Annual Report 2013
On the cover, Michael Gore, a T10 complete paraplegic,
stands tall in the Parker Indego® which gives him the
independence to do something he was told by the medical
community that he would never do again – walk. Parker
is pursuing a new growth platform in human motion
and control as a natural extension of our vision to be the
global leader in motion and control technologies. Indego®
presents a compelling first step in a broader opportunity
to create a meaningful and positive impact on the lives of
individuals with limited mobility.
This year’s annual report focuses on innovations that
have helped our customers solve problems. The difference
made in the lives of our customers is representative
of the broader change we hope to effect in the world
around us.
Food
Water
Energy
Transportation
Defense
Environment
Infrastructure
Life Sciences
It is our dedication to solving some of the world’s greatest
engineering challenges, and our commitment to partner
with our customers in search of unique and promising
advancements, that drives Parker people forward and
secures our future growth.
The Year In Review
For The Years Ended June 30,
(dollars in thousands, except per share data)
Operating Data
2013
2012
2011
Net sales ......................................................................................
$ 13,015,704
$ 13,145,942
$ 12,345,870
Gross profit ...................................................................................
2,929,029
3,187,605
2,958,413
Net income attributable to common shareholders ..........................
948,427
1,151,823
1,049,130
Net cash provided by operating activities ......................................
1,190,935
1,530,385
1,166,933
Net cash (used in) investing activities ............................................
(809,845)
(375,768)
(244,938)
Net cash provided by (used in) financing activities .........................
576,174
(823,520)
(915,778)
Per Share Data
Diluted earnings ............................................................................
$
6.26
$
7.45
$
Dividends ......................................................................................
Book value ....................................................................................
1.70
38.44
1.54
32.72
6.37
1.25
34.71
Ratios
Return on sales ................................................................................
7.3 %
8.8 %
8.5 %
Return on average assets..................................................................
Return on average shareholders’ equity ............................................
Debt to debt-shareholders’ equity .....................................................
8.0
17.8
33.0
10.4
22.4
26.1
10.1
21.5
24.7
Other
Number of employees .......................................................................
58,151
59,331
58,409
3
1
0
2
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
3
1
0
2
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
3
1
0
2
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
3
1
0
2
3
1
0
2
14,000
13,000
3,250
12,000
3,000
11,000
2,750
10,000
2,500
9,000
2,250
8,000
2,000
7,000
1,750
6,000
1,500
5,000
1,250
4,000
1,000
3,000
750
2,000
500
3
1
0
2
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
1
0
2
0
1
1
0
2
2
1
0
2
3
1
0
2
3
1
0
2
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
3,250
1,200
3,000
1,100
2,750
1,000
3
1
0
2
2,500
900
2,250
800
2,000
700
1,750
600
1,500
500
1,250
1,000
400
750
300
500
200
3
1
0
2
1,200
1,100
1,000
900
800
700
600
500
400
300
200
3
1
0
2
1,200
1,100
1,000
900
800
700
600
500
400
300
200
3
1
0
2
240
220
200
180
160
140
120
100
80
60
40
1,200
3
1
0
1,100
2
1,000
900
800
700
600
500
400
300
200
3
1
0
2
240
220
200
180
160
140
120
100
80
60
40
3
1
0
2
240
220
200
180
160
140
120
100
80
60
40
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Net Sales
Millions of Dollars
9
0
0
2
2
1
0
2
0
1
1,000
1
1
0
0
2
2
0
Net Sales
Millions of Dollars
2
1
0
2
9
0
0
2
1,000
0
1
1
1
0
0
2
2
0
Net Sales
Millions of Dollars
9
0
0
2
9
0
0
2
1
1
0
2
2
1
0
2
2
1
0
2
0
0
1
1,000
1
1
1
0
0
0
2
2
2
0
Net Sales
Gross Profit
Millions of Dollars
Millions of Dollars
9
0
0
2
0
0
250
1,000
1
0
2
0
1
1
0
2
2
1
0
2
9
0
0
2
Gross Profit
Millions of Dollars
Gross Profit
Millions of Dollars
9
0
0
2
1
1
0
2
2
1
0
2
1
0
1
1
0
0
2
2
2
1
1
1
0
0
2
2
0
100
1
0
2
0
0
250
9
1
0
0
0
2
2
0
Gross Profit
Net Income Attributable to
Common Shareholders
Millions of Dollars
Millions of Dollars
9
250
0
0
2
0
Net Income Attributable to
Common Shareholders
Millions of Dollars
100
0
1
0
2
0
9
0
0
2
2
1
0
2
2
1
0
2
1
1
0
2
100
1
1
0
2
1
1
0
2
2
1
0
2
9
0
0
2
9
0
0
2
0
2
1
1
0
0
2
2
9
1
0
1
0
0
2
2
0
100
1
0
2
0
20
0
1
0
2
0
Net Income Attributable to
Sales Per Average
Common Shareholders
Number of Employees
Millions of Dollars
Thousands of Dollars
20
0
1
0
2
0
Sales Per Average
Number of Employees
Thousands of Dollars
20
0
1
0
2
0
Sales Per Average
Number of Employees
Thousands of Dollars
0
Sales Per Average
Number of Employees
Thousands of Dollars
9
0
0
2
9
0
0
2
2
1
0
2
2
1
0
2
2
1
0
2
1
1
0
2
1
1
0
2
0
Net Income Attributable to
Common Shareholders
Millions of Dollars
3
1
0
2
240
220
200
180
160
140
120
100
80
60
40
20
1
Letter to Shareholders
Don E. Washkewicz, Chairman, Chief Executive Officer and President
In this year’s annual report, we highlight
some of the many examples of what Parker
is really all about - helping our customers
address real world engineering challenges
that benefit everyday people. Dating back
to Art Parker’s original product 95 years
ago - a revolutionary pneumatic braking
system that improved safety on trucks -
the inventive spirit illustrated throughout
these pages remains a distinct competitive
advantage for Parker. The breadth of our
proven technology offerings means that,
today, there is much more opportunity for
Parker to solve some of the world’s greatest
engineering challenges.
A Fundamentally Stronger Business
Fiscal year 2013 reflected ongoing softness in the
global macroeconomic environment, particularly in
markets outside North America. In the face of this
challenge, Parker adapted quickly to the uncertainty
that confronted us. We delivered strong financial
performance in less-than-ideal market conditions
and continued to advance our long-term growth
initiatives.
• Total sales were $13.0 billion. A 3% contribution
from acquisitions was offset by lower organic sales,
currency rate changes and two divestitures of
non-core businesses.
• Total segment operating margins were 13.8%
representing strong performance despite soft economic
conditions.
2
• Net income for the year was $948.8 million, or $6.26
per diluted share. Earnings were impacted primarily
by lower volume, acquisition and integration related
costs and higher engineering development expenses in
the Aerospace segment.
• Net cash provided by operating activities remained
strong and reached $1.2 billion. Before a discretionary
contribution to our pension plan, net cash provided
by operating activities was 10.9% of sales, which is
the 12th consecutive year that we generated operating
cash flow as a percentage of sales greater than 10%.
Free cash flow(1) of $1.1 billion, before discretionary
pension contributions, exceeded net income for the
12th year in a row.
• In fiscal year 2013, we strengthened our portfolio
by acquiring eight companies totaling just under
$500 million in annualized sales and completed
divestitures within the Climate and Industrial
Controls (CIC) segment totaling more than $150
million in annualized sales.
• A strong balance sheet and healthy free cash flows
also allowed us the flexibility to raise our dividend
by 10% during the year. This represents the 57th
consecutive fiscal year that we have increased our
annual dividend. Our payout has doubled in the past
five years.
• We repurchased $257 million worth of our own shares
in fiscal year 2013 reaffirming our confidence in
Parker as a stable long-term investment.
Reflecting on fiscal year 2013, the global Parker team
responded quickly to the challenges presented to them
while staying focused on executing the Win Strategy.
Having demonstrated the resilience of our business,
we embark on the new fiscal year a stronger company.
Focused on Profitable Growth
We continue to balance resources and focus on
long-term profitable growth. Our goal is to generate
12% sales growth over the economic cycle with 4%
from acquisitions and 8% from organic growth. We are
also targeting 15% segment operating margin, which
we now believe can be achieved by the end of fiscal
year 2015.
Margin expansion is expected to come from three
primary sources. In fiscal year 2014, we estimate
spending approximately $100 million to right-size
our global operations, reflecting what we believe will
be a modest global growth environment. We expect
the significant savings from these actions to begin
accruing in fiscal year 2014 and thereafter. Within
our aerospace business, we will have lower up front
development costs associated with the large number
of new program wins that we have secured in previous
years as those projects begin to be commercialized.
Additionally, our innovation pipeline continues to
drive not only higher levels of organic growth but
also higher levels of profit margin as many of these
new projects carry a higher-than-average margin for
Parker.
During the year the acquisitions we made helped us
strengthen our portfolio, gain access to new markets,
increase our aftermarket exposure and increase our
presence in key growth markets. We completed our
previously announced acquisition of the Olaer Group
in the U.K., expanding Parker’s presence in important
geographic areas and offering expertise in hydraulic
accumulator and cooling systems. The acquisition of
the filtration business of John Fowler and the hose and
fittings business of PIX Transmissions Ltd. helped us
expand in India. We acquired U.K.-based Kittiwake
Developments Ltd., bringing us the ability to offer
condition monitoring technology in targeted growth
markets. Our acquisitions of Velcon Filters, LLC and
Twelve Consecutive Years of Greater Than 10% Cash Flow
as a Percent of Sales
Net Cash Provided by Operating Activities*
Millions of Dollars
2,000
1,500
1,000
500
0
3
1
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
*Before discretionary pension contributions.
(1) Free cash flow of $1.1 billion is calculated as net cash provided by operating activities
of $1.2 billion minus capital expenditures of $0.3 billion plus discretionary pension
contributions of $0.2 billion.
3
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Sea Recovery also strengthened our filtration offering.
The acquisition of PGI International strengthened
Parker’s position in the oil and gas and general
instrumentation markets.
We further realigned our portfolio with the divestiture
of the automotive air conditioning portion of our
Mobile Climate Systems Division to ContiTech AG.
Subsequently, we consolidated the CIC group into
other operating groups within the company to better
leverage the natural synergies among them and
foster greater focus, efficiencies and opportunities for
growth. Additionally, Parker Aerospace entered into
an agreement with GE Aviation to form a joint venture,
Advanced Atomization Technologies, LLC, to enhance
the development and manufacture of commercial
aircraft engine fuel nozzles.
As is evident from the examples in this report,
innovation continues to play the preeminent role in
our growth strategy and is expected to account for half
of our organic growth rate target. We set a high bar for
new product contributions by using a disciplined new
product development process that we call Winovation.
New products must meet strict definitional criteria as
new-to-the-world, new-to-the-market. Our measure
of success is then established as the incremental
portfolio value from these new products, which is
targeted at 4% sales growth each year.
We are making this new product development
success happen by creating synergies across all
of our operating groups. Teams are collaborating
with greater frequency and efficiency, often using
combinations of components and systems to develop
fresh approaches to solving customer challenges. We
are targeting key growth areas such as food, water,
energy, transportation, environment, infrastructure,
defense and life sciences. While these initiatives
may not spark significant annual sales alone, their
cumulative impact can add up to sizeable revenues.
Today, we have more than 1,800 products in our
Winovation pipeline.
In fiscal year 2013, we also expanded our technology
capabilities by signing an exclusive licensing
agreement with Vanderbilt University to further
develop their exoskeleton technology, which allows
individuals with severe spinal cord injury to walk and
enhances rehabilitation for people who have suffered
a stroke. Branded under the name Indego®, Parker is
Cleveland State University opened the Parker Hannifin Human Motion and
Control lab in August 2013. The lab, established with a $1.5 million pledge from
Parker, contains state-of-the-art treadmills, motion sensors and 3D imaging
equipment. The lab will be used to research and develop new technology for
prostheses and powered orthoses.
continuing to refine the key advantages of this exciting
technology and plans to commercialize it in 2015.
Indego is just the beginning of what is an exciting
new growth platform for Parker in human motion
and control technologies. During the year, we also
established an endowed professorship at Cleveland
State University and opened the Parker Hannifin
Human Motion and Control Lab under the direction of
renowned expert, Dr. Antonie van den Bogert. The lab
will be used to further our understanding of human
motion, informing the development of next generation
assistive motion technologies.
Continued innovation across all of our technologies
is creating new opportunities for Parker in developing
complete systems that are ready to use in a customer
application in contrast to a historical focus on
components. From developments in filtration systems
that furnish clean water to fuel cell systems that may
one day provide clean, efficient, grid-free power to
homes, Parker continues to focus on systems that solve
some of the world’s greatest engineering challenges.
This shift helps reduce the number of suppliers our
customers have to source from and ensures the highest
quality system built solely with Parker components,
providing unparalleled value for the customer and
generating higher returns for our shareholders. System
sales now represent approximately 25% of our total
sales.
The distribution side of Parker’s business cannot be
matched by any competitor and is nearly impossible
to replicate. In fiscal year 2013, we continued to
expand this advantage by adding more than 400 new
distributor authorizations. Early in the fiscal year,
we reached a milestone by celebrating the opening
of the 2,000th ParkerStore in France, one of 214 new
ParkerStore retail locations. Our distribution business
is so connected to customers that about half of our
industrial revenues come from maintenance, repair
and overhaul (MRO) sales through distributors. As a
critical aspect of our growth plans, we will continue to
support this vital channel to market.
We continue to expand geographically as a way to
better balance our sales across regions and take
advantage of key markets that are expected to
grow faster than global GDP. In fiscal year 2013,
we celebrated the opening of our newest facility
in Chennai, India. A $20 million investment, this
266,000 square foot factory will improve our ability
to respond to increasing demand for engineering
solutions in India. Chennai is among six green-field
manufacturing sites that are either completed or in
progress across emerging markets in the Asia Pacific
region within the past two years.
While 12% sales growth may appear to be an
aggressive goal, we are pursuing multiple paths to
achieve it. Our continued focus on the Win Strategy
and strong operational execution, as we take
advantage of these opportunities for growth, will give
us the ability to drive even higher levels of profitability.
Excited for the Future
Fiscal year 2013 proved to us that Parker has
transformed into a fundamentally stronger business
under the development of the Win Strategy. To better
highlight this transformation, we will be changing our
segment reporting beginning in fiscal year 2014 to two
segments, Diversified Industrial (which will continue
to include supplemental sales and profitability data
for North America and International) and Aerospace
Systems. Also, we will be providing supplemental
information, including sales, on three global
technology platforms within the Diversified Industrial
Segment called Motion Systems, Flow and Process
Control, and Filtration and Engineered Materials. This
supplemental information will showcase the breadth
of the technologies that we leverage in unique ways to
meet our customers’ needs and broaden awareness of
our competitive strengths.
As we continue to advance the Win Strategy
throughout our operations, we are confident that even
higher levels of performance will ensue. Importantly,
when we look to the horizon, we see a great number of
opportunities to grow our business into a $20 billion
enterprise within five years. I am extremely confident
in the future ahead.
I offer my sincere thanks to all of our employees
globally for their continued dedication to our goals
and for their steadfast commitment to the Win
Strategy and to you, my fellow shareholders, for
your continued confidence in Parker. I am excited
to see what the future will bring. From enabling
the paralyzed to walk and creating cleaner skies
to healing the sick, read on to see how Parker’s
motion and control technologies are serving a more
meaningful purpose in today’s world than even Art
Parker may have envisioned.
Don E. Washkewicz, Chairman, Chief Executive Officer and President
August 2013
Parker's Win Strategy
Parker's Win Strategy
Vision
Goals
S
T
R
A
T
E
G
I
E
S
The #1 Motion & Control Company
#1 Premier
Customer Service
Financial
Performance
Profitable
Growth
◆ Quality Products
on Time
◆ Value Added Services
◆ Best Systems -
PHconnect
◆ Suppliers: Strategic
Procurement
Internal
Acquisitions
Globalization
◆ Operations: Lean
◆ Customers: Strategic
Pricing
◆ Innovative Products
◆ Systems Solutions
◆ European Initiatives
◆ Strong Distribution
Empowered Employees
What does good look like?
What does good look like?
#1 Premier
Customer Service
Financial
Performance
Profitable
Growth
◆ 95% + on time delivery
◆ Over the line
ROS
NxNW
A/S
◆ Sole source customers
◆ 15% operating income
◆ Partnership accounts
◆ Top quartile P/E
◆ Selling Total Parker
◆ "Premier" Diversified Ind’l
◆ Best cost producer
◆ 10% compound growth
◆ 20% + market share
◆ #1, #2 position each Group
◆ 30% MROS
◆ Strong Distribution
50% Dist 50% OEM
◆ Increasing systems sales
◆ High % New product sales
Empowered Employees ◆ Aligned with Parker Values
◆ High Performance Teams & Leaders
◆ Inclusive Culture
◆ Accountability
Master/Goals & Objectives
The Win Strategy is the principle focus for how the company runs its daily
operations.
PS-1002 Updated: 9/16/2010
4
5
Indego® Exoskeleton
Millions of individuals experience the
unique, daily challenges of living with
limited mobility. Parker has licensed a
powered exoskeleton called Indego that
holds great promise for providing a new
level of independence enabling users to
stand and walk on all surfaces and access
areas not accessible by a wheelchair.
Indego is designed for institutional and
personal settings for both rehabilitation
or daily use. The system can be scaled
to fit users of different sizes and also
incorporates a proven therapy technique
called functional electrical stimulation.
Indego’s technology offers remarkably
intuitive, smooth operation, replicating
a natural gait for maximum effectiveness
as a therapeutic tool. Indego is unique in
its ability to provide all of the power and
support required to walk, or adjust the
amount of robotic assistance for users who
have limited muscle control in their legs.
Indego uses the latest sensor, motor
and battery technologies with superior
cooperative controls, a slim profile and a
modular design that is nearly 50% lighter
than competing devices. The system
is ideal for persons with complete and
incomplete spinal cord injuries, multiple
sclerosis, traumatic brain injury and other
neurological conditions or for those who
have suffered a stroke.
Parker is targeting 2015 for the commercial
launch of Indego. Future enhancements
will enable remote monitoring of the
system’s performance and extend to
applications beyond medical needs.
6
7
Parker has licensed the exoskeleton technology developed at Vanderbilt
University and is currently engaged with the Shepherd Center to further
develop and test the system. Indego® has not been submitted for FDA
approval and is not currently available for sale. Continued development
and testing is anticipated to result in FDA approval to market and sell the
device for clinical rehabilitation and personal mobility.
Fast-Fill Compressed Natural
Gas Fuel Dispenser
As fuel costs continue to rise and vehicle
emissions standards grow increasingly
stringent, many are turning to natural
gas as an alternative to gasoline or diesel.
Natural gas provides comparable amounts
of power and acceleration while producing
lower levels of emissions and particulates,
all at a significantly lower cost.
When it comes to filling the tank, the
transition to a vehicle powered by natural
gas feels seamless to a driver refueling with
a Parker CNG dispenser. The unit is capable
of refilling an empty tank in roughly three
minutes and displays traditional metrics
such as the fuel quantity and cost, in
addition to natural gas-specific measures
of flow rate and pressure, offering a familiar
and convenient user experience.
Designed with safety as a top priority,
the Parker CNG dispenser uses a series of
protective sensors, breakaway couplings
and hose disconnects to eliminate the
risk of mechanical or user malfunctions.
The system is held to the highest standard
of quality to prevent leakage, minimize
downtime and provide consistent and
reliable service.
Each day thousands of drivers across India
refuel using the Parker CNG dispenser,
and sales will be extended to fuel stations
throughout Asia and in other regions as the
demand for natural gas vehicles continues
to grow.
The Parker CNG dispenser is a model
example of Parker’s ability to leverage its
premium components and engineering
expertise to develop a complete system and
to respond to global trends with localized
solutions.
8
9
Negative Pressure Wound
Therapy
Extensive research and development has
significantly advanced medical technology
related to wound care. Traditional methods,
comprised mostly of gauze-based dressings,
merely cover a wound and rely on the
passage of time to facilitate the natural
healing process. Many medical facilities,
committed to providing patients with the
best care techniques available, are using
negative pressure wound therapy (NPWT)
for advanced wound care and treatment.
As an alternative to traditional wound care,
the technology aids the process by providing
a moist healing environment, removing
wound fluids and infectious materials,
physically drawing the edges of the wound
together and increasing blood flow and
circulation to the wound site.
Parker’s miniature diaphragm pump
with a brushless slotless motor is used
within NPWT devices to pull a vacuum on
the wound site and the wound bed. The
vacuum pulls exudate from the wound site
and physically draws the wound together,
promoting blood flow, thus expediting the
healing process. The motor provides low
revolution control and allows for quick
vacuum corrections to the wound bed to
minimize patient discomfort, is very quiet
and offers low degrees of vibration; creating
a device that provides patients with a unique
and reassuring healing experience.
Leveraging over 10 years of experience in the
industry, Parker has established itself as the
preferred pneumatic supplier to the NPWT
market, leading the design and development
of customizable motor, pump and digital
valve offerings.
While more than 500,000 patients in the
United States benefit from NPWT each year,
there are still considerable steps to be taken
to allow the impact of this technology to
reach its full potential. Parker is partnering
with its customers to expand the bounds of
wound care technology by creating devices
that are smaller and more powerful, while
working to make them more portable and
disposable, aspiring to a solution which will
be accessible on a global level.
10
11
Multi-Function Fuel Cell System
A substantially cleaner, more efficient
airplane is attractive to everyone from
airlines and pilots to airport employees and
passengers. Such advancements present
a unique challenge in an industry where
passenger safety and aircraft reliability
are paramount, and changes to aircraft
design are implemented only after careful
consideration and extensive testing.
Parker has partnered with Airbus to take
on this challenge, working to develop a
multi-function fuel cell system which will
replace the small engine located near the
rear of the aircraft known as the auxiliary
power unit.
The fuel cell is planned to provide the
power to start the main aircraft engines
and generate enough electricity to
operate accessories such as pre-flight air
conditioning and power the electric motor-
driven wheels used to taxi, instead of using
thrust from the main engines.
The fuel cell generates electrical power by
combining hydrogen stored on the plane
and oxygen pulled from the atmosphere.
One byproduct of this process is oxygen-
depleted air, critical for inerting the
aircraft’s fuel tanks to eliminate the
possibility of combustion. Another
byproduct is clean water, used for engine
injection, potable water and restrooms,
increasing efficiency by reducing the
amount of water stored in aircraft tanks.
A demonstration flight using the system,
which is anticipated to significantly
reduce an aircraft’s fuel consumption and
emissions, is expected mid-decade.
By applying years of expertise in aerospace
technology, Parker was able to look beyond
the individual components of an aircraft
and focus on the technology roadmap
of the future, providing an innovative
solution to increase the efficiency and
sustainability of the world’s airline fleet.
12
13
Financial Success
Financial Review
Parker’s Win Strategy has driven the company’s financial performance to a higher level. As our employees continue to execute the
Win Strategy, we will continue to operate from a position of financial strength, enabling us to invest in new opportunities to grow our
business and provide strong returns to our shareholders.
Consolidated Statement of Income ............................................................. page 22
Consolidated Statement of Cash Flows ...................................................... page 25
Consolidated Statement of Comprehensive Income ................................... page 22
Consolidated Statement of Equity ............................................................... page 26
Business Segment Information ................................................................... page 23
Notes to Consolidated Financial Statements .............................................. page 27
Consolidated Balance Sheet ....................................................................... page 24
Eleven-Year Financial Summary .................................................................. page 42
Total Shareholder Return
Annual Equivalent
Our Return on Net Assets Goal
25%
20%
15%
10%
5%
0%
12
11
13
L
A
O
A G
N
O
R
10
09
l
s
e
a
S
n
o
n
r
u
t
e
R
f
o
%
3 Year
5 Year
10 Year
S&P 500
S&P 500 Industrials
Parker
The total return calculation reflects share price appreciation and dividend payments and
assumes reinvestment of dividends. The return provided is an annual equivalent percentage
return reflecting the effect of compounding as of June 30, 2013.
Net Assets/Sales
Return on Net Assets (RONA) is a common metric used throughout the company, providing
a standard for how efficiently and productively each operating unit employs the average dollar
invested in assets. To reach Parker's internally established benchmark, the RONA Goal line,
operations must successfully balance investments in assets with profitable sales growth.
Since the launch of the Win Strategy, Parker has steadily moved toward the goal, reaching
the line in 2005 and eclipsing it in 2006, 2007, 2008, 2011 and 2012. The impact of the global
recession in 2009 and 2010 and challenging macroeconomic conditions in 2013 pushed this
performance measure below the line.
Parker Return on Invested Capital versus Peers*
Peers
Parker
Parker
18.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Return on Invested Capital (ROIC) %
*Return on Invested Capital = [Net Income Attributable to Common Shareholders + Interest Expense + Income Taxes] / [Average Total Debt + Average Shareholders’ Equity]. Parker’s ROIC peers include
(identified by stock symbol) CAT, CMI, DE, DHR, DOV, EMR, ETN, FLS, HON, IR, ITT, ITW, JCI, PLL, ROK, SPW and TXT. Peer data is trailing twelve months as of June 30, 2013.
15%
12%
9%
6%
3%
0%
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Five-Year Compound
Sales Growth
– Goal: 10%
10%
8%
6%
4%
2%
0%
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Return on Sales
– Goal: 6.5%
3
1
0
2
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Average Assets/Sales
– Goal: $0.80
25%
20%
15%
10%
5%
0%
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Return on
Invested Capital
– Goal: 15%
Management’s Discussion and Analysis
Overview
The Company is a leading worldwide diversified manufacturer of motion
and control technologies and systems, providing precision engineered
solutions for a wide variety of mobile, industrial and aerospace markets.
The Company’s order rates provide a near-term perspective of the
Company’s outlook particularly when viewed in the context of prior
and future order rates. The Company publishes its order rates on a
quarterly basis. The lead time between the time an order is received
and revenue is realized generally ranges from one day to 12 weeks
for mobile and industrial orders and from one day to 18 months for
aerospace orders. The Company believes the leading economic
indicators of these markets that have a correlation to the Company’s
future order rates are as follows:
• Purchasing Managers Index (PMI) on manufacturing activity
specific to regions around the world with respect to most mobile
and industrial markets;
• Global aircraft miles flown and global revenue passenger miles for
commercial aerospace markets and Department of Defense spending
for military aerospace markets; and
• Housing starts with respect to the North American residential air
conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a
region of the world in the mobile and industrial markets is expanding.
A PMI below 50 indicates the opposite. Recent PMI levels for some
regions around the world were as follows:
June 30, 2013
March 31, 2013
June 30, 2012
United States
Eurozone countries
China
50.9
48.8
48.2
51.3
46.8
51.6
49.7
45.1
48.2
Global aircraft miles flown increased one percent from the comparable
2012 level and global revenue passenger miles increased two percent
from the comparable 2012 level. The Company anticipates that U.S.
Department of Defense spending with regards to appropriations, and
operations and maintenance for the U.S. government’s fiscal year 2014
will decrease by one percent from the comparable fiscal 2013 level.
Housing starts in June 2013 were approximately 10 percent higher
than housing starts in June 2012 and were approximately 19 percent
lower than housing starts in March 2013.
The Company has remained focused on maintaining its financial
strength by adjusting its cost structure to reflect changing demand
levels, maintaining a strong balance sheet and managing its cash.
The Company continues to generate substantial cash flows from
operations, has controlled capital spending and has proactively
managed working capital. The Company has been able to borrow
needed funds at affordable interest rates and had a debt to debt-
shareholders’ equity ratio of 33.0 percent at June 30, 2013 compared
to 35.9 percent at March 31, 2013 and 26.1 percent at June 30, 2012.
Net of cash and cash equivalents, the debt to debt-shareholders’ equity
ratio was 15.4 percent at June 30, 2013 compared to 19.9 percent at
March 31, 2013 and 15.4 percent at June 30, 2012.
The Company believes many opportunities for growth are available.
The Company intends to focus primarily on business opportunities
in the areas of energy, water, food, environment, defense, life sciences,
infrastructure and transportation.
14
15
The Company believes it can meet its strategic objectives by:
• Serving the customer;
• Successfully executing its Win Strategy initiatives relating to premier
customer service, financial performance and profitable growth;
• Maintaining its decentralized division and sales company structure;
• Fostering an entrepreneurial culture;
• Engineering innovative systems and products to provide superior
customer value through improved service, efficiency and productivity;
• Delivering products, systems and services that have demonstrable
savings to customers and are priced by the value they deliver;
• Acquiring strategic businesses;
• Organizing around targeted regions, technologies and markets;
• Driving efficiency by implementing lean enterprise principles; and
• Creating a culture of empowerment through its values, inclusion
and diversity, accountability and teamwork.
During fiscal 2013, the Company completed eight acquisitions whose
aggregate sales for their most recent fiscal year prior to acquisition
were $484 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.
During fiscal 2013, the Company divested the automotive businesses
of the Mobile Climate Systems division and the Turkey refrigeration
components business. Both of the divested businesses were part of
the Climate & Industrial Controls Segment. The Company recognized
a net pre-tax gain of approximately $18 million related to these
divestitures. The Company will continue to assess its existing
businesses and initiate efforts to divest businesses that are not
considered to be a good long-term strategic fit for the Company.
Future business divestitures could have a negative effect on the
Company’s results of operations.
The discussion below is structured to separately discuss each
of the financial statements presented on pages 22 to 25. 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.
(dollars in millions)
Net sales
Gross profit margin
Selling, general and
administrative expenses
Selling, general and
administrative expenses,
as a percent of sales
Interest expense
Other (income) expense, net
(Gain) on disposal of assets
Effective tax rate
Net income attributable to
common shareholders
2013
$13,016
2012
2011
$13,146
$12,346
22.5%
24.2%
24.0%
$ 1,555
$ 1,519
$ 1,468
11.9%
$ 92
(18)
(10)
27.6%
11.6%
$ 93
1
(2)
26.7%
11.9%
$ 100
(15)
(8)
25.2%
$ 948
$ 1,152
$ 1,049
NET SALES in 2013 were 1.0 percent lower than 2012. Acquisitions
made in the last 12 months contributed approximately $448 million
in sales in 2013 and the effect of currency rate changes decreased
net sales in 2013 by approximately $140 million. Excluding the
effect of acquisitions and currency rate changes, net sales in 2013
were 3.3 percent lower than 2012. The decrease in sales in 2013 is
primarily due to lower volume experienced in the Industrial Segment.
Net sales in 2012 were 6.5 percent higher than 2011. The increase
in sales in 2012 primarily reflects higher volume in the Industrial
and Aerospace Segments. Acquisitions contributed approximately
$72 million in sales in 2012. The effect of currency rate changes
decreased net sales in 2012 by approximately $102 million.
GROSS PROFIT MARGIN decreased in 2013 primarily due to higher
defined benefit costs in all segments, operating inefficiencies in the
Industrial Segment and higher engineering development costs in the
Aerospace Segment. Gross profit margin was higher in 2012 primarily
due to the higher sales volume in the Industrial North American
businesses and the Aerospace Segment. Included in gross profit in
2013, 2012 and 2011 were business realignment charges of $8.4
million, $12.7 million and $15.3 million, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased
2.3 percent in 2013 and increased 3.5 percent in 2012. The increase
in 2013 was primarily due to higher amortization expense and charitable
contributions, partially offset by lower net expenses associated with
the Company’s incentive and deferred compensation programs. The
increase in 2012 was primarily due to the higher sales volume as well
as higher expenses associated with the Company’s incentive and
deferred compensation programs.
INTEREST EXPENSE in 2013 decreased primarily due to a lower average
interest rate in the debt portfolio during the latter part of 2013 than
the debt portfolio during the latter half of 2012 more than offsetting
the effect of higher weighted-average borrowings and interest rates
on commercial paper borrowings. Interest expense in 2012 decreased
primarily due to lower average debt outstanding as well as lower
weighted-average interest rates on commercial paper borrowings.
OTHER (INCOME) EXPENSE, NET in 2012 included $8.3 million in
expense related to historical tax credits. Other (income) expense, net in
2011 included $10.9 million of income related to insurance recoveries.
(GAIN) ON DISPOSAL OF ASSETS in 2013 includes a net gain of
$14.7 million resulting from business divestiture activity. (Gain) on
disposal of assets in 2012 included $3.7 million of gains from asset
sales. (Gain) on disposal of assets in 2011 included income of $3.8
million related to insurance recoveries for expenses incurred related
to a previously divested business, $3.8 million of expense related to
asset writedowns and $7.5 million of gains from asset sales.
EFFECTIVE TAX RATE in 2013 and 2012 was higher primarily due
to an unfavorable geographical mix of earnings. Effective tax rate
in 2013 was favorably impacted by the enactment of the American
Taxpayer Relief Act on January 2, 2013. Effective tax rate in 2012
was favorably impacted by the settlement of tax audits.
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 to the Consolidated Financial Statements
for a description of the Company’s reportable business segments and
a discussion of the recent consolidation of the Company’s reportable
business segments, effective for fiscal periods after June 30, 2013.
2013
2012
2011
The following business realignment expenses are included in Industrial
North America and Industrial International operating income:
INDUSTRIAL SEGMENT
(dollars in millions)
Sales
North America
International
Operating income
North America
International
Operating income
as a percent of sales
North America
International
Backlog
Assets
Return on average assets
$5,051
4,868
845
584
16.7%
12.0%
$1,693
8,780
17.0%
$5,041
5,034
895
733
17.8%
14.6%
$ 1,814
7,991
19.8%
$4,517
4,917
746
754
16.5%
15.3%
$1,907
8,414
19.1%
Sales in 2013 for the Industrial North American operations increased
slightly from 2012 compared to an increase of 11.6 percent from 2011
to 2012. Acquisitions completed within the last 12 months contributed
approximately $217 million in net sales in 2013. Excluding acquisitions,
sales in 2013 decreased 4.1 percent from 2012 reflecting lower demand
from distributors as well as from end-users in most markets with the
largest decline occurring in the construction equipment, oil and gas,
mining, heavy-duty truck and machine tool markets. The increase in
sales in 2012 reflects higher demand from distributors and higher
end-user demand in a number of markets, particularly in the heavy-duty
truck, construction equipment, farm and agriculture equipment, oil and
gas and machine tools markets.
Sales in the Industrial International operations decreased 3.3 percent
in 2013 following an increase of 2.4 percent from 2011 to 2012.
Acquisitions completed within the last 12 months contributed
approximately $231 million in net sales in 2013, most of which related
to Europe. The effect of currency rate fluctuations decreased 2013 net
sales by approximately $137 million, half of which related to Europe,
a quarter of which related to the Asia Pacific region and a quarter of
which related to Latin America. Excluding acquisitions and the effect
of currency rate changes, sales in the Industrial International operations
decreased 5.2 percent from 2012, primarily due to lower volume across
most markets in all regions with the largest decrease equally distributed
between Europe and the Asia Pacific region. The sales increase in
2012 is primarily due to higher volume experienced in Europe.
The decrease in operating margins in 2013 in the Industrial North
American operations is primarily due to an unfavorable product mix
and operating inefficiencies resulting from the decrease in sales
volume, partially offset by the favorable effect of lower raw material
prices. The decrease in operating margins in 2013 in the Industrial
International operations is primarily due to the lower sales volume,
resulting in operating inefficiencies, as well as the impact of integration
costs related to 2013 acquisitions. Operating margins in 2012 in the
Industrial North American operations were higher than the prior year
primarily due to the higher sales volume, resulting in manufacturing
efficiencies. Industrial International operating margins in 2012 were
lower than the prior year primarily due to operating inefficiencies
resulting from the decline in the rate of sales growth between 2011
and 2012, especially in Europe and the Asia Pacific region, as well
as an unfavorable product mix.
(dollars in thousands)
Industrial North America
Industrial International
2013
$2,342
8,973
2012
$3,355
9,711
2011
$ 4,223
11,204
The business realignment charges consist primarily of severance
costs resulting from plant closures as well as general reductions in
work force. The Industrial North America business realignment charges
for 2012 also include expenses associated with enhanced retirement
benefits. The Company does not anticipate that cost savings realized
from the work force reductions taken during 2013 will have a material
impact on future operating margins. In 2014, the Company expects
to take actions necessary to structure appropriately the operations
of the Industrial Segment. Such actions are expected to result in
approximately $95 million in business realignment charges in 2014.
The Company anticipates Industrial North American sales for 2014 will
range between being flat to increasing 5.0 percent from the 2013 level
and Industrial International sales for 2014 will range between being flat
to increasing 4.8 percent from the 2013 level. Industrial North American
operating margins in 2014 are expected to range from 16.5 percent to
17.1 percent and Industrial International margins are expected to range
from 10.3 percent to 10.7 percent. The change in sales and operating
margins between 2013 and 2014 include the businesses of the Climate
& Industrial Controls Segment, which has been consolidated into the
Industrial Segment effective July 1, 2013.
The decline in total Industrial Segment backlog in 2013 is primarily
due to lower order rates in both the Industrial North American and
Industrial International businesses partially offset by an increase in
backlog from acquisitions. The decline in total Industrial Segment
backlog in 2012 is primarily due to lower order rates in the Industrial
International businesses, especially in Europe and the Asia Pacific
region, more than offsetting higher order rates in the Industrial North
American businesses.
The increase in assets in 2013 was primarily due to acquisitions as
well as increases in plant and equipment, net and cash and cash
equivalents, partially offset by the effect of currency fluctuations as
well as decreases in inventory and intangible assets, net. The decrease
in assets in 2012 was primarily due to the effect of currency fluctuations
as well as decreases in cash and cash equivalents, inventory, intangible
assets, net and deferred taxes partially offset by an increase in accounts
receivable, net.
AEROSPACE SEGMENT
(dollars in millions)
Sales
Operating income
Operating income
as a percent of sales
Backlog
Assets
Return on average assets
2013
$2,268
280
12.4%
$ 1,936
1,140
25.8%
2012
$2,103
290
13.8%
$1,862
1,033
28.6%
2011
$1,922
247
12.9%
$1,702
995
25.9%
Sales in 2013 increased 7.8 percent compared to an increase of
9.4 percent from 2011 to 2012. The increase in net sales in 2013
is primarily due to higher volume in all businesses with the largest
increase being experienced in the commercial and military original
equipment manufacturer (OEM) businesses. The increase in net sales
in 2012 is primarily due to higher volume in both the commercial
and military OEM and aftermarket businesses.
16
17
The lower margin in 2013 is primarily due to higher engineering
development costs, including fuel cell development, more than
offsetting the benefit of the higher sales volume. The higher margin
in 2012 is primarily due to the higher sales volume, particularly in
the higher margin commercial aftermarket business, partially offset
by higher engineering development costs.
The increase in backlog in 2013 is primarily due to higher commercial
and military OEM orders and commercial aftermarket orders partially
offset by lower military aftermarket orders. The increase in backlog
in 2012 is primarily due to higher order rates in the military OEM
businesses.
For 2014, sales are expected to range from being flat to increasing
4.0 percent from the 2013 level and operating margins are expected
to range from 12.4 percent to 13.4 percent. A higher concentration
of commercial OEM volume in future product mix and higher than
expected new product development costs could result in lower margins.
The change in sales and operating margins between 2013 and 2014
include the impact of the anticipated formation of the previously
announced joint venture with GE Aviation.
The increase in assets in 2013 and 2012 was primarily due to increases
in accounts receivable, net, inventory and intangible assets, net.
CLIMATE & INDUSTRIAL CONTROLS SEGMENT
(dollars in millions)
2013
2012
Sales
Operating income
Operating income
as a percent of sales
Backlog
Assets
Return on average assets
$830
82
9.9%
$ 110
608
12.5%
$968
84
8.7%
$ 160
705
11.8%
2011
$990
76
7.7%
$ 171
725
10.7%
Sales in 2013 decreased 14.3 percent compared to a decrease of
2.3 percent from 2011 to 2012. The decrease in sales in 2013 is
primarily due to the absence of sales from businesses divested in
2013 as well as lower volume in the commercial refrigeration and
air conditioning markets. The decrease in sales in 2012 is primarily
due to lower end-user demand in the commercial refrigeration and
residential air conditioning markets, partially offset by an increase
in volume in the automotive and heavy-duty truck markets. Operating
margins in 2013 and 2012 were higher primarily due to spending
control efforts and lower material costs more than offsetting the
impact of the lower sales volume and an unfavorable product mix.
The decrease in assets in 2013 was primarily due to the absence of
assets from businesses divested in 2013. The decrease in assets in
2012 was primarily due to the effect of currency fluctuations as well
as decreases in inventory, plant and equipment, net, and intangible
assets, net.
CORPORATE assets increased 39.7 percent in 2013 compared to
an increase of 91.3 percent from 2011 to 2012. The change in
Corporate assets in 2013 and 2012 was primarily due to fluctuations
in the amount of cash and cash equivalents and deferred taxes.
Discussion of Consolidated Balance Sheet
Discussion of Consolidated Statement of Cash Flows
The Consolidated Balance Sheet shows the Company’s financial
position at year-end, compared with the previous year-end. This
discussion provides information to assist in assessing factors such
as the Company’s liquidity and financial resources.
(dollars in millions)
Cash and cash equivalents
Accounts receivable, net
Inventories
Notes payable and long-term debt
payable within one year
Pensions and postretirement benefits
Shareholders’ equity
Working capital
Current ratio
2013
$1,781
2,063
1,377
1,334
1,372
5,738
$2,011
1.6
2012
$ 838
1,992
1,401
226
1,910
4,897
$2,012
1.8
CASH AND CASH EQUIVALENTS include $1,655 million and $629 million
held by the Company’s foreign subsidiaries at June 30, 2013 and
June 30, 2012, respectively. Generally, cash and cash equivalents held
by foreign subsidiaries are not readily available for use in the United
States without adverse tax consequences. The Company’s principal
sources of liquidity are its cash flows provided by operating activities,
commercial paper borrowings or borrowings directly from its line of
credit. The Company does not believe the level of its non-U.S. cash
position will have an adverse effect on working capital needs, planned
growth, repayment of maturing debt, benefit plan funding, dividend
payments or share repurchases.
ACCOUNTS RECEIVABLE, NET are primarily receivables due from
customers for sales of product ($1,841 million at June 30, 2013 and
$1,782 million at June 30, 2012). Days sales outstanding relating to
trade receivables for the Company was 49 days in 2013 and 48 days
in 2012. The Company believes that its receivables are collectible and
appropriate allowances for doubtful accounts have been recorded.
INVENTORIES decreased $24 million (which includes a decrease of
$7 million from the effect of foreign currency translation) primarily
due to a decrease in inventory levels in the Industrial Segment partially
offset by acquisitions and an increase in inventory levels in the
Aerospace Segment. Days supply of inventory on hand was 62 days
in 2013 and 63 days in 2012. Days supply of inventory amount at
June 30, 2012 has been revised from the amount previously presented
to conform to the current calculation methodology.
NOTES PAYABLE AND LONG-TERM DEBT PAYABLE WITHIN ONE YEAR
increased primarily due to a higher amount of commercial paper
borrowings outstanding at the end of 2013. The Company from time
to time will utilize short-term intercompany loans to repay commercial
paper borrowings. At times, the short-term intercompany loans are
outstanding at the end of a fiscal quarter.
PENSIONS AND POSTRETIREMENT BENEFITS decreased primarily due
to an increase in the funded status of the Company’s defined benefit
pension plans. The change in this amount is further explained
in Note 10 to the Consolidated Financial Statements.
SHAREHOLDERS’ EQUITY activity during 2013 included a decrease of
$257 million related to share repurchases, an increase of $325 million
related to pensions and postretirement benefits, and a decrease of
$17 million related to foreign currency translation adjustments.
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:
(dollars in millions)
2013
2012
2011
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates
Net increase in cash and
cash equivalents
$1,191
(810)
576
(14)
$1,530
(376)
(823)
(150)
$1,167
(245)
(916)
76
$ 943
$ 181
$ 82
CASH FLOWS FROM OPERATING ACTIVITIES decreased from 2012
primarily due to a decrease in net income as well as $226 million
of voluntary cash contributions made to the Company’s domestic
qualified defined benefit pension plan in 2013. Cash flows from
operating activities increased from 2011 primarily due to an increase
in net income as well as the absence of voluntary contributions made
to the Company’s qualified defined benefit plans in 2012. The Company
made $400 million in voluntary cash contributions to the Company’s
domestic qualified defined benefit plan in 2011.
CASH FLOWS USED IN INVESTING ACTIVITIES increased from 2012
and 2011 primarily due to an increase in acquisition activity and
capital expenditures. Cash flows used in investing activities in 2013
was favorably impacted by net proceeds from business divestitures.
CASH FLOWS USED IN FINANCING ACTIVITIES in 2013 included the
repurchase of approximately 3.0 million common shares for $257
million as compared to the repurchase of 6.4 million common shares
for $455 million in 2012. In both 2013 and 2012, the Company
purchased the outstanding shares not previously owned by the
Company in majority-owned subsidiaries. Cash flows used in financing
activities in 2013 include a higher level of commercial paper borrowings
due to the increase in acquisition activity. Cash flows used in financing
activities in 2012 included a borrowing and a repayment, each for
Japanese Yen (JPY) 6 billion (approximately $73 million), under the
terms of separate credit facilities. Cash flows used in financing activities
in 2011 included the issuance of $300 million aggregate principal
amount of medium-term notes and a payment of approximately $257
million related to Euro bonds, which matured in November 2010.
Dividends have been paid for 252 consecutive quarters, including a
yearly increase in dividends for the last 57 fiscal years. The current
annual dividend rate is $1.80.
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-shareholders’
equity of no more than 37 percent.
DEBT TO DEBT-SHAREHOLDERS’ EQUITY RATIO
2013
(dollars in millions)
Debt
Debt & Shareholders’ Equity
Ratio
$2,830
8,568
2012
$1,730
6,626
33.0%
26.1%
As of June 30, 2013, the Company had a line of credit totaling $2,000
million through a multi-currency revolving credit agreement with a
group of banks, of which $669 million was available at June 30, 2013.
The credit agreement expires in October 2017; however, the Company
has the right to request a one-year extension of the expiration date on
an annual basis, which request may result in changes to the current
terms and conditions of the credit agreement. Advances from the credit
agreement can be used for general corporate purposes, including
acquisitions, and for the refinancing of existing indebtedness. The
revolving credit agreement requires the payment of an annual facility
fee, the amount of which would increase in the event the Company’s
credit ratings are lowered. Although a lowering of the Company’s
credit ratings would likely increase the cost of future debt, it would
not limit the Company’s ability to use the credit agreement nor would
it accelerate the repayment of any outstanding borrowings.
The Company is currently authorized to sell up to $1,850 million of
short-term commercial paper notes. As of June 30, 2013, $1,331 million
of commercial paper notes were outstanding and the largest amount
of commercial paper notes outstanding during the last quarter of 2013
was $1,525 million.
The Company’s credit agreements and indentures governing certain
debt agreements contain various covenants, the violation of which
would limit or preclude the use of the applicable agreements for future
borrowings, or might accelerate the maturity of the related outstanding
borrowings covered by the applicable agreements. Based on the Company’s
rating level at June 30, 2013, the most restrictive financial covenant
contained in the credit agreements and the indentures provides that
the ratio of secured debt to net tangible assets be less than 10 percent.
However, the Company currently does not have secured debt in its
debt portfolio. The Company is in compliance with all covenants and
expects to remain in compliance during the term of the credit
agreements and indentures.
CONTRACTUAL OBLIGATIONS – The total amount of gross unrecognized
tax benefits, including interest, for uncertain tax positions was
$112.6 million at June 30, 2013. Payment of these obligations would
result from settlements with worldwide taxing authorities. Due to the
difficulty in determining the timing of the settlements, these obligations
are not included in the following summary of the Company’s fixed
contractual obligations. References to Notes are to the Notes to the
Consolidated Financial Statements.
(dollars in millions)
Payments due by period
Contractual
obligations
Long-term
debt
(Note 9)
Interest on
long-term
debt
Operating
leases
(Note 9)
Retirement
benefits
(Note 10)
Total
Less than
1 year
Total
1-3 years 3-5 years
More than
5 years
$1,498
$ 2
$ 260
$ 511
$ 725
803
73
140
123
467
281
86
96
38
200
$2,782
150
$311
12
12
$ 508
$684
$1,279
61
26
18
19
Quantitative and Qualitative Disclosures
About Market Risk
The Company manages foreign currency transaction and translation
risk by utilizing derivative and non-derivative financial instruments,
including forward exchange contracts, costless collar contracts,
cross-currency swap contracts and certain foreign denominated
debt designated as net investment hedges. The derivative financial
instrument contracts are with major investment grade financial
institutions and the Company does not anticipate any material non-
performance by any of the counterparties. The Company does not
hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated
Balance Sheet as either assets or liabilities and are measured at fair
value. Further information on the fair value of these contracts is
provided in Note 15 to the Consolidated Financial Statements. Gains
or losses on derivatives that are not hedges are adjusted to fair value
through the Consolidated Statement of Income. Gains or losses
on derivatives that are hedges are adjusted to fair value through
accumulated other comprehensive income (loss) in the Consolidated
Balance Sheet until the hedged item is recognized in earnings. The
translation of the foreign denominated debt that has been designated
as a net investment hedge is recorded in accumulated other
comprehensive income (loss) and remains there until the underlying
net investment is sold or substantially liquidated.
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, 2013
by approximately $12.3 million.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements.
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
and Climate & Industrial Controls Segment revenues are recognized
when persuasive evidence of an arrangement exists, product has
shipped and the risks and rewards of ownership have transferred or
services have been rendered, the price to the customer is fixed and
determinable and collectibility is reasonably assured, which is generally
at the time the product is shipped. The Aerospace Segment recognizes
revenues primarily using the percentage of completion method and the
extent of progress toward completion is primarily measured using the
units-of-delivery method. The Company estimates costs to complete
long-term contracts for purposes of evaluating and establishing
contract reserves. The estimation of these costs requires substantial
judgment on the part of management due to the duration of the
contractual agreements as well as the technical nature of the products
involved. Adjustments to cost estimates are made on a consistent
basis and a contract reserve is established when the estimated costs
to complete a contract exceed the expected 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 may exceed its fair value. For
the Company, a reporting unit is one level below the operating segment
level. Determining whether an impairment has occurred requires the
valuation of the respective reporting unit, which the Company has
consistently estimated using primarily a discounted cash flow model.
The Company believes that the use of a discounted cash flow model
results in the most accurate calculation of a reporting unit’s fair value
since the market value for a reporting unit is not readily available. The
discounted cash flow analysis requires several assumptions including
future sales growth and operating margin levels as well as assumptions
regarding future industry specific market conditions. Each reporting
unit regularly prepares discrete operating forecasts and uses these
forecasts as the basis for the assumptions used in the discounted
cash flow analysis. The Company has consistently used a discount
rate commensurate with its cost of capital, adjusted for inherent
business risks, and has consistently used a terminal growth factor
of 2.5 percent. The Company also reconciles the estimated aggregate
fair value of its reporting units as derived from the discounted cash
flow analysis to the Company’s overall market capitalization.
The results of the Company’s fiscal 2013 annual goodwill impairment
test performed as of December 31, 2012 indicated that no goodwill
impairment existed. The results of the Company’s annual goodwill
impairment test and rollforward procedures performed as of June 30,
2013 indicated that the following reporting units had an estimated fair
value that the Company determined was not significantly in excess of
its carrying value (dollars in millions).
Reporting Unit
Goodwill Balance
Worldwide Energy Products
Hiross/Zander
SSD Drives
$176.0
102.3
45.0
Fair Value In Excess
of Carrying Value
114.2%
107.2%
104.8%
All of these reporting units are part of the Industrial Segment and
the sales growth assumption had the most significant influence on
the estimation of fair value.
The sales growth assumption for Worldwide Energy Products was
based on future business already secured or highly likely to be
secured with existing customers based on current quoting activity
and forecasted demand for the oil and gas industry as well as sales
initiatives to expand the use of the reporting unit’s products in the
oil and gas industry.
The sales growth assumption for Hiross/Zander was based on
forecasted market data specific to the products this reporting unit
currently manufactures as well as new product introductions and
sales initiatives to expand market share.
The sales growth assumption for SSD Drives was based on market
data research, historical sales trends and new product introductions.
The key uncertainty in the sales growth assumption used in the
estimation of the fair value for all these reporting units is actual market
demand versus forecasted demand as well as the ability to successfully
introduce new products in the marketplace and expand market share.
STOCK-BASED COMPENSATION – The computation of the expense
associated with stock-based compensation requires the use of a
valuation model. The Company currently uses a Black-Scholes option
pricing model to calculate the fair value of its stock options and stock
appreciation rights. The Black-Scholes model requires assumptions
regarding the volatility of the Company’s stock, the expected life of the
stock award and the Company’s dividend ratio. The Company primarily
uses historical data to determine the assumptions to be used in the
Black-Scholes model and has no reason to believe that future data is
likely to differ materially from historical data. However, changes in
the assumptions to reflect future stock price volatility, future dividend
payments and future stock award exercise experience could result in
a change in the assumptions used to value awards in the future and
may result in a material change to the fair value calculation of stock-
based awards. Further information on stock-based compensation is
provided in Note 12 to the Consolidated Financial Statements.
INCOME TAXES – Significant judgment is required in determining
the Company’s income tax expense and in evaluating tax positions.
Deferred income tax assets and liabilities have been recorded for the
differences between the financial accounting and income tax basis
of assets and liabilities. Factors considered by the Company in
determining the probability of realizing deferred income tax assets
include forecasted operating earnings, available tax planning strategies
and the time period over which the temporary differences will reverse.
The Company reviews its tax positions on a regular basis and adjusts
the balances as new information becomes available. Further information
on income taxes is provided in Note 4 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 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 February 2013, the Financial Accounting Standards Board (FASB)
issued new accounting guidance requiring an entity to provide
information about the amounts reclassified out of accumulated other
comprehensive income (AOCI) by component. For items reclassified
out of AOCI in their entirety, the disclosure of the income statement
line where those items are reflected is also required. Cross-reference
to disclosures providing additional information is required for other
items not reclassified in their entirety. The guidance does not change
the current requirements for reporting net income or other
comprehensive income. The guidance, which must be presented
prospectively, is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2012.
The Company continually monitors its reporting units for impairment
indicators and updates assumptions used in the most recent
calculation of the fair value of a reporting unit as appropriate. The
Company is unaware of any current market trends that are contrary
to the assumptions made in the estimation of the fair value of any
of its reporting units. If actual experience is not consistent with the
assumptions made in the estimation of the fair value of the reporting
units, especially assumptions regarding penetration into new markets
and the recovery of the current economic environment, it is possible
that the estimated fair value of certain reporting units could fall below
their carrying value resulting in the necessity to conduct additional
goodwill impairment tests.
Long-lived assets held for use, which primarily includes finite-lived
intangible assets and property, plant and equipment, are evaluated
for impairment whenever events or circumstances indicate that the
undiscounted net cash flows to be generated by their use over their
expected useful lives and eventual disposition are less than their
carrying value. The long-term nature of these assets requires the
estimation of their cash inflows and outflows several years into
the future and only takes into consideration technological advances
known at the time of the impairment test. During 2013, there were
no events or circumstances that indicated that the carrying value
of the Company’s long-lived assets held for use were not recoverable.
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
domestic 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 rate of 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 plans’ measurement date. Changes in the assumptions to reflect
actual experience as well as the 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 50 basis point
change in the assumed long-term rate of return on plan assets is
estimated to have an $11 million effect on pension expense and a
50 basis point decrease in the discount rate is estimated to increase
pension expense by $27 million. As of June 30, 2013, $1,157 million
of past years’ net actuarial losses related to the Company’s domestic
qualified defined benefit plans are subject to amortization in the future.
These losses will generally be amortized over approximately eight
years and will negatively affect 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.
20
21
Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(DOLL A RS IN THOUSA NDS, E XCEPT PER SH A RE A MOUNTS)
BUSINESS SEGMENT INFORM ATION
(DOLL A RS IN THOUSA NDS)
For the years ended June 30,
Net Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Interest expense
Other (income) expense, net
(Gain) on disposal of assets
Income before income taxes
Income taxes (Note 4)
Net Income
Less: Noncontrolling interest in subsidiaries’ earnings
2013
$13,015,704
10,086,675
2,929,029
1,554,973
91,552
(18,198)
(10,299)
1,311,001
362,217
948,784
357
2012
2011
$13,145,942
9,958,337
$12,345,870
9,387,457
3,187,605
1,519,316
92,790
1,295
(2,494)
1,576,698
421,206
1,155,492
3,669
2,958,413
1,467,773
99,704
(15,075)
(7,710)
1,413,721
356,571
1,057,150
8,020
Net Income Attributable to Common Shareholders
$ 948,427
$ 1,151,823
$ 1,049,130
Earnings per Share Attributable to
Common Shareholders (Note 5)
Basic earnings per share
$ 6.36
$ 7.62
$ 6.51
Diluted earnings per share
$ 6.26
$ 7.45
$ 6.37
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIV E INCOME
(DOLL A RS IN THOUSA NDS)
For the years ended June 30,
Net Income
Less: Noncontrolling interests in subsidiaries’ earnings
Net income attributable to common shareholders
2013
$ 948,784
357
948,427
2012
2011
$ 1,155,492
3,669
1,151,823
$ 1,057,150
8,020
1,049,130
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment (net of tax of $1,239,
$(11,530) and $12,675 in 2013, 2012 and 2011)
Retirement benefits plan activity (net of tax of $(195,884),
$330,984 and $(144,108) in 2013, 2012 and 2011)
Realized loss (net of tax of $(101), $(102), and $(119) in 2013,
2012 and 2011)
Other comprehensive income (loss)
Less: Other comprehensive (loss) income for
noncontrolling interests
Other comprehensive income (loss) attributable to
common shareholders
Total Comprehensive Income Attributable to
Common Shareholders
The accompanying notes are an integral part of the financial statements.
(18,974)
(392,742)
512,081
325,066
204
306,296
(1,771)
(597,979)
204
(990,517)
(25,607)
253,603
212
765,896
8,325
308,067
(964,910)
757,571
$ 1,256,494
$ 186,913
$ 1,806,701
By Industry
Net Sales:
Industrial:
North America
International
Aerospace
Climate & Industrial
Controls
Segment Operating Income:
Industrial:
North America
International
Aerospace
Climate & Industrial
Controls
Total segment
operating income
Corporate administration
Income before
interest expense
and other
Interest expense
Other expense
Income before
income taxes
Assets:
Industrial
Aerospace
Climate & Industrial
Controls
Corporate (a)
Property Additions (b):
Industrial
Aerospace
Climate & Industrial
Controls
Corporate
2013
2012
2011
2013
2012
2011
$ 5,050,604
4,867,758
2,267,715
$ 5,041,106
5,034,249
2,102,747
$ 4,516,510
4,917,007
1,921,984
829,627
967,840
990,369
$ 13,015,704
$13,145,942
$12,345,870
Depreciation:
Industrial
Aerospace
Climate & Industrial
Controls
Corporate
By Geographic Area (c)
$ 845,225
583,747
280,286
$ 895,010
733,123
290,135
$ 745,544
754,222
247,126
Net Sales:
North America
International
82,227
84,274
76,134
1,791,485
185,767
2,002,542
193,367
1,823,026
163,868
Long-Lived Assets:
North America
International
$ 177,296
19,498
$ 171,131
19,395
$ 186,057
20,035
9,718
7,210
11,722
8,260
12,895
10,251
$ 213,722
$ 210,508
$ 229,238
2013
2012
2011
$ 7,844,552
5,171,152
$ 7,830,517
5,315,425
$ 7,151,390
5,194,480
$13,015,704
$13,145,942
$12,345,870
$ 871,958
936,282
$ 867,159
852,809
$ 864,287
932,892
$ 1,808,240
$ 1,719,968
$ 1,797,179
1,605,718
91,552
203,165
1,809,175
92,790
139,687
1,659,158
99,704
145,733
$ 1,311,001
$ 1,576,698
$ 1,413,721
$ 8,779,858
1,139,967
$ 7,991,498
1,033,449
$ 8,413,552
995,026
608,169
2,012,904
704,596
1,440,739
724,966
753,261
$12,540,898
$ 11,170,282
$10,886,805
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 and the major portion of the
Company’s domestic data processing equipment.
(b) Includes the value of net plant and equipment at the date
of acquisition of acquired companies (2013 - $74,439;
2012 - $28,929; 2011 - $5,376).
$ 306,060
20,838
$ 211,778
19,651
$ 147,929
18,012
6,332
7,105
8,094
8,223
8,234
38,495
$ 340,335
$ 247,746
$ 212,670
(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 percent of consolidated sales.
Long-lived assets are comprised of plant and equipment
based on physical location.
22
23
CONSOLIDATED BAL ANCE SHEET
(DOLL A RS IN THOUSA NDS)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLL A RS IN THOUSA NDS)
June 30,
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net (Note 1)
Inventories (Notes 1 and 6):
Finished products
Work in process
Raw materials
Prepaid expenses
Deferred income taxes (Notes 1 and 4)
Total Current Assets
Plant and equipment (Note 1):
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress
Less accumulated depreciation
Investments and other assets (Note 1)
Intangible assets, net (Notes 1 and 7)
Goodwill (Notes 1 and 7)
Total Assets
Liabilities and Equity
Current Liabilities
Notes payable and long-term debt payable within one year (Notes 8 and 9)
Accounts payable, trade
Accrued payrolls and other compensation
Accrued domestic and foreign taxes
Other accrued liabilities
Total Current Liabilities
Long-term debt (Note 9)
Pensions and other postretirement benefits (Note 10)
Deferred income taxes (Notes 1 and 4)
Other liabilities
Total Liabilities
Equity (Note 11)
Shareholders’ Equity
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
Common stock, $.50 par value, authorized 600,000,000 shares;
issued 181,046,128 shares in 2013 and 2012
Additional capital
Retained earnings
Accumulated other comprehensive (loss)
Treasury shares at cost: 31,757,604 in 2013 and 31,415,530 in 2012
Total Shareholders’ Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of the financial statements.
2013
2012
For the years ended June 30,
2013
2012
2011
$ 1,781,412
2,062,745
$ 838,317
1,992,284
531,897
733,025
112,483
1,377,405
182,669
126,955
5,531,186
316,360
1,431,358
3,131,077
120,506
4,999,301
3,191,061
1,808,240
687,458
1,290,499
3,223,515
576,291
692,042
132,399
1,400,732
137,429
129,352
4,498,114
300,852
1,401,234
3,051,684
95,459
4,849,229
3,129,261
1,719,968
931,126
1,095,218
2,925,856
$12,540,898
$11,170,282
$ 1,333,826
1,156,002
426,996
136,079
467,300
3,520,203
1,495,960
1,372,437
102,920
307,897
6,799,417
90,523
608,752
8,421,270
(1,107,833)
(2,274,286)
5,738,426
3,055
5,741,481
$ 225,589
1,194,684
463,889
153,809
448,042
2,486,013
1,503,946
1,909,755
88,091
276,747
6,264,552
90,523
640,249
7,787,175
(1,415,900)
(2,205,532)
4,896,515
9,215
4,905,730
$12,540,898
$11,170,282
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization
Stock incentive plan compensation
Deferred income taxes
Foreign currency transaction loss
Loss (gain) on disposal of assets
Gain on sale of businesses
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable
Inventories
Prepaid expenses
Other assets
Accounts payable, trade
Accrued payrolls and other compensation
Accrued domestic and foreign taxes
Other accrued liabilities
Pensions and other postretirement benefits
Other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Acquisitions (less cash acquired of $33,932 in 2013,
$19,161 in 2012 and $385 in 2011)
Capital expenditures
Proceeds from disposal of assets
Proceeds from sale of businesses
Other
Net cash used in investing activities
Cash Flows From Financing Activities
Proceeds from exercise of stock options
Payments for common shares
Tax benefit from stock incentive plan compensation
Acquisition of noncontrolling interests
Proceeds from (payments for) notes payable, net
Proceeds from long-term borrowings
Payments for long-term borrowings
Dividends paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
$ 948,784
$1,155,492
$1,057,150
213,722
121,902
84,996
(1,368)
19,497
2,746
(14,637)
(21,206)
98,518
(47,451)
(16,007)
(66,082)
(45,771)
(17,054)
(62,728)
(16,691)
9,765
210,508
111,421
80,935
(56,452)
4,300
(2,494)
—
(91,091)
(28,333)
(26,981)
(6,578)
59,692
16,003
(70,302)
33,512
123,944
16,809
229,238
110,562
73,238
20,715
10,470
(7,710)
—
(259,752)
(139,062)
6,477
(39,118)
228,164
75,405
53,424
(27,726)
(281,285)
56,743
1,190,935
1,530,385
1,166,933
(621,144)
(265,896)
25,047
73,515
(21,367)
(809,845)
32,204
(258,007)
66,030
(1,091)
1,319,524
3,768
(331,245)
(255,009)
576,174
(14,169)
943,095
838,317
(156,256)
(218,817)
20,404
—
(21,099)
(375,768)
10,599
(456,969)
16,107
(147,441)
(1,961)
73,556
(76,757)
(240,654)
(823,520)
(150,246)
180,851
657,466
(60,227)
(207,294)
32,289
—
(9,706)
(244,938)
25,862
(693,096)
42,823
—
(18,908)
291,683
(358,058)
(206,084)
(915,778)
75,723
81,940
575,526
Cash and cash equivalents at end of year
$1,781,412
$ 838,317
$ 657,466
Supplemental Data:
Cash paid during the year for:
Interest
Income taxes
The accompanying notes are an integral part of the financial statements.
$ 88,084
311,988
$ 91,677
494,378
$ 99,227
203,539
24
25
Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF EQUIT Y
(DOLL A RS IN THOUSA NDS)
(DOLL A RS IN THOUSA NDS, E XCEPT PER SH A RE A MOUNTS)
Common
Stock
Additional
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Treasury
Shares
Noncontrolling
Interests
Total
Balance June 30, 2010
$90,523
$ 637,442
$6,086,545
$(1,208,561)
$ (1,237,984)
$ 91,435
$ 4,459,400
Net income
Other comprehensive income
Dividends paid
Stock incentive plan activity
Shares purchased at cost
1,049,130
(202,786)
(41,482)
30,890
757,571
8,020
8,325
(3,298)
1,057,150
765,896
(206,084)
105,070
(693,096)
115,662
(693,096)
Balance June 30, 2011
$90,523
$668,332
$ 6,891,407
$ (450,990) $ (1,815,418)
$104,482
$5,488,336
Net income
Other comprehensive loss
Dividends paid
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
1,151,823
(233,168)
(22,887)
(964,910)
45,532
(73,615)
3,669
(25,607)
(7,486)
(65,843)
1,155,492
(990,517)
(240,654)
87,911
(139,458)
(455,380)
65,266
(455,380)
Balance June 30, 2012
$90,523
$640,249
$ 7,787,175
$(1,415,900)
$(2,205,532)
$ 9,215
$ 4,905,730
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
948,427
(254,283)
(60,049)
308,067
(34,678)
3,181
357
(1,771)
(726)
(4,020)
948,784
306,296
(255,009)
93,696
(839)
(257,177)
188,423
(257,177)
Balance June 30, 2013
$90,523
$608,752
$ 8,421,270
$(1,107,833)
$(2,274,286)
$ 3,055
$ 5,741,481
The accompanying notes are an integral part of the financial statements.
NOTE 1. Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are summarized below.
NATURE OF OPERATIONS – The Company is a leading worldwide
diversified manufacturer of motion and control technologies and
systems, providing precision engineered solutions for a wide variety
of mobile, industrial and aerospace markets. The Company evaluates
performance based on segment operating income before corporate
and administrative expenses, interest expense and income taxes.
As of June 30, 2013, the Company operated in three business segments:
Industrial, Aerospace and Climate & Industrial Controls. 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 Industrial North
American operations have manufacturing plants and distribution
networks throughout the United States, Canada and Mexico and
primarily service North America. The Industrial International operations
provide Parker products and services to 46 countries throughout
Europe, Asia Pacific, Latin America, the Middle East and Africa.
The Aerospace Segment produces hydraulic, fuel, pneumatic and
electro-mechanical 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 Climate & Industrial Controls Segment manufactures motion-control
systems and components for use primarily in the refrigeration and air
conditioning and transportation industries. The products in the Climate
& Industrial Controls Segment are marketed primarily through field
sales employees and independent distributors. Effective July 1, 2013,
the businesses of the Climate & Industrial Controls Segment will be
consolidated into various business units of the Industrial Segment.
As a result of this consolidation and resulting change in management
structure, beginning in fiscal 2014, the Company will have two reporting
segments: Diversified Industrial and Aerospace Systems.
See the table of Business Segment Information “By Industry” and
“By Geographic Area” on page 23 for further disclosure of business
segment information.
There are no individual customers to whom sales are more than three
percent 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 the risk that adverse changes with respect to any particular
product and geographic operation 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 majority-owned domestic and foreign
subsidiaries. All intercompany transactions and profits have been
eliminated in the consolidated financial statements. The Company does
not have off-balance sheet arrangements. Within the Business Segment
Information, intersegment and interarea sales have been eliminated.
REVENUE RECOGNITION – Revenue is recognized when persuasive
evidence of an arrangement exists, product has shipped and the risks
and rewards of ownership have transferred or services have been
rendered, the price to the customer is fixed and determinable and
collectibility is reasonably assured, which is generally at the time the
product is shipped. Shipping and handling costs billed to customers
are included in net sales and the related costs in cost of sales.
LONG-TERM CONTRACTS – The Company enters into long-term
contracts primarily for the production of aerospace products. For
financial statement purposes, revenues are primarily recognized using
the percentage-of-completion method. The extent of progress toward
completion is primarily measured using the units-of-delivery method.
Unbilled costs on these contracts are included in inventory. Progress
payments are netted against the inventory balances. The Company
estimates costs to complete long-term contracts for purposes of
evaluating and establishing contract reserves. Adjustments to cost
estimates are made on a consistent basis and a contract reserve is
established when the estimated costs to complete a contract exceed
the expected contract revenues.
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.
ACCOUNTS RECEIVABLE – The accounts receivable, net caption in the
Consolidated Balance Sheet is comprised of the following components:
June 30,
Accounts receivable, trade
Allowance for doubtful accounts
Non-trade accounts receivable
Notes receivable
Total
2013
2012
$1,855,644
(14,824)
110,394
111,531
$ 1,792,961
(10,518)
84,872
124,969
$2,062,745
$1,992,284
Accounts receivable are initially recorded at their net collectible
amount and are generally recorded at the time the revenue from the
sales transaction is recorded. Receivables are written off to bad debt
primarily when, in the judgment of the Company, the receivable is
deemed to be uncollectible due to the insolvency of the debtor.
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.
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, seven to
10 years for machinery and equipment, and three to eight years for
vehicles and office equipment. Improvements, which extend the useful
life of property, are capitalized, and maintenance and repairs are
expensed. The Company reviews plant and equipment for impairment
whenever events or changes in circumstances indicate that their
carrying value may not be recoverable. When plant and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation
26
27
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 percent 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. Also included in this balance sheet caption is non-current
deferred income taxes of $319,586 and $571,039 at June 30, 2013
and June 30, 2012, 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 the shorter of
their remaining useful or 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
anticipated customer attrition rates. The Company reviews intangible
assets for impairment whenever events or changes in circumstances
indicate that their carrying value may not be recoverable.
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. The Company recognizes accrued interest related to unrecognized
tax benefits in income tax expense. Penalties, if incurred, are
recognized in income tax expense.
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, 2013 and 2012 is immaterial to the financial position of the
Company and the change in the accrual during 2013, 2012 and 2011
was immaterial to the Company’s results of operations and cash flows.
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
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.
SUBSEQUENT EVENTS – The Company has evaluated subsequent
events that have occurred through the date of filing of the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
No subsequent events occurred that required adjustment to these
financial statements. In July 2013, final regulatory approval was
received for a previously announced agreement to form a joint venture
between the Company and GE Aviation. The joint venture is expected to
be formed in fiscal 2014.
RECENT ACCOUNTING PRONOUNCEMENTS – In February 2013, the
Financial Accounting Standards Board (FASB) issued new accounting
guidance requiring an entity to provide information about the amounts
reclassified out of accumulated other comprehensive income (AOCI)
by component. For items reclassified out of AOCI in their entirety, the
disclosure of the income statement line where those items are reflected
is also required. Cross-reference to disclosures providing additional
information is required for other items not reclassified in their entirety.
The guidance does not change the current requirements for reporting
net income or other comprehensive income. The guidance, which must
be presented prospectively, is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2012.
NOTE 2. Acquisitions and Divestitures
ACQUISITIONS – During 2013, the Company completed eight
acquisitions whose aggregate sales for their most recent fiscal year
prior to acquisition were $484 million. Total purchase price for the
eight acquisitions was approximately $621 million in cash and $114
million in assumed debt.
During 2012, the Company completed four acquisitions whose
aggregate sales for their most recent fiscal year prior to acquisition
were $141 million. Total purchase price for the four acquisitions
in 2012 was approximately $156 million in cash. Also during 2012,
the Company purchased the outstanding shares not previously owned
by the Company in two majority-owned subsidiaries. Total purchase
price for the two majority-owned subsidiaries was $147 million in cash.
During 2011, the Company completed three acquisitions whose
aggregate sales for their most recent fiscal year prior to acquisition
were $65 million. Total purchase price for the three acquisitions
was approximately $61 million in cash.
The results of operations for all acquisitions are included as of the
respective dates of acquisition. The initial purchase price allocation
and subsequent purchase price adjustments for acquisitions in 2013,
2012 and 2011 are presented below. Some of the 2013 acquisitions
are still subject to purchase price adjustments.
2013
2012
2011
Assets:
Accounts receivable
Inventories
Prepaid expenses
Deferred income taxes
Plant and equipment
Intangible and other assets
Goodwill
$ 91,668
93,915
4,672
(1,713)
74,439
280,001
317,879
$ 24,833
29,102
1,541
5,679
28,929
59,576
68,144
860,861
217,804
Liabilities and equity:
Notes payable
Accounts payable, trade
Accrued payrolls and
other compensation
Accrued domestic and
foreign taxes
Other accrued liabilities
Long-term debt
Pensions and other
postretirement benefits
Deferred income taxes
Other liabilities
Noncontrolling interests
11,920
46,596
12,099
7,073
16,805
102,122
2,125
39,214
689
1,074
239,717
1,887
7,189
3,672
2,882
5,984
4,365
11,396
24,062
111
—
61,548
$ 9,332
7,908
69
468
5,376
35,094
8,715
66,962
—
2,440
765
215
1,500
—
—
1,815
—
—
6,735
Net assets acquired
$ 621,144
$156,256
$60,227
DIVESTITURES – During 2013, the Company completed several
divestitures, the primary ones being the automotive businesses
of its Mobile Climate Systems division and its Turkey refrigeration
components business. Both of these businesses were part of the
Climate & Industrial Control Segment and had combined revenues
of approximately $158 million for their most recent fiscal year. The
Company recorded a net pre-tax gain during 2013 of approximately
$18 million related to these divestitures. The gain is reflected in the
(gain) on disposal of assets caption in the Consolidated Statement
of Income.
NOTE 3. Charges Related to Business Realignment
To structure its businesses in light of current and anticipated customer
demand, the Company incurred business realignment charges in 2013,
2012 and 2011.
Business realignment charges by business segment are as follows:
Industrial
Aerospace
Climate & Industrial Controls
2013
$11,315
—
919
2012
$13,066
—
1,255
Work force reductions by business segment are as follows:
Industrial
Aerospace
Climate & Industrial Controls
2013
644
—
81
2012
496
—
25
2011
$15,427
1,024
—
2011
466
49
—
The charges primarily consist of severance costs related to plant
closures as well as general work force reductions implemented by
various operating units throughout the world. In addition, $1,918 of
severance costs for 98 people have been recognized in connection
with the Company’s divestiture of its Turkey refrigeration components
business and is reflected in the other expense caption in the Business
Segment Information for 2013. The business realignment charges in
2012 also included charges related to enhanced retirement benefits. 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 charges are presented in the Consolidated
Statement of Income as follows:
Cost of sales
Selling, general and
administrative expenses
Other (income) expense, net
2013
$8,354
3,880
1,918
2012
$12,669
1,020
632
2011
$15,276
1,175
—
As of June 30, 2013, approximately $10 million in severance payments
had been made relating to charges incurred during 2013, with the
majority of the remaining payments expected to be made by March 31,
2014. All required severance payments have been made relating to
charges incurred in 2012 and 2011. Additional charges to be recognized
in future periods related to the realignment actions described above are
not expected to be material.
NOTE 4. Income Taxes
Income before income taxes was derived from the following sources:
United States
Foreign
2013
2012
2011
$ 653,622
657,379
$ 810,150
766,548
$ 681,910
731,811
$1,311,001
$1,576,698
$1,413,721
Income taxes include the following:
Federal
Current
Deferred
Foreign
Current
Deferred
State and local
Current
Deferred
2013
2012
2011
$ 167,350
26,523
$ 255,991
(48,252)
$ 121,292
34,136
176,739
(28,472)
191,167
(29)
193,064
(24,229)
19,496
581
30,500
(8,171)
21,500
10,808
$ 362,217
$ 421,206
$ 356,571
A reconciliation of the Company’s effective income tax rate to the
statutory Federal rate follows:
Statutory Federal income
tax rate
State and local income taxes
Foreign tax rate difference
Cash surrender value of
life insurance
Federal manufacturing
deduction
Research tax credit
Other
2013
2012
2011
35.0%
1.0
(5.8)
(0.7)
(1.0)
(1.1)
0.2
35.0%
0.9
(5.8)
0.1
(1.6)
(0.4)
(1.5)
35.0%
1.8
(8.7)
(0.9)
(0.9)
(1.1)
—
Effective income tax rate
27.6%
26.7%
25.2%
28
29
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:
Retirement benefits
Other liabilities and reserves
Long-term contracts
Stock-based incentive compensation
Loss carryforwards
Unrealized currency exchange gains
and losses
Inventory
Foreign tax credit carryforward
Depreciation and amortization
Valuation allowance
2013
$ 535,260
113,257
26,714
59,274
286,180
14,639
15,570
25,195
(527,860)
(273,413)
2012
$ 751,676
134,358
27,726
70,129
175,571
9,057
18,535
19,079
(480,791)
(176,079)
Net deferred tax asset
$ 274,816
$549,261
Change in net deferred tax asset:
Provision for deferred tax
Items of other comprehensive (loss)
Acquisitions and other
$ 1,368
(194,746)
(81,067)
$ 56,452
319,352
(16,160)
Total change in net deferred tax
$(274,445)
$359,644
At June 30, 2013, the Company had recorded deferred tax assets of
$286,180 resulting from $1,012,448 in loss carryforwards. A valuation
allowance of $256,124 related to the loss carryforwards has been
established due to the uncertainty of realizing certain deferred tax
assets. Of this valuation allowance, $244,484, relates to non-operating
entities whose loss carryforward utilization is considered to be remote.
Some of the loss carryforwards can be carried forward indefinitely;
others can be carried forward from three to 20 years.
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 approximately $2,700,000 at June 30, 2013.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
Balance July 1
Additions for tax positions
related to current year
Additions for tax positions
of prior years
Reductions for tax positions
of prior years
Reductions for settlements
Reductions for expiration
of statute of limitations
Effect of foreign currency
translation
2013
2012
2011
$109,735
$ 81,156
$82,089
10,285
66,500
8,398
10,719
11,047
10,015
(20,683)
(4,266)
(23,456)
(23,434)
(15,060)
(7,133)
(437)
(1,636)
—
2,087
(442)
2,847
Balance June 30
$107,440
$109,735
$ 81,156
The total amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate was $60,876, $61,601 and $78,754
as of June 30, 2013, 2012 and 2011, respectively. If recognized, a
significant portion of the gross unrecognized tax benefits as of
June 30, 2013 would be offset against an asset currently recorded
in the Consolidated Balance Sheet. The accrued interest related to
the gross unrecognized tax benefits, excluded from the amounts
above, was $5,184, $3,676 and $11,331 as of June 30, 2013, 2012
and 2011, respectively.
The Company and its subsidiaries file income tax returns in the
United States and in various foreign jurisdictions. In the normal course
of business, the Company’s tax returns are subject to examination
by taxing authorities throughout the world. The Company is no longer
subject to examinations of its federal income tax returns by the United
States Internal Revenue Service for fiscal years through 2010. All
significant state, local and foreign tax returns have been examined
for fiscal years through 2003. The Company does not anticipate that,
within the next twelve months, the total amount of unrecognized tax
benefits will significantly change due to the settlement of examinations
and the expiration of statute of limitations.
NOTE 5. Earnings Per Share
Basic earnings per share are computed using the weighted-average
number of common shares outstanding during the year. Diluted
earnings per share are 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-based awards. The computation of net income per
share was as follows:
2013
2012
2011
Numerator:
Net income attributable
to common shareholders
Denominator:
Basic – weighted-average
common shares
Increase in weighted-
average common shares
from dilutive effect
of stock-based awards
Diluted - weighted-average
common shares,
assuming exercise of
stock-based awards
$948,427
$1,151,823
$1,049,130
149,218,257
151,222,033
161,125,869
2,369,774
3,442,477
3,672,352
151,588,031
154,664,510
164,798,221
Basic earnings per share
Diluted earnings per share
$ 6.36
$ 6.26
$ 7.62
$ 7.45
$ 6.51
$ 6.37
For 2013, 2012 and 2011, 1.3 million, 0.7 million, and 1.6 million
common shares, respectively, subject to stock-based awards were
excluded from the computation of diluted earnings per share because
the effect of their exercise would be anti-dilutive.
NOTE 6. Inventories
Inventories valued on the last-in, first-out (LIFO) cost method were
approximately 29 percent of total inventories in 2013 and 31 percent
of total inventories in 2012. The current cost of these inventories
exceeds their valuation determined on the LIFO basis by $207,277 in
2013 and $212,033 in 2012. Progress payments of $42,446 in 2013
and $36,087 in 2012 are netted against inventories.
NOTE 7. Goodwill and Intangible Assets
The Company’s annual impairment tests performed in 2013, 2012,
and 2011 resulted in no impairment loss being recognized.
The changes in the carrying amount of goodwill are as follows:
Industrial Aerospace
Segment
Segment
Climate &
Industrial
Controls
Segment
During 2013, the Company acquired intangible assets with an initial
purchase price allocation and weighted-average life as follows:
Purchase Price
Allocation
Weighted-
Average Life
Patents
Trademarks
Customer lists
and other
$ 21,616
65,280
16 years
17 years
204,461
13 years
Total
$291,357
14 years
Total intangible amortization expense in 2013, 2012 and 2011 was
$118,516, $107,086 and $107,701, respectively. Estimated intangible
amortization expense for the five years ending June 30, 2014 through
2018 is $117,556, $113,034, $110,292, $105,602 and $101,876,
respectively.
Total
NOTE 8. Financing Arrangements
Balance
June 30, 2011
Acquisitions
Foreign currency
translation and
other
Balance
June 30, 2012
Acquisitions
Divestitures
Foreign currency
translation and
other
Balance
June 30, 2013
$2,595,989
65,480
$98,914
(193)
$314,213 $ 3,009,116
65,287
—
(143,348)
(47)
(5,152)
(148,547)
$ 2,518,121
$ 98,674
$309,061 $2,925,856
316,857
(61)
—
—
—
(20,044)
316,857
(20,105)
(1,588)
(334)
2,829
907
$2,833,329
$98,340
$291,846 $3,223,515
Acquisitions represent the original goodwill allocation, purchase price
adjustments, and final adjustments to the purchase price allocation
for the acquisitions during the measurement period subsequent to
the applicable acquisition dates. The Company’s previously reported
results of operations and financial position would not be materially
different had the goodwill adjustments recorded during 2013 and
2012 been reflected in the same reporting period that the initial
purchase price allocations for those acquisitions were made.
Divestitures represent goodwill associated with businesses divested
during 2013 as more fully discussed in Note 2.
The Company has a line of credit totaling $2,000,000 through a multi-
currency revolving credit agreement with a group of banks, $668,555
of which was available at June 30, 2013. The credit agreement expires
in October 2017; however, the Company has the right to request a one-
year extension of the expiration date on an annual basis, which request
may result in changes to the current terms and conditions of the credit
agreement. Advances from the credit agreement can be used for general
corporate purposes, including acquisitions, and for the refinancing of
existing indebtedness. The credit agreement requires the payment of
an annual facility fee, the amount of which would increase in the event
the Company’s credit ratings are lowered. Although a lowering of the
Company’s credit ratings would likely increase the cost of future debt,
it would not limit the Company’s ability to use the credit agreement nor
would it accelerate the repayment of any outstanding borrowings.
The Company is currently authorized to sell up to $1,850,000 of
short-term commercial paper notes. At June 30, 2013, $1,331,445
of commercial paper notes were outstanding. No commercial paper
notes were outstanding at June 30, 2012.
In addition to commercial paper notes, notes payable includes
short-term lines of credit and borrowings from foreign banks. At June
30, 2013, the Company had $83,556 in lines of credit from various
foreign banks, all of which was available at June 30, 2013. Most of
these agreements are renewed annually. The weighted-average interest
rate on notes payable during 2013 and 2012 was 0.3 percent and 0.2
percent, respectively.
Intangible assets are amortized on a straight-line method over their
legal or estimated useful life. The gross carrying value and accumulated
amortization for each major category of intangible asset at June 30
are as follows:
The Company’s foreign locations in the ordinary course of business
may enter into financial guarantees through financial institutions which
enable customers to be reimbursed in the event of nonperformance
by the Company.
2013
2012
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization
Amount Amortization
$ 141,160
386,619
$ 75,175
148,319
$ 118,034
321,019
$ 66,303
129,081
1,468,243
482,029
1,247,820
396,271
Patents
Trademarks
Customer lists
and other
Total
$1,996,022
$705,523
$1,686,873
$591,655
The Company’s credit agreements and indentures governing certain
debt agreements contain various covenants, the violation of which
would limit or preclude the use of the applicable agreements for future
borrowings, or might accelerate the maturity of the related outstanding
borrowings covered by the applicable agreements. At the Company’s
present rating level, the most restrictive covenant contained in the
credit agreements and the indentures provides that the ratio of secured
debt to net tangible assets be less than 10 percent. As of June 30, 2013,
the Company does not have any secured debt outstanding. The
Company is in compliance with all covenants.
30
31
2013
2012
Benefit cost
556
552
Change in benefit obligation
NOTE 9. Debt
June 30,
Domestic:
Fixed rate medium-term notes
3.50% to 6.55%, due 2018-2038
Fixed rate senior notes
4.875%, due 2013
Foreign:
Bank loans, including revolving credit
1% to 11.75%, due 2014
Euro bonds 4.125%, due 2016
Japanese Yen credit facility
JPY Libor plus 55 bps, due 2017
Other long-term debt,
including capitalized leases
$ 1,175,000
$ 1,175,000
—
225,000
2,045
260,200
589
253,220
60,540
75,174
Total long-term debt
Less long-term debt payable
within one year
Long-term debt, net
1,498,341
1,729,535
2,381
225,589
$1,495,960
$1,503,946
Principal amounts of long-term debt payable in the five years ending
June 30, 2014 through 2018 are $2,381, $215, $260,205, $60,540 and
$450,000, respectively.
LEASE COMMITMENTS – Future minimum rental commitments as of
June 30, 2013, under non-cancelable operating leases, which expire
at various dates, are as follows: 2014 – $86,145; 2015 – $58,816;
2016 – $37,339; 2017 – $23,067; 2018 – $14,709 and after 2018 – $60,990.
Rental expense in 2013, 2012 and 2011 was $133,478, $124,546 and
$118,496, respectively.
NOTE 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 also has arrangements for 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.
A summary of the Company’s defined benefit pension plans follows:
Service cost
Interest cost
Expected return on
plan assets
Amortization of prior
service cost
Amortization of
unrecognized actuarial loss
Amortization of initial
net obligation (asset)
2013
2012
2011
$ 107,519
174,152
$ 84,663
185,550
$ 87,676
176,081
(211,694)
(201,845)
(200,303)
14,472
14,016
12,636
200,849
105,788
109,436
22
(60)
(63)
Net periodic benefit cost
$ 285,320
$ 188,112
$ 185,463
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Plan amendments
Acquisitions
Foreign currency translation and other
2013
2012
$ 4,506,521
107,519
174,152
(241,674)
(157,838)
11,236
1,283
(18,636)
$ 3,569,560
84,663
185,550
847,628
(152,417)
3,475
40,324
(72,262)
Benefit obligation at end of year
$ 4,382,563
$ 4,506,521
Change in plan assets
Fair value of plan assets
at beginning of year
Actual gain on plan assets
Employer contributions
Benefits paid
Acquisitions
Foreign currency translation and other
$ 2,700,050
278,862
291,018
(157,838)
285
(15,761)
$ 2,798,417
4,515
68,799
(152,417)
28,928
(48,192)
Fair value of plan assets at end of year
$ 3,096,616
$ 2,700,050
Funded status
$(1,285,947)
$(1,806,471)
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement
benefits
$ (20,643) $
(11,448)
(1,265,304)
(1,795,023)
Net amount recognized
$(1,285,947)
$(1,806,471)
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service cost
Transition obligation
Net amount recognized
$ 1,537,549
54,630
166
$ 2,051,178
57,756
230
$ 1,592,345
$ 2,109,164
The presentation of the amounts recognized on the Consolidated
Balance Sheet and in accumulated other comprehensive (loss) is
on a debit (credit) basis and excludes the effect of income taxes.
The estimated amount of net actuarial loss, prior service cost and
transition obligation that will be amortized from accumulated other
comprehensive (loss) into net periodic benefit pension cost in 2014
is $157,221, $11,348 and $20, respectively.
The accumulated benefit obligation for all defined benefit plans was
$3,944,921 and $4,025,095 at June 30, 2013 and 2012, 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 $4,351,955, $3,920,218
and $3,070,157, respectively, at June 30, 2013, and $4,491,415,
$4,012,352 and $2,684,948, respectively, at June 30, 2012. The
projected benefit obligation and fair value of plan assets for pension
plans with projected benefit obligations in excess of plan assets
were $4,381,914 and $3,095,942, respectively, at June 30, 2013,
and $4,499,085 and $2,691,772, respectively, at June 30, 2012.
The Company expects to make cash contributions of approximately
$144 million to its defined benefit pension plans in 2014, about half
of which relate to U.S. qualified benefit plans. Estimated future benefit
payments in the five years ending June 30, 2014 through 2018 are
$178,948, $211,013, $201,031, $212,975 and $217,266, respectively
and $1,314,513 in the aggregate for the five years ending June 30,
2019 through June 30, 2023.
The assumptions used to measure net periodic benefit cost for the
Company’s significant defined benefit plans are:
U.S. defined benefit plans
Discount rate
Average increase in
compensation
Expected return on
plan assets
Non-U.S. defined benefit
plans
Discount rate
Average increase in
compensation
Expected return on
plan assets
2013
2012
2011
3.91%
5.45%
5.30%
5.21%
5.21%
5.21%
8.0%
8.0%
8.5%
1.75 to 4.7%
2.0 to 5.87%
1.75 to 6.0%
2.0 to 6.0%
2.0 to 5.0%
2.0 to 4.5%
1.0 to 6.4%
1.0 to 7.5%
1.0 to 8.0%
The assumptions used to measure the benefit obligation for the
Company’s significant defined benefit plans are:
U.S. defined benefit plans
Discount rate
Average increase in compensation
Non-U.S. defined benefit plans
Discount rate
Average increase in compensation
2013
2012
4.52%
5.13%
3.91%
5.21%
1.5 to 4.59%
2.0 to 6.0%
1.75 to 4.7%
2.0 to 6.0%
The discount rate assumption is based on current rates of high-quality
long-term 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:
Equity securities
Debt securities
Other
2013
57%
30%
13%
100%
2012
54%
34%
12%
100%
The weighted-average target asset allocation as of June 30, 2013 is 54
percent equity securities, 34 percent debt securities and 12 percent
other investments. The investment strategy for the Company’s
worldwide defined benefit pension plan assets focuses on achieving
prudent actuarial funding ratios while maintaining acceptable levels of
risk in order to provide adequate liquidity to meet immediate and future
benefit requirements. This strategy requires investment portfolios
that are broadly diversified across various asset classes and external
investment managers. Assets held in the U.S. defined benefit plans
account for approximately 74 percent of the Company’s total defined
benefit plan assets. The Company’s overall investment strategy
with respect to the Company’s U.S. defined benefit plans is to
opportunistically migrate from its current mix between growth seeking
assets (primarily consisting of global public equities in developed and
emerging countries and hedge fund of fund strategies) and income
generating assets (primarily consisting of high quality bonds, both
domestic and global, emerging market bonds, high yield bonds and
Treasury Inflation Protected Securities) to an allocation more heavily
weighted toward income generating assets. Over time, long duration
fixed income assets are being added to the portfolio. These securities
are highly correlated with the Company’s pension liabilities and will
serve to hedge a portion of the Company’s interest rate risk.
The fair values of pension plan assets at June 30, 2013 and at June 30,
2012, by asset class, are as follows.
Quoted Prices Significant Other
In Active
Markets
(Level 1)
Total
Significant
Observable Unobservable
Inputs
(Level 3)
Inputs
(Level 2)
191,266
223,764
366,692
Cash and cash
equivalents $ 65,170
Equity securities
U.S. based
companies
Non-U.S. based
companies
Fixed income
securities
Corporate
bonds
Government
issued
securities
Mutual funds
Equity funds
Fixed income
funds
Common/
Collective trusts
Equity funds
Fixed income
funds
Limited
Partnerships
Miscellaneous
302,913
33,443
826,654
334,370
108,212
587,023
57,109
$ 64,208
$ 962
$ —
366,692
223,764
—
—
80,959
110,307
57,278
50,934
333,695
675
32,926
24,183
2,743
823,911
2,979
584,044
—
772
302,913
32,671
—
—
—
—
—
—
—
—
—
—
Total at
June 30, 2013 $3,096,616
$1,166,016
$1,930,600
$ —
32
33
Quoted Prices Significant Other
In Active
Markets
(Level 1)
Total
Significant
Observable Unobservable
Inputs
(Level 3)
Inputs
(Level 2)
336,676
188,859
245,460
Cash and cash
equivalents $ 92,718
Equity securities
U.S. based
companies
Non-U.S. based
companies
Fixed income
securities
Corporate
bonds
Government
issued
securities
Mutual funds
Equity funds
Fixed income
funds
Common/
Collective trusts
Equity funds 661,622
Fixed income
funds
Limited
Partnerships
Miscellaneous
392,398
120,103
222,147
337,374
126,837
(24,144)
$ 92,718
$ —
$ —
336,676
245,460
—
—
58,038
130,821
64,681
55,422
336,747
218,208
—
—
—
664
627
3,939
661,622
392,398
126,837
(24,808)
—
—
—
—
—
—
—
—
—
—
Total at
June 30, 2012 $2,700,050
$1,353,192
$1,346,858
$ —
Cash and cash equivalents, which include repurchase agreements and
other short-term investments, are valued at cost, which approximates
fair value.
Limited Partnerships primarily consist of global equity, small cap
equity and hedge funds and are valued using a net asset value per share.
Limited Partnership investments can be redeemed daily and without
restriction. Redemption of the entire investment balance generally
requires a 30-day notice period. Small cap equity funds provide
exposure to domestic small cap equities and hedge funds provide
exposure to a variety of hedging strategies including long/short
equity, relative value, event driven and global macro.
Miscellaneous primarily includes net payables for securities purchased
but not settled in the asset portfolio of the Company’s U.S. defined
benefit pension plans and insurance contracts held in the asset portfolio
of the Company’s non-U.S. defined benefit pension plans. Insurance
contracts are valued at the present value of future cash flows promised
under the terms of the insurance contracts.
The primary investment objective of equity securities and equity funds,
within both the mutual fund and common/collective trust asset class,
is to obtain capital appreciation in an amount that at least equals various
market-based benchmarks. The primary investment objective of fixed
income securities and fixed income funds, within both the mutual fund
and common/collective trust asset class, is to provide for a constant
stream of income while preserving capital. The primary investment
objective of limited partnerships is to achieve capital appreciation
through an investment program focused on specialized investment
strategies. The primary investment objective of insurance contracts,
included in the miscellaneous asset class, is to provide a stable rate
of return over a specified period of time.
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. Company contributions to the ESOP are generally
made in the form of cash and are recorded as compensation expense.
Equity securities are valued at the closing price reported on the
active market on which the individual securities are traded. U.S.
based companies include Company stock with a fair value of
$126,834 as of June 30, 2013 and $102,212 as of June 30, 2012.
Shares held by ESOP
Company contributions
to ESOP
2013
2012
2011
9,686,238
10,216,738
10,308,032
$61,067
$58,067
$52,627
Fixed income securities are valued using both market observable inputs
for similar assets that are traded on an active market and the closing
price on the active market on which the individual securities are traded.
In addition to shares within the ESOP, as of June 30, 2013, employees
have elected to invest in 2,739,619 shares of common stock within the
company stock fund of the savings and investment 401(k) plan.
Mutual funds are valued using both the closing market price reported
on the active market on which the fund is traded and market observable
inputs for similar assets that are traded on an active market and
primarily consist of equity and fixed income funds. The equity funds
primarily provide exposure to U.S. and international equities and fixed
income securities, real estate and commodities. The fixed income
funds primarily provide exposure to high-yield securities and emerging
market fixed income instruments.
Common/Collective trusts primarily consist of equity and fixed income
funds and are valued using a net asset value per share. Common/Collective
trust investments can be redeemed daily and without restriction.
Redemption of the entire investment balance generally requires a
30-day notice period. The equity funds provide exposure to large, mid
and small cap U.S. equities, international large and small cap equities and
emerging market equities. The fixed income fund provides exposure to
U.S., international and emerging market debt securities.
The Company has a retirement income account (RIA) within the
employee savings plan. 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. The Company recognized $22,046, $19,372 and $16,844
in expense related to the RIA in 2013, 2012 and 2011, respectively.
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 these
benefit plans.
Certain employees are covered under benefit provisions that include
prescription drug coverage for Medicare eligible retirees. The impact
of the subsidy received under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 on the Company’s other
postretirement benefits was immaterial.
A summary of the Company’s other postretirement benefit plans follows:
Benefit cost
Service cost
Interest cost
Net amortization and deferral
Net periodic benefit cost
2013
$ 825
2,826
1,279
$4,930
2012
$ 728
3,482
480
2011
$ 675
3,579
524
$ 4,690
$ 4,778
Change in benefit obligation
2013
2012
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
$ 83,654
825
2,826
(6,752)
(5,009)
$ 73,139
728
3,482
11,447
(5,142)
Benefit obligation at end of year
$ 75,544
$ 83,654
Funded status
$(75,544)
$(83,654)
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement benefits
$ (6,068)
(69,476)
$ (5,041)
(78,613)
Net amount recognized
$(75,544)
$(83,654)
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service (credit)
Net amount recognized
$ 13,115
(920)
$ 21,246
(1,023)
$ 12,195
$ 20,223
The presentation of the amounts recognized on the Consolidated
Balance Sheet and in accumulated other comprehensive (loss) is on
a debit (credit) basis and is before the effect of income taxes. The
amount of net actuarial loss and prior service (credit) that will be
amortized from accumulated other comprehensive (loss) into net
periodic postretirement cost in 2014 is $1,239 and $(123), respectively.
The assumptions used to measure the net periodic benefit cost for
postretirement benefit obligations are:
Discount rate
Current medical cost
trend rate
Ultimate medical cost
trend rate
Medical cost trend rate
decreases to ultimate in year
2013
3.62%
8.0%
5.0%
2012
5.00%
8.0%
5.0%
2011
5.01%
8.0%
5.0%
2019
2019
2018
The discount rate assumption used to measure the benefit obligation
was 4.10 percent in 2013 and 3.62 percent in 2012.
Estimated future benefit payments for other postretirement benefits in
the five years ending June 30, 2014 through 2018 are $6,098, $6,076,
$6,060, $6,146 and $6,108, respectively, and $26,131 in the aggregate
for the five years ending June 30, 2019 through June 30, 2023.
A one percentage point change in assumed health care cost trend rates
would have the following effects:
Effect on total of service and interest
cost components
Effect on postretirement benefit
obligation
1% Increase 1% Decrease
$ 158
$ (135)
2,437
(2,136)
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 matching contributions, and earnings on the
deferrals. During 2013, 2012 and 2011, the Company recorded expense
relating to deferred compensation of $19,182, $4,499 and $28,720,
respectively.
The Company has invested in corporate-owned life insurance policies
to assist in meeting the obligation under these programs. The policies
are held in a rabbi trust and are recorded as assets of the Company.
NOTE 11. Equity
As of July 1, 2012, the Company adopted the provisions of FASB
Accounting Standards Update No. 2011-05, “Presentation of
Comprehensive Income.” As a result of this adoption, the Company
has presented total comprehensive income in a separate Statement
of Comprehensive Income.
The balance of accumulated other comprehensive (loss) in
shareholders’ equity is comprised of the following:
Foreign currency translation
Retirement benefit plans
Other
2013
2012
$ (68,328)
(1,039,072)
(433)
$ (51,125)
(1,364,138)
(637)
SHARE REPURCHASES – The Company has a program to repurchase its
common shares. On January 24, 2013, the Board of Directors of the
Company approved an increase in the overall maximum number of
shares authorized for repurchase under the program so that, beginning
on such date, the aggregate number of shares authorized for repurchase
was 15 million. Subject to this limitation, the Company is authorized to
repurchase, in any single fiscal year, an amount of common shares
equal to the greater of 7.5 million shares or five percent of the shares
outstanding as of the end of the prior fiscal year. Repurchases are
funded primarily from operating cash flows and commercial paper
borrowings, and the shares are initially held as treasury stock. The
number of common shares repurchased at the average purchase price
follows:
Shares repurchased
Average price per share
3,006,005
$85.55
6,395,866
$71.20
8,008,926
$86.54
2013
2012
2011
34
35
NOTE 12. Stock Incentive Plans
The Company’s 2009 Omnibus Stock Incentive Plan provides for the
granting of share-based incentive awards in the form of nonqualified stock
options, stock appreciation rights (SARs), restricted stock units (RSUs)
and restricted and unrestricted stock to officers and key employees of
the Company. The aggregate number of shares authorized for issuance
under the 2009 Omnibus Stock Incentive Plan is 14,700,000. The
Company satisfies share-based incentive award obligations by issuing
shares of common stock out of treasury, which have been repurchased
pursuant to the Company’s share repurchase program described in
Note 11, or through the issuance of previously unissued common stock.
STOCK OPTIONS/SARs - Stock options allow the participant 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 of grant. Upon exercise, SARs entitle
the participant to receive shares of common stock equal to the increase
in value of the award between the grant date and the exercise date. Stock
options and SARs are exercisable from one to three years after the date
of grant and expire no more than 10 years after grant.
The fair value of each stock option and SAR award granted in 2013, 2012
and 2011 was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
Risk-free interest rate
Expected life of award
Expected dividend yield of stock
Expected volatility of stock
Weighted-average fair value
2013
0.8%
4.9 yrs
1.7%
39.0%
2012
0.9%
5.2 yrs
1.6%
37.3%
2011
1.5%
5.2 yrs
1.5%
35.9%
$24.76
$20.30
$18.70
The risk-free interest rate was based on U.S. Treasury yields with a term
similar to the expected life of the award. The expected life of the award
was derived by referring to actual exercise and post-vesting employment
termination experience. The expected dividend yield was based on the
Company’s historical dividend rate and stock price over a period similar
to the expected life of the award. The expected volatility of stock was
derived by referring to changes in the Company’s historical common
stock prices over a timeframe similar to the expected life of the award.
Stock option and SAR activity during 2013 is as follows (aggregate
intrinsic value in millions):
Weighted-
Average
Weighted-
Remaining
Average
Exercise Contractual
Term
Price
Number
of Shares
Aggregate
Intrinsic
Value
A summary of the status and changes of shares subject to stock option
and SAR awards and the related average price per share follows:
Nonvested June 30, 2012
Granted
Vested
Canceled
Nonvested June 30, 2013
Number of
Shares
Weighted-Average
Grant Date
Fair Value
2,774,590
1,920,863
(1,729,322)
(32,929)
2,933,202
$ 18.06
24.76
17.22
20.92
$22.91
At June 30, 2013, $24,565 of expense with respect to nonvested stock
option and SAR awards has yet to be recognized and will be amortized
into expense over a weighted-average period of approximately 12 months.
The total fair value of shares vested during 2013, 2012 and 2011 was
$29,777, $37,885 and $45,635, respectively.
Information related to stock options and SAR awards exercised during
2013, 2012 and 2011 is as follows:
Net cash proceeds
Intrinsic value
Income tax benefit
2013
$ 32,204
208,426
47,659
2012
$10,599
57,567
14,008
2011
$ 25,862
163,752
42,546
During 2013, 2012 and 2011, the Company recognized stock-based
compensation expense of $33,018, $26,585 and $36,617, respectively,
relating to stock option and SAR awards. The Company derives a tax
deduction measured by the excess of the market value over the grant
price at the date stock-based awards are exercised. The related tax
benefit is credited to additional capital as the Company is currently
in a windfall tax benefit position.
Shares surrendered upon exercise of stock options and SARs:
2013 – 1,947,148; 2012 – 321,266; 2011 – 2,447,908.
RSUs – RSUs constitute an agreement to deliver shares of common
stock to the participant at the end of a vesting period. Generally, the
RSUs vest and the underlying stock is issued ratably over a three-year
graded vesting period. Unvested RSUs may not be transferred and do
not have dividend or voting rights. For each unvested RSU, recipients
are entitled to receive a dividend equivalent, payable in cash or common
shares, equal to the cash dividend per share paid to common
shareholders.
The fair value of each RSU award was based on the fair market value of
the Company’s common stock on the date of grant. A summary of the
status and changes of shares subject to RSU awards and the related
average price per share follows:
12,798,326
$ 54.74
1,920,863
(5,246,595)
(37,421)
85.53
50.14
58.68
9,435,173
$63.48
6.1 years
$302.2
6,501,971
$56.58
5.1 years
$252.4
Nonvested June 30, 2012
Granted
Vested
Canceled
Nonvested June 30, 2013
Number of
Shares
Weighted-Average
Grant Date
Fair Value
450,941
220,232
(193,143)
(11,789)
466,241
$65.69
81.90
64.66
74.50
$73.55
Outstanding
June 30, 2012
Granted
Exercised
Canceled
Outstanding
June 30, 2013
Exercisable
June 30, 2013
36
During 2013, 2012 and 2011, the Company recognized stock-based
compensation expense of $17,852, $12,393 and $12,243 respectively,
relating to RSU awards. At June 30, 2013, $11,489 of expense with
respect to nonvested RSU awards has yet to be recognized and will be
amortized into expense over a weighted-average period of approximately
18 months. The total fair value of RSU awards vested during 2013, 2012
and 2011 was $12,488, $8,642 and $20 respectively. The Company
recognized a tax benefit of $976 and $1,673 relating to the issuance of
common stock for RSU awards that vested during 2013 and 2012.
LTIP/RESTRICTED STOCK – The Company’s Long Term Incentive Plans
(LTIP) provide for the issuance of unrestricted stock to certain officers
and key employees based on the attainment of certain goals relating to
the Company’s revenue growth, earnings per share growth and return
on invested capital during the 3-year performance period. No dividends
or dividend equivalents are paid on unearned shares. For awards
granted prior to the 2010-11-12 LTIP, restricted stock was 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. The shares of restricted stock issued to plan participants after
the end of the performance period are entitled to cash dividends and to
vote their respective shares, but transferability of the restricted stock
is restricted for 3 years following issuance.
Stock issued for LTIP
2013
2012
2011
LTIP 3-year plan
Number of shares issued
Average share value
on date of issuance
Total value
2010-11-12
792,428
2009-10-11
243,266
2008-09-10
157,491
$ 83.64
$66,278
$ 69.10
$16,810
$62.35
$9,820
Under the Company’s 2011-12-13 LTIP, a payout of unrestricted stock
will be issued in April 2014.
The fair value of each LTIP award granted in 2013, 2012 and 2011 was
based on the fair market value of the Company’s common stock on the
date of grant. A summary of the status and changes of shares relating
to the LTIP and the related average price per share follows:
Nonvested June 30, 2012
Granted
Vested
Canceled
Nonvested June 30, 2013
Number of
Shares
Weighted-Average
Grant Date
Fair Value
1,159,842
307,506
(460,884)
(5,071)
1,001,393
$68.51
92.64
51.67
83.87
$83.59
During 2013, 2012 and 2011, the Company recorded stock-based
compensation expense of $34,127, $41,886 and $24,378, respectively,
relating to the LTIP.
Shares surrendered in connection with the LTIP: 2013 – 311,110;
2012 – 76,427; 2011 – 126,462.
In 2013, 2012 and 2011, 14,580, 15,010 and 17,820 restricted shares,
respectively, were issued to certain non-employee members of the
Board of Directors. Transferability of these shares is restricted for
one to three years following issuance. In addition, prior to 2012 non-
employee members of the Board of Directors were given the opportunity
to receive all or a portion of their fees in restricted shares. These shares
vest ratably, on an annual basis, over the term of office of the director.
In 2011, 2,400 restricted shares were issued in lieu of directors’ fees.
During 2013, 2012 and 2011, the Company recognized a tax benefit
of $17,395, $426, and $277, respectively, relating to the LTIP and
restricted stock issued to non-employee members of the Board of
Directors.
At June 30, 2013, the Company had approximately 13 million common
shares reserved for issuance in connection with its stock incentive
plans.
NOTE 13. Shareholders’ Protection Rights Agreement
On January 25, 2007, the Board of Directors of the Company
declared a dividend of one Shareholders’ Right for each common
share outstanding on February 17, 2007 in relation to the Company’s
Shareholders Protection Rights Agreement. As of June 30, 2013,
149,288,524 common shares 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 shares, all
holders of Shareholders’ Rights would be entitled to purchase one
common share at an exercise price currently set at $160. In addition,
in certain circumstances, all holders of Shareholders’ Rights (other
than the acquiring entity) would be entitled to purchase a number of
common shares equal to twice the exercise price, or at the option
of the Board, to exchange each Shareholders’ Right for one common
share. The Shareholders’ Rights remain in existence until February 17,
2017, unless extended by the Board of Directors or earlier redeemed
(at one cent per Shareholders’ Right), exercised or exchanged under
the terms of the agreement. In the event of an unfriendly business
combination attempt, the Shareholders’ Rights will cause substantial
dilution to the person attempting the business combination. The
Shareholders’ 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 Shareholders’ Rights may be redeemed.
NOTE 14. Research and Development
Research and development costs amounted to $406,613 in 2013,
$365,703 in 2012 and $359,456 in 2011. 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. Costs incurred in connection
with research and development contracts amounted to $58,916 in 2013,
$43,658 in 2012 and $61,327 in 2011. These costs are included in the
total research and development cost for each of the respective years.
NOTE 15. Financial Instruments
The Company’s financial instruments consist primarily of cash and
cash equivalents, long-term investments, and accounts receivable,
net as well as obligations under accounts payable, trade, notes payable
and long-term debt. Due to their short-term nature, the carrying values
for cash and cash equivalents, accounts receivable, net, accounts
payable, trade and notes payable approximate fair value. The carrying
value of long-term debt (excluding capital leases) and estimated fair
value of long-term debt (excluding capital leases) at June 30 are as
follows:
Carrying value of long-term debt
(excluding capital leases)
Estimated fair value of long-term debt
(excluding capital leases)
2013
2012
$1,498,025
$1,728,983
1,654,886
2,005,887
The fair value of 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.
37
The Company utilizes derivative and non-derivative financial
instruments, including forward exchange contracts, costless collar
contracts, cross-currency swap contracts and certain foreign
denominated debt designated as net investment hedges, to manage
foreign currency transaction and translation risk. The derivative financial
instrument contracts are with major investment grade financial
institutions and the Company does not anticipate any material non-
performance by any of the counterparties. The Company does not
hold or issue derivative financial instruments for trading purposes.
The Company’s Euro bonds and Japanese Yen credit facility have been
designated as a hedge of the Company’s net investment in certain
foreign subsidiaries. The translation of the Euro bonds and Japanese
Yen credit facility into U.S. dollars is recorded in accumulated other
comprehensive income (loss) and remains there until the underlying
net investment is sold or substantially liquidated.
Derivative financial instruments are recognized on the balance sheet
as either assets or liabilities and are measured at fair value. Derivatives
consist of forward exchange, costless collar and cross-currency swap
contracts the fair value of which is calculated using market observable
inputs including both spot and forward prices for the same underlying
currencies. The fair value of the cross-currency swap contracts is
calculated using a present value cash flow model that has been adjusted
to reflect the credit risk of either the Company or the counterparty.
Gains or losses on derivatives that are not hedges are adjusted to fair
value through the cost of sales caption in the Consolidated Statement
of Income. Gains or losses on derivatives that are hedges are adjusted
to fair value through accumulated other comprehensive income (loss)
in the Consolidated Balance Sheet until the hedged item is recognized
in earnings.
The location and fair value of derivative financial instruments reported
in the Consolidated Balance Sheet are as follows:
Balance Sheet Caption
2013
2012
Other liabilities
Net investment
hedges
Cross-currency
swap contracts
Cash flow hedges
Costless collar
contracts
Forward exchange
contracts
Costless collar
contracts Other accrued liabilities
Accounts receivable
Accounts receivable
$22,438
$2,008
1,422
41
953
2,466
1,887
552
The fair values at June 30, 2013 and 2012 are classified within Level 2
of the fair value hierarchy. There are no other financial assets or
liabilities that are marked to market on a recurring basis. Fair values
are transferred between levels of the fair value hierarchy when facts
and circumstances indicate that a change in the method of estimating
the fair value of a financial asset or financial liability is warranted.
The cross-currency swap contracts have been designated as hedging
instruments. The forward exchange and costless collar contracts have
not been designated as hedging instruments and are considered to be
economic hedges of forecasted transactions.
NOTE 17. Quarterly Information (Unaudited)
2013
Net sales
Gross profit
Net income attributable to common shareholders
Diluted earnings per share
2012
Net sales
Gross profit
Net income attributable to common shareholders
Diluted earnings per share
1st
$3,214,935
737,488
239,741
1.57
1st
$3,233,881
819,439
297,018
1.91
2nd
$3,065,495
643,523
180,962
1.19
2nd
$ 3,106,832
725,510
240,766
1.56
3rd
$ 3,307,041
737,852
256,560
1.68
3rd
$3,393,563
803,248
312,074
2.01
4th
Total
$3,428,233
810,166
271,164
1.78
$13,015,704
2,929,029
948,427
6.26
4th
Total
$ 3,411,666
839,408
301,965
1.96
$13,145,942
3,187,605
1,151,823
7.45
Earnings per share amounts are computed independently for each of the quarters presented, therefore, the sum of the quarterly earnings per share
amounts may not equal the total computed for the year.
NOTE 18. Stock Prices and Dividends (Unaudited)
(In dollars)
2013
2012
2011
High
Low
Dividends
High
Low
Dividends
High
Low
Dividends
1st
$87.71
70.42
0.41
$92.01
60.36
0.37
$72.12
54.26
0.27
2nd
$87.04
75.80
0.41
$85.84
59.26
0.37
$87.36
67.52
0.29
3rd
$98.15
86.51
0.43
$ 91.47
76.92
0.39
$95.00
82.80
0.32
4th
$101.88
84.50
0.45
$ 89.45
71.90
0.41
$ 99.40
83.65
0.37
Total
$101.88
70.42
1.70
$92.01
59.26
1.54
$99.40
54.26
1.25
Common Stock Listing: New York Stock Exchange, Stock Symbol PH
Gains (losses) on derivative financial instruments that were recorded
in the Consolidated Statement of Income are as follows:
Forward exchange contracts
Costless collar contracts
2013
$(1,821)
502
2012
$(4,156)
5,111
2011
$19,048
(6,624)
Gains (losses) on derivative and non-derivative financial instruments
that were recorded in accumulated other comprehensive (loss) in the
Consolidated Balance Sheet are as follows:
Cross-currency swap contracts
Foreign denominated debt
2013
$(12,622)
4,743
2012
$21,359
22,039
There was no ineffectiveness of the cross-currency swap contracts
or foreign denominated debt, nor were any portion of these financial
instruments excluded from the effectiveness testing, during 2013,
2012 and 2011.
NOTE 16. Contingencies
The Company is involved in various litigation matters 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 United
States 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 various manufacturing facilities
presently or formerly operated by the Company and has been
named as a “potentially responsible party,” along with other
companies, at off-site waste disposal facilities and regional sites.
As of June 30, 2013, the Company had a reserve of $12,475 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.
The Company’s estimated total liability for environmental matters
ranges from a minimum of $12.5 million to a maximum of $80.1 million.
The largest range for any one site is approximately $15.1 million.
The actual costs to be incurred by the Company will be dependent
on final determination of contamination and required remedial action,
negotiations with governmental authorities with respect to cleanup
levels, changes in regulatory requirements, innovations in investigatory
and remedial technologies, effectiveness of remedial technologies
employed, the ability of other responsible parties to pay, and any
insurance or other third-party recoveries.
38
39
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders
of Parker-Hannifin Corporation
We have audited the accompanying consolidated balance sheets of
Parker-Hannifin Corporation and subsidiaries (the “Company”) as
of June 30, 2013 and 2012, and the related consolidated statements
of income, comprehensive income, equity, and cash flows for each of
the three years in the period ended June 30, 2013. We also have audited
the Company’s internal control over financial reporting as of June 30,
2013, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits.
As described in Management’s Report on Internal Control Over Financial
Reporting, management excluded from its assessment the internal
control over financial reporting at eight entities, which were acquired on
various dates during the year ended June 30, 2013, and whose financial
statements constitute approximately 7.0 percent and 2.7 percent of total
assets and revenues, respectively, of the consolidated financial statement
amounts as of and for the year ended June 30, 2013. Accordingly, our
audit did not include the internal control over financial reporting at the
eight entities acquired during the year ended June 30, 2013.
We conducted our audits 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 and whether effective internal control over
financial reporting was maintained in all material respects. Our audits
of the financial statements included 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. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors,
management, and other personnel 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 (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) 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 (3) 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 the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Parker-Hannifin Corporation and subsidiaries as of June 30, 2013
and 2012, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2013, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2013, based on the criteria
established in Internal Control – Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Cleveland, Ohio
August 29, 2013
Management’s Report on
Internal Control Over
Financial Reporting
Our management, including the principal executive officer and
the principal financial officer, 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)). We
assessed the effectiveness of our internal control over financial
reporting as of June 30, 2013. We have excluded eight entities
from our evaluation of internal control over financial reporting as
of June 30, 2013 because the entities were acquired in purchase
business combinations during the year ended June 30, 2013. On
a combined basis, the entities represent approximately 7.0 percent
of total assets and 2.7 percent of total revenues as of and for the
fiscal year ended June 30, 2013. In making this assessment, we
used the criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission in “Internal Control-
Integrated Framework (1992 Framework).” We concluded that
based on our assessment, the Company’s internal control over
financial reporting was effective as of June 30, 2013.
Deloitte & Touche LLP, the independent registered public accounting
firm that audited the Company’s consolidated financial statements,
has issued an attestation report on the Company’s internal control
over financial reporting as of June 30, 2013, which is included herein.
Donald E. Washkewicz
Chairman,
Chief Executive Officer
and President
Jon P. Marten
Executive Vice President –
Finance & Administration
and Chief Financial Officer
Forward-Looking Statements
Forward-looking statements contained in this and other written and
oral reports 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 future performance and earnings
projections of the Company, including its individual segments, may
differ materially from current expectations, depending on economic
conditions within its mobile, industrial and aerospace markets, and
the Company’s ability to maintain and achieve anticipated benefits
associated with announced realignment activities, strategic initiatives
to improve operating margins, actions taken to combat the effects of
the current economic environment, and growth, innovation and global
diversification initiatives. A change in the economic conditions in
individual markets may have a particularly volatile effect on segment
performance.
Among other factors which may affect future performance are:
• changes in business relationships with and purchases by or
from major customers, suppliers or distributors, including delays
or cancellations in shipments, disputes regarding contract terms
or significant changes in financial condition, changes in contract
cost and revenue estimates for new development programs, and
changes in product mix;
• ability to identify acceptable strategic acquisition targets;
• uncertainties surrounding timing, successful completion
or integration of acquisitions and similar transactions, including
the anticipated closing of the previously announced joint venture
with GE Aviation;
• the determination to undertake business realignment activities
and the expected costs thereof and, if undertaken, the ability to
complete such activities and realize the anticipated cost savings
from such activities;
• ability to realize anticipated benefits of the consolidation of the
Climate & Industrial Controls Group;
• threats associated with and efforts to combat terrorism;
• uncertainties surrounding the ultimate resolution of outstanding
legal proceedings, including the outcome of any appeals;
• competitive market conditions and resulting effects on sales
and pricing;
• increases in raw material costs that cannot be recovered in
product pricing;
• the Company’s ability to manage costs related to insurance
and employee retirement and health care benefits; and
• global economic factors, including manufacturing activity,
air travel trends, currency exchange rates, difficulties entering
new markets and general economic conditions such as inflation,
deflation, interest rates and credit availability.
The Company makes these statements as of the date of the filing
of its Annual Report on Form 10-K for the year ended June 30, 2013,
and undertakes no obligation to update them unless otherwise
required by law.
40
41
Eleven-Year Financial Summary
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
(A MOUNTS IN THOUSA NDS, E XCEPT PER SH A RE INFOR M ATION)
Net sales
Cost of sales
Selling, general and administrative expenses
Interest expense
Income taxes
Income - continuing operations
Net income attributable to common shareholders
Basic earnings per share - continuing operations
Diluted earnings per share - continuing operations
Basic earnings per share
Diluted earnings per share
Average number of shares outstanding - Basic
Average number of shares outstanding - Diluted
Cash dividends per share
Net income attributable to common shareholders
as a percent of net sales
Return on average assets
Return on average shareholders’ equity
Book value per share
Working capital
Ratio of current assets to current liabilities
Plant and equipment, net
Total assets
Long-term debt
Shareholders’ equity
Debt to debt-shareholders’ equity percent
Depreciation
Capital expenditures
Number of employees
Number of shares outstanding at year-end
$13,015,704
10,086,675
1,554,973
91,552
362,217
948,427
948,427
6.36
6.26
6.36
$ 6.26
149,218
151,588
$ 1.700
$13,145,942
9,958,337
1,519,316
92,790
421,206
1,151,823
1,151,823
7.62
7.45
7.62
$ 7.45
151,222
154,665
$ 1.540
$12,345,870
9,387,457
1,467,773
99,704
356,751
1,049,130
1,049,130
6.51
6.37
6.51
$ 6.37
161,126
164,798
$ 1.250
7.3%
8.0%
17.8%
8.8%
10.4%
22.4%
8.5%
10.1%
21.5%
$ 38.44
$ 2,010,983
1.6
$ 1,808,240
12,540,898
1,495,960
$ 5,738,426
$ 32.72
$ 2,012,101
1.8
$ 1,719,968
11,170,282
1,503,946
$ 4,896,515
$ 34.71
$ 1,914,213
1.8
$ 1,797,179
10,886,805
1,691,086
$ 5,383,854
$9,993,166
7,847,067
1,277,080
103,599
198,452
554,065
554,065
3.44
3.40
3.44
$ 3.40
160,910
162,902
$ 1.010
5.5%
5.6%
12.8%
$ 27.09
$1,383,905
1.6
$ 1,697,881
9,910,382
1,413,634
$4,367,965
$10,309,015
8,181,348
1,290,379
112,071
172,939
508,515
508,515
3.15
3.13
3.15
$ 3.13
161,564
162,719
$ 1.000
$12,145,605
9,339,072
1,364,082
98,996
377,058
949,466
949,466
5.64
5.53
5.64
$ 5.53
168,285
171,644
$ .840
4.9%
5.0%
10.7%
7.8%
10.1%
19.1%
$ 26.59
$ 1,118,027
1.6
$ 1,880,554
9,855,902
1,839,705
$ 4,268,199
$ 31.35
$ 1,912,369
1.9
$ 1,926,522
10,386,854
1,952,452
$ 5,251,553
$10,718,059
8,272,949
1,226,861
83,414
329,236
830,046
830,046
4.75
4.68
4.75
$ 4.68
174,643
177,495
$ .692
7.7%
10.0%
18.5%
$ 27.14
$ 1,460,930
1.8
$ 1,736,372
8,441,413
1,089,916
$ 4,712,680
$9,385,888
7,367,618
1,036,646
75,763
261,682
638,276
673,167
3.57
3.52
3.76
$ 3.71
178,817
181,326
$ .612
7.2%
9.0%
17.8%
$ 23.64
$ 1,457,873
1.9
$ 1,693,794
8,173,432
1,059,461
$ 4,240,904
$8,068,805
6,391,477
860,278
66,869
205,105
533,166
604,692
2.99
2.95
3.39
$ 3.35
178,193
180,674
$ .520
7.5%
9.3%
19.1%
$ 18.76
$ 1,454,883
2.1
$ 1,581,348
6,860,703
938,424
$ 3,340,157
$6,887,596
5,577,888
765,570
73,144
140,871
332,085
345,783
1.88
1.86
1.96
$ 1.94
176,562
178,509
$ .507
5.0%
5.7%
12.6%
$ 16.83
$1,260,036
2.0
$1,574,988
6,194,701
953,796
$2,982,454
$6,222,452
5,165,523
687,455
81,249
97,246
189,362
196,272
1.09
1.08
1.13
$ 1.12
174,573
175,343
$ .493
3.2%
3.4%
7.7%
$ 14.42
$ 950,286
1.7
$ 1,641,532
5,938,209
966,332
$ 2,520,911
33.0%
26.1%
24.7%
28.9%
35.2%
28.3%
21.4%
21.1%
22.5%
24.9%
35.6%
$ 213,722
$ 265,896
58,151
149,289
$ 210,508
$ 218,817
59,331
149,631
$ 229,238
$ 207,294
58,409
155,091
$ 245,295
$ 129,222
54,794
161,256
$ 252,599
$ 270,733
51,639
160,489
$ 257,570
$ 280,327
61,722
167,512
$ 245,058
$ 237,827
57,338
173,618
$ 245,681
$ 198,113
57,073
179,417
$ 245,206
$ 154,905
50,019
178,034
$ 239,106
$ 138,291
47,433
177,252
$ 246,267
$ 156,342
46,787
174,789
3
1
0
2
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Net Sales
Millions of Dollars
42
3
1
0
2
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
3
1
0
2
9.00
8.25
7.50
6.75
6.00
5.25
4.50
3.75
3.00
2.25
1.50
0.75
0.00
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Diluted Earnings Per Share
Dollars
3
1
0
2
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Total Assets
Millions of Dollars
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
3
1
0
2
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Long-Term Debt
Millions of Dollars
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Net Income Attributable To
Common Shareholders
Millions of Dollars
3
1
0
2
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
43
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Shareholders’ Equity
Millions of Dollars
Corporate Management
MANAGEMENT COMMITTEE
GROUP PRESIDENTS & OFFICERS
DONALD E. WASHKEWICZ
Chairman, Chief Executive Officer
and President
Age: 63
Years of Parker service: 41
LEE C. BANKS
Executive Vice President
and Operating Officer
Age: 50
Years of Parker service: 21
JON P. MARTEN
Executive Vice President –
Finance & Administration
and Chief Financial Officer
Age: 57
Years of Parker service: 26
DANIEL S. SERBIN
Executive Vice President –
Human Resources
Age: 59
Years of Parker service: 33
THOMAS L. WILLIAMS
Executive Vice President
and Operating Officer
Age: 54
Years of Parker service: 10
ROBERT W. BOND
Vice President and President –
Fluid Connectors Group
Age: 55
Years of Parker service: 36
YOON “MICHAEL” CHUNG
Vice President and President –
Automation Group
Age: 50
Years of Parker service: 27
JEFFERY A. CULLMAN
Vice President and President –
Hydraulics Group
Age: 58
Years of Parker service: 35
JOHN R. GRECO
Vice President and President –
Instrumentation Group
Age: 59
Years of Parker service: 37
KURT A. KELLER
Vice President and President –
Asia Pacific Group
Age: 55
Years of Parker service: 33
GROUP PRESIDENTS & OFFICERS
GROUP PRESIDENTS
CORPORATE OFFICERS
CORPORATE OFFICERS
PETER POPOFF
Vice President and President –
Filtration Group
Age: 61
Years of Parker service: 34
ANDREW D. ROSS
Vice President and President –
Engineered Materials Group
Age: 46
Years of Parker service: 14
ROGER S. SHERRARD
Vice President and President –
Aerospace Group
Age: 47
Years of Parker service: 24
JOACHIM GUHE
President – Europe, Middle
East and Africa (EMEA) Group
Age: 49
Years of Parker service: 19
CANDIDO LIMA
President –
Latin America Group
Age: 48
Years of Parker service: 11
JOHN G. DEDINSKY, JR.
Vice President –
Global Supply Chain
and Procurement
Age: 56
Years of Parker service: 34
WILLIAM G. ELINE
Vice President –
Chief Information Officer
Age: 57
Years of Parker service: 34
THOMAS F. HEALY
Vice President – Business Services
Age: 53
Years of Parker service: 30
PAMELA J. HUGGINS
Vice President and Treasurer
Age: 59
Years of Parker service: 29
M. CRAIG MAXWELL
Vice President –
Chief Technology and
Innovation Officer
Age: 55
Years of Parker service: 17
CORPORATE OFFICERS
THOMAS A. PIRAINO, JR.
Vice President, General Counsel
and Secretary
Age: 64
Years of Parker service: 31
CHARLY SAULNIER
Vice President
Age: 65
Years of Parker service: 43
CATHERINE A. SUEVER
Vice President and Controller
Age: 54
Years of Parker service: 26
44
45
Board of Directors
CHAIRMAN OF THE BOARD
DONALD E. WASHKEWICZ
Chairman, Chief Executive Officer
and President
Parker Hannifin Corporation
Age: 63, Director since 2000
Chairman since 2004
DIRECTORS
ROBERT G. BOHN 1, 3
Former Chairman of the Board
and Chief Executive Officer (retired)
Oshkosh Corporation
(specialty vehicles)
Age: 60, Director since 2010
LINDA S. HARTY 1, 4
Treasurer
Medtronic, Inc.
(medical technology)
Age: 53, Director since 2007
KLAUS-PETER MÜLLER 3, 4
Chairman of the Supervisory Board
Commerzbank AG
(international banking)
Age: 68, Director since 1998
CANDY M. OBOURN 2, 3
Chairman
Isoflux Incorporated
(coatings technologies)
Age: 63, Director since 2002
JOSEPH M. SCAMINACE 2, 3
Chief Executive Officer, President
and Director
OM Group, Inc.
(metal-based specialty chemicals)
Age: 60, Director since 2004
WILLIAM E. KASSLING 1, 4
Lead Director
Wabtec Corporation
(services for the rail industry)
Age: 69, Director since 2001
WOLFGANG R. SCHMITT 1, 2
Chief Executive Officer
Trends 2 Innovation
(strategic growth consultants)
Age: 69, Director since 1992
ROBERT J. KOHLHEPP 2, 3
Chairman of the Board
Cintas Corporation
(uniform rental)
Age: 69, Director since 2002
ÅKE SVENSSON 1, 4
Director General
Association of Swedish
Engineering Industries
Age: 61, Director since 2010
KEVIN A. LOBO 1, 4
Chief Executive Officer,
President and Director
Stryker Corporation
(medical technologies)
Age: 48, Director since 2013
JAMES L. WAINSCOTT 2, 4
Chairman, Chief Executive Officer
and President
AK Steel Holding Corporation
(steel producer)
Age: 56, Director since 2009
46
COMMITTEES OF THE BOARD
(1) AUDIT
Chair: L. S. Harty
(2) HUMAN RESOURCES
AND COMPENSATION
Chair: C. M. Obourn
(3) CORPORATE GOVERNANCE
AND NOMINATING
Chair: R. J. Kohlhepp
(4) FINANCE
Chair: J. L. Wainscott
With Appreciation
Robert P. Barker
The Board of Directors and Management of Parker
Hannifin acknowledge the retirement of Executive
Vice President and Operating Officer, and President –
Aerospace Group, Robert P. Barker, after 39 years of
dedicated service. Under his leadership, the Aerospace
Group was transformed from a component level
supplier to a systems provider and a key partner to
all major commercial and U.S. military aircraft
manufacturers. Mr. Barker’s unwavering support and
leadership was inspirational to all, and he leaves the
Parker Aerospace Group positioned for a new period
of growth and success based upon a $20 billion
pipeline of new system wins that will secure Parker’s
leadership in the aerospace market for many years
to come.
A. Ricardo Machado
After 20 years of dedicated service, the Board of
Directors and Management of Parker Hannifin
acknowledge the retirement of Vice President and
President – Latin America Group, A. Ricardo Machado.
Under his leadership, Parker’s fluid conveyance
technology was established and grown in the region,
Parker achieved a leading position in the pneumatics
market in Brazil and the Group enjoyed a period of
unprecedented growth and financial performance.
Mr. Machado’s enthusiasm and tireless passion for
results were key to the Latin America Group’s success,
and he leaves the Group poised for continued growth
and financial success.
Corporate Information
ETHICS & INTEGRITY
Parker Hannifin’s reputation as an ethical company
and trustworthy business partner is its most valuable
asset, and is preserved by doing more than what the
law requires and often, more than what customers
even ask. The Global Code of Business Conduct sets
non-negotiable expectations for the behaviors,
decisions and actions of employees, and defines how
Parker embeds integrity, respect and fairness into its
business operations.
EQUAL OPPORTUNITY
Parker Hannifin is an affirmative action/equal
opportunity employer that extends its commitment
beyond equal opportunity and nondiscriminatory
practices to take positive steps to create an inclusive
and empowered employee environment.
It is the policy of Parker Hannifin to provide all
employees with a working environment free from all
forms of discrimination and harassment. Parker
Hannifin will not tolerate discrimination or harassment
against any person for any reason.
Parker Hannifin’s policy is to make all employment
decisions on the basis of an individual’s job related
qualifications, abilities and performance – not on the
basis of personal characteristics unrelated to
successful job performance.
ANNUAL MEETING
The 2013 Annual Meeting of Shareholders will be held
on Wednesday, October 23, 2013 at Parker Hannifin
Global Headquarters, 6035 Parkland Blvd., Cleveland,
Ohio 44124-4141 at 9:00 a.m. EDT.
Telephone 216 896 3000.
FORM 10-K
Shareholders may request a free copy of Parker
Hannifin’s Annual Report to the Securities and
Exchange Commission on Form 10-K by writing to the
Secretary, Parker Hannifin Corporation,
6035 Parkland Blvd., Cleveland, Ohio 44124-4141.
TRANSFER AGENT & REGISTRAR
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
6035 Parkland Boulevard
Cleveland, Ohio 44124-4141
Telephone 216 896 3000
PRODUCT INFORMATION & DISTRIBUTOR
LOCATIONS
North America:
1-800-C-PARKER (1 800 272 7537)
Outside North America:
00800-C-PARKER-H (0800 2727 5374)
Visit us online at: www.parker.com
STOCK INFORMATION
New York Stock Exchange
Ticker symbol: PH
On the Internet at:
www.phstock.com
As of July 31, 2013, Parker Hannifin’s number of
shareholders of record was 4,102.
WORLDWIDE CAPABILITIES
Parker Hannifin is the world’s leading diversified
manufacturer of motion and control technologies and
systems. The company’s engineering expertise spans
the core motion technologies – electromechanical,
hydraulic and pneumatic – with a full complement of
fluid handling, filtration, sealing and shielding, climate
control, process control and aerospace technologies.
The company partners with its customers to increase
their productivity and profitability.
INVESTOR CONTACT
Pamela J. Huggins
Vice President and Treasurer
216 896 2240, phuggins@parker.com
MEDIA CONTACT
Christopher M. Farage, Ph.D.
Vice President, Communications
and External Affairs
216 896 3000, cfarage@parker.com
CAREER OPPORTUNITIES
Search for job openings and apply online at:
www.parker.com/careers
Comparison of 5-Year Cumulative Total Return*
Among Parker-Hannifin Corporation, the S&P 500 Index and the
S&P Industrial Machinery Index
DIVIDEND REINVESTMENT PLAN
Parker Hannifin provides a Dividend Reinvestment
Plan for its shareholders. Under the Plan, Parker
Hannifin pays all bank service charges and brokerage
commissions. Supplemental cash payments are also
an option. For information, contact:
Parker-Hannifin Corporation
S&P 500
S&P Industrial Machinery
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche, LLP, Cleveland, Ohio
PARKER HANNIFIN CORPORATION
6/08
6/09
6/10
6/11
6/12
6/13
2008
2009
2010
2011
2012
2013
Parker-Hannifin Corporation
S&P 500
S&P Industrial Machinery
100.00
100.00
100.00
61.64
73.79
69.98
81.02
84.43
89.04
133.13
110.35
132.80
116.12
116.36
120.24
146.96
140.32
163.65
*$100 invested on 6/30/08 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
$200
150
100
50
Diversified Industrial Segment
Global Technology Platforms
Aerospace Systems
Segment
Sales by Region
Diversified Industrial Segment
Motion Systems
Flow & Process Control
Filtration & Engineered Materials
Aerospace
Product Groups
Hydraulics
Automation
Fluid Connectors
Instrumentation
Filtration
Engineered Materials*
Aerospace
Key Markets
Aerial lift
Agriculture
Bulk chemical handling
Construction machinery
Food & beverage
Fuel & gas delivery
Industrial machinery
Life sciences
Marine
Mining
Mobile
Oil & gas
Renewable energy
Transportation
Key Products
Check valves
Connectors for low pressure
fluid conveyance
Deep sea umbilicals
Diagnostic equipment
Hose couplings
Industrial hose
Mooring systems &
power cables
PTFE hose & tubing
Quick couplings
Rubber & thermoplastic hose
Tube fittings & adapters
Tubing & plastic fittings
Key Markets
Aerial lift
Agriculture
Construction machinery
Forestry
Industrial machinery
Machine tools
Marine
Material handling
Mining
Oil & gas
Power generation
Refuse vehicles
Renewable energy
Truck hydraulics
Turf equipment
Key Products
Accumulators
Cartridge valves
Coolers
Electrohydraulic actuators
Electronic displays
Electronic I/O controllers
Fan drives
Hybrid drives
Hydraulic cylinders
Hydraulic motors & pumps
Hydraulic systems
Hydraulic valves & controls
Hydrostatic steering
Integrated hydraulic circuits
Power take-offs
Power units
Rotary actuators
Sensors
Telematic controllers
Key Markets
Automotive
Conveyor & material handling
Factory automation
Food & beverage
Industrial machinery
Life sciences
Machine tools
Medical
Mobile
Oil & gas
Packaging machinery
Paper machinery
Plastics machinery
Primary metals
Process
Renewable energy
Safety & security
Semiconductor & electronics
Transportation
Key Products
AC/DC drives & systems
Air preparation
Electric actuators, gantry
robots & slides
Human machine interfaces
Inverters
Manifolds
Miniature fluidics
Pneumatic actuators
& grippers
Pneumatic valves & controls
Rotary actuators
Solenoid valves
Stepper motors, servo motors,
drives & controls
Structural extrusions
Vacuum generators, cups
& sensors
© 2013 PARKER HANNIFIN CORPORATION *The Engineered Materials Group was formerly known as the Seal Group.
Key Markets
Air conditioning
Alternative fuels
Biopharmaceuticals
Chemical & refining
Conscious sedation
Food & beverage
Life sciences
Microelectronics
Mining
Oil & gas
Pharmaceuticals
Power generation
Precision cooling
Refrigeration
Water/wastewater
Key Products
Accumulators
Analytical instruments
& sample conditioning systems
CNG dispensers
CO2 controls
Electronic controllers
Filter driers
Fluoropolymer chemical
delivery fittings, valves & pumps
Hand shut-off valves
High pressure fittings, valves,
pumps & systems
High purity gas delivery
fittings, valves, regulators
& digital flow controllers
Industrial mass flow meters/
controllers
Medical devices
Pressure regulating valves
Process control fittings, valves,
regulators & manifold valves
Refrigerant distributors
Safety relief valves
Solenoid valves
Thermostatic expansion valves
Key Markets
Aerospace
Food & beverage
Industrial machinery
Life sciences
Marine
Mobile
Oil & gas
Power generation
Renewable energy
Transportation
Water purification
Key Products
Analytical gas generators
Compressed air & gas filters & dryers
Engine air, coolant, fuel & oil filtration
systems
Filtration & purification systems
Fluid condition monitoring
systems
Hydraulic & lubrication filters
Instrumentation filters
Membrane & fiber filters
Nitrogen & hydrogen generators
Sterile air filtration
Water desalination and purification
filters & systems
Key Markets
Aerospace
Chemical processing
Consumer
Fluid power
General industrial
Information technology
Life sciences
Microelectronics
Military
Oil & gas
Power generation
Renewable energy
Telecommunications
Transportation
Key Products
Dynamic seals
Elastomeric o-rings
Electro-medical instrument
design & assembly
EMI shielding
Extruded & precision-cut,
fabricated elastomeric seals
High temperature metal seals
Homogeneous & inserted
elastomeric shapes
Medical devices
Metal & plastic retained
composite seals
Shielded optical windows
Silicone tubing & extrusions
Thermal management
Vibration dampening
Key Markets
Aftermarket services
Commercial transports
Engines
General & business aviation
Helicopters
Launch vehicles
Military aircraft
Missiles
Power generation
Regional transports
Unmanned aerial vehicles
Key Products
Control systems &
actuation products
Engine systems & components
Fluid conveyance systems
& components
Fluid metering, delivery
& atomization devices
Fuel systems & components
Fuel tank inerting systems
Hydraulic systems
& components
Lubrication systems & components
Power conditioning &
management systems
Thermal management
Wheels & brakes
Motion Systems
Latin America
North America
Asia Pacific
EMEA
Flow & Process Control
Latin America
North America
Asia Pacific
EMEA
Filtration & Engineered Materials
Latin America
North America
Asia Pacific
EMEA
Aerospace Systems Segment
Aerospace
Latin America
North America
Asia Pacific
EMEA
View additional examples of Parker innovations that are creating a more sustainable future and
making our world a better place to live.
Sustainable Business: 101 smart products from the global leader in motion and control technologies.
is available by scanning this tag or visiting www.parker.com/smartproducts.
Parker Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, 216 896 3000, www.parker.com