Exhibit 10(y)
PARKER-HANNIFIN CORPORATION
2004 NON-EMPLOYEE DIRECTORS’ STOCK INCENTIVE PLAN
1.
Purpose
.
The 2004 Non-Employee
Directors’ Stock Incentive Plan is intended to help maintain and develop focused leadership and governance through ownership of Shares of the Corporation by non-employee directors of the Corporation.
2.
Definitions
.
In this Plan, except where the context otherwise indicates, the following definitions apply:
(a) “Award” means a Stock Option, a Stock Appreciation Right,
Restricted Stock, or a Dividend Equivalent Right.
(b)
“Board” means the Board of Directors of the Corporation.
(c) “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 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 Corporation representing 20% or more of the combined voting power of the
Corporation’s then outstanding securities eligible to vote for the election of the Board (“Corporation 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 Corporation or any Subsidiary; (B) an acquisition by any employee benefit plan sponsored or maintained by the Corporation 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 an individual Grantee, any acquisition by the Grantee or any group of persons (within the
meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act) including the Grantee (or any entity in which the Grantee or a group of persons including the Grantee, directly or indirectly, holds a majority of the voting power of such entity’s
outstanding voting interests); or (F) the acquisition of Corporation Voting Securities from the Corporation, 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);
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(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 Corporation’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 Corporation 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 Corporation 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 Corporation or any
Subsidiary that requires the approval of the Corporation’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 Corporation Voting Securities that were outstanding immediately
prior to the Business Combination (or, if applicable, shares into which such Corporation 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 Corporation 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 Corporation Voting Securities from the Corporation, 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 Corporation approve a plan of complete liquidation or
dissolution of the Corporation or the sale or other disposition of all or substantially all of the assets of the Corporation 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 Corporation Voting Securities as a result of the acquisition of Corporation Voting Securities by the Corporation which, by reducing the number of Corporation 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 Corporation (if not for the operation of this sentence), and after the Corporation’s acquisition such person becomes the beneficial
owner of additional Corporation Voting Securities that increases the percentage of outstanding Corporation Voting Securities beneficially owned by such person, a Change in Control shall then occur.
(d) “Code” means the Internal Revenue Code and the regulations
promulgated thereunder, as in effect from time to time.
(e)
“Compensation and Management Development Committee” or “Committee” means the committee of the Board so designated. The Committee will be constituted in a manner that satisfies all applicable legal requirements, including
satisfying any independence standard contained in the listing requirements of the New York Stock Exchange.
(f) “Corporation” means Parker-Hannifin Corporation, an Ohio corporation.
(g) “Designated Beneficiary” means the person designated by the Grantee of an Award hereunder to be entitled, on
the death of the Grantee, to any remaining rights arising out of such Award. Such designation must be made in writing and in accordance with such regulations as the Committee may establish.
(h) “Detrimental Activity” means activity that is determined in
individual cases, by the Committee or its express delegate, to be detrimental to the interests of the Corporation or a Subsidiary, including without limitation (i) the rendering of services to an organization, or engaging in a business, that is, in
the judgment of the Committee or its express delegate, in competition with the Corporation; (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, whether acquired by the Grantee during or after service with the Corporation; (iii) fraud, embezzlement, theft-in-office or other illegal activity; or (iv) a violation of the Corporation’s Code of Ethics.
(i) “Dividend Equivalent Right,” herein sometimes
called a “DER,” means the right of the Grantee thereof to receive, pursuant to the terms of the DER, credits based on the cash dividends that would be paid on the Shares specified in the DER if such shares were held by the grantee, as more
particularly set forth in Section 10(a) below.
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(j) “Eligible Director” means a Director who is not an employee of the Corporation.
(k) “Director” means a member of the Board of Directors of the
Corporation.
(l) “Exchange Act” means the Securities
Exchange Act of 1934, as amended from time to time.
(m)
“Fair Market Value” in relation to a Share as of any specific time shall mean the closing price as reported for the New York Stock Exchange—Composite Transactions on such date, or if no shares are traded on that date, the next
preceding date on which trading occurred.
(n)
“Grantee” means a recipient of an Award under this Plan.
(o) “Restricted Stock” means any Share issued with the restriction that the Grantee may not sell, transfer, pledge, or assign such Share and such other restrictions (which may include, but are not limited to, restrictions on the
right to vote or receive dividends) which may expire separately or in combination, at one time or in installments, all as specified by the Award.
(p) “Rule 16b-3” means Rule 16b-3 (or any successor thereto) under the Exchange Act that exempts from Section 16(b) of the Exchange Act
transactions under employee benefit plans, as in effect from time to time with respect to this Plan.
(q) “Share” means a common share, par value $.50, of the Corporation issued and reacquired by the Corporation or previously authorized but
unissued.
(r) “Stock Appreciation Right,” herein
sometimes called an “SAR,” means the right of the Grantee thereof to receive, pursuant to the terms of the SAR, a number of Shares or cash or a combination of Shares and cash, based on the increase in the value of the number of Shares
specified in the SAR, as more particularly set forth in Section 8 below.
(s) “Stock Option” means the right of the Grantee thereof to acquire a number of Shares upon payment to the Corporation of the exercise price specified in the Award.
(t) “Subsidiary” means any corporation, partnership, or other
entity in which the Corporation, directly or indirectly, owns a 50 percent or greater equity interest.
(u) “Terminate” or “Termination” means cease to be a Director, except by death.
(v) “1996 Plan” means the Corporation’s 1996 Non-Employee
Directors’ Stock Option Plan.
3.
Eligibility
.
The selection of Eligible Directors to receive Awards will be
within the discretion of the Committee. More than one Award may be granted to the same Eligible Director.
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4.
Administration
.
(a) The Committee shall administer this Plan. The Committee will, subject to the terms of the Plan, have the authority to
(i) select the Eligible Directors who will receive Awards; (ii) grant Awards; (iii) determine the number and types of Awards to be granted to Directors; (iv) subject to the terms of the Plan, determine the terms, conditions, vesting periods and
restrictions applicable to Awards; (v) adopt, alter and repeal administrative rules and practices governing this Plan; (vi) interpret the terms and provisions of this Plan and any Awards granted under this Plan; (vii) prescribe the forms of any
notices of Awards or other instruments relating to Awards; and (viii) otherwise supervise the administration of this Plan. All decisions by the Committee will be made with the approval of not less than a majority of its members.
(b) All determinations and interpretations pursuant to the provisions of this
Plan shall be binding and conclusive upon the individual Director involved and all persons claiming under them.
(c) Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of this Plan or any
action by the Committee under this Plan fails to so comply, such provision or action shall, without further action by any person, be deemed to be automatically amended to the extent necessary to effect compliance with Rule 16b-3, provided that if
such provision or action cannot be amended to effect such compliance, such provision or action shall be deemed null and void, to the extent permitted by law and deemed advisable by the appropriate authority. Each Award to a Director under this Plan
shall be deemed issued subject to the foregoing qualification.
(d) Except as otherwise determined by the Committee, an Award under this Plan is not transferable other than by will or the laws of descent and distribution and is not subject, in whole or in part, to attachment, execution, or levy of any
kind.
(e) Any rights with respect to an Award granted under
this Plan existing after the Grantee dies are exercisable by the Grantee’s Designated Beneficiary or, if there is no such Designated Beneficiary who may, and does, lawfully do so, by the Grantee’s personal representative.
(f) Except as otherwise provided herein, a particular form of Award may be
granted to an Eligible Director either alone or in addition to other Awards hereunder. The provisions of particular forms of Award need not be the same with respect to each recipient.
(g) To the extent permitted by law, the Committee may delegate any of its authority to any other person or persons that it
deems appropriate, provided the delegation does not cause the Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3 or violate any independence standard contained in the New York Stock Exchange
listing requirements.
(h) This Plan and all action taken under
it shall be governed by the laws of the State of Ohio without giving effect to the principles of conflict of laws thereof.
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(i) The Committee may permit or require any Grantee to exercise any Stock Options or SARs by means of
electronic signature.
(j) Each Award shall be evidenced in
such form (written, electronic or otherwise) as the Committee shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.
5.
Awards That May Be Granted
.
(a) The aggregate number of Shares that may be delivered (i) upon the exercise of a Stock Option or SAR; (ii) as Restricted
Stock and released from a substantial risk of forfeiture thereof; or (iii) in payment of DERs, subject to adjustment as provided in the Plan, is 250,000.
(b) To the extent that Shares subject to an outstanding Award are not delivered to a Grantee by reason of the expiration, termination, cancellation or
forfeiture of such Award or by reason of the tendering or withholding of Shares to satisfy all or a portion the tax withholding obligations relating to an Award, then such Shares shall not be deemed to have been delivered for purposes of determining
the maximum number of Shares available for delivery under the Plan. If the exercise price of any Stock Option granted under the Plan is satisfied by tendering Shares (by actual delivery or attestation), only the number of shares issued to the
participant net of the Shares tendered shall be deemed to be delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. When an unexercised Award lapses, expires, terminates or is forfeited, the related
Shares may be available for distribution in connection with future Awards. If the benefit provided by any Award is paid in cash, any Shares covered by the Award will be available for distribution in connection with future Awards.
(c) The assumption of Awards granted by an organization acquired by the
Corporation, or the grant of Awards under this Plan in substitution for any such Awards, will not reduce the number of Shares available for the grant of Awards under this Plan.
6.
Adjustments
.
In the event that the Committee shall determine that any (a) stock dividend, stock split, combination of Shares, recapitalization or other change in the
capital structure of the Corporation, or (b) merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or
(c) other corporate transaction or event having an effect similar to any of the foregoing affects the Shares of the Corporation such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available
under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of (i) the number and kind of Shares which thereafter may be the subject of Awards under this Plan, (ii) the
number and kind of Shares subject to outstanding Awards, and (iii) the exercise price with respect to any of the foregoing. Moreover, in the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for
any or all outstanding Awards under this Plan such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all Awards so replaced.
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7.
Stock Options
.
(a) One or more Stock Options may be granted to any Eligible Director. Each Stock Option so granted shall be subject to such terms and conditions as
the Committee shall impose. The exercise price per Share shall be specified by the Award, but shall in no instance be less than 100 percent of Fair Market Value at the time of the Award. Payment of the exercise price shall be made in cash, Shares,
or other consideration, or any combination thereof, in accordance with the terms of this Plan and any applicable regulations of the Committee in effect at the time and valued at Fair Market Value on the date prior to exercise of the Stock Option.
All Stock Options granted hereunder shall have a maximum life of no more than ten (10) years from the date of issuance of the Award. In no event shall any Stock Option vest sooner than one (1) year from date of issuance of the Award except in the
event of a Change in Control.
(b) The Committee shall not
adjust or amend the exercise price of Stock Options previously awarded to any Grantee, whether through amendment, cancellation and replacement grant, or any other means.
(c) The Committee may grant reload Stock Options, separately or together with another Stock Option, pursuant to which,
subject to the terms and conditions established by the Committee, the Grantee would be granted a new Stock Option when the payment of the exercise price of a previously granted Stock Option is made by the delivery of Shares owned by the Grantee,
which new Stock Option would be an option to purchase the number of Shares not exceeding the number of Shares so provided as consideration upon the exercise of the previously granted Stock Option to which such reload Stock Option relates. Reload
Stock Options may be granted with respect to Stock Options previously granted under the Plan or any other Stock Option plan of the Corporation. Reload Stock Options shall have a per Share exercise price equal to the Fair Market Value as of the date
of grant of the reload Stock Option. Any Reload Option shall be subject to availability of sufficient Shares for grant under the Plan.
8.
Stock Appreciation Rights
.
(a) An SAR may be granted to an Eligible Director as a separate Award hereunder. Any SAR shall be subject to such terms and conditions as the Committee
shall impose, which shall include provisions that (i) such SAR shall entitle the Grantee, upon exercise thereof in accordance with such SAR and the regulations of the Committee, to receive from the Corporation that number of Shares having an
aggregate value equal to the excess of the Fair Market Value, at the time of exercise of such SAR, of one Share over the exercise price per Share specified by the Award of such SAR (which shall in no instance be less than 100 percent of Fair Market
Value at the time of the Award) times the number of Shares specified in such SAR, or portion thereof, which is so exercised.
(b) Any Stock Option granted under this Plan may include an SAR, either at the time of the Award or by amendment. An SAR included in a Stock Option shall
be subject to such terms and conditions as the Committee shall impose, which shall include provisions that
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(i) such SAR shall be exercisable to the extent, and only to the extent, the Stock Option
is exercisable; and
(ii) such SAR shall
entitle the Grantee to surrender to the Corporation unexercised the Stock Option in which the SAR is included, or any portion thereof, and to receive from the Corporation in exchange therefor that number of Shares having an aggregate value equal to
the excess of the Fair Market Value, at the time of exercise of such SAR, of one Share over the exercise price specified in the Award of such Stock Option times the number of Shares specified in the Award of such Stock Option, or portion thereof,
which is so surrendered.
(c) All SARs granted hereunder shall
have a maximum life of ten (10) years from the date of issuance of the Award. In no event shall any SAR vest sooner than one (1) year from the date of issuance of the Award except in the event of a Change in Control.
(d) In lieu of the right to receive all or any specified portion of such
Shares, an SAR may entitle the holder thereof to receive the cash equivalent thereof as specified by the Award.
(e) An SAR may provide that such SAR shall be deemed to have been exercised at the close of business on the business day preceding the expiration of such
SAR or the related Stock Option, if any, if at such time such SAR has positive value and would have expired.
9.
Restricted Stock
.
(a) An Award of Restricted Stock may be granted hereunder to an Eligible Director for such consideration, if any, as may be required by applicable law. The terms and conditions of Restricted Stock, including the vesting period, shall be
specified by the Committee, at its sole discretion, in the Award.
(b) Any Shares of Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or
certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded hereunder, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such award.
(c) The grant of any Award of Restricted Stock may be conditioned upon the
achievement of performance-based criteria. Further, any Award of Restricted Stock may specify performance-based criteria which, if achieved by the Corporation, will result in termination or early termination of the restrictions applicable to such
Shares.
10.
Dividend Equivalent Rights; Interest Equivalents
.
(a) A DER may be granted hereunder to an Eligible Director,
as a component of another Award or as a separate Award. The terms and conditions of DERs shall be specified by the Award. Dividend Equivalents Rights credited to the Grantee of a DER may be paid currently or may be deemed to be reinvested in
additional Shares (which may thereafter accrue additional
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Dividend Equivalents Rights). Any such reinvestment shall be at Fair Market Value at the time thereof. DERs may be settled in cash or Shares or a combination
thereof, in a single installment or installments. A DER granted as a component of another Award may provide that such DER shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other Award, and that such DER
shall expire or be forfeited or annulled under the same conditions as such other Award. A DER granted as a component of another Award may also contain terms and conditions different from such other Award.
(b) Any Award under this Plan that is settled in whole or in part in cash on
a deferred basis may provide by the Award for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the Award.
11.
Deferral of Payment
.
With the approval of the Committee, the delivery of Shares, cash or any
combination thereof subject to an award may be deferred, either in the form of installments or a single future delivery. The Committee may also permit or require selected Grantees to defer payment of some or all of their Awards, as well as other
compensation, in accordance with procedures established by the Committee to assure that recognition of taxable income is deferred under the Code.
12.
Termination of Service
.
If the service of a Grantee as a Director terminates for any reason, all unexercised, deferred and unpaid Awards may be exercisable and paid only as
specified in the Award and in accordance with rules established by the Committee. These rules may provide, as the Committee deems appropriate, subject to the terms of the Plan, for the expiration, continuation, or acceleration of the vesting of all
or part of the Awards.
13.
Detrimental Activity
.
The Committee may cancel any unexpired, unpaid or deferred Awards at any
time if the Grantee is not in compliance with all applicable provisions of this Plan or with the terms of any notice of Award or if the Grantee engages in Detrimental Activity. The Committee may, in its discretion and as a condition to the exercise
of an Award, require a Grantee to acknowledge that he or she is in compliance with all applicable provisions of the Plan and of any notice of Award and has not engaged in any Detrimental Activity. Any Award may provide that if a Grantee, either
during service as a Director or within a specified period after termination of such service, shall engage in any Detrimental Activity, and the Committee shall so find, forthwith upon notice of such finding, the Grantee shall:
(a) return to the Corporation, in exchange for payment by the Corporation of
any amount actually paid therefor by the Grantee, all Shares that the Grantee has not disposed of that were issued pursuant to this Plan within a specified period prior to the date of the commencement of such Detrimental Activity; and
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(b) with respect to any Shares so acquired that the Grantee has disposed of, pay to the Corporation in
cash the difference between:
(i) any amount
actually paid therefor by the Grantee pursuant to this Plan; and
(ii) the Fair Market Value of such Shares on the date of such acquisition.
To the extent that such amounts are not paid to the Corporation, the Corporation may set off the amounts so payable to it against any amounts that may be owing from time to time by the Corporation to the Grantee,
whether as director fees, deferred compensation or in the form of any other benefit or for any other reason.
14.
Change in Control
.
The Committee may in its discretion and upon such terms as it deems appropriate, either in the Award or subsequent thereto, accelerate the date on which any outstanding Stock Option or SAR becomes exercisable or waive the restrictions or
other terms and conditions on the vesting of any Restricted Stock in the event of a Change in Control or proposed Change in Control of the Corporation. In addition to the foregoing, the Corporation may, with the approval of the Committee, purchase
Stock Options previously granted to any Grantee who is at the time of any such transaction an Eligible Director of the Corporation for a price equal to the difference between the consideration per Share payable pursuant to the terms of the
transaction resulting in the Change in Control and the exercise price specified in the Award.
15.
Amendments to This Plan; Amendments of Outstanding Awards
.
(a) The Board may from time to time amend or terminate this Plan, or any provision hereof, provided, however, approval of the shareholders of the
Corporation will be required to the extent necessary to comply with Rule 16b-3 or any other applicable law, regulation, or stock exchange listing requirement, or to qualify for an exemption or characterization that is deemed desirable by the Board.
(b) The Committee may, in its discretion, subject to the terms
of the Plan, amend the terms of any Award, prospectively or retroactively, but no such amendment may impair the rights of any Grantee without his or her consent. The Committee may, in whole or in part, subject to the terms of the Plan, waive any
restrictions or conditions applicable to, or accelerate the vesting of, any Award.
16.
Withholding Taxes
.
The Corporation
shall have the right to deduct from any cash payment made under this Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Corporation to
deliver Shares upon exercise of a Stock Option or SAR, upon settlement of a DER, upon delivery of Restricted Stock, or upon exercise, settlement, or payment of any other Award under this Plan, that the Grantee of such Award pay to the Corporation
such amount as may be requested by the
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Corporation for the purpose of satisfying any liability for such withholding taxes. Any Award under this Plan may provide by the Award that the Grantee of
such Award may elect, in accordance with any applicable regulations of the Committee, to pay a portion or all of the amount of such minimum required or additional permitted withholding taxes in Shares. The Grantee shall authorize the Corporation to
withhold, or shall agree to surrender back to the Corporation, on or about the date such withholding tax liability is determinable, Shares previously owned by such Grantee or a portion of the shares that were or otherwise would be distributed to
such Grantee pursuant to such Award having a Fair Market Value on the day prior to the date such payment is made equal to the amount of such required or permitted withholding taxes to be paid in Shares.
17.
Grants of Awards to Eligible Directors Who are Foreign Nationals
.
Without amending this Plan, but subject to the limitations
specified in Section 15 above, the Committee may grant, amend, administer, annul, or terminate Awards to Eligible Directors who are foreign nationals on such terms and conditions different from those specified in this Plan as may in the judgment of
the Committee be necessary or desirable to foster and promote achievement of the purposes of this Plan.
18.
Termination
.
No Awards will be made under this Plan more than ten (10) years after the date on which this Plan is first approved by the shareholders of the Corporation, but all Awards made on or prior to such date will continue in effect thereafter
subject to the terms thereof and this Plan.
19.
Effective Date
.
This Plan was approved by the Board on August 12, 2004 and
will become effective when approved by the shareholders of the Corporation. Upon approval of the Plan by the shareholders of the Corporation, no further Awards may be made by the Corporation under the 1996 Plan.
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Exhibit 13
Exhibit (13) to Report
On Form
10-K for Fiscal
Year Ended June 30, 2005
By Parker-Hannifin Corporation
Forward-Looking Statements
Forward-looking statements
contained in this Annual Report and other written reports and oral statements are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements
regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the Company’s future performance and earnings projections of the Company may differ materially from current
expectations, depending on economic conditions within both its industrial and aerospace markets, and the Company’s ability to achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve
operating margins and growth and innovation initiatives. A change in economic conditions in individual markets may have a particularly volatile effect on segment performance. Among other factors which may affect future performance are:
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changes in business relationships with and purchases by or from major customers or suppliers, including delays or cancellations in shipments,
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uncertainties surrounding timing, successful completion or integration of acquisitions,
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threats associated with and efforts to combat terrorism,
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competitive market conditions and resulting effects on sales and pricing,
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increases in raw material costs that cannot be recovered in product pricing,
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the Company’s ability to manage costs related to insurance and employee retirement and health care benefits, and
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global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as
interest rates.
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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 - 1
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overview
The Company is a leading worldwide diversified manufacturer of motion control technologies and systems, providing precision engineered solutions for a wide variety of
commercial, mobile, industrial and aerospace markets.
The Company’s order
rates are highly indicative of the Company’s future revenues and thus a key metric for future performance. The Company publishes its order rates on a monthly basis. The lead time between the time an order is received and revenue is realized can
range from one day to 12 weeks for commercial, mobile and industrial orders and three to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company’s
future order rates are the Institute of Supply Management (ISM) index of manufacturing activity with respect to commercial, mobile and industrial markets and aircraft miles flown, revenue passenger miles and Department of Defense spending for
aerospace markets. An ISM index above 50 indicates that the manufacturing economy is expanding resulting in the expectation that the Company’s order rates in the commercial, mobile and industrial markets should be positive year-over-year. The
ISM index at the end of fiscal 2005 was 53.8 compared to 61.2 at the end of June 2004. With respect to the aerospace market, aircraft miles flown and revenue passenger miles have shown improvement over comparable fiscal 2004 levels and the Company
expects continued improvement in 2006. The Company anticipates that Department of Defense spending will remain at its current level or be up slightly in the near term. The Company also believes that there is a high correlation between interest rates
and Industrial manufacturing activity. The Federal Reserve raised the federal funds rate nine times during fiscal 2005. Additional increases in interest rates could have a negative impact on industrial production thereby lowering future order rates.
The Company’s major opportunities for growth are as follows:
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Leverage the Company’s broad product line with customers desiring to consolidate their vendor base and outsource engineering,
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Marketing systems solutions for customer applications,
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Expand the Company’s business presence outside of North America,
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New product introductions, including those resulting from the Company’s innovation initiatives, and
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Strategic acquisitions.
|
The financial condition of the Company remains strong as evidenced by the continued generation of substantial cash flows from operations, a debt to debt-equity ratio of 22.5 percent, ample borrowing capabilities and
strong short-term credit ratings. Cash flows from operations in 2005 were $872 million, or 10.6 percent of sales. This record amount of cash flow was achieved even though the Company made discretionary contributions to its retirement and benefits
plans of $83 million.
Many acquisition opportunities remain available to the
Company within its target markets. During fiscal 2005, the Company completed 10 acquisitions with combined annual revenues of approximately $410 million. Acquisitions will continue to be considered from time to time to the extent there is a strong
strategic fit, while at the same time, maintaining the Company’s strong financial position. The Company will also continue to assess the strategic fit of its existing businesses and initiate efforts to divest businesses that are not considered
to be a good long-term fit for the Company, as evidenced by the divestiture of the Wynn’s automotive chemical business unit in fiscal 2005.
13 - 2
Current challenges facing the Company include maintaining premier customer service levels while benefiting from strong
customer demand, successfully matching price increases to raw material price increases and the rising expenses related to insurance and employee retirement and health care benefits. The Company has implemented a number of strategic financial
performance initiatives relating to growth and margin improvement in order to meet these challenges, including strategic procurement, strategic pricing, lean manufacturing and business realignments.
The discussion below is structured to separately discuss each of the financial statements
presented on pages 13-15 to 13-19. All year references are to fiscal years.
Discussion of Consolidated Statement of Income
The
Consolidated Statement of Income summarizes the Company’s operating performance over the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net sales
|
|
$
|
8,215
|
|
|
$
|
6,999
|
|
|
$
|
6,312
|
|
|
Gross profit margin
|
|
|
20.8
|
%
|
|
|
19.0
|
%
|
|
|
16.9
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
872
|
|
|
$
|
776
|
|
|
$
|
695
|
|
|
Goodwill impairment loss
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
Interest expense
|
|
|
67
|
|
|
|
73
|
|
|
|
81
|
|
|
Other expense (income), net
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
Loss (gain) on disposal of assets
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
4
|
|
|
Effective tax rate from continuing operations
|
|
|
27.6
|
%
|
|
|
30.0
|
%
|
|
|
33.4
|
%
|
|
Income from continuing operations
|
|
$
|
548
|
|
|
$
|
336
|
|
|
$
|
192
|
|
|
Income from continuing operations, as a percent of sales
|
|
|
6.7
|
%
|
|
|
4.8
|
%
|
|
|
3.0
|
%
|
|
Discontinued operations
|
|
$
|
57
|
|
|
$
|
10
|
|
|
$
|
4
|
|
|
Net income
|
|
$
|
605
|
|
|
$
|
346
|
|
|
$
|
196
|
|
Net sales
in 2005 were
17.4 percent higher than 2004. The increase in sales in 2005 primarily reflects higher volume experienced throughout all of the Company’s segments, especially in the Industrial North American and Industrial International operations.
Acquisitions completed within the last 12 months contributed about one-third of the sales increase and the effect of currency rate changes contributed about 15 percent of the sales increase.
Net sales in 2004 were 10.9 percent higher than 2003. The increase in sales in 2004 primarily
reflects higher volume experienced in the Industrial North American and Industrial International operations. Sales in the Aerospace operations and Climate & Industrial Controls Segment increased slightly during 2004. The effects of acquisitions
completed in 2004 and currency-rate changes also contributed to the sales increase.
13 - 3
During 2005, the Company experienced strong business conditions in most of the markets that the Industrial North American
businesses serve. The Company anticipates that business conditions will continue to be strong into 2006 translating into sales growth in the mid-single-digit range with operating margin increasing in proportion to the sales increase. Sales in the
Industrial International operations are expected to increase approximately 10 percent with a corresponding low double-digit percentage increase in operating margin. The Industrial International sales and operating margin improvement is expected in
Europe and the Asia Pacific region. Aerospace operations sales are expected to increase in the mid-single-digit range with operating margins remaining at or slightly below their 2005 level. The Climate & Industrial Controls operations are
expected to experience improved economic conditions in 2006 resulting in double-digit sales growth and a corresponding double-digit operating margin percentage improvement.
Gross profit margin
was higher in 2005 as a result of the increased sales volume, most notably in the Industrial Segment. The
higher margins in both 2005 and 2004 reflect the effects of the Company’s financial performance initiatives, resulting in better manufacturing utilization levels. Current-year acquisitions, not yet fully integrated, negatively affected the
current-year gross margin.
Selling, general and administrative
expenses
increased 12.3 percent in 2005 due to higher expenses associated with employee benefit and performance-based compensation plans as well as an increase in professional fees.
Goodwill impairment loss
in 2004 resulted from the Company’s goodwill
impairment test required to be performed under the provisions of SFAS No. 142. No impairment loss was required to be recognized in 2005 or 2003.
Interest expense
declined in both 2005 and 2004 as a result of lower average debt outstanding. Interest expense in 2004 included expenses associated with
renewing the Company’s revolving credit agreement.
Loss (gain) on
disposal of assets
includes property, plant and equipment disposals, divestitures of businesses and asset impairments and other miscellaneous asset adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2005
|
|
2004
|
|
|
2003
|
|
|
Property, plant and equipment disposals
|
|
$
|
3
|
|
$
|
2
|
|
|
$
|
4
|
|
|
Divestitures
|
|
|
|
|
|
(9
|
)
|
|
|
(5
|
)
|
|
Asset adjustments
|
|
|
1
|
|
|
5
|
|
|
|
5
|
|
See Note 2 on page 13-24 for a
discussion of divestitures. See Notes 1 and 3 on pages 13-21 and 13-25, respectively, for a discussion of asset adjustments.
Effective tax rate from continuing operations
in 2005 was lower primarily due to a favorable ruling obtained from the Internal Revenue Service regarding
research and development tax credits as well as the effect of tax planning initiatives related to recent acquisitions. The lower rate in 2004 was due primarily to the net effect of both the completion of tax planning initiatives that generated a
capital loss that was used to offset capital gains in the current and prior years and the settlement of an IRS audit.
13 - 4
Income from continuing operations
- In addition to the individual income statement items discussed above,
net income in 2005 and 2004 was adversely affected by an additional expense of approximately $11 million and $28 million, respectively, related to domestic qualified defined benefit plans. The increase in expense associated with the Company’s
domestic qualified defined benefit plans results primarily from higher amortization of prior years’ actuarial losses. Net income in 2006 is expected to be adversely affected by an additional $18 million in excess of the 2005 expense for
domestic qualified defined benefit plans. The increase in pension expense in 2006 is primarily due to a reduction in the discount rate from 6.25 percent to 5.25 percent and higher expense from amortization of prior years’ actuarial losses.
Discontinued operations
represents the operating
results and related gain on the sale, net of tax, of the Wynn’s automotive chemical business unit which was divested in December 2004. The divested business unit developed and manufactured chemical car care products and maintenance equipment.
Other comprehensive income (loss)
– Items included in other
comprehensive income (loss) are gains and losses that under generally accepted accounting principles are recorded directly into stockholders’ equity. The following are the Company’s items of other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2005
|
|
|
2004
|
|
2003
|
|
|
Foreign currency translation
|
|
$
|
13
|
|
|
$
|
34
|
|
$
|
99
|
|
|
Unrealized (losses) gains on marketable equity securities
|
|
|
(11
|
)
|
|
|
5
|
|
|
|
|
|
Minimum pension liability
|
|
|
(154
|
)
|
|
|
95
|
|
|
(297
|
)
|
|
Unrealized (loss) on cash flow hedges
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
The change in foreign
currency translation in 2005 and 2004 resulted from the strengthening of the U.S. dollar against most other currencies. The minimum pension liability was recorded in comprehensive income in accordance with the requirements of SFAS No. 87 (see Note
10 on page 13-31 for further discussion). See page 13-12 for further discussion of the unrealized (loss) on cash flow hedges.
Discussion of Business Segment Information
The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company’s various businesses
are managed for internal review and decision-making. See Note 1 on page 13-20 for a description of the Company’s reportable business segments.
13 - 5
Industrial Segment
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,517
|
|
|
$
|
3,017
|
|
|
$
|
2,768
|
|
|
International
|
|
|
2,398
|
|
|
|
1,970
|
|
|
|
1,583
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
468
|
|
|
|
291
|
|
|
|
142
|
|
|
International
|
|
|
267
|
|
|
|
160
|
|
|
|
96
|
|
|
Operating income as a percent of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
13.3
|
%
|
|
|
9.6
|
%
|
|
|
5.1
|
%
|
|
International
|
|
|
11.1
|
%
|
|
|
8.1
|
%
|
|
|
6.1
|
%
|
|
Backlog
|
|
$
|
944
|
|
|
$
|
840
|
|
|
$
|
602
|
|
|
Assets
|
|
|
4,714
|
|
|
|
4,277
|
|
|
|
3,914
|
|
|
Return on average assets
|
|
|
10.4
|
%
|
|
|
7.1
|
%
|
|
|
3.7
|
%
|
Sales in 2005 for the Industrial North
American operations were 16.6 percent higher than 2004 following a 9.0 percent increase from 2003 to 2004. The increase in sales in 2005 was primarily due to acquisitions as well as higher end-user demand experienced in virtually all markets, with
the largest increases in heavy-duty truck, construction, agriculture and mobile equipment. The sales increase from 2003 to 2004 was also primarily due to higher end-user demand experienced in the heavy-duty truck, construction and agriculture
markets.
Sales in the Industrial International operations
increased 21.8 percent in 2005 following an increase of 24.4 percent from 2003 to 2004. The increase in sales in 2005 was primarily due to higher volume across most markets in Europe, Latin America and the Asia Pacific region. Acquisitions completed
in 2005 and the effect of foreign currency rate changes each contributed about 30 percent of the sales increase. The sales increase from 2003 to 2004 was primarily due to higher volume experienced in the Latin America and Asia Pacific region as well
as the effect of foreign currency rate changes and acquisitions completed in 2004.
The higher Industrial North American operating margins in 2005 and 2004 were primarily due to the increased sales volume as well as operating efficiencies. The operating efficiencies reflect the benefits of past
business realignment activities as well as the implementation of financial performance initiatives. Acquisitions, not yet fully integrated, negatively impacted margins in both 2005 and 2004. Included in Industrial North American operating income in
2005, 2004 and 2003 are business realignment charges of $3.7 million, $9.1 million and $8.3 million, respectively. The business realignment charges resulted from actions the Company took to structure the Industrial North American operations to
operate in their then current economic environment and primarily consisted of severance costs and costs relating to the consolidation of manufacturing operations.
The Industrial International operating margin improvement in 2005 and 2004 was primarily due to the higher sales volume,
especially in higher margin businesses, as well as the effects of the Company’s financial performance initiatives, especially in Europe and the Asia Pacific region.
13 - 6
Acquisitions, not fully integrated, negatively impacted margins in 2005. Operating income in 2005, 2004 and 2003 included
$9.9 million, $4.5 million and $7.9 million, respectively, of business realignment charges that were taken to appropriately structure primarily the European operations.
Industrial Segment order rates were higher throughout 2005 as virtually all markets experienced continued strength in
end-user demand. The Company expects order entry levels in 2006 in most markets of the Industrial North American operations to increase at the same pace as in 2005. Operating income in the Industrial North American operations is expected to increase
as a result of the higher sales volume and continued implementation of the Company’s financial performance initiatives.
The Company expects the Industrial International operations to experience strong end-user demand resulting in higher
sales with related improvements in operating margins. Operating margin improvements are primarily expected in the European operations and the Asia Pacific region while margins in the Latin American operations are expected to be down slightly. As
part of the Company’s financial performance initiatives, the recognition of additional business realignment charges may be required in 2006.
The increase in total Industrial Segment backlog from 2004 to 2005 is primarily due to acquisitions, which contributed one-half of the increase, as well
as higher order rates in both the Industrial North American and Industrial International businesses. The increase in total Industrial Segment backlog from 2003 to 2004 is primarily due to higher order rates within most markets in both the Industrial
North American and Industrial International businesses.
The
increase in assets in 2005 was primarily due to current-year acquisitions and the effect of currency fluctuations partially offset by a decrease in property, plant and equipment. The increase in assets in 2004 was primarily due to current-year
acquisitions and the effect of currency fluctuations.
Aerospace Segment
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales
|
|
$
|
1,359
|
|
|
$
|
1,216
|
|
|
$
|
1,183
|
|
|
Operating income
|
|
|
199
|
|
|
|
158
|
|
|
|
170
|
|
|
Operating income as a percent of sales
|
|
|
14.7
|
%
|
|
|
13.0
|
%
|
|
|
14.4
|
%
|
|
Backlog
|
|
$
|
1,229
|
|
|
$
|
1,203
|
|
|
$
|
1,043
|
|
|
Assets
|
|
|
658
|
|
|
|
635
|
|
|
|
664
|
|
|
Return on average assets
|
|
|
30.8
|
%
|
|
|
24.3
|
%
|
|
|
24.6
|
%
|
Sales in 2005
increased 11.8 percent compared to an increase of 2.8 percent from 2003 to 2004. The increase in sales in 2005 reflects the continued recovery of the commercial airline industry, in both the original equipment manufacturer (OEM) and aftermarket
markets, that began in late 2004 as well as continued strong demand in the military market. Sales in 2004 increased slightly primarily due to an upturn in commercial activity in late 2004 as well as higher volume in the military business throughout
the year.
The higher margins in 2005 were primarily due to the
higher sales volume as well as product mix partially offset by higher aircraft product liability insurance premiums. The continued implementation of the Company’s financial performance initiatives also contributed to the margin improvement in
2005. The lower margins in 2004 were primarily due to higher costs associated with employee benefit plans and product liability insurance partially offset by higher commercial volume.
The slight increase in backlog in 2005 was primarily due to higher order rates in the commercial businesses being partially
offset by lower order rates in the military business. The increase in backlog in 2004 was primarily due to higher order rates in both the commercial and military businesses. The upward trend in commercial order rates experienced in 2005 is expected
to continue in 2006. Military order rates are expected to remain at their current level. Heavier commercial OEM volume in future product mix could result in lower margins.
13 - 7
The increase in assets in 2005 was primarily due to increases in accounts receivable and inventory
partially offset by a decline in property, plant and equipment.
The decline in assets in 2004 was primarily due to a decrease in inventory and property, plant and equipment partially offset by an increase in accounts receivable.
Climate & Industrial Controls Segment
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales
|
|
$
|
794
|
|
|
$
|
671
|
|
|
$
|
666
|
|
|
Operating income
|
|
|
75
|
|
|
|
72
|
|
|
|
63
|
|
|
Operating income as a percent of sales
|
|
|
9.4
|
%
|
|
|
10.7
|
%
|
|
|
9.5
|
%
|
|
Backlog
|
|
$
|
131
|
|
|
$
|
122
|
|
|
$
|
117
|
|
|
Assets
|
|
|
696
|
|
|
|
361
|
|
|
|
377
|
|
|
Return on average assets
|
|
|
14.2
|
%
|
|
|
19.5
|
%
|
|
|
16.6
|
%
|
Sales in 2005
increased 18.3 percent compared to a slight increase in sales from 2003 to 2004. The increase in sales in 2005 was the result of current-year acquisitions partially offset by lower end-user demand experienced in the automotive market. The increase
in sales in 2004 was primarily the result of the effect of foreign currency exchange rates and higher end-user demand in the commercial refrigeration and air conditioning market. The lower margins in 2005 are primarily due to unfavorable overhead
absorption levels and higher automotive platform set-up costs as compared to 2004. The higher margin in 2004 was primarily a result of the realization of benefits from business realignment actions.
During 2005, the Climate & Industrial Controls Segment experienced soft
business conditions in the automotive market. An improvement in business conditions in the automotive market in 2006 along with a full year of operating results from acquisitions made in 2005 are expected to result in sales and operating margin
percentage increases in the low double-digit range.
The
increase in assets in 2005 was primarily due to current-year acquisitions. The decrease in assets in 2004 was due to a decline in inventory, accounts receivable and property, plant and equipment.
Other Segment
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Sales
|
|
$
|
146
|
|
|
$
|
125
|
|
|
$
|
111
|
|
|
Operating income
|
|
|
18
|
|
|
|
8
|
|
|
|
2
|
|
|
Operating income as a percent of sales
|
|
|
12.6
|
%
|
|
|
6.5
|
%
|
|
|
2.2
|
%
|
|
Backlog
|
|
$
|
52
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
Assets
|
|
|
120
|
|
|
|
116
|
|
|
|
125
|
|
|
Return on average assets
|
|
|
15.6
|
%
|
|
|
6.8
|
%
|
|
|
2.0
|
%
|
The Other Segment
consists of a business unit which designs and manufactures custom-engineered buildings. The Company has entered into a definitive agreement to sell this business unit. Finalization of the sale is subject to regulatory approval and other customary
closing conditions and is expected to take place in the first quarter of fiscal 2006. The Company anticipates recognizing a gain on the sale of this business, substantially all of which is attributed to foreign currency translation adjustments.
The increase in sales in 2005 and 2004 was primarily due to
the effect of foreign currency exchange rates as well as higher demand for custom engineered buildings. The increase in margins in 2005 and 2004 was primarily due to the higher sales volume.
13 - 8
The increase in assets in 2005 was primarily due to an increase in accounts receivable and inventory. The
decrease in assets in 2004 is primarily due to a business divestiture partially offset by the effect of currency fluctuations.
Corporate
assets decreased 15.9 percent in 2005 and 4.8 percent in 2004. The fluctuation in 2005 was primarily due to a decrease in accounts receivable and
investments and net assets of discontinued operations and an increase in inventory reserves. The fluctuation in 2004 is primarily due to the level of cash and cash equivalents.
Discussion of Consolidated 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.
|
|
|
|
|
|
|
|
|
(millions)
|
|
2005
|
|
2004
|
|
Accounts receivable
|
|
$
|
1,241
|
|
$
|
1,175
|
|
Inventories
|
|
|
1,031
|
|
|
976
|
|
Plant and equipment
|
|
|
1,592
|
|
|
1,586
|
|
Investments and other assets
|
|
|
791
|
|
|
798
|
|
Goodwill
|
|
|
1,444
|
|
|
1,178
|
|
Intangible assets, net
|
|
|
240
|
|
|
102
|
|
Accounts payable, trade
|
|
|
584
|
|
|
525
|
|
Shareholders’ equity
|
|
|
3,340
|
|
|
2,982
|
|
Working capital
|
|
$
|
1,450
|
|
$
|
1,253
|
|
Current ratio
|
|
|
2.09
|
|
|
2.01
|
Accounts
receivable
are primarily receivables due from customers for sales of product ($1,127.7 million at June 30, 2005 and $1,039.1 million at June 30, 2004). The current-year increase in accounts receivable is primarily due to acquisitions. Days sales
outstanding relating to trade receivables for the Company decreased to 46 days in 2005 compared to 48 days in 2004.
Inventories
increased primarily due to acquisitions and the effect of currency rate changes partially offset by an increase in LIFO inventory
reserves, which decreased total Inventories by $20.4 million in 2005. Days supply of inventory on hand decreased to 64 days in 2005 from 67 days in 2004.
Plant and equipment
, net of accumulated depreciation, increased slightly in 2005 as the effect of currency rate changes and current-year
acquisitions were offset mostly by depreciation expense exceeding capital expenditures.
Goodwill
increased primarily as a result of current-year acquisitions.
Intangible assets, net
consist primarily of patents, trademarks and customer lists. Intangible assets, net increased primarily due to current-year
acquisitions.
Accounts payable, trade
increased
primarily due to current-year acquisitions.
Accrued
payrolls and other compensation
increased to $268.1 million from $234.7 million primarily due to higher incentive compensation accruals.
Accrued domestic and foreign taxes
decreased to $105.8 million in 2005 from $123.0 million in 2004 primarily due to the timing of payment of
estimated income taxes between 2004 and 2005.
13 - 9
Pensions and other postretirement benefits
increased 30.1 percent in 2005. The change in this
amount is explained further in Note 10 to the Consolidated Financial Statements.
Net deferred income taxes
increased $71.0 million in 2005. The change in this amount is explained further in Note 4 to the Consolidated Financial Statements.
In June 2005, the State of Ohio enacted legislation creating a new gross
receipts tax which replaces the Ohio franchise tax over a 5-year phase-in period. The gross receipts tax will be computed based on qualifying “taxable gross receipts” and will generally not consider any expenses or costs incurred to
generate such receipts. As a result of the tax law change, deferred tax assets of $4.2 million were reversed in 2005 as no state tax benefit will be received when the liabilities become deductible.
Other liabilities
increased to $189.7 million in 2005 from $167.7
million in 2004 as a result of higher long-term incentive compensation accruals.
Shareholders’ equity
- The effect of currency rate changes during the year caused a $13.1 million increase in Shareholders’ equity. These rate changes also caused increases in accounts receivable,
inventories, plant and equipment and various accrual accounts.
Discussion
of Consolidated Statement of Cash Flows
The Consolidated Statement of
Cash Flows reflects cash inflows and outflows from the Company’s operating, investing and financing activities.
A summary of cash flows follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
872
|
|
|
$
|
649
|
|
|
$
|
557
|
|
|
Investing activities
|
|
|
(565
|
)
|
|
|
(270
|
)
|
|
|
(136
|
)
|
|
Financing activities
|
|
|
(138
|
)
|
|
|
(448
|
)
|
|
|
(222
|
)
|
|
Discontinued operations
|
|
|
(19
|
)
|
|
|
13
|
|
|
|
(1
|
)
|
|
Effect of exchange rates
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
152
|
|
|
$
|
(62
|
)
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Operating Activities –
The increase in net cash provided by operating activities in 2005 was primarily the result of an increase in net income and a decrease in cash used by other assets partially offset by a decrease in working capital and
net income from discontinued operations. Working capital decreased in 2005 primarily due to a decrease in cash flow provided from inventories, accounts payable and accrued domestic and foreign taxes, partially offset by accounts receivable. The
decrease in cash used by other assets is primarily due to a decrease in qualified defined benefit plan assets and other investment assets.
Cash Flows Used In Investing Activities –
The significant increase in the amount of cash used in investing activities in 2005 is attributable
to an increase in acquisition activity partially offset by an increase in proceeds from the sale of businesses. Capital expenditures increased $16.4 million in 2005. The level of capital expenditures is expected to be approximately 3 ½% of
sales in 2006. Refer to Note 2 on page 13-23 for a summary of net assets of acquired companies at their respective acquisition dates.
Cash Flows From Financing Activities –
In 2005, the Company decreased its outstanding borrowings by a net total of $21.2 million compared to a
decrease of $415.4 million in 2004. The substantial level of cash flow from operating activities allowed the Company to minimize the borrowings necessary to complete acquisitions in 2005 and 2004. Common share activity used cash of $23.7 million in
2005 compared to providing cash of $56.2 million in 2004 primarily due to a significant increase in the purchase of shares of the Company’s common stock for treasury, partially offset by the exercise of stock options.
13 - 10
Excluded from Cash flows from financing activities are book overdrafts of $46.3 million, $33.4 million
and $51.5 million in 2005, 2004 and 2003, respectively. These cash flows are included in Accounts payable, trade in Cash flows from operating activities. The book overdrafts result from a delay in sweeping cash from one bank to another and are
settled the next business day; therefore, the book overdrafts are not considered bank borrowings by the Company.
The Company has the availability to issue securities with an aggregate initial offering price of $775 million under its universal shelf registration
statement. Securities that may be issued under this shelf registration statement include debt securities, common stock, serial preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
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. As one means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-equity of 34 to 37 percent.
|
|
|
|
|
|
|
|
|
|
|
Debt to Debt-Equity Ratio (millions)
|
|
2005
|
|
|
2004
|
|
|
Debt
|
|
$
|
970
|
|
|
$
|
989
|
|
|
Debt & Equity
|
|
|
4,311
|
|
|
|
3,971
|
|
|
Ratio
|
|
|
22.5
|
%
|
|
|
24.9
|
%
|
The Company is
currently exploring several acquisition opportunities and additional borrowings may be used to finance acquisitions completed in 2006.
Common share activity in 2005 primarily involves the exercise of stock options and the purchase of shares of the Company’s common stock for treasury.
The purchase of the Company’s shares is done pursuant to a program to repurchase up to 1 million of the Company’s common shares on the open market, at prevailing prices, including the systematic repurchase of no less than $10 million in
common shares each fiscal quarter.
Dividends have been paid
for 220 consecutive quarters, including a yearly increase in dividends for the last 49 fiscal years. The current annual dividend rate is $.80 per share.
As of June 30, 2005 the Company has committed lines of credit totaling $1,025 million through two multi-currency unsecured revolving credit agreements.
The credit agreements support the Company’s commercial paper note program, which is rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. These ratings are considered investment grade. The revolving credit
agreements contain provisions that increase the facility fee of the credit agreement in the event the Company’s credit ratings are changed. A credit rating change would not limit the Company’s ability to use the credit agreements nor would
it accelerate the repayment of any outstanding borrowings.
The
Company seeks to minimize its total cost of borrowing and therefore uses its commercial paper note program as its primary source of working capital liquidity. The primary alternative source of borrowing for working capital liquidity is the committed
lines of credit, which typically bear a higher cost of borrowing.
The Company’s revolving credit agreements and certain debt agreements contain certain financial and other covenants, the violation of which would limit or preclude the use of the agreements for future borrowings. The most restrictive
financial covenant provides that the ratio of debt to total capitalization be less than 60 percent. As of June 30, 2005, the ratio of debt to total capitalization was 22.5 percent. The Company is in compliance with all covenants and expects to
remain in compliance during the term of the agreements.
13 - 11
Based upon the Company’s past performance and current expectations, management believes the cash
flows generated from future operating activities should provide adequate funds to support internal growth and continued improvements in the Company’s manufacturing facilities and equipment. The Company’s worldwide financial capabilities
may be used to support planned growth as needed.
Contractual
Obligations
– The Company is obligated to make future payments in fixed amounts primarily under long-term debt and various lease agreements. The following table summarizes the Company’s fixed contractual obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Payments due by period
|
|
Contractual obligations
|
|
Total
|
|
Less than 1
year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
Long-term debt (Note 9)
|
|
$
|
958,370
|
|
$
|
19,946
|
|
$
|
80,950
|
|
$
|
53,176
|
|
$
|
804,298
|
|
Interest on long-term debt
|
|
|
275,633
|
|
|
54,105
|
|
|
65,921
|
|
|
56,868
|
|
|
98,739
|
|
Operating leases (Note 9)
|
|
|
150,155
|
|
|
47,631
|
|
|
57,373
|
|
|
22,333
|
|
|
22,818
|
|
Retirement benefits (Note 10)
|
|
|
1,431,941
|
|
|
200,019
|
|
|
225,637
|
|
|
250,432
|
|
|
755,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,816,099
|
|
$
|
321,701
|
|
$
|
429,881
|
|
$
|
382,809
|
|
$
|
1,681,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative and Qualitative
Disclosures About Market Risk
The Company enters into forward exchange
contracts and costless collar contracts to reduce its exposure to fluctuations in related foreign currencies. The total carrying and fair value of open contracts and any risk to the Company as a result of these arrangements is not material to the
Company’s financial position, liquidity or results of operations. The Company has entered into two interest rate swap agreements for a total notional amount of EUR 300 million. The swap agreements expire in November 2005 and effectively protect
the Company against adverse interest rate changes in the EURO bond market and have been designated as a hedge against the Company’s anticipated refinancing of its EURO Notes that are due in November 2005. The fair value of the interest rate
swap agreements was a liability of approximately $12 million as of June 30, 2005, which has been recorded in the Consolidated Balance Sheet. The net payment or receipt under the swap agreements will be recognized as an adjustment to interest expense
over the term of the EURO Notes anticipated to be issued in November 2005. A 100 basis point decrease in the EURO bond rates specified in the interest rate swap agreements would change the fair value of the swap agreements by approximately $24.1
million.
The Company’s debt portfolio contains variable rate debt,
inherently exposing the Company to interest rate risk. The Company’s objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase
in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 2005 by approximately $0.3 million.
13 - 12
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements with unconsolidated entities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more
critical than other policies because their application places the most significant demands on management’s judgment.
Revenue Recognition
– Substantially all of the Industrial Segment, the Climate & Industrial Controls Segment and the Other Segment revenues are recognized
when the risks and rewards of ownership and title to the product have transferred to the customer. This generally takes place at the time the product is shipped. The Aerospace Segment uses the percentage of completion method to recognize a portion
of its revenue. The percentage of completion method requires the use of estimates of costs to complete long-term contracts and for some contracts includes estimating costs related to aftermarket orders. The estimation of these costs requires
substantial judgment on the part of management due to the duration of the contracts as well as the technical nature of the products involved. Adjustments to estimated costs are made on a consistent basis and a contract reserve is established when
the costs to complete a contract exceed the contract revenues.
Impairment
of Goodwill
and Long-lived Assets
– Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting
unit’s goodwill may exceed its fair value. A discounted cash flow model is used to estimate the fair value of a reporting unit. This model requires the use of long-term planning forecasts and assumptions regarding industry specific economic
conditions that are outside the control of the Company. Long-lived assets held for use are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use and eventual disposition
is less than their carrying value. The long-term nature of these assets requires the estimation of its cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the
impairment test.
Inventories
– Inventories are valued at the lower
of cost or market. Cost is determined on the last-in, first-out basis for a majority of U.S. inventories and on the first-in, first-out basis for the balance of the Company’s inventories. Inventories have been reduced by an allowance for
obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales. Changes in the allowance have not had a material effect on the Company’s results of
operations, financial position or cash flows.
Pensions and Postretirement
Benefits Other Than Pensions
– The annual net periodic expense and benefit obligations related to the Company’s defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the
discount rate, long-term return on plan assets, increases in compensation levels, amortization periods for actuarial gains and losses and health care cost trends. Assumptions are determined based on Company data and appropriate market indicators,
and are evaluated each year as of the plan’s measurement date. Changes in the assumptions to reflect actual experience as well as the
13 - 13
amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and
benefit obligations reported in the financial statements. For the Company’s domestic defined benefit plans, a one-half percentage point change in the assumed long-term rate of return on plan assets is estimated to have a $6 million effect on
pension expense and a one-half percentage point decrease in the discount rate is estimated to increase pension expense by $13 million. As of June 30, 2005, $819 million of past years’ actuarial losses related to the Company’s domestic
defined benefit plans have yet to be amortized. These losses will generally be amortized over approximately 12 years and will negatively effect earnings in the future. Actuarial gains experienced in future years will help reduce the effect of the
actuarial loss amortization.
Further information on pensions and
postretirement benefits other than pensions is provided in Note 10 to the Consolidated Financial Statements.
Other Loss Reserves
– The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability, litigation, recoverability of deferred income
tax benefits and accounts receivable reserves. Establishing loss reserves for these matters requires management’s estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss reserves are reviewed
periodically and adjustments are made to reflect the most recent facts and circumstances.
Recently Issued Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement requires retrospective application to prior period’s financial statements of changes
in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change and is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 31, 2005. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements
and is effective for the Company beginning July 1, 2005. The Company currently expects to value its share-based payment transactions using a Black-Scholes valuation model. The amounts reflected in the table on page 13-22 are anticipated to
approximate the effect of the adoption of this Statement.
13 - 14
Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net Sales
|
|
$
|
8,215,095
|
|
|
$
|
6,998,761
|
|
|
$
|
6,311,693
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
6,508,111
|
|
|
|
5,672,294
|
|
|
|
5,246,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,706,984
|
|
|
|
1,326,467
|
|
|
|
1,065,276
|
|
|
Selling, general and administrative expenses
|
|
|
872,113
|
|
|
|
775,502
|
|
|
|
694,815
|
|
|
Goodwill impairment loss (Note 7)
|
|
|
|
|
|
|
1,033
|
|
|
|
|
|
|
Interest expense
|
|
|
67,030
|
|
|
|
73,219
|
|
|
|
81,407
|
|
|
Other expense (income), net
|
|
|
7,420
|
|
|
|
(1,309
|
)
|
|
|
(2,600
|
)
|
|
Loss (gain) on disposal of assets
|
|
|
3,948
|
|
|
|
(2,104
|
)
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
756,473
|
|
|
|
480,126
|
|
|
|
287,997
|
|
|
Income taxes (Note 4)
|
|
|
208,500
|
|
|
|
143,953
|
|
|
|
96,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
547,973
|
|
|
|
336,173
|
|
|
|
191,837
|
|
|
Income from discontinued operations (Note 2)
|
|
|
56,719
|
|
|
|
9,610
|
|
|
|
4,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
604,692
|
|
|
$
|
345,783
|
|
|
$
|
196,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
(Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.61
|
|
|
$
|
2.86
|
|
|
$
|
1.65
|
|
|
Income from discontinued operations
|
|
|
0.48
|
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
5.09
|
|
|
$
|
2.94
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.55
|
|
|
$
|
2.82
|
|
|
$
|
1.64
|
|
|
Income from discontinued operations
|
|
|
0.47
|
|
|
|
0.09
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
5.02
|
|
|
$
|
2.91
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements.
Consolidated Statement of Comprehensive
Income
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net Income
|
|
$
|
604,692
|
|
|
$
|
345,783
|
|
|
$
|
196,272
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes (Note 11):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
13,138
|
|
|
|
34,487
|
|
|
|
99,029
|
|
|
Minimum pension liability
|
|
|
(154,377
|
)
|
|
|
94,513
|
|
|
|
(297,487
|
)
|
|
Net unrealized (loss) gain on marketable equity securities
|
|
|
(10,697
|
)
|
|
|
5,272
|
|
|
|
(27
|
)
|
|
Unrealized cash flow hedging (loss)
|
|
|
(7,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$
|
445,438
|
|
|
$
|
480,055
|
|
|
$
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the financial statements.
13 - 15
Business Segment Information
By Industry
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
Industrial:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,516,627
|
|
$
|
3,016,820
|
|
$
|
2,767,939
|
|
International
|
|
|
2,398,439
|
|
|
1,969,727
|
|
|
1,583,414
|
|
Aerospace
|
|
|
1,359,431
|
|
|
1,215,920
|
|
|
1,183,284
|
|
Climate & Industrial Controls
|
|
|
794,308
|
|
|
671,157
|
|
|
665,629
|
|
Other
|
|
|
146,290
|
|
|
125,137
|
|
|
111,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,215,095
|
|
$
|
6,998,761
|
|
$
|
6,311,693
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income:
|
|
|
|
|
|
|
|
|
|
|
Industrial:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
468,213
|
|
$
|
290,783
|
|
$
|
142,092
|
|
International
|
|
|
267,207
|
|
|
159,641
|
|
|
96,389
|
|
Aerospace
|
|
|
199,187
|
|
|
157,946
|
|
|
170,372
|
|
Climate & Industrial Controls
|
|
|
74,843
|
|
|
71,769
|
|
|
63,441
|
|
Other
|
|
|
18,452
|
|
|
8,138
|
|
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
1,027,902
|
|
|
688,277
|
|
|
474,725
|
|
Corporate administration
|
|
|
111,832
|
|
|
106,281
|
|
|
79,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before interest expense and other
|
|
|
916,070
|
|
|
581,996
|
|
|
394,965
|
|
Interest expense
|
|
|
67,030
|
|
|
73,219
|
|
|
81,407
|
|
Other expense
|
|
|
92,567
|
|
|
28,651
|
|
|
25,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
756,473
|
|
$
|
480,126
|
|
$
|
287,997
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
4,713,574
|
|
$
|
4,277,413
|
|
$
|
3,914,326
|
|
Aerospace
|
|
|
658,394
|
|
|
634,930
|
|
|
663,563
|
|
Climate & Industrial Controls
|
|
|
695,641
|
|
|
361,148
|
|
|
376,731
|
|
Other
|
|
|
120,443
|
|
|
116,145
|
|
|
124,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,188,052
|
|
|
5,389,636
|
|
|
5,079,499
|
|
Corporate (a)
|
|
|
710,909
|
|
|
845,597
|
|
|
887,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,898,961
|
|
$
|
6,235,233
|
|
$
|
5,967,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Additions
(b)
:
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
196,394
|
|
$
|
165,983
|
|
$
|
145,357
|
|
Aerospace
|
|
|
12,919
|
|
|
9,691
|
|
|
12,092
|
|
Climate & Industrial Controls
|
|
|
40,050
|
|
|
12,625
|
|
|
8,812
|
|
Other
|
|
|
1,662
|
|
|
1,847
|
|
|
1,731
|
|
Corporate
|
|
|
9,900
|
|
|
852
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
260,925
|
|
$
|
190,998
|
|
$
|
169,443
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
198,247
|
|
$
|
195,865
|
|
$
|
200,772
|
|
Aerospace
|
|
|
20,777
|
|
|
19,723
|
|
|
20,115
|
|
Climate & Industrial Controls
|
|
|
19,954
|
|
|
18,675
|
|
|
20,545
|
|
Other
|
|
|
2,009
|
|
|
2,067
|
|
|
1,716
|
|
Corporate
|
|
|
6,228
|
|
|
4,843
|
|
|
4,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,215
|
|
$
|
241,173
|
|
$
|
247,983
|
|
|
|
|
|
|
|
|
|
|
|
13 - 16
By Geographic Area
(c)
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,455,466
|
|
$
|
4,714,184
|
|
$
|
4,457,132
|
|
International
|
|
|
2,759,629
|
|
|
2,284,577
|
|
|
1,854,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,215,095
|
|
$
|
6,998,761
|
|
$
|
6,311,693
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,027,376
|
|
$
|
1,041,171
|
|
$
|
1,166,879
|
|
International
|
|
|
564,541
|
|
|
544,818
|
|
|
485,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,591,917
|
|
$
|
1,585,989
|
|
$
|
1,652,158
|
|
|
|
|
|
|
|
|
|
|
|
The accounting policies of the
business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a basis that is consistent with the manner in which the Company’s management
disaggregates financial information for internal review and decision-making.
|
(a)
|
Corporate assets are principally cash and cash equivalents, domestic deferred income taxes, investments, benefit plan assets, headquarters facilities, assets held for sale and the
major portion of the Company’s facilities, assets 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 (2005 - $104,358; 2004 - $50,860; 2003 - $11,370).
|
|
(c)
|
Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States
represents greater than 10% of consolidated sales. Long-lived assets are comprised of property, plant and equipment based on physical location.
|
13 - 17
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
(Dollars in thousands)
|
|
2005
|
|
|
2004
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
336,080
|
|
|
$
|
183,847
|
|
|
Accounts receivable, less allowance for doubtful accounts (2005 - $13,586; 2004 - $13,322)
|
|
|
1,241,029
|
|
|
|
1,174,601
|
|
|
Inventories (Notes 1 and 6):
|
|
|
|
|
|
|
|
|
|
Finished products
|
|
|
455,818
|
|
|
|
437,705
|
|
|
Work in process
|
|
|
427,552
|
|
|
|
415,440
|
|
|
Raw materials
|
|
|
147,592
|
|
|
|
123,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030,962
|
|
|
|
976,258
|
|
|
Prepaid expenses
|
|
|
49,956
|
|
|
|
43,907
|
|
|
Deferred income taxes (Notes 1 and 4)
|
|
|
127,845
|
|
|
|
112,828
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,785,872
|
|
|
|
2,491,441
|
|
|
Plant and equipment (Note 1):
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
184,296
|
|
|
|
175,542
|
|
|
Buildings and building equipment
|
|
|
1,025,669
|
|
|
|
952,964
|
|
|
Machinery and equipment
|
|
|
2,524,980
|
|
|
|
2,441,116
|
|
|
Construction in progress
|
|
|
42,494
|
|
|
|
46,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,777,439
|
|
|
|
3,616,567
|
|
|
Less accumulated depreciation
|
|
|
2,185,522
|
|
|
|
2,030,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591,917
|
|
|
|
1,585,989
|
|
|
Investments and other assets (Note 1)
|
|
|
791,420
|
|
|
|
798,242
|
|
|
Goodwill (Notes 1 and 7)
|
|
|
1,443,811
|
|
|
|
1,177,532
|
|
|
Intangible assets, net (Notes 1 and 7)
|
|
|
239,891
|
|
|
|
102,085
|
|
|
Deferred income taxes (Notes 1 and 4)
|
|
|
46,050
|
|
|
|
28,020
|
|
|
Net assets of discontinued operations (Note 2)
|
|
|
|
|
|
|
51,924
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,898,961
|
|
|
$
|
6,235,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable and long-term debt payable within one year (Notes 8 and 9)
|
|
$
|
31,962
|
|
|
$
|
35,198
|
|
|
Accounts payable, trade
|
|
|
584,253
|
|
|
|
525,113
|
|
|
Accrued payrolls and other compensation
|
|
|
268,113
|
|
|
|
234,678
|
|
|
Accrued domestic and foreign taxes
|
|
|
105,831
|
|
|
|
123,030
|
|
|
Other accrued liabilities
|
|
|
345,768
|
|
|
|
320,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,335,927
|
|
|
|
1,238,644
|
|
|
Long-term debt (Note 9)
|
|
|
938,424
|
|
|
|
953,796
|
|
|
Pensions and other postretirement benefits (Note 10)
|
|
|
1,058,814
|
|
|
|
813,635
|
|
|
Deferred income taxes (Notes 1 and 4)
|
|
|
35,911
|
|
|
|
79,028
|
|
|
Other liabilities
|
|
|
189,738
|
|
|
|
167,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,558,814
|
|
|
|
3,252,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
(Note 11)
|
|
|
|
|
|
|
|
|
|
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
|
Common stock, $.50 par value, authorized 600,000,000 shares; issued 120,437,280 shares in 2005 and 119,711,057 shares in 2004 at par
value
|
|
|
60,219
|
|
|
|
59,856
|
|
|
Additional capital
|
|
|
478,219
|
|
|
|
451,891
|
|
|
Retained earnings
|
|
|
3,352,888
|
|
|
|
2,840,787
|
|
|
Unearned compensation related to ESOP (Note 9)
|
|
|
(36,818
|
)
|
|
|
(48,868
|
)
|
|
Deferred compensation related to stock options
|
|
|
2,347
|
|
|
|
2,347
|
|
|
Accumulated other comprehensive (loss)
|
|
|
(470,964
|
)
|
|
|
(311,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,385,891
|
|
|
|
2,994,303
|
|
|
Common stock in treasury at cost: 743,767 shares in 2005 and 227,067 shares in 2004
|
|
|
(45,744
|
)
|
|
|
(11,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
3,340,147
|
|
|
|
2,982,454
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
6,898,961
|
|
|
$
|
6,235,233
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the financial statements.
13 - 18
Consolidated Statement of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended June 30,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
604,692
|
|
|
$
|
345,783
|
|
|
$
|
196,272
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) from discontinued operations
|
|
|
(56,719
|
)
|
|
|
(9,610
|
)
|
|
|
(4,435
|
)
|
|
Depreciation
|
|
|
247,215
|
|
|
|
241,173
|
|
|
|
247,983
|
|
|
Amortization
|
|
|
17,484
|
|
|
|
10,580
|
|
|
|
10,682
|
|
|
Deferred income taxes
|
|
|
16,268
|
|
|
|
(4,093
|
)
|
|
|
21,828
|
|
|
Foreign currency transaction loss
|
|
|
9,456
|
|
|
|
1,950
|
|
|
|
5,227
|
|
|
Loss on sale of plant and equipment
|
|
|
3,948
|
|
|
|
7,139
|
|
|
|
8,102
|
|
|
(Gain) on divestiture of businesses
|
|
|
|
|
|
|
(11,444
|
)
|
|
|
(7,400
|
)
|
|
Changes in assets and liabilities, net of effects from acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,954
|
)
|
|
|
(138,828
|
)
|
|
|
60,072
|
|
|
Inventories
|
|
|
13,829
|
|
|
|
71,696
|
|
|
|
104,806
|
|
|
Prepaid expenses
|
|
|
(2,720
|
)
|
|
|
10,203
|
|
|
|
(2,444
|
)
|
|
Other assets
|
|
|
(13,607
|
)
|
|
|
(74,531
|
)
|
|
|
(73,765
|
)
|
|
Accounts payable, trade
|
|
|
30,153
|
|
|
|
81,378
|
|
|
|
(27,620
|
)
|
|
Accrued payrolls and other compensation
|
|
|
24,568
|
|
|
|
30,445
|
|
|
|
(2,413
|
)
|
|
Accrued domestic and foreign taxes
|
|
|
2,167
|
|
|
|
50,626
|
|
|
|
21,949
|
|
|
Other accrued liabilities
|
|
|
(15,012
|
)
|
|
|
(1,851
|
)
|
|
|
22,057
|
|
|
Pensions and other postretirement benefits
|
|
|
(2,947
|
)
|
|
|
3,438
|
|
|
|
(8,020
|
)
|
|
Other liabilities
|
|
|
994
|
|
|
|
35,430
|
|
|
|
(15,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
871,815
|
|
|
|
649,484
|
|
|
|
557,562
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions (less cash acquired of $21,720 in 2005, $63,691 in 2004, and $196 in 2003)
|
|
|
(558,569
|
)
|
|
|
(200,314
|
)
|
|
|
(16,648
|
)
|
|
Capital expenditures
|
|
|
(156,567
|
)
|
|
|
(140,138
|
)
|
|
|
(158,073
|
)
|
|
Proceeds from sale of plant and equipment
|
|
|
20,359
|
|
|
|
27,195
|
|
|
|
20,752
|
|
|
Proceeds from sale of businesses
|
|
|
120,000
|
|
|
|
33,213
|
|
|
|
14,709
|
|
|
Other
|
|
|
10,217
|
|
|
|
9,783
|
|
|
|
2,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(564,560
|
)
|
|
|
(270,261
|
)
|
|
|
(136,404
|
)
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Payments for) proceeds from common share activity
|
|
|
(23,724
|
)
|
|
|
56,223
|
|
|
|
9,386
|
|
|
(Payments of) notes payable, net
|
|
|
(16,927
|
)
|
|
|
(12,785
|
)
|
|
|
(370,467
|
)
|
|
Proceeds from long-term borrowings
|
|
|
1,094
|
|
|
|
18,962
|
|
|
|
258,642
|
|
|
(Payments of) long-term borrowings
|
|
|
(5,369
|
)
|
|
|
(421,605
|
)
|
|
|
(33,891
|
)
|
|
Dividends paid, net of tax benefit of ESOP shares
|
|
|
(92,612
|
)
|
|
|
(89,286
|
)
|
|
|
(85,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(137,538
|
)
|
|
|
(448,491
|
)
|
|
|
(222,163
|
)
|
|
Net cash (used in) provided by operating activities of discontinued operations
|
|
|
(19,004
|
)
|
|
|
12,969
|
|
|
|
(505
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
1,520
|
|
|
|
(5,704
|
)
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
152,233
|
|
|
|
(62,003
|
)
|
|
|
199,466
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
183,847
|
|
|
|
245,850
|
|
|
|
46,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
336,080
|
|
|
$
|
183,847
|
|
|
$
|
245,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest
|
|
$
|
66,827
|
|
|
$
|
73,433
|
|
|
$
|
73,575
|
|
|
Income taxes
|
|
|
186,853
|
|
|
|
96,097
|
|
|
|
44,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the financial statements.
13 - 19
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
full-line manufacturer of motion-control products, including fluid power systems, electromechanical controls and related components. The Company evaluates performance based on segment operating income before Corporate general and administrative
expenses, Interest expense and Income taxes.
The Company
operates in two principal business segments: Industrial and Aerospace. The Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of
manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Industrial Segment products are marketed primarily through field sales employees and independent distributors. The North American
Industrial business represents the largest portion of the Company’s manufacturing plants and distribution networks and primarily services North America. The International Industrial operations provide Parker products and services to countries
throughout Europe, Asia Pacific and Latin America.
The
Aerospace Segment produces hydraulic, fuel and pneumatic systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and also performs a vital role in naval vessels and land-based weapons
systems. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Aerospace Segment products are marketed by field sales employees and are sold directly to manufacturers and end users.
The Company also reports a Climate & Industrial Controls Segment and an
Other Segment. The Climate & Industrial Controls Segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries. The Other Segment consists of a business unit
which designs and manufactures custom-engineered buildings. In December 2004 and February 2004, the Company divested businesses included in the Other Segment which developed and manufactured chemical car care products and maintenance equipment and
sold industrial lubricants, respectively (See Note 2 for further discussion). The products in the Climate & Industrial Controls Segment and the Other Segment are marketed primarily through field sales employees and independent distributors.
See the table of Business Segment Information “By
Industry” and “By Geographic Area” on pages 13–16 and 13-17 for further disclosure of business segment information.
There are no individual customers to whom sales are three percent or more of the Company’s consolidated sales. Due to the diverse group of customers
throughout the world the Company does not consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the
Company’s products and geographic operations mitigate significantly the risk that adverse changes would materially affect the Company’s operating results.
Use of Estimates -
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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. The Company does not have off-balance sheet arrangements with unconsolidated
entities. Within the Business Segment Information, intersegment and interarea sales are recorded at fair market value and are immaterial in amount.
13 - 20
Revenue Recognition -
Revenue is recognized when the risks and rewards of ownership and title to
the product have transferred to the customer. The Company’s revenue recognition policies are in compliance with the SEC’s Staff Accounting Bulletin (SAB) No. 104. Shipping and handling costs billed to customers are included in Net sales
and the related costs in Cost of sales.
Cash -
Cash
equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash.
Inventories -
Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued
by the last-in, first-out method and the balance of the Company’s inventories are valued by the first-in, first-out method. In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs – an
amendment of ARB No. 43, Chapter 4.” This Statement requires certain abnormal expenses be recognized as current-period charges. This Statement is effective for the Company beginning July 1, 2005 and is not expected to have a material effect on
the Company’s results of operations, financial position or cash flows.
Long-term Contracts -
The Company enters into long-term contracts for the production of aerospace products and the manufacture of custom-engineered buildings. For financial statement purposes, revenues are
recognized using the percentage-of-completion method. The extent of progress toward completion is measured using the units-of-delivery method. Unbilled costs on these contracts are included in inventory. Progress payments are netted against the
inventory balances. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Plant, Equipment and Depreciation -
Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for
financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings; 15 years for land improvements and building equipment; 10 years for machinery; seven years for equipment; and three
to five years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. When property is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the appropriate accounts and any gain or loss is included in current income.
Investments and Other Assets -
Investments in joint-venture companies in which ownership is 50% or less and in which the Company does not have
operating control are stated at cost plus the Company’s equity in undistributed earnings. These investments and the related earnings are not material to the consolidated financial statements. During 2005 the Company recorded a charge of $8,766
($.05 per share) related to a real estate investment. During 2003 the Company recorded a charge of $2,565 ($.02 per share) related to an adjustment in an equity investment in a publicly traded Japanese company. Investments and other assets include a
prepaid pension cost at June 30, 2005 and 2004 of $366,675 and $371,819, respectively, and an intangible asset recognized in connection with an additional minimum pension liability of $90,310 and $95,076 at June 30, 2005 and 2004, respectively.
Goodwill -
The Company conducts a formal impairment
test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
-
Intangible assets primarily include patents,
trademarks and customer lists and are recorded at cost and amortized on a straight-line method. Patents are amortized over their remaining legal life. Trademarks are amortized over the estimated time period over which an economic benefit is expected
to be received. Customer lists are amortized over a period based on historical customer attrition rates.
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.
Product Warranty
-
In the ordinary course of business the
Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual at June 30, 2005 and 2004 is immaterial to the financial position of the Company and the change in the accrual during
2005 was immaterial to the Company’s results of operations and cash flows.
13 - 21
Foreign Currency Translation -
Assets and liabilities of most foreign subsidiaries are translated
at current exchange rates, and income and expenses are translated using weighted average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the
Accumulated other comprehensive (loss) component of Shareholders’ equity. Such adjustments will affect Net income only upon sale or liquidation of the underlying foreign investments, which, except for the divestiture discussed on page 13-24, 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 Net income.
Financial Instruments -
The Company’s financial
instruments consist primarily of investments in cash, cash equivalents and long-term investments as well as obligations under notes payable and long-term debt. Due to their short term nature, the carrying values for Cash and cash equivalents,
Investments and other assets and Notes payable approximate fair value. See Note 9 for fair value of long-term debt.
The Company enters into forward exchange contracts (forward contracts) and costless collar contracts 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 that hedge specific transactions are
recognized in Net income, offsetting the underlying foreign currency gains or losses. Gains or losses on costless collar contracts are recognized in Net income when the spot rate of the contract falls outside the collar range.
The Company has entered into two interest rate swap agreements for a total
notional amount of EUR 300 million. The swap agreements effectively protect the Company against adverse interest rate changes in the EURO bond market and have been designated as a hedge against the Company’s anticipated refinancing of its EURO
Notes that are due in November 2005. The fair value of the interest rate swap agreements was a liability of approximately $12 million as of June 30, 2005, which has been recorded in the Consolidate Balance Sheet. The net payment or receipt under the
swap agreements will be recognized as an adjustment to interest expense over the term of the EURO Notes anticipated to be issued in November 2005.
In addition, the Company’s foreign locations in the ordinary course of business enter into financial guarantees through financial institutions which
enable customers to be reimbursed in the event of nonperformance by the Company.
The total carrying and fair value of open forward exchange and costless collar contracts and any risk to the Company as a result of the arrangements as described above is not material.
Stock Options -
The Company applies the intrinsic-value based method
to account for stock options granted to employees or 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. The Company
does recognize compensation expense related to the issuance of restricted stock. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested stock
awards using the nominal vesting period approach:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
Net income, as reported
|
|
$
|
604,692
|
|
$
|
345,783
|
|
$
|
196,272
|
|
|
|
|
|
|
|
Add: Stock-based employee compensation included in reported net income, net of tax
|
|
|
10,139
|
|
|
7,691
|
|
|
(327
|
)
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense determined under fair value method, net of tax
|
|
|
28,258
|
|
|
27,109
|
|
|
18,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
586,573
|
|
$
|
326,365
|
|
$
|
177,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic: as reported
|
|
$
|
5.09
|
|
$
|
2.94
|
|
$
|
1.69
|
|
|
pro forma
|
|
$
|
4.94
|
|
$
|
2.77
|
|
$
|
1.52
|
|
|
Diluted: as reported
|
|
$
|
5.02
|
|
$
|
2.91
|
|
$
|
1.68
|
|
|
pro forma
|
|
$
|
4.87
|
|
$
|
2.74
|
|
$
|
1.51
|
|
13 - 22
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement requires
that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement is effective for the Company beginning July 1, 2005. The Company currently expects to value its share-based payment
transactions using a Black-Scholes valuation model. The amounts reflected in the table above are anticipated to approximate the effect of the adoption of this Statement.
Reclassifications
-
Certain prior period amounts have been reclassified to conform to the current year
presentation, most notably presenting the operations of a divested business unit as discontinued operations.
2. Acquisitions and Divestitures
Acquisitions
–
In October 2004, the Company completed the acquisition of the Sporlan Valve Company (Sporlan). Sporlan is a manufacturer of refrigeration and air conditioning components, controls and systems. In November
2004, the Company acquired Acadia Elastomers Corporation, a producer of sealing solutions. Annual sales for these businesses and other businesses acquired during fiscal 2005, for their most recent fiscal year prior to acquisition, were approximately
$410 million. Total purchase price for all businesses acquired during fiscal 2005 was approximately $580 million in cash.
In February 2004, the Company completed the acquisition of Denison International plc (Denison). Denison is an industrial manufacturer and service provider for highly
engineered hydraulic fluid power systems and components. Annual sales for this business and other businesses acquired during fiscal 2004, for their most recent fiscal year prior to acquisition, were approximately $188 million. Total purchase price
for all businesses acquired during fiscal 2004 was approximately $264 million in cash.
All acquisitions were accounted for by the purchase method, and results of operations for all acquisitions are included as of the respective dates of acquisition. The purchase price allocation for acquisitions in 2005, 2004 and 2003 are
presented below. Some of the 2005 purchase price allocations are preliminary and may require subsequent adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
2003
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
51,333
|
|
$
|
49,556
|
|
|
$
|
5,339
|
|
Inventories
|
|
|
58,513
|
|
|
51,192
|
|
|
|
7,227
|
|
Prepaid expenses
|
|
|
2,703
|
|
|
2,675
|
|
|
|
219
|
|
Deferred income taxes
|
|
|
1,919
|
|
|
(4,462
|
)
|
|
|
|
|
Plant & equipment
|
|
|
104,358
|
|
|
50,860
|
|
|
|
11,370
|
|
Intangible and other assets
|
|
|
154,674
|
|
|
54,519
|
|
|
|
2,851
|
|
Goodwill
|
|
|
274,995
|
|
|
78,192
|
|
|
|
3,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648,495
|
|
|
282,532
|
|
|
|
30,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity assumed:
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
8,819
|
|
|
3,466
|
|
|
|
242
|
|
Accounts payable
|
|
|
26,301
|
|
|
12,139
|
|
|
|
2,786
|
|
Accrued payrolls
|
|
|
8,209
|
|
|
8,037
|
|
|
|
795
|
|
Accrued taxes
|
|
|
433
|
|
|
4,542
|
|
|
|
79
|
|
Other accrued liabilities
|
|
|
15,127
|
|
|
17,593
|
|
|
|
1,247
|
|
Long-term debt
|
|
|
6,415
|
|
|
2,402
|
|
|
|
785
|
|
Pensions and other postretirement benefits
|
|
|
7,239
|
|
|
18,583
|
|
|
|
|
|
Deferred income taxes
|
|
|
17,383
|
|
|
11,681
|
|
|
|
3,882
|
|
Other liabilities
|
|
|
|
|
|
3,775
|
|
|
|
4,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,926
|
|
|
82,218
|
|
|
|
13,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
558,569
|
|
$
|
200,314
|
|
|
$
|
16,648
|
|
|
|
|
|
|
|
|
|
|
|
|
13 - 23
Divestitures –
In December 2004 the Company divested a business unit which developed and manufactured
chemical car care products and maintenance equipment. This business was part of the Other Segment for segment reporting purposes. The following results of operations for this business unit have been presented as discontinued operations for all
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net sales
|
|
$
|
55,485
|
|
$
|
108,146
|
|
$
|
98,350
|
|
Earnings before income taxes
|
|
|
6,336
|
|
|
13,942
|
|
|
9,385
|
|
Net income
|
|
|
4,172
|
|
$
|
9,610
|
|
$
|
4,435
|
|
Gain on disposal, net of taxes of $16,914
|
|
$
|
52,547
|
|
|
|
|
|
|
As of June 30, 2005, there were no
assets or liabilities remaining from the discontinued operations. The net assets of discontinued operations as of June 30, 2004 primarily consisted of $24,430 of accounts receivable, $15,120 of inventory, $20,879 in goodwill, $5,865 of property,
plant and equipment, net, $9,448 of accounts payable and $5,894 of other liabilities.
In June 2004, the Company completed the divestiture of its Zenith Pump (Zenith) division. Zenith was part of the Industrial Segment for segment reporting purposes. In February 2004, the Company completed the divestiture of Wynn’s
Industrie, an industrial lubricants unit of the Wynn’s Specialty Chemicals business. Wynn’s Industrie was part of the Other Segment for segment reporting purposes. In May 2003, the Company completed the divestiture of its United Aircraft
Products (UAP) division. The UAP division was part of the Aerospace Segment for segment reporting purposes. The divestitures resulted in a gain of $11,070 ($6,223 after-tax or $.05 per share) and $7,400 ($4,618 after-tax or $.04 per share) in 2004
and 2003, respectively, and are reflected in Loss (gain) on disposal of assets in the Consolidated Statement of Income. The results of operations and net assets of the divested businesses were immaterial to the consolidated results of operations and
financial position of the Company.
The Company has entered into a definitive
agreement to sell the business unit comprising the Other Segment which designs and manufactures custom-engineered buildings. Finalization of the sale is subject to regulatory approval and other customary closing conditions and is expected to take
place in the first quarter of fiscal 2006. The results of operations and net assets of this business unit are immaterial to the consolidated results of operations and financial position of the Company. The Company anticipates recognizing a gain on
the sale of this business unit, substantially all of which is attributed to foreign currency translation adjustments.
3. Charges Related to Business Realignment
In 2005, the Company recorded a $14,263 charge ($8,900 after-tax or $.08 per share) for the costs to structure its businesses in light of current and anticipated customer
demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital. The charge primarily related to severance costs
attributable to approximately 600 employees in the Industrial Segment. A portion of the severance costs have been paid with the remaining payments expected to be made by June 30, 2006. The business realignment costs are presented primarily in the
Cost of sales caption in the Consolidated Statement of Income for 2005. A significant portion of the fiscal 2005 charge relates to the closure of a manufacturing facility in Hilden, Germany. The facility was acquired as part of the Denison
International acquisition. The decision to close the facility results from the completion of the Company’s acquisition integration analysis.
In 2004, the Company recorded a $15,146 charge ($10,140 after-tax or $.09 per share) for the costs to structure its businesses in light of current and anticipated
customer demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital. The charge primarily related to severance costs
attributable to approximately 1,200 employees in the Industrial Segment, 90 employees in the Climate & Industrial Controls Segment, 15 employees in the Other Segment and 5 employees in the Aerospace Segment. All severance payments have been made
as of June 30, 2005. Of the pre-tax amount, $13,591 relates to the Industrial Segment, $443 relates to the Climate & Industrial Controls Segment, $1,003 relates to the Other Segment and $109 relates to the Aerospace Segment. The business
realignment costs are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for 2004.
13 - 24
In 2003, the Company recorded a $24,624 charge ($16,275 after-tax or $.14 per share) related to costs of structuring its
businesses in response to current and anticipated customer demand. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital.
The business realignment charge primarily consists of severance costs of $16,237 and $8,387 of costs relating to the consolidation of manufacturing product lines. The severance costs are attributable to approximately 1,050 employees in the
Industrial Segment, 210 employees in the Aerospace Segment and 50 employees in the Other Segment. All severance payments have been made as of June 30, 2004. Of the pre-tax amount, $18,715 relates to the Industrial Segment, $2,495 relates to the
Aerospace Segment, $2,106 relates to the Climate & Industrial Controls Segment and $1,308 relates to the Other Segment. The business realignment charge is presented in the Consolidated Statement of Income for 2003 in the following captions:
$20,133 in Cost of sales; $992 in Selling, general and administrative expenses; and $3,499 in Loss (gain) on disposal of assets.
4. Income Taxes
Income from continuing operations before income taxes was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
United States
|
|
$
|
439,717
|
|
$
|
295,362
|
|
$
|
190,812
|
|
Foreign
|
|
|
316,756
|
|
|
184,764
|
|
|
97,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
756,473
|
|
$
|
480,126
|
|
$
|
287,997
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
2003
|
|
Federal
|
|
$
|
108,182
|
|
$
|
74,527
|
|
|
$
|
28,097
|
|
Foreign
|
|
|
78,676
|
|
|
61,976
|
|
|
|
44,794
|
|
State and local
|
|
|
5,374
|
|
|
11,543
|
|
|
|
1,441
|
|
Deferred
|
|
|
16,268
|
|
|
(4,093
|
)
|
|
|
21,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,500
|
|
$
|
143,953
|
|
|
$
|
96,160
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Company’s
effective income tax rate to the statutory Federal rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory Federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State and local income taxes
|
|
.6
|
|
|
1.7
|
|
|
.6
|
|
|
Export tax benefit
|
|
(1.3
|
)
|
|
(1.5
|
)
|
|
(1.3
|
)
|
|
Foreign tax rate difference
|
|
(3.8
|
)
|
|
(1.7
|
)
|
|
(2.7
|
)
|
|
Cash surrender of life insurance
|
|
(.4
|
)
|
|
(.7
|
)
|
|
.8
|
|
|
Research tax credit
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
Capital loss
|
|
(.2
|
)
|
|
(4.2
|
)
|
|
|
|
|
Other
|
|
.2
|
|
|
1.4
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
27.6
|
%
|
|
30.0
|
%
|
|
33.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
13 - 25
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Postretirement benefits
|
|
$
|
215,595
|
|
|
$
|
142,890
|
|
|
Other liabilities and reserves
|
|
|
92,778
|
|
|
|
87,013
|
|
|
Long-term contracts
|
|
|
10,689
|
|
|
|
11,542
|
|
|
Operating loss carryforwards
|
|
|
45,009
|
|
|
|
55,634
|
|
|
Foreign tax credit carryforwards
|
|
|
3,276
|
|
|
|
486
|
|
|
Valuation allowance
|
|
|
(33,199
|
)
|
|
|
(54,093
|
)
|
|
Depreciation and amortization
|
|
|
(222,021
|
)
|
|
|
(198,234
|
)
|
|
Inventory
|
|
|
15,143
|
|
|
|
11,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
127,270
|
|
|
$
|
56,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Provision for deferred tax
|
|
$
|
(16,268
|
)
|
|
$
|
4,093
|
|
|
Items of other comprehensive income
|
|
|
97,511
|
|
|
|
(45,696
|
)
|
|
Acquisitions and other
|
|
|
(10,251
|
)
|
|
|
(20,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total change in net deferred tax
|
|
$
|
70,992
|
|
|
$
|
(61,830
|
)
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2005, the Company has
recorded deferred tax assets of $45,009 resulting from $286,447 in loss carryforwards. A valuation allowance has been established due to the uncertainty of realizing certain operating loss carryforwards and items of other comprehensive income. Some
of the operating loss carryforwards can be carried forward indefinitely and others can be carried forward from one to 19 years. The decrease in the valuation allowance in 2005 was primarily due to a change in the uncertainty of realizing certain
operating loss and capital loss carryforwards. A decrease in the valuation allowance in the amount of $5,568 was attributable to the Denison acquisition, of which $2,812 reduced goodwill.
Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those
earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings.
Accumulated undistributed earnings of foreign operations reinvested in their operations
amounted to $546,740, $364,864 and $321,479, at June 30, 2005, 2004 and 2003, respectively.
The American Jobs Creation Act, signed into law in October of 2004, provides the Company a one-time opportunity to repatriate accumulated undistributed earnings and claim an 85% dividend received deduction against the
repatriated amount. At the present time, the Company does not anticipate repatriating any accumulated undistributed earnings.
13 - 26
5. Earnings Per Share
Earnings per share have been computed according to SFAS No. 128, “Earnings per Share.” Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding during the year.
Diluted earnings per share
is computed using the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock options. The computation of income from continuing
operations per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
547,973
|
|
$
|
336,173
|
|
$
|
191,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic - weighted average common shares
|
|
|
118,794,564
|
|
|
117,707,772
|
|
|
116,381,880
|
|
|
|
|
|
|
Increase in weighted average from dilutive effect of exercise of stock options
|
|
|
1,654,442
|
|
|
1,298,696
|
|
|
512,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted - weighted average common shares, assuming exercise of stock options
|
|
|
120,449,006
|
|
|
119,006,468
|
|
|
116,894,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
|
|
$
|
4.61
|
|
$
|
2.86
|
|
$
|
1.65
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
4.55
|
|
$
|
2.82
|
|
$
|
1.64
|
For 2005, 2004 and 2003, 0.2 million,
0.3 million, and 3.1 million common shares, respectively, subject to stock options were excluded from the computation of diluted earnings per share from continuing operations because the effect of their exercise would be anti-dilutive.
6. Inventories
Inventories valued on the last-in, first-out cost method were approximately 37% and 36%,
respectively, of total inventories in 2005 and 2004. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $172,944 in 2005 and $152,579 in 2004. Progress payments of $17,978 in 2005 and $14,100 in 2004 are
netted against inventories.
7. Goodwill and Intangible Assets
The Company conducts an annual impairment test as required by FASB
Statement No. 142. The annual impairment test performed in 2005 and 2003 resulted in no impairment loss being recognized. The goodwill impairment test performed in 2004 resulted in an impairment charge of $1,033 ($682 after-tax or $.01 per share)
and was recorded in the Industrial Segment. The Company uses a discounted cash flow analysis for purposes of estimating the fair value of a reporting unit. The impairment charges primarily resulted from declining market conditions and lower future
growth potential relative to expectations at the acquisition date for the reporting unit involved.
The changes in the carrying amount of goodwill for the year ended June 30, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Segment
|
|
|
Aerospace
Segment
|
|
|
Climate & Industrial
Controls Segment
|
|
|
Other
Segment
|
|
|
Total
|
|
|
Balance June 30, 2004
|
|
$
|
926,603
|
|
|
$
|
79,623
|
|
|
$
|
96,705
|
|
|
$
|
74,601
|
|
|
$
|
1,177,532
|
|
|
Acquisitions
|
|
|
108,901
|
|
|
|
|
|
|
|
166,094
|
|
|
|
|
|
|
|
274,995
|
|
|
Foreign currency translation
|
|
|
(2,393
|
)
|
|
|
(48
|
)
|
|
|
(21
|
)
|
|
|
(565
|
)
|
|
|
(3,027
|
)
|
|
Goodwill adjustments
|
|
|
(4,451
|
)
|
|
|
|
|
|
|
11
|
|
|
|
(1,249
|
)
|
|
|
(5,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2005
|
|
$
|
1,028,660
|
|
|
$
|
79,575
|
|
|
$
|
262,789
|
|
|
$
|
72,787
|
|
|
$
|
1,443,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 - 27
“Goodwill adjustments” primarily represent final adjustments to the purchase price allocation during the
twelve-month period subsequent to the acquisition date and goodwill associated with businesses divested.
Intangible assets are amortized on a straight-line method over their legal or estimated useful life. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible
asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2005
|
|
2004
|
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Patents
|
|
$
|
48,973
|
|
$
|
17,598
|
|
$
|
36,077
|
|
$
|
14,491
|
|
Trademarks
|
|
|
93,471
|
|
|
7,137
|
|
|
38,298
|
|
|
3,057
|
|
Customer lists and other
|
|
|
142,797
|
|
|
20,615
|
|
|
56,148
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
285,241
|
|
$
|
45,350
|
|
$
|
130,523
|
|
$
|
28,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible amortization expense
in 2005, 2004 and 2003 was $15,857, $7,083 and $5,760, respectively. The estimated amortization expense for the five years ending June 30, 2006 through 2010 is $19,771, $18,548, $17,050, $16,371 and $16,031, respectively.
8. Financing Arrangements
The Company has committed lines of credit totaling $1,025,000 through two multi-currency
unsecured revolving credit agreements with a group of banks, all of which was available at June 30, 2005. One agreement, totaling $625,000, expires September 2008, and the other, totaling $400,000, expires September 2009. The credit agreements
support the Company’s commercial paper note program. The interest on borrowings is based upon the terms of each specific borrowing and is subject to market conditions. These agreements also require facility fees of up to 8/100ths of one percent
of the commitment per annum at the Company’s present rating level. Covenants in some of the agreements include a limitation on the Company’s ratio of debt to total capitalization. It is the Company’s policy to reduce the amount
available for borrowing under the revolving credit agreements, on a dollar for dollar basis, by the amount of commercial paper notes outstanding.
The Company has other lines of credit, primarily short-term, aggregating $206,301 from various foreign banks, of which $191,439 was available at June 30, 2005. Most of
these agreements are renewed annually.
As of June 30, 2005 the Company has
$775,000 available under its universal shelf registration statement.
The
Company is authorized to sell up to $1,025,000 of short-term commercial paper notes, rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch, Inc. At June 30, 2005 and 2004 there were no commercial paper notes outstanding.
Short-term borrowings from foreign banks make up the balance of Notes payable.
The balance and weighted average interest rate of the Notes payable at June 30, 2005 and 2004 were $12,016 and 2.8% and $18,468 and 1.6%, respectively.
13 - 28
9. Debt
|
|
|
|
|
|
|
|
|
June 30,
|
|
2005
|
|
2004
|
|
Domestic:
|
|
|
|
|
|
|
|
Debentures
|
|
|
|
|
|
|
|
7.30%, due 2011
|
|
$
|
100,000
|
|
$
|
100,000
|
|
Fixed rate medium-term notes
|
|
|
|
|
|
|
|
6.55% to 7.39%, due 2007-2019
|
|
|
195,000
|
|
|
195,000
|
|
Fixed rate senior notes
|
|
|
|
|
|
|
|
4.88%, due 2013
|
|
|
225,000
|
|
|
225,000
|
|
ESOP loan guarantee
|
|
|
|
|
|
|
|
6.34%, due 2009
|
|
|
42,785
|
|
|
54,479
|
|
Variable rate demand bonds
|
|
|
|
|
|
|
|
2.41%, due 2010-2025
|
|
|
20,035
|
|
|
20,035
|
|
Foreign:
|
|
|
|
|
|
|
|
Bank loans, including revolving credit
|
|
|
|
|
|
|
|
1.0% to 10.0%, due 2006-2016
|
|
|
11,976
|
|
|
6,506
|
|
Euro Notes
|
|
|
|
|
|
|
|
6.25%, due 2006
|
|
|
363,060
|
|
|
365,880
|
|
Other long-term debt, including capitalized leases
|
|
|
514
|
|
|
3,626
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
958,370
|
|
|
970,526
|
|
Less long-term debt payable within one year
|
|
|
19,946
|
|
|
16,730
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
$
|
938,424
|
|
$
|
953,796
|
|
|
|
|
|
|
|
|
Included in Long-term debt are $363
million of Euro Notes that are due in November 2005. The settlement of this obligation is not expected to require the use of working capital in fiscal 2006 because the Company has both the intent and ability to refinance this debt on a long-term
basis. The repayment of this debt has been excluded from the schedule of long-term debt payable over the next five years as presented below.
Principal amounts of Long-term debt payable in the five years ending June 30, 2006 through 2010 are $19,946, $38,060, $42,890, $7,069 and $46,107, respectively. The
carrying value of the Company’s Long-term debt (excluding leases) was $957,856 and $969,901 at June 30, 2005 and 2004, respectively, and was estimated to have a fair value of $1,007,406 and $1,015,761, at June 30, 2005 and 2004, respectively.
The 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. Some of the debt agreements include a limitation on
the Company’s ratio of secured debt to net tangible assets and debt to total capitalization.
ESOP Loan Guarantee -
In 1999 the Company’s Employee Stock Ownership Plan (ESOP) was leveraged when the ESOP Trust borrowed $112,000 and used the proceeds to purchase 3,055,413 shares of the Company’s
common stock from the Company’s treasury. The loan is unconditionally guaranteed by the Company and therefore the unpaid balance of the borrowing is reflected on the Consolidated Balance Sheet as Long-term debt. A corresponding amount
representing Unearned compensation is recorded as a deduction from Shareholders’ equity.
Lease Commitments -
Future minimum rental commitments as of June 30, 2005, under noncancelable operating leases, which expire at various dates, are as follows: 2006-$47,631; 2007-$34,929; 2008-$22,444;
2009-$12,948; 2010-$9,385 and after 2010-$22,818.
Rental expense in
2005, 2004 and 2003 was $66,350, $65,252 and $63,331, respectively.
13 - 29
10. 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 uses a June 30 measurement date for a majority
of its pension plans. 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 cost for all plans was $121,596, $109,160 and $58,623 for 2005, 2004 and 2003,
respectively. Pension cost for all defined benefit plans accounted for using SFAS No. 87, “Employers’ Accounting for Pensions,” was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Service cost
|
|
$
|
64,901
|
|
|
$
|
67,103
|
|
|
$
|
56,613
|
|
|
Interest cost
|
|
|
129,609
|
|
|
|
119,770
|
|
|
|
113,464
|
|
|
Expected return on plan assets
|
|
|
(134,397
|
)
|
|
|
(127,968
|
)
|
|
|
(132,152
|
)
|
|
Net amortization and deferral and other
|
|
|
58,274
|
|
|
|
47,025
|
|
|
|
16,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
118,387
|
|
|
$
|
105,930
|
|
|
$
|
54,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
2,177,110
|
|
|
$
|
1,995,511
|
|
|
Service cost
|
|
|
64,901
|
|
|
|
67,103
|
|
|
Interest cost
|
|
|
129,609
|
|
|
|
119,770
|
|
|
Actuarial loss
|
|
|
328,884
|
|
|
|
16,172
|
|
|
Benefits paid
|
|
|
(101,629
|
)
|
|
|
(92,372
|
)
|
|
Plan amendments
|
|
|
(7,694
|
)
|
|
|
5,288
|
|
|
Acquisitions
|
|
|
7,199
|
|
|
|
25,042
|
|
|
Foreign currency translation and other
|
|
|
(4,636
|
)
|
|
|
40,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
2,593,744
|
|
|
$
|
2,177,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,624,503
|
|
|
$
|
1,315,899
|
|
|
Actual gain on plan assets
|
|
|
106,274
|
|
|
|
244,272
|
|
|
Employer contributions
|
|
|
105,385
|
|
|
|
110,674
|
|
|
Benefits paid
|
|
|
(91,513
|
)
|
|
|
(83,384
|
)
|
|
Acquisitions
|
|
|
8,158
|
|
|
|
9,698
|
|
|
Foreign currency translation and other
|
|
|
(2,997
|
)
|
|
|
27,344
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
1,749,810
|
|
|
$
|
1,624,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
|
Plan assets (under) benefit obligation
|
|
$
|
(843,934
|
)
|
|
$
|
(552,607
|
)
|
|
Unrecognized net actuarial loss
|
|
|
984,702
|
|
|
|
693,448
|
|
|
Unrecognized prior service cost
|
|
|
88,062
|
|
|
|
93,323
|
|
|
Unrecognized initial net obligation (asset)
|
|
|
229
|
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
229,059
|
|
|
$
|
234,034
|
|
|
|
|
|
|
|
|
|
|
|
13 - 30
Amounts recognized on the Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Prepaid benefit cost
|
|
$
|
366,675
|
|
|
$
|
371,819
|
|
|
Accrued benefit liability
|
|
|
(944,328
|
)
|
|
|
(703,181
|
)
|
|
Intangible asset
|
|
|
90,310
|
|
|
|
95,076
|
|
|
Accumulated other comprehensive loss
|
|
|
716,402
|
|
|
|
470,320
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
229,059
|
|
|
$
|
234,034
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for
all defined benefit plans was $2,339,083 and $1,958,613 at June 30, 2005 and 2004, respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations
in excess of plan assets were $2,543,461, $2,294,486 and $1,701,537, respectively, at June 30, 2005, and $2,137,471, $1,922,560 and $1,582,576, respectively, at June 30, 2004.
If the accumulated benefit obligation exceeds the fair value of plan assets, accounting rules require that the Company recognize a liability
that is at least equal to the unfunded accumulated benefit obligation. Accordingly, a minimum pension liability of $806,711 and $565,397 has been recognized at June 30, 2005 and 2004, respectively. The net of tax effect of recording the minimum
pension liability on shareholders’ equity was a decrease of $154,377 in 2005 and an increase of $94,513 in 2004. The minimum pension liability could be reversed should the fair value of plan assets exceed the accumulated benefit obligation at
the end of 2006.
The Company expects to contribute approximately $95 million
to its defined benefit pension plans in 2006. The majority of the expected contribution is discretionary. Estimated future benefit payments in the five years ending June 30, 2006 through 2010 are $97,417, $102,000, $108,578, $114,812 and $120,490,
respectively and $715,187 in the aggregate for the five years ending June 30, 2011 through June 30, 2015.
The assumptions used to measure net periodic benefit cost for the Company’s significant defined benefit plans are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
U.S. defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.25
|
%
|
|
6.25
|
%
|
|
7.25
|
%
|
|
Average increase in compensation
|
|
4.9
|
%
|
|
4.9
|
%
|
|
4.9
|
%
|
|
Expected return on plan assets
|
|
8.25
|
%
|
|
8.25
|
%
|
|
8.5
|
%
|
|
|
|
|
|
|
Non-U.S. defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2 to 6.25
|
%
|
|
2 to 6.75
|
%
|
|
4.5 to 6.75
|
%
|
|
Average increase in compensation
|
|
1 to 4
|
%
|
|
1 to 3.5
|
%
|
|
2.5 to 3.75
|
%
|
|
Expected return on plan assets
|
|
1 to 7.75
|
%
|
|
1 to 7.5
|
%
|
|
5 to 7.75
|
%
|
The assumptions used to measure the
benefit obligation for the Company’s significant defined benefit plans are:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
U.S. defined benefit plans
|
|
|
|
|
|
|
|
Discount rate
|
|
5.25
|
%
|
|
6.25
|
%
|
|
Average increase in compensation
|
|
4.9
|
%
|
|
4.9
|
%
|
|
|
|
|
|
Non-U.S. defined benefit plans
|
|
|
|
|
|
|
|
Discount rate
|
|
2 to 5.5
|
%
|
|
2 to 6.25
|
%
|
|
Average increase in compensation
|
|
1 to 4
|
%
|
|
1 to 4
|
%
|
13 - 31
The discount rate assumption is based on current rates on investment grade corporate bonds over the same estimated time
period that benefit payments will be required to be made. The expected return on plan assets assumption is based on the weighted-average expected return of the various asset classes in the plans’ portfolio. The asset class return is developed
using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Equity securities
|
|
64
|
%
|
|
66
|
%
|
|
Debt securities
|
|
34
|
%
|
|
31
|
%
|
|
Other
|
|
2
|
%
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
The investment strategy for the
defined benefit pension plan assets focuses on achieving prudent actuarial funding ratios while maintaining acceptable levels of risk. This strategy requires an investment portfolio that is broadly diversified across various asset classes and
investment managers. The current weighted-average target asset allocation is 63% equity securities, 35% debt securities and 2% other. At June 30, 2005 and 2004, the plans’ assets included Company stock with market values of $74,350 and $71,293,
respectively.
Employee Savings Plan -
The Company sponsors an employee
stock ownership plan (ESOP) as part of its existing savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Parker Hannifin common stock is used to match contributions made by employees to the ESOP up to a maximum
of 4.0 percent of an employee’s annual compensation. A breakdown of shares held by the ESOP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Allocated shares
|
|
|
9,558,612
|
|
|
9,453,916
|
|
|
9,440,648
|
|
Suspense shares
|
|
|
1,004,423
|
|
|
1,315,814
|
|
|
1,844,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares held by the ESOP
|
|
|
10,563,035
|
|
|
10,769,730
|
|
|
11,284,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of suspense shares
|
|
$
|
62,284
|
|
$
|
78,238
|
|
$
|
77,434
|
|
|
|
|
|
|
|
|
|
|
|
In 1999, the ESOP was leveraged and
the loan was unconditionally guaranteed by the Company. The Company’s matching contribution and dividends on the shares held by the ESOP are used to repay the loan, and shares are released from the suspense account as the principal and interest
are paid. The unreleased portion of the shares in the ESOP suspense account is not considered outstanding for purposes of earnings per share computations. Company contributions to the ESOP, recorded as compensation and interest expense, were $40,396
in 2005, $37,208 in 2004 and $37,733 in 2003. Dividends earned by the suspense shares and interest income within the ESOP totaled $962 in 2005, $1,245 in 2004 and $1,580 in 2003.
In 2004, the Company added to the employee savings plan a new separate account called the retirement income account (RIA). The RIA replaces
the defined benefit pension plan for new employees hired at locations that previously offered a salary-based formula under the pension plan. Employees who were already under the salary-based formula in the pension plan were given the choice to stay
in the pension plan or participate in the RIA. The Company makes a contribution to the participant’s RIA account each year, the amount of which is based on the participant’s age and years of service. Participants do not contribute to the
RIA. Company contributions to the RIA were $2,258 in 2005.
In addition to
shares within the ESOP, as of June 30, 2005 employees have elected to invest in 2,325,158 shares of common stock within the Company Stock Fund of the Parker Retirement Savings Plan.
13 - 32
Other Postretirement Benefits -
The Company provides postretirement medical and life insurance benefits to certain
retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments
by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change or eliminate these
benefit plans.
Certain employees are covered under benefit provisions that
include prescription drug coverage for Medicare eligible retirees. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a plan sponsor subsidy based on a
percentage of a beneficiary’s annual prescription drug benefit, within defined limits, and the opportunity for a retiree to obtain prescription drug benefits under Medicare. The impact of the subsidy on the Company’s other postretirement
benefits was immaterial.
Postretirement benefit cost included the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Service cost
|
|
$
|
1,885
|
|
$
|
1,633
|
|
$
|
1,289
|
|
Interest cost
|
|
|
6,301
|
|
|
6,270
|
|
|
5,957
|
|
Net amortization and deferral
|
|
|
71
|
|
|
409
|
|
|
2,323
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
8,257
|
|
$
|
8,312
|
|
$
|
9,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
104,895
|
|
|
$
|
101,488
|
|
|
Service cost
|
|
|
1,885
|
|
|
|
1,633
|
|
|
Interest cost
|
|
|
6,301
|
|
|
|
6,270
|
|
|
Actuarial loss
|
|
|
11,348
|
|
|
|
744
|
|
|
Benefits paid
|
|
|
(6,908
|
)
|
|
|
(5,010
|
)
|
|
Acquisitions and other
|
|
|
2,448
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
119,969
|
|
|
$
|
104,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets
|
|
$
|
(119,969
|
)
|
|
$
|
(104,895
|
)
|
|
Unrecognized net actuarial loss
|
|
|
28,417
|
|
|
|
17,521
|
|
|
Unrecognized prior service cost
|
|
|
(2,646
|
)
|
|
|
(3,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(94,198
|
)
|
|
$
|
(90,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(94,198
|
)
|
|
$
|
(90,641
|
)
|
|
|
|
|
|
|
|
|
|
|
The assumptions used to measure the
net periodic benefit cost for postretirement benefit obligations are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Discount rate
|
|
6.25
|
%
|
|
6.25
|
%
|
|
7.25
|
%
|
|
Current medical cost trend rate
|
|
9.8
|
%
|
|
8.9
|
%
|
|
9.9
|
%
|
|
Ultimate medical cost trend rate
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
Medical cost trend rate decreases to ultimate in year
|
|
2012
|
|
|
2010
|
|
|
2010
|
|
The discount rate assumption used to
measure the benefit obligation was 5.25% in 2005 and 6.25% in 2004.
13 - 33
Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2006 through 2010
are $7,602, $7,517, $7,542, $7,495 and $7,635, respectively and $40,666 in the aggregate for the five years ending June 30, 2011 through June 30, 2015.
A one percentage point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
|
|
Effect on total of service and interest cost components
|
|
$
|
1,051
|
|
$
|
(823
|
)
|
|
Effect on postretirement benefit obligation
|
|
$
|
14,200
|
|
$
|
(11,562
|
)
|
Other -
The Company has
established nonqualified deferred compensation programs, which permit officers, directors and certain management employees annually to 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 $13,622, $20,006 and $7,127 in 2005, 2004 and 2003, respectively.
The Company has invested in corporate-owned life insurance policies to assist in meeting the
obligation under these programs, including a $55 million cash contribution in 2004. The policies are held in a rabbi trust and are recorded as assets of the Company.
11. Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance July 1
|
|
$
|
59,856
|
|
|
$
|
59,143
|
|
|
$
|
59,062
|
|
|
Shares issued under stock incentive plans (2005 – 726,224 ; 2004 – 1,425,321; 2003 – 168,442)
|
|
|
363
|
|
|
|
713
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
60,219
|
|
|
$
|
59,856
|
|
|
$
|
59,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1
|
|
$
|
451,891
|
|
|
$
|
389,021
|
|
|
$
|
378,918
|
|
|
Shares issued under stock option plans
|
|
|
1,385
|
|
|
|
34,825
|
|
|
|
1,393
|
|
|
Tax benefit of stock option plans
|
|
|
16,520
|
|
|
|
13,627
|
|
|
|
1,675
|
|
|
Restricted stock issued
|
|
|
214
|
|
|
|
2,088
|
|
|
|
852
|
|
|
Shares related to ESOP
|
|
|
8,209
|
|
|
|
12,330
|
|
|
|
6,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
478,219
|
|
|
$
|
451,891
|
|
|
$
|
389,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1
|
|
$
|
2,840,787
|
|
|
$
|
2,584,268
|
|
|
$
|
2,473,808
|
|
|
Net income
|
|
|
604,692
|
|
|
|
345,783
|
|
|
|
196,272
|
|
|
Cash dividends paid on common shares, net of tax benefits
|
|
|
(92,591
|
)
|
|
|
(89,264
|
)
|
|
|
(85,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
3,352,888
|
|
|
$
|
2,840,787
|
|
|
$
|
2,584,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned Compensation Related to ESOP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1
|
|
$
|
(48,868
|
)
|
|
$
|
(63,418
|
)
|
|
$
|
(79,474
|
)
|
|
Unearned compensation related to ESOP debt guarantee
|
|
|
12,050
|
|
|
|
14,550
|
|
|
|
16,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
(36,818
|
)
|
|
$
|
(48,868
|
)
|
|
$
|
(63,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 - 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Deferred Compensation Related to Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1 and June 30
|
|
|
$2,347
|
|
|
|
$2,347
|
|
|
|
$2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1
|
|
$
|
(311,710
|
)
|
|
$
|
(445,982
|
)
|
|
$
|
(247,497
|
)
|
|
Foreign currency translation
|
|
|
13,138
|
|
|
|
34,487
|
|
|
|
99,029
|
|
|
Unrealized (loss) gain on marketable securities (net of tax of: 2005 - $6,451; 2004 – $4,979; 2003 – $16)
|
|
|
(10,706
|
)
|
|
|
8,262
|
|
|
|
(27
|
)
|
|
Realized loss (gain) on marketable securities (net of tax of: 2005 - $7; 2004 – $1,802)
|
|
|
9
|
|
|
|
(2,990
|
)
|
|
|
|
|
|
Minimum pension liability (net of tax of: 2005 - $93,127; 2004 - $44,464; 2003 - $127,558)
|
|
|
(154,377
|
)
|
|
|
94,513
|
|
|
|
(297,487
|
)
|
|
Unrealized (loss) on cash flow hedges (net of tax of: 2005 - $4,410)
|
|
|
(7,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
(470,964
|
)
|
|
$
|
(311,710
|
)
|
|
$
|
(445,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock in Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1
|
|
$
|
(11,849
|
)
|
|
$
|
(4,468
|
)
|
|
$
|
(3,648
|
)
|
|
Shares purchased at cost (2005 – 1,000,000; 2004 – 224,891; 2003 – 45,000)
|
|
|
(61,781
|
)
|
|
|
(12,691
|
)
|
|
|
(1,696
|
)
|
|
Shares issued under stock option plans (2005 – 413,582 ; 2004 – 135,291; 2003 – 14,522)
|
|
|
23,779
|
|
|
|
6,021
|
|
|
|
538
|
|
|
Restricted stock issued (surrendered)
|
|
|
4,107
|
|
|
|
(711
|
)
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30
|
|
$
|
(45,744
|
)
|
|
$
|
(11,849
|
)
|
|
$
|
(4,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares surrendered upon exercise of
stock options: 2005 – 655,385; 2004 – 737,594; 2003 – 111,538.
Share Repurchases
-
The Company has a program to repurchase up to 1 million of the Company’s common shares per fiscal year on the open market, at prevailing prices, including the systematic repurchase of no less than $10
million in common shares each fiscal quarter. At June 30, 2005, the remaining authorization to repurchase was 1.78 million shares. Repurchases are primarily funded from operating cash flows, and the shares are initially held as treasury
stock.
12. Stock Incentive Plans
Employees’ Stock Options -
The Company’s incentive plan provides 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 date options are granted. Outstanding options generally are
exercisable either one or two years 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.
13 - 35
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. See Note 1 on page
13-22 for 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.
The fair values for the significant options granted in 2005, 2004 and 2003 were estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug/04
|
|
|
Aug/03
|
|
|
Aug/02
|
|
|
Risk-free interest rate
|
|
3.50
|
%
|
|
3.4
|
%
|
|
3.3
|
%
|
|
Expected life of option
|
|
4.2 yrs
|
|
|
4.4 yrs
|
|
|
4.6 yrs
|
|
|
Expected dividend yield of stock
|
|
1.7
|
%
|
|
1.7
|
%
|
|
1.6
|
%
|
|
Expected volatility of stock
|
|
32.7
|
%
|
|
36.8
|
%
|
|
38.0
|
%
|
Options exercisable and shares
available for future grant on June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Options exercisable
|
|
|
5,445,970
|
|
|
4,957,612
|
|
|
4,898,070
|
|
Weighted-average option price per share of options exercisable
|
|
$
|
41.88
|
|
$
|
39.95
|
|
$
|
37.57
|
|
Weighted-average fair value of options granted during the year
|
|
$
|
14.97
|
|
$
|
14.38
|
|
$
|
12.68
|
|
Shares available for grant
|
|
|
8,552,300
|
|
|
9,594,980
|
|
|
525,951
|
A summary of the status and changes of
shares subject to options and the related average price per share follows:
|
|
|
|
|
|
|
|
|
|
|
Shares Subject
To Options
|
|
|
Average Option
Price Per Share
|
|
Outstanding June 30, 2003
|
|
8,317,257
|
|
|
$
|
39.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
2,347,725
|
|
|
|
47.43
|
|
Exercised
|
|
(2,270,221
|
)
|
|
|
36.75
|
|
Canceled
|
|
(95,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2004
|
|
8,299,369
|
|
|
$
|
42.03
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,728,775
|
|
|
|
55.17
|
|
Exercised
|
|
(1,776,432
|
)
|
|
|
39.28
|
|
Canceled
|
|
(101,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2005
|
|
8,150,709
|
|
|
$
|
45.31
|
|
|
|
|
|
|
|
|
13 - 36
The range of exercise prices and the remaining contractual life of options as of June 30, 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices
|
|
|
$24-$36
|
|
|
$39-$45
|
|
|
$47-$75
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding:
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2005
|
|
|
951,672
|
|
|
3,413,974
|
|
|
3,785,063
|
|
Weighted-average remaining contractual life
|
|
|
4.2 yrs
|
|
|
6.1 yrs
|
|
|
8.4 yrs
|
|
Weighted-average exercise price
|
|
$
|
33.40
|
|
$
|
42.40
|
|
$
|
50.93
|
|
|
|
|
|
|
Options exercisable:
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2005
|
|
|
951,672
|
|
|
3,413,974
|
|
|
1,080,324
|
|
Weighted-average remaining contractual life
|
|
|
4.2 yrs
|
|
|
6.1 yrs
|
|
|
7.9 yrs
|
|
Weighted-average exercise price
|
|
$
|
33.40
|
|
$
|
42.40
|
|
$
|
47.70
|
Restricted Stock -
Restricted
stock was issued under the Company’s 2003 and 1993 Stock Incentive Program to certain key employees under the Company’s 2002-03-04, 2001-02-03 and 2000-01-02 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 each 3-year Plan. 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.
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares for LTIP Plan
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued
|
|
|
66,393
|
|
|
19,566
|
|
|
18,953
|
|
Average share value on date of issuance
|
|
$
|
60.52
|
|
$
|
47.29
|
|
$
|
41.20
|
|
Total value
|
|
$
|
4,018
|
|
$
|
925
|
|
$
|
781
|
|
|
|
|
|
|
|
|
|
|
|
Under the Company’s 2003-04-05
LTIP a payout of shares of restricted stock from the Company’s 2003 Stock Incentive Program will be issued to certain key employees in 2006. The balance of the 2003-04-05 LTIP payout will be made as deferred cash compensation (if elected by the
participant) or in cash. The total payout, valued at $12,118 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 2005, 2004 and 2003, 3,132, 9,382 and 12,679 shares, respectively, were issued in lieu of directors’ fees.
13 - 37
Non-employee Directors’ Stock Options -
The Company’s Non-employee Directors’ Stock Incentive Plan
provides for the granting of nonqualified options to 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 date the options are granted. Outstanding options are
exercisable either one or two years 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
To Options
|
|
|
Average Option
Price Per Share
|
|
Outstanding June 30, 2003
|
|
55,013
|
|
|
$
|
39.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
16,965
|
|
|
|
48.94
|
|
Exercised
|
|
(9,500
|
)
|
|
|
32.38
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2004
|
|
62,478
|
|
|
$
|
43.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
39,095
|
|
|
|
56.29
|
|
Exercised
|
|
(13,663
|
)
|
|
|
44.05
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2005
|
|
87,910
|
|
|
$
|
48.79
|
|
|
|
|
|
|
|
|
As of June 30, 2005, 42,815 options
were exercisable and 246,655 shares were available for grant.
At June 30,
2005, the Company had 17,082,161 common shares reserved for issuance in connection with its stock incentive plans.
13. 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, 2005, 119,693,513 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, 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 business combination. The Rights should not interfere with any merger or other business combination that is in the best interest of the Company and
its shareholders since the Rights may be redeemed.
14. Research and
Development
Research and development costs amounted to $165,331 in 2005,
$143,023 in 2004 and $122,013 in 2003. These amounts include both costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Customer
reimbursements included in the total cost for each of the respective years were $34,757, $48,435 and $29,561.
13 - 38
15. 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, general liability and product liability up to predetermined amounts, above which third
party insurance applies. 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 liabilities. While the
outcome of pending proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these proceedings will not have a material adverse effect on the Company’s liquidity, financial condition or
results of operations.
Environmental -
The Company is currently
responsible for environmental remediation at 31 manufacturing facilities presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other companies, at two off-site waste disposal
facilities and three regional sites.
As of June 30, 2005, the Company has a
reserve of $20,612 for environmental matters, which are probable and reasonably estimable. This reserve is recorded based upon the best estimate of 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 and the amount of the Company’s liability in proportion to other responsible parties. This reserve is net of $3,363 for discounting, primarily at a 4.5 percent
discount rate, a portion of the costs at 30 locations to operate and maintain remediation treatment systems as well as gauge treatment system effectiveness through monitoring and sampling over periods up to 30 years.
The Company’s estimated total liability for the above mentioned sites ranges from a
minimum of $20,612 to a maximum of $66,517. The actual costs to be incurred by the Company will be dependent on final determination of remedial action required, negotiations with federal and state agencies, changes in regulatory requirements and
technology innovation, the effectiveness of remedial technologies employed, the ability of other responsible parties to pay, and any insurance or third party recoveries.
13 - 39
16. Quarterly Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 (a)
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
Total
|
|
Net sales
|
|
$
|
1,919,968
|
|
$
|
1,942,887
|
|
$
|
2,141,708
|
|
$
|
2,210,532
|
|
$
|
8,215,095
|
|
Gross profit
|
|
|
409,569
|
|
|
396,530
|
|
|
428,824
|
|
|
472,061
|
|
|
1,706,984
|
|
Income from continuing operations
|
|
|
130,533
|
|
|
113,853
|
|
|
142,175
|
|
|
161,412
|
|
|
547,973
|
|
Net income
|
|
|
132,783
|
|
|
171,127
|
|
|
139,370
|
|
|
161,412
|
|
|
604,692
|
|
Diluted earnings per share from continuing operations
|
|
|
1.09
|
|
|
94
|
|
|
1.18
|
|
|
1.34
|
|
|
4.55
|
|
Net diluted earnings per share
|
|
|
1.11
|
|
|
1.41
|
|
|
1.15
|
|
|
1.34
|
|
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (b)
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
Total
|
|
Net sales
|
|
$
|
1,562,105
|
|
$
|
1,593,340
|
|
$
|
1,879,057
|
|
$
|
1,964,259
|
|
$
|
6,998,761
|
|
Gross profit
|
|
|
279,223
|
|
|
279,538
|
|
|
352,760
|
|
|
414,946
|
|
|
1,326,467
|
|
Income from continuing operations
|
|
|
54,387
|
|
|
53,494
|
|
|
105,740
|
|
|
122,552
|
|
|
336,173
|
|
Net income
|
|
|
56,691
|
|
|
55,771
|
|
|
107,848
|
|
|
125,473
|
|
|
345,783
|
|
Diluted earnings per share from continuing operations
|
|
|
.46
|
|
|
.45
|
|
|
.88
|
|
|
1.02
|
|
|
2.82
|
|
Net diluted earnings per share
|
|
|
.48
|
|
|
.47
|
|
|
.90
|
|
|
1.05
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share are
computed independently for each of the quarters presented, therefore, the sum of the quarterly diluted earnings per share may not equal the total computed for the year.
|
(a)
|
Income from continuing operations for the first quarter include a $1,459 charge ($910 after-tax or $.01 per diluted share) related to business realignment costs. Income from
continuing operations for the second quarter include a $1,056 charge ($659 after-tax or $.01 per diluted share) related to business realignment costs. Income from continuing operations for the third quarter include a $6,267 charge ($3,911 after-tax
or $.03 per diluted share) related to business realignment costs. Income from continuing operations for the fourth quarter include a $5,481 charge ($3,420 after-tax or $.03 per diluted share) related to business realignment costs. Net income for the
second quarter includes an after-tax gain of $55,352 ($.47 per diluted share) related to the divestiture of a business. Net income for the third quarter includes an after-tax loss of $2,805 ($.03 per diluted share) resulting from additional
accounting adjustments related to the gain on the divestiture of a business.
|
|
(b)
|
Results for the first quarter include a $6,940 charge ($4,650 after-tax or $.04 per diluted share) related to business realignment costs. Results for the second quarter include a
$3,654 charge ($2,448 after-tax or $.02 per diluted share) related to business realignment costs. Results for the third quarter include a $1,542 charge ($1,025 after-tax or $.01 per diluted share) related to business realignment costs. Results for
the fourth quarter include a $3,010 charge ($2,017 after-tax or $.02 per diluted share) related to business realignment costs, a $1,033 goodwill impairment charge ($682 after-tax or $.01 per diluted share) and a gain of $9,973 ($6,223 after-tax or
$.05 per diluted share) related to the divestiture of a business.
|
13 - 40
17. Stock Prices and Dividends
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In dollars)
|
|
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
Full Year
|
|
2005
|
|
High
|
|
$59.42
|
|
$78.42
|
|
$76.23
|
|
$62.98
|
|
$78.42
|
|
|
|
Low
|
|
53.14
|
|
58.65
|
|
59.12
|
|
56.80
|
|
53.14
|
|
|
|
Dividends
|
|
.190
|
|
.190
|
|
.200
|
|
.200
|
|
.780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
High
|
|
$50.85
|
|
$59.80
|
|
$61.00
|
|
$59.96
|
|
$61.00
|
|
|
|
Low
|
|
40.76
|
|
44.57
|
|
53.50
|
|
51.73
|
|
40.76
|
|
|
|
Dividends
|
|
.190
|
|
.190
|
|
.190
|
|
.190
|
|
.760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
High
|
|
$47.30
|
|
$48.20
|
|
$48.93
|
|
$45.84
|
|
$48.93
|
|
|
|
Low
|
|
35.95
|
|
34.52
|
|
35.82
|
|
38.00
|
|
34.52
|
|
|
|
Dividends
|
|
.180
|
|
.180
|
|
.190
|
|
.190
|
|
.740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Listing: New York Stock
Exchange, Stock Symbol PH
13 - 41
Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
We assessed the effectiveness of our internal control over financial reporting as of June 30, 2005. We have excluded six entities from our evaluation of internal control
over financial reporting as of June 30, 2005 because the entities were acquired in purchase business combinations during the year ended June 30, 2005. On a combined basis, the entities represent approximately 3.0% of total assets and 2.8% of total
revenues as of and for the fiscal year ended June 30, 2005. In making this assessment, we used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework
.
We concluded that based on its assessment, the Company’s internal control over financial reporting was effective as of June 30, 2005.
Our assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
|
|
|
|
|
/s/ Donald E. Washkewicz
|
|
/s/ Timothy K. Pistell
|
|
Chairman and
|
|
Executive Vice President – Finance
|
|
Chief Executive Officer
|
|
and Administration and
|
|
|
|
Chief Financial Officer
|
13 - 42
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Parker Hannifin Corporation:
We have completed an integrated audit of Parker Hannifin Corporation’s 2005 consolidated financial statements and of its internal control over financial reporting as
of June 30, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the
index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of Parker Hannifin Corporation and its subsidiaries (the “Company”) at June 30, 2005 and 2004, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
index appearing in Item 15(a)(1) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit of financial statements 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 our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of June 30, 2005 based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria
established in
Internal Control - Integrated Framework
issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinions.
13 - 43
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As described in
Management’s Report on Internal Control Over Financial Reporting, management has excluded six entities from its assessment of internal control over financial reporting as of June 30, 2005 because they were acquired by the Company in purchase
business combinations during the year ended June 30, 2005. We have also excluded these six entities from our audit of internal control over financial reporting. The excluded entities are wholly-owned subsidiaries whose total assets and total
revenues represent 3.0% and 2.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2005.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
August 15, 2005
13 - 44
Five-Year Financial Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share information)
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Net sales
|
|
$
|
8,215,095
|
|
|
$
|
6,998,761
|
|
|
$
|
6,311,693
|
|
|
$
|
6,149,122
|
|
|
$
|
5,979,604
|
|
|
Cost of sales
|
|
|
6,508,111
|
|
|
|
5,672,294
|
|
|
|
5,246,417
|
|
|
|
5,116,570
|
|
|
|
4,728,156
|
|
|
Selling, general and administrative expenses
|
|
|
872,113
|
|
|
|
775,502
|
|
|
|
694,815
|
|
|
|
686,485
|
|
|
|
679,963
|
|
|
Goodwill impairment loss
|
|
|
|
|
|
|
1,033
|
|
|
|
|
|
|
|
39,516
|
|
|
|
|
|
|
Interest expense
|
|
|
67,030
|
|
|
|
73,219
|
|
|
|
81,407
|
|
|
|
82,484
|
|
|
|
95,775
|
|
|
Income taxes
|
|
|
208,500
|
|
|
|
143,953
|
|
|
|
96,160
|
|
|
|
87,886
|
|
|
|
187,391
|
|
|
Income - continuing operations
|
|
|
547,973
|
|
|
|
336,173
|
|
|
|
191,837
|
|
|
|
130,150
|
|
|
|
340,792
|
|
|
Net income
|
|
|
604,692
|
|
|
|
345,783
|
|
|
|
196,272
|
|
|
|
130,150
|
|
|
|
340,792
|
|
|
Basic earnings per share - continuing operations
|
|
|
4.61
|
|
|
|
2.86
|
|
|
|
1.65
|
|
|
|
1.13
|
|
|
|
2.98
|
|
|
Diluted earnings per share - continuing operations
|
|
|
4.55
|
|
|
|
2.82
|
|
|
|
1.64
|
|
|
|
1.12
|
|
|
|
2.96
|
|
|
Basic earnings per share
|
|
|
5.09
|
|
|
|
2.94
|
|
|
|
1.69
|
|
|
|
1.13
|
|
|
|
2.98
|
|
|
Diluted earnings per share
|
|
$
|
5.02
|
|
|
$
|
2.91
|
|
|
$
|
1.68
|
|
|
$
|
1.12
|
|
|
$
|
2.96
|
|
|
Average number of shares outstanding - Basic
|
|
|
118,795
|
|
|
|
117,708
|
|
|
|
116,382
|
|
|
|
115,409
|
|
|
|
114,305
|
|
|
Average number of shares outstanding - Diluted
|
|
|
120,449
|
|
|
|
119,006
|
|
|
|
116,895
|
|
|
|
116,061
|
|
|
|
115,064
|
|
|
Cash dividends per share
|
|
$
|
.780
|
|
|
$
|
.760
|
|
|
$
|
.740
|
|
|
$
|
.720
|
|
|
$
|
.700
|
|
|
Net income as a percent of net sales
|
|
|
7.4
|
%
|
|
|
4.9
|
%
|
|
|
3.1
|
%
|
|
|
2.1
|
%
|
|
|
5.7
|
%
|
|
Return on average assets
|
|
|
9.2
|
%
|
|
|
5.7
|
%
|
|
|
3.3
|
%
|
|
|
2.3
|
%
|
|
|
12.8
|
%
|
|
Return on average equity
|
|
|
19.1
|
%
|
|
|
12.6
|
%
|
|
|
7.7
|
%
|
|
|
5.1
|
%
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
28.14
|
|
|
$
|
25.24
|
|
|
$
|
21.63
|
|
|
$
|
22.26
|
|
|
$
|
21.99
|
|
|
Working capital
|
|
$
|
1,449,945
|
|
|
$
|
1,252,797
|
|
|
$
|
947,690
|
|
|
$
|
875,781
|
|
|
$
|
783,233
|
|
|
Ratio of current assets to current liabilities
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
Plant and equipment, net
|
|
$
|
1,591,917
|
|
|
$
|
1,585,989
|
|
|
$
|
1,652,158
|
|
|
$
|
1,696,965
|
|
|
$
|
1,548,688
|
|
|
Total assets
|
|
|
6,898,961
|
|
|
|
6,235,233
|
|
|
|
5,967,214
|
|
|
|
5,752,583
|
|
|
|
5,337,661
|
|
|
Long-term debt
|
|
|
938,424
|
|
|
|
953,796
|
|
|
|
966,332
|
|
|
|
1,088,883
|
|
|
|
857,078
|
|
|
Shareholders’ equity
|
|
$
|
3,340,147
|
|
|
$
|
2,982,454
|
|
|
$
|
2,520,911
|
|
|
$
|
2,583,516
|
|
|
$
|
2,528,915
|
|
|
Debt to debt-equity percent
|
|
|
22.5
|
%
|
|
|
24.9
|
%
|
|
|
35.6
|
%
|
|
|
36.8
|
%
|
|
|
35.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
247,215
|
|
|
$
|
241,173
|
|
|
$
|
247,983
|
|
|
$
|
231,235
|
|
|
$
|
200,270
|
|
|
Capital expenditures
|
|
$
|
156,567
|
|
|
$
|
140,138
|
|
|
$
|
158,073
|
|
|
$
|
206,564
|
|
|
$
|
334,748
|
|
|
Number of employees
|
|
|
50,638
|
|
|
|
48,099
|
|
|
|
46,449
|
|
|
|
48,176
|
|
|
|
46,302
|
|
|
Number of shareholders
|
|
|
54,632
|
|
|
|
54,683
|
|
|
|
51,154
|
|
|
|
53,001
|
|
|
|
50,731
|
|
|
Number of shares outstanding at year-end
|
|
|
118,689
|
|
|
|
118,168
|
|
|
|
116,526
|
|
|
|
116,051
|
|
|
|
114,989
|
|
13 - 45
