parker hannifin 0884_1-16_3

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.

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For the years ended June 30, 1999 1998 1997

Operating Data

Net sales $ 4,958,800 $ 4,633,023 $ 4,091,081

Income from operations 538,749 549,897 462,913

Net income 310,501 319,551 274,039

Per Share Data

Diluted earnings per share $ 2.83 $ 2.85 $ 2.44

Dividends .64 .60 .51

Book value 17.03 15.32 13.87

Ratios

Return on sales 6.3% 6.9% 6.7%

Return on average assets 8.6 9.8 9.3

Return on average equity 17.6 19.8 18.7

Debt to debt-equity 29.8 31.6 24.5

Other

Number of shareholders 39,380 44,250 43,014

Number of employees 38,928 39,873 34,927

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.

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

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Net SalesMillions of Dollars

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Income from OperationsMillions of Dollars

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Net IncomeMillions of Dollars

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Cash Flows From Operating Activities Millions of Dollars

The Year In Review

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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.

To Our Shareholders

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.

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In Motion…Leading the Industry The consolidation movement in industrial

markets is favorable for Parker. We lead our

industry, and have established the most

complete combination of motion and control

technologies for thousands of applications.

We have accompanied our customers around theworld, delivering on our promise of premier customerservice. Now, as more customers demand one-stopshopping and value-added capabilities, we have evengreater opportunities to enhance their performancewith wholly integrated systems.

In Control…Growing ProfitablyParker has the financial resources and discipline to growprofitably for the long term, through the ups and downsthat influence the markets we serve. For example, in the first half of fiscal 1999, there was a prevalent

slowdown among industrials. To ensure we’d bestronger on the upside of the cycle, we cut inventoriesby nearly $100 million in the second half of fiscal 1999,and began to see margins improve by end of the year.For the full year, we posted record sales, up seven percent despite the year’s softer industrial demand, with strong contributions from our aerospace businessand industrial acquisitions. Earnings in 1999 were relatively even with the prior year, off by two cents perdiluted share, and the fourth quarter showed sequentialimprovement. We again exceeded our return-on-sales(ROS) target, achieving 6.3 percent for the year, and inthe fourth quarter we reached 7.2 percent, our highestROS level since September 1997.

We also generated a record $459 million in cashfrom operations in 1999, bolstering our strong balancesheet for the right acquisition opportunities. Our

reputation for growing the businesses we buy

makes Parker the clear choice for companies

looking to gain the strengths of a larger partner.

Balanced Growth in Diverse MarketsIn the past five years, we built the business model forParker’s future growth. We now have the most compre-hensive product offering in the motion and controlindustry. Our operating groups have ever-broadeningmarkets in new products and applications, and jointly,they garner incremental growth from technology transfer and innovative systems. We are stronger thanever in our traditional markets, and we are driving new growth in non-traditional, high-tech markets.

We have the right combination of businesses, widely diversified in both product categories and geographic markets. Our operating units have their own cycles, and all are balanced with a mix of original-equipment and aftermarket revenues. We have a measured stake in mature and emergingeconomies, and among the many industries we serve. In our Aerospace segment, sales are divided among

commercial and military contracts, with additional dispersion in general and private aviation markets.

Among our largest industrial customers, none todayapproaches four percent of sales. In these industrial markets, customer-direct transactions account for 50percent of North American sales, and nearly 70 percentin the rest of the world. Yet we also have the largest distribution force in the industry – a competitively enviable asset that is not reflected on the balance sheet.

Parker is committed to offer products on the customers’ terms. We launched technical certificationprograms for distributors to develop field-engineeringservices to create system solutions for our customers,and in turn enhance the performance of their operations.At parker.com, we are developing the industry’s mostadvanced e-commerce capabilities to provide onlineengineering, trouble-shooting and fulfillment.

Having recently completed international imple-mentation of our enterprise information system, we are now able to manage our worldwide business

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Built for Profitable GrowthParker 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.

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more efficiently, with real-time, global reporting on customer demand, production, inventory and capital.This enables us to fully realize our ability to delivermulti-component solutions on a single purchase order;to concurrently engineer products around the globe;and efficiently handle multiple currencies. The systemalso ensures year-2000 compliance.

Positioned for Global GrowthWe are establishing a second wholly owned foreignenterprise in China, and expanding our low-cost facilities in the Czech Republic and Poland. Our threenew Korean businesses are performing ahead of expectations, and we are expanding in India with atrading subsidiary and distribution facility.

We completed four acquisitions in 1999, totalingroughly $115 million in annualized sales: Fluid

Power Systems provides solutions to global mobile

equipment manufacturers. Veriflo Corporation

strengthens our position in the medical, analytical,petrochemical and semiconductor industries Cougar

Valves and Fittings broadens our product offerings inthe Australian-Asian market. Jinyoung Electric

Machinery of Korea manufactures automation compo-nents serving growing demand in Asia and Europe.

We also completed a 33.4-percent equity investmentvia a strategic alliance with Tokyo-based KurodaPrecision Industries. Our stake in the $120-million company establishes a strong base in the importantJapanese pneumatics market, with additional opportu-nities to market Kuroda products outside Japan at atime of growing global demand for factory automation.

We remain focused on our primary objectives:Premier customer service; Financial

performance; and Profitable growth.

In fiscal 2000, we are taking further steps to align our business as we anticipate weak internationalindustrial markets and slowing in commercial aircraft.

As we consolidate operations and reduce costs in theseareas, the immediate effect will curtail first-quarterearnings, but position us for both volume and earningsgrowth in the full year.

This year, we promoted three executives to ourcorporate management team: Claus Beneker leads our engineering efforts as Chief Technical Officer; Lynn Cortright continues to grow our Climate &Industrial Controls business as Group President; and Tom Piraino oversees legal affairs as GeneralCounsel and Secretary.

Throughout the year, you can expect to hear more about our growth strategies. We are stepping up efforts to establish the respected Parker name as the foremost brand in motion and control, with an aim to win more business on the product breadth and system capabilities that are our most powerful competitive advantages.

This report is an example of that effort,

to convey three things about Parker we want

all investors to know: We are dynamic.

We are diversified. And we are committed

to creating value in everything we do.

To those of you who already own our stock, wethank you for entrusting your capital to us. We willcontinue to use these proceeds to make value-mindedinvestments in Parker’s growth. We thank every one ofthe 400,000 customers around the globe who honor uswith their business. And most of all, we thank all ofour Parker employees, who have doubled our sales overthe past five years, and who are working to achieve the ambitious vision we have for the company: to be everywhere in the world, on everything that moves.

Patrick S. Parker, Duane E. Collins,

Chairman of the Board President and Chief Executive Officer

September 13, 1999

Strategic Acquisitions

GlobalExpansion

New Applications Climate & Industrial Controls

AutomationAerospace

Hydraulics

Fluid Connectors Seals

Filtration

Instrumentation

INCREMENTAL GROWTH LONG-TERM GROWTH

SystemsNew ProductsTech Transfer

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Progress

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Our climate control systems ensure a comfortable working environment inside thetruck and constructionequipment cabs.

Our filtration systemsremove 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.

Our sealing technologyenables cell phones tooperate clearly, personalcomputers to performwithout overheating and ensures hydraulicconstruction equipmentremains leak-free andenvironmentally friendly.

Our instrumentation products are critical to the manufacture ofintegrated circuits usedin 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’sretractable roof.

Parker Makes It Possible

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Quality

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Our filters in engine vent systems protect the environment.

Our fluid connector,hydraulic, automation and filtration componentsin machine tools manufacture thousands of products includingtrucks, automobiles and shopping carts.

Our automation components package food products and aid in material handling to get products wherethey need to be.

And, our filtration and clarification systems ensure manyfoods and beverages,including potato chips,taste better.

Our engineering expertise helped Jeep create its Quadra-drivesystem 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 sealingtechnologies are used inheavy-duty truck braking,fuel, power steering andairbag systems helping to transport goods and services safely.

Our hydraulic pumps are used in syntheticfiber production makingdurable fabrics for clothing and upholstery.


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Enterprise

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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 rightprograms for the future.

And, our strategy to follow the customer globally is paying off.Parker’s Asia PacificGroup is headquartered in Hong Kong and we’reestablishing our secondwholly owned foreignenterprise in China.Parker is well positionedto serve thousands of multi-national customers everyday.

On site at the world’sbusiest and most efficient container port in Hong Kong, our filters,pneumatic, hydraulic,fluid connectors and sealing technologies liftand precisely positioncargo for shipmentaround the world.

Our hydraulic, filtration,fluid connectors and sealing technologiespower winches and propel diesel engines in a wide variety ofmarine applications.

Our instrumentation components, filtration and gas turbine productsare used in power generation applicationsproviding electricity tomillions of people.


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GrowingTelecommunication

Most of the world’s population have no access to basictelephone service. In fact, less than one-fifth of the earth’s surface is wired for telephones and mostdeveloping 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 wirelesscommunication becomes more and more widespread,Parker products will connect people more easily byeliminating interference problems.

Beyond portable telephones and satellite dishes,Parker products are in many other electronic devicesthat you’ve already purchased or will want soon.

Wherever there is communication… Parker makes it possible.

Entertainment

From movies to motorsports, when you’re being entertained… Parker plays a major role.

Parker products make cameo appearances in manyhit movies, including the epic film Titanic, which used Parker hydraulics to sink the set of the movierepeatedly – imitating the original disaster. In themovie Batman & Robin, Parker provided the lift androtating functions for the Batlift.

Additionally, our fluid connector systems areimproving the performance of race cars at tracks everywhere, and our components create the thrillingmotion for state-of-the-art ride simulators, includingthose 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, offer guests a unique dining experience with help from Parker motion and control systems.

Wherever there is excitement…Parker makes it possible.

Dynamic

Satellites provide wireless, real-time communication for people everywhere, and Parker electromechanical technology precisely rotates dishes for maximum transmission efficiency.

At the Bellagio resort in Las Vegas, Parker’s computerizedcontrols move more than 1,000 dancing fountains performing water ballet synchronized to classical music, and our brass fittings are part of a sophisticated air purgingsystem that keeps the computerized electronics dry.

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Parker…More Diversified

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Animation

Attractions everywhere rely on Parker technology tomake your experience more realistic and memorable.Moving and breathing dinosaurs at Universal StudiosFlorida, Sea World and Disney World, are all broughtto life by Parker motion and control systems.

Additionally, our products go behind-the-scenes inmovies like JAWS, where we control the motion of thekiller 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 alsomove you on rides and attractions at theme parksaround the world. Parker systems lift, shake and dropthrill rides including Back to the Future at UniversalStudios and the “Big Shot” acceleration ride atop theStratosphere in Las Vegas.

Wherever there is adventure…Parker makes it possible.

Exploration

Space programs around the world use Parker products to seal shuttle windows, hatches, and igniters; connectastronaut 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 Parkeris there. Our valves deflate cuffs on blood pressuremachines, control ventilator oxygen levels and movefluid to and from dialysis patients. And, our climate controls cool insulin for pharmaceutical companies.

For Parker, exploration extends beyond medicaland aerospace markets. Our products probe the oceanfloor on research and recovery robots. And, we go even deeper. Parker hose and tubing plunge throughthe ocean floor, bringing natural resources such as oil to the surface.

Wherever there is discovery…Parker makes it possible.

Precise

The International Space Station is humankind’s highest construction project, and Parker provides vital onboard technologies to sustain a controlled environment for theastronauts and their research.

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Parker breathes life into legendary characters and colossal creatures like the T-Rex shown here. At theme parks everywhere, our high-tech “animatronics” create effects realistic enough for even the most close-up encounters (if you dare).

Exciting

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Premier Customer ServicePremier customer service nets Parker a customer satisfaction rate consistently above99 percent. Across a host of industries and around the world, manufacturers rely on us for quality products and value-added services in motion and control:

Automated inventory management —Parker’s proprietary “Par-Zap” technology helpsFreightliner cut inventory and material handling costs.Par-Zap automates inventory levels and replenishmentwith just-in-time delivery. This allows Freightliner toeliminate centrally stored inventory and reduce in-process supplies on the factory floor. In three months,Parker’s Par-Zap system cut Freightliner’s inventorycosts by as much as $800,000 per plant.

On-site technical support — Parker provides in-depth, on-the-spot engineering know-howto customers all over the world. At Airbus facilities in Filton, England, and Toulouse, France, Parker’s technical teams are on the job supporting the company’s design-and-build programs for two majorAirbus properties: the A-340-500/600 and A3XX aircraft. Parker experts participate in day-to-day engineering, testing, and troubleshooting to ensure all systems are go for this high-flying customer.

System optimization and customized, pre-assembled kits — Working with PierceManufacturing, the world’s leading manufacturer of fire-fighting apparatus, Parker reviewed thehydraulic system on the company’s fire trucks to recommend design changes for more efficient operation, longer life and easier maintenance. Becausethese improvements could be life-saving, Parkerquickly developed specialized kits with all of the components needed to make the new truckapparatus. Now providing 350 different componentsin each kit, all under one part number and invoice,Parker’s custom solution means reduced procurementcosts and shorter cycle times for Pierce. ValueDriven

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With more than 1,400 product lines and thousands of applications, Parker’s business today is diversified widelyamong aerospace, commercial and industrial sectors, providing a constant balance among economic cycles and continuously renewable growth.

Premier service is Parker’s most vital distinction – to delivercapabilities that competitors can’t, offering customers full-line, global support and systematically engineered solutions for all of their motion-control needs, which ultimately generates trust and loyalty for long-term growth.

Market Diversification Provides Balance

Customer Service Breeds Long-Term Loyalty

Refrigeration & heating equipment

Electronic equipment

Machine tools

Material handling

Construction equipment

Rubber, plastics & petrochemical

Instrumentation & controls

Infrastructure/ municipalities

Consumer goods

Lawn, garden & turf equipment

Power generation

Medical & analytical

Oil & gas exploration

Mining & mineral processing

Heavy-duty trucks

Factory automation

Aerospace & Marine

Agriculture & food processing

Pulp & paper

Entertainment

Semiconductor

Driving Value for Our Customers and Investors

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Electronic training and design certifi-cation — At parker.com, employees and distributorsanywhere in the world can access training and certification modules for a variety of motion and control applications. And because Parker is the world’sleading authority in the engineering sciences of electronic, hydraulic and pneumatic muscle, we’vedeveloped a compact-disc series of computer-basedtraining and reference resources to help customers optimize their motion-control applications. The CDscome in a variety of languages, and also are popularamong engineering students who learn to specify Parker in their designs for predictable performance.

Rapid response and made-to-order products — When the John Deere Company was building a prototype of its 5000B tractor for worldwidecommercialization, engineers discovered they needed a customized fitting solution to optimize the new tractor’s performance. With only three days to completethe project, the Deere team turned to Parker, and wedelivered. Within seven hours of receiving details onDeere’s urgent request, Parker was able to complete the design, fabrication and assembly of the specializedfittings to make the newest Deere run.

Financial PerformanceOur financial performance is solid. In S&P’sindex of diversified manufacturers, Parker is inthe top quartile when compared with peers in quality measures such as return on assets andearnings growth. We consistently exceed ourfinancial goals:

Sales growth — Five-year compound salesgrowth is 14 percent, against a goal of 7.5 percent.

Earnings margin — Return on sales was 6.3 percent, even as international markets weakenedthrough the year.

Michael J. Hiemstra,Vice President – Finance and Administration and Chief Financial Officer

As a measure of management discipline, Parker’s return on assets consistently outpaces its peers in the S&P indexof diversified manufacturers.

Parker’s Return on Average AssetsExceeds Peer Group

2.00

2.50

$3.00

1.50

1995 1996 1997 1998 1999

Parker Hannifin EPS Index Average EPS

Source: First Call

Since July 1, 1995, Parker has outperformed the S&P index of diversified manufacturers in earnings growth,shown here in a rolling comparison plotted to coincidewith Parker’s fiscal year.

Parker’s EPS Growth Leads Peer Group

*Given differences among the indexed companies’ fiscal closing dates, returns werecalculated using the most recent SEC filings and annualized for 1999, whileaverage assets reflect the average reported at year end and most recent SEC filings.

3%

6%

9%

12%

1995 1996 1997 1998 1999

Parker Hannifin S&P Diversified Manufacturers*

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Profitable GrowthOur people are intensely focused on profitablegrowth. Our employees own 11 percent of the company, and are fully incented to meet our economic profit goals, charting a return on sales and net assets exceeding the cost of capital, and therefore creating real value.Each business unit keeps such a metric, with a common aim to exceed the cost-of-capital goal. We call it the “North-by-Northwest” metric, becausemoving in that direction – reducing net assets to saleswhile increasing operating margins – is the surest way to achieve economic profit. Inside Parker, thisvalue-minded model is the performance measure that ensures we’re realizing our full profit potential.

By June 30 – the close of fiscal 1999’s fourth quarter – we were already realizing margin gains fromsteps we took earlier in the year to trim inventories and workforce hours. We continued these efforts intothe first quarter of the new year, with consolidationdesigned to improve our profit performance in Europeand Latin America. We are shifting more productionto our lowest-cost facilities and cutting selling, general and administrative expenses now that we haveour global enterprise system in place. In the aerospace

segment, where the industry is anticipating slowerbuild-rates for large airplanes, we launched cutbacks atthe facilities that support this market.

All of these actions prove the integrity of ourvalue philosophy. We made the adjustments as themarkets warranted. We ran them through the incomestatement rather than recording a series of charges.And we are confident they will position us for volumeand profit gains in the year 2000.

Parker has tremendous capacity for growth. Withthe burgeoning development of Latin America,Eastern Europe, Asia and the greater Pacific region,our motion and control systems will draw greaterdemand than ever before: from basic infrastructure to every kind of technological advancement… Parkeris established to serve these markets on-shore, and grow with them around the world.

As much as global development is a growth enginefor our business, it lends greater, more immediate value potential when combined with the right acquisitions. We intend to lead the consolidation ofmotion and control suppliers by offering prospectivepartners the best business profile in the industry: premier customer service, financial performance and long-term, profitable growth.

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Corporate Goal

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Our return-minded economic profit measure ensures every division of Parker is managing for value creation, with common controls for effective asset utilization and margin realization.

Performance Metric Assures Value Creation

Parker employees consistently prove they are our greateststrength: In five years, they doubled sales and continuouslyincreased productivity, with remarkable enthusiasm forimproving the performance of their company.

Average Sales per Employee

120

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$150

110

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parker hannifin 0884_1-16_3

Economy & Finance