested
Trusts for Children of M. J. Hiemstra dated August 16, 1999.
(m) "Owner's Death Benefit" shall mean the portion of the Policy's
death benefit, if any, that exceeds the Corporation's Death
Benefit. The ultimate amount of death benefit payable under
the Policy is dependent upon the financial performance of the
Policy.
(n) "Participant" shall mean Michael J. Hiemstra.
(o) "Policy" shall mean the following joint life policy on the
life of the Participant and his wife that is issued by the
Insurer:
<TABLE>
<CAPTION>
INSURER POLICY NUMBER TYPE OF POLICY
-------------------------------------- ---------------------- -------------------------
<S> <C> <C>
John Hancock Life Insurance Company 20039806 Estate Protection Life
Insurance
-------------------------------------- ---------------------- -------------------------
</TABLE>
(p) "Split Dollar Maturity Date" shall mean the date on which the
first of any of the following events occurs:
(i) the fifteenth (15th) anniversary of the issuance of
the Policy;
(ii) the death of the Decedent; or
(iii) Termination for Cause.
(q) "Termination for Cause" shall mean termination of the
Participant's employment by the Corporation as a result of
activity by the Participant detrimental to the interest of the
Corporation, including without limitation:
(i) the rendering of services for an organization, or
engaging in a business, that is in competition with
the Corporation;
2
<PAGE> 6
(ii) the disclosure to anyone outside of the Corporation,
or the use for any purpose other than the
Corporation's business, of confidential information
or material related to the Corporation;
(iii) fraud, embezzlement, theft-in-office or other illegal
activity; or
(iv) violation of the Corporation's Code of Ethics.
2. ACQUISITION OF POLICY; OWNERSHIP OF INSURANCE. The parties to this
Agreement shall cooperate in applying for and obtaining the Policy. The
Policy shall be issued to the Owner as the sole and exclusive owner of
the Policy, subject to the rights and interests granted to the
Corporation as provided in this Agreement and the Collateral
Assignment. Concurrent with the signing of this Agreement, the Owner
will collaterally assign the Policy to the Corporation, in the form of
the Collateral Assignment, as security for the payment of the
Collateral Interest, which assignment shall not be altered or changed
without the mutual consent of the Corporation and the Owner.
3. PREMIUM PAYMENTS ON POLICY.
--------------------------
(a) PAYMENTS AND REIMBURSEMENTS. Prior to the occurrence of the
Split Dollar Maturity Date, the Corporation shall pay to the
Insurer, on or before each applicable premium due date, all
applicable premiums for the Policy, less the amount payable by
the Owner as described in subsection (b) below. The
Corporation shall promptly notify Owner in writing of the
amount and date of such premium payments. In the event that
the Corporation fails to make any such payment, the Owner or
the Participant may make (but is not required to make) any
such payment, and the Corporation shall immediately reimburse
the Owner or the Participant, as the case may be, for any
amount so paid.
(b) PREMIUM PAYMENT BY OWNER. Prior to the occurrence of the Split
Dollar Maturity Date, Owner shall pay to the Insurer, on or
before each applicable premium due date, a premium payment
equal to the Economic Income for such calendar year, as
mutually determined by the Corporation and the Participant.
(c) PREMIUM REIMBURSEMENT. At least sixty (60) days prior to each
applicable premium due date, the Corporation shall make a
payment to the Participant equal to the premium payable by the
Owner pursuant to subsection (b) above.
(d) TAX REIMBURSEMENT. On or before March 15 following each
calendar year until the Split Dollar Maturity Date, the
Corporation shall reimburse the Participant for the
Participant's state, local and federal income tax liability
attributable to (i) the Participant's Economic Income for such
calendar year, if any; (ii) the payment by the Corporation to
the Participant pursuant to subsection (c) above; and (iii)
payments made pursuant to this subsection (d). The tax rates
used by the Corporation in calculating the reimbursement under
this Section 3(d) shall be the appropriate federal, state and
local income tax rates in effect for the Participant at the
time of payment, as determined by the Corporation.
3
<PAGE> 7
4. Corporation's Rights. The Corporation's rights and interests in and
to the Policy shall be specifically limited to (i) the right to be
paid its Collateral Interest and the Corporation's Death
Benefit, if any, in accordance with Section 6 below, and (ii) the
rights specified in the Collateral Assignment.
5. Owner's Rights. Subject to the terms of this Agreement and the
Collateral Assignment, the Owner of the Policy shall be entitled to
exercise all rights in the Policy; provided, however, that while the
Collateral Assignment is in effect, the following rights may be
exercised only with the consent of the Corporation, which consent may
be withheld at the sole discretion of the Corporation:
(a) To borrow against or pledge the Policy;
(b) To surrender or cancel the Policy;
(c) To take a distribution or withdrawal from the Policy; or
(d) To make Investment Elections.
In particular, subject to the terms and conditions of the Policy, and
the provisions of Section 6 below, the Owner may assign its rights
under this Agreement and the Collateral Agreement, including but not
limited to an assignment to an insurance trust of which the
Participant is a settlor. In the event of an assignment of its rights,
the Owner shall promptly notify the Corporation of the name and
address of the new Owner or assignee, including the name and address
of any trustee.
6. COLLATERAL INTEREST. On the Split Dollar Maturity Date, the Collateral
Interest (or, if applicable under Section 6(a) below, the Corporation's
Death Benefit) shall be paid or repaid to the Corporation in the
following manner:
(a) Notwithstanding any provision of this Agreement or the Policy
that may be construed to the contrary, if the Split Dollar
Maturity Date occurs due to the death of the Decedent, (i) the
Corporation shall be entitled to that portion of the Policy's
death proceeds that equals the Corporation's Death Benefit, if
any, and (ii) the Owner or the Designated Beneficiary, as the
case may be, shall be entitled to the Owner's Death Benefit;
provided, however, if the Split Dollar Maturity Date occurs
due to the suicide of the Decedent, and the proceeds from the
Policy are limited by either a suicide or contestability
provision under the Policy, the Corporation shall be entitled
to that portion of the higher of the Policy's Cash Surrender
Value or death proceeds that does not exceed the Aggregate
Premiums Paid. In either event, promptly following the
Decedent's death, the Corporation and the Owner or the
Designated Beneficiary shall take all steps necessary to
collect the death proceeds of the Policy by submitting the
proper claims forms to the Insurer. The Corporation shall
notify the Insurer of the amount of the Owner's Death Benefit
(except when the Policy's proceeds are limited because of the
Decedent's death by suicide) and the Corporation's Death
Benefit. Such amounts shall be paid, respectively, by the
Insurer to the Owner or to the Designated Beneficiary, as the
case may be, and the Corporation.
4
<PAGE> 8
(b) If the Split Dollar Maturity Date is other than the date of
the Decedent's death, the Corporation's Collateral Interest in
the Policy shall be paid to the Corporation in one of the
following ways, as elected by the Owner in writing within
thirty (30) days after the date the Corporation first notifies
the Participant and Owner in writing of the occurrence of the
Split Dollar Maturity Date:
(i) By the Owner authorizing the Insurer to make a loan
against the Policy in an amount equal to the
Corporation's Collateral Interest and to pay the
proceeds to the Corporation, in which case the Owner
shall be considered the borrower for all purposes
under the loan;
(ii) By the Owner authorizing the Insurer to withdraw from
the Cash Surrender Value of the Policy an amount
equal to the Corporation's Collateral Interest and to
pay the proceeds to the Corporation; or
(iii) By the Owner paying to the Corporation, from the
Owner's separate funds, an amount equal to the
Corporation's Collateral Interest.
(c) If the Owner fails to timely exercise any of the options under
Section 6(b) above, the Corporation shall be entitled to
instruct the Insurer to pay to the Corporation from the Cash
Surrender Value of the Policy an amount equal to the
Corporation's Collateral Interest.
(d) The Corporation agrees to keep records of its premium payments
and to furnish the Owner and the Insurer with a statement of
its Collateral Interest whenever either party requires such
statement.
(e) Upon and after the Corporation's Collateral Interest in the
Policy has been repaid pursuant to Section 6(b) above, the
Corporation shall execute and file with the Insurer an
appropriate release of the Corporation's interest in the
Policy and shall have no further interest in the Policy.
Further, the Participant and/or Owner hereby acknowledge,
understand and agree that, upon the release of the
Corporation's Collateral Interest, the Corporation shall
continue not to have any responsibility for the future
performance of the Policy and shall have no obligation to make
any additional premium payments.
(f) Upon payment to the Corporation of its Collateral Interest or
the Corporation's Death Benefit in accordance with this
Section 6, this Agreement shall terminate and no party shall
have any further rights or obligations under the Agreement
with respect to any other party provided that the Corporation
has complied with all provisions of this Agreement.
7. INSURER
5
<PAGE> 9
(a) The Insurer is not a party to this Agreement, shall in no way
be bound by or charged with notice of its terms, and is
expressly authorized to act only in accordance with the terms
of the Policy. The Insurer shall be fully discharged from any
and all liability under the Policy upon payment or other
performance of its obligations in accordance with the terms of
the Policy.
(b) The signature(s) required for the Insurer to recognize the
exercise of a right under the Policy shall be specified in the
Collateral Assignment.
8. CLAIMS PROCEDURE.
The following claims procedure shall be followed in handling any
benefit claim under this Agreement:
(a) The Owner, Participant, or the Designated Beneficiary, as the
case may be, (the "Claimant"), shall file a claim for benefits
by notifying the Corporation in writing. If the claim is
wholly or partially denied, the Corporation shall provide a
written notice within ninety (90) days (unless special
circumstances require an extension of time for processing the
claim, in which case an extension not to exceed ninety (90)
days shall be allowed) specifying the reasons for the denial,
the provisions of this Agreement on which the denial is based,
and additional material or information, if any, that is
necessary for the Claimant to receive benefits. Such written
notice shall also indicate the steps to be taken by the
Claimant if a review of the denial is desired.
(b) If a claim is denied, and a review is desired, the Claimant
shall notify the Corporation in writing within sixty (60) days
after receipt of written notice of a denial of a claim. In
requesting a review, the Claimant may submit any written
issues and comments the Claimant feels are appropriate. The
Corporation shall then review the claim and provide a written
decision within sixty (60) days of receipt of a request for a
review (unless special circumstances require an extension of
time for processing the claim, in which case an extension not
to exceed ninety (60) days shall be allowed). This decision
shall state the specific reasons for the decision and shall
include references to specific provisions of this Agreement,
if any, upon which the decision is based.
(c) If no event shall the Corporation's liability under this
Agreement exceed the amount of proceeds from the Policy.
9. AMENDMENT OF AGREEMENT. This Agreement shall not be modified or amended
except by a writing signed by all the parties hereto.
10. BINDING AGREEMENT. This Agreement shall be binding upon the heirs,
administrators, executors, successors and assigns of each party to this
Agreement.
11. STATE LAW. This Agreement shall be subject to and construed under the
internal laws of the State of Ohio, without regard to its conflicts of
laws principles.
6
<PAGE> 10
12. VALIDITY. In case any provision of this Agreement shall be illegal or
invalid for any reason, said illegality or invalidity shall not affect
the remaining parts of this Agreement, but this Agreement shall be
construed and enforced as if such illegal or invalid provision had
never been inserted in this Agreement.
13. NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this
Agreement shall not be deemed to constitute a contract of employment
between the Corporation and the Participant. Nothing in this Agreement
shall be deemed to give the Participant the right to be retained in the
service of the Corporation or to interfere with the right of the
Corporation to discipline or discharge the Participant at any time.
14. NOTICE. Any notice or filing required or permitted to be given under
this Agreement to the Owner, Participant or the Corporation shall be
sufficient if in writing and hand-delivered, or sent by registered or
certified mail, to the address below:
To the Owner: The Irrevocable Trust Creating Vested Trusts
for Children of M. J. Hiemstra dated
August 16, 1999
c/o David J. Hiemstra, Trustee
21006 Bayside
St. Clair Shores, MI 48081
To the Participant: Michael J. Hiemstra
55 Winding River Trail
Chagrin Falls, OH 44022
To the Corporation: Parker Hannifin Corporation
6035 Parkland Boulevard
Cleveland, OH 44124
Attn: General Counsel
or to such other address as may be furnished to the Owner, Participant
or the Corporation in writing in accordance with this notice provision.
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 on the
receipt for registration or certification. Any notice or filing
required or permitted to be given to the Owner and/or the Participant
or the Designated Beneficiary under this Agreement shall be sufficient
if in writing and hand-delivered, or sent by mail, to the last known
address of the Owner and/or the Participant, as the case may be.
15. CREDITWORTHINESS OF INSURER; TAX CONSEQUENCES. The Participant and
Owner assume all risk of the creditworthiness of the Insurer and
acknowledge that the Corporation makes no representation or guarantee
of the creditworthiness of any Insurer. The Participant and Owner
acknowledge responsibility for all federal, state and local income,
estate or gift tax consequences imposed on the Participant and Owner as
a result of this Agreement and further acknowledge that the Corporation
has not made any representations or guarantees of present or future tax
consequences.
7
<PAGE> 11
16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with regard to the subject matter of this
Agreement and supersedes all previous negotiations, agreements and
commitments in respect thereto. No oral explanation or oral information
by the parties to this Agreement shall alter the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first written above.
PARKER-HANNIFIN CORORATION
By: /s/ Duane E. Collins
Duane E. Collins
President and Chief Executive Officer
/s/ Michael J. Hiemstra
Michael J. Hiemstra
THE IRREVOCABLE TRUST CREATING
VESTED TRUSTS FOR CHILDREN OF
M. J. HIEMSTRA DATED AUGUST 16, 1999
By: /s/ David J. Hiemstra
David J. Hiemstra, Trustee
8
<PAGE> 12
EXHIBIT 1
COLLATERAL ASSIGNMENT
This Collateral Assignment (this "Assignment") is made and entered into
as of October 29, 1999, by and between the Irrevocable Trust Creating Vested
Trusts for Children of M. J. Hiemstra dated August 16, 1999 (the "Owner"), as
the owner of a life insurance policy, No. 20039806 (the "Policy"), issued by
John Hancock Life Insurance Company (the "Insurer"), on the lives of Michael J.
Hiemstra (the "Participant") and Kathleen M. Hiemstra, Participant's wife (the
"Wife"), and Parker-Hannifin Corporation, an Ohio corporation (the
"Corporation").
RECITALS
A. The Corporation desires to help the Owner provide life insurance for
the benefit and protection of the Participant's family or beneficiary
by providing funds from time to time to pay the premiums due on the
Policy as more specifically provided in the Executive Estate Protection
Agreement entered into between the Participant, the Owner and the
Corporation as of the date hereof (the "Agreement"); and
B. In consideration of the Corporation agreeing to provide such funds in
accordance with the terms and conditions of the Agreement, the Owner
agrees to grant to the Corporation, as a security interest in the
Policy, a collateral security interest for the payment of the
Corporation's Collateral Interest (as defined in the Agreement).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual agreements and
covenants set forth below, the parties to this Assignment agree as follows:
1. ASSIGNMENT. The Owner hereby assigns, transfers and sets over to the
Corporation, and its successors and assigns, those certain rights and
interests described in the Agreement that are to be assigned to the
Corporation in accordance with the Agreement. Furthermore, this
Assignment is made, and the Policy is to be held as collateral security
for, any and all liabilities of the Owner to the Corporation, either
now existing, or that may hereafter arise, pursuant to the terms of the
Agreement.
2. SIGNATURES.
(a) To facilitate the operation of this Assignment, the parties
agree that the Insurer is hereby notified that the following
rights under the Policy may be exercised while the Assignment
is in effect without the signature or consent of any other
party:
(i) The Owner may sign a request to change the
beneficiary under the Policy without the signature or
consent of the Corporation.
1
<PAGE> 13
(ii) The Corporation may sign an instruction to the
Insurer to pay an amount equal to the Corporation's
Collateral Interest from the Policy's Cash Surrender
Value to the Corporation without the Participant's or
the Owner's signature or consent; provided that the
Corporation simultaneously delivers to the Insurer a
notarized statement that the Corporation is
exercising its rights in accordance with Section 6(c)
of the Agreement.
(b) The exercise of any other right under the Policy not
specifically set forth above shall be exercised with the
signature of both the Corporation and the Owner.
3. POLICY PROCEEDS. Any amount payable from the Policy during the
Participant's or the Wife's lives or at the Decedent's (as defined in
the Agreement) death shall first be paid to the Corporation to the
extent of its Collateral Interest or the Corporation's Death Benefit
(as defined in the Agreement), respectively. Any balance will be paid
to the Owner during the Participant's or the Wife's lifetime or to the
Designated Beneficiary (as defined in the Agreement) upon or after the
Decedent's death. A settlement option may be elected by the recipient
of the proceeds. For purposes of this Section, the amount of the
Collateral Interest or Corporation's Death Benefit shall be determined
for purposes of the Insurer by a written statement delivered to the
Insurer and signed by the Corporation.
4. ENDORSEMENT. The Corporation shall hold the Policy while this
Assignment is operative and, upon request, forward the Policy to the
Insurer, without unreasonable delay, for endorsement of any designation
or change of beneficiary, any election of optional mode of settlement,
or the exercise of any other right reserved by the Owner in this
Assignment.
5. INSURER. The Insurer is hereby authorized to recognize the
Corporation's claims to rights hereunder without investigating the
reason for any action taken by the Corporation, the validity or amount
of any of the liabilities of the Owner to the Corporation under the
Agreement, the existence of any default therein, the giving of any
notice required herein, or the application to be made by the
Corporation of any amounts to be paid to the Corporation. The Insurer
shall not be responsible for the sufficiency or validity of this
Assignment and is not a party to the Agreement (or any other similar
executive life insurance agreement) between the Corporation and the
Owner or the Participant.
6. RELEASE OF ASSIGNMENT. Upon the full payment of the Corporation's
Collateral Interest in accordance with the terms and conditions of this
Assignment and the Agreement, the Corporation shall release to the
Owner, if the Owner retains the Policy in accordance with the
Agreement, the Policy and all specific rights included in this
Assignment.
7. AMENDMENT OF ASSIGNMENT. This Assignment shall not be modified, amended
or terminated, except by a writing signed by all the parties hereto.
8. NO RESTRICTION ON ASSIGNMENT. This Assignment does not limit the
rights of the Owner to assign the rights it has retained under the
Policy which rights may be assigned in accordance with Section 5 of the
Agreement.
2
<PAGE> 14
9. BINDING AGREEMENT. This Assignment shall be binding upon the heirs,
administrators, executors and permitted successors and assigns of each
party to this Assignment.
10. STATE LAW. This Assignment shall be subject to and be construed under
the internal laws of the State of Ohio, without regard to its conflicts
of law principles.
11. VALIDITY. In case any provision of this Assignment shall be illegal or
invalid for any reason, said illegality or invalidity shall not affect
the remaining parts of this Assignment, but this Assignment shall be
construed and enforced as if such illegal or invalid provision had
never been inserted in this Assignment.
IN WITNESS WHEREOF, the Owner and the Corporation have signed this
Assignment as of the date first written above.
THE IRREVOCABLE TRUST CREATING PARKER-HANNIFIN CORPORATION
VESTED TRUSTS FOR CHILDREN OF
M. J. HIEMSTRA DATED AUGUST 16, 1999
By: /s/ David J. Hiemstra By: /s/ Duane E. Collins
David J. Hiemstra, Trustee Duane E. Collins
President and
Chief Executive Officer
FILED WITH THE INSURER:
/s/ Charles Defilippo Date: 12/23/99
Insurer
The John Hancock Mutual Life Insurance Company without assuming any
responsibility for the validity or the sufficiency of this instrument, has on
this date, filed a duplicate thereof at it's Home Office.
Date 12/23/99
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
By /s/ Bruce Skrine - Attorney at Law
Secretary
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-Q FOR ITS QUARTERLY PERIOD ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 74,353
<SECURITIES> 0
<RECEIVABLES> 637,591
<ALLOWANCES> 9,477
<INVENTORY> 915,037
<CURRENT-ASSETS> 1,767,490
<PP&E> 2,572,878
<DEPRECIATION> 1,358,676
<TOTAL-ASSETS> 3,722,411
<CURRENT-LIABILITIES> 653,793
<BONDS> 735,266
0
0
<COMMON> 56,065
<OTHER-SE> 1,912,879
<TOTAL-LIABILITY-AND-EQUITY> 3,722,411
<SALES> 2,481,500
<TOTAL-REVENUES> 2,481,500
<CGS> 1,947,919
<TOTAL-COSTS> 1,947,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,171
<INTEREST-EXPENSE> 28,571
<INCOME-PRETAX> 226,805
<INCOME-TAX> 78,248
<INCOME-CONTINUING> 148,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,557
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.35
</TABLE>
