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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File number 1-4982

 

LOGO

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)

 

OHIO   34-0451060

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

6035 Parkland Blvd., Cleveland, Ohio   44124-4141
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (216) 896-3000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of Common Shares outstanding at March 31, 2012            151,051,111


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     March 31,     March 31,  
     2012      2011     2012     2011  

Net sales

   $ 3,393,563       $ 3,240,103      $ 9,734,276      $ 8,936,040   

Cost of sales

     2,590,315         2,463,083        7,386,079        6,796,685   
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     803,248         777,020        2,348,197        2,139,355   

Selling, general and administrative expenses

     377,479         375,069        1,132,635        1,054,332   

Interest expense

     22,313         24,619        69,303        74,883   

Other expense (income), net

     2,629         (12,385     (5,100     (22,191
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     400,827         389,717        1,151,359        1,032,331   

Income taxes

     88,138         108,069        298,169        269,835   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 312,689       $ 281,648      $ 853,190      $ 762,496   

Less: Noncontrolling interests

     615         2,059        3,332        5,556   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

   $ 312,074       $ 279,589      $ 849,858      $ 756,940   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share attributable to common shareholders:

         

Basic

   $ 2.07       $ 1.72      $ 5.61      $ 4.68   

Diluted

   $ 2.01       $ 1.68      $ 5.49      $ 4.58   

Cash dividends per common share

   $ .39       $ .32      $ 1.13      $ .88   

See accompanying notes to consolidated financial statements.

 

- 2 -


PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

 

     (Unaudited)
March 31,
2012
    June 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 773,459      $ 657,466   

Accounts receivable, net

     2,061,501        1,977,856   

Inventories:

    

Finished products

     562,422        584,683   

Work in process

     720,188        670,588   

Raw materials

     146,404        156,882   
  

 

 

   

 

 

 
     1,429,014        1,412,153   

Prepaid expenses

     100,336        111,934   

Deferred income taxes

     132,991        145,847   
  

 

 

   

 

 

 

Total current assets

     4,497,301        4,305,256   

Plant and equipment

     4,876,378        4,944,735   

Less accumulated depreciation

     3,154,408        3,147,556   
  

 

 

   

 

 

 
     1,721,970        1,797,179   

Goodwill

     2,926,311        3,009,116   

Intangible assets, net

     1,096,306        1,177,722   

Other assets

     647,236        597,532   
  

 

 

   

 

 

 

Total assets

   $ 10,889,124      $ 10,886,805   
  

 

 

   

 

 

 

LIABILITIES

    

Current liabilities:

    

Notes payable and long-term debt payable within one year

   $ 273,907      $ 75,271   

Accounts payable, trade

     1,148,939        1,173,851   

Accrued payrolls and other compensation

     412,997        467,043   

Accrued domestic and foreign taxes

     193,907        232,774   

Other accrued liabilities

     459,550        442,104   
  

 

 

   

 

 

 

Total current liabilities

     2,489,300        2,391,043   

Long-term debt

     1,515,217        1,691,086   

Pensions and other postretirement benefits

     848,521        862,938   

Deferred income taxes

     141,467        160,035   

Other liabilities

     308,151        293,367   
  

 

 

   

 

 

 

Total liabilities

     5,302,656        5,398,469   

EQUITY

    

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 at March 31 and June 30

     90,523        90,523   

Additional capital

     625,730        668,332   

Retained earnings

     7,551,260        6,891,407   

Accumulated other comprehensive (loss)

     (599,160     (450,990

Treasury shares, at cost; 29,995,017 shares at March 31 and 25,955,619 shares at June 30

     (2,090,761     (1,815,418
  

 

 

   

 

 

 

Total shareholders’ equity

     5,577,592        5,383,854   

Noncontrolling interests

     8,876        104,482   
  

 

 

   

 

 

 

Total equity

     5,586,468        5,488,336   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 10,889,124      $ 10,886,805   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- 3 -


PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Nine Months Ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 853,190      $ 762,496   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation

     159,505        172,469   

Amortization

     84,898        81,656   

Share incentive plan compensation

     64,102        56,792   

Deferred income taxes

     (54,928     7,557   

Foreign currency transaction loss

     8,626        2,324   

(Gain) on sale of plant and equipment

     (2,921     (8,191

Changes in assets and liabilities, net of effect of acquisitions:

    

Accounts receivable, net

     (138,796     (255,673

Inventories

     (55,329     (134,256

Prepaid expenses

     11,367        27,927   

Other assets

     (26,360     (40,926

Accounts payable, trade

     3,054        149,961   

Accrued payrolls and other compensation

     (40,216     9,608   

Accrued domestic and foreign taxes

     (33,478     47,365   

Other accrued liabilities

     52,368        (20,070

Pensions and other postretirement benefits

     89,078        (95,379

Other liabilities

     32,301        36,273   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,006,461        799,933   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Acquisitions (less cash acquired of $6,802 in 2012 and $385 in 2011)

     (31,004     (60,227

Capital expenditures

     (154,097     (158,455

Proceeds from sale of plant and equipment

     15,560        23,818   

Other

     (16,381     (8,251
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (185,922     (203,115

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from exercise of stock options

     8,451        22,982   

(Payments for) common shares

     (333,545     (56,235

Tax benefit from share incentive plan compensation

     12,549        37,451   

Acquisition of noncontrolling interests

     (147,441     —     

Proceeds from (payments for) notes payable, net

     48,102        (18,901

Proceeds from long-term borrowings

     73,066        291,688   

(Payments for) long-term borrowings

     (73,405     (257,752

Dividends

     (178,606     (142,906
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (590,829     (123,673

Effect of exchange rate changes on cash

     (113,717     59,284   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     115,993        532,429   

Cash and cash equivalents at beginning of year

     657,466        575,526   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 773,459      $ 1,107,955   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- 4 -


PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

The Company operates in three reportable business segments: Industrial, Aerospace and Climate & Industrial Controls. The Industrial Segment is the largest and includes a significant portion of international operations.

Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. Sales are made directly to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket.

Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.

Climate & Industrial Controls - This segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries.

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  

Net sales

           

Industrial:

           

North America

   $ 1,315,357       $ 1,178,714       $ 3,703,526       $ 3,289,098   

International

     1,286,751         1,293,047         3,794,678         3,533,259   

Aerospace

     542,760         503,806         1,536,757         1,400,116   

Climate & Industrial Controls

     248,695         264,536         699,315         713,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,393,563       $ 3,240,103       $ 9,734,276       $ 8,936,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment operating income

           

Industrial:

           

North America

   $ 226,986       $ 189,463       $ 645,951       $ 538,254   

International

     195,065         199,798         569,224         551,374   

Aerospace

     65,925         68,984         204,824         176,404   

Climate & Industrial Controls

     23,203         22,577         52,818         53,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment operating income

     511,179         480,822         1,472,817         1,319,662   

Corporate general and administrative expenses

     38,377         41,734         142,529         112,681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before interest expense and other expense

     472,802         439,088         1,330,288         1,206,981   

Interest expense

     22,313         24,619         69,303         74,883   

Other expense

     49,662         24,752         109,626         99,767   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 400,827       $ 389,717       $ 1,151,359       $ 1,032,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 5 -


PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

 

 

1. Management representation

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2012, the results of operations for the three and nine months ended March 31, 2012 and 2011 and cash flows for the nine months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2011 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year. The Company incorrectly presented the acquisition of a noncontrolling interest in the investing activities section of the Consolidated Statement of Cash Flows for the three months ended September 30, 2011 and the six months ended December 31, 2011. Such amounts have been corrected through reclassification to the financing activities section in the Consolidated Statement of Cash Flows for the nine months ended March 31, 2012.

The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to these financial statements. On April 19, 2012, the Board of Directors of the Company modified the share repurchase program described in Note 5 such that for the fourth quarter of fiscal 2012 the fiscal year limitation was eliminated and the number of shares authorized for repurchase under the program was increased to up to 16 million, exclusive of any shares previously repurchased under the program during fiscal 2012.

2. New accounting pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance requiring an entity to present net income and other comprehensive income (OCI) in either a single continuous statement or in separate consecutive statements. The guidance does not change the items reported in OCI or when an item of OCI must be reclassified to net income. The guidance, which must be presented retrospectively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

In September 2011, the FASB issued new accounting guidance related to testing goodwill for impairment. The new guidance allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether the entity should calculate the fair value of a reporting unit. It also expands the events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has not yet determined the effect, if any, that this new guidance will have on its goodwill impairment tests.

3. Product warranty

In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship over various time periods. The warranty accrual as of March 31, 2012 and June 30, 2011 is immaterial to the financial position of the Company and the change in the accrual for the current and prior-year quarter and first nine months of fiscal 2012 and fiscal 2011 is immaterial to the Company’s results of operations and cash flows.

 

- 6 -


4. Earnings per share

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2012 and 2011.

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  

Numerator:

           

Net income attributable to common shareholders

   $ 312,074       $ 279,589       $ 849,858       $ 756,940   

Denominator:

           

Basic - weighted average common shares

     151,017,910         162,160,426         151,472,380         161,711,394   

Increase in weighted average common shares from dilutive effect of equity-based awards

     3,926,336         4,529,921         3,432,169         3,559,088   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted - weighted average common shares, assuming exercise of equity-based awards

     154,944,246         166,690,347         154,904,549         165,270,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 2.07       $ 1.72       $ 5.61       $ 4.68   

Diluted earnings per share

   $ 2.01       $ 1.68       $ 5.49       $ 4.58   

For the three months ended March 31, 2012 and 2011, 74,554 and 33,129 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended March 31, 2012 and 2011, 764,508 and 2,046,685 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

5. Share repurchase program

The Company has a program to repurchase its common shares. Under the program, the Company is authorized to repurchase an amount of common shares each fiscal year 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. During the three-month period ended March 31, 2012, the Company repurchased 235,046 shares at an average price, including commissions, of $85.09 per share. Fiscal year-to-date, the Company repurchased 4,850,573 shares at an average price, including commissions, of $68.44 per share.

 

- 7 -


6. Accounts receivable, net

The Accounts receivable, net caption in the Consolidated Balance Sheet is comprised of the following components:

 

     March 31,
2012
    June 30,
2011
 

Accounts receivable, trade

   $ 1,843,990      $ 1,780,137   

Allowance for doubtful accounts

     (13,235     (10,472

Non-trade accounts receivable

     82,525        75,550   

Notes receivable

     148,221        132,641   
  

 

 

   

 

 

 

Total

   $ 2,061,501      $ 1,977,856   
  

 

 

   

 

 

 

Accounts receivable, trade 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.

7. Business realignment charges

To structure its businesses in light of current and anticipated customer demand, the Company incurred business realignment charges in fiscal 2012 and fiscal 2011.

Business realignment charges by business segment are as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  

Industrial

   $ 3,133       $ 5,310       $ 10,031       $ 9,747   

Aerospace

              320   

Climate & Industrial Controls

     192            340      

Work force reductions by business segment are as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  

Industrial

     152         149         356         357   

Aerospace

              22   

Climate & Industrial Controls

     8            12      

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. The business realignment charges for the three and nine months ended March 31, 2012 also included charges related to enhanced retirement benefits. The Company believes the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital. The charges are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for the three and nine months ended March 31, 2012 and March 31, 2011. As of March 31, 2012, approximately $7 million in severance payments have been made relating to charges incurred during fiscal 2012, with the majority of the remaining payments expected to be made by June 30, 2012. All required severance payments have been made relating to charges incurred in fiscal 2011. Additional charges to be recognized in future periods related to the realignment actions described above are not expected to be material.

 

- 8 -


8. Equity

Changes in equity for the three months ended March 31, 2012 and March 31, 2011 are as follows (net of tax amounts relate to Shareholders’ Equity):

 

     Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance December 31, 2011

   $ 5,158,126      $ 97,777      $ 5,255,903   

Net income

     312,074        615        312,689   

Other comprehensive income (loss):

      

Foreign currency translation (net of tax of $3,983)

     147,042        (27,101     119,941   

Retirement benefits plan activity (net of tax of $11,244)

     19,096          19,096   

Realized loss (net of tax of $25)

     51          51   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     478,263        (26,486     451,777   

Dividends paid

     (59,015     (560     (59,575

Stock incentive plan activity

     28,912          28,912   

Acquisition activity

     (8,694     (61,855     (70,549

Shares purchased at cost

     (20,000       (20,000
  

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

   $ 5,577,592      $ 8,876      $ 5,586,468   
  

 

 

   

 

 

   

 

 

 
     Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance December 31, 2010

   $ 5,113,261      $ 101,332      $ 5,214,593   

Net income

     279,589        2,059        281,648   

Other comprehensive income (loss):

      

Foreign currency translation (net of tax of $9,584)

     124,570        (1,570     123,000   

Retirement benefits plan activity (net of tax of $11,516)

     19,659          19,659   

Realized loss (net of tax of $25)

     52          52   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     423,870        489        424,359   

Dividends paid

     (51,999       (51,999

Stock incentive plan activity

     23,011          23,011   

Shares purchased at cost

     (26,235       (26,235
  

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

   $ 5,481,908      $ 101,821      $ 5,583,729   
  

 

 

   

 

 

   

 

 

 

 

- 9 -


8. Equity, cont’d

 

Changes in equity for the nine months ended March 31, 2012 and March 31, 2011 are as follows (net of tax amounts relate to Shareholders’ Equity):

 

     Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance June 30, 2011

   $ 5,383,854      $ 104,482      $ 5,488,336   

Net income

     849,858        3,332        853,190   

Other comprehensive income (loss):

      

Foreign currency translation (net of tax of $15,583)

     (204,717     (25,609     (230,326

Retirement benefits plan activity (net of tax of $33,768)

     56,392          56,392   

Realized loss (net of tax of $75)

     153          153   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     701,686        (22,277     679,409   

Dividends paid

     (171,106     (7,500     (178,606

Stock incentive plan activity

     68,744          68,744   

Acquisition activity

     (73,614     (65,829     (139,443

Shares purchased at cost

     (331,972       (331,972
  

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

   $ 5,577,592      $ 8,876      $ 5,586,468   
  

 

 

   

 

 

   

 

 

 
     Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance June 30, 2010

   $ 4,367,965      $ 91,435      $ 4,459,400   

Net income

     756,940        5,556        762,496   

Other comprehensive income:

      

Foreign currency translation (net of tax of $27,071)

     413,271        5,105        418,376   

Retirement benefits plan activity (net of tax of $33,805)

     57,721          57,721   

Realized loss (net of tax of $93)

     162          162   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     1,228,094        10,661        1,238,755   

Dividends paid

     (142,631     (275     (142,906

Stock incentive plan activity

     84,715          84,715   

Shares purchased at cost

     (56,235       (56,235
  

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

   $ 5,481,908      $ 101,821      $ 5,583,729   
  

 

 

   

 

 

   

 

 

 

 

- 10 -


9. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the nine months ended March 31, 2012 are as follows:

 

     Industrial
Segment
    Aerospace
Segment
    Climate &
Industrial
Controls
Segment
    Total  

Balance June 30, 2011

   $ 2,595,989      $ 98,914      $ 314,213      $ 3,009,116   

Acquisitions

     7,876        (192       7,684   

Foreign currency translation

     (83,684     (31     (3,516     (87,231

Goodwill adjustments

     (3,258         (3,258
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

   $ 2,516,923      $ 98,691      $ 310,697      $ 2,926,311   
  

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions represent the original goodwill allocation and any changes in the purchase price for the acquisitions during the measurement period subsequent to the applicable acquisition dates.

Goodwill adjustments primarily represent final adjustments to the purchase price allocation for 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 the first nine months of fiscal 2012 been reflected in the same reporting period that the initial purchase price allocations for those acquisitions were made.

Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:

 

     March 31, 2012      June 30, 2011  
     Gross  Carrying
Amount
     Accumulated
Amortization
     Gross  Carrying
Amount
     Accumulated
Amortization
 

Patents

   $ 120,441       $ 65,547       $ 124,015       $ 61,061   

Trademarks

     310,722         127,882         319,158         116,995   

Customer lists and other

     1,244,312         385,740         1,251,271         338,666   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,675,475       $ 579,169       $ 1,694,444       $ 516,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible amortization expense for the nine months ended March 31, 2012 was $81,559. The estimated amortization expense for the five years ending June 30, 2012 through 2016 is $100,529, $94,556, $90,943, $87,143 and $83,328, respectively.

Intangible assets 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 may be less than their net carrying value. No such events or circumstances occurred during the nine months ended March 31, 2012.

 

- 11 -


10. Retirement benefits

Net pension benefit cost recognized included the following components:

 

$137,544 $137,544 $137,544 $137,544
     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  

Service cost

   $ 21,350      $ 21,139      $ 63,974      $ 63,029   

Interest cost

     45,981        43,852        138,720        130,697   

Expected return on plan assets

     (50,225     (49,196     (150,495     (147,130

Amortization of prior service cost

     3,505        3,137        10,512        9,463   

Amortization of net actuarial loss

     26,706        27,370        79,166        81,529   

Amortization of initial net (asset)

     (15     (15     (45     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension benefit cost

   $ 47,302      $ 46,287      $ 141,832      $ 137,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net postretirement benefit cost recognized included the following components:

 

$137,544 $137,544 $137,544 $137,544
     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  

Service cost

   $ 183       $ 233       $ 545       $ 508   

Interest cost

     838         724         2,600         2,686   

Net amortization and deferral and other

     92         621         350         393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net postretirement benefit cost

   $ 1,113       $ 1,578       $ 3,495       $ 3,587   
  

 

 

    

 

 

    

 

 

    

 

 

 

11. Income taxes

As of March 31, 2012, the Company had gross unrecognized tax benefits of $121,097, including $65,305 of additions for tax positions related to the current fiscal year. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $72,005. If recognized, a significant portion of the gross unrecognized tax benefits 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 $5,563.

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 is 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 the total amount of gross unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statutes of limitations within the next twelve months.

 

- 12 -


12. Financial instruments and fair value measurement

In May 2011, the FASB issued new accounting guidance to improve consistency with fair value measurement disclosure requirements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company’s fair value measurements and disclosures did not significantly change as a result of applying this new guidance.

The Company’s financial instruments consist primarily of cash and cash equivalents, long-term investments, and accounts receivable 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, accounts payable, trade and notes payable approximate fair value. The carrying value of long-term debt (excluding leases) was $1,740,528 and $1,765,892 at March 31, 2012 and June 30, 2011, respectively, and was estimated to have a fair value of $1,966,552 and $1,902,221 at March 31, 2012 and June 30, 2011, respectively. 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.

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 Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Derivatives consist of 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.

The following summarizes the location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet as of March 31, 2012 and June 30, 2011:

 

     Balance Sheet Caption      March 31,
2012
     June 30,
2011
 

Net investment hedges

        

Cross-currency swap contracts

     Other liabilities         $19,292       $ 36,582   

Cash flow hedges

        

Costless collar contracts

     Accounts receivable         3,180         638   

Forward exchange contracts

     Accounts receivable         2,615      

Costless collar contracts

     Other accrued liabilities         894         2,979   

 

- 13 -


12. Financial instruments and fair value measurement, cont’d

 

The fair values at March 31, 2012 and June 30, 2011 are classified within level 2 of the fair value hierarchy. There are no other financial assets or financial 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.

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 cross-currency swap contracts have been designated as hedging instruments. The costless collar contracts and forward exchange contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

Gains (losses) on derivative financial instruments that were recorded in the Consolidated Statement of Income are as follows:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  

Forward exchange contracts

   $ 11,031      $        $ (3,557   $ 19,048   

Costless collar contracts

     (1,252     (1,212     4,598        (5,766

Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive income (loss) in the Consolidated Balance Sheet are as follows:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012      2011  

Cross-currency swap contracts

   $ (6,633   $ (7,317   $ 10,682       $ (18,894

Foreign denominated debt

     (1,268     (8,353     15,397         (44,687

There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor was any portion of these financial instruments excluded from the effectiveness testing, during the nine months ended March 31, 2012 and 2011.

 

- 14 -


PARKER-HANNIFIN CORPORATION

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2012

AND COMPARABLE PERIODS ENDED MARCH 31, 2011

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 strong 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. The PMI at the end of March 2012 for the United States, the Eurozone countries and China was 53.4, 47.7 and 48.3, respectively. Since June 30, 2011 and December 31, 2011, the PMI for China has decreased, while the PMI for the United States and the Eurozone countries have declined since June 30, 2011 but have increased since December 31, 2011.

Global aircraft miles flown have increased approximately three percent from the comparable fiscal 2011 level and global revenue passenger miles have increased approximately four percent from the comparable fiscal 2011 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 2012 will be slightly up from the comparable fiscal 2011 level.

Housing starts in March 2012 were approximately 10 percent higher than housing starts in March 2011 and remained at essentially the same level of housing starts in December 2011.

The Company remains 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 funds at affordable interest rates and had a debt to debt-shareholders’ equity ratio of 24.3 percent at March 31, 2012 compared to 25.2 percent at December 31, 2011 and 24.7 percent at June 30, 2011.

The Company believes many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, agriculture, environment, defense, life sciences, infrastructure and transportation.

 

- 15 -


The Company believes it can meet its strategic objectives by:

 

   

Serving the customer;

 

   

Empowering its employees to become successful in its lean enterprise and fostering an entrepreneurial culture;

 

   

Successfully executing its Win Strategy initiatives relating to premier customer service, financial performance and profitable growth;

 

   

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;

 

   

Maintaining its decentralized division and sales company structure;

 

   

Acquiring strategic businesses;

 

   

Organizing around targeted regions, technologies and markets; and

 

   

Advancing business practices to achieve corporate sustainability goals.

During the first nine months of fiscal 2012, the Company completed three acquisitions and purchased the outstanding shares not previously owned by the Company in two majority-owned subsidiaries. Acquisitions will continue to be considered from time to time to the extent there is a strong strategic fit, while at the same time, maintaining the Company’s strong financial position. The Company will also continue to assess 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 the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

CONSOLIDATED STATEMENT OF INCOME

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

(dollars in millions)

   2012     2011     2012     2011  

Net sales

   $ 3,393.6      $ 3,240.1      $ 9,734.3      $ 8,936.0   

Gross profit

   $ 803.2      $ 777.0      $ 2,348.2      $ 2,139.3   

Gross profit margin

     23.7     24.0     24.1     23.9

Selling, general and administrative expenses

   $ 377.5      $ 375.1      $ 1,132.6      $ 1,054.3   

Selling, general and administrative expenses, as a percent of sales

     11.1     11.6     11.6     11.8

Interest expense

   $ 22.3      $ 24.6      $ 69.3      $ 74.9   

Other expense (income), net

   $ 2.6      $ (12.4   $ (5.1   $ (22.2

Effective tax rate

     22.0     27.7     25.9     26.1

Net income

   $ 312.7      $ 281.6      $ 853.2      $ 762.5   

Net income, as a percent of sales

     9.2     8.7     8.8     8.5

 

- 16 -


Net sales increased 4.7 percent for the current-year quarter and 8.9 percent for the first nine months of fiscal 2012, over the comparable prior-year net sales amounts. The increase in net sales for the current-year quarter reflects higher sales in both the Industrial North American businesses and the Aerospace Segment. The increase in net sales for the first nine months of fiscal 2012 reflects higher sales in the Industrial North American businesses and the Aerospace Segment as well as the Industrial International businesses. Acquisitions made in the last 12 months contributed approximately $7 million and $39 million in sales in the current-year quarter and first nine months of fiscal 2012, respectively. The effect of currency rate changes decreased net sales by approximately $42 million in the current-year quarter and increased net sales by approximately $44 million for the first nine months of fiscal 2012.

Gross profit margin declined slightly in the current-year quarter from the comparable prior-year period primarily due to operating inefficiencies in the Industrial International businesses and higher engineering development costs in the Aerospace Segment. Gross profit margin for the first nine months of fiscal 2012 improved from the first nine months of fiscal 2011 due to a combination of the higher sales volume in the Industrial North American businesses, resulting in operating efficiencies, as well as favorable product mix in the Aerospace Segment.

Selling, general and administrative expenses increased for the first nine months of fiscal 2012 over the comparable prior period primarily due to the higher sales volume as well as higher expenses associated with the Company’s incentive and deferred compensation programs.

Interest expense for the current-year quarter and first nine months of fiscal 2012 decreased from the comparable prior-year periods primarily due to lower average debt outstanding.

Other expense (income), net for the prior-year quarter and first nine months of fiscal 2011 included income of $14.6 million related to insurance recoveries.

Effective tax rate for the current-year quarter was lower than the prior-year quarter primarily due to discrete tax items in the current-year quarter having a more favorable impact on the tax rate than those recorded in the prior-year quarter. The discrete tax items in both periods relate primarily to the settlement of tax audits. The Company expects the effective tax rate for fiscal 2012 will be approximately 27 percent.

RESULTS BY BUSINESS SEGMENT

Industrial Segment

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

(dollars in millions)

   2012     2011     2012     2011  

Net sales

        

North America

   $ 1,315.4      $ 1,178.7      $ 3,703.5      $ 3,289.1   

International

     1,286.8        1,293.0        3,794.7        3,533.3   

Operating income

        

North America

     227.0        189.5        646.0        538.3   

International

   $ 195.1      $ 199.8      $ 569.2      $ 551.4   

Operating margin

        

North America

     17.3     16.1     17.4     16.4

International

     15.2     15.5     15.0     15.6

Backlog

   $ 1,887.8      $ 1,855.8      $ 1,887.8      $ 1,855.8   

 

- 17 -


The Industrial Segment operations experienced the following percentage changes in net sales in the current-year period compared to the comparable prior-year period:

 

     Period Ending March 31  
     Three Months     Nine Months  

Industrial North America – as reported

     11.6     12.6

Acquisitions

     0.3     0.6

Currency

     (0.3 )%      (0.1 )% 
  

 

 

   

 

 

 

Industrial North America – without acquisitions and currency

     11.6     12.1
  

 

 

   

 

 

 

Industrial International – as reported

     (0.5 )%      7.4

Acquisitions

     0.3     0.5

Currency

     (2.7 )%      1.3
  

 

 

   

 

 

 

Industrial International – without acquisitions and currency

     1.9     5.6
  

 

 

   

 

 

 

Total Industrial Segment – as reported

     5.3     9.9

Acquisitions

     0.3     0.6

Currency

     (1.6 )%      0.6
  

 

 

   

 

 

 

Total Industrial Segment – without acquisitions and currency

     6.6     8.7
  

 

 

   

 

 

 

The above presentation reconciles the percentage changes in net sales of the Industrial Segment operations reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the prior four fiscal quarters as well as the effects of currency exchange rates. The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Excluding the effects of acquisitions and changes in currency exchange rates, the increase in Industrial North American sales for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily the result of higher demand from distributors and end-users in a number of markets, particularly in the heavy-duty truck, construction equipment, oil and gas, farm and agriculture equipment and machine tool markets. The increase in Industrial International sales for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily attributable to higher volume across most markets in all regions with the largest increase in volume experienced in Europe.

The increase in operating margins in the Industrial North American businesses for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to the higher sales volume, resulting in operating efficiencies. The decrease in operating margins in the Industrial International businesses for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to operating inefficiencies resulting from a decline in the rate of sales growth between the current year and comparable prior-year periods, especially in Europe and the Asia Pacific region.

 

- 18 -


Included in Industrial North American operating income are business realignment charges of $2.0 million and $0.6 million for the current-year quarter and prior-year quarter, respectively, and $3.0 million and $4.1 million for the first nine months of fiscal 2012 and fiscal 2011, respectively. Included in Industrial International operating income are business realignment charges of $1.1 million and $4.7 million for the current-year quarter and prior-year quarter, respectively, and $7.0 million and $5.7 million for the first nine months of fiscal 2012 and fiscal 2011, respectively. The business realignment charges consist primarily of severance costs resulting from plant closures as well as general reductions in work force. The Industrial North American business realignment charges for the current-year quarter also include expenses associated with enhanced retirement benefits. The Company does not anticipate that cost savings realized from the work force reductions taken during the first nine months of fiscal 2012 will have a material impact on future operating margins. The Company expects to continue to take the actions necessary to structure appropriately the operations of the Industrial Segment. Such actions may include the necessity to record additional business realignment charges in fiscal 2012, the timing and amount of which has not been finalized.

The increase in backlog from the prior-year quarter is primarily due to higher order rates in the Industrial North American businesses more than offsetting lower order rates in the Industrial International businesses, primarily in the Asia Pacific region. The decline in backlog from the June 30, 2011 amount of $1,907.0 million is primarily due to lower order rates in virtually all of the Industrial International businesses more than offsetting higher order rates in the Industrial North American businesses. The Company anticipates Industrial North American sales for fiscal 2012 will increase between 11.0 percent and 11.5 percent from the fiscal 2011 level and Industrial International sales for fiscal 2012 will increase between 3.3 percent and 4.1 percent from the fiscal 2011 level. Industrial North American operating margins in fiscal 2012 are expected to range from 17.3 percent to 17.5 percent and Industrial International operating margins are expected to range from 14.9 percent to 15.1 percent.

Aerospace Segment

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

(dollars in millions)

   2012     2011     2012     2011  

Net sales

   $ 542.8      $ 503.8      $ 1,536.8      $ 1,400.1   

Operating income

   $ 65.9      $ 69.0      $ 204.8      $ 176.4   

Operating margin

     12.1     13.7     13.3     12.6

Backlog

   $ 1,925.7      $ 1,755.3      $ 1,925.7      $ 1,755.3   

The increase in net sales in the Aerospace Segment for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to higher volume in both the commercial original equipment manufacturer (OEM) and aftermarket businesses as well as higher volume in both the military OEM and aftermarket businesses. The lower margins in the current-year quarter compared to the prior-year quarter were primarily due to the benefits from the higher sales volume being more than offset by higher engineering development costs. Margins for the first nine months of fiscal 2012 were higher compared to the prior-year first nine months primarily due to the higher sales volume and a favorable product mix.

The increase in backlog from the prior-year quarter and the June 30, 2011 amount of $1,702.3 million is primarily due to higher order rates in both the commercial and military OEM businesses as well as the military aftermarket business. For fiscal 2012, sales are expected to increase between 8.0 percent and 9.0 percent from the fiscal 2011 level and operating margins are expected to range from 13.2 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.

 

- 19 -


Climate & Industrial Controls Segment

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

(dollars in millions)

   2012     2011     2012     2011  

Net sales

   $ 248.7      $ 264.5      $ 699.3      $ 713.6   

Operating income

   $ 23.2      $ 22.6      $ 52.8      $ 53.6   

Operating margin

     9.3     8.5     7.6     7.5

Backlog

   $ 178.0      $ 189.6      $ 178.0      $ 189.6   

The Climate & Industrial Controls (CIC) Segment operations experienced the following percentage changes in net sales in the current-year period compared to the comparable prior-year period:

 

     Period Ending March 31  
     Three Months     Nine Months  

CIC Segment – as reported

     (6.0 )%      (2.0 )% 

Acquisitions

     0.0     0.1

Currency

     (0.9 )%      0.1
  

 

 

   

 

 

 

CIC Segment – without
acquisitions and currency

     (5.1 )%      (2.2 )% 
  

 

 

   

 

 

 

The above presentation reconciles the percentage changes in net sales of the Climate & Industrial Controls Segment operations reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the prior four fiscal quarters as well as the effects of currency exchange rates. The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Excluding the effects of acquisitions and changes in currency exchange rates, the decrease in net sales in the Climate & Industrial Controls Segment for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to lower end-user demand in the residential air conditioning market partially offset by higher end-user demand in the heavy-duty truck and automotive markets. Operating margins in both the current-year quarter and first nine months of fiscal 2012 were higher from the comparable prior-year periods primarily due to spending control efforts more than offsetting the impact of the decrease in sales volume. Business realignment charges recorded by the Climate & Industrial Controls Segment in fiscal 2012 and fiscal 2011 were not significant. The Company may take further actions to structure appropriately the operations of the Climate & Industrial Controls Segment. Such actions may include the necessity to record business realignment charges in fiscal 2012.

For fiscal 2012, sales are expected to decrease between 3.9 percent and 2.8 percent from the fiscal 2011 level and operating margins are expected to range from 8.0 percent to 8.2 percent, reflecting continued spending control efforts.

Corporate general and administrative expenses

Corporate general and administrative expenses were $38.4 million in the current-year quarter compared to $41.7 million in the prior-year quarter and were $142.5 million for the first nine months of fiscal 2012 compared to $112.7 million for the first nine months of fiscal 2011. As a percent of sales, corporate general and administrative expenses for the current-year quarter were 1.1 percent compared to 1.3 percent for the prior-year quarter and were 1.5 percent and 1.3 percent for the first nine months of fiscal 2012 and fiscal 2011, respectively. The lower expenses for the current-year quarter are primarily due to market value fluctuations related to investments associated with the Company’s deferred compensation program more than offsetting an increase in incentive compensation expenses. The higher expenses for the first nine months of fiscal 2012 are primarily due to higher deferred and incentive compensation expenses.

 

- 20 -


Other expense (in the Business Segment Results) included the following:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 

(in millions)

   2012     2011     2012     2011  

Expense (income)

        

Currency transaction

   $ 8.4      $ (3.1   $ 4.3      $ (0.9

Stock-based compensation

     9.5        9.2        37.3        42.4   

Pensions

     17.8        17.6        53.7        54.6   

Asset sales and writedowns

     (1.6     .9        (2.9     (2.0

Other items, net

     15.6        .2        17.2        5.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 49.7      $ 24.8      $ 109.6      $ 99.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Included in Other items, net in the prior-year quarter and first nine months of fiscal 2011 was income of $14.6 million related to insurance recoveries.

CONSOLIDATED BALANCE SHEET

 

(dollars in millions)

   March 31,
2012
     June 30,
2011
 

Accounts receivable, net

   $ 2,061.5       $ 1,977.9   

Inventories

     1,429.0         1,412.2   

Notes payable

     273.9         75.3   

Shareholders’ equity

     5,577.6         5,383.9   

Noncontrolling interests

     8.9         104.5   

Working capital

   $ 2,008.0       $ 1,914.2   

Current ratio

     1.81         1.80   

Accounts receivable, net is primarily receivables due from customers for sales of product ($1,844 million at March 31, 2012 and $1,780 million at June 30, 2011). Days sales outstanding relating to trade accounts receivable was 50 days at March 31, 2012 and 48 days at June 30, 2011. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Inventories increased $17 million ($55 million excluding the effect of foreign currency translation of $38 million) primarily in the Industrial North American businesses and Aerospace Segment, in response to positive order trends. Days’ supply of inventory was 57 days at March 31, 2012 and 55 days at June 30, 2011.

Notes payable at March 31, 2012 included $225 million of long-term debt repayable within one year.

Shareholders’ equity activity during the first nine months of fiscal 2012 included a decrease of approximately $332 million related to share repurchases, a decrease of approximately $74 million related to the acquisition of the remaining ownership interest in two majority-owned subsidiaries, and a decrease of approximately $205 million related to foreign currency translation adjustments, primarily affecting Accounts receivable, Inventories, Plant and equipment, Goodwill, Intangible assets, Accounts payable, trade, Other accrued liabilities, and Long-term debt.

Noncontrolling interests decreased from June 30, 2011 primarily as a result of the Company’s purchase of outstanding shares not previously owned by the Company in two majority-owned subsidiaries.

 

- 21 -


CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Nine months ended
March 31,
 

(in millions)

   2012     2011  

Cash provided by (used in):

    

Operating activities

   $ 1,006.5      $ 799.9   

Investing activities

     (185.9     (203.1

Financing activities

     (590.8     (123.7

Effect of exchange rates

     (113.8     59.3   

Net increase in cash and cash equivalents

   $ 116.0      $ 532.4   

Cash flows from operating activities increased compared to the first nine months of fiscal 2011 primarily due to a lower amount of cash used for working capital needs, especially Accounts receivable and Inventory, as well as an increase in Net income. The Company continues to focus on managing its inventory and other working capital requirements. The Company made a $200 million voluntary contribution to its domestic qualified defined benefit pension plan during the first nine months of fiscal 2011.

Cash flows used in financing activities in fiscal 2012 included the repurchase of approximately 4.9 million common shares for $332 million as compared to the repurchase of approximately 0.7 million common shares for $56 million in the prior year. During the first nine months of fiscal 2012, the Company purchased the outstanding shares not previously owned by the Company in two majority- owned subsidiaries. Cash flow activities in the current-year include a borrowing and a repayment, each for 6 billion Japanese Yen (approximately $73 million), under the terms of separate credit facilities. Cash flow activities in the prior year included the issuance of $300 million aggregate principal amount of Medium-Term Notes and payments of approximately $257 million related to the Euro bonds which matured in November 2010.

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 a 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.

 

(dollars in millions)

Debt to Debt-Shareholders’ Equity Ratio

   March 31,
2012
    June 30,
2011
 

Debt

   $ 1,789      $ 1,766   

Debt & Shareholders’ equity

   $ 7,367      $ 7,150   

Ratio

     24.3     24.7

The Company has a line of credit totaling $1,500 million through a multi-currency revolving credit agreement with a group of banks, of which $1,452 million was available as of March 31, 2012. The credit agreement expires in March 2016; 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. A portion of the credit agreement supports the Company’s commercial paper note program, which is rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch Ratings. These ratings are considered investment grade. 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 $1,350 million of short-term commercial paper notes. As of March 31, 2012, $48 million of commercial paper notes were outstanding and the largest amount of commercial paper notes outstanding during the third quarter of fiscal 2012 was $692 million.

 

- 22 -


During the current-year quarter, the Company entered into a five-year JPY (Japanese Yen) 6 billion credit facility. Based on the Company’s rating level at March 31, 2012, the credit facility bears interest of JPY LIBOR (reset semi-annually) plus 55 basis points. Interest is paid semi-annually and any principal borrowings are due to be repaid in March 2017. The Company borrowed the full JPY 6 billion during the current-year quarter, equivalent to approximately $73 million as of March 31, 2012, and used the funds to repay the balance due on the Company’s previous JPY credit facility.

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 credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at March 31, 2012, the most restrictive financial covenant 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.

The Company’s principal sources of liquidity are its cash flows provided from operating activities and borrowings either from or directly supported by its line of credit. The Company’s ability to borrow has not been affected by a lack of general credit availability and the Company does not foresee any impediments to borrow funds at favorable interest rates in the near future. The Company expects that its ability to generate cash from its operations and ability to borrow directly from its line of credit or sources directly supported by its line of credit should be sufficient to support working capital needs, planned growth, repayment of maturing debt, benefit plan funding, dividend payments and share repurchases in the near term.

CRITICAL ACCOUNTING POLICIES

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 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 because 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 analyses. 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 analyses to the Company’s overall market capitalization.

The results of the Company’s fiscal 2012 annual goodwill impairment test performed as of December 31, 2011 indicated that no goodwill impairment existed and all reporting units had an estimated fair value that the Company determined, from a quantitative or qualitative perspective, was significantly in excess of their carrying value.

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 its reporting unit’s fair value. If the recovery of the current economic environment is not consistent with the Company’s current expectations, 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

 

- 23 -


disposition are less than their net 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 the first nine months of fiscal 2012, there were no events or circumstances that indicated that the net carrying value of the Company’s long-lived assets held for use was not recoverable.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 to the Consolidated Financial Statements for discussion of recently issued accounting pronouncements.

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,

 

   

ability to realize anticipated cost savings from business realignment activities,

 

   

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 this disclosure, and undertakes no obligation to update them unless otherwise required by law.

 

- 24 -


ITEM 3. 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 and 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 12 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.

 

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the third quarter of fiscal 2012. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

- 25 -


PARKER-HANNIFIN CORPORATION

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings. Parker ITR S.r.l. (Parker ITR), a subsidiary acquired on January 31, 2002, has been the subject of a number of lawsuits and regulatory investigations. The lawsuits and investigations relate to allegations that for a period of up to 21 years, the Parker ITR business unit that manufactures and sells marine hose, typically used in oil transfer, conspired with competitors in unreasonable restraint of trade to artificially raise, fix, maintain or stabilize prices, rig bids and allocate markets and customers for marine oil and gas hose in the United States and in other jurisdictions. Parker ITR and the Company have cooperated with all of the regulatory authorities investigating the activities of the Parker ITR business unit that manufactures and sells marine hose and continue to cooperate with the investigations that remain ongoing. Several of the investigations and all but one of the lawsuits have concluded. The following investigations and lawsuit remain pending.

Brazilian competition authorities commenced their investigations on November 14, 2007. Parker ITR filed a procedural defense in January 2008. The Brazilian authorities appear to be investigating the period from 1999 through May 2007. In June 2011, the Brazilian competition authorities issued a report and Parker ITR filed a response to that report. The potential outcome of the investigation in Brazil is uncertain and will depend on the resolution of numerous issues not known at this stage of the investigation.

On May 15, 2007, the European Commission issued its initial Request for Information to the Company and Parker ITR. On January 28, 2009, the European Commission announced the results of its investigation of the alleged cartel activities. As part of its decision, the European Commission found that Parker ITR infringed Article 81 of the European Commission treaty from April 1986 to May 2, 2007 and fined Parker ITR 25.61 million euros. The European Commission also determined that the Company was jointly and severally responsible for 8.32 million euros of the total fine which related to the period from January 2002, when the Company acquired Parker ITR, to May 2, 2007, when the cartel activities ceased. Parker ITR and the Company filed an appeal to the Court of First Instance of the European Communities on April 10, 2009.

A lawsuit was filed against the Company and Parker ITR on May 25, 2010 under the False Claims Act in the Central District of California: The United States of America ex rel. Douglas Farrow v. Trelleborg, AB et al. The United States declined to intervene against the Company or Parker ITR in the case. Plaintiff generally seeks treble damages, penalties for each false claim and attorneys’ fees. The court dismissed the complaint with prejudice as to the Company, but it remains pending against Parker ITR.

 

- 26 -


ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

  (a) Unregistered Sales of Equity Securities. Not applicable.
  (b) Use of Proceeds. Not applicable.
  (c) Issuer Purchases of Equity Securities.

 

Period

   (a) Total
Number of
Shares
Purchased
     (b) Average
Price Paid
Per Share
     (c) Total Number  of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
     (d) Maximum Number
(or  Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
 

January 1, 2012 through January 31, 2012

     79,800       $ 80.41         79,800         10,376,473   

February 1, 2012 through February 29, 2012

     75,300       $ 86.62         75,300         10,301,173   

March 1, 2012 through March 31, 2012

     79,946       $ 88.26         79,946         10,221,227   

Total:

     235,046       $ 85.07         235,046         10,221,227   

 

(1) On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase by the Company of up to 3.0 million shares of its common stock. From time to time, the Board of Directors has adjusted the number of shares authorized for repurchase under this program. On August 3, 2011, the Board of Directors of the Company approved an increase in the number of shares authorized for repurchase under this program so that, beginning on such date, the aggregate number of shares authorized for repurchase was equal to 15 million. Subject to this overall limitation, each fiscal year the Company is authorized to repurchase 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. On April 19, 2012, the Board of Directors of the Company modified the repurchase program such that for the fourth quarter of fiscal year 2012 the fiscal year limitation was eliminated and the number of shares authorized for repurchase under the program was increased to up to 16 million, exclusive of any shares previously repurchased under the program during fiscal year 2012. There is no expiration date for this program.

ITEM 6. Exhibits.

The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:

 

Exhibit
No.

 

Description of Exhibit

10(a)   Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan.*
12   Computation of Ratio of Earnings to Fixed Charges as of March 31, 2012.*
31(i)(a)   Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
31(i)(b)   Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*

 

- 27 -


32    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. *
101.INS    XBRL Instance Document.*
101.SCH    XBRL Taxonomy Extension Schema Document.*
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.*

 

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended March 31, 2012 and 2011, (ii) Consolidated Statement of Income for the nine months ended March 31, 2012 and 2011, (iii) Consolidated Balance Sheet at March 31, 2012 and June 30, 2011, (iv) Consolidated Statement of Cash Flows for the nine months ended March 31, 2012 and 2011 and (v) Notes to Consolidated Financial Statements for the nine months ended March 31, 2012.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

- 28 -


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PARKER-HANNIFIN CORPORATION
(Registrant)

/s/ Jon P. Marten

Jon P. Marten
Executive Vice President - Finance and Administration and Chief Financial Officer

Date: May 9, 2012

 

- 29 -


EXHIBIT INDEX

 

Exhibit
No.

 

Description of Exhibit

  10(a)   Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan.*
  12   Computation of Ratio of Earnings to Fixed Charges as of March 31, 2012.*
  31(i)(a)   Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
  31(i)(b)   Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
  32   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. *
101.INS   XBRL Instance Document.*
101.SCH   XBRL Taxonomy Extension Schema Document.*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.*

 

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended March 31, 2012 and 2011, (ii) Consolidated Statement of Income for the nine months ended March 31, 2012 and 2011, (iii) Consolidated Balance Sheet at March 31, 2012 and June 30, 2011, (iv) Consolidated Statement of Cash Flows for the nine months ended March 31, 2012 and 2011 and (v) Notes to Consolidated Financial Statements for the nine months ended March 31, 2012.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.