Parker is the world leader in motion and control technologies,

providing systematic, precision-engineered solutions fo...
The Year In Review

           For the years ended June 30,                                                            ...
To Our Shareholders

         We appreciate your interest in Parker Hannifin, especially

since today’s marketplace o...
In Motion…Leading the Industry                                    Balanced Growth in Diverse Markets
As we consolidate operations and reduce costs in these
more efficiently, with real-time, global reporting on

Our sealing technology
          enables cell phones to
          operate clearly, personal
          computers to perform...

Our engineering
          expertise helped Jeep
          create its Quadra-drive
          system for a safer,

On site at the world’s
          busiest and most
          efficient container port
          in Hong Kong, our filters,
Parker…More Diversified

      From movies to motorsports, when you’re being
      entertained… Park...
 Space programs around the world use Parker products
 to seal shuttle windows, hatches, and igniters; connect
Driving Value for Our Customers and Investors

      Premier Customer Service                                           ...
Michael J. Hiemstra,
             Electronic training and design certifi-
Profitable Growth                                                               segment, where the industry is anticipatin...
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  1. 1. Parker is the world leader in motion and control technologies, providing systematic, precision-engineered solutions for a variety of commercial, industrial and aerospace markets. Parker is strategically diversified, value-driven and well positioned for global growth as the industry consolidator and supplier of choice.
  2. 2. The Year In Review For the years ended June 30, 1998 1997 1999 Operating Data Net sales $ 4,633,023 $ 4,091,081 $ 4,958,800 Income from operations 549,897 462,913 538,749 Net income 319,551 274,039 310,501 Per Share Data Diluted earnings per share $ 2.85 $ 2.44 $ 2.83 Dividends .60 .51 .64 Book value 15.32 13.87 17.03 Ratios Return on sales 6.9% 6.7% 6.3% Return on average assets 9.8 9.3 8.6 Return on average equity 19.8 18.7 17.6 Debt to debt-equity 31.6 24.5 29.8 Other Number of shareholders 44,250 43,014 39,380 Number of employees 39,873 34,927 38,928 Income from operations and Net income for 1998 include a non-cash, non-recurring pretax charge of $15.8 million or $12.0 million after tax ($.11 per share) for in-process R&D purchased as part of two acquisitions. The 1998 results also include a charge of $3.7 million ($.03 per share) for the early retirement of debt. Net Income from Net Cash Flows From Sales Operations Income Operating Activities Millions of Dollars Millions of Dollars Millions of Dollars Millions of Dollars 5000 600 350 500 400 480 280 4000 360 210 300 3000 240 140 200 2000 100 120 70 1000 95 96 97 98 99 95 96 97 98 99 95 96 97 98 99 95 96 97 98 99 Shareholders’ Letter: Your company in motion and control...............................................................3 Movement makes PROGRESS a reality...................................................................................................................6 Improving the world for a higher QUALITY of life .......................................................................................8 Controlling motion for ENTERPRISE everywhere........................................................................................10 Strategically diversified for balanced growth ...............................................................................................12 Driving value for customers and investors ......................................................................................................14 Financial Review .....................................................................................................................................................................17
  3. 3. To Our Shareholders We appreciate your interest in Parker Hannifin, especially since today’s marketplace offers you more choices than ever before about where to invest. What you own in Parker is a piece of virtually everything that moves. Our markets are highly diversified, and our growth opportunities are expansive . Wherever there is development – world over, wherever the standard and quality of living are being improved – Parker is there. Pictured above: Chairman Patrick Parker, second to the right; with members of the Office of the President: to the left, Vice President Lawrence Zeno, second to the left, Executive Vice President Dennis Sullivan, and to the right, President and Chief Executive Officer Duane Collins.
  4. 4. In Motion…Leading the Industry Balanced Growth in Diverse Markets In the past five years, we built the business model for The consolidation movement in industrial Parker’s future growth. We now have the most compre- markets is favorable for Parker. We lead our hensive product offering in the motion and control industry, and have established the most industry. Our operating groups have ever-broadening complete combination of motion and control markets in new products and applications, and jointly, technologies for thousands of applications. they garner incremental growth from technology We have accompanied our customers around the transfer and innovative systems. We are stronger than world, delivering on our promise of premier customer ever in our traditional markets, and we are driving service. Now, as more customers demand one-stop new growth in non-traditional, high-tech markets. shopping and value-added capabilities, we have even We have the right combination of businesses, greater opportunities to enhance their performance widely diversified in both product categories and with wholly integrated systems. geographic markets. Our operating units have their own cycles, and all are balanced with a mix In Control…Growing Profitably of original-equipment and aftermarket revenues. Parker has the financial resources and discipline to grow We have a measured stake in mature and emerging profitably for the long term, through the ups and downs economies, and among the many industries we serve. that influence the markets we serve. For example, In our Aerospace segment, sales are divided among in the first half of fiscal 1999, there was a prevalent Built for Profitable Growth Parker has built a business model to grow incrementally through technology transfer and innovative system combinations and in the long term via strategic acquisitions, global expansion and new applications. commercial and military contracts, with additional slowdown among industrials. To ensure we’d be dispersion in general and private aviation markets. stronger on the upside of the cycle, we cut inventories Among our largest industrial customers, none today by nearly $100 million in the second half of fiscal 1999, approaches four percent of sales. In these industrial and began to see margins improve by end of the year. markets, customer-direct transactions account for 50 For the full year, we posted record sales, up seven percent of North American sales, and nearly 70 percent percent despite the year’s softer industrial demand, in the rest of the world. Yet we also have the largest with strong contributions from our aerospace business distribution force in the industry – a competitively and industrial acquisitions. Earnings in 1999 were enviable asset that is not reflected on the balance sheet. relatively even with the prior year, off by two cents per Parker is committed to offer products on the diluted share, and the fourth quarter showed sequential customers’ terms. We launched technical certification improvement. We again exceeded our return-on-sales programs for distributors to develop field-engineering (ROS) target, achieving 6.3 percent for the year, and in services to create system solutions for our customers, the fourth quarter we reached 7.2 percent, our highest and in turn enhance the performance of their operations. ROS level since September 1997. At, we are developing the industry’s most We also generated a record $459 million in cash from operations in 1999, bolstering our strong balance advanced e-commerce capabilities to provide online sheet for the right acquisition opportunities. Our engineering, trouble-shooting and fulfillment. Having recently completed international imple- reputation for growing the businesses we buy mentation of our enterprise information system, makes Parker the clear choice for companies we are now able to manage our worldwide business looking to gain the strengths of a larger partner. 4
  5. 5. As we consolidate operations and reduce costs in these more efficiently, with real-time, global reporting on areas, the immediate effect will curtail first-quarter customer demand, production, inventory and capital. earnings, but position us for both volume and earnings This enables us to fully realize our ability to deliver growth in the full year. multi-component solutions on a single purchase order; This year, we promoted three executives to our to concurrently engineer products around the globe; corporate management team: Claus Beneker leads and efficiently handle multiple currencies. The system our engineering efforts as Chief Technical Officer; also ensures year-2000 compliance. Lynn Cortright continues to grow our Climate & Industrial Controls business as Group President; Positioned for Global Growth and Tom Piraino oversees legal affairs as General We are establishing a second wholly owned foreign Counsel and Secretary. enterprise in China, and expanding our low-cost Throughout the year, you can expect to hear facilities in the Czech Republic and Poland. Our three more about our growth strategies. We are stepping new Korean businesses are performing ahead of up efforts to establish the respected Parker name expectations, and we are expanding in India with a as the foremost brand in motion and control, with trading subsidiary and distribution facility. an aim to win more business on the product We completed four acquisitions in 1999, totaling breadth and system capabilities that are our most roughly $115 million in annualized sales: Fluid powerful competitive advantages. Power Systems provides solutions to global mobile Climate & New Applications Instrumentation Industrial Controls Aerospace Automation INCREMENTAL GROWTH LONG-TERM GROWTH New Products Tech Transfer Hydraulics Filtration Strategic Global Systems Acquisitions Expansion Fluid Seals Connectors equipment manufacturers. Veriflo Corporation This report is an example of that effort, strengthens our position in the medical, analytical, to convey three things about Parker we want petrochemical and semiconductor industries Cougar all investors to know: We are dynamic. Valves and Fittings broadens our product offerings in We are diversified. And we are committed the Australian-Asian market. Jinyoung Electric to creating value in everything we do. Machinery of Korea manufactures automation compo- To those of you who already own our stock, we nents serving growing demand in Asia and Europe. thank you for entrusting your capital to us. We will We also completed a 33.4-percent equity investment continue to use these proceeds to make value-minded via a strategic alliance with Tokyo-based Kuroda investments in Parker’s growth. We thank every one of Precision Industries. Our stake in the $120-million the 400,000 customers around the globe who honor us company establishes a strong base in the important with their business. And most of all, we thank all of Japanese pneumatics market, with additional opportu- our Parker employees, who have doubled our sales over nities to market Kuroda products outside Japan at a the past five years, and who are working to achieve time of growing global demand for factory automation. the ambitious vision we have for the company: to be We remain focused on our primary objectives: everywhere in the world, on everything that moves. Premier customer service; Financial performance; and Profitable growth. In fiscal 2000, we are taking further steps to Patrick S. Parker, Duane E. Collins, align our business as we anticipate weak international Chairman of the Board President and Chief Executive Officer industrial markets and slowing in commercial aircraft. September 13, 1999 5
  6. 6. Progress 6
  7. 7. Our sealing technology enables cell phones to operate clearly, personal computers to perform without overheating and ensures hydraulic construction equipment remains leak-free and environmentally friendly. Our instrumentation products are critical to the manufacture of integrated circuits used in phones, computers, automobiles and construction equipment. Our hydraulics, automation and fluid connector systems provide the muscle to move heavy equipment and the finesse to precisely control the stadium’s retractable roof. Parker Makes It Possible Our climate control systems ensure a comfortable working environment inside the truck and construction equipment cabs. Our filtration systems remove contaminants ensuring equipment continues to run smoothly and efficiently, while our in-cab filtration contributes to a cleaner, healthier work environment. And when the stadium is complete, our refrigeration system and 33 miles of our beverage tubing will deliver ice-cold soda to 70,000 thirsty fans.
  8. 8. Quality 8
  9. 9. Our engineering expertise helped Jeep create its Quadra-drive system for a safer, more reliable vehicle. Our refrigeration and sealing systems keep freezer cases, ice machines and refrigerated trucks cold for fresher, safer, longer-lasting food. Our fluid connectors, hydraulic and sealing technologies are used in heavy-duty truck braking, fuel, power steering and airbag systems helping to transport goods and services safely. Our hydraulic pumps are used in synthetic fiber production making durable fabrics for clothing and upholstery. Parker Makes It Possible Our filters in engine vent systems protect the environment. Our fluid connector, hydraulic, automation and filtration components in machine tools manufacture thousands of products including trucks, automobiles and shopping carts. Our automation components package food products and aid in material handling to get products where they need to be. And, our filtration and clarification systems ensure many foods and beverages, including potato chips, taste better.
  10. 10. Enterprise 10
  11. 11. On site at the world’s busiest and most efficient container port in Hong Kong, our filters, pneumatic, hydraulic, fluid connectors and sealing technologies lift and precisely position cargo for shipment around the world. Our hydraulic, filtration, fluid connectors and sealing technologies power winches and propel diesel engines in a wide variety of marine applications. Our instrumentation components, filtration and gas turbine products are used in power generation applications providing electricity to millions of people. Parker Makes It Possible Our filtration systems ensure clean fluids on land and at sea throughout the world. At the new Hong Kong airport nearby, our aerospace components are on virtually every aircraft flying today – and we’re on all the right programs for the future. And, our strategy to follow the customer globally is paying off. Parker’s Asia Pacific Group is headquartered in Hong Kong and we’re establishing our second wholly owned foreign enterprise in China. Parker is well positioned to serve thousands of multi-national customers everyday.
  12. 12. Parker…More Diversified Entertainment From movies to motorsports, when you’re being entertained… Parker plays a major role. Parker products make cameo appearances in many hit movies, including the epic film Titanic, which used Parker hydraulics to sink the set of the movie repeatedly – imitating the original disaster. In the movie Batman & Robin, Parker provided the lift and rotating functions for the Batlift. Additionally, our fluid connector systems are improving the performance of race cars at tracks everywhere, and our components create the thrilling motion for state-of-the-art ride simulators, including those used to train pilots. And theme restaurants like the Rainforest Cafe, with locations around the world, and Mars 2112, located in New York City’s Time Square district, At the Bellagio resort in Las Vegas, Parker’s computerized offer guests a unique dining experience with help controls move more than 1,000 dancing fountains from Parker motion and control systems. performing water ballet synchronized to classical music, Wherever there is excitement… and our brass fittings are part of a sophisticated air purging Parker makes it possible. system that keeps the computerized electronics dry. Growing Dynamic Telecommunication Most of the world’s population have no access to basic telephone service. In fact, less than one-fifth of the earth’s surface is wired for telephones and most developing nations have no plans to build the infrastructure to support wireline technologies. But the world is on the move and so is Parker. Between 1980 and 1999, more than 150 countries introduced cellular communication services. Moreover, worldwide cellular subscriber growth will reach one billion by 2003 – a 250% increase from the 1999 level. This is good news for Parker since one in every five wireless handsets produced around the world today includes Parker products. As wireless communication becomes more and more widespread, Parker products will connect people more easily by eliminating interference problems. Satellites provide wireless, real-time communication Beyond portable telephones and satellite dishes, for people everywhere, and Parker electromechanical Parker products are in many other electronic devices technology precisely rotates dishes for maximum that you’ve already purchased or will want soon. transmission efficiency. Wherever there is communication… Parker makes it possible. 12
  13. 13. Exploration Space programs around the world use Parker products to seal shuttle windows, hatches, and igniters; connect astronaut oxygen tubes; and build efficient fuel systems. In fact, the Hubble Space Telescope relies on our products to keep electronics onboard at the proper temperatures as it orbits Earth. Parker also explores frontiers closer to home. Medical advances are being made everyday – and Parker is there. Our valves deflate cuffs on blood pressure machines, control ventilator oxygen levels and move fluid to and from dialysis patients. And, our climate controls cool insulin for pharmaceutical companies. For Parker, exploration extends beyond medical and aerospace markets. Our products probe the ocean floor on research and recovery robots. And, we go even deeper. Parker hose and tubing plunge through The International Space Station is humankind’s highest the ocean floor, bringing natural resources such as construction project, and Parker provides vital onboard oil to the surface. technologies to sustain a controlled environment for the Wherever there is discovery… astronauts and their research. Parker makes it possible. Exciting Precise Animation Attractions everywhere rely on Parker technology to make your experience more realistic and memorable. Moving and breathing dinosaurs at Universal Studios Florida, Sea World and Disney World, are all brought to life by Parker motion and control systems. Additionally, our products go behind-the-scenes in movies like JAWS, where we control the motion of the killer Great White, and in the motion picture Godzilla, where the giant animatronic reptile’s crushing jaws and swishing tail perform with help from Parker. We not only put creatures in motion, but we also move you on rides and attractions at theme parks around the world. Parker systems lift, shake and drop thrill rides including Back to the Future at Universal Studios and the “Big Shot” acceleration ride atop the Stratosphere in Las Vegas. Parker breathes life into legendary characters and Wherever there is adventure… colossal creatures like the T-Rex shown here. At theme Parker makes it possible. parks everywhere, our high-tech “animatronics” create effects realistic enough for even the most close-up encounters (if you dare). 13
  14. 14. Driving Value for Our Customers and Investors Premier Customer Service On-site technical support — Parker provides in-depth, on-the-spot engineering know-how Premier customer service nets Parker a to customers all over the world. At Airbus facilities customer satisfaction rate consistently above Across a host of industries and around in Filton, England, and Toulouse, France, Parker’s 99 percent. the world, manufacturers rely on us for quality products technical teams are on the job supporting the and value-added services in motion and control: company’s design-and-build programs for two major Airbus properties: the A-340-500/600 and A3XX Automated inventory management — Parker’s proprietary “Par-Zap” technology helps aircraft. Parker experts participate in day-to-day Freightliner cut inventory and material handling costs. engineering, testing, and troubleshooting to ensure Par-Zap automates inventory levels and replenishment all systems are go for this high-flying customer. with just-in-time delivery. This allows Freightliner to System optimization and customized, eliminate centrally stored inventory and reduce in- kits — Working with Pierce pre-assembled process supplies on the factory floor. In three months, Manufacturing, the world’s leading manufacturer Parker’s Par-Zap system cut Freightliner’s inventory of fire-fighting apparatus, Parker reviewed the costs by as much as $800,000 per plant. hydraulic system on the company’s fire trucks to recommend design changes for more efficient operation, longer life and easier maintenance. Because these improvements could be life-saving, Parker quickly developed specialized kits with all of the components needed to make the new truck apparatus. Now providing 350 different components Value Driven in each kit, all under one part number and invoice, Parker’s custom solution means reduced procurement costs and shorter cycle times for Pierce. Customer Service Market Diversification Breeds Long-Term Loyalty Provides Balance Defection Indifference Affection Refrigeration Instrumentation Mining & mineral 10 & heating & controls processing equipment Infrastructure/ Heavy-duty trucks Loyalty 10=Highest 08 Electronic municipalities Factory equipment Consumer goods automation Machine tools 06 Lawn, garden Aerospace Material & turf equipment & Marine handling Power Agriculture & 04 Construction generation food processing Parker has a equipment Medical & Pulp & paper Customer 02 Rubber, analytical Satisfaction Entertainment plastics & Rate above 99% Oil & gas Semiconductor petrochemical exploration 0% 25% 50% 75% 100% Customer Satisfaction Premier service is Parker’s most vital distinction – to deliver With more than 1,400 product lines and thousands of capabilities that competitors can’t, offering customers applications, Parker’s business today is diversified widely full-line, global support and systematically engineered among aerospace, commercial and industrial sectors, solutions for all of their motion-control needs, which providing a constant balance among economic cycles ultimately generates trust and loyalty for long-term growth. and continuously renewable growth. 14
  15. 15. Michael J. Hiemstra, Electronic training and design certifi- Vice President – At, employees and distributors cation — Finance and Administration anywhere in the world can access training and and Chief Financial Officer certification modules for a variety of motion and control applications. And because Parker is the world’s leading authority in the engineering sciences of electronic, hydraulic and pneumatic muscle, we’ve developed a compact-disc series of computer-based training and reference resources to help customers optimize their motion-control applications. The CDs come in a variety of languages, and also are popular among engineering students who learn to specify Parker in their designs for predictable performance. Financial Performance Rapid response and made-to-order Our financial performance is solid. In S&P’s When the John Deere Company was products — index of diversified manufacturers, Parker is in building a prototype of its 5000B tractor for worldwide the top quartile when compared with peers commercialization, engineers discovered they needed in quality measures such as return on assets and a customized fitting solution to optimize the new earnings growth. We consistently exceed our tractor’s performance. With only three days to complete financial goals: the project, the Deere team turned to Parker, and we Sales growth — Five-year compound sales delivered. Within seven hours of receiving details on growth is 14 percent, against a goal of 7.5 percent. Deere’s urgent request, Parker was able to complete Earnings margin — Return on sales was the design, fabrication and assembly of the specialized 6.3 percent, even as international markets weakened fittings to make the newest Deere run. through the year. Parker’s Return on Average Assets Parker’s EPS Growth Exceeds Peer Group Leads Peer Group Parker Hannifin EPS Index Average EPS Parker Hannifin S&P Diversified Manufacturers* $3.00 12% 9% 2.50 6% 2.00 3% 1.50 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 Source: First Call As a measure of management discipline, Parker’s return Since July 1, 1995, Parker has outperformed the S&P on assets consistently outpaces its peers in the S&P index index of diversified manufacturers in earnings growth, of diversified manufacturers. shown here in a rolling comparison plotted to coincide with Parker’s fiscal year. * Given differences among the indexed companies’ fiscal closing dates, returns were calculated using the most recent SEC filings and annualized for 1999, while average assets reflect the average reported at year end and most recent SEC filings. 15
  16. 16. Profitable Growth segment, where the industry is anticipating slower build-rates for large airplanes, we launched cutbacks at Our people are intensely focused on profitable the facilities that support this market. growth. Our employees own 11 percent of All of these actions prove the integrity of our the company, and are fully incented to meet value philosophy. We made the adjustments as the our economic profit goals, charting a return markets warranted. We ran them through the income on sales and net assets exceeding the cost statement rather than recording a series of charges. of capital, and therefore creating real value. Each business unit keeps such a metric, with a And we are confident they will position us for volume common aim to exceed the cost-of-capital goal. and profit gains in the year 2000. We call it the “North-by-Northwest” metric, because Parker has tremendous capacity for growth. With moving in that direction – reducing net assets to sales the burgeoning development of Latin America, while increasing operating margins – is the surest Eastern Europe, Asia and the greater Pacific region, way to achieve economic profit. Inside Parker, this our motion and control systems will draw greater value-minded model is the performance measure demand than ever before: from basic infrastructure that ensures we’re realizing our full profit potential. to every kind of technological advancement… Parker By June 30 – the close of fiscal 1999’s fourth is established to serve these markets on-shore, and quarter – we were already realizing margin gains from grow with them around the world. steps we took earlier in the year to trim inventories As much as global development is a growth engine and workforce hours. We continued these efforts into for our business, it lends greater, more immediate the first quarter of the new year, with consolidation value potential when combined with the right designed to improve our profit performance in Europe acquisitions. We intend to lead the consolidation of and Latin America. We are shifting more production motion and control suppliers by offering prospective to our lowest-cost facilities and cutting selling, partners the best business profile in the industry: general and administrative expenses now that we have premier customer service, financial performance and our global enterprise system in place. In the aerospace long-term, profitable growth. Performance Metric Average Sales Assures Value Creation per Employee Corporate Goal 18% $150 FY95 FY96 140 FY97 Operating Margin 14% FY98 130 FY99 120 10% 110 0.40 0.50 0.60 0.70 1995 1996 1997 1998 1999 Net Assets/Sales (dollars in thousands) Our return-minded economic profit measure ensures Parker employees consistently prove they are our greatest every division of Parker is managing for value creation, strength: In five years, they doubled sales and continuously with common controls for effective asset utilization and increased productivity, with remarkable enthusiasm for margin realization. improving the performance of their company. 16