UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ý☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20162019
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
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| Ohio | 34-0451060 |
(State or other jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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| 6035 Parkland Boulevard, | Cleveland, | Ohio | 44124-4141 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (216)(216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbol | | Name of Each Exchange on which Registered |
| Common Shares, $.50 par value | | PH | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesý☒ No ¨☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐Noý☒
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. Yesý☒ No ¨☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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). Yesý☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý.☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer:Filer | ý☒ | Accelerated Filer:Filer | ¨☐ |
Non-Accelerated Filer:Filer | ¨☐ | Smaller Reporting Company:Company | ¨
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| (Do not check if a smaller reporting company) | | | |
| Emerging Growth Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒
The aggregate market value of the outstanding common stock held by non-affiliates of the Registrant as of December 31, 2015, excluding, for purpose of this computation only, stock holdings of the Registrant’s Directors and Officers: $12,945,310,211.2018: $19,209,620,506.
The number of Common Shares outstanding on July 31, 20162019 was 133,901,044.128,441,799.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company’s 20162019 Annual Meeting of Shareholders, to be held on October 26, 201623, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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| PART I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
Item 1C. | | |
Item 2. | | |
Item 3.1C. | | |
Item 4.2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
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PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 20162019
PART I
ITEM 1. Business.Parker-Hannifin Corporation 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 was incorporated in Ohio in 1938. ItsOur principal executive offices are located at 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, telephone (216) 896-3000. As used in this Annual Report on Form 10-K, unless the context otherwise requires, the termterms "Company" refers, "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries, and the term "year" and references to specific years refer to the applicable fiscal year.
The Company’sOur investor relations internet website address is www.phstock.com. The Company makesWe make available free of charge on or through itsour website itsour annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after filing or furnishing such materialthose reports electronically with the Securities and Exchange Commission. The information contained on or accessible through the Company’sour website is not part of this Annual Report on Form 10-K.
The Board of Directors has adopted a written charter for each of the committees of the Board of Directors.its committees. These charters, as well as the Company’sour Global Code of Business Conduct, Board of Directors Guidelines on Significant Corporate Governance IssuesGuidelines and Independence Standards for Directors, are posted and available on the Company’sour investor relations internet website at www.phstock.com under the Corporate Governance page. Shareholders may request copies of these corporate governance documents, free of charge, by writing to Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, Attention: Secretary, or by calling (216) 896-3000.
The Company’sOur manufacturing, service, sales, distribution and administrative facilities are located in 3937 states within the United States and in 4849 other countries. The Company’sWe sell our products are sold as original and replacement equipment through sales and distribution centers worldwide. The Company markets itsWe market our products through direct-sales employees, independent distributors and sales representatives. The Company'sWe supply products are supplied to approximately 444,000459,000 customers in virtually every significant manufacturing, transportation and processing industry.
The Company hasWe have two reporting segments: Diversified Industrial and Aerospace Systems. During 2016, the Company's2019, our technologies and systems were used in the products of these two reporting segments. For 2016, total2019, the Company's net sales were $11.4$14.3 billion. Diversified Industrial Segment products accounted for 80%82% and Aerospace Systems Segment products accounted for 20%18% of those net sales.
Markets
The Company’sOur technologies and systems are used throughout various industries and in various applications. The approximately 444,000459,000 customers who purchase the Company’sParker products are found throughout virtuallyin almost every significant manufacturing, transportation and processing industry. No single customer accounted for more than 4%3% of the Company’sour total net sales for the year ended June 30, 2016.2019.
Diversified Industrial Segment. Sales of Our Diversified Industrial Segment sells products are made primarily to both original equipment manufacturers ("OEMs") and theirdistributors who serve the replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment industries. The major markets for products of theserved by our Diversified Industrial Segment are listed below by group:
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Automation
Group: | • Battery Energy Storage
• Factory automation
• Food and beverage
• Heavy industry
• Industrial machinery
| • Life sciences
• Packaging
• Semiconductor and electronics
• Transportation
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| Engineered Materials Group: | • Aerospace • Agriculture • Chemical processing • Consumer • Fluid power
• General industrialConstruction
• Information technology • Life sciences
| • Microelectronics
| • Military • Oil and& gas • Power generation • Renewable energy • Telecommunications • Transportation
• Truck & bus |
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Filtration
Group: | • Agriculture • Aerospace and& defense • Construction • Food and& beverage • Heating, ventilation & air conditioning (HVAC) • Industrial machinery • Life sciences
| • Marine
| • Mining • Oil and& gas • Power generation • Renewable energy • Transportation • Water purification
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Fluid
Connectors
Group: | • Aerial lift • Agriculture • Bulk chemical handling • Construction machinery • Food and& beverage • Fuel and& gas delivery • Industrial machinery
| • Life sciences • Marine • Mining • Mobile • Oil and& gas • Renewable energy • Transportation
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Hydraulics
Instrumentation
Group:
| • Aerial lift
• Agriculture
• Air conditioning • Alternative fuels • Construction machineryAnalytical • EntertainmentChemical • ForestryDiesel engine • Food & beverage • Industrial machinery • Machine tools
• Marine
| • Material handlingLife sciences • MiningMicroelectronics • Oil and& gas • Refining • Power generationRefrigeration • Recreational vehiclesTransportation
• Refuse vehicles
• Renewable energy
• Truck hydraulics
• Turf equipment
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Instrumentation
Motion Systems
Group: | Mobile: • Air conditioningAgriculture • Construction • Alternative fuelsMarine • Bio pharmaceuticalsMaterial handling • Military • ChemicalTransportation • Food and beverageTruck & bus • Life sciencesTurf | Industrial: • MicroelectronicsDistribution
• General machinery
| • Machine tool • Mining • Oil and& gas • Pharmaceuticals
• Power generation • RefiningSemiconductor • Refrigeration
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• Water/wastewater
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Aerospace Systems Segment. Sales of the Our Aerospace Systems Segment sells products are made primarily in the commercial and military aerospace markets to both OEMs and to end users for spares, maintenance, repair and overhaul. The major markets for products of the Aerospace Systems Segment are listed below:
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• Aftermarket services • Commercial transports • Engines • General and& business aviation • Helicopters | • Military aircraft | • Missiles • Power generation • Regional transports • Unmanned aerial vehicles • Aftermarket services
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Principal Products and Methods of Distribution
Although the Company offersWe offer hundreds of thousands of individual products, and no single product contributed more than 1% to the Company’sour total net sales for the year ended June 30, 2016.2019. Listed below are some of the Company’sour principal products.
Diversified Industrial Segment. The products produced by the Company’s Our Diversified Industrial Segment products consist of a broad range of motion-control and fluid systems and components, which are described below by group:
Automation Group: pneumatic, fluidic and electromechanical components and systems, including:
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• Air regulators/filters
• Electric actuators and stages
• Fluid control valves
• Fluid system mass flow meters/controllers
• Grippers
• Inverters
• Miniature air/liquid pumps
| • Motion controllers
• Pneumatic control valves
• Pneumatic cylinders
• Pressure and flow controls
• Servo motors and drives
• Solenoid valves
• Vacuum variable frequency drives
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Engineered Materials Group: static and dynamic sealing devices, including:
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• Dynamic seals • Elastomeric o-rings • Electro-medical instrument design and assembly
• Electromagnetic interference shielding • Extruded and precision-cutExtrusion & fabricated elastomeric seals • High-temperature metal seals
| • Homogeneous and& inserted elastomeric shapes • Medical deviceproducts fabrication and& assembly • Metal and& plastic retained composite bonded seals • Shielded optical windows • Silicone tubing and extrusionsPrecision-cut seals
• Thermal management • Vibration dampening
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Filtration Group: filters, systems and diagnostics solutions to monitor and remove contaminants from fuel, air, oil, water and other liquids and gases, including:
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• Aerospace filters and& systems • Air pollution control & dust collection systems & filters • Compressed air and& gas treatment solutions • Engine fuel, oil, air and& closed crankcase ventilation filtration systems • Filtration and& purification systems • Fluid condition monitoring systems • Hydraulic and lubricationGas turbine air inlet filters
• Heating, ventilation & air conditioning filters
| • Hydraulic & lubrication filters & systems • Industrial and& analytical gas generators • Instrumentation filters • Membrane, and fiber, & sintered metal filters • Natural gas filters • Process liquid, air and& gas filters • Sterile air filters • Water purification filters and& systems |
Fluid Connectors Group: connectors which control, transmit and contain fluid, including:
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• Check valves • Diagnostic equipment and IoT sensors • Hose couplings • Hose crimpers • Industrial hose • Low pressure fittings and& adapters
| • Polytetrafluoroethylene ("PTFE")(PTFE) hose and& tubing • Quick couplings • Rubber and& thermoplastic hose • Tube fittings and& adapters • Tubing and& plastic fittings
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Hydraulics Group: hydraulic components and systems for builders and users of industrial and mobile machinery and equipment, including:
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• Accumulators
• Cartridge valves
• Coolers
• Electrohydraulic actuators
• Electronic displays and human machine interfaces
• Electronic I/O controllers
• Fan drives
• Hybrid drives
• Hydraulic cylinders
• Hydraulic motors and pumps
| • Hydraulic systems
• Hydraulic valves and controls
• Hydrostatic steering units
• Integrated hydraulic circuits
• Intensifiers
• Power take-offs
• Power units
• Rotary actuators
• Sensors
• Telematic controllers
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Instrumentation Group: high quality flow control solutions that are critical to a wide range of applications involving extreme corrosion resistance, temperatures, pressures and precise flow, components for process instrumentation, healthcare and ultra-high-purity applications and components for use in refrigeration and air conditioning systems and in fluid control applications for processing, fuel dispensing, beverage dispensing and mobile emissions, including:
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• Accumulators • Analytical instruments and& sample conditioning systems • Carbon dioxide controls
• Compressed natural gas dispensers • Cryogenic valves • Electronic controllersvalves • Electronic valvesEmissions • Filter driers
| • Fluid system & control fittings, meters, valves, regulators, and& manifold valves
| • Fluoropolymer chemical delivery fittings, valves and& pumps • High pressure fittings, valves, pumps and& systems • High-purity gas delivery fittings, valves and& regulators • Miniature valves & pumps • Natural gas on-board fuel systems • Pressure regulating valves • Refrigeration and& air conditioning electronic controls and& monitoring
• Solenoid valves
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Motion Systems Group: hydraulic, pneumatic, and electromechanical components and systems for builders and users of mobile and industrial machinery and equipment, including:
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Hydraulic Actuation: • Cylinders • Rotary actuators • Helical actuators • Accumulators • Electrohydraulic actuators • Coolers Hydraulic Pumps & Motors: • Piston pumps & motors • Vane pumps & motors • Gerotor pumps & motors • Power take-offs • Fan drives • Electrohydraulic pumps • Drive controlled pumps • Screw pumps • Integrated hydrostatic transmissions
| Hydraulic and Electro Hydraulic Systems: • Hydraulic valves • Cartridge valves • Industrial valves • Mobile valves Pneumatics: • Pneumatic valves • Air preparation (FRL) & dryers • Pneumatic cylinders • Grippers • IO link controllers Electronics: • Electric actuators & positioners • Electronic displays & human machine interfaces (HMI) • Controllers & HMI • Sensors • IoT • Electric motors & gearheads • Drives (AC/DC Servo) • Joysticks • Clusters • Software |
Diversified Industrial Segment products include standard products, as well as custom products which are engineered and produced to OEMs’OEM specifications for application to particular end products. Both standardStandard and custom products are also used in the replacement of original products. We market our Diversified Industrial Segment products are marketed primarily through field sales employees and approximately 13,20015,500 independent distributor locations throughout the world.
Aerospace Systems Segment. The principal products of the Company’s Our Aerospace Systems Segment products are used onin commercial and military airframe and engine programs and include:
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• Control actuation systems and& components • Engine systems and& components • Fluid conveyance systems and& components • Fluid metering, delivery and& atomization devices • Fuel systems and& components • Fuel tank inerting systems
| • Hydraulic systems and& components • Lubrication components • Pneumatic control components • Power conditioning and& management systems • Thermal management • Wheels and& brakes |
We market our Aerospace Systems Segment products are marketed by the Company’sthrough our regional sales organizations, and are soldwhich sell directly to original equipment manufacturersOEMs and end users throughout the world.
Competition
The Company’s businessParker operates in highly competitive markets and industries. The Company offers itsWe offer our products over numerous, varied markets through itsour divisions operating in 49 countries and consequently has50 countries. Our global scope means that we have hundreds of competitors when viewed across itsour various markets and product offerings. The Company’sOur competitors include U.S. and non-U.S. companies. These competitors and the degree of competition vary widely by product lines, end markets, geographic scope and/or geographic locations. Although each of the Company’sour segments has numerous competitors, given the Company’sour market and product breadth, no single competitor competes with the Company with respect to all the products manufacturedwe manufacture and sold by the Company.sell.
In the Diversified Industrial Segment, the CompanyParker competes on the basis of product quality and innovation, customer service, manufacturing and distribution capability, and price competitiveness. The Company believesWe believe that it iswe are one of the market leaders in most of the major markets for itsour most significant Diversified Industrial Segment products. The Company hasWe have comprehensive motion and control packages for the broadest systems capabilities. While the Company’sour primary global competitors include Bosch Rexroth AG, Danaher Corporation, Danfoss A/S, Donaldson Company, Inc., Eaton Corporation plc, Emerson Climate Technologies, Inc., Emerson/ASCO, Festo AG & Co., Freudenberg-NOK, Gates Corporation, IMI/Norgren, SMC Corporation, Swagelok Company, and Trelleborg AB, none of these businesses compete with every group or product in the Company'sour Diversified Industrial Segment and every product line offered by this segment.Segment.
In the Aerospace Systems Segment, the Company haswe have developed alliances with key customers based on the Company’sour advanced technological and engineering capabilities, superior performance in quality, delivery, and service, and price competitiveness, whichcompetitiveness. This has enabled the Companyus to obtain significant original equipment business on new aircraft programs for itsour systems and components and to thereby obtainas well as the follow-on repair and replacement business for these programs. Further, the Aerospace Systems Segment is able to utilizeutilizes low-cost manufacturing techniques for similar products in the Diversified Industrial Segmentand best cost region strategies to achieve a lower cost producer status. Although the Company believeswe believe that it iswe are one of the market leaders in most of the major markets for itsour most significant Aerospace Systems Segment products, the Company’s primary global competitors for the most significant Aerospace Systems Segmentthese products include Eaton Corporation plc, Honeywell International, Inc., Moog Inc., Triumph Group, Inc., UTC Collins Aerospace, Systems, Woodward, Inc. and Zodiac Aerospace SA.Safran S.A.
The Company believesWe believe that itsour platform utilizing nineeight core technologies, which consist of aerospace, electromechanical, filtration, fluid handling, hydraulics, pneumatics, process control, refrigeration, and sealing and shielding, is a positive factor in itsour ability to compete effectively with both large and small competitors. For both of itsour segments, the Company believeswe believe that the following factors also contribute to itsour ability to compete effectively:
decentralized operating structure that allows each division to focus on its customersbusiness model;
technology breadth and respond quickly atinterconnectivity;
engineered products with intellectual property;
long product life cycles;
balanced OEM vs. aftermarket;
low capital investment requirements; and
great generators and delployers of cash over the local level;
systems solution capabilities that use the Company’s core technologies from both of its segments;
global presence; and
a strong global distribution network.
Research and Product Development
The Company continually researches the feasibility of new products and services through its development laboratories and testing facilities in many of its worldwide manufacturing locations. Its research and product development staff includes chemists, physicists, and mechanical, chemical and electrical engineers.
Total research and development costs relating to the development of new products and services and the improvement of existing products and services amounted to $359.8 million in 2016, $403.1 million in 2015 and $410.1 million in 2014. These amounts include costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Costs incurred in connection with research and development contracts and included in the total research and development costs reported above for 2016, 2015 and 2014 were $58.0 million, $57.8 million and $55.9 million, respectively.cycle.
Patents, Trademarks, Licenses
The Company ownsWe own a number of patents, trademarks, copyrights and licenses related to its products and hasour products. We also have exclusive and non-exclusive rights to use a number of patents, trademarks and copyrights owned by others. In addition, patent and trademark applications on certain products are now pending, although there can be no assurance that further patents and trademarks will be issued. The Company isWe do not dependent to any material extentdepend on any single patent, trademark, copyright or license or group of patents, trademarks, copyrights or licenses.licenses to any material extent.
Backlog and Seasonal Nature of Business
Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale. The Company'sOur backlog by business segment for the past two years is included in Part II, Item 7 of this Annual Report on Form 10-K and is incorporated herein by reference. The Company’sOur backlog was $3.2$4.2 billion at June 30, 20162019 and $3.3$4.1 billion at June 30, 2015.2018. Approximately 86%90 percent of the Company’sour backlog at June 30, 20162019 is scheduled for delivery in the succeeding twelve months. The Company’sBecause of the breadth and global scope of our business, our overall business is generally not seasonal in nature.
Environmental Regulation
Certain of the Company’sour operations necessitaterequire the use and handling of hazardous materials and, as a result, the Company is subject to United States federal, state, and local laws and regulations as well as non-U.S. laws and regulations designed to protect the environment and regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damage and personal injury resulting from past and current spills, disposals or other releases of, or exposures to, hazardous materials. Among other environmental laws, the Company iswe are subject to the United States federal "Superfund" law, under which the Company haswe have been designated as a "potentially responsible party" and may be liable for cleanup costs associated with various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list.
As of June 30, 2016, the Company2019, Parker was involved in environmental remediation at various United StatesU.S. and non-U.S. manufacturing facilities presently or formerly operated by the Companyus and as a "potentially responsible party," along with other companies, at off-site waste disposal facilities and regional sites.
The Company believesWe believe that itsour policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management efforts and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes,we believe, will not have in the future, a material adverse effect on theour capital expenditures, earnings, or competitive position of the Company.position.
As of June 30, 2016, the Company had aOur reserve of $15.2 million for environmental matters that were probableis discussed in Note 16 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and reasonably estimable. This reserve was recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions requiredis incorporated herein by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
The Company’s estimated total liability for the above mentioned sites ranges from a minimum of $15.2 million to a maximum of $80.6 million. The largest range of the estimated total liability for any one site is approximately $7.6 million. The actual costs to be incurred by the Company will be dependent on final determination of contamination and required remedial action, negotiations with governmental authorities with respect to cleanup levels, changes in regulatory requirements, innovations in investigatory and remedial technologies, effectiveness of remedial technologies employed, the ability of the other responsible parties to pay, and any insurance or other third-party recoveries.reference.
Energy Matters and Sources and Availability of Raw Materials
The Company’sOur primary energy source for both of itsour business segments is electric power. While the Companywe cannot predict future costs of electric power, the primary source for production of the required electric power willis expected to be coal and natural gas from substantial, proven coal and natural gas reserves available to electric utilities. The Company isWe are subject to governmental regulations in regard to energy supplies in the United States and elsewhere. To date, the Company haswe have not experienced any significant disruptions of itsour operations due to energy curtailments.
Steel,We primarily use steel, brass, copper, aluminum, nickel, rubber and thermoplastic materials and chemicals areas the principal raw materials used by the Company. Thesein our products. We expect these materials areto be available from numerous sources in quantities sufficient to meet the requirements of the Company.our requirements.
Employees
The Company employedWe employ approximately 48,95055,610 persons as of June 30, 2016,2019, of whom approximately 26,28028,500 were employed by foreign subsidiaries.
Business Segment InformationAcquisitions
The Company’s net sales, segment operating incomeCompany made no material acquisitions in 2019. During 2019, we entered into a definitive agreement under which we expect to acquire LORD Corporation ("Lord"). The proposed Lord acquisition and assets by business segment and net sales and long-lived assets by geographic area forprior-year acquisitions are discussed in Note 3 to the past three years areConsolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. On July 29, 2019, the Company announced that it had entered into a definitive agreement to acquire EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic"). The proposed Exotic acquisition is discussed in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 1A. 1A. Risk Factors.
The following "risk factors" identify what the Company believeswe believe to be the risks that could materially adversely affect the Company’sour financial and/or operational performance. These risk factors should be considered and evaluated together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K. Additional risks not currently known to the Company or that the Company currently believes are immaterial also may impair the Company’s business, financial condition, results of operations and cash flows.
The Company may be subject to risks
Risks arising from uncertainty in worldwide and regional economic conditions.conditions may harm our business and make it difficult to project long-term performance.
The Company'sOur business is sensitive to global macro-economic conditions. Slow economic growth persists in the economic regions in which the Company conducts substantial operations. The continued effects of the global economic downturn and the rate of recoveryFuture macroeconomic downturns may have an adverse effect on theour business, results of operations and financial condition, of the Company and itsas well as our distributors, customers and suppliers, and on the general economic activity in many of the industries and markets in which the Company and its distributors, customers and suppliers operate.we serve. Among the economic factors which may have such an effect are manufacturing and other end-market activity, currency exchange rates, air travel trends, difficulties entering new markets, tariffs and governmental trade and monetary policies, and general economic conditions such as inflation, deflation, interest rates and credit availability. These factors may, among other things, negatively impact theour level of purchases, capital expenditures, and creditworthiness, of the Company and itsas well as our distributors, customers and suppliers, and, therefore, the Company’s revenues, operating profits, margins, and order rates.
The Company has remained focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The CompanyWe cannot predict changes in worldwide or regional economic conditions and government policies, as such conditions are highly volatile and beyond the Company’sour control. If these conditions deteriorate or do not return to previousremain at depressed levels for extended periods, however, the Company’sour business, results of operations and financial condition could be materially adversely affected.
The Company may be subjectAs a global business, we are exposed to economic, political and other risks relating to its non-U.S. operations.in different countries in which we operate, which could materially reduce our sales, profitability or cash flows, or materially increase our liabilities.
The Company’sOur net sales derived from customers outside the United States were approximately 39% in 2019, 41% in 2016, 42%2018 and 40% in 2015 and 44% in 2014.2017. In addition, many of the Company’sour manufacturing operations and suppliers are located outside the United States. The Company expects net sales from non-U.S. markets to continue to represent a significant portion of its total net sales. The Company’sOur non-U.S. operations are subject to risks in addition to those facing itsour domestic operations, including:
fluctuations in currency exchange rates;rates and/or changes in monetary policy;
limitations on ownership and on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
government embargoes or trade restrictions;
the imposition of duties and tariffs and other trade barriers;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on the Company’sour ability to enforce legal rights and remedies;
potentially adverse tax consequences; and
difficulties in implementing restructuring actions on a timely basis.
If the Company iswe are unable to successfully manage the risks associated with expanding itsour global business or adequately manage operational fluctuations internationally, the risks could have a material adverse effect on the Company’sour business, results of operations or financial condition.
We are subject to risks relating to acquisitions and joint ventures, and risks relating to the integration of acquired companies, including risks related to the integration of CLARCOR Inc. ("Clarcor") and the proposed acquisitions of Lord and Exotic.
We expect to continue our strategy of identifying and acquiring businesses with complementary products and services, and entering into joint ventures, which we believe will enhance our operations and profitability. However, there can be no assurance that we will be able to continue to find suitable businesses to purchase or joint venture opportunities, or that we will be able to acquire such businesses or enter into such joint ventures on acceptable terms. Furthermore, there are no assurances that we will be able to avoid acquiring or assuming unexpected liabilities. If we are unable to avoid these risks, our results of operations and financial condition could be materially adversely affected.
For example, although we expect to realize certain benefits as a result of our proposed acquisitions of Lord and Exotic, there is the possibility that we may not complete these proposed acquisitions or that following our acquisitions of Lord and Exotic we may be unable to successfully integrate those businesses in order to realize the anticipated benefits of the acquisitions or to do so within the intended timeframe. Uncertainties associated with our proposed acquisitions of Lord and Exotic may also cause a loss of management personnel and other key employees, which could adversely affect our future business, operations and financial results.
The risks and uncertainties of our proposed acquisitions of Lord and Exotic include, among others:
the occurrence of any event, change or other circumstances that could delay the closing of the proposed transactions;
the possibility of non-consummation of the proposed transactions and termination of the acquisition agreements;
the failure to satisfy any of the conditions to the proposed transactions set forth in the acquisition agreements; the possibility that a governmental entity may prohibit the consummation of the proposed transactions or may delay or refuse to grant a necessary regulatory approval in connection with the proposed transactions or that in order for the parties to obtain any such regulatory approvals, conditions are imposed that adversely affect the anticipated benefits from the proposed transactions or cause the parties to abandon the proposed transactions;
adverse effects on our common stock or other securities because of the failure to complete the proposed transactions;
business disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, business partners or governmental entities;
the possibility that the expected synergies and value creation from the proposed transactions will not be realized or will not be realized within the expected time period;
the parties being unable to successfully implement integration strategies; and
and significant transaction costs related to the proposed transactions.
In addition, we may not be able to integrate successfully any businesses that we purchase into our existing business and it is possible that any acquired businesses or joint ventures may not be profitable. For example, we have devoted significant management attention and resources to integrating the business and operations of Clarcor. We may encounter or have encountered the following difficulties during the integration process of Clarcor:
the consequences of a change in tax treatment, including the cost of integration and compliance and the possibility that the full benefits anticipated to result from the Clarcor acquisition may not be realized;
delays in the integration of management teams, strategies, operations, products, and services;
differences in business backgrounds, corporate cultures, and management philosophies that may delay successful integration;
the ability to retain key employees;
the ability to create and enforce uniform standards, controls, procedures, policies, and information systems;
challenges of integrating complex systems, technologies, networks, and other assets of Clarcor in a manner that minimizes any adverse impact or disruptions to customers, suppliers, employees, and other constituencies; and
unknown liabilities and unforeseen increased expenses or delays associated with the integration beyond current estimates.
The successful integration of new businesses and the success of joint ventures also depend on our ability to manage these new businesses and cut excess costs. If we are unable to avoid these risks, our results of operations and financial condition could be materially adversely affected.
Our results may be adversely affected if expanded operations from the acquisition of Clarcor or the proposed acquisitions of Lord and Exotic are not effectively managed.
Our acquisition of Clarcor greatly expanded the size and complexity of our business. The proposed acquisitions of Lord and Exotic would further expand the size and complexity of our business. Our future success depends, in part, on the ability to manage this expanded business, which may pose or has posed substantial challenges for management, including challenges related to the management and monitoring of the expanded global operations and new manufacturing processes and products, and the associated costs and complexity. There can be no assurance of successful management of these matters or that we will realize the expected benefits of the acquisition of Clarcor or the proposed acquisitions of Lord and Exotic.
The Company may be subject to risks relating to organizational changes.
The CompanyWe regularly executesexecute organizational changes such as acquisitions, divestitures and realignments to support itsour growth and cost management strategies. The CompanyWe also engagesengage in initiatives aimed to increase productivity, efficiencies and cash flow and to reduce costs. The Company further commits significant resources to identify, develop and retain key employees to ensure uninterrupted leadership and direction. If the Company iswe are unable to successfully manage these and other organizational changes, the ability to complete such activities and realize anticipated synergies or cost savings as well as the Company'sour results of operations and financial condition could be materially adversely affected. The Company alsoWe cannot offer assurances that any of these initiatives will continue to be beneficial to the extent anticipated, or that the estimated efficiency improvements, incremental cost savings or cash flow improvements will be realized as anticipated or at all.
The Company may be subject
Increased cybersecurity threats and more sophisticated and targeted computer crime could pose a risk to risks relating to acquisitions and joint ventures.
The Company expects to continue its strategy of identifying and acquiring businesses with complementary products and services, and entering into joint ventures, which it believes will enhance its operations and profitability. However, there can be no assurance that the Company will be able to continue to find suitable businesses to purchase or joint venture opportunities or that it will be able to acquire such businesses or enter into such joint ventures on acceptable terms. In addition, there is no assurance that the Company will be able to avoid acquiring or assuming unexpected liabilities, that the Company will be able to integrate successfully any businesses that it purchases into its existing business or that any acquired businesses or joint ventures will be profitable. The successful integration of new businesses and the success of joint ventures depend on the Company’s
ability to manage these new businesses and cut excess costs. If the Company is unable to avoid these risks, its results of operations and financial condition could be materially adversely affected.
The Company may be subject to risks relating to itsour information technology systems.
The Company reliesWe rely extensively on information technology systems to manage and operate itsour business, some of which are managed by third parties. The security and functionality of these information technology systems, and the processing of data by these systems, are critical to our business operations. If these systems, or any part of the systems, are damaged, intruded upon, attacked, shutdown or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, hardware or software break-ins or viruses, or other cybersecurity incidents) and the Company sufferswe suffer any resulting interruption in itsour ability to manage and operate itsour business or if itsour products are effected, the Company'sour results of operations and financial condition could be materially adversely affected.
The In addition to existing risks, any adoption or deployment of new technologies via acquisitions or internal initiatives may increase our exposure to risks, breaches, or failures, which could materially adversely affect our results of operations or financial condition. Furthermore, the Company may have access to sensitive, confidential, or personal data or information that may be subject to risks relatingprivacy and security laws, regulations, or other contractually-imposed controls. Despite our use of reasonable and appropriate controls, material security breaches, theft, misplaced, lost or corrupted data, programming, or employee errors and/or malfeasance could lead to changesthe compromise or improper use of such sensitive, confidential, or personal data or information, resulting in possible negative consequences, such as fines, penalties, loss of reputation, competitiveness or customers, or other negative consequences resulting in adverse impacts to our results of operations or financial condition.
Changes in the demand for and supply of its products.our products may adversely affect our financial results, financial condition and cash flow.
Demand for and supply of the Company’sour products may be adversely affected by numerous factors, some of which the Companywe cannot predict or control. Such factors include:
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, and changes in contract cost and revenue estimates for new development programs;
changes in product mix;
changes in the market acceptance of the Company’sour products;
increased competition in the markets the Company serves;we serve;
declines in the general level of industrial production;
weakness in the end-markets the Company serves;we serve;
fluctuations in the availability or the prices of raw materials; and
fluctuations in currency exchange rates.
If any of these factors occur, the demand for and supply of the Company’sour products could suffer, which could materially adversely affect the Company’s results of operations.
The Company may be subject to risks relating to the development of new products and technologies.technologies requires substantial investment and is required to remain competitive in the markets we serve. If we are unable to successfully introduce new commercial products, our profitability could be adversely affected.
The markets in which the Company operateswe serve are characterized by rapidly changing technologies and frequent introductions of new products and services. The Company’sOur ability to develop new products based on technological innovation can affect itsour competitive position and often requires the investment of significant resources. If the Company does notwe cannot develop, or hashave difficulties or delays in the development of, innovativedeveloping new and enhanced products and services, or failsif we fail to gain market or regulatory acceptance of new products and technologies, the Company'sour revenues may be materially reduced and the Company'sour competitive position could be materially adversely affected. In addition, the Companywe may invest in research and development of products and services, or in acquisitions or other investments, that do not lead to significant revenue, which could adversely affect our profitability.
The Company may be subject to risks arising from price
Price and supply fluctuations inof the raw materials used in the Company’sour production processes and by itsour suppliers of component parts.parts could negatively impact our financial results.
The Company’sOur supply of raw materials for its businesses could be interrupted for a variety of reasons, including availability and pricing. Furthermore, recently implemented changes to United States and other countries' tariff and import/export regulations may have a negative impact on the availability and pricing of raw materials. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company’sour results of operations and profit margins. Although the Company generally attemptsOur efforts to manage these fluctuations by, among other things, passing along increased raw material prices to its customers in the form of price increases thereto our customers, may be subject to a time delay between the increased raw material prices and the Company’sour ability to increase the price of itsour products, or the Companywe may be unable to increase the prices of itsour products due to pricing pressure, contract terms or other factors whichfactors. Any such inability to manage fluctuations could adversely impact our results of operations and cash flows.
The Company’sOur suppliers of component parts may significantly and quickly increase their prices in response to increases in costs of raw materials that they use to manufacture the component parts. As a result, the Companywe may not be able to
increase itsour prices commensurately with itsour increased costs. Consequently, the Company’sour results of operations or financial condition could be materially adversely affected.
The Company may be subject to risks arising from changesChanges in the competitive environment in which it operates.we operate may eliminate any competitive advantages that we currently have, which could adversely impact our business.
The Company’sOur operations are subject to competition from a wide variety of global, regional and local competitors, which could adversely affect the Company’sour results of operations by creating downward pricing pressure and/or a decline in the Company’sour margins or market shares. To compete successfully, the Companywe must excel in terms of product quality and innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness, and customer service.experience.
TheLitigation and legal and regulatory proceedings against the Company could decrease our liquidity, impair our financial condition and adversely affect our results of operations.
From time to time, we are subject to litigation or other commercial disputes and other legal and regulatory proceedings relating to our business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, we cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact our business, financial condition and results of operations. Furthermore, as required by U.S. generally accepted accounting principles, we establish reserves based on our assessment of contingencies, including contingencies related to legal claims asserted against us. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a reserve and require us to make payments in excess of our reserves, which could have an adverse effect on our results of operations.
We are subject to national and international laws and regulations, such as the anti-corruption laws of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to our business and our employees. Despite our policies, procedures and compliance programs, our internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by our employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject us to civil or criminal judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact our business, financial condition and results of operations.
Further, our operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our business, in particular the United States and Europe. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements or practices are found to violate or infringe such laws, we may be subject to riskscivil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe antitrust and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and enforceable. Accordingly, any violation of these laws could harm our reputation and could have a material adverse effect on our earnings, cash flows and financial condition.
Additional liabilities relating to changes in its tax rates or exposure to additional income tax liabilities.liabilities could adversely impact our financial condition and cash flow.
The CompanyParker is subject to income taxes in the United StatesU.S. and various non-U.S. jurisdictions. The Company'sOur domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. The Company’sOur future results of operation could be adversely affected by changes in the Company's effective tax rate as a result of changes in tax laws and judicial or regulatory interpretation thereof, the mix of earnings in countries with differing statutory tax rates, changes in overall profitability, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets or changes in tax laws or regulations. In addition, the amount of income taxes paid by the Company is subject to ongoing audits by United StatesU.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s results of operations.
The CompanyDue to the nature of our business and products, we may be subject toliable for damages based on product liability risks.claims.
The Company’sOur businesses expose itus to potential product liability risks that are inherent in the design, manufacture and sale of itsour products and the products of third-party vendors that the Company useswe use or resells.resell. Significant product liability claims could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Although the Companywe currently maintainsmaintain what it believeswe believe to be suitable and adequate product liability insurance, there can be no assurance that the Companywe will be able to maintain itsour insurance on acceptable terms or that itsour insurance will provide adequate protection against all potential significant liabilities.
The CompanyFailure to protect our intellectual property and know-how could reduce or eliminate any competitive advantage and reduce our sales and profitability, and the cost of protecting our intellectual property may be subject to risks arising from litigation, legal and regulatory proceedings and obligations.
From time to time, the Company is subject to litigation or other commercial disputes and other legal and regulatory proceedings relating to its business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’s business, financial condition or results of operations. Furthermore, as required by U.S. generally accepted accounting principles, the Company establishes reserves based on its assessment of contingencies, including contingencies related to legal claims asserted against it. Subsequent developments in legal proceedings may affect the Company's assessment and estimates of the loss contingency recorded as a reserve and require the Company to make payments in excess of our reserves, which could have an adverse effect on the Company's results of operations.
The Company is subject to national and international laws and regulations, such as the anti-corruption laws of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to its business and its employees. Despite the Company's policies, procedures and compliance programs, its internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by its employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject it to civil or criminal judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact the Company's business, financial condition or results of operations.
The Company may be subject to risks relating to the preservation of its intellectual property.significant.
Protecting the Company’sour intellectual property is critical to itsour innovation efforts. The Company ownsWe own a number of patents, trade secrets, copyrights, trademarks, trade names and other forms of intellectual property in itsrelated to our products and services throughout the world. The Companyworld and the operation of our business. We also hashave exclusive and non-exclusive rights to intellectual property owned by others. The Company’sOur intellectual property may be challenged or infringed upon by third parties or the Companywe may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, the global nature of the Company’sour business increases the risk that the Company’sour intellectual property may be subject to infringement or other unauthorized use or disclosure by others. In some cases, the Company’sour ability to protect itsour intellectual property
rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are inadequate or undeveloped. Unauthorized use or disclosure of the Company’sour intellectual property rights or the Company'sour inability to preserve existing intellectual property rights could adversely impact the Company’sour competitive position and results of operations.
The CompanyOur indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility.
We have incurred significant indebtedness, and may incur additional debt for acquisitions, operations, research and development and capital expenditures. Our ability to make interest and scheduled principal payments and meet restrictive covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of financing and limit our debt capacity, thereby limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital needs, which may place us at a competitive disadvantage.
We carry goodwill on our balance sheet, which is subject to impairment testing and could subject us to significant non-cash charges to earnings in the future if impairment occurs.
We have goodwill recorded on our balance sheet. Goodwill is not amortized, but is tested for impairment annually in the second quarter or more often if events or changes in circumstances indicate a potential impairment may exist. Factors that could indicate that our goodwill is impaired include a decline in our stock price and market capitalization, lower than projected operating results and cash flows, and slower growth rates in our industry. Declines in our stock price, lower operating results and any decline in industry conditions in the future could increase the risk of impairment. Impairment testing incorporates our estimates of future operating results and cash flows, estimates of allocations of certain assets and cash flows among reporting units, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating results and cash flows. If we determine at a future time that further impairment exists, it may result in a significant non-cash charge to earnings and lower stockholders’ equity.
We may be subjectrequired to risks arising from the impact ofmake material expenditures in order to comply with environmental laws and climate change regulations, or incur additional liabilities under these laws and regulations.
The Company’sOur operations necessitate the use and handling of hazardous materials and, as a result, it is subject us to various United StatesU.S. federal, state and local laws and regulations, as well as non-U.S. laws, designed to protect the environment and to regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or the exposure to, hazardous materials. Among other laws, the Company iswe are subject to the United StatesU.S. federal "Superfund" law, under which it haswe have been designated as a "potentially responsible party" and may be liable for clean-up costs associated with various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list. The CompanyWe could incur substantial costs as a result of non-compliance with or liability for cleanup or other costs or damages under environmental laws, including the Superfund"Superfund" law.
In addition, increased worldwide focus on climate change issues has led to recent legislative and regulatory efforts to limit greenhouse gas emissions, including regulation of such emissions through a "cap-and-trade" system globally. Increased regulation of greenhouse gas emissions and other climate changeschange concerns could subject the Companyus to additional costs and restrictions, including increased energy and raw material costs. Until definitive regulations are adopted, the Company iswe are not able to predict how such regulations would affect the Company’sour business, operations or financial results.
The CompanyWe may be subject to other more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on the Company’sour business, results of operations and financial condition.
The Company may be subject to risks relating to increasingIncreasing costs of certain employee and retiree benefits could adversely affect our liability for such benefits.
The funding requirements and the amount of expenses recorded for the Company’sour defined benefit pension plans are dependent on changes in market interest rates and the value of plan assets, which are dependent on actual plan asset returns. Significant changes in market interest rates and decreases in the fair value of plan assets and investment losses on plan assets would increase funding requirements and expenses and may adversely impact the Company’sour results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and the Company continueswe continue to absorb the majority of these costs, these increasing costs may adversely impact the Company'sour future results of operations.
The Company may beAs a provider of products to the U.S. government, we are subject to additional risks arising from regulations applicablerelated to companies doing business with the United States government.future government spending as well as unusual performance conditions and enhanced compliance risks.
In addition to the risks identified herein, doing business with the United StatesU.S. government subjects the Companyus to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental procurementacquisition regulations. Agreements relating to the sale of products to government entities may be subject to termination, reduction or modification, either at the convenience of the government or for the Company’sour failure to perform, or other unsatisfactory performance under the applicable contract. The Company isWe are subject to government investigations of our business practices and compliance with government procurementacquisition regulations. If the Company were charged with wrongdoing as a result of any such investigation, it could be suspended from bidding on or receiving awards of new government contracts, and we could be subject to fines or penalties associated with contract non-compliance or resulting from such investigations, which could have a material adverse effect on the Company’sour results of operations.
ITEM 1B.Unresolved Staff Comments.None.
ITEM 1C.Information about our Executive Officers of the Registrant.
The Company’sOur executive officers as of August 15, 20162019, were as follows:
| | | Name | | Position | | Officer Since(1) | | Age as of 8/15/2016 | | Position | | Officer Since(1) | | Age as of 8/15/2019 |
| Thomas L. Williams | | Chairman of the Board, Chief Executive Officer and Director | | 2005 | | 57 |
| | Chairman of the Board, Chief Executive Officer and Director | | 2005 | | 60 |
|
| Lee C. Banks | | President, Chief Operating Officer and Director | | 2001 | | 53 |
| | President, Chief Operating Officer and Director | | 2001 | | 56 |
|
| Jon P. Marten | | Executive Vice President – Finance & Administration and Chief Financial Officer | | 2008 | | 60 |
| |
| Catherine A. Suever | | | Executive Vice President – Finance & Administration and Chief Financial Officer | | 2010 | | 60 |
|
| Mark J. Hart | | Executive Vice President – Human Resources & External Affairs | | 2016 | | 51 |
| | Executive Vice President – Human Resources & External Affairs | | 2016 | | 54 |
|
| Robert W. Bond | | Vice President – eBusiness, IoT and Services | | 2000 | | 58 |
| |
| Yoon "Michael" Chung | | Vice President and President – Automation Group | | 2008 | | 53 |
| |
| John G. Dedinsky, Jr. | | Vice President – Global Supply Chain and Procurement | | 2006 | | 59 |
| |
| William G. Eline | | Vice President – Chief Information Officer | | 2002 | | 60 |
| |
| John R. Greco | | Vice President and President – Instrumentation Group | | 2006 | | 62 |
| |
| Kurt A. Keller | | Vice President and President – Asia Pacific Group | | 2009 | | 58 |
| |
| William R. "Skip" Bowman | | | Vice President and President - Instrumentation Group | | 2016 | | 61 |
|
| Thomas C. Gentile | | | Vice President – Global Supply Chain | | 2017 | | 47 |
|
| Todd M. Leombruno | | | Vice President and Controller | | 2017 | | 49 |
|
| Joseph R. Leonti | | Vice President, General Counsel and Secretary | | 2014 | | 44 |
| | Vice President, General Counsel and Secretary | | 2014 | | 47 |
|
| Robert W. Malone | | Vice President and President – Filtration Group | | 2014 | | 52 |
| | Vice President and President – Filtration Group | | 2014 | | 55 |
|
| M. Craig Maxwell | | Vice President – Chief Technology and Innovation Officer | | 2003 | | 58 |
| | Vice President – Chief Technology and Innovation Officer | | 2003 | | 61 |
|
| Dinu J. Parel | | | Vice President and Chief Information Officer | | 2018 | | 39 |
|
| Jennifer A. Parmentier | | Vice President and President – Engineered Materials Group | | 2015 | | 49 |
| | Vice President and President – Motion Systems Group | | 2015 | | 52 |
|
| Andrew D. Ross | | Vice President and President – Fluid Connectors Group | | 2012 | | 49 |
| | Vice President and President – Fluid Connectors Group | | 2012 | | 52 |
|
| Daniel S. Serbin | | Vice President | | 2005 | | 62 |
| |
| Roger S. Sherrard | | Vice President and President – Aerospace Group | | 2003 | | 50 |
| | Vice President and President – Aerospace Group | | 2003 | | 53 |
|
| Catherine A. Suever | | Vice President and Controller | | 2010 | | 57 |
| |
| Andrew M. Weeks | | Vice President and President – Hydraulics Group | | 2015 | | 53 |
| | Vice President and President – Engineered Materials Group | | 2015 | | 56 |
|
| |
(1) | Executive officers of the Company are elected by the Board of Directors to serve for a term of one year or until their respective successors are elected, except in the case of death, resignation or removal. Messrs. Marten, Dedinsky, Eline, Greco, and Maxwell and Ms. Suever have served in the executive capacities indicated above opposite their respective names during each of the past five years. |
(1)Executive officers are elected by the Board of Directors to serve for a term of one year or until their respective successors are elected, except in the case of death, resignation or removal. Messrs. Leonti, Maxwell, and Sherrard have served in the executive capacities indicated above during each of the past five years.
Mr. Williams has been a Director since January 2015; Chief Executive Officer since February 2015; and Chairman of the Board since January 2016. He was an Executive Vice President from August 2008 to February 2015 and an Operating Officer from November 2006 to February 2015. He is also a Director of Chart Industries, Inc.Goodyear Tire & Rubber Company.
Mr. Banks has been a Director since January 2015 and President and Chief Operating Officer since February 2015. He was an Executive Vice President from August 2008 to February 2015 and an Operating Officer from November 2006 to February 2015. He is also a Director of Nordson Corporation.
Ms. Suever has been Executive Vice President - Finance & Administration and Chief Financial Officer since April 2017. She was Vice President and Controller from December 2010 to April 2017. She is also a director of Hexcel Corporation.
Mr. Hart has been Executive Vice President - Human Resources & External Affairs since January 2016. He was Vice President - Total Rewards from August 2013 to January 2016 and Area2016.
Mr. Bowman has been Vice President and President - Human Resources of theInstrumentation Group since September 2016. He was Vice President, Operations - Filtration Group from March 2015 to August 2016; and Vice President, Operations - Fluid Connectors Group Filtration Group and Climate and Industrial Controls Group from October 2010November 2007 to August 2013.February 2015.
Mr. BondGentile has been Vice President - eBusiness, IoTGlobal Supply Chain since July 2017. He was General Manager of the Company's domnick hunter Process Filtration Division from December 2013 to July 2017.
Mr. Leombruno has been Vice President and ServicesController since September 2015.July 2017. He was Vice President from July 2000 to September 2015 and President of the Fluid Connectors Group from March 2005 to September 2015.
Mr. Chung has been President of the Automation Group since July 2012 and has been a Vice President since March 2008. He was President of the Asia Pacific Group from March 2008 to July 2012.
Mr. Keller has been President of the Asia-Pacific Group since July 2012 and has been a Vice President since August 2009. He was President of theController - Engineered Materials Group from August 2009January 2015 to July 2012.June 2017; and Director of Investor Relations from June 2012 to December 2014.
Mr. Leonti has been Vice President, General Counsel and Secretary since July 2014. He was Assistant Secretary from April 2011 to July 20142014; and Associate General Counsel from January 2008 to July 2014.
Mr. Malone has been Vice President and President of the Filtration Group since December 2014. He was Vice President - Operations of the Filtration Group from January 2013 to December 2014 and2014.
Mr. Parel has been Vice President and Chief ExecutiveInformation Officer of Purolator Filters (a German joint venture)since October 2018. He was Vice President and Chief Information Officer at Dover Corporation from April 2006May 2016 through October 2018. Prior to January 2013.Dover, he held several IT leadership roles at Baker Hughes from March 2010 to May 2016, including IT Integration Leader and Senior Director, IT North America.
Ms. Parmentier has been Vice President and President of the Motion Systems Group since February 2019. She was Vice President and President of the Engineered Materials Group sincefrom September 2015.2015 to February 2019. She was General Manager of the Hose Products Division from May 2014 to September 2015; and General Manager of the Sporlan Division from May 2012 to May 2014; and Business Unit Manager of the Sporlan Division from December 2008 to May 2012.2014.
Mr. Ross has been Vice President since July 2012 and President of the Fluid Connectors Group since September 2015. He was President of the Engineered Materials Group from July 2012 to September 2015; Vice President - Operations of the Hydraulics Group from July 2011 to July 2012; and General Manager of the Hydraulic Valve Division from June 2007 to July 2011.
Mr. Serbin has been Vice President since January 2016. He was Executive Vice President - Human Resources & External Affairs from July 2014 to January 2016 and Executive Vice President – Human Resources from January 2011 to July 2014.
Mr. Sherrard has been President of the Aerospace Group since July 2012 and has been Vice President since November 2003. He was President of the Automation Group from March 2005 to July 2012.2015.
Mr. Weeks has been Vice President and President of the HydraulicsEngineered Materials Group since February 2019. He was Vice President and President of the Motion Systems Group from September 2015.2015 to February 2019. He was Vice President - Operations of the Aerospace Group from April 2013 to September 2015 and Senior Vice President and General Manager of the Fluid and Electrical Distribution Division of Eaton Corporation plc (power management company) from July 2003 to April 2013.2015.
ITEM 2. Properties. The Company’sOur corporate headquarters is located in Cleveland, Ohio, and, at June 30, 2016,2019, the Company had 292maintained approximately 290 manufacturing plants, 88 distribution centers and 154plants. We also maintain various sales and administrative offices and distribution centers throughout the world, noneworld. None of which werethese plants, administrative offices or distribution centers are individually material to itsour operations. The facilities are situated in 3937 states within the United States and in 4849 other countries. The Company ownsWe own the majority of itsour manufacturing plants, and itsour leased properties primarily consist of sales and administrative offices and distribution centers. The number of facilities used by each of the Company’s operating segments is summarized by type and geographic location in the tables below:
|
| | | | | | | | |
| | Type of Facility |
| | Manufacturing Plants | | Distribution Centers | | Sales and Administrative Offices |
| Diversified Industrial | 275 |
| | 81 |
| | 140 |
|
| Aerospace Systems | 17 |
| | 7 |
| | 14 |
|
| Total | 292 |
| | 88 |
| | 154 |
|
|
| | | | | | | | | | | |
| | Geographic Location |
| | North America | | Europe | | Asia-Pacific | | Latin America |
| Diversified Industrial | 225 |
| | 143 |
| | 108 |
| | 20 |
|
| Aerospace Systems | 32 |
| | 4 |
| | 2 |
| | — |
|
| Total | 257 |
| | 147 |
| | 110 |
| | 20 |
|
Several facilities are shared between the Company’s operating segments. To avoid double counting, each shared facility is counted once, primarily in the Diversified Industrial Segment.
The Company believesWe believe that itsour properties have been adequately maintained, are in good condition generally and are suitable and adequate for itsour business as presently conducted. The extent to which the Company uses itswe utilize our properties varies by property and from time to time. The Company believesWe believe that itsour restructuring efforts have brought capacity levels closer to present and anticipated needs. Most of the Company’sour manufacturing facilities remain capable of handling volume increases.
ITEM 3. 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 of the lawsuits have concluded. The following investigation remains pending.
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 Community 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 General Court of the European Union on April 10, 2009. On May 12, 2013, the court reversed in part the decision of the European Commission, reducing the original fine of 25.61 million euros to 6.40 million euros and holding that the Company and Parker ITR are jointly and severally liable for payment of the fine up to 6.30 million euros. The European Commission appealed the ruling to the European Court of Justice. On December 18, 2014, the European Court of Justice reversed the ruling of the General Court and referred the case back to the General Court. On July 14, 2016, the General Court rendered its judgment and reduced Parker ITR's fine from the initial 25.61 million euros to 19.95 million euros, of which it determined the Company is jointly and severally liable for 6.40 million euros.
ITEM 3. Legal Proceedings. None.
ITEM 4. Mine Safety Disclosures. Not applicable.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| |
| (a) | Market for the Registrant’s Common Equity. The Company’s common stock is listed for trading on the New York Stock Exchange (NYSE)("NYSE") under the symbol "PH". Information regarding stock price as reported onAs of July 31, 2019, the NYSE and dividend information with respect tonumber of shareholders of record of the Company’s common stock, is included in the table below.Company was 3,464. |
|
| | | | | | | | | | | | | | | | | | | | |
| (In dollars) | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Fiscal Year |
|
| 2016 | High | $ | 117.98 |
| | $ | 108.00 |
| | $ | 113.51 |
| | $ | 117.78 |
| | $ | 117.98 |
|
| | Low | 94.64 |
| | 93.47 |
| | 83.32 |
| | 99.10 |
| | 83.32 |
|
| | Dividends | 0.63 |
| | 0.63 |
| | 0.63 |
| | 0.63 |
| | 2.52 |
|
| | | | | | | | | | | |
| 2015 | High | $ | 127.60 |
| | $ | 133.41 |
| | $ | 129.54 |
| | $ | 125.33 |
| | $ | 133.41 |
|
| | Low | 105.91 |
| | 99.82 |
| | 115.86 |
| | 115.65 |
| | 99.82 |
|
| | Dividends | 0.48 |
| | 0.63 |
| | 0.63 |
| | 0.63 |
| | 2.37 |
|
| | | | | | | | | | | |
| 2014 | High | $ | 110.21 |
| | $ | 129.77 |
| | $ | 129.40 |
| | $ | 130.44 |
| | $ | 130.44 |
|
| | Low | 94.81 |
| | 103.36 |
| | 108.66 |
| | 118.46 |
| | 94.81 |
|
| | Dividends | 0.45 |
| | 0.45 |
| | 0.48 |
| | 0.48 |
| | 1.86 |
|
As of July 31, 2016, the number of shareholders of record of the Company was 3,789.
| |
| (b) | Use of Proceeds. Not Applicable. |
| |
| (c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
|
| | | | | | | | | | | | | |
| 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 |
| April 1, 2016 through April 30, 2016 | | 147,500 |
| | $ | 111.82 |
| | 147,500 |
| | 20,122,709 |
|
| May 1, 2016 through May 31, 2016 | | 404,100 |
| | $ | 111.70 |
| | 404,100 |
| | 19,718,609 |
|
| June 1, 2016 through June 30, 2016 | | 401,504 |
| | $ | 114.20 |
| | 401,504 |
| | 19,317,105 |
|
| Total: | | 953,104 |
| | $ | 112.77 |
| | 953,104 |
| | 19,317,105 |
|
|
| | | | | | | | | | | | | |
| 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 |
| April 1, 2019 through April 30, 2019 | | 91,600 |
| | $ | 182.97 |
| | 91,600 |
| | 11,046,103 |
|
| May 1, 2019 through May 31, 2019 | | 103,000 |
| | $ | 168.89 |
| | 103,000 |
| | 10,943,103 |
|
| June 1, 2019 through June 30, 2019 | | 96,283 |
| | $ | 164.50 |
| | 96,283 |
| | 10,846,820 |
|
| Total | | 290,883 |
| | | | 290,883 |
| |
|
|
| |
| (1) | On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase by the Company of up to 3 million shares of its common stock. From time to time thereafter, the Board of Directors has adjusted the overall maximum number of shares authorized for repurchase under this program. On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under this program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a year. There is no expiration date for this program. |
ITEM 6. Selected Financial Data.
| | | (Amounts in thousands, except per share information) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2019 |
| | 2018 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Net sales | | $ | 11,360,753 |
| | $ | 12,711,744 |
| | $ | 13,215,971 |
| | $ | 13,015,704 |
| | $ | 13,145,942 |
| | $ | 14,320,324 |
| | $ | 14,302,392 |
| | $ | 12,029,312 |
| | $ | 11,360,753 |
| | $ | 12,711,744 |
|
| Net income attributable to common shareholders | | 806,840 |
| | 1,012,140 |
| | 1,041,048 |
| | 948,427 |
| | 1,151,823 |
| | 1,512,364 |
| | 1,060,801 |
| | 983,412 |
| | 806,840 |
| | 1,012,140 |
|
| Basic earnings per share | | 5.96 |
| | 7.08 |
| | 6.98 |
| | 6.36 |
| | 7.62 |
| | 11.63 |
| | 7.98 |
| | 7.37 |
| | 5.96 |
| | 7.08 |
|
| Diluted earnings per share | | 5.89 |
| | 6.97 |
| | 6.87 |
| | 6.26 |
| | 7.45 |
| | 11.48 |
| | 7.83 |
| | 7.25 |
| | 5.89 |
| | 6.97 |
|
| Cash dividends per share | | 2.52 |
| | $ | 2.37 |
| | $ | 1.86 |
| | $ | 1.70 |
| | $ | 1.54 |
| | 3.16 |
| | 2.74 |
| | 2.58 |
| | 2.52 |
| | 2.37 |
|
Total assets (1) | | 12,056,738 |
| | 12,279,282 |
| | 13,259,815 |
| | 12,502,478 |
| | 11,126,276 |
| | 17,576,690 |
| | 15,320,087 |
| | 15,489,904 |
| | 12,034,142 |
| | 12,254,279 |
|
| Long-term debt | | 2,675,000 |
| | 2,723,960 |
| | 1,508,142 |
| | 1,495,960 |
| | 1,503,946 |
| | 6,520,831 |
| | 4,318,559 |
| | 4,861,895 |
| | 2,652,457 |
| | 2,698,957 |
|
(1) Amounts revised to reflect the reclassification of current deferred tax assets and liabilities to noncurrent in accordance with Accounting Standards Update 2015-17. Refer to Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may impact the Company's tax calculations. 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 withglobal economic and purchases by or from major customers, suppliers or distributors,political factors, including delays or cancellations in shipments, disputes regarding contract terms or significant changes in financial condition, changes in contract costmanufacturing activity, air travel trends, currency exchange rates and revenue estimates formonetary policy, trade policy and tariffs, difficulties entering new development programs,markets and changes in product mix;general economic conditions such as inflation, deflation, interest rates and credit availability;
our ability to identify acceptable strategic acquisition targets;
uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions;
transactions, including the integration of CLARCOR Inc. ("Clarcor") and the proposed acquisitions of LORD Corporation ("Lord") and EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic"); ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
our ability to effectively manage expanded operations from the acquisition of Clarcor or the proposed acquisitions of Lord and Exotic;
the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;
increased cybersecurity threats and sophisticated computer crime;
business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;
the development of new products and technologies requiring substantial investment;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
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;
uncertainties surrounding the ultimate resolution of outstanding legal and regulatory proceedings, including the outcome of any appeals;
additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
potential product liability risks;
our ability to enter into, own, renew and maintain intellectual property and know-how;
our leverage and future debt service obligations;
potential impairment of goodwill;
compliance costs associated with environmental laws and climate change regulations;
our ability to manage costs related to insurance and employee retirement and health care benefits;
compliance with federal rules, regulations, audits and investigations associated with being a provider of products to the United States government; and
our ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases;repurchases.
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;
threats associated with and efforts to combat terrorism and cyber-security risks;
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; and
global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability.
The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2016,2019, and undertakes no obligation to update them unless otherwise required by law.
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
Our 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 believesWe believe the leading economic indicators of these markets that have a correlation to the Company's future order rates are as follows:
Purchasing Managers Index (PMI)("PMI") on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;
Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and
Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:
| | | | June 30, 2016 |
| | March 31, 2016 |
| | June 30, 2015 |
| June 30, 2019 | | March 31, 2019 | | June 30, 2018 |
| United States | 53.2 |
| | 51.8 |
| | 53.5 |
| 50.6 |
| | 55.3 |
| | 60.2 |
|
| Eurozone countries | 52.8 |
| | 51.6 |
| | 52.5 |
| 47.6 |
| | 47.5 |
| | 54.9 |
|
| China | 48.6 |
| | 49.7 |
| | 49.4 |
| 49.4 |
| | 50.8 |
| | 51.0 |
|
| Brazil | 43.2 |
| | 46.0 |
| | 46.5 |
| 51.0 |
| | 52.8 |
| | 49.8 |
|
Global aircraft miles flown increased by approximately four percent and global revenue passenger miles have both increased approximately sixfive percent from their comparable 2015 level.2018 levels. 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 20162019 will increase by approximately onefour percent from the comparableits fiscal 20152018 level.
Housing starts in June 20162019 were approximately nine10 percent higher than housing starts in March 2016 but were two2019 and six percent lowerhigher than housing starts in June 2015.2018.
The Company has remained focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The Company continues to generate substantial cash flows from operations, has controlled capital spending and has proactively managed working capital. The Company has been able to borrow needed funds at affordable interest rates and had a debt to debt-shareholders' equity ratio of 39.9 percent at June 30, 2016 compared to 39.3 percent at March 31, 2016 and 36.6 percent at June 30, 2015. Net of cash and cash equivalents and marketable securities and other investments, the debt to debt-shareholders' equity ratio was 16.9 percent at June 30, 2016 compared to 18.6 percent at March 31, 2016 and 16.8 percent at June 30, 2015.
The Company believesWe believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.
The Company believes itWe believe we can meet itsour strategic objectives by:
Serving the customer and continuously enhancing its experience with the Company;
Successfully executing itsThe Win Strategy initiatives relating to engaged people, premier customer service,experience, profitable growth and financial performance and profitable growth;performance;
Maintaining itsa decentralized division and sales company structure;
Fostering ana safety first and entrepreneurial culture;
Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;
Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;
Acquiring strategic businesses;
Organizing around targeted regions, technologies and markets;
Driving efficiency by implementing lean enterprise principles; and
Creating a culture of empowerment through itsour values, inclusion and diversity, accountability and teamwork.
Acquisitions will 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 CompanyIn addition, we will continue to assess itsour 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 financial statements presented in Part II, Item 8 of this Annual Report on Form 10-K. The term "year" and references to specific years refer to the applicable fiscal year.
Discussion of Consolidated Statementthe 2017 financial statements is included in Part II, Item 7 of Incomethe Company's 2018 Annual Report on Form 10-K.
CONSOLIDATED STATEMENT OF INCOME
The Consolidated Statement of Income summarizes the Company's operating performance over the last three years. The discussion below compares the operating performance in 2019 and 2018.
| | | (dollars in millions) | | 2016 | | 2015 | | 2014 | | 2019 |
| | 2018 |
|
| Net sales | | $ | 11,361 |
| | $ | 12,712 |
| | $ | 13,216 |
| | $ | 14,320 |
| | $ | 14,302 |
|
| Gross profit margin | | 22.3 | % | | 24.0 | % | | 22.9 | % | | 25.3 | % | | 24.9 | % |
| Selling, general and administrative expenses | | $ | 1,359 |
| | $ | 1,545 |
| | $ | 1,634 |
| | $ | 1,544 |
| | $ | 1,640 |
|
| Selling, general and administrative expenses, as a percent of sales | | 12.0 | % | | 12.2 | % | | 12.4 | % | | 10.8 | % | | 11.5 | % |
| Goodwill and intangible asset impairment | | $ | — |
| | $ | — |
| | $ | 189 |
| |
| Interest expense | | 137 |
| | 118 |
| | 83 |
| | $ | 190 |
| | $ | 214 |
|
| Other (income), net | | (62 | ) | | (43 | ) | | (26 | ) | |
| (Gain) loss on disposal of assets | | (11 | ) | | 4 |
| | (409 | ) | |
| Other (income) expense, net | | | (61 | ) | | 13 |
|
| Loss (gain) on disposal of assets | | | 11 |
| | (4 | ) |
| Effective tax rate | | 27.6 | % | | 29.3 | % | | 33.1 | % | | 21.7 | % | | 37.7 | % |
| Net income attributable to common shareholders | | $ | 807 |
| | $ | 1,012 |
| | $ | 1,041 |
| | $ | 1,512 |
| | $ | 1,061 |
|
Net salesin 2016 were 10.6 percent lower than 2015. Acquisitions made2019 increased slightly from the 2018 amount. This change was a result of an increase in volume, primarily in the last 12 months contributed approximately $42 million in sales in 2016 andAerospace Systems Segment, partially offset by the effect of currency rate changes. The effect of currency rate changes decreased net sales in 20162019 by approximately $403 million. Excluding$305 million, of which $285 million was attributable to the effect of acquisitions and currency rate changes,Diversified Industrial International operations.
Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2016 were 7.8 percent lower than 20152019 primarily due to a decreasehigher margins in volume in the both the Diversified Industrial North American and Diversified Industrial International operations.
Net sales in 2015 were 3.8 percent lower than 2014. Acquisitions made in 2015 contributed approximately $14 million in sales in 2015 and the effect of currency rate changes decreased net sales in 2015 by approximately $547 million. Excluding the effect of acquisitions and currency rate changes, net sales in 2015 were essentially unchanged from 2014 as an increase in volume experienced in the Diversified Industrial North American operations and the Aerospace Systems Segment was offsetdriven by increased aftermarket and original equipment manufacturer ("OEM") volume and profitability and lower volume experienced in the Diversified Industrial International operations.
Gross profit margin decreased in 2016 primarily due to both lower sales volume, resulting in manufacturing inefficiencies, and higher business realignment chargesengineering development costs. Lower operating costs in the Diversified Industrial Segment partially offset by favorable product mix and lower engineering costs in the Aerospace Systems Segment. Gross profit margin increased in 2015 primarily due to lowerresulting from prior-year business realignment chargesand acquisition integration activities and the Company's simplification initiative also contributed to higher margins in the Diversified Industrial International operations and lower product support costs in the Aerospace Systems Segment.2019. Foreign currency transaction (gain) loss (relating to cash, marketable securities and other investments and intercompany transactions) included in cost of sales for 2016, 20152019 and 2014 were $22.7 million, $(77.8)2018 was $5.9 million and $5.4 million, respectively. Pension cost included in cost of sales in 2016, 2015 and 2014 were $172.4 million, $169.8 million and $174.8$7.3 million, respectively. Included in cost of sales in 2016, 20152019 and 20142018 were business realignment charges of $76.2 million, $19.4$14.7 million and $63.6$44.9 million, respectively.
Selling, general and administrative expensesdecreased 12.05.9 percent in 2016 and decreased 5.5 percent in 2015. The decrease in 2016 was2019 primarily due to the benefits from prior-year business realignment and acquisition integration activities and the Company's simplification initiative, lower research and development expenses, lower incentive compensationamortization expense and lower stock compensation expense,incentive compensation. These benefits were partially offset by higher business realignment charges. The decreasean increase in selling, generalacquisition-related expenses and administrative expenses in 2015 was primarily due to lower business realignment charges and stock compensation expense, partially offset by higher net expensesexpense associated with the Company's deferred compensation programs. The decrease in stock compensation expense in 2016 is primarily due to fewer stock awards granted. The decrease in stock compensation expense in 2015 is primarily due to a lower fair value calculated for 2015 stock awards as well as fewer stock awards granted. Pension cost included in selling, generalprogram and administrative expenses in 2016, 2015 and 2014 were $74.4 million, $69.6 million and $64.2 million, respectively.related investments. Included in selling, general and administrative expenses in 2016, 20152019 and 20142018 were business realignment charges of $21.1 million, $12.9$13.2 million and $38.9$36.8 million, respectively.
Goodwill and intangible asset impairment related to the Worldwide Energy Products Division. Refer to Note 7 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Interest expensein 2016 increased2019 decreased primarily due to lower weighted-average interest rates, partially offset by higher weighted-average borrowings and higher weighted-average interest rates. Interest expense in 2015 increased primarily due to higher weighted-average interest rates.borrowings.
Other (income), expense, net in 2016, 2015 and 2014 includes $25.6 million, $23.2 million and $11.1 million of income, respectively, related to included the Company's equity interests in joint ventures.following:
(Gain) loss |
| | | | | | | | |
| (dollars in millions) | | |
| Expense (income) | | 2019 |
| | 2018 |
|
| Income related to equity method investments | | $ | (93 | ) | | $ | (50 | ) |
| Non-service components of retirement benefit cost | | 40 |
| | 42 |
|
| Sale and writedown of investments | | — |
| | 41 |
|
| Interest income | | (18 | ) | | (15 | ) |
| Other items, net | | 10 |
| | (5 | ) |
| | | $ | (61 | ) | | $ | 13 |
|
Loss (gain) on disposal of assets in 2018 includes a gainloss of $11.5$20 million related toon the sale of businesses in 2016a business and a gain of $412.6$28 million relatedon the sale of real estate.
Effective tax rate in 2019 was lower than 2018 primarily due to the deconsolidationnet impact of a subsidiary in 2014.
Effective tax rate in 2016 was favorably impacted by an increase of discrete tax benefits, an increaseone-time adjustments that were recorded in the U.S. Research and Development credit, and an increase inprior year as a result of the U.S. Foreign Tax Credit. These benefits were partially offset by an unfavorable geographic mix of earnings. The effectiveCuts and Jobs Act ("TCJ Act") and the reduced U.S. income tax rate in 2015 was favorably impacted by the re-enactmentcurrent year resulting from enactment of the U.S. Research and Development credit, an increase in the federal manufacturing deduction and the absence of discrete tax costs incurred in the prior year. These benefits were partially offset by an unfavorable geographic mix of earnings.TCJ Act.
Discussion of Business Segment Information
BUSINESS SEGMENT INFORMATION
The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.
Diversified Industrial Segment
|
| | | | | | | | |
| (dollars in millions) | | 2019 |
| | 2018 |
|
| Sales | | | | |
| North America | | $ | 6,809 |
| | $ | 6,727 |
|
| International | | 5,001 |
| | 5,260 |
|
| Operating income | | | | |
| North America | | 1,139 |
| | 1,076 |
|
| International | | 805 |
| | 765 |
|
| Operating income as a percent of sales | | | | |
| North America | | 16.7 | % | | 16.0 | % |
| International | | 16.1 | % | | 14.5 | % |
| Backlog | | $ | 2,011 |
| | $ | 2,167 |
|
The Diversified Industrial Segment (dollarsoperations experienced the following percentage changes in millions)
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Sales | | | | | |
| North America | $ | 4,955 |
| | $ | 5,716 |
| | $ | 5,694 |
|
| International | 4,145 |
| | 4,741 |
| | 5,288 |
|
| Operating income | | | | | |
| North America | 790 |
| | 956 |
| | 946 |
|
| International | 448 |
| | 584 |
| | 572 |
|
| Operating income as a percent of sales | | | | | |
| North America | 15.9 | % | | 16.7 | % | | 16.6 | % |
| International | 10.8 | % | | 12.3 | % | | 10.8 | % |
| Backlog | $ | 1,455 |
| | $ | 1,586 |
| | $ | 1,861 |
|
| Assets | 8,729 |
| | 8,735 |
| | 9,471 |
|
| Return on average assets | 14.2 | % | | 16.9 | % | | 16.1 | % |
|
| | | |
| | 2019 |
|
| Diversified Industrial North America – as reported | | 1.2 | % |
| Divestitures | | (0.3 | )% |
| Currency | | (0.3 | )% |
| Diversified Industrial North America – without divestitures and currency | | 1.8 | % |
| | |
| Diversified Industrial International – as reported | | (4.9 | )% |
| Divestitures | | (0.6 | )% |
| Currency | | (5.4 | )% |
| Diversified Industrial International – without divestitures and currency | | 1.1 | % |
| | |
| Total Diversified Industrial Segment – as reported | | (1.5 | )% |
| Divestitures | | (0.5 | )% |
| Currency | | (2.5 | )% |
| Total Diversified Industrial Segment – without divestitures and currency | | 1.5 | % |
SalesThe above presentation reconciles the percentage changes in 2016 fornet sales of the Diversified Industrial North American operations decreased 13.3 percent from 2015 comparedSegment reported in accordance with U.S. GAAP to remaining relatively flat between 2014 and 2015. Acquisitions completedpercentage changes in net sales adjusted to remove the effects of divestitures made within the last 12 months contributed approximately $8 million in sales in 2016 andprior four fiscal quarters as well as the effecteffects of currency exchange rates decreased sales in 2016 by $60 million. Excluding acquisitions(a non-GAAP measure). The effects of divestitures and currency exchange rates are removed to allow investors and the effect of currency rateCompany to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in 2016 in the Diversified Industrial North American operations decreased 12.4 percent from 2015 reflecting lower demand from distributors and end-users in most markets. The markets that
experienced the largest decline in end-user demand were the oil and gas, construction equipment and farm and agriculture equipment markets. Excluding acquisitions and the effect of currency rate changes, sales in 2015 in2019 for the Diversified Industrial North American operations increased 1.2 percent from 20142018. Divestitures and the effect of currency exchange rates decreased sales by approximately $21 million and $17 million, respectively. Excluding divestitures and the effect of currency rate changes, sales in 2019 for the Diversified Industrial North American operations increased 1.8 percent from prior-year levels reflecting higher demand from distributors as well as from end-usersand end users in the car and light truck, heavy-duty truck, refrigeration and air conditioningengine, and construction equipment markets, partially offset by lower demand from end users in the farmoil and agriculture equipment market.gas, marine, semiconductor and power generation markets.
Sales in the Diversified Industrial International operations decreased 12.64.9 percent in 2016 after a decrease of 10.3 percent from 2014 to 2015. Acquisitions completed within the last 12 months2019. Divestitures contributed approximately $34$31 million to the decrease in sales in 2016.2019. The effect of currency rate changes decreased sales by $338$285 million, reflecting the strengthening of the U.S. dollar primarily against most currencies.currencies in the Eurozone countries, China and Brazil. Excluding acquisitionsdivestitures and the effect of currency rate changes, sales in 2016 in2019 for the Diversified Industrial International operations decreased 6.1increased 1.1 percent from 2015, primarily2018 levels due to lower volume in all regions, with approximately 55 percent of the decrease occurring in Europe and approximately 35 percent of the decrease occurring in the Asia Pacific region. Within these regions, the largest decrease in sales was experienced from distributors and end-users in the oil and gas, marine, engine and construction equipment markets. Excluding acquisitions and the effect of currency rate changes, sales in 2015 in the Diversified Industrial International operations decreased 1.3 percent from 2014 primarily due toslightly higher volume in the Asia Pacific and Latin America regions, partially offset by a decrease in sales in Europe. Within the Asia Pacific region, being more thanthe increase in sales was primarily due to higher demand from distributors as well as end users in the construction equipment, oil and gas and engine markets, partially offset by lower volumeend-user demand in the semiconductor, cars and light truck and industrial machinery markets. In Europe, approximately two-thirds of whichhigher demand from distributors and end users in the construction equipment, forestry and heavy-duty truck markets was dueoffset by lower end-user demand in the general industrial machinery, cars and light truck, mills and foundries, machine tool and oil and gas markets. Within Latin America, distributors and end users in the farm and agricultural equipment and heavy-duty truck markets contributed to the absence ofincrease in sales, from divested businesses, andpartially offset by lower end-user demand in Latin America.the power generation market.
The decrease in operatingOperating margins in 20162019 increased in both the Diversified Industrial North American and International operations was primarily due to the lower sales volume and higheroperating expenses resulting from prior-year business realignment charges,and acquisition integration activities and the Company's simplification initiative, lower current-year business realignment expenses and lower intangible amortization expense, partially offset by lower operating expenses primarily resulting from the Company's Simplification initiative. The decrease in operating margins in 2016 in the Diversified Industrial International operations was primarily due to the lower sales volume, an unfavorable product mixhigher warehouse and higher business realignment charges, partially offset by lower operating expenses primarily resulting from the Company's Simplification initiativeshipping costs. Higher manufacturing and prior-year restructuring activities. The increase in operating margins in 2015 inmaterials support costs also impacted the Diversified Industrial North American operations was primarily due to the higher sales volume, a favorable product mix and manufacturing efficiencies, partially offset by higher warehouse, shipping, and manufacturing support costs, research and development expenses and raw material costs. Diversified Industrial North American margins in 2015 were also adversely affected by a voluntary retirement expense of $12.7 million. The increase in operating margins in 2015 in the Diversified Industrial International operations was primarily due to lower fixed overhead costs and lower business realignment charges in the current-year, partially offset by higher raw material costs due to changes in currency exchange rates.margins.
The following business realignment charges and acquisition integration costs are included in Diversified Industrial North America and Diversified Industrial International operating income:
| | | (dollars in millions) | | 2016 | | 2015 | | 2014 | | 2019 |
| | 2018 |
|
| Diversified Industrial North America | | $ | 31 |
| | $ | 4 |
| | $ | 2 |
| | $ | 13 |
| | $ | 37 |
|
| Diversified Industrial International | | 60 |
| | 27 |
| | 99 |
| | 15 |
| | 41 |
|
The business realignment charges consist primarily of severance and plant closure costs related to actions taken under the Company's Simplificationsimplification initiative aimed at reducing organizational and process complexity, which is being implemented by its operating units throughout the world as well as plant closures.world. The majority of the Diversified Industrial International business realignment charges were incurred in Europe. In addition to the business realignment charges presented in the table above, the Company recognized $12 million of expense associated with enhanced retirement benefits in connection with a plant closure during 2016. The Company anticipates that cost savings realized from the work force reduction measures taken during 20162019 will increase 20172020 operating income by approximately 11two percent in both the Diversified Industrial North American business and by approximately 13 percent in the Diversified Industrial International business.operations. In 2017,2020, the Company expects to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. SuchThese actions are expected to result in approximately $48$20 million in business realignment charges in 2017.2020.
The Company anticipates Diversified Industrial North American sales for 20172020 will range frombetween a decrease of five2.8 percent to a decreaseand an increase of one0.2 percent from the 20162019 level and Diversified Industrial International sales for 20172020 will increasedecrease between one6.2 percent and five3.2 percent from the 20162019 level. Diversified Industrial North American operating margins in 20172020 are expected to range from 16.716.8 percent to 17.117.2 percent and Diversified Industrial International margins are expected to range from 12.515.4 percent to 12.915.9 percent.
The decrease in total Diversified Industrial Segment backlog in 2016 was primarily due to shipments exceeding orders primarily in North America and Europe, with North America accounting for approximately 70 percent of the decrease and
Europe accounting for approximately 30 percent of the decrease. The decrease in total Diversified Industrial Segment backlog in 20152019 was primarily due to shipments exceeding orders in all regions.both the North American and International businesses, with each business accounting for 50 percent of the change. Within the Diversified Industrial International business, the decrease in backlog was split evenly between Europe and the Asia Pacific region. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
The decrease in total Diversified Industrial Segment assets in 2016 was primarily due to the effect of currency rate fluctuations and a decrease in prepaid expenses, inventory, intangible assets, trade accounts receivable, net and plant and equipment, net, partially offset by an increase in marketable securities and other investments, cash and cash equivalents, deferred income taxes and goodwill. The decrease in total Diversified Industrial Segment assets in 2015 was primarily due to the effect of currency rate fluctuations and a decrease in trade accounts receivable, net, non-trade and notes receivable and intangible assets, partially offset by an increase in cash and cash equivalents and other assets.
Aerospace Systems Segment(dollars in millions)
| | | | 2016 | | 2015 | | 2014 | |
| (dollars in millions) | | | 2019 |
| | 2018 |
|
| Sales | $ | 2,260 |
| | $ | 2,255 |
| | $ | 2,235 |
| | $ | 2,511 |
| | $ | 2,316 |
|
| Operating income | 338 |
| | 299 |
| | 271 |
| | 488 |
| | 398 |
|
| Operating income as a percent of sales | 14.9 | % | | 13.3 | % | | 12.1 | % | | 19.4 | % | | 17.2 | % |
| Backlog | $ | 1,762 |
| | $ | 1,756 |
| | $ | 1,994 |
| | $ | 2,209 |
| | $ | 1,954 |
|
| Assets | 1,431 |
| | 1,376 |
| | 1,359 |
| |
| Return on average assets | 24.1 | % | | 21.9 | % | | 21.7 | % | |
Sales in 20162019 were higher than the 20152018 level asprimarily due to higher volume in the commercial and military aftermarket businesses as well as in the commercial and military original equipment manufacturer (OEM) and commercial and military aftermarket businesses was partially offset by lower volume in the commercial OEM business. Sales in 2015 were higher than the 2014 level as higher volume in the commercial OEM and aftermarket businesses was partially offset by lower volume in the military OEM business.businesses.
The higher margin in 20162019 was primarily due to a favorable product mix favorable contract settlements,resulting from higher aftermarket and OEM volume and profitability, higher joint venture earnings, lower engineering development and the absence of business realignment expenses and lower operating costs. The higher margin in 2015 was primarily due to the higher sales volume and lower engineering and development costs partially offset by a voluntary retirement expense of $5.4 million. Margins in 2015 and 2014 were favorably impacted by the finalization of contract negotiations related to certain programs.current year.
The increase in backlog in 20162019 was primarily due to orders exceeding shipments in the military OEM and commercial and military aftermarket businesses and in the commercial aftermarket business, partially offset by shipments exceeding orders in the commercial OEM business. The decrease in backlog in 2015 was primarily due to shipments exceeding orders in all businesses of the Aerospace Systems Segment. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
For 2017,2020, sales are expected to increase between one3.0 percent and three5.6 percent from the 20162019 level and operating margins are expected to range from 15.120.4 percent to 15.521.0 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.
The increase in assets in 2016 was primarily due to an increase in trade accounts receivable, net and other assets, partially offset by a decrease in inventory. The increase in assets in 2015 was primarily due to an increase in inventory and other assets, partially offset by a decrease in trade accounts receivable, net.
Corporategeneral and administrative expenses were $173.2$195 million in 20162019 compared to $215.4$201 million in 2015 and $181.9 million in 2014.2018. As a percent of sales, corporate general and administrative expenses in both 2019 and 2018 were 1.5 percent of sales compared to 1.7 percent in 2015 and 1.4 percent in 2014.percent. The lower expense in 2016 was2019 is primarily due to a decrease in research and development expense and lower incentive compensation, expense. The higher expense in 2015 was primarily due to an increase in incentive compensation expense andpartially offset by higher net expensesexpense associated with the Company's deferred compensation programs. Corporate generalprogram and administrative expenses in 2015 included $3.1 million in voluntary retirement expense.related investments.
Corporate assets decreased 12.5 percent in 2016 compared to a decrease of 10.8 percent from 2014 to 2015. The decrease in Corporate assets in 2016 was primarily due to decreases in marketable securities and other investments, non-trade and notes receivable, cash and cash equivalents and the effect of currency rate fluctuations, partially offset by an increase in deferred income taxes. The decrease in Corporate assets in 2015 was primarily due to the effect of currency rate fluctuations and changes in cash and cash equivalents, marketable securities and other investments, non-trade and notes receivable, deferred income taxes and other assets.
Other expense (income) (in(in the Business Segment Information)
| | | (dollars in millions) | 2016 | | 2015 | | 2014 | | | |
| Expense (income) | | 2019 |
| | 2018 |
|
| Foreign currency transaction | $ | 23 |
| | $ | (78 | ) | | $ | 5 |
| $ | 6 |
| | $ | 7 |
|
| Stock compensation | 49 |
| | 57 |
| | 71 |
| |
| Stock-based compensation | | 52 |
| | 51 |
|
| Pensions | 116 |
| | 97 |
| | 108 |
| 20 |
| | 26 |
|
| Divestitures and asset sales and writedowns | (11 | ) | | 4 |
| | (409 | ) | |
| Goodwill and intangible asset impairment | — |
| | — |
| | 189 |
| |
| Interest income | (18 | ) | | (15 | ) | | (11 | ) | |
| Divestitures and asset sales and writedowns, net | | 11 |
| | (4 | ) |
| Sale and writedown of investments | | — |
| | 41 |
|
| Acquisition expenses | | 17 |
| | 5 |
|
| Other items, net | (8 | ) | | 7 |
| | 16 |
| 7 |
| | (4 | ) |
| | $ | 151 |
| | $ | 72 |
| | $ | (31 | ) | $ | 113 |
| | $ | 122 |
|
Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. A significant portion of the foreign currency transaction gain in 2015 related to intercompany loans and was attributable to the Swiss National Bank lifting the cap on the fluctuation of the exchange rate used to measure the Swiss Franc against the Euro. The Company has since settled these particular intercompany loans. The decrease in stock compensation expense in 2016 is primarily due to fewer stock awards granted. The decrease in stock compensation expense in 2015 is primarily due to a lower fair value calculated for 2015 stock awards as well as fewer stock awards granted. Included in divestituresDivestitures and asset sales and writedowns for 2014 isin 2018 includes a net gain on the sale of approximately $413 million resulting fromassets, partially offset by a loss on the deconsolidationsale of a subsidiary.the global Facet filtration business. The acquisition expenses incurred in 2019 primarily relate to the proposed acquisition of Lord.
Discussion of Consolidated Balance Sheet
CONSOLIDATED BALANCE SHEET
The Consolidated Balance Sheet shows the Company's financial position at year-end,year end, compared with the previous year-end.year end. This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.
| | | (dollars in millions) | | 2016 |
| | 2015 |
| | 2019 |
| | 2018 |
|
| Cash | | $ | 2,104 |
| | $ | 1,914 |
| | $ | 3,371 |
| | $ | 855 |
|
| Trade accounts receivable, net | | 1,594 |
| | 1,620 |
| | 2,131 |
| | 2,146 |
|
| Inventories | | 1,173 |
| | 1,300 |
| | 1,678 |
| | 1,621 |
|
| Long-term debt | | | 6,521 |
| | 4,319 |
|
| Shareholders' equity | | 4,575 |
| | 5,104 |
| | 5,962 |
| | 5,860 |
|
| Working capital | | $ | 2,842 |
| | $ | 3,092 |
| | $ | 4,521 |
| | $ | 1,888 |
|
| Current ratio | | 2.2 |
| | 2.3 |
| | 2.4 |
| | 1.6 |
|
Cash (comprised of cash and cash equivalents and marketable securities and other investments)includes $2,065$975 million and $1,777$836 million held by the Company's foreign subsidiaries at June 30, 20162019 and June 30, 2015,2018, respectively. Generally,As a result of the TCJ Act, the prior worldwide tax system was replaced by a territorial tax system, which generally allows companies to repatriate future foreign source earnings without incurring additional U.S. federal taxes. However, other U.S. or foreign taxes may be incurred should cash and cash equivalents and marketable securities and other investments held by foreign subsidiaries are not readily available for use inbe distributed between the United States without adverse tax consequences. The Company's principal sources of liquidity are its cash flows provided by operating activities, commercial paper borrowings or borrowings directly from its line of credit.subsidiaries. The Company does not believehas determined it will no longer permanently reinvest certain foreign earnings. All other undistributed foreign earnings remain permanently reinvested. Refer to Note 5 to the levelConsolidated Financial Statements in Part II, Item 8 of its non-U.S. cash position will have an adverse effectthis Annual Report on working capital needs, planned growth, repayment of maturing debt, benefit plan funding, dividend payments or share repurchases.Form 10-K for further discussion.
Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade receivables for the Company was 4953 days in 20162019 and 4851 days in 2015.2018. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.
Inventories decreased $127increased $57 million from 2015 (which includes2018 primarily due to a $59 million increase in inventories in the Aerospace Systems Segment and an increase of $12 million in the Diversified Industrial Segment, partially offset by a decrease of $17$15 million fromrelated to the effect of foreign currency translation and an increase of $7 million from current-year acquisitions). The decrease in inventories was primarily intranslation. Within the
Diversified Industrial Segment, withan increase in inventories in the decrease occurring evenly between the Diversified Industrial North American businesses andoperations was partially offset by a decrease in the Diversified Industrial International businesses.operations. Days supply of inventory on hand was 6269 days in 20162019 and 6564 days in 2015.2018.
Long-term debt increased$2,202 million from 2018 primarily due to issuance of new debt related to the proposed acquisition of Lord. Refer to Note 10to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Shareholders' equity activity during 20162019 included a decrease of $558$800 million related to share repurchases, a decrease of $205$228 million related to pensions and postretirement benefits resulting from net actuarial losses due to a decrease in discount rates and a decrease of $66 million related to foreign currency translation adjustments and a decrease of $286 million related to pensions and postretirement benefits.adjustments.
Discussion of Consolidated Statement of Cash Flows
CONSOLIDATED STATEMENT OF CASH FLOWS
The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing and financing activities.
A summary of cash flows follows:
| | | (dollars in millions) | | 2016 | | 2015 | | 2014 | | 2019 |
| | 2018 |
|
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | | $ | 1,170 |
| | $ | 1,302 |
| | $ | 1,388 |
| | $ | 1,730 |
| | $ | 1,597 |
|
| Investing activities | | (265 | ) | | (579 | ) | | (646 | ) | | (219 | ) | | 24 |
|
| Financing activities | | (802 | ) | | (1,045 | ) | | (958 | ) | | 902 |
| | (1,682 | ) |
| Effect of exchange rates | | (62 | ) | | (111 | ) | | 48 |
| | (16 | ) | | (1 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 41 |
| | $ | (433 | ) | | $ | (168 | ) | | $ | 2,397 |
| | $ | (62 | ) |
Cash Flows From Operating Activitiesflows from operating activities in 20162019 reflects a decreasean increase in net income from 2015 of $205$452 million and an increase of $120$144 million forfrom cash provided by working capital items. Cash flows from operating activities in 2015 reflects a reduction of $257 million for cash used by working capital items. Cash flow from operating activities in 2014 benefited from a $294 million increase in cash provided by working capital items, partially offset by a $184 million decrease in net income after consideration of non-cash items, including a $413 million gain on the deconsolidation of a subsidiary and a $189 million impairment charge. The Company also made voluntarya discretionary cash contributionscontribution to the Company's domestic qualified defined benefit plan of $200 million in 2016 and $75 million in 2014.2019.
Cash Flows Used In Investing Activities in 2016 and 2015 includes $51 million and $356 million, respectively, in net purchases of marketable securities and other investments. Cash flows used infrom investing activities in 2014 includes $625 million in purchasesnet (purchases) maturities of marketable securities and other investments of $(107) million and $202$3 million in 2019 and 2018, respectively. It also includes $195 million and $248 million of capital expenditures in 2019 and 2018, respectively. During 2018 cash flows from investing activities benefited from proceeds fromrelated to the sale of a 50 percent equity interestthe global Facet filtration business.
Cash flows from financing activities includes issuance of long-term debt of $2,337 million in a subsidiary2019 primarily related to the joint venture with GE Aviation.
proposed acquisition of Lord. Refer to Note 10to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. Cash Flows Used In Financing Activities flows from financing activities during 2015 includes the issuance of $1,500 million of medium-term notes and2018 included the repayment of commercial paper notes outstanding at the timelong-term debt of the debt issuance.approximately $945 million. The Company repurchased 5.14.8 million common shares for $558$800 million during 2016 as2019 compared to the repurchase of 11.1 million common shares for $1,394 million in 2015 and 1.7 million common shares for $200$300 million in 2014.2018.
Dividends have been paid for 264276 consecutive quarters, including a yearly increase in dividends for the last 6063 years. The current annual dividend rate is $2.52$3.52 per common share.
The Company's goal is to maintain no less than an "A" rating ona strong investment-grade credit profile. At June 30, 2019, the long-term credit ratings assigned to the Company's senior debt to ensure availability and reasonable cost of external funds. As a means of achieving this objective,securities by the credit rating agencies engaged by the Company has established a financial goal of maintaining a ratio of debt to debt-shareholders' equity of no more than 37 percent. From time to time, suchwere as at June 30, 2016, fluctuations in cash flows from operations or capital deployment actions may cause the ratio of debt to debt-shareholders' equity to exceed the 37 percent goal. The Company does not believe that its ability to borrow funds at affordable interest rates has been or will be impacted when the debt to debt-shareholders' equity ratio temporarily exceeds 37 percent.
follows:
|
| | | | | | | | |
| Debt to Debt-Shareholders' Equity Ratio (dollars in millions) | | 2016 | | 2015 |
| Debt | | $ | 3,037 |
| | $ | 2,947 |
|
| Debt & Shareholders' Equity | | 7,612 |
| | 8,051 |
|
| Ratio | | 39.9 | % | | 36.6 | % |
|
| | |
| Fitch Ratings | | A- |
| Moody's Investor Services, Inc. | | Baa1 |
| Standard & Poor's | | A |
The rating agencies periodically update the Company's credit ratings as events occur. On July 29, 2019, Standard & Poor's downgraded the Company's credit rating to A- reflecting the additional debt that will be used to fund the recently announced acquisitions.
As of June 30, 2016,2019, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, $1,696 million of which $1,414 million was available at June 30, 2016.2019. Refer to Note 89 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
The Company is currently authorized to sell up to $1,850$2,000 million of short-term commercial paper notes. There were $304$586 million outstanding commercial paper notes as of June 30, 2016,2019, and the largest amount of commercial paper notes outstanding during the last quarter of 20162019 was $541$1,000 million.
The Company's credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the applicable agreements for future borrowings or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.
During 2019, the Company entered into a definitive agreement under which it expects to acquire Lord for approximately $3,675 million in cash. The Company intends to finance the purchase price for the Lord acquisition with the net proceeds from the Senior Notes due 2024, 2029 and 2049, the delayed-draw term loan and certain commercial paper proceeds. Refer to Note 10to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. On July 29, 2019, the Company announced that it had entered into a definitive agreement to acquire Exotic for approximately $1,725 million in cash and intends to finance the purchase price for this acquisition with new debt. These acquisitions remain subject to certain closing conditions.
Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $152$166 million at June 30, 2016.2019. Payment of these obligations would result from settlements with worldwide taxing authorities. Due to the difficulty in determining the timing of the settlements, these obligations are not included in the following summary of the Company's fixed contractual obligations. References to Notes are to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
| | | (dollars in millions) | | Payments due by period | | Payments due by period |
| Contractual obligations | | Total |
| | Less than 1 year |
| | 1-3 years |
| | 3-5 years |
| | More than 5 years |
| | Total |
| | Less than 1 year |
| | 1-3 years |
| | 3-5 years |
| | More than 5 years |
|
Long-term debt (Note 9) | | $ | 2,733 |
| | $ | 58 |
| | $ | 550 |
| | $ | — |
| | $ | 2,125 |
| |
Transition tax payments related to TCJ Act (Note 5) | | | $ | 187 |
| | $ | — |
| | $ | — |
| | $ | 59 |
| | $ | 128 |
|
Long-term debt (Note 10) | | | 6,596 |
| | — |
| | — |
| | 875 |
| | 5,721 |
|
| Interest on long-term debt | | 1,708 |
| | 122 |
| | 211 |
| | 181 |
| | 1,194 |
| | 3,681 |
| | 227 |
| | 454 |
| | 436 |
| | 2,564 |
|
Operating leases (Note 9) | | 195 |
| | 69 |
| | 72 |
| | 24 |
| | 30 |
| |
Retirement benefits (Note 10) | | 367 |
| | 312 |
| | 14 |
| | 13 |
| | 28 |
| |
Operating leases (Note 10) | | | 143 |
| | 46 |
| | 53 |
| | 21 |
| | 23 |
|
Retirement benefits (Note 11) | | | 119 |
| | 82 |
| | 10 |
| | 9 |
| | 18 |
|
| Total | | $ | 5,003 |
| | $ | 561 |
| | $ | 847 |
| | $ | 218 |
| | $ | 3,377 |
| | $ | 10,726 |
| | $ | 355 |
| | $ | 517 |
| | $ | 1,400 |
| | $ | 8,454 |
|
Off-Balance Sheet Arrangements
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements.
Critical Accounting Policies
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.
Revenue Recognition - Substantially allRevenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of the Diversified Industrial SegmentCompany’s revenues are recognized at a point in time when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership havecontrol is transferred or services have been rendered, the price to the customer, is fixed and determinable and collectibility is reasonably assured, which is generally at the time of shipment. However, a portion of the Company’s revenues are recognized over time if the customer simultaneously receives control as the Company performs work under a contract, if the customer controls the asset as it is being produced, or if the product is shipped. The Aerospace Systems Segment recognizes revenues primarily usingbeing produced for the percentage-of-completion methodcustomer has no alternative use and the extentCompany has a contractual right to payment.
For contracts where revenue is recognized over time, the Company uses the cost-to-cost, efforts expended or units of progress toward completion is primarily measured usingdelivery method depending on the units-of-delivery method. The Company estimates costs to complete long-term contracts for purposesnature of evaluating and establishingthe contract, reserves.including length of production time. The estimation of these costs and efforts expended requires judgment on the part of management due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to costthese estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.
When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and the Company’s best judgment at the time.
Impairment of Goodwilland 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 belowunits are equivalent to its operating segments. As quoted market prices are not available for the operating segment level. Determiningreporting units, determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistentlywas estimated using primarilyboth income-based and market-based valuation methods. The income-based valuation method utilized a discounted cash flow model. The Company believes that the use of a discounted cash flow model,
results in the most accurate calculation of a reporting unit's fair value since the market value for a reporting unit is not readily available. The discounted cash flow analysis requires which required several assumptions including future sales growth and operating margin levels as well as assumptions regarding future industry specificindustry-specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analysis. TheWithin the discounted cash flow models, the Company has consistentlyalso used a discount rate, commensurate with its cost of capital, but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation method included an analysis, for each reporting unit, consisting of market-adjusted multiples based on key data points for guideline public companies. The Company also reconcilesreconciled the estimated aggregate fair value of its reporting units as derivedresulting from the discounted cash flow analysisthese procedures to the Company'sits overall market capitalization.
The results of the Company's 20162019 annual goodwill impairment test performed as of December 31, 20152018 indicated that no goodwill impairment existed. During 2014, the Company made a decision to restructure and change the strategic direction of its Worldwide Energy Products Division (EPD). The Company calculated the fair value of EPD using assumptions reflecting the Company's current strategic direction for this reporting unit, the results of which indicated that the carrying value of EPD exceeded its fair value. As a result, the Company estimated the implied fair value of EPD's goodwill, which resulted in a non-cash impairment charge of $140 million. The fair value of EPD was calculated using both a discounted cash flow analysis and estimated fair market values of comparable businesses.
The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate. The Company is unaware of any current market trends that are contrary to the assumptions made in the estimation of the fair value of any of its reporting units. If actual experience is not consistent with the assumptions made in the estimation of the fair value of the reporting units, especially assumptions regarding penetration into new markets and the recovery of the current economic environment, it is possible that the Company may need to conduct additional goodwill impairment tests, and the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests.value.
Long-lived assets held for use, which primarily includes finite-lived intangible assets and plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2016, there were no events or circumstances that indicated that the carrying value of the Company's long-lived assets held for use were not recoverable. During 2014, in connection with the goodwill impairment review discussed above,2019, the Company determined certain intangible assets of EPD, primarily trademarks and customer lists, and plant and equipment were impaired resulting in a non-cashdid not record any material impairment charge of $49 million. The fair value of EPD's intangible assets and plant and equipment were determined using the income approach for each asset.related to long-lived assets.
Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements. Beginning in 2017, the Company will change the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant cash outflows. Previously, these costs were determined using a single-weighted average discount rate. The change does not affect the measurement of the Company's benefit obligations. The new method provides a more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the discrete spot yield curve rates and will be accounted for as a change in estimate prospectively beginning in the first quarter of 2017. Annual net periodic pension expense in 2017 is expected to be lower by approximately $33 million compared to the previous method. Annual net periodic postretirement cost is not expected to be materially different.
For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have a $12$15 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $31$23 million. As of June 30, 2016, $1,5352019, $1,064 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately eightseven years and will negatively affect earnings in the future. ActuarialAny actuarial gains experienced in future years will help reduce the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 1011 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 45 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss accruals are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.
Recently Issued Accounting PronouncementsRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.
The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Part II, Item 8 of this Annual Report on Form 10-K. Gains or losses on derivatives that are not designated as hedges are adjusted to fair value through the Consolidated Statement of Income. Gains or losses on derivatives that are designated as hedges are adjusted to fair value through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.
The Company's debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company's objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 20162019 by approximately $6$9 million.
ITEM 8. Financial Statements and Supplementary Data. |
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Financial Statements | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Parker-Hannifin Corporation
Cleveland, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Parker-Hannifin Corporation and subsidiaries (the "Company") as of June 30, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended June 30, 2016. Our audits also included2019, and the financial statementrelated notes and the schedule listed in the Index at Item 15.15 (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2016,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company's management is responsible for these financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Parker-Hannifin Corporation and subsidiaries as of June 30, 2016 and 2015, the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly,and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Goodwill - Refer to Notes 1 and 8 to the financial statements |
Critical Audit Matter Description
The Company tests goodwill 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 year ended June 30, 2019, the Company’s reporting units are the same as its operating segments. Prior to fiscal year 2019, the Company’s reporting units were one level below the operating segment level.
We identified the determination of reporting units for goodwill as a critical audit matter due to the changes in all material respects, the information set forth therein. Also, in our opinion,composition of reporting units made by the Company maintained,during the year ended June 30, 2019 and the significant judgments made by management to conclude that the Company’s reporting units are the same as its operating segments. This, in all material respects, effective internalturn, required a high degree of auditor judgment and an increased extent of effort to evaluate management’s conclusions regarding the changes to the composition of reporting units.
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| How the Critical Audit Matter Was Addressed in the Audit |
Our audit procedures related to the determination of reporting units for goodwill included the following, among others:
We tested the effectiveness of the control over financialmanagement’s determination of goodwill reporting asunits for goodwill.
We evaluated the following significant judgments made by management:
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| – | Identification of reporting units including the consideration of discrete financial information that was available and level of review of the operating results for each reporting unit. |
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| – | The aggregation of single reporting units based on similar economic characteristics. |
We performed a retrospective review of June 30, 2016, based onselect reporting units identified at one level below the criteria establishedoperating segment level to evaluate the potential existence of any impairment indicators prior to the change in Internal Control - Integrated Framework (2013) issued by the Committeedetermination of Sponsoring Organizations ofreporting units at the Treadway Commission.operating segment level.
/s/ DELOITTE & TOUCHE, LLP
Cleveland, Ohio
August 26, 201623, 2019
We have served as the Company's auditor since 2008.
Consolidated Statement of IncomeCONSOLIDATED STATEMENT OF INCOME
| | | | | For the years ended June 30, | | For the years ended June 30, |
| (Dollars in thousands, except per share amounts) | | 2016 |
| | 2015 |
| | 2014 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Net Sales | | $ | 11,360,753 |
| | $ | 12,711,744 |
| | $ | 13,215,971 |
| | $ | 14,320,324 |
| | $ | 14,302,392 |
| | $ | 12,029,312 |
|
| Cost of sales | | 8,823,384 |
| | 9,655,245 |
| | 10,188,227 |
| | 10,703,484 |
| | 10,737,745 |
| | 9,119,029 |
|
| Gross profit | | 2,537,369 |
| | 3,056,499 |
| | 3,027,744 |
| |
| Selling, general and administrative expenses | | 1,359,360 |
| | 1,544,746 |
| | 1,633,992 |
| | 1,543,939 |
| | 1,639,989 |
| | 1,412,820 |
|
| Goodwill and intangible asset impairment (Note 7) | | — |
| | — |
| | 188,870 |
| |
| Interest expense | | 136,517 |
| | 118,406 |
| | 82,566 |
| | 190,138 |
| | 213,873 |
| | 162,436 |
|
| Other (income), net | | (62,199 | ) | | (43,374 | ) | | (25,513 | ) | |
| (Gain) loss on disposal of assets (Note 2) | | (11,037 | ) | | 4,481 |
| | (408,891 | ) | |
| Other (income) expense, net | | | (61,247 | ) | | 12,991 |
| | 49,647 |
|
| Loss (gain) on disposal of assets (Note 3) | | | 10,585 |
| | (4,483 | ) | | (43,261 | ) |
| Income before income taxes | | 1,114,728 |
| | 1,432,240 |
| | 1,556,720 |
| | 1,933,425 |
| | 1,702,277 |
| | 1,328,641 |
|
| Income taxes (Note 4) | | 307,512 |
| | 419,687 |
| | 515,302 |
| |
| Income taxes (Note 5) | | | 420,494 |
| | 640,962 |
| | 344,797 |
|
| Net Income | | 807,216 |
| | 1,012,553 |
| | 1,041,418 |
| | 1,512,931 |
| | 1,061,315 |
| | 983,844 |
|
| Less: Noncontrolling interest in subsidiaries' earnings | | 376 |
| | 413 |
| | 370 |
| | 567 |
| | 514 |
| | 432 |
|
| Net Income Attributable to Common Shareholders | | $ | 806,840 |
| | $ | 1,012,140 |
| | $ | 1,041,048 |
| | $ | 1,512,364 |
| | $ | 1,060,801 |
| | $ | 983,412 |
|
| | | | | | | | | | | | | |
| Earnings per Share Attributable to Common Shareholders (Note 5) | | | | | | | |
| Earnings per Share Attributable to Common Shareholders (Note 6) | | | | | | | |
| Basic earnings per share | | $ | 5.96 |
| | $ | 7.08 |
| | $ | 6.98 |
| | $ | 11.63 |
| | $ | 7.98 |
| | $ | 7.37 |
|
| Diluted earnings per share | | $ | 5.89 |
| | $ | 6.97 |
| | $ | 6.87 |
| | $ | 11.48 |
| | $ | 7.83 |
| | $ | 7.25 |
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The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statement of Comprehensive IncomeCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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| | | | | | | | | | | | |
| | | For the years ended June 30, |
| (Dollars in thousands) | | 2016 |
| | 2015 |
| | 2014 |
|
| Net Income | | $ | 807,216 |
| | $ | 1,012,553 |
| | $ | 1,041,418 |
|
| Less: Noncontrolling interests in subsidiaries' earnings | | 376 |
| | 413 |
| | 370 |
|
| Net income attributable to common shareholders | | 806,840 |
| | 1,012,140 |
| | 1,041,048 |
|
| | | | | | | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Foreign currency translation adjustment and other (net of tax of $(2,342), $(31,024) and $4,591 in 2016, 2015 and 2014) | | (203,299 | ) | | (765,659 | ) | | 193,130 |
|
| Retirement benefits plan activity (net of tax of $152,203, $88,547 and $(54,473) in 2016, 2015 and 2014) | | (286,044 | ) | | (149,710 | ) | | 91,182 |
|
| Other comprehensive income (loss) | | (489,343 | ) | | (915,369 | ) | | 284,312 |
|
| Less: Other comprehensive (loss) for noncontrolling interests | | (196 | ) | | (249 | ) | | (23 | ) |
| Other comprehensive income (loss) attributable to common shareholders | | (489,147 | ) | | (915,120 | ) | | 284,335 |
|
| Total Comprehensive Income Attributable to Common Shareholders | | $ | 317,693 |
| | $ | 97,020 |
| | $ | 1,325,383 |
|
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| | | | | | | | | | | | |
| | | For the years ended June 30, |
| (Dollars in thousands) | | 2019 |
| | 2018 |
| | 2017 |
|
| Net Income | | $ | 1,512,931 |
| | $ | 1,061,315 |
| | $ | 983,844 |
|
| Less: Noncontrolling interests in subsidiaries' earnings | | 567 |
| | 514 |
| | 432 |
|
| Net income attributable to common shareholders | | 1,512,364 |
| | 1,060,801 |
| | 983,412 |
|
| | | | | | | |
| Other comprehensive (loss) income, net of tax | | | | | | |
| Foreign currency translation adjustment and other (net of tax of $709, $16,964 and $40,935 in 2019, 2018 and 2017) | | (66,392 | ) | | (18,575 | ) | | (80,865 | ) |
| Retirement benefits plan activity (net of tax of $71,821, $(82,506) and $(218,590) in 2019, 2018 and 2017) | | (227,783 | ) | | 179,253 |
| | 384,784 |
|
| Other comprehensive (loss) income | | (294,175 | ) | | 160,678 |
| | 303,919 |
|
| Less: Other comprehensive income (loss) for noncontrolling interests | | 53 |
| | (440 | ) | | 358 |
|
| Other comprehensive (loss) income attributable to common shareholders | | (294,228 | ) | | 161,118 |
| | 303,561 |
|
| Total Comprehensive Income Attributable to Common Shareholders | | $ | 1,218,136 |
| | $ | 1,221,919 |
| | $ | 1,286,973 |
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The accompanying notes are an integral part of the consolidated financial statements.
Business Segment InformationBUSINESS SEGMENT INFORMATION
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| (Dollars in thousands) | | 2019 |
| | 2018 |
| | 2017 |
|
| Net Sales: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 6,808,948 |
| | $ | 6,726,900 |
| | $ | 5,366,809 |
|
| International | | 5,000,599 |
| | 5,259,793 |
| | 4,377,776 |
|
| Aerospace Systems | | 2,510,777 |
| | 2,315,699 |
| | 2,284,727 |
|
| | | $ | 14,320,324 |
| | $ | 14,302,392 |
| | $ | 12,029,312 |
|
| Segment Operating Income: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 1,138,586 |
| | $ | 1,076,021 |
| | $ | 873,552 |
|
| International | | 804,890 |
| | 765,188 |
| | 579,207 |
|
| Aerospace Systems | | 487,757 |
| | 397,970 |
| | 337,496 |
|
| Total segment operating income | | 2,431,233 |
| | 2,239,179 |
| | 1,790,255 |
|
| Corporate administration | | 194,994 |
| | 200,901 |
| | 172,632 |
|
| Income before interest expense and other expense | | 2,236,239 |
| | 2,038,278 |
| | 1,617,623 |
|
| Interest expense | | 190,138 |
| | 213,873 |
| | 162,436 |
|
| Other expense | | 112,676 |
| | 122,128 |
| | 126,546 |
|
| Income before income taxes | | $ | 1,933,425 |
| | $ | 1,702,277 |
| | $ | 1,328,641 |
|
| | | | | | | |
| Assets: | | | | | | |
| Diversified Industrial | | $ | 13,189,204 |
| | $ | 13,368,619 |
| | $ | 13,366,981 |
|
| Aerospace Systems (a) | | 1,546,053 |
| | 1,446,745 |
| | 1,412,707 |
|
| Corporate | | 2,841,433 |
| | 504,723 |
| | 710,216 |
|
| | | $ | 17,576,690 |
| | $ | 15,320,087 |
| | $ | 15,489,904 |
|
| | | | | | | |
| Property Additions: | | | | | | |
| Diversified Industrial | | $ | 172,348 |
| | $ | 196,469 |
| | $ | 148,765 |
|
| Aerospace Systems | | 20,748 |
| | 15,225 |
| | 16,929 |
|
| Corporate | | 1,993 |
| | 35,973 |
| | 38,054 |
|
| | | $ | 195,089 |
| | $ | 247,667 |
| | $ | 203,748 |
|
| | | | | | | |
| Depreciation: | | | | | | |
| Diversified Industrial | | $ | 203,144 |
| | $ | 211,648 |
| | $ | 176,823 |
|
| Aerospace Systems | | 16,268 |
| | 16,737 |
| | 17,484 |
|
| Corporate | | 6,263 |
| | 9,421 |
| | 8,561 |
|
| | | $ | 225,675 |
| | $ | 237,806 |
| | $ | 202,868 |
|
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2016 |
| | 2015 |
| | 2014 |
|
| Net Sales: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 4,955,211 |
| | $ | 5,715,742 |
| | $ | 5,693,527 |
|
| International | | 4,145,272 |
| | 4,741,376 |
| | 5,287,916 |
|
| Aerospace Systems | | 2,260,270 |
| | 2,254,626 |
| | 2,234,528 |
|
| | | $ | 11,360,753 |
| | $ | 12,711,744 |
| | $ | 13,215,971 |
|
| Segment Operating Income: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 789,667 |
| | $ | 955,501 |
| | $ | 946,493 |
|
| International | | 448,457 |
| | 583,937 |
| | 572,476 |
|
| Aerospace Systems | | 337,531 |
| | 298,994 |
| | 271,238 |
|
| Total segment operating income | | 1,575,655 |
| | 1,838,432 |
| | 1,790,207 |
|
| Corporate administration | | 173,203 |
| | 215,396 |
| | 181,926 |
|
| Income before interest expense and other | | 1,402,452 |
| | 1,623,036 |
| | 1,608,281 |
|
| Interest expense | | 136,517 |
| | 118,406 |
| | 82,566 |
|
| Other expense (income) | | 151,207 |
| | 72,390 |
| | (31,005 | ) |
| Income before income taxes | | $ | 1,114,728 |
| | $ | 1,432,240 |
| | $ | 1,556,720 |
|
| | | | | | | |
| Assets (a): | | | | | | |
| Diversified Industrial | | $ | 8,728,671 |
| | $ | 8,734,942 |
| | $ | 9,470,822 |
|
| Aerospace Systems (b) | | 1,430,577 |
| | 1,375,845 |
| | 1,359,063 |
|
| Corporate (c) | | 1,897,490 |
| | 2,168,495 |
| | 2,429,930 |
|
| | | $ | 12,056,738 |
| | $ | 12,279,282 |
| | $ | 13,259,815 |
|
| | | | | | | |
| Property Additions: | | | | | | |
| Diversified Industrial | | $ | 134,618 |
| | $ | 190,580 |
| | $ | 189,832 |
|
| Aerospace Systems | | 10,857 |
| | 18,427 |
| | 23,261 |
|
| Corporate | | 3,932 |
| | 6,520 |
| | 3,247 |
|
| | | $ | 149,407 |
| | $ | 215,527 |
| | $ | 216,340 |
|
| | | | | | | |
| Depreciation: | | | | | | |
| Diversified Industrial | | $ | 163,014 |
| | $ | 174,102 |
| | $ | 187,347 |
|
| Aerospace Systems | | 18,469 |
| | 19,509 |
| | 19,193 |
|
| Corporate | | 8,825 |
| | 9,165 |
| | 8,425 |
|
| | | $ | 190,308 |
| | $ | 202,776 |
| | $ | 214,965 |
|
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2019 |
| | 2018 |
| | 2017 |
|
| By Geographic Area (b) | | | | | | |
| Net Sales: | | | | | | |
| North America | | $ | 9,318,195 |
| | $ | 8,978,490 |
| | $ | 7,585,689 |
|
| International | | 5,002,129 |
| | 5,323,902 |
| | 4,443,623 |
|
| | | $ | 14,320,324 |
| | $ | 14,302,392 |
| | $ | 12,029,312 |
|
| Long-Lived Assets: | | | | | | |
| North America | | $ | 1,052,263 |
| | $ | 1,103,308 |
| | $ | 1,145,127 |
|
| International | | 716,024 |
| | 752,929 |
| | 792,165 |
|
| | | $ | 1,768,287 |
| | $ | 1,856,237 |
| | $ | 1,937,292 |
|
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2016 |
| | 2015 |
| | 2014 |
|
| By Geographic Area (d) | | | | | | |
| Net Sales: | | | | | | |
| North America | | $ | 7,144,481 |
| | $ | 7,891,571 |
| | $ | 7,853,603 |
|
| International | | 4,216,272 |
| | 4,820,173 |
| | 5,362,368 |
|
| | | $ | 11,360,753 |
| | $ | 12,711,744 |
| | $ | 13,215,971 |
|
| Long-Lived Assets: | | | | | | |
| North America | | $ | 817,872 |
| | $ | 856,947 |
| | $ | 861,300 |
|
| International | | 750,228 |
| | 807,075 |
| | 962,994 |
|
| | | $ | 1,568,100 |
| | $ | 1,664,022 |
| | $ | 1,824,294 |
|
The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a basis that is consistent with the manner in which the Company’s management disaggregates financial information for internal review and decision-making.
| |
| (a) | Amounts in 2015 and 2014 have been adjusted to reflect the retrospective adoption of Accounting Standards Update (ASU) 2015-17 in the fourth quarter of 2016. |
| |
(b) | Includes an investment in a joint venture in which ownership is 50 percent or less and in which the Company does not have operating control (2016(2019 - $241,728; 2015$234,703; 2018 - $251,365; 2014$235,665; 2017 - $263,246)$240,182). |
| |
(c)(b) | Corporate assets are principally cash and cash equivalents, marketable securities and other investments, domestic deferred income taxes, deferred compensation plan assets, headquarters facilities and the major portion of the Company’s domestic data processing equipment. |
| |
(d) | Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10 percent of consolidated sales. Long-lived assets are comprised of plant and equipment based on physical location. |
Consolidated Balance SheetCONSOLIDATED BALANCE SHEET
| | | (Dollars in thousands) | | | | |
| June 30, | | 2016 |
| | 2015 |
| | 2019 |
| | 2018 |
|
| Assets | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents (Note 1) | | $ | 1,221,653 |
| | $ | 1,180,584 |
| | $ | 3,219,767 |
| | $ | 822,137 |
|
| Marketable securities and other investments (Note 1) | | 882,342 |
| | 733,490 |
| | 150,931 |
| | 32,995 |
|
| Trade accounts receivable, net (Note 1) | | 1,593,920 |
| | 1,620,194 |
| | 2,131,054 |
| | 2,145,517 |
|
| Non-trade and notes receivable (Note 1) | | 232,183 |
| | 364,534 |
| | 310,708 |
| | 328,399 |
|
| Inventories (Note 6) | | 1,173,329 |
| | 1,300,459 |
| |
| Inventories (Note 7) | | | 1,678,132 |
| | 1,621,304 |
|
| Prepaid expenses | | 104,360 |
| | 241,684 |
| | 182,494 |
| | 134,886 |
|
| Total Current Assets | | 5,207,787 |
| | 5,440,945 |
| | 7,673,086 |
| | 5,085,238 |
|
| Plant and equipment (Note 1) | | 4,737,141 |
| | 4,862,611 |
| | 5,186,730 |
| | 5,215,253 |
|
| Less: Accumulated depreciation | | 3,169,041 |
| | 3,198,589 |
| | 3,418,443 |
| | 3,359,016 |
|
| | | 1,568,100 |
| | 1,664,022 |
| |
| Deferred income taxes (Notes 1 and 4) | | 605,155 |
| | 406,267 |
| |
| Plant and equipment, net | | | 1,768,287 |
| | 1,856,237 |
|
| Deferred income taxes (Notes 1 and 5) | | | 150,462 |
| | 57,623 |
|
| Investments and other assets (Note 1) | | 850,088 |
| | 811,930 |
| | 747,773 |
| | 801,049 |
|
| Intangible assets, net (Notes 1 and 7) | | 922,571 |
| | 1,013,439 |
| |
| Goodwill (Notes 1 and 7) | | 2,903,037 |
| | 2,942,679 |
| |
| Intangible assets, net (Notes 1 and 8) | | | 1,783,277 |
| | 2,015,520 |
|
| Goodwill (Notes 1 and 8) | | | 5,453,805 |
| | 5,504,420 |
|
| Total Assets | | $ | 12,056,738 |
| | $ | 12,279,282 |
| | $ | 17,576,690 |
| | $ | 15,320,087 |
|
| | | | | | | | | |
| Liabilities and Equity | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Notes payable and long-term debt payable within one year (Notes 8 and 9) | | $ | 361,840 |
| | $ | 223,142 |
| |
| Notes payable and long-term debt payable within one year (Notes 9 and 10) | | | $ | 587,014 |
| | $ | 638,466 |
|
| Accounts payable, trade | | 1,034,589 |
| | 1,092,138 |
| | 1,413,155 |
| | 1,430,306 |
|
| Accrued payrolls and other compensation | | 382,945 |
| | 409,762 |
| | 426,285 |
| | 427,500 |
|
| Accrued domestic and foreign taxes | | 127,597 |
| | 139,285 |
| | 167,312 |
| | 198,878 |
|
| Other accrued liabilities | | 458,970 |
| | 484,793 |
| | 558,007 |
| | 502,333 |
|
| Total Current Liabilities | | 2,365,941 |
| | 2,349,120 |
| | 3,151,773 |
| | 3,197,483 |
|
| Long-term debt (Note 9) | | 2,675,000 |
| | 2,723,960 |
| |
| Pensions and other postretirement benefits (Note 10) | | 2,076,143 |
| | 1,699,197 |
| |
| Deferred income taxes (Notes 1 and 4) | | 54,395 |
| | 63,222 |
| |
| Long-term debt (Note 10) | | | 6,520,831 |
| | 4,318,559 |
|
| Pensions and other postretirement benefits (Note 11) | | | 1,304,379 |
| | 1,177,605 |
|
| Deferred income taxes (Notes 1 and 5) | | | 193,066 |
| | 234,858 |
|
| Other liabilities | | 306,581 |
| | 336,214 |
| | 438,489 |
| | 526,089 |
|
| Total Liabilities | | 7,478,060 |
| | 7,171,713 |
| | 11,608,538 |
| | 9,454,594 |
|
Equity (Note 11) | | | | | |
Equity (Note 12) | | | | | |
| Shareholders' Equity | | | | | | | | |
| Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued | | — |
| | — |
| | — |
| | — |
|
| Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2016 and 2015 | | 90,523 |
| | 90,523 |
| |
| Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2019 and 2018 | | | 90,523 |
| | 90,523 |
|
| Additional capital | | 628,451 |
| | 622,729 |
| | 462,086 |
| | 496,592 |
|
| Retained earnings | | 10,302,866 |
| | 9,841,885 |
| | 12,777,538 |
| | 11,625,975 |
|
| Accumulated other comprehensive (loss) | | (2,227,765 | ) | | (1,738,618 | ) | | (2,059,048 | ) | | (1,763,086 | ) |
| Treasury shares at cost: 47,033,896 in 2016 and 42,487,389 in 2015 | | (4,218,820 | ) | | (3,712,232 | ) | |
| Treasury shares at cost: 52,566,086 in 2019 and 48,632,105 in 2018 | | | (5,309,130 | ) | | (4,590,138 | ) |
| Total Shareholders' Equity | | 4,575,255 |
| | 5,104,287 |
| | 5,961,969 |
| | 5,859,866 |
|
| Noncontrolling interests | | 3,423 |
| | 3,282 |
| | 6,183 |
| | 5,627 |
|
| Total Equity | | 4,578,678 |
| | 5,107,569 |
| | 5,968,152 |
| | 5,865,493 |
|
| Total Liabilities and Equity | | $ | 12,056,738 |
| | $ | 12,279,282 |
| | $ | 17,576,690 |
| | $ | 15,320,087 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statement of Cash FlowsCONSOLIDATED STATEMENT OF CASH FLOWS
| | | | | For the years ended June 30, | | For the years ended June 30, |
| (Dollars in thousands) | | 2016 |
| | 2015 |
| | 2014 |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Cash Flows From Operating Activities | | | | | | | | | | | | |
| Net income | | $ | 807,216 |
| | $ | 1,012,553 |
| | $ | 1,041,418 |
| | $ | 1,512,931 |
| | $ | 1,061,315 |
| | $ | 983,844 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | 190,308 |
| | 202,776 |
| | 214,965 |
| | 225,675 |
| | 237,806 |
| | 202,868 |
|
| Amortization | | 116,535 |
| | 114,715 |
| | 121,737 |
| | 210,514 |
| | 228,279 |
| | 152,361 |
|
| Goodwill and intangible asset impairment | | — |
| | — |
| | 188,870 |
| |
| Stock incentive plan compensation | | 71,293 |
| | 96,093 |
| | 103,161 |
| | 104,078 |
| | 118,831 |
| | 80,339 |
|
| Deferred income taxes | | (65,686 | ) | | 18,865 |
| | (74,139 | ) | | 32,537 |
| | (41,412 | ) | | 37,024 |
|
| Foreign currency transaction loss (gain) | | 22,750 |
| | (77,784 | ) | | 5,398 |
| |
| Loss on disposal of assets | | 414 |
| | 14,953 |
| | 2,997 |
| |
| Gain on sale of businesses | | (10,666 | ) | | (6,420 | ) | | — |
| |
| Net gain on deconsolidation | | — |
| | — |
|
| (412,612 | ) | |
| (Gain) loss on sale of marketable securities | | (723 | ) | | 3,817 |
| | — |
| |
| Foreign currency transaction loss | | | 5,888 |
| | 7,284 |
| | 8,060 |
|
| Loss (gain) on sale of plant and equipment | | | 5,091 |
| | (24,422 | ) | | 1,494 |
|
| Loss (gain) on sale of businesses | | | 5,854 |
| | 19,666 |
| | (41,285 | ) |
| (Gain) loss on sale and impairment of investments | | | (16,749 | ) | | 41,219 |
| | — |
|
| Loss (gain) on sale of marketable securities | | | 7,563 |
| | (2 | ) | | (1,032 | ) |
| Changes in assets and liabilities, net of effects from acquisitions: | | | | | | | | | | | | |
| Accounts receivable | | 17,549 |
| | 143,179 |
| | (99,144 | ) | | 2,452 |
| | (301,978 | ) | | (95,347 | ) |
| Inventories | | 120,243 |
| | (70,377 | ) | | (3,816 | ) | | (51,817 | ) | | (92,209 | ) | | (73,673 | ) |
| Prepaid expenses | | 136,034 |
| | (116,561 | ) | | 58,117 |
| | (33,335 | ) | | (16,206 | ) | | 2,410 |
|
| Other assets | | (5,033 | ) | | 20,976 |
| | (79,158 | ) | | 2,677 |
| | (16,880 | ) | | (5,795 | ) |
| Accounts payable, trade | | (52,378 | ) | | (86,750 | ) | | 92,927 |
| | (12,397 | ) | | 125,907 |
| | 174,761 |
|
| Accrued payrolls and other compensation | | (22,865 | ) | | (12,657 | ) | | 20,840 |
| | 2,088 |
| | (4,614 | ) | | 5,922 |
|
| Accrued domestic and foreign taxes | | (17,430 | ) | | (66,870 | ) | | 86,745 |
| | (30,593 | ) | | 44,019 |
| | 18,165 |
|
| Other accrued liabilities | | (61,424 | ) | | (46,633 | ) | | (23,480 | ) | | 16,698 |
| | (5,567 | ) | | (59,738 | ) |
| Pensions and other postretirement benefits | | (45,796 | ) | | 156,859 |
| | 99,569 |
| | (168,368 | ) | | 31,239 |
| | (103,866 | ) |
| Other liabilities | | (30,498 | ) | | 1,207 |
| | 43,498 |
| | (90,647 | ) | | 184,425 |
| | 14,051 |
|
| Net cash provided by operating activities | | 1,169,843 |
| | 1,301,941 |
| | 1,387,893 |
| | 1,730,140 |
| | 1,596,700 |
| | 1,300,563 |
|
| Cash Flows From Investing Activities | | | | | | | | | | | | |
| Acquisitions (less cash acquired of $3,814 in 2016, $8,332 in 2015 and $1,780 in 2014) | | (67,552 | ) | | (18,618 | ) | | (17,593 | ) | |
| Acquisitions (net of cash acquired of $690 in 2019 and $157,426 in 2017) | | | (2,042 | ) | | — |
| | (4,069,197 | ) |
| Capital expenditures | | (149,407 | ) | | (215,527 | ) | | (216,340 | ) | | (195,089 | ) | | (247,667 | ) | | (203,748 | ) |
| Proceeds from disposal of assets | | 18,821 |
| | 19,655 |
| | 14,368 |
| |
| Proceeds from sale of plant and equipment | | | 46,592 |
| | 81,881 |
| | 14,648 |
|
| Proceeds from sale of businesses | | 24,325 |
| | 37,265 |
| | — |
| | 19,678 |
| | 177,741 |
| | 85,610 |
|
| Net proceeds from deconsolidation | | — |
| | — |
| | 202,498 |
| |
| Purchase of marketable securities and other investments | | (1,351,464 | ) | | (1,747,333 | ) | | (624,880 | ) | | (181,780 | ) | | (80,607 | ) | | (465,666 | ) |
| Maturities and sales of marketable securities and other investments | | 1,300,633 |
| | 1,391,396 |
| | — |
| | 74,908 |
| | 83,905 |
| | 1,279,318 |
|
| Other | | (39,995 | ) | | (46,001 | ) | | (4,454 | ) | | 19,223 |
| | 8,424 |
| | (4,205 | ) |
| Net cash (used in) investing activities | | (264,639 | ) | | (579,163 | ) | | (646,401 | ) | |
| Net cash (used in) provided by investing activities | | | (218,510 | ) | | 23,677 |
| | (3,363,240 | ) |
| Cash Flows From Financing Activities | | | | | | | | | | | | |
| Proceeds from exercise of stock options | | 126 |
| | 3,355 |
| | 8,013 |
| | 2,475 |
| | 3,682 |
| | 2,202 |
|
| Payments for common shares | | (557,575 | ) | | (1,398,446 | ) | | (204,043 | ) | | (860,052 | ) | | (381,041 | ) | | (338,078 | ) |
| Tax benefit from stock incentive plan compensation | | 11,145 |
| | 23,429 |
| | 33,732 |
| |
| Proceeds from (payments for) notes payable, net | | 303,624 |
| | (815,171 | ) | | (515,387 | ) | |
| Proceeds from notes payable, net | | | 48,828 |
| | 4,115 |
| | 230,499 |
|
| Proceeds from long-term borrowings | | 2,287 |
| | 1,483,015 |
| | 748 |
| | 2,336,749 |
| | 1,189 |
| | 2,614,463 |
|
| Payments for long-term borrowings | | (220,068 | ) | | (537 | ) | | (2,934 | ) | | (213,226 | ) | | (944,629 | ) | | (381,078 | ) |
| Dividends paid | | (341,962 | ) | | (340,389 | ) | | (278,244 | ) | | (412,468 | ) | | (365,288 | ) | | (345,380 | ) |
| Net cash (used in) financing activities | | (802,423 | ) | | (1,044,744 | ) | | (958,115 | ) | |
| Net cash provided by (used in) financing activities | | | 902,306 |
| | (1,681,972 | ) | | 1,782,628 |
|
| Effect of exchange rate changes on cash | | (61,712 | ) | | (111,005 | ) | | 48,766 |
| | (16,306 | ) | | (1,154 | ) | | (56,718 | ) |
| Net increase (decrease) in cash and cash equivalents | | 41,069 |
| | (432,971 | ) | | (167,857 | ) | | 2,397,630 |
| | (62,749 | ) | | (336,767 | ) |
| Cash and cash equivalents at beginning of year | | 1,180,584 |
| | 1,613,555 |
| | 1,781,412 |
| | 822,137 |
| | 884,886 |
| | 1,221,653 |
|
| Cash and cash equivalents at end of year | | $ | 1,221,653 |
| | $ | 1,180,584 |
| | $ | 1,613,555 |
| | $ | 3,219,767 |
| | $ | 822,137 |
| | $ | 884,886 |
|
| Supplemental Data: | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
| Interest | | $ | 133,999 |
| | $ | 105,202 |
| | $ | 77,144 |
| | $ | 169,378 |
| | $ | 200,860 |
| | $ | 131,937 |
|
| Income taxes | | 250,155 |
| | 515,350 |
| | 472,369 |
| | 454,699 |
| | 408,765 |
| | 268,127 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statement of EquityCONSOLIDATED STATEMENT OF EQUITY
| | | (Dollars in thousands) | | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Treasury Shares | | Noncontrolling Interests | | Total | | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Treasury Shares | | Noncontrolling Interests | | Total |
| Balance June 30, 2013 | | $ | 90,523 |
| | $ | 608,752 |
| | $ | 8,421,270 |
| | $ | (1,107,833 | ) | | $ | (2,274,286 | ) | | $ | 3,055 |
| | $ | 5,741,481 |
| |
| Balance June 30, 2016 | | | $ | 90,523 |
| | $ | 628,451 |
| | $ | 10,302,866 |
| | $ | (2,227,765 | ) | | $ | (4,218,820 | ) | | $ | 3,423 |
| | $ | 4,578,678 |
|
| Net income | | |
| |
| | 983,412 |
| |
| |
| | 432 |
| | 983,844 |
|
| Other comprehensive income | | |
| |
| |
| | 303,561 |
| |
| | 358 |
| | 303,919 |
|
| Dividends paid ($2.58 per share) | | |
| |
| | (345,042 | ) | |
| |
| | (338 | ) | | (345,380 | ) |
| Stock incentive plan activity | | |
| | (84,572 | ) | | (10,888 | ) | |
| | 104,615 |
| |
| | 9,155 |
|
| Acquisition activity | | |
| |
| |
| |
| |
|
| | 1,822 |
| | 1,822 |
|
| Shares purchased at cost | | |
| |
| |
| |
| | (264,692 | ) | |
| | (264,692 | ) |
| Balance June 30, 2017 | | | $ | 90,523 |
| | $ | 543,879 |
| | $ | 10,930,348 |
| | $ | (1,924,204 | ) | | $ | (4,378,897 | ) | | $ | 5,697 |
| | $ | 5,267,346 |
|
| Net income | |
| |
| | 1,041,048 |
| |
| |
| | 370 |
| | 1,041,418 |
| |
| |
| | 1,060,801 |
| |
| |
| | 514 |
| | 1,061,315 |
|
| Other comprehensive income (loss) | |
| |
| |
| | 284,335 |
| |
| | (23 | ) | | 284,312 |
| |
| |
| |
| | 161,118 |
| |
| | (440 | ) | | 160,678 |
|
| Dividends paid | |
| |
| | (278,222 | ) | |
| |
| | (22 | ) | | (278,244 | ) | |
| Dividends paid ($2.74 per share) | | |
| |
| | (365,174 | ) | |
| |
| | (114 | ) | | (365,288 | ) |
| Stock incentive plan activity | | |
| | (47,287 | ) | |
|
| |
| | 88,759 |
| |
| | 41,472 |
|
| Acquisition activity | | |
| |
| |
| |
| |
|
| | (30 | ) | | (30 | ) |
| Shares purchased at cost | | |
| |
| |
| |
| | (300,000 | ) | |
| | (300,000 | ) |
| Balance June 30, 2018 | | | $ | 90,523 |
| | $ | 496,592 |
| | $ | 11,625,975 |
| | $ | (1,763,086 | ) | | $ | (4,590,138 | ) | | $ | 5,627 |
| | $ | 5,865,493 |
|
| Impact of adoption of accounting standards | | |
| |
| | 51,603 |
| | (1,734 | ) | |
| |
|
| | 49,869 |
|
| Net income | | |
| |
| | 1,512,364 |
| |
| |
| | 567 |
| | 1,512,931 |
|
| Other comprehensive (loss) income | | |
| |
| |
|
| | (294,228 | ) | |
| | 53 |
| | (294,175 | ) |
| Dividends paid ($3.16 per share) | | |
| |
| | (412,404 | ) | |
| |
| | (64 | ) | | (412,468 | ) |
| Stock incentive plan activity | |
| | (13,254 | ) | | (9,907 | ) | |
| | 97,002 |
| |
| | 73,841 |
| |
| | (34,506 | ) | |
|
| |
| | 81,007 |
| |
|
| | 46,501 |
|
| Shares purchased at cost | |
| |
| |
| |
| | (200,000 | ) | |
| | (200,000 | ) | |
| |
| |
|
| |
| | (799,999 | ) | |
|
| | (799,999 | ) |
| Balance June 30, 2014 | | $ | 90,523 |
| | $ | 595,498 |
| | $ | 9,174,189 |
| | $ | (823,498 | ) | | $ | (2,377,284 | ) | | $ | 3,380 |
| | $ | 6,662,808 |
| |
| Net income | |
| |
| | 1,012,140 |
| |
| |
| | 413 |
| | 1,012,553 |
| |
| Other comprehensive income (loss) | |
| |
| |
| | (915,120 | ) | |
| | (249 | ) | | (915,369 | ) | |
| Dividends paid | |
| |
| | (340,132 | ) | |
| |
| | (257 | ) | | (340,389 | ) | |
| Stock incentive plan activity | |
| | 27,231 |
| | (4,312 | ) | |
| | 58,630 |
| |
| | 81,549 |
| |
| Liquidation activity | |
| |
| |
| |
| |
|
| | (5 | ) | | (5 | ) | |
| Shares purchased at cost | |
| |
| |
| |
| | (1,393,578 | ) | |
| | (1,393,578 | ) | |
| Balance June 30, 2015 | | $ | 90,523 |
| | $ | 622,729 |
| | $ | 9,841,885 |
| | $ | (1,738,618 | ) | | $ | (3,712,232 | ) | | $ | 3,282 |
| | $ | 5,107,569 |
| |
| Net income | |
| |
| | 806,840 |
| |
| |
| | 376 |
| | 807,216 |
| |
| Other comprehensive (loss) | |
| |
| |
|
| | (489,147 | ) | |
| | (196 | ) | | (489,343 | ) | |
| Dividends paid | |
| |
| | (341,923 | ) | |
| |
| | (39 | ) | | (341,962 | ) | |
| Stock incentive plan activity | |
| | 5,722 |
| | (3,936 | ) | |
| | 50,916 |
| |
|
| | 52,702 |
| |
| Shares purchased at cost | |
| |
| |
|
| |
| | (557,504 | ) | |
|
| | (557,504 | ) | |
| Balance June 30, 2016 | | $ | 90,523 |
| | $ | 628,451 |
| | $ | 10,302,866 |
| | $ | (2,227,765 | ) | | $ | (4,218,820 | ) | | $ | 3,423 |
| | $ | 4,578,678 |
| |
| Balance June 30, 2019 | | | $ | 90,523 |
| | $ | 462,086 |
| | $ | 12,777,538 |
| | $ | (2,059,048 | ) | | $ | (5,309,130 | ) | | $ | 6,183 |
| | $ | 5,968,152 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The term "year" and references to specific years refer to the applicable fiscal years.
| |
| 1. | Significant Accounting Policies |
The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below.
Nature of Operations- The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. The Company evaluates performance based on segment operating income before corporate and administrative expenses, interest expense and income taxes.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Diversified Industrial Segment products are marketed primarily through field sales employees and independent distributors. The Diversified Industrial North American operations have manufacturing plants and distribution networks throughout the United States, Canada and Mexico and primarily service North America. The Diversified Industrial International operations provide Parker products and services to 4647 countries throughout Europe, Asia Pacific, Latin America, the Middle East and Africa.
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and also performs a vital role in naval vessels and land-based weapons systems. This Segmentsegment serves original equipment and maintenance, repair and overhaul customers worldwide. Aerospace Systems Segment products are marketed by field sales employees and are sold directly to manufacturers and end-users.end users.
There are no individual customers to whom sales are more than fourthree percent of the Company's consolidated sales. Due to the diverse group of customers throughout the world, the Company does not consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company's products and geographic operations mitigate the risk that adverse changes with respect to any particular product and geographic operation would materially affect the Company's operating results.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation - The consolidated financial statements include the accounts of all majority-owned domestic and foreign subsidiaries. All intercompany transactions and profits have been eliminated in the consolidated financial statements. The Company does not have off-balance sheet arrangements. Within the Business Segment Information, intersegment and interarea sales have been eliminated.
Revenue Recognition - Revenue Revenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. When revenue is recognized when persuasive evidenceat a point in time, control generally transfers at time of an arrangement exists,shipment. Revenues are recognized over time if the customer simultaneously receives control as the Company performs work under a contract, if the customer controls the asset as it is being produced, or if the product produced for the customer has shippedno alternative use and the risksCompany has a contractual right to payment.
For contracts where revenue is recognized over time, the Company uses the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time. The estimation of these costs and rewardsefforts expended requires judgment on the part of ownership have transferred or services have been rendered, the pricemanagement due to the customer is fixed and determinable and collectibility is reasonably assured, which is generally atduration of the timecontractual agreements as well as the product is shipped. Shipping and handling costs billed to customers are included in net sales andtechnical nature of the related costs in cost of sales. Taxes collected from customers and remitted to governmental authorities are excluded from revenue.
Long-term Contracts - The Company enters into long-term contracts primarily for the production of aerospace products. For financial statement purposes, revenues are primarily recognized using the percentage-of-completion method. The extent of progress toward completion is primarily measured using the units-of-delivery method. Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves.products involved. Adjustments to costthese estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.
A contract’s transaction price is allocated to each distinct performance obligation. When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers of the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration primarily includes prompt pay discounts, rebates and volume discounts and is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and the Company’s best judgment at the time.
Payment terms vary by customer and the geographic location of the customer. The time between when revenue is recognized and payment is due is not significant. The Company’s contracts with customers generally do not include significant financing components or noncash consideration.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. The costs to obtain a contract where the amortization period for the related asset is one year or less are expensed as incurred.
There is generally no unilateral right to return products. The Company primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery. This type of warranty does not represent a separate performance obligation.
Cash - Cash equivalents consist of short-term, highly liquid investments with a three-month or less maturity,maturity. These investments are carried at cost plus accrued interest whichand are readily convertible into cash.
Marketable Securities and Other Investments - Consist of short-term, highly liquid investments with stated maturities of greater than three months from the date of purchase, which are carried at cost plus accrued interest,interest. Marketable securities and other investments classified asalso includes investments in equity securities and available-for-sale debt securities, which are carried at fair value. Changes in fair value with unrealizedrelated to equity securities are recorded in net income. Unrealized gains and losses related to available-for-sale debt securities are recorded in accumulated other comprehensive (loss). Gains and losses on available-for-sale investmentsdebt securities are calculated based on the first-in, first-out method. The Company has the ability to liquidate the available-for-salethese investments after giving appropriate notice to the issuer.
Trade Accounts Receivable, Net - Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was $8,010$8,874 and $9,284$9,672 at June 30, 20162019 and June 30, 2015,2018, respectively.
Non-Trade and Notes Receivable - The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
| June 30, | | 2019 |
| | 2018 |
|
| Notes receivable | | $ | 147,719 |
| | $ | 149,254 |
|
| Accounts receivable, other | | 162,989 |
| | 179,145 |
|
| Total | | $ | 310,708 |
| | $ | 328,399 |
|
|
| | | | | | | | |
| June 30, | | 2016 |
| | 2015 |
|
| Notes receivable | | $ | 102,400 |
| | $ | 90,470 |
|
| Reverse repurchase agreements | | — |
| | 113,558 |
|
| Accounts receivable, other | | 129,783 |
| | 160,506 |
|
| Total | | $ | 232,183 |
| | $ | 364,534 |
|
Reverse repurchase agreements are collateralized lending arrangements and have a maturity longer than three months from the date of purchase. The Company does not record an asset or liability for the collateral associated with the reverse repurchase agreements.
Plant, Equipment and Depreciation - Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings, 15 years for land improvements and building equipment, seven to 10 years for machinery and equipment, and three to eight years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. The Company reviews plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income.
The plant and equipment caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
| June 30, | | 2019 |
| | 2018 |
|
| Land and land improvements | | $ | 281,040 |
| | $ | 289,686 |
|
| Buildings and building equipment | | 1,567,130 |
| | 1,578,701 |
|
| Machinery and equipment | | 3,223,585 |
| | 3,218,639 |
|
| Construction in progress | | 114,975 |
| | 128,227 |
|
| Total | | $ | 5,186,730 |
| | $ | 5,215,253 |
|
|
| | | | | | | | |
| June 30, | | 2016 |
| | 2015 |
|
| Land and land improvements | | $ | 291,122 |
| | $ | 294,537 |
|
| Buildings and building equipment | | 1,437,601 |
| | 1,457,650 |
|
| Machinery and equipment | | 2,933,818 |
| | 3,017,011 |
|
| Construction in progress | | 74,600 |
| | 93,413 |
|
| Total | | $ | 4,737,141 |
| | $ | 4,862,611 |
|
Investments and Other Assets -Investments in joint-venture companies in which ownership is 50 percent or less and in which the Company does not have operating control are stated at cost plus the Company's equity in undistributed earnings and amounted to $355,876$316,728 and $315,989304,389 at June 30, 20162019 and June 30, 20152018, respectively. A significant portion of the underlying net assets of the joint ventures are related to goodwill. The Company's share of earnings from these investments in joint-venture companies were immaterial to the Company's results of operations.$93,239, $50,473 and $42,352 in 2019, 2018 and 2017, respectively.
Intangible Assets- Intangible assets primarily include patents, trademarks and customer lists and are recorded at cost and amortized on a straight-line method. Patents are amortized over the shorter of their remaining useful or legal life. Trademarks are amortized over the estimated time period over which an economic benefit is expected to be received. Customer lists are amortized over a period based on anticipated customer attrition rates. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
Goodwill - The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value.
Income Taxes - Income taxes are provided based upon income for financial reporting purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise. The Company recognizes accrued interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, are recognized in income tax expense. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Income tax effects resulting from adjusting temporary differences recorded in accumulated other comprehensive (loss) are released when the circumstances on which they are based cease to exist.
During the fourth quarter of 2016, the Company adopted ASU 2015-17, "Income Taxes - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires companies to present deferred tax assets and deferred tax liabilities as noncurrent in the statement of financial position. The following captions within the Consolidated Balance Sheet at June 30, 2015 have been revised:
|
| | | | | | | |
| | As Previously Reported | | Revised |
| Current Assets | | | |
| Deferred income taxes | $ | 142,147 |
| | $ | — |
|
| Noncurrent Assets | | | |
| Deferred income taxes | — |
| | 406,267 |
|
| Investments and other assets | 1,091,805 |
| | 811,930 |
|
| Current Liabilities | | | |
| Accrued domestic and foreign taxes | 140,295 |
| | 139,285 |
|
| Noncurrent Liabilities | | | |
| Deferred income taxes | 77,967 |
| | 63,222 |
|
Foreign Currency Translation - Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the accumulated other comprehensive (loss) component of shareholders' equity.. Such adjustments will affect net income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time.investments. Exchange (gains) losses from transactions in a currency other than the local currency of the entity involved are included within the cost of goods soldsales caption in the Consolidated Statement of Income and were $22,750, $(77,784)$5,888, $7,284 and $5,398,$8,060, in 2016, 20152019, 2018 and 2014,2017, respectively.
Subsequent Events - The Company has evaluated subsequent events that have occurred through the date of filing of this Annual Report on Form 10-K for the year ended June 30, 20162019. No subsequent events occurredOn July 29, 2019, the Company announced that required adjustmentit had entered into a definitive agreement to or disclosureacquire EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC for approximately $1,725 million in these financial statements.cash. The Company intends to finance the purchase price for the acquisition with new debt. The acquisition remains subject to certain customary closing conditions.
Recent Accounting Pronouncements - In June 2016,August 2018, the Financial Accounting Standards Board (FASB)("FASB") issued Accounting Standards Update ("ASU") 2018-14, "Compensation--Retirement Benefits--Defined Benefit Plans--General." ASU 2018-14 aims to improve disclosure effectiveness by adding, removing or clarifying certain disclosure requirements related to defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company adopted ASU 2018-14 on June 30, 2019. The adoption of ASU 2018-14 did not materially impact the Company's financial statements or related disclosures.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement." ASU 2018-13 aims to improve disclosure effectiveness by adding, modifying or removing certain disclosure requirements for both recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU for any removed or modified disclosure. Adoption of additional disclosures may be delayed until their effective dates. The Company adopted ASU 2018-13 on April 1, 2019. The adoption of ASU 2018-13 did not materially impact the Company's financial statements or related disclosures.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJ Act") reduction of the U.S. federal corporate income tax rate. The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any period after the issuance of the update. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act is recognized. The Company adopted ASU 2018-02 on April 1, 2019 and elected not to reclassify the tax effects resulting from the TCJ Act. As a result, the adoption of ASU 2018-02 did not affect the Company's financial statements.
In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides targeted improvements to Topic 815 accounting for hedging activities by expanding an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early application is permitted in any interim period after issuance of the update. ASU 2017-12 should be applied using a modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption and prospectively for presentation and disclosure requirements. The Company adopted ASU 2017-12 on April 1, 2019. The adoption of ASU 2017-12 did not materially impact the Company's financial statements or related disclosures.
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost component is eligible for capitalization, when applicable. ASU 2017-07 should be applied retrospectively for the income statement presentation of net periodic pension cost and net periodic postretirement benefit cost and prospectively, on or after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost. On July 1, 2018, the Company retrospectively adopted ASU 2017-07 and reclassified prior-year amounts using a practical expedient that permits the usage of amounts previously disclosed in the retirement benefits note. As a result, $25,096 and $17,163 of expense was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for 2018. Expense of $69,933 and $41,115 was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for 2017.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16 provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. The Company adopted ASU 2016-16 on July 1, 2018 and recorded a cumulative effect adjustment to increase retained earnings by approximately $32 million.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides specific guidance on several cash flow classification issues to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. On July 1, 2018, the Company adopted ASU 2016-15 and retrospectively adjusted its Consolidated Statement of Cash Flows. These retrospective adjustments were not material.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods withwithin those years, beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." Under ASU 2016-09, all excess tax benefits and deficiencies arising from employee share-based payment awards, and dividends on those awards, will be recognized in the income statement during the period in which they occur. ASU 2016-09 allows companies to make an accounting policy election to estimate forfeitures, as required today, or record them when they occur and allows companies to withhold an amount up to the maximum statutory tax rate without causing the award to be classified as a liability. Within the statement of cash flows, ASU 2016-09 requires excess tax benefits to be classified as an operating activity and cash payments to tax authorities in connection with shares withheld to be classified as a financing activity. ASU 2016-09 is effective for annual periods, and interim periods within the annual periods, beginning after December 15, 2016. The Company intends to adopt ASU 2016-09 during the first quarter of 2017. The impact of ASU 2016-09 will generally be dependent on the amount of employee exercises of share-based awards.
In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting." ASU 2016-07 eliminates the requirement to apply the equity method of accounting, upon obtaining significant influence, as if it was applied to the investment from inception. Instead, at the date significant influence is obtained, companies should add the cost of the additional interest acquired to the current basis of the investment and apply the equity method prospectively. If an available-for-sale security becomes eligible for the equity method of accounting, any unrealized gains or losses within accumulated other comprehensive income should be recognized within earnings on the date the investment becomes qualified for use of the equity method. During fourth quarter of 2016, the Company adopted ASU 2016-07. The adoption of ASU 2016-07 did not affect the Company's financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases with terms greater than 12 months on their balance sheet by recognizing a liability to make lease payments and an asset representing their right to use the asset during the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election, by class of underlying asset, not to recognize the corresponding assets and lease liabilities. Lessee recognition, measurement, and presentation of expenses and cash flows will not change significantly from existing guidance. Lessorguidance and lessor accounting is also largely unchanged from existing guidance.unchanged. ASU 2016-02 also changes the definition of a lease and requires qualitative, and quantitative disclosures that provide information about the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company has not yet determined the effect thatadopted ASU 2016-02 on July 1, 2019 using the optional transition method and will have onnot restate prior periods. The Company elected to use the package of practical expedients permitted under the transition guidance of the new standard. The Company is executing a project plan to guide the implementation of this standard and is identifying and implementing appropriate changes to its financial statements.business processes and controls to support the accounting and disclosure requirements under the new guidance. Upon adoption, the Company recorded a right-of-use asset and lease liability related to its operating leases of less than one percent of total assets.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Liabilities." ASU 2016-01 requires equity investments (excluding equity method investments and investments that are consolidated) to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost, adjusted for impairment and observable price changes. The ASU 2016-01 also simplifies the impairment assessment of equity investments, eliminates the disclosure of the assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at cost on the balance sheet and requires the exit price to be used when measuring fair value of financial instruments for disclosure purposes. Under ASU 2016-01, changes in fair value (resulting from instrument-specific credit risk) will be presented separately in other comprehensive income for liabilities measured using the fair value option and financialoption. Financial assets and liabilities will be presented separately by measurement category and type, either on the balance sheet or in the financial statement disclosures. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has not yet determined the effect that ASU 2016-01 will have on its financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 requires the recognition of adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. The effects of the adjustments to provisional amounts on depreciation, amortization or other income effects should be recognized in current-period earnings as if the accounting had been completed at the acquisition date. Disclosure of the portion of the adjustment recorded in current-period earnings that would have been reported in prior reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date is also required. During the first quarter of 2016, the Company adopted ASU 2015-16. The adoption2016-01 on July 1, 2018 and reclassified approximately $2 million of ASU 2015-16 did not materially affect the Company's financial statements.
In July 2015, the FASB issued ASU 2015-11, "Inventory - Simplifying the Measurement of Inventory." ASU 2015-11 requires companiesunrealized gains from accumulated other comprehensive (loss) to measure inventory (valued using first-in, first-out or average cost methods) at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The measurement of inventory valued using the last-in, first-out method is unchanged. During the fourth quarter of 2016, the Company adopted ASU 2015-11. The adoption of ASU 2015-11 did not materially affect the Company's financial statements.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that ASU 2015-03 will have a material impact on its financial statements.retained earnings.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitativeThe Company adopted ASU 2014-09 on July 1, 2018 using the modified retrospective method and qualitative disclosurerecorded a cumulative effect adjustment to enhanceincrease retained earnings by approximately $5 million. See Note 2 for further discussion.
2. Revenue recognition
Revenue is derived primarily from the understanding aboutsale of products in a variety of mobile, industrial and aerospace markets. A majority of the nature, amount, timing,Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.
Disaggregation of revenue
Revenue from contracts with customers is disaggregated by technology platforms for the Diversified Industrial Segment, by product platforms for the Aerospace Systems Segment and uncertaintyby geographic location for the total Company.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Contracts consist of individual purchase orders for standard product, blanket purchase orders and production contracts. Blanket purchase orders are often associated with individual purchase orders and have terms and conditions which are subject to a master supply or distributor agreement. Individual production contracts, some of which may include multiple performance obligations, are typically for products to be manufactured to the customer's specifications. Revenue in the Diversified Industrial Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time for installation services or in situations where the product being manufactured has no alternative use and cash flowsthe Company has an enforceable right to payment.
Diversified Industrial Segment revenues by technology platform: |
| | | | |
| | | 2019 |
|
| Motion Systems | | $ | 3,485,068 |
|
| Flow and Process Control | | 4,293,393 |
|
| Filtration and Engineered Materials | | 4,031,086 |
|
| Total | | $ | 11,809,547 |
|
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and which also perform a vital role in naval vessels and land-based weapon systems. Contracts generally consist of blanket purchase orders and individual long-term production contracts. Blanket purchase orders, which have terms and conditions subject to long-term supply agreements, are typically associated with individual purchase orders. Revenue in the Aerospace Systems Segment is also required.typically recognized at the time of product shipment, but a portion of revenue may be recognized over time in situations where the customer controls the asset as it is being produced or the product being manufactured has no alternative use and the Company has an enforceable right to payment.
Aerospace Systems Segment revenues by product platform: |
| | | | |
| | | 2019 |
|
| Flight Control Actuation | | $ | 750,311 |
|
| Fuel and Inerting | | 634,658 |
|
| Hydraulics | | 461,554 |
|
| Engines | | 285,292 |
|
| Fluid Conveyance | | 299,035 |
|
| Other | | 79,927 |
|
| Total | | $ | 2,510,777 |
|
Total revenues by geographic region based on the Company's selling operation's location: |
| | | | |
| | | 2019 |
|
| North America | | $ | 9,318,195 |
|
| Europe | | 2,968,971 |
|
| Asia Pacific | | 1,855,831 |
|
| Latin America | | 177,327 |
|
| Total | | $ | 14,320,324 |
|
The majority of revenues from the Aerospace Systems Segment is generated from sales to customers within North America.
Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
Total contract assets and contract liabilities are as follows: |
| | | | |
| | | 2019 |
|
| Contract assets, current (included within Prepaid expenses and other) | | $ | 22,726 |
|
| Contract assets, noncurrent (included within Investments and other assets) | | 1,301 |
|
| Total contract assets | | 24,027 |
|
| Contract liabilities, current (included within Other accrued liabilities) | | (64,668 | ) |
| Contract liabilities, noncurrent (included within Other liabilities) | | (421 | ) |
| Total contract liabilities | | (65,089 | ) |
| Net contract (liabilities) | | $ | (41,062 | ) |
At June 30, 2019, net contract liabilities increased $3 million from July 1, 2018 net contract liabilities of $38 million. The increase in net contract liabilities was primarily due to advance payments from customers exceeding revenue recognized during the period. During 2019, approximately $37 million of revenue was recognized that was included in the contract liabilities at July 1, 2018.
Remaining performance obligations
The Company’s backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. The Company believes its backlog represents its unsatisfied or partially unsatisfied performance obligations. Backlog at June 30, 2019 was $4,220 million, of which approximately 90 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
Adoption of ASU 2014-09
On July 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The provisions of ASU 2014-09 were applied only to contracts that were not completed as of July 1, 2018. Comparative prior-period financial information has not been restated and continues to be reported under the accounting standards in effect for the comparative prior-year period.
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of July 1, 2018 related to the adoption of ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies the following two aspects of ASUas follows: |
| | | | | | | | | | | | |
| | | Balance as of | | Cumulative Effect | | Balance as of |
| | | June 30, 2018 | | of Adjustments | | July 1, 2018 |
| Assets: | | | | | | |
| Trade accounts receivable, net | | $ | 2,145,517 |
| | $ | (11 | ) | | $ | 2,145,506 |
|
| Inventories | | 1,621,304 |
| | 23,205 |
| | 1,644,509 |
|
| Prepaid expenses and other | | 134,886 |
| | 14,575 |
| | 149,461 |
|
| Investments and other assets | | 801,049 |
| | 2,020 |
| | 803,069 |
|
| Liabilities: | | | | | | |
| Other accrued liabilities | | $ | 502,333 |
| | $ | 28,288 |
| | $ | 530,621 |
|
| Other liabilities | | 526,089 |
| | 5,160 |
| | 531,249 |
|
| Deferred income taxes | | 234,858 |
| | 1,560 |
| | 236,418 |
|
| Equity: | | | | | | |
| Retained earnings | | $ | 11,625,975 |
| | $ | 4,781 |
| | $ | 11,630,756 |
|
2014-09: identifying performance obligations and licensing implementation guidance. The effective dateadoption of ASU 2016-10 is2014-09 had an immaterial impact on the same as the effective dateCompany’s net sales, results of ASU 2014-09. The Company has not yet determined the effect that ASU 2014-09operations and ASU 2016-10 will have on its financial statements.position in 2019.
| |
2.3. | Acquisitions and Deconsolidation of SubsidiaryDivestitures |
Acquisitions - On April 26, 2019, the Company announced that it had entered into a definitive agreement under which it expects to acquire LORD Corporation ("Lord") for approximately $3,675 million in cash. Acquisition-related transaction and integration costs totaled $17,146 in 2019. These costs are included in selling, general, and administrative expenses in the Consolidated Statement of Income. The acquisition remains subject to certain closing conditions. The Company intends to finance the purchase price for the Lord acquisition with the net proceeds from the Senior Notes due 2024, 2029 and 2049, the delayed-draw term loan and certain commercial paper proceeds. See Note 10 for further discussion.
During 2016,2017, the Company completed twothree acquisitions, including Clarcor, whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $48 million. Total purchase price for the two acquisitions was approximately $71$1,522 million in cash and $2 million in assumed debt.
During 2015, the Company completed four acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $27 million. Total purchase price for the fourthree acquisitions was approximately $274,227 million in cash.cash and $316 million in assumed debt.
During 2014, the Company completed three acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $14 million. Total purchase price for the three acquisitions was approximately $19 million in cash.
The results of operations for allcompleted acquisitions arewere included as of the respective dates of acquisition. Assets acquired and liabilities assumed were recognized at their respective fair values as of the acquisition date. The initialprocess of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. Revisions occur as valuations are finalized, additional information becomes available and as additional analysis is performed. All measurement period adjustments were completed within a year from the acquisition date, and such adjustments did not have a material impact on the Company's results of operations and financial position.
The purchase price allocation and subsequent purchase price adjustments for acquisitions in 2016, 2015 and 2014 are presented below. Some2017 is as follows:
|
| | | | |
| | | 2017 |
|
| Assets: | | |
| Accounts receivable | | $ | 263,616 |
|
| Inventories | | 302,422 |
|
| Prepaid expenses | | 18,342 |
|
| Deferred income taxes | | 4,658 |
|
| Plant and equipment | | 376,826 |
|
| Intangible and other assets | | 1,526,909 |
|
| Goodwill | | 2,677,489 |
|
| | | 5,170,262 |
|
| Liabilities: | | |
| Notes payable | | 20,162 |
|
| Accounts payable, trade | | 84,753 |
|
| Accrued payrolls and other compensation | | 45,942 |
|
| Accrued domestic and foreign taxes | | 5,435 |
|
| Other accrued liabilities | | 80,515 |
|
| Long-term debt | | 296,240 |
|
| Pensions and other postretirement benefits | | 33,929 |
|
| Deferred income taxes | | 520,389 |
|
| Other liabilities | | 11,878 |
|
| Noncontrolling interests | | 1,822 |
|
| | | 1,101,065 |
|
| Net assets acquired | | $ | 4,069,197 |
|
Goodwill is calculated as the excess of the 2016 acquisitions are still subject to purchase price adjustments.over the net assets acquired, primarily all of which is not deductible for tax purposes. With respect to the Clarcor acquisition, goodwill represents cost synergies and enhancements to the Company's existing filtration technologies.
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Assets: | | | | | |
| Accounts receivable | $ | 6,793 |
| | $ | 7,656 |
| | $ | 954 |
|
| Inventories | 12,041 |
| | 3,099 |
| | 2,184 |
|
| Prepaid expenses | 1,350 |
| | 91 |
| | 57 |
|
| Deferred income taxes | — |
| | 5 |
| | 189 |
|
| Plant and equipment | 5,647 |
| | 1,123 |
| | 11,211 |
|
| Intangible and other assets | 26,849 |
| | 7,794 |
| | 5,646 |
|
| Goodwill | 31,134 |
| | 10,430 |
| | 3,195 |
|
| | 83,814 |
| | 30,198 |
| | 23,436 |
|
| Liabilities: | | | | | |
| Notes payable | 720 |
| | — |
| | — |
|
| Accounts payable, trade | 2,536 |
| | 2,689 |
| | 915 |
|
| Accrued payrolls and other compensation | 1,310 |
| | 243 |
| | 263 |
|
| Accrued domestic and foreign taxes | 604 |
| | 777 |
| | 1 |
|
| Other accrued liabilities | 1,804 |
| | 5,267 |
| | 3,864 |
|
| Long-term debt | 1,743 |
| | — |
| | — |
|
| Deferred income taxes | 7,545 |
| | 2,604 |
| | — |
|
| Other liabilities | — |
| | — |
| | 800 |
|
| | 16,262 |
| | 11,580 |
| | 5,843 |
|
| Net assets acquired | $ | 67,552 |
| | $ | 18,618 |
| | $ | 17,593 |
|
DeconsolidationClarcor is a major manufacturer of Subsidiary - During 2014, the Companyfiltration products under more than a dozen respected brands, including CLARCOR, Baldwin, Fuel Manager, PECOFacet, Airguard, Altair, BHA, Clearcurrent, Clark Filter, Hastings, United Air Specialists, Keddeg and GE Aviation, a non-related party, finalized a joint venture in which the Company sold a 50 percent equity interest in onePurolator. Clarcor had annual sales of approximately $1,400 million for its wholly-owned subsidiaries. The salefiscal 2016. For segment reporting purposes, Clarcor is part of the 50 percent equity interest in the wholly-owned subsidiary resulted in a loss of control of the subsidiary, and therefore it was deconsolidated from the Company's financial statements during 2014.Diversified Industrial Segment.
The Company recognizedbelieves that Clarcor is a highly complementary acquisition that provides the Company with additional proprietary media, industrial and process filtration products and technologies, as well as a broad portfolio of replacement filters. The acquisition of Clarcor also offers significant expected operating synergies.
The Company's results of operations for 2017 include Clarcor's results of operations from the date of acquisition, February 28, 2017, through June 30, 2017. Net sales and segment operating (loss) attributable to Clarcor during this period was $487,388 and $(16,164), respectively.
The following unaudited pro forma information gives effect to the Company's acquisition of Clarcor as if the acquisition had occurred on July 1, 2015, and Clarcor had been included in the Company's results of operations for 2017.
|
| | | |
| | 2017 |
|
| Net sales | $ | 12,935,834 |
|
| Net income attributable to common shareholders | 1,027,693 |
|
| Diluted earnings per share | 7.58 |
|
The unaudited pro forma financial information in the table above includes adjustments related to amortization expense, depreciation, interest expense and transaction costs incurred as well as adjustments to cost of sales for the step-up in inventory to estimated acquisition-date fair value and related income tax effects and was based on a preliminary purchase price allocation using information available at that time. Transaction costs incurred (which are reflected in the selling, general and administrative expenses caption in the Consolidated Statement of Income) and the adjustment to cost of sales for the step-up in inventory to estimated acquisition-date fair value are considered to be non-recurring. Adjustments for non-recurring items increased pro forma net income attributable to common shareholders by $108,078 for 2017. The unaudited pro forma financial information does not give effect to any synergies, operating efficiencies or cost savings that may result or have resulted from the Clarcor acquisition.
Divestitures - During 2018, the Company divested its global Facet filtration business, which was part of the Diversified Industrial Segment. The operating results and net assets of the global Facet filtration business were immaterial to the Company's consolidated results of operations and financial position. The Company recorded a pre-tax loss in 2018 of approximately $20 million and tax expense of approximately $29 million resulting from a tax gain of $413 million on the deconsolidation, measured as the fair value of the consideration received for the 50 percent equity interest in the former subsidiary and the fair value of the retained investment less the carrying amount of the former subsidiary's net assets. Approximately $186 million of the pre-tax gain is attributablerelated to the remeasurement of the retained investment in the former subsidiary to its current fair value.divestiture. The gainpre-tax loss is reflected in the loss (gain)loss on disposal of assets caption in the Consolidated Statement of Income and the other expense (income)caption in the Business Segment Information.
During 2017, the Company divested its Autoline product line, which was part of the Diversified Industrial Segment. The operating results and net assets of the Autoline product line were immaterial to the Company's consolidated results of operations and financial position. The Company recorded a net pre-tax gain in 2017 of approximately $45 million related to the divestiture. The gain is reflected in the loss (gain) on disposal of assets caption in the Consolidated Statement of Income and the other expense caption in the Business Segment Information.
| |
3.4. | Charges Related to Business Realignment |
To structure its businesses in light of current and anticipated customer demand, theThe Company incurred business realignment charges and acquisition integration costs in 2016, 20152019, 2018 and 2014.2017. The acquisition integration costs relate to the 2017 acquisition of Clarcor.
Business realignment charges and acquisition integration costs presented in the Business Segment Information are as follows:
| | | | 2016 |
| | 2015 |
| | 2014 |
| 2019 |
| | 2018 |
| | 2017 |
|
| Diversified Industrial | $ | 91,404 |
| | $ | 30,882 |
| | $ | 101,524 |
| $ | 27,830 |
| | $ | 78,558 |
| | $ | 52,939 |
|
| Aerospace Systems | 3,629 |
| | 967 |
| | 925 |
| — |
| | 3,428 |
| | 2,674 |
|
| Corporate administration | 2,215 |
| | 458 |
| | — |
| |
| Other expense (income) | 116 |
| | 2,399 |
| | 1,331 |
| |
| Other expense | | 305 |
| | 1,009 |
| | 784 |
|
Work force reductions related to thein connection with such business realignment charges and acquisition integration costs in the Business Segment Information are as follows:
|
| | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Diversified Industrial | 598 |
| | 1,757 |
| | 1,102 |
|
| Aerospace Systems | — |
| | 265 |
| | 89 |
|
|
| | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Diversified Industrial | 3,515 |
| | 668 |
| | 1,581 |
|
| Aerospace Systems | 81 |
| | 21 |
| | 44 |
|
| Corporate administration | 53 |
| | 18 |
| | — |
|
The business realignment charges primarily consist of severance costs relatedrelate to actions taken under the Company's Simplificationsimplification initiative aimed at reducing organizational and process complexity,complexity. Business realignment charges and acquisition integration costs primarily consist of severance costs as well as plant closures, with the majority of charges incurred in Europe and North America. In connection with a plant closure during 2016, the Company recognized an expense associated with enhanced retirement benefits (refer to Note 10 for further discussion). The Company believes the realignment and acquisition integration actions taken will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.
The business realignment charges and acquisition integration costs are presented in the Consolidated Statement of Income as follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Cost of sales | $ | 14,650 |
| | $ | 44,949 |
| | $ | 35,932 |
|
| Selling, general and administrative expenses | 13,180 |
| | 36,813 |
| | 19,681 |
|
| Loss (gain) on disposal of assets | 305 |
| | 1,233 |
| | 784 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Cost of sales | $ | 76,197 |
| | $ | 19,419 |
| | $ | 63,575 |
|
| Selling, general and administrative expenses | 21,051 |
| | 12,888 |
| | 38,874 |
|
| (Gain) loss on disposal of assets | 116 |
| | 2,399 |
| | 1,331 |
|
As of June 30, 2016,2019, approximately $55$14 million in severance payments have been made relating to business realignment and acquisition integration charges incurred during 2016,2019, the remainder of which are expected to be paid by March 31, 2017.June 30, 2020. Severance payments relating to prior-year actions are being made as required. Remaining severance payments related to current-year and prior-year business realignment and acquisition integration actions of approximately $40$13 million are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment and acquisition integration actions described above, the timing and amount of which are not known at this time.
Income before income taxes was derived from the following sources:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| United States | $ | 1,124,933 |
| | $ | 963,843 |
| | $ | 722,925 |
|
| Foreign | 808,492 |
| | 738,434 |
| | 605,716 |
|
| | $ | 1,933,425 |
| | $ | 1,702,277 |
| | $ | 1,328,641 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| United States | $ | 672,907 |
| | $ | 779,782 |
| | $ | 1,115,010 |
|
| Foreign | 441,821 |
| | 652,458 |
| | 441,710 |
|
| | $ | 1,114,728 |
| | $ | 1,432,240 |
| | $ | 1,556,720 |
|
Income taxes include the following:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Federal | | | | | |
| Current | $ | 160,858 |
| | $ | 453,821 |
| | $ | 132,420 |
|
| Deferred | 14,903 |
| | (23,876 | ) | | 37,316 |
|
| Foreign | | | | | |
| Current | 206,167 |
| | 210,385 |
| | 157,518 |
|
| Deferred | 3,202 |
| | (17,454 | ) | | (5,319 | ) |
| State and local | | | | | |
| Current | 20,932 |
| | 18,168 |
| | 17,835 |
|
| Deferred | 14,432 |
| | (82 | ) | | 5,027 |
|
| | $ | 420,494 |
| | $ | 640,962 |
| | $ | 344,797 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Federal | | | | | |
| Current | $ | 235,557 |
| | $ | 185,761 |
| | $ | 377,404 |
|
| Deferred | (45,797 | ) | | 28,108 |
| | (45,643 | ) |
| Foreign | | | | | |
| Current | 113,146 |
| | 189,826 |
| | 168,177 |
|
| Deferred | (7,006 | ) | | (11,208 | ) | | (28,016 | ) |
| State and local | | | | | |
| Current | 24,495 |
| | 25,235 |
| | 43,860 |
|
| Deferred | (12,883 | ) | | 1,965 |
| | (480 | ) |
| | $ | 307,512 |
| | $ | 419,687 |
| | $ | 515,302 |
|
A reconciliation of the Company's effective income tax rate to the statutory Federalfederal rate follows:
|
| | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Statutory federal income tax rate | 21.0 | % | | 28.1 | % | | 35.0 | % |
| State and local income taxes | 1.7 |
| | 1.2 |
| | 1.7 |
|
| Tax related to international activities | 2.9 |
| | (1.0 | ) | | (5.5 | ) |
| Transition tax related to the TCJ Act | 0.8 |
| | 17.5 |
| | — |
|
| Remeasurement of deferred tax assets and liabilities related to the TCJ Act | (0.9 | ) | | (4.8 | ) | | — |
|
| Cash surrender value of life insurance | (0.1 | ) | | (0.4 | ) | | (0.9 | ) |
| Federal manufacturing deduction | 0.1 |
| | (1.0 | ) | | (0.9 | ) |
| Foreign derived intangible income deduction | (1.0 | ) | | — |
| | — |
|
| Research tax credit | (0.5 | ) | | (0.7 | ) | | (0.8 | ) |
| Share-based compensation | (1.7 | ) | | (2.2 | ) | | (2.7 | ) |
| Other | (0.6 | ) | | 1.0 |
| | 0.1 |
|
| Effective income tax rate | 21.7 | % | | 37.7 | % | | 26.0 | % |
|
| | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Statutory Federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State and local income taxes | 0.6 |
| | 1.1 |
| | 1.8 |
|
| Goodwill and intangible asset impairment | — |
| | — |
| | 4.5 |
|
| Tax related to international activities | (5.2 | ) | | (4.5 | ) | | (5.6 | ) |
| Cash surrender value of life insurance | 0.2 |
| | (0.1 | ) | | (0.9 | ) |
| Federal manufacturing deduction | (1.0 | ) | | (1.6 | ) | | (1.0 | ) |
| Research tax credit | (1.9 | ) | | (0.8 | ) | | (0.3 | ) |
| Other | (0.1 | ) | | 0.2 |
| | (0.4 | ) |
| Effective income tax rate | 27.6 | % | | 29.3 | % | | 33.1 | % |
The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income ("GILTI") as a current period expense when incurred. The tax rate impact of GILTI is included with tax related to international activities in the table above.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118, which provided guidance on accounting for the tax effects of the TCJ Act. SAB 118 provided a measurement period that should not extend beyond one year from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118 and based on the information available, the Company recorded additional tax expense of $14,485 to the estimated one-time transition tax during 2019 prior to the close of the measurement period. This adjustment is a result of the Company's analysis of related proposed regulations that were issued subsequent to the recording of the previous provisional amount. The Company considers its provisional accounting for the effects of the TCJ Act, which includes the remeasurement of deferred tax balances and related valuation allowances, the one-time transition tax and the repatriation of undistributed foreign earnings, as being complete and as meeting the recognition guidance under Topic 740.
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows:
|
| | | | | | | |
| | 2019 |
| | 2018 |
|
| Retirement benefits | $ | 368,269 |
| | $ | 340,480 |
|
| Other liabilities and reserves | 104,850 |
| | 112,935 |
|
| Long-term contracts | 22,241 |
| | 17,496 |
|
| Stock-based compensation | 38,730 |
| | 38,535 |
|
| Loss carryforwards | 792,914 |
| | 679,880 |
|
| Unrealized currency exchange gains and losses | 27,034 |
| | 27,228 |
|
| Inventory | 5,540 |
| | 6,696 |
|
| Foreign tax credit carryforward | 1,726 |
| | — |
|
| Undistributed foreign earnings | (16,762 | ) | | (16,308 | ) |
| Depreciation and amortization | (589,454 | ) | | (689,320 | ) |
| Valuation allowance | (797,692 | ) | | (694,857 | ) |
| Net deferred tax (liability) | $ | (42,604 | ) | | $ | (177,235 | ) |
| | | | |
| Change in net deferred tax (liability): | | | |
| Provision for deferred tax | $ | (32,537 | ) | | $ | 41,412 |
|
| Items of other comprehensive income (loss) | 72,530 |
| | (65,542 | ) |
| Acquisitions and other | 94,638 |
| | 32,628 |
|
| Total change in net deferred tax | $ | 134,631 |
| | $ | 8,498 |
|
|
| | | | | | | |
| | 2016 |
| | 2015 |
|
| Retirement benefits | $ | 815,545 |
| | $ | 614,127 |
|
| Other liabilities and reserves | 126,524 |
| | 127,838 |
|
| Long-term contracts | 64,371 |
| | 49,929 |
|
| Stock-based incentive compensation | 67,138 |
| | 66,015 |
|
| Loss carryforwards | 326,707 |
| | 316,994 |
|
| Unrealized currency exchange gains and losses | (19,491 | ) | | (17,218 | ) |
| Inventory | 14,693 |
| | 16,659 |
|
| Foreign tax credit carryforward | 24,051 |
| | 29,965 |
|
| Depreciation and amortization | (536,070 | ) | | (531,258 | ) |
| Valuation allowance | (332,708 | ) | | (330,006 | ) |
| Net deferred tax asset | $ | 550,760 |
| | $ | 343,045 |
|
| | | | |
| Change in net deferred tax asset: | | | |
| Provision for deferred tax | $ | 65,686 |
| | $ | (18,865 | ) |
| Items of other comprehensive (loss) | 149,861 |
| | 57,523 |
|
| Acquisitions and other | (7,832 | ) | | (1,225 | ) |
| Total change in net deferred tax | $ | 207,715 |
| | $ | 37,433 |
|
As of June 30, 20162019, the Company has recorded deferred tax assets of $326,707$792,914 resulting from $1,145,475$3,057,386 in loss carryforwards. A valuation allowance of $313,554$779,733 related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $288,515$745,293 relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years.years. In addition, a valuation allowance of $19,154$17,959 related to future deductible items has been established due to the uncertainty of their realization. These future deductible items are recorded in the other liabilities and reserves line in the table above.
Provision has
Although future distributions of foreign earnings to the U.S. should not been made for additionalbe subject to U.S. federal income taxes, other U.S. or foreign taxes may be imposed on such earnings. The Company has analyzed existing factors and determined it will no longer permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $219 million that are no longer permanently reinvested outside of the U.S., the Company has recorded a deferred tax liability of $11 million. The remaining undistributed foreign earnings of approximately $3,000 million remain permanently reinvested outside the U.S. at June 30, 2019. Of these undistributed earnings, we have recorded a deferred tax liability of $6 million where certain international operations as those earnings will continue to be reinvested.foreign holding companies are not permanently reinvested in their subsidiaries. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittancepotential distribution of such earnings. Accumulated undistributed earningspermanently reinvested in international operations amounted to approximately $3,200,000 at June 30, 2016.foreign earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Balance July 1 | $ | 153,091 |
| | $ | 147,506 |
| | $ | 139,907 |
|
| Additions for tax positions related to current year | 2,272 |
| | 4,195 |
| | 4,735 |
|
| Additions for tax positions of prior years | 45 |
| | 8,333 |
| | 2,618 |
|
| Additions for acquisitions | — |
| | — |
| | 3,939 |
|
| Reductions for tax positions of prior years | (927 | ) | | (3,790 | ) | | (1,175 | ) |
| Reductions for settlements | (832 | ) | | (315 | ) | | (3,020 | ) |
| Reductions for expiration of statute of limitations | (9,388 | ) | | (4,480 | ) | | (2,792 | ) |
| Effect of foreign currency translation | (3,599 | ) | | 1,642 |
| | 3,294 |
|
| Balance June 30 | $ | 140,662 |
| | $ | 153,091 |
| | $ | 147,506 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Balance July 1 | $ | 145,688 |
| | $ | 164,813 |
| | $ | 107,440 |
|
| Additions for tax positions related to current year | 7,025 |
| | 6,090 |
| | 7,752 |
|
| Additions for tax positions of prior years | 2,582 |
| | 14,989 |
| | 55,136 |
|
| Reductions for tax positions of prior years | (627 | ) | | (6,945 | ) | | (1,359 | ) |
| Reductions for settlements | (10,284 | ) | | — |
| | (1,856 | ) |
| Reductions for expiration of statute of limitations | (4,142 | ) | | (6,251 | ) | | (5,005 | ) |
| Effect of foreign currency translation | (335 | ) | | (27,008 | ) | | 2,705 |
|
| Balance June 30 | $ | 139,907 |
| | $ | 145,688 |
| | $ | 164,813 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $140,662, $80,722, $83,471153,091 and $71,89895,460 as of June 30, 20162019, 20152018 and 20142017, respectively. If recognized, a significant portion of the gross unrecognized tax benefits as of June 30, 20162017, would behave been offset against an asset currentlythat had been recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $25,214, $12,357, $9,51421,737 and $8,19815,432 as of June 30, 20162019, 20152018 and 20142017, respectively.
It is reasonably possible that, within the next 12 months, the amount of gross unrecognized tax benefits could be reduced by up to approximately $100,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of unrecognized tax benefits within the next 12 months is expected to be insignificant.
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 open to assessment of its U.S. federal income tax returns by the U.S. Internal Revenue Service for years after 2011,2013, and its state and local tax returns for years after 2006.2013. The Company is open to assessment for significant foreign jurisdictions for years after 2007.2009.
Basic earnings per share are computed using the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock-basedequity-based awards. The computationreconciliation of net incomethe numerator and denominator of basic and diluted earnings per share was as follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Numerator: | | | | | |
| Net income attributable to common shareholders | $ | 1,512,364 |
| | $ | 1,060,801 |
| | $ | 983,412 |
|
| Denominator: | | | | | |
| Basic - weighted-average common shares | 129,997,640 |
| | 133,004,613 |
| | 133,377,547 |
|
| Increase in weighted-average common shares from dilutive effect of equity-based awards | 1,783,977 |
| | 2,422,221 |
| | 2,182,217 |
|
| Diluted - weighted-average common shares, assuming exercise of equity-based awards | 131,781,617 |
| | 135,426,834 |
| | 135,559,764 |
|
| Basic earnings per share | $ | 11.63 |
| | $ | 7.98 |
| | $ | 7.37 |
|
| Diluted earnings per share | $ | 11.48 |
| | $ | 7.83 |
| | $ | 7.25 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Numerator: | | | | | |
| Net income attributable to common shareholders | $ | 806,840 |
| | $ | 1,012,140 |
| | $ | 1,041,048 |
|
| Denominator: | | | | | |
| Basic - weighted-average common shares | 135,353,321 |
| | 142,925,327 |
| | 149,099,448 |
|
| Increase in weighted-average common shares from dilutive effect of stock-based awards | 1,558,369 |
| | 2,186,823 |
| | 2,344,655 |
|
| Diluted - weighted-average common shares, assuming exercise of stock-based awards | 136,911,690 |
| | 145,112,150 |
| | 151,444,103 |
|
| Basic earnings per share | $ | 5.96 |
| | $ | 7.08 |
| | $ | 6.98 |
|
| Diluted earnings per share | $ | 5.89 |
| | $ | 6.97 |
| | $ | 6.87 |
|
For 20162019, 20152018 and 20142017, 3.10.9 million,, 1.10.5 million and 1.21.4 million common shares, respectively, subject to stock-basedequity-based awards were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
The majority of domestic inventories are valued by the last-in, first-out (LIFO)("LIFO") cost method and the balance of the Company's inventories are valued by the first-in, first-out (FIFO)("FIFO") cost method. Inventories valued by the FIFO cost method are stated at the lower of cost or net realizable value. Inventories valued by the LIFO cost method are stated at lower of cost or market.
Inventories valued on the LIFO cost method were approximately 3041 percent of total inventories in 2016both 2019 and 32 percent of total inventories in 20152018. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $200,247$222,715 in 20162019 and $206,233203,192 in 20152018. Progress payments of $51,10425,026 in 2016 and $34,820 in 20152018 are netted against inventories.
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
| June 30, | | 2019 |
| | 2018 |
|
| Finished products | | $ | 663,068 |
| | $ | 673,323 |
|
| Work in process | | 850,778 |
| | 765,835 |
|
| Raw materials | | 164,286 |
| | 182,146 |
|
| Total | | $ | 1,678,132 |
| | $ | 1,621,304 |
|
|
| | | | | | | | |
| June 30, | | 2016 |
| | 2015 |
|
| Finished products | | $ | 458,657 |
| | $ | 526,708 |
|
| Work in process | | 639,907 |
| | 688,727 |
|
| Raw materials | | 74,765 |
| | 85,024 |
|
| Total | | $ | 1,173,329 |
| | $ | 1,300,459 |
|
| |
7.8. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill are as follows:
|
| | | | | | | | | | | |
| | Diversified Industrial Segment | | Aerospace Systems Segment | | Total |
| Balance June 30, 2017 | $ | 5,488,236 |
| | $ | 98,642 |
| | $ | 5,586,878 |
|
| Acquisitions | 37,489 |
| | — |
| | 37,489 |
|
| Divestitures | (138,541 | ) | | — |
| | (138,541 | ) |
| Foreign currency translation and other | 18,587 |
| | 7 |
| | 18,594 |
|
| Balance June 30, 2018 | $ | 5,405,771 |
| | $ | 98,649 |
| | $ | 5,504,420 |
|
| Acquisitions | 2,940 |
| | — |
| | 2,940 |
|
| Foreign currency translation and other | (53,546 | ) | | (9 | ) | | (53,555 | ) |
| Balance June 30, 2019 | $ | 5,355,165 |
| | $ | 98,640 |
| | $ | 5,453,805 |
|
|
| | | | | | | | | | | |
| | Diversified Industrial Segment | | Aerospace Systems Segment | | Total |
| Balance June 30, 2014 | $ | 3,072,724 |
| | $ | 98,701 |
| | $ | 3,171,425 |
|
| Acquisitions | 10,430 |
| | — |
| | 10,430 |
|
| Divestitures | (4,757 | ) | | — |
| | (4,757 | ) |
| Foreign currency translation and other | (234,352 | ) | | (67 | ) | | (234,419 | ) |
| Balance June 30, 2015 | $ | 2,844,045 |
| | $ | 98,634 |
| | $ | 2,942,679 |
|
| Acquisitions | 31,134 |
| | — |
| | 31,134 |
|
| Foreign currency translation and other | (70,776 | ) | | — |
| | (70,776 | ) |
| Balance June 30, 2016 | $ | 2,804,403 |
| | $ | 98,634 |
| | $ | 2,903,037 |
|
Acquisitions represent the original goodwill allocation, purchase price adjustments and final adjustments to the purchase price allocation for the acquisitions during the measurement period subsequent to the applicable acquisition dates. The impact of the purchase price adjustments and final adjustments to the purchase price allocation on the Company's results of operations and financial position were immaterial. Divestitures primarily represent goodwill associated with the sale of a business in 2018 (see Note 3 for further discussion).
In 2014, the Company made a decision to restructure and change the strategic direction of its Worldwide Energy Products Division (EPD). The Company calculated the fair value of EPD using assumptions reflecting the Company's updated strategic direction for this reporting unit, the results of which indicated that the carrying value of EPD exceeded its fair value. As a result, the Company estimated the implied fair value of EPD's goodwill, which resulted in a non-cash impairment charge of $140,334. The impairment charge is reflected in the goodwill and intangible asset impairment caption in the Consolidated Statement of Income and in the other expense (income) caption in the Business Segment Information. The fair value of EPD was calculated using both a discounted cash flow analysis and estimated fair market values of comparable businesses with each valuation method having equal weight. Fair value calculated using a discounted cash flow analysis is classified within level 3 of the fair value hierarchy and requires several assumptions including a risk-adjusted interest rate and future sales and operating margin levels.
The Company's annual impairment tests performed in 20162019, 20152018 and 20142017 resulted in no impairment loss being recognized.
Intangible assets are amortized on a straight-line method over their legal or estimated useful life.lives. The gross carrying value and accumulated amortization for each major category of intangible asset at June 30 are as follows:
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents | $ | 265,644 |
| | $ | 130,233 |
| | $ | 265,423 |
| | $ | 117,440 |
|
| Trademarks | 542,573 |
| | 252,388 |
| | 546,905 |
| | 227,580 |
|
| Customer lists and other | 2,435,461 |
| | 1,077,780 |
| | 2,482,079 |
| | 933,867 |
|
| Total | $ | 3,243,678 |
| | $ | 1,460,401 |
| | $ | 3,294,407 |
| | $ | 1,278,887 |
|
|
| | | | | | | | | | | | | | | |
| | 2016 | | 2015 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents | $ | 150,914 |
| | $ | 95,961 |
| | $ | 149,066 |
| | $ | 88,540 |
|
| Trademarks | 340,805 |
| | 179,156 |
| | 355,108 |
| | 172,187 |
|
| Customer lists and other | 1,362,521 |
| | 656,552 |
| | 1,369,380 |
| | 599,388 |
|
| Total | $ | 1,854,240 |
| | $ | 931,669 |
| | $ | 1,873,554 |
| | $ | 860,115 |
|
During 2016, the Company acquired intangible assets, either individually or as part of a group of assets, with an initial purchase price allocation and weighted-average life as follows:
|
| | | | | |
| | Purchase Price Allocation | | Weighted-Average Life |
| Patents | $ | 565 |
| | 12 years |
| Trademarks | 761 |
| | 5 years |
| Customer lists and other | 25,523 |
| | 11 years |
| Total | $ | 26,849 |
| | 11 years |
Total intangible asset amortization expense in 20162019, 20152018 and 20142017 was $108,019, $109,887$205,164, $221,494 and $118,782,$145,128, respectively. Estimated intangible asset amortization expense for the five years ending June 30, 20172020 through 20212024 is $95,873, $91,902, $85,091, $78,297$177,239, $172,522, $166,398, $155,437 and $70,252,$149,798, 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. In 2014, in connection with the goodwill impairment review of EPD, the Company determined that certain intangible assets of EPD, primarily trademarks and customer lists, were impaired resulting in the recognition of a non-cash impairment charge of $43,664. The impairment charge is reflected in the goodwill andNo material intangible asset impairment captionimpairments occurred in the Consolidated Statement of Income and in the other expense (income) caption in the Business Segment Information. The fair value of EPD's intangible assets were determined using an income approach for the individual intangible assets. Fair value calculated using an income approach is classified within level 3 of the fair value hierarchy and requires several assumptions including future sales and operating margins expected to be generated from the use of the individual intangible asset.2019, 2018 or 2017.
| |
8.9. | Financing Arrangements |
The Company has a line of credit totaling $2,000,000 through a multi-currency revolving credit agreement with a group of banks, $1,696,300 of which $1,414,000 was available at June 30, 2016.2019. The credit agreement expires in October 2017;2021; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which may increase in the event the Company's credit ratings are lowered. Although a lowering of the Company's credit ratings would likely increase the cost of future debt, it would not limit the Company's ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
The Company is currently authorized to sell up to $1,850,000$2,000,000 of short-term commercial paper notes. At June 30, 2016, $303,700 of commercialCommercial paper notes were outstanding and no commercial paper notes were outstanding at June 30, 2015.2019 and 2018 were $586,000 and $533,800, respectively.
In addition to commercial paper notes, notes payable includes short-term lines of credit and borrowings from foreign banks. At June 30, 2016,2019 and 2018, the Company had $64,310$48,751 and $48,338, respectively, in lines of credit from various foreign banks, none of which waswere outstanding at June 30, 2016.2019 and 2018. Most of these agreements are renewed annually. The Company had borrowings from foreign banks of $786 and $4,255 at June 30, 2019 and 2018, respectively. The weighted-average interest rate on notes payable during 20162019 and 2018 was 0.32.8 percent and was 0.21.8 percent, during 2015.respectively.
The Company's foreign locations in the ordinary course of business may enter into financial guarantees through financial institutions which enable customers to be reimbursed in the event of nonperformance by the Company.
The Company's credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the applicable agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. AtBased on the Company's present rating level at June 30, 2019, the most restrictive financial covenant contained in the credit agreements and the indentures provides that the ratio of secured debt to net tangible assets be less than 10 percent.debt-shareholders' equity cannot exceed 0.60 to 1.0. As of June 30, 2016,2019, the Company does not have any securedCompany's debt outstanding.to debt-shareholders' equity ratio was 0.55 to 1.0. The Company is in compliance with all covenants.
|
| | | | | | | | |
| June 30, | | 2019 |
| | 2018 |
|
| Domestic: | | | | |
| Fixed rate medium-term notes, 3.30% to 6.25%, due 2023 - 2045 | | $ | 2,125,000 |
| | $ | 2,225,000 |
|
| Senior Notes, 2.70% to 4.10%, due 2024 - 2049 | | 3,675,000 |
| | 1,300,000 |
|
| Foreign: | | | | |
| Euro Senior Notes, 1.125%, due 2025 | | 796,040 |
| | 817,810 |
|
| Euro Term loan, Libor plus 150 bps, due 2022 | | — |
| | 116,830 |
|
| Other long-term debt | | 340 |
| | 762 |
|
| Deferred debt issuance costs | | (75,321 | ) | | (41,432 | ) |
| Total long-term debt | | 6,521,059 |
| | 4,418,970 |
|
| Less: Long-term debt payable within one year | | 228 |
| | 100,411 |
|
| Long-term debt, net | | $ | 6,520,831 |
| | $ | 4,318,559 |
|
|
| | | | | | | | |
| June 30, | | 2016 |
| | 2015 |
|
| Domestic: | | | | |
| Fixed rate medium-term notes 3.30% to 6.55%, due 2018-2045 | | $ | 2,675,000 |
| | $ | 2,675,000 |
|
| Foreign: | | | | |
| Bank loans, including revolving credit 1% to 11.75%, due 2016 | | — |
| | 322 |
|
| Euro bonds 4.125%, due 2016 | | — |
| | 222,820 |
|
| Japanese Yen credit facility JPY Libor plus 55 bps, due 2017 | | 58,140 |
| | 48,960 |
|
| Total long-term debt | | 2,733,140 |
| | 2,947,102 |
|
| Less: Long-term debt payable within one year | | 58,140 |
| | 223,142 |
|
| Long-term debt, net | | $ | 2,675,000 |
| | $ | 2,723,960 |
|
During 2019, the Company also entered into a delayed-draw term loan with an aggregate principal amount of $800,000. The draw on the term loan is subject to the closing of the proposed acquisition of Lord, and the related proceeds will be used solely to finance a portion of the purchase price. The Company anticipates that the term loan will bear an interest rate of LIBOR plus 112.5 bps. Interest payments are due quarterly.
Debt issuance costs related to both the Senior Notes and delayed-draw term loan were approximately $39,322 and will be amortized over the respective debt terms.
Principal amounts of long-term debt payable in the five years ending June 30, 20172020 through 20212024 are $58,140, $450,000, $100,000, $0$228, $32, $11, $300,006 and $0,$575,006, respectively. The principal amounts of long-term debt payable exclude the impact of the amortization of debt issuance costs.
Lease Commitments - Future minimum rental commitments as of June 30, 20162019, under non-cancelable operating leases, which expire at various dates, are as follows: 20172020-$68,718; 2018-45,920; 2021-$44,506; 2019-31,115; 2022-$27,412; 2020-21,625; 2023-$15,009; 2021-13,228; 2024-$9,3387,591 and after 2021-2024-$29,946.22,723.
Rental expense in 20162019, 20152018 and 20142017 was $126,752, $119,004, $125,657126,940 and $131,948118,723, respectively.
11. Retirement Benefits
Pensions - The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. The Company also has arrangements for certain key employees which provide for supplemental retirement benefits. In general, the Company's policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries.
A summary of the Company's defined benefit pension plans follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Benefit cost | | | | | |
| Service cost | $ | 76,647 |
| | $ | 82,993 |
| | $ | 94,356 |
|
| Interest cost | 160,542 |
| | 144,339 |
| | 126,131 |
|
| Expected return on plan assets | (251,072 | ) | | (258,490 | ) | | (239,537 | ) |
| Amortization of prior service cost | 6,655 |
| | 6,570 |
| | 8,116 |
|
| Amortization of unrecognized actuarial loss | 121,823 |
| | 147,387 |
| | 212,433 |
|
| Amortization of transition obligation | 18 |
| | 18 |
| | 18 |
|
| Net periodic benefit cost | $ | 114,613 |
| | $ | 122,817 |
| | $ | 201,517 |
|
Components of net pension benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Benefit cost | | | | | |
| Service cost | $ | 94,650 |
| | $ | 97,960 |
| | $ | 99,929 |
|
| Interest cost | 181,469 |
| | 176,556 |
| | 190,999 |
|
| Special termination cost | 7,088 |
| | 21,174 |
| | — |
|
| Settlement cost | 5,102 |
| | — |
| | — |
|
| Expected return on plan assets | (221,629 | ) | | (218,938 | ) | | (226,884 | ) |
| Amortization of prior service cost | 7,470 |
| | 9,437 |
| | 14,644 |
|
| Amortization of unrecognized actuarial loss | 170,407 |
| | 152,664 |
| | 159,584 |
|
| Amortization of initial net obligation | 17 |
| | 17 |
| | 19 |
|
| Net periodic benefit cost | $ | 244,574 |
| | $ | 238,870 |
| | $ | 238,291 |
|
|
| | | | | | | |
| | 2019 |
| | 2018 |
|
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 5,033,997 |
| | $ | 5,217,857 |
|
| Service cost | 76,647 |
| | 82,993 |
|
| Interest cost | 160,542 |
| | 144,339 |
|
| Plan amendments | 7,719 |
| | 2,932 |
|
| Divestiture | — |
| | (9,535 | ) |
| Actuarial loss (gain) | 491,792 |
| | (182,588 | ) |
| Benefits paid | (237,080 | ) | | (216,169 | ) |
| Foreign currency translation and other | (46,043 | ) | | (5,832 | ) |
| Benefit obligation at end of year | $ | 5,487,574 |
| | $ | 5,033,997 |
|
| | | | |
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 3,915,889 |
| | $ | 3,896,001 |
|
| Actual gain on plan assets | 318,809 |
| | 174,951 |
|
| Divestiture | — |
| | (12,231 | ) |
| Employer contributions | 284,965 |
| | 81,518 |
|
| Benefits paid | (237,080 | ) | | (216,169 | ) |
| Foreign currency translation and other | (37,614 | ) | | (8,181 | ) |
| Fair value of plan assets at end of year | $ | 4,244,969 |
| | $ | 3,915,889 |
|
| Funded status | $ | (1,242,605 | ) | | $ | (1,118,108 | ) |
|
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (8,396 | ) | | $ | (11,333 | ) |
| Pensions and other postretirement benefits | (1,234,209 | ) | | (1,106,775 | ) |
| Net amount recognized | $ | (1,242,605 | ) | | $ | (1,118,108 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 1,510,901 |
| | $ | 1,216,612 |
|
| Prior service cost | 19,602 |
| | 18,900 |
|
| Transition obligation | 44 |
| | 61 |
|
| Net amount recognized | $ | 1,530,547 |
| | $ | 1,235,573 |
|
|
| | | | | | | |
| | 2016 |
| | 2015 |
|
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 4,867,703 |
| | $ | 4,749,447 |
|
| Service cost | 94,650 |
| | 97,960 |
|
| Interest cost | 181,469 |
| | 176,556 |
|
| Special termination cost | 7,088 |
| | 21,174 |
|
| Actuarial loss | 487,523 |
| | 237,896 |
|
| Benefits paid | (230,551 | ) | | (261,473 | ) |
| Plan amendments | 2,992 |
| | 3,033 |
|
| Foreign currency translation and other | (95,219 | ) | | (156,890 | ) |
| Benefit obligation at end of year | $ | 5,315,655 |
| | $ | 4,867,703 |
|
| | | | |
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 3,238,307 |
| | $ | 3,499,274 |
|
| Actual gain on plan assets | 97,165 |
| | 51,514 |
|
| Employer contributions | 279,140 |
| | 62,852 |
|
| Benefits paid | (230,551 | ) | | (261,473 | ) |
| Foreign currency translation and other | (77,014 | ) | | (113,860 | ) |
| Fair value of plan assets at end of year | $ | 3,307,047 |
| | $ | 3,238,307 |
|
| Funded status | $ | (2,008,608 | ) | | $ | (1,629,396 | ) |
|
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (42,763 | ) | | $ | (31,206 | ) |
| Pensions and other postretirement benefits | (1,965,845 | ) | | (1,598,190 | ) |
| Net amount recognized | $ | (2,008,608 | ) | | $ | (1,629,396 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 2,047,103 |
| | $ | 1,639,010 |
|
| Prior service cost | 27,723 |
| | 32,126 |
|
| Transition obligation | 103 |
| | 103 |
|
| Net amount recognized | $ | 2,074,929 |
| | $ | 1,671,239 |
|
The presentation of the amounts recognized on the Consolidated Balance Sheet and in accumulated other comprehensive (loss) is on a debit (credit) basis and excludes the effect of income taxes.
During 2016, the Company provided enhanced retirement benefits in connection with a plant closure, which resulted in an
The increase in the benefit obligation in 2019, largely reflected in the net actuarial loss component, is primarily due to the decrease in the discount rate used to measure the obligation across all pension plans. Additionally, the benefit costobligation increased slightly as a result of $7,088. During 2015,updated census data for the Company initiated a voluntary retirement program under which certain participants in its U.S.domestic qualified defined benefit pension plan were offered enhanced retirement benefits,due to delayed retirements and higher than anticipated compensation increases.
The decrease in the benefit obligation in 2018, which resultedis also largely reflected in annet actuarial loss component, is primarily due to the increase in net pension benefit cost of $21,174.
During 2015, the Company offered lump-sum distributions to certain participants in its U.S.discount rates for all plans as well as updated mortality assumptions for the domestic qualified defined benefit plan. Included
The increase in benefits paidthe fair value of plan assets in 20152019 is $81,496, relatedattributable to participants who electeda $200 million discretionary contribution made during 2019 into the domestic qualified defined benefit plan and investment gains. The increase in the fair value of plan assets in 2018 is predominantly due to receive lump-sum distributions.the favorable investment returns of plan assets.
The estimated amount of net actuarial loss, prior service cost and transition obligation that will be amortized from accumulated other comprehensive (loss) into net periodic benefit pension cost in 2017 is $200,725, $6,579 and $19, respectively.
The accumulated benefit obligation for all defined benefit plans was $4,884,985$5,184,637 and $4,451,047$4,751,111 at June 30, 20162019 and 2015,2018, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5,211,768, $4,796,860$5,094,129 and $3,206,287,$4,140,395, respectively, at June 30, 2016,2019, and $4,761,438, $4,352,369$4,665,272 and $3,129,803,$3,807,859, respectively, at June 30, 2015.2018. The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $5,310,979$5,427,084 and $3,302,370,$4,175,871, respectively, at June 30, 2016,2019, and $4,821,675$4,970,120 and $3,188,293,$3,842,539, respectively, at June 30, 2015.2018.
The Company expects to make cash contributions of approximately $306$77 million to its defined benefit pension plans in 2017,2020, the majority of which relate to its U.S. qualified defined benefit plan.non-U.S. plans. Estimated future benefit payments in the five years ending June 30,2017 2020 through 20212024 are $239,898, $220,006, $224,569, $248,085$235,709, $249,814, $306,446, $266,915 and $272,250,$274,452, respectively, and $1,381,405$1,482,681 in the aggregate for the five years ending June 30, 2021 2025 through June 30, 2025. 2029.
The assumptions used to measure net periodic benefit cost for the Company's significant defined benefit plans are:
|
| | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| U.S. defined benefit plan | | | | | |
| Discount rate | 4.01 | % | | 3.64 | % | | 3.33 | % |
| Average increase in compensation | 3.65 | % | | 3.89 | % | | 5.02 | % |
| Expected return on plan assets | 7.00 | % | | 7.50 | % | | 7.50 | % |
| Non-U.S. defined benefit plans | | | | | |
| Discount rate | 0.30 to 3.37% |
| | 0.30 to 7.57% |
| | 0.23 to 7.75% |
|
| Average increase in compensation | 1.75 to 5.5% |
| | 2.0 to 5.5% |
| | 2.0 to 5.5% |
|
| Expected return on plan assets | 1.0 to 5.75% |
| | 1.0 to 5.75% |
| | 1.0 to 5.75% |
|
|
| | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| U.S. defined benefit plans | | | | | |
| Discount rate | 4.19 | % | | 4.05 | % | | 4.52 | % |
| Average increase in compensation | 5.14 | % | | 5.12 | % | | 5.13 | % |
| Expected return on plan assets | 7.5 | % | | 7.5 | % | | 8.0 | % |
| Non-U.S. defined benefit plans | | | | | |
| Discount rate | 0.7 to 6.0% |
| | 0.9 to 4.2% |
| | 1.5 to 4.59% |
|
| Average increase in compensation | 2.0 to 5.5% |
| | 2.0 to 5.0% |
| | 2.0 to 6.0% |
|
| Expected return on plan assets | 1.0 to 5.75% |
| | 1.0 to 6.25% |
| | 1.0 to 6.25% |
|
The assumptions used to measure the benefit obligation for the Company's significant defined benefit plans are:
|
| | | | | |
| | 2019 |
| | 2018 |
|
| U.S. defined benefit plan | | | |
| Discount rate | 3.28 | % | | 4.01 | % |
| Average increase in compensation | 3.60 | % | | 3.65 | % |
| Non-U.S. defined benefit plans | | | |
| Discount rate | 0.20 to 2.96% |
| | 0.30 to 3.37% |
|
| Average increase in compensation | 1.75 to 3.9% |
| | 1.75 to 5.5% |
|
|
| | | | | |
| | 2016 |
| | 2015 |
|
| U.S. defined benefit plans | | | |
| Discount rate | 3.33 | % | | 4.19 | % |
| Average increase in compensation | 5.02 | % | | 5.14 | % |
| Non-U.S. defined benefit plans | | | |
| Discount rate | 0.23 to 7.75% |
| | 0.7 to 6.0% |
|
| Average increase in compensation | 2.0 to 5.5% |
| | 2.0 to 5.5% |
|
The discount rate assumption is based on current rates of high-quality, long-term corporate bonds over the same estimated time period that benefit payments will be required to be made. The expected return on plan assets assumption is based on the weighted-average expected return of the various asset classes in the plans' portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
Beginning in 2017, the Company will change the method used to estimate the service and interest cost components of net periodic pension cost. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash outflows. Previously, these cost components were determined using a single-weighted average discount rate. This change does not affect the measurement of the Company benefit obligation.
The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:
|
| | | | | |
| | 2019 |
| | 2018 |
|
| Equity securities | 43 | % | | 44 | % |
| Debt securities | 54 | % | | 49 | % |
| Other investments | 3 | % | | 7 | % |
| | 100 | % | | 100 | % |
|
| | | | | |
| | 2016 |
| | 2015 |
|
| Equity securities | 39 | % | | 41 | % |
| Debt securities | 51 | % | | 47 | % |
| Other investments | 10 | % | | 12 | % |
| | 100 | % | | 100 | % |
The weighted-average target asset allocation as of June 30, 20162019 is 4142 percent equity securities, 4746 percent debt securities and 12 percent other investments. The investment strategy for the Company's worldwide defined benefit pension plan assets focuses on achieving prudent actuarial funding ratios while maintaining acceptable levels of risk in order to provide adequate liquidity to meet immediate and future benefit requirements. This strategy requires investment portfolios that are broadly diversified across various asset classes and external investment managers. Assets held in the U.S. defined benefit plansplan account for approximately 7375 percent of the Company's total defined benefit plan assets. The Company's overall investment strategy with respect to the Company's U.S. defined benefit plansplan is to opportunistically migrate from its traditional mix between
growth seeking assets (primarily consisting of global public equities in developed and emerging countries and hedge fund of fund strategies) and income generating assets (primarily consisting of high quality bonds, both domestic and global, emerging market bonds, high yield bonds and Treasury Inflation Protected Securities)global) to an allocation more heavily weighted toward income generatingliability-hedging assets. Over time, the Company will continue to add long duration fixed income assets are being added to the portfolio.portfolio and eliminate hedge funds. These securities are highly correlated with the Company's pension liabilities and will serve to hedgebe managed in a portion of the Company's interest rate risk.liability framework.
The fair values of pension plan assets at June 30, 20162019 and at June 30, 20152018, by asset class, are as follows:
| | | | June 30, 2016 | | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | June 30, 2019 | | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | $ | 46,052 |
| | $ | 45,474 |
| | $ | 578 |
| | $ | — |
| $ | 111,520 |
| | $ | 117,823 |
| | $ | (6,303 | ) | | $ | — |
|
| Equity securities | | | | | | | | | | | | | | |
| U.S. based companies | 292,138 |
| | 292,138 |
| | — |
| | — |
| 226,027 |
| | 226,027 |
| | — |
| | — |
|
| Non-U.S. based companies | 191,647 |
| | 191,647 |
| | — |
| | — |
| 16,385 |
| | 16,385 |
| | — |
| | — |
|
| Fixed income securities | | | | | | | | | | | | | | |
| Corporate bonds | 141,549 |
| | 73,685 |
| | 67,864 |
| | — |
| |
| Corporate debt securities | | 701,842 |
| | 137,227 |
| | 564,615 |
| | — |
|
| Government issued securities | 203,000 |
| | 141,935 |
| | 61,065 |
| | — |
| 528,394 |
| | 367,518 |
| | 160,876 |
| | — |
|
| Mutual funds | | | | | | | | | | | | | | |
| Equity funds | 149,807 |
| | 149,807 |
| | — |
| | — |
| 266,240 |
| | 266,240 |
| | — |
| | — |
|
| Fixed income funds | 151,649 |
| | 151,649 |
| | — |
| | — |
| 183,732 |
| | 183,732 |
| | — |
| | — |
|
| Mutual funds measured at net asset value | 246,075 |
| | | | | | | 304,504 |
| | | | | | |
| Common/Collective trusts | | | | | | | | | | | | | | |
| Equity funds | 65,404 |
| | 65,404 |
| | — |
| | — |
| 84,790 |
| | 84,790 |
| | — |
| | — |
|
| Fixed income funds | 43,981 |
| | 43,981 |
| | — |
| | — |
| |
| Common/Collective trusts measured at net asset value | 1,487,170 |
| | | | | | | 1,872,473 |
| | | | | | |
| Limited Partnerships measured at net asset value | 280,248 |
| | | | | | | 240,803 |
| | | | | | |
| Miscellaneous | 8,327 |
| | — |
| | 8,327 |
| | — |
| (291,741 | ) | | — |
| | (291,741 | ) | | — |
|
| Total at June 30, 2016 | $ | 3,307,047 |
| | $ | 1,155,720 |
| | $ | 137,834 |
| | $ | — |
| |
| Total at June 30, 2019 | | $ | 4,244,969 |
| | $ | 1,399,742 |
| | $ | 427,447 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 | | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | $ | 57,307 |
| | $ | 54,322 |
| | $ | 2,985 |
| | $ | — |
|
| Equity securities |
| | | | | | |
| U.S. based companies | 447,553 |
| | 447,553 |
| | — |
| | — |
|
| Non-U.S. based companies | 243,253 |
| | 243,253 |
| | — |
| | — |
|
| Fixed income securities | | | | | | | |
| Corporate debt securities | 225,929 |
| | 115,534 |
| | 110,395 |
| | — |
|
| Government issued securities | 272,604 |
| | 184,636 |
| | 87,968 |
| | — |
|
| Mutual funds | | | | | | | |
| Equity funds | 176,846 |
| | 176,846 |
| | — |
| | — |
|
| Fixed income funds | 179,562 |
| | 179,562 |
| | — |
| | — |
|
| Mutual funds measured at net asset value | 232,050 |
| | | | | | |
| Common/Collective trusts | | | | | | | |
| Equity funds | 89,578 |
| | 89,578 |
| | — |
| | — |
|
| Fixed income funds | 46,620 |
| | 46,620 |
| | — |
| | — |
|
| Common/Collective trusts measured at net asset value | 1,737,543 |
| | | | | | |
| Limited Partnerships measured at net asset value | 243,536 |
| | | | | | |
| Miscellaneous | (36,492 | ) | | — |
| | (36,492 | ) | | — |
|
| Total at June 30, 2018 | $ | 3,915,889 |
| | $ | 1,537,904 |
| | $ | 164,856 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | June 30, 2015 | | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | $ | 75,015 |
| | $ | 75,015 |
| | $ | — |
| | $ | — |
|
| Equity securities |
| | | | | | |
| U.S. based companies | 299,321 |
| | 299,321 |
| | — |
| | — |
|
| Non-U.S. based companies | 203,199 |
| | 203,199 |
| | — |
| | — |
|
| Fixed income securities | | | | | | | |
| Corporate bonds | 165,226 |
| | 77,224 |
| | 88,002 |
| | — |
|
| Government issued securities | 143,697 |
| | 90,785 |
| | 52,912 |
| | — |
|
| Mutual funds | | | | | | | |
| Equity funds | 149,383 |
| | 149,383 |
| | — |
| | — |
|
| Fixed income funds | 135,949 |
| | 135,949 |
| | — |
| | — |
|
| Mutual funds measured at net asset value | 5,564 |
| | | | | | |
| Common/Collective trusts | | | | | | | |
| Equity funds | 77,429 |
| | 77,429 |
| | — |
| | — |
|
| Fixed income funds | 46,184 |
| | 46,184 |
| | — |
| | — |
|
| Common/Collective trusts measured at net asset value | 1,635,135 |
| | | | | | |
| Limited Partnerships measured at net asset value | 290,904 |
| | | | | | |
| Miscellaneous | 11,301 |
| | — |
| | 11,301 |
| | — |
|
| Total at June 30, 2015 | $ | 3,238,307 |
| | $ | 1,154,489 |
| | $ | 152,215 |
| | $ | — |
|
Cash and cash equivalents, which include repurchase agreements and other short-term investments, are valued at cost, which approximates fair value.
Equity securities are valued at the closing price reported on the active market on which the individual securities are traded. U.S. based companies include CompanyParker stock with a fair value of $226,027 and $143,652207,202 as of June 30, 20162019 and $154,660 as of June 30, 2015.2018, respectively.
Fixed income securities are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded.
Mutual funds are valued using the closing market price reported on the active market on which the fund is traded or at net asset value per share and primarily consist of equity and fixed income funds. The equity funds primarily provide exposure to U.S. and international equities, real estate and commodities. The fixed income funds primarily provide exposure to high-yield securities and emerging market fixed income instruments. Mutual funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the Consolidated Balance Sheet.total pension plan assets.
Common/Collective trusts primarily consist of equity, and fixed income and real estate funds and are valued using the closing market price reported on the active market on which the fund is traded or at net asset value per share. Common/Collective trust investments can be redeemed daily and without restriction. Redemptionrestriction after giving appropriate notice to the issuer. Generally, redemption of the entire investment balance generally requires a 30-day60-day notice period. The equity funds provide exposure to large, mid and small cap U.S. equities, international large and small cap equities and emerging market equities. The fixed income funds provide exposure to U.S., international and emerging market debt securities. Common/Collective trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the Consolidated Balance Sheet.total pension plan assets.
Limited Partnerships primarily consist of hedge funds valued using a net asset value per share and provide exposure to a variety of hedging strategies including long/short equity, relative value, event driven and global macro. Limited Partnership investments can be redeemed dailyeither monthly or quarterly and without restriction.restriction after giving appropriate notice to the issuer. Redemption of the entire investment balance generally requires no more than a 30-day95-day notice period. Limited Partnerships measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the Consolidated Balance Sheet.
total pension plan assets.
Miscellaneous primarily includes real estate funds, insurance contracts held in the asset portfolio of the Company's non-U.S. defined benefit pension plans and net payables for securities purchased but not settled in the asset portfolio of the Company's U.S. defined benefit pension plans.plan. Insurance contracts are valued at the present value of future cash flows promised under the terms of the insurance contracts.
The primary investment objective of equity securities and equity funds, within both the mutual fund and common/collective trust asset class, is to obtain capital appreciation in an amount that at least equals various market-based benchmarks. The primary investment objective of fixed income securities and fixed income funds, within both the mutual fund and common/collective trust asset class, is to provide for a constant stream of income while preserving capital. The primary investment objective of limited partnerships is to achieve capital appreciation through an investment program focused on specialized investment strategies. The primary investment objective of insurance contracts, included in the miscellaneous asset class, is to provide a stable rate of return over a specified period of time.
Employee Savings Plan - The Company sponsors an employee stock ownership plan (ESOP)("ESOP") as part of its existing savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Company matching contributions, up to a maximum of four percent of an employee's annual compensation, are recorded as compensation expense. Prior to August 1, 2014, Company stock was used to match employee contributions. Effective August 1, 2014, participantsParticipants may direct company matching contributions to any investment option within the savings and investment 401(k) plan.
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Shares held by ESOP | 6,134,280 |
| | 6,476,154 |
| | 6,911,436 |
|
| Company matching contributions | $ | 72,032 |
| | $ | 65,262 |
| | $ | 57,766 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Shares held by ESOP | 7,728,332 |
| | 8,407,858 |
| | 8,944,697 |
|
| Company matching contributions | $ | 58,922 |
| | $ | 63,914 |
| | $ | 63,441 |
|
In addition to shares within the ESOP, as of June 30, 20162019, employees have elected to invest in 2,317,9241,777,467 shares of common stock within a company stock fund of the savings and investment 401(k) plan.
The Company has a retirement income account (RIA)("RIA") within the employee savings plan. The Company makes a cash contribution to the participant's RIA each year, the amount of which is based on the participant's age and years of service. Participants do not contribute to the RIA. The Company recognized $30,603, $25,780, $29,57029,023 and $25,24729,309 in expense related to the RIA in 20162019, 20152018 and 20142017, respectively.
During 2017, the Company assumed various defined contribution plans previously sponsored by Clarcor. The Company recognized expense of $4,481 and $2,199 in 2018 and 2017, respectively, related to these defined contribution plans. In January 2018, the former employees of Clarcor became eligible to participate in the savings and investment 401(k) plan.
Other Postretirement Benefits - The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change these benefit plans.
The Company recognized $8,754, $4,340$1,838, $2,755 and $4,478$4,357 in expense related to other postretirement benefits in 2016, 20152019, 2018 and 2014,2017, respectively. During 2016, the Company provided enhanced retirement benefits in connection with a plant closure, which resulted in an increase in expense related toComponents of net other postretirement benefitsbenefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of $4,521.Income.
| | | | 2016 |
| | 2015 |
| 2019 |
| | 2018 |
|
| Change in benefit obligation | | | | | | |
| Benefit obligation at beginning of year | $ | 75,953 |
| | $ | 76,207 |
| $ | 66,521 |
| | $ | 79,933 |
|
| Service cost | 591 |
| | 632 |
| 205 |
| | 320 |
|
| Interest cost | 2,834 |
| | 2,723 |
| 2,043 |
| | 2,003 |
|
| Special termination cost | 4,521 |
| | — |
| |
| Actuarial loss | 10,217 |
| | 655 |
| |
| Actuarial gain | | (3,235 | ) | | (11,259 | ) |
| Benefits paid | (4,331 | ) | | (4,264 | ) | (4,536 | ) | | (4,476 | ) |
| Benefit obligation at end of year | $ | 89,785 |
| | $ | 75,953 |
| $ | 60,998 |
| | $ | 66,521 |
|
| Funded status | $ | (89,785 | ) | | $ | (75,953 | ) | $ | (60,998 | ) | | $ | (66,521 | ) |
|
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (5,308 | ) | | $ | (6,180 | ) |
| Pensions and other postretirement benefits | (55,690 | ) | | (60,341 | ) |
| Net amount recognized | $ | (60,998 | ) | | $ | (66,521 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial (gain) loss | $ | (1,713 | ) | | $ | 1,232 |
|
| Prior service credit | (194 | ) | | (314 | ) |
| Net amount recognized | $ | (1,907 | ) | | $ | 918 |
|
|
| | | | | | | |
| | 2016 |
| | 2015 |
|
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (6,216 | ) | | $ | (5,629 | ) |
| Pensions and other postretirement benefits | (83,569 | ) | | (70,324 | ) |
| Net amount recognized | $ | (89,785 | ) | | $ | (75,953 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 22,914 |
| | $ | 13,626 |
|
| Prior service credit | (556 | ) | | (676 | ) |
| Net amount recognized | $ | 22,358 |
| | $ | 12,950 |
|
The presentation of the amounts recognized on the Consolidated Balance Sheet and in accumulated other comprehensive (loss) is on a debit (credit) basis and is before the effect of income taxes.
The amount ofdecrease in the benefit obligation in 2019, largely reflected in the net actuarial lossgain component, is primarily due to updated census data resulting from a different mix of benefit selections and prior service credit that will be amortized from accumulated other comprehensive (loss) intoactuarial assumptions reflecting lower benefit claims offset by decreases in the discount rates. The decrease in the benefit obligation in 2018, which is also primarily reflected in the net periodic postretirement costactuarial gain component, is due to increases in 2017 is $2,101the discount rates, updated census data related to coverage elections and $(121), respectively.actuarial assumption changes.
The assumptions used to measure the net periodic benefit cost for postretirement benefit obligations are:
|
| | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Discount rate | 3.92 | % | | 3.46 | % | | 3.15 | % |
| Current medical cost trend rate (Pre-65 participants) | 7.47 | % | | 8.19 | % | | 7.35 | % |
| Current medical cost trend rate (Post-65 participants) | 7.87 | % | | 9.79 | % | | 8.68 | % |
| Ultimate medical cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Medical cost trend rate decreases to ultimate in year | 2026 |
| | 2025 |
| | 2025 |
|
|
| | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Discount rate | 3.96 | % | | 3.74 | % | | 4.10 | % |
| Current medical cost trend rate (Pre-65 participants) | 7.61 | % | | 7.75 | % | | 7.75 | % |
| Current medical cost trend rate (Post-65 participants) | 9.00 | % | | 7.75 | % | | 7.75 | % |
| Ultimate medical cost trend rate | 4.50 | % | | 5.00 | % | | 5.00 | % |
| Medical cost trend rate decreases to ultimate in year | 2025 |
| | 2021 |
| | 2021 |
|
The discount rate assumption used to measure the benefit obligation was 3.15 percent in 20162019 and 3.963.92 percent in 20152018.
Estimated future benefit payments for other postretirement benefits in the five years ending June 30,20172020 through 20212024 are $6,216, $6,796, $6,717, $6,349$5,308, $5,051, $4,675, $4,401 and $6,287,$4,212, respectively, and $27,882$18,271 in the aggregate for the five years ending June 30, 2021 2025 through June 30, 2025. 2029.
A one percentage point change in assumed health care cost trend rates would not have a material effect on the benefit cost or benefit obligation.
Other - The Company has established nonqualified deferred compensation programs, which permit officers, directors and certain management employees annually to elect to defer a portion of their compensation, on a pre-tax basis, until their retirement. The retirement benefit to be provided is based on the amount of compensation deferred, Company matching contributions and earnings on the deferrals. In addition, the Company maintains a defined contribution nonqualified supplemental executive pension plan in which the Company is the only contributor. During 20162019, 20152018 and 20142017, the Company recorded (income) expense relating to deferred compensationthese programs of $5,916, $(2,917), $5,67613,420 and $24,54920,400, respectively.
The Company has invested in corporate-owned life insurance policies to assist in meeting the obligation under these programs. The policies are held in a rabbi trust and are recorded as assets of the Company.
Changes in accumulated other comprehensive (loss) in shareholders' equity by component:
|
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustment and Other | | Retirement Benefit Plans | | Total |
| Balance June 30, 2017 | $ | (925,342 | ) | | $ | (998,862 | ) | | $ | (1,924,204 | ) |
| Other comprehensive income (loss) before reclassifications | (10,141 | ) | | 76,417 |
| | 66,276 |
|
| Amounts reclassified from accumulated other comprehensive (loss) | (7,994 | ) | | 102,836 |
| | 94,842 |
|
| Balance June 30, 2018 | $ | (943,477 | ) | | $ | (819,609 | ) | | $ | (1,763,086 | ) |
| Impact of adoption of ASU 2016-01 | (1,734 | ) | | — |
| | (1,734 | ) |
| Other comprehensive loss before reclassifications | (70,023 | ) | | (325,213 | ) | | (395,236 | ) |
| Amounts reclassified from accumulated other comprehensive (loss) | 3,578 |
| | 97,430 |
| | 101,008 |
|
| Balance June 30, 2019 | $ | (1,011,656 | ) | | $ | (1,047,392 | ) | | $ | (2,059,048 | ) |
|
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustment and Other | | Retirement Benefit Plans | | Total |
| Balance June 30, 2014 | $ | 124,392 |
| | $ | (947,890 | ) | | $ | (823,498 | ) |
| Other comprehensive (loss) before reclassifications | (769,431 | ) | | (253,206 | ) | | (1,022,637 | ) |
| Amounts reclassified from accumulated other comprehensive (loss) | 4,021 |
| | 103,496 |
| | 107,517 |
|
| Balance June 30, 2015 | $ | (641,018 | ) | | $ | (1,097,600 | ) | | $ | (1,738,618 | ) |
| Other comprehensive (loss) before reclassifications | (202,444 | ) | | (400,053 | ) | | (602,497 | ) |
| Amounts reclassified from accumulated other comprehensive (loss) | (659 | ) | | 114,009 |
| | 113,350 |
|
| Balance June 30, 2016 | $ | (844,121 | ) | | $ | (1,383,644 | ) | | $ | (2,227,765 | ) |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2016:2019: | | | Details about Accumulated Other Comprehensive (Loss) Components | | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | | Consolidated Statement of Income Classification | | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | | Consolidated Statement of Income Classification |
| Retirement benefit plans | | | | | | |
| Amortization of prior service cost and initial net obligation | | $ | (7,366 | ) | | See Note 10 | | $ | (6,552 | ) | | Other (income) expense, net |
| Recognized actuarial loss | | (171,337 | ) | | See Note 10 | | (121,534 | ) | | Other (income) expense, net |
| Total before tax | | (178,703 | ) | | | (128,086 | ) | |
| Tax benefit | | 64,694 |
| | Income taxes | | 30,656 |
| |
|
| Net of tax | | $ | (114,009 | ) | | | $ | (97,430 | ) | |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2015:2018:
|
| | | | | | |
| Details about Accumulated Other Comprehensive (Loss) Components | | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | | Consolidated Statement of Income Classification |
| Retirement benefit plans | | | | |
| Amortization of prior service cost and initial net obligation | | $ | (6,467 | ) | | Other (income) expense, net |
| Recognized actuarial loss | | (147,611 | ) | | Other (income) expense, net |
| Total before tax | | (154,078 | ) | | |
| Tax benefit | | 51,242 |
| |
|
| Net of tax | | $ | (102,836 | ) | | |
|
| | | | | | |
| Details about Accumulated Other Comprehensive (Loss) Components | | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | | Consolidated Statement of Income Classification |
| Retirement benefit plans | | | | |
| Amortization of prior service cost and initial net obligation | | $ | (9,333 | ) | | See Note 10 |
| Recognized actuarial loss | | (153,770 | ) | | See Note 10 |
| Total before tax | | (163,103 | ) | | |
| Tax benefit | | 59,607 |
| | Income taxes |
| Net of tax | | $ | (103,496 | ) | | |
Share Repurchases- The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. The number of common shares repurchased at the average purchase price follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Shares repurchased | 4,755,273 |
| | 1,738,234 |
| | 1,976,778 |
|
| Average price per share including commissions | $ | 168.23 |
| | $ | 172.59 |
| | $ | 133.90 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Shares repurchased | 5,121,051 |
| | 11,091,759 |
| | 1,741,143 |
|
| Average price per share | $ | 108.87 |
| | $ | 125.64 |
| | $ | 114.87 |
|
| |
12.13. | Stock Incentive Plans |
The Company's 20092016 Omnibus Stock Incentive Plan provides for the granting of share-based incentive awards in the form of nonqualified stock options, stock appreciation rights (SARs)("SARs"), restricted stock units (RSUs)("RSUs") and restricted and unrestricted stock to officers and key employees of the Company. The aggregate number of shares authorized for issuance under the 20092016 Omnibus Stock Incentive Plan is 14.716 million. At June 30, 2016, 3.42019, 8.7 million common shares were reservedavailable for issuance in connection with stock incentive plans.future issuance.
The Company satisfies share-based incentive award obligations by issuing shares of common stock out of treasury, which have been repurchased pursuant to the Company's share repurchase program described in Note 11,12, or through the issuance of previously unissued common stock.
Stock Options/SARs - Stock options allow the participant to purchase shares of common stock at a price not less than 100 percent of the fair market value of the stock on the date of grant. Upon exercise, SARs entitle the participant to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date. Stock options and SARs are exercisable from one to three years after the date of grant and expire no more than 10 years after grant.
The fair value of each stock option and SAR award granted in 20162019, 20152018 and 20142017 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Risk-free interest rate | 2.8 | % | | 1.9 | % | | 1.4 | % |
| Expected life of award | 5.1 years |
| | 5.2 years |
| | 5.3 years |
|
| Expected dividend yield of stock | 1.9 | % | | 2.0 | % | | 2.0 | % |
| Expected volatility of stock | 24.2 | % | | 23.4 | % | | 28.5 | % |
| Weighted-average fair value | $ | 35.09 |
| | $ | 29.71 |
| | $ | 27.39 |
|
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Risk-free interest rate | 1.9 | % | | 2.0 | % | | 1.55 | % |
| Expected life of award | 5.4 yrs |
| | 5.4 yrs |
| | 5.1 yrs |
|
| Expected dividend yield of stock | 1.9 | % | | 1.8 | % | | 1.9 | % |
| Expected volatility of stock | 28.7 | % | | 32.3 | % | | 39.1 | % |
| Weighted-average fair value | $ | 26.88 |
| | $ | 30.50 |
| | $ | 32.57 |
|
The risk-free interest rate was based on U.S. Treasury yields with a term similar to the expected life of the award. The expected life of the award was derived by referring to actual exercise and post-vesting employment termination experience. The expected dividend yield was based on the Company's historical dividend rate and stock price over a period similar to the expected life of the award. The expected volatility of stock was derived by referring to changes in the Company's historical common stock prices over a time-frame similar to the expected life of the award.
Stock option and SAR activity during 20162019 is as follows (aggregate intrinsic value in millions):
|
| | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Outstanding June 30, 2018 | 6,046,881 |
| | $ | 106.98 |
| | | | |
| Granted | 748,901 |
| | $ | 166.49 |
| | | | |
| Exercised | (983,205 | ) | | $ | 77.28 |
| | | | |
| Canceled | (63,122 | ) | | $ | 154.93 |
| | | | |
| Outstanding June 30, 2019 | 5,749,455 |
| | $ | 119.29 |
| | 5.8 years | | $ | 291.6 |
|
| Exercisable June 30, 2019 | 4,088,257 |
| | $ | 105.15 |
| | 4.8 years | | $ | 265.2 |
|
|
| | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Outstanding June 30, 2015 | 8,134,206 |
| | $ | 79.84 |
| | | | |
| Granted | 968,445 |
| | 113.23 |
| | | | |
| Exercised | (945,191 | ) | | 67.65 |
| | | | |
| Canceled | (101,012 | ) | | 108.32 |
| | | | |
| Outstanding June 30, 2016 | 8,056,448 |
| | $ | 84.93 |
| | 5.3 years | | $ | 199.2 |
|
| Exercisable June 30, 2016 | 6,018,552 |
| | $ | 75.80 |
| | 4.3 years | | $ | 198.4 |
|
A summary of the status and changes of shares subject to stock option and SAR awards and the related average price per share follows:
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2018 | 1,878,209 |
| | $ | 28.44 |
|
| Granted | 748,901 |
| | $ | 35.09 |
|
| Vested | (905,842 | ) | | $ | 28.00 |
|
| Canceled | (60,070 | ) | | $ | 31.15 |
|
| Nonvested June 30, 2019 | 1,661,198 |
| | $ | 31.58 |
|
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2015 | 2,310,089 |
| | $ | 30.71 |
|
| Granted | 968,445 |
| | 26.88 |
|
| Vested | (1,164,552 | ) | | 29.80 |
|
| Canceled | (76,086 | ) | | 29.31 |
|
| Nonvested June 30, 2016 | 2,037,896 |
| | $ | 29.46 |
|
At June 30, 2016, $15,844 of expense with respect to nonvested stock option and SAR awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 18 months. The total fair value of shares vested during 2016, 2015 and 2014 was $34,706, $34,064 and $42,363, respectively.
Information related to stock option and SAR awards exercised during 2016, 2015 and 2014 is as follows:
|
| | | | | | | | | | | |
| | 2016 |
| | 2015 |
| | 2014 |
|
| Net cash proceeds | $ | 126 |
| | $ | 3,355 |
| | $ | 8,013 |
|
| Intrinsic value | 40,612 |
| | 72,140 |
| | 155,903 |
|
| Income tax benefit | 7,188 |
| | 17,355 |
| | 37,993 |
|
During 2016, 20152019, 2018 and 2014,2017, the Company recognized stock-based compensation expense of $28,129, $34,617$26,568, $27,422 and $49,998,$28,535, respectively, relating to stock option and SAR awards. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards are exercised. The related income tax benefit iswas credited to additional capitalincome tax expense.
At June 30, 2019, $11,817 of expense with respect to nonvested SAR awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 16 months. The total fair value of shares vested during 2019, 2018 and 2017 was $25,365, $26,461 and $33,094, respectively.
Information related to SAR awards exercised during 2019, 2018 and 2017 is as the Company is currently in a windfall tax benefit position.follows:
|
| | | | | | | | | | | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Net cash proceeds | $ | 2,475 |
| | $ | 3,682 |
| | $ | 2,202 |
|
| Intrinsic value | 95,502 |
| | 136,000 |
| | 153,908 |
|
| Income tax benefit | 15,584 |
| | 28,701 |
| | 31,193 |
|
Shares surrendered upon exercise of stock options and SARs: 20162019 - 158,808158,610; 2018 - 269,670; 20152017 - 243,799; 2014 - 775,163371,246.
RSUs - RSUs constitute an agreement to deliver shares of common stock to the participant at the end of a vesting period. Generally, the RSUs granted to employees vest and the underlying stock is issued ratably over a three-year graded vesting period. UnvestedNonvested RSUs may not be transferred and do not have dividend or voting rights. For each unvestednonvested RSU, recipients are entitled to receive a dividend equivalent, payable in cash or common shares, equal to the cash dividend per share paid to common shareholders.
The fair value of each RSU award granted in 2016, 20152019, 2018 and 20142017 was based on the fair market value of the Company's common stock on the date of grant. A summary of the status and changes of shares subject to RSU awards for employees and the related average price per share follows:
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2018 | 360,611 |
| | $ | 138.85 |
|
| Granted | 184,913 |
| | $ | 166.47 |
|
| Vested | (156,079 | ) | | $ | 131.18 |
|
| Canceled | (15,365 | ) | | $ | 154.22 |
|
| Nonvested June 30, 2019 | 374,080 |
| | $ | 155.07 |
|
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2015 | 449,288 |
| | $ | 105.63 |
|
| Granted | 180,487 |
| | 113.19 |
|
| Vested | (210,777 | ) | | 100.45 |
|
| Canceled | (44,830 | ) | | 108.68 |
|
| Nonvested June 30, 2016 | 374,168 |
| | $ | 111.82 |
|
During 20162019, 20152018 and 20142017, the Company recognized stock-based compensation expense of $25,258, $21,190, $22,54724,073 and $21,47523,025 respectively, relating to RSU awards.awards for employees. At June 30, 20162019, $14,714$21,933 of expense with respect to nonvested RSU awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 17 months.24 months. The total fair value of RSU awards vested during 20162019, 20152018 and 20142017 was $20,475, $21,173, $18,95320,681 and $18,00721,576, respectively. The Company recognized aan income tax benefit of $1,548, $870, $7042,451 and $2,509$939 relating to the issuance of common stock for RSU awards that vested during 20162019, 20152018 and 2014,2017, respectively.
In 2016, 14,404During 2019, 2018 and 2017, 8,047, 9,900 and 12,430 RSU awards, respectively, with a one-year vesting period were granted to certain non-employee members of the Board of Directors. Although nonvested shares do not have dividend or voting rights, recipients receive a dividend equivalent payable in common shares, equal to the cash dividend per share paid to common shareholders. In 2016,2019, 2018 and 2017, the Company recognized $824stock-based compensation expense of $1,345, $1,697, and $1,560, respectively, relating to these awards. At June 30, 2019, $414 of expense with respect to these awards.8,003 nonvested RSU awards granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-average period of approximately four months. During 2019, 2018 and 2017 the Company recognized an income tax (cost) benefit of $(82), $270 and $105 respectively, related to the vesting of 9,889, 12,639 and $13,740 RSU awards, respectively, issued to the Board of Directors.
LTIP - The Company's Long Term Incentive Plans (LTIP)("LTIP") provide for the issuance of unrestricted stock to certain officers and key employees based on the attainment of certain goals relating to the Company's revenue growth, earnings per share growth and return on invested capital during the three-year performance period. No dividends or dividend equivalents are paid on unearned shares.
|
| | | | | | | | | | | | |
| Stock issued for LTIP | | 2019 |
| | 2018 |
| | 2017 |
|
| LTIP three-year plan | | 2016-17-18 |
| | 2015-16-17 |
| | 2014-15-16 |
|
| Number of shares issued | | 293,136 |
| | 308,278 |
| | 227,707 |
|
| Share value on date of issuance | | $ | 183.00 |
| | $ | 176.39 |
| | $ | 157.07 |
|
| Total value | | $ | 53,644 |
| | $ | 54,377 |
| | $ | 35,766 |
|
|
| | | | | | | | | | | | |
| Stock issued for LTIP | | 2016 |
| | 2015 |
| | 2014 |
|
| LTIP three-year plan | | 2013-14-15 |
| | 2012-13-14 |
| | 2011-12-13 |
|
| Number of shares issued | | 175,291 |
| | 185,063 |
| | 298,813 |
|
| Average share value on date of issuance | | $ | 113.91 |
| | $ | 119.06 |
| | $ | 126.17 |
|
| Total value | | $ | 19,967 |
| | $ | 22,034 |
| | $ | 37,701 |
|
Under the Company's 2014-15-162017-18-19 LTIP, a payout of unrestricted stock will be issued in April 2017.2020.
The fair value of each LTIP award granted in 20162019, 20152018 and 20142017 was based on the fair market value of the Company's common stock on the date of grant. Beginning January 2019, the Company changed the terms of the LTIP plan allowing newly granted LTIP awards to earn a dividend equivalent unit payable in common shares, equal to the cash dividend per share paid to common shareholders. These dividend equivalent units do not have dividend or voting rights and are subject to the same performance goals as the initial award granted. Any nonvested LTIP awards granted prior to January 2019 will continue not earning dividends or dividend equivalent units. A summary of the status and changes of shares relating to the LTIP and the related average price per share follows: |
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2018 | 658,271 |
| | $ | 143.90 |
|
| Granted | 198,737 |
| | $ | 157.20 |
|
| Vested | (232,842 | ) | | $ | 86.51 |
|
| Canceled | (23,449 | ) | | $ | 174.05 |
|
| Nonvested June 30, 2019 | 600,717 |
| | $ | 169.36 |
|
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2015 | 876,171 |
| | $ | 109.27 |
|
| Granted | 262,032 |
| | 88.63 |
|
| Vested | (298,105 | ) | | 93.05 |
|
| Canceled | (26,336 | ) | | 115.60 |
|
| Nonvested June 30, 2016 | 813,762 |
| | $ | 108.37 |
|
During 20162019, 20152018 and 20142017, the Company recorded stock-based compensation expense of $50,908, $21,150, $38,92965,640 and $31,68827,219, respectively, relating to the LTIP. During 2016, 20152019, 2018 and 2014,2017, the Company recognized aan income tax benefit (cost) of $3,119, $5,373$14,101, $3,893 and $(6,983),$1,701, respectively, relating to the LTIP.
Shares surrendered in connection with the LTIP: 20162019 - 78,173; 2015134,169; 2018 - 42,394; 2014139,918; 2017 - 140,406.113,074.
Restricted Shares - In 2015 and 2014, 12,716 and 12,353 restricted shares, respectively, were issued to non-employee members of the Board of Directors. Transferability of the restricted shares is restricted for one to three years following issuance, and they vest ratably, on an annual basis, over the term of office of the director. The fair value of the restricted shares was based on the fair market value of the Company's common stock on the date of grant. During 2016, 2015 and 2014 the Company recognized expense of $468, $1,401 and $1,304, respectively, related to the restricted shares. During 2016, 2015 and 2014, the Company recognized a tax (cost) benefit of $(32), $(3) and $212, respectively, related to the restricted shares.
| |
13. | Shareholders' Protection Rights Agreement |
On January 25, 2007, the Board of Directors of the Company declared a dividend of one Shareholders' Right for each common share outstanding on February 17, 2007 in relation to the Company's Shareholders Protection Rights Agreement. As of June 30, 2016, 134,012,232 common shares were reserved for issuance under this Agreement. Under certain conditions involving acquisition of, or an offer for, 15 percent or more of the Company's common shares, all holders of Shareholders' Rights would be entitled to purchase one common share at an exercise price currently set at $160. In addition, in certain circumstances, all holders of Shareholders' Rights (other than the acquiring entity) would be entitled to purchase a number of common shares equal to twice the exercise price, or at the option of the Board of Directors, to exchange each Shareholders' Right for one common share. The Shareholders' Rights remain in existence until February 17, 2017, unless extended by the Board of Directors or earlier redeemed (at one cent per Shareholders' Right), exercised or exchanged under the terms of the agreement. In the event of an unfriendly business combination attempt, the Shareholders' Rights will cause substantial dilution to the person attempting the business combination. The Shareholders' Rights should not interfere with any merger or other business combination that is in the best interest of the Company and its shareholders since the Shareholders' Rights may be redeemed.
| |
| 14. | Research and Development |
Research and development costs amounted to $359,796$294,852 in 2016, $403,0852019, $327,877 in 20152018 and $410,132$336,675 in 2014.2017. These amounts include both costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Costs incurred in connection with research and development contracts amounted to $57,999$44,484 in 2016, $57,7992019, $40,823 in 20152018 and $55,916$65,292 in 2014.2017. These costs are included in the total research and development cost for each of the respective years.
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments 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.
Marketable securities and other investments include deposits, whichequity investments and available-for-sale debt securities. Deposits are recorded at cost, and equity investments classified asand available-for-sale whichdebt securities are recorded at fair value. Changes in fair value with unrealized gains and lossesrelated to available-for-sale debt securities are recorded in accumulated other comprehensive (loss). Upon the adoption of ASU 2016-01 on July 1, 2018, changes in fair value of equity investments are recognized in net income. Prior to the adoption of ASU 2016-01, these changes in fair value were recognized in accumulated other comprehensive (loss).
Gross unrealized gains and losses related to both equity investments and available-for-sale debt securities were not material as of June 30, 20162019 and 2015. Substantially all of the available-for-sale investments in an unrealized loss position have been in that position for less than 12 months.2018. There were no facts or circumstances that indicated the unrealized losses were other than temporary.
There were no investments in available-for-sale debt securities at June 30, 2019. The contractual maturities of available-for-sale investments were predominantly one to three years at June 30, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | |
| | June 30, 2016 | | June 30, 2015 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Less than one year | $ | 29,960 |
| | $ | 29,990 |
| | $ | 13,561 |
| | $ | 13,555 |
|
| One to three years | 144,100 |
| | 144,625 |
| | 188,539 |
| | 188,057 |
|
| Over three years | 34,276 |
| | 34,275 |
| | 15,673 |
| | 15,587 |
|
2018. Actual maturities of available-for-sale investments may differ from their contractual maturities as the Company has the ability to liquidate the available-for-sale investments after giving appropriate notice to the issuer.
The carrying value of long-term debt and estimated fair value of long-term debt at June 30 are as follows:
|
| | | | | | | | |
| | | 2019 |
| | 2018 |
|
| Carrying value of long-term debt | | $ | 6,596,380 |
| | $ | 4,460,402 |
|
| Estimated fair value of long-term debt | | 7,012,641 |
| | 4,548,796 |
|
|
| | | | | | | | |
| | | 2016 |
| | 2015 |
|
| Carrying value of long-term debt | | $ | 2,733,140 |
| | $ | 2,947,102 |
|
| Estimated fair value of long-term debt | | 3,133,989 |
| | 3,107,735 |
|
The fair value of long-term debt was determined based on observable market prices in the active market in which the security is traded and is classified within level 2 of the fair value hierarchy.
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, which matured in November 2015, and Japanese Yen credit facility€700 million aggregate principal amount of Senior Notes due 2025 have each 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 facilitySenior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (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.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
|
| | | | | | | | | |
| | Balance Sheet Caption | | 2019 |
| | 2018 |
|
| Net investment hedges | | | | | |
| Cross-currency swap contracts | Other assets | | $ | 24,545 |
| | $ | 7,614 |
|
| Cash flow hedges | | | | | |
| Forward exchange contracts | Non-trade and notes receivable | | 13,242 |
| | 5,564 |
|
| Forward exchange contracts | Other accrued liabilities | | 2,578 |
| | 5,079 |
|
| Costless collar contracts | Non-trade and notes receivable | | 457 |
| | 932 |
|
| Costless collar contracts | Other accrued liabilities | | 1,934 |
| | 236 |
|
|
| | | | | | | | | |
| | Balance Sheet Caption | | 2016 |
| | 2015 |
|
| Net investment hedges | | | | | |
| Cross-currency swap contracts | Other assets | | $ | 24,771 |
| | $ | 17,994 |
|
| Cash flow hedges | | | | | |
| Costless collar contracts | Non-trade and notes receivable | | — |
| | 5,627 |
|
| Costless collar contracts | Other accrued liabilities | | 8,368 |
| | 1,970 |
|
The cross-currency swap, forward exchange contracts and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The Company has not entered into any master netting arrangements.
Gains or losses on derivatives that are not designated as 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 designated as hedges are adjusted to fair value through accumulated other comprehensive (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 forward exchange and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains (losses)or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income during 2016, 20152019, 2018 and 20142017 were not material.
Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) in the Consolidated Balance Sheet are as follows: |
| | | | | | | |
| | 2019 |
| | 2018 |
|
| Cross-currency swap contracts | $ | 13,723 |
| | $ | (9,209 | ) |
| Foreign denominated debt | 16,458 |
| | (9,543 | ) |
|
| | | | | | | |
| | 2016 |
| | 2015 |
|
| Cross-currency swap contracts | $ | 6,869 |
| | $ | 39,406 |
|
| Foreign denominated debt | (8,180 | ) | | 37,871 |
|
There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor were anyNo portion of these financial instruments were excluded from the effectiveness testing during 2016, 20152019, 2018 and 2014.2017.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 20162019 and 20152018 are as follows:
| | | | | June 30, 2016 |
| | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | June 30, 2019 |
| | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 1,296 |
| | $ | 1,296 |
| | $ | — |
| | $ | — |
| | $ | 7,533 |
| | $ | 7,533 |
| | $ | — |
| | $ | — |
|
| Government bonds | | 15,764 |
| | 15,764 |
| | — |
| | — |
| |
| Corporate bonds | | 184,380 |
| | 184,380 |
| | — |
| | — |
| |
| Asset-backed and mortgage-backed securities | | 8,746 |
| | — |
| | 8,746 |
| | — |
| |
| Derivatives | | 25,303 |
| | — |
| | 25,303 |
| | — |
| | 38,244 |
| | — |
| | 38,244 |
| | — |
|
| Investments measured at net asset value | | 361,770 |
| | | | | | | | 9,728 |
| | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivatives | | 13,028 |
| | — |
| | 13,028 |
| | — |
| | 4,512 |
| | — |
| | 4,512 |
| | — |
|
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2018 |
| | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | |
| Equity securities | | $ | 2,956 |
| | $ | 2,956 |
| | $ | — |
| | $ | — |
|
| Corporate bonds | | 5,331 |
| | 5,331 |
| | — |
| | — |
|
| Asset-backed and mortgage-backed securities | | 3,911 |
| | — |
| | 3,911 |
| | — |
|
| Derivatives | | 14,110 |
| | — |
| | 14,110 |
| | — |
|
| Investments measured at net asset value | | 7,208 |
| | | | | | |
| Liabilities: | | | | | | | | |
| Derivatives | | 5,315 |
| | — |
| | 5,315 |
| | — |
|
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2015 |
| | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | |
| Government bonds | | $ | 60,512 |
| | $ | 60,512 |
| | $ | — |
| | $ | — |
|
| Corporate bonds | | 145,717 |
| | 145,717 |
| | — |
| | — |
|
| Asset-backed and mortgage-backed securities | | 10,970 |
| | — |
| | 10,970 |
| | — |
|
| Derivatives | | 23,598 |
| | — |
| | 23,598 |
| | — |
|
| Investments measured at net asset value | | 187,534 |
| | | | | | |
| Liabilities: | | | | | | | | |
| Derivatives | | 1,970 |
| | — |
| | 1,970 |
| | — |
|
The fair values of the equity securities, government bonds, corporate bonds and asset-backed and mortgage-backed securities are determined using the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are traded in an active market.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy and are presented in the table above is to permit reconciliation of the fair value hierarchy to the Consolidated Balance Sheet.hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
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.
The Company is involved in various litigation matters arising in the normal course of business, including proceedings based on product liability claims, workers' compensation claims and alleged violations of various environmental laws. The Company is self-insured in the United States for health care, workers' compensation, general liability and product liability up to predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage and the established accruals for liabilities. While the outcome of pending proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these proceedings will not have a material adverse effect on the Company's liquidity, financial condition or results of operations.
Environmental - The Company is currently responsible for environmental remediation at various manufacturing facilities presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other companies, at off-site waste disposal facilities andregional sites.
As of June 30, 20162019, the Company had an accrual of $15,152$16,070 for environmental matters, which are probable and reasonably estimable. The accrual is recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company's liability in proportion to other responsible parties.
The Company's estimated total liability for environmental matters ranges from a minimum of $15.2$16.1 million to a maximum of $80.6 million.$80.1 million. The largest range for any one site is approximately $7.6 million.$8.2 million. The actual costs to be incurred by the Company will be dependent on final determination of contamination and required remedial action, negotiations with governmental authorities with respect to cleanup levels, changes in regulatory requirements, innovations in investigatory and remedial technologies, effectiveness of remedial technologies employed, the ability of other responsible parties to pay, and any insurance or other third-party recoveries.
| |
| 17. | Quarterly Information (Unaudited) |
| | | 2016 | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Total |
| |
| 2019 | | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Total |
|
| Net sales | | $ | 2,869,348 |
| | $ | 2,705,590 |
| | $ | 2,828,665 |
| | $ | 2,957,150 |
| | $ | 11,360,753 |
| | $ | 3,479,294 |
| | $ | 3,472,045 |
| | $ | 3,687,518 |
| | $ | 3,681,467 |
| | $ | 14,320,324 |
|
| Gross profit | | 668,444 |
| | 564,966 |
| | 619,264 |
| | 684,695 |
| | 2,537,369 |
| |
| Net income attributable to common shareholders | | 194,978 |
| | 182,982 |
| | 187,084 |
| | 241,796 |
| | 806,840 |
| | 375,711 |
| | 311,737 |
| | 411,248 |
| | 413,668 |
| | 1,512,364 |
|
| Diluted earnings per share | | 1.41 |
| | 1.33 |
| | 1.37 |
| | 1.77 |
| | 5.89 |
| | 2.79 |
| | 2.36 |
| | 3.14 |
| | 3.17 |
| | 11.48 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Total |
|
| Net sales | | $ | 3,364,651 |
| | $ | 3,370,673 |
| | $ | 3,749,591 |
| | $ | 3,817,477 |
| | $ | 14,302,392 |
|
| Net income attributable to common shareholders | | 285,397 |
| | 56,159 |
| | 365,989 |
| | 353,256 |
| | 1,060,801 |
|
| Diluted earnings per share | | 2.10 |
| | 0.41 |
| | 2.70 |
| | 2.62 |
| | 7.83 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2015 | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Total |
|
| Net sales | | $ | 3,269,932 |
| | $ | 3,134,993 |
| | $ | 3,162,311 |
| | $ | 3,144,508 |
| | $ | 12,711,744 |
|
| Gross profit | | 810,067 |
| | 733,409 |
| | 789,295 |
| | 723,728 |
| | 3,056,499 |
|
| Net income attributable to common shareholders | | 280,089 |
| | 267,252 |
| | 285,345 |
| | 179,454 |
| | 1,012,140 |
|
| Diluted earnings per share | | 1.85 |
| | 1.80 |
| | 2.02 |
| | 1.27 |
| | 6.97 |
|
Earnings per share amounts are computed independently for each of the quarters presented, therefore, the sum of the quarterly earnings per share amounts may not equal the total computed for the year.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
ITEM 9A.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 of June 30, 2016.2019. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2016,2019, the Company’s disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 20162019 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management's Report On Internal Control Over Financial Reporting
Our management, including the principal executive officer and the principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). We assessed the effectiveness of our internal control over financial reporting as of June 30, 2016.2019. In making this assessment, we used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework (2013).” We concluded that based on our assessment, the Company's internal control over financial reporting was effective as of June 30, 2016.2019.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements, has issued an attestation report on the Company's internal control over financial reporting as of June 30, 2016,2019, which is included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 9B.Other Information. None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance. Information required with respect to the Directors of the Company is set forth under the caption "Item I – Election of Directors" in the definitive Proxy Statement for the Company’s 20162019 Annual Meeting of Shareholders, to be held October 26, 201623, 2019 (the "2016"2019 Proxy Statement"), and is incorporated herein by reference. Information with respect to the executive officers of the Company is included in Part I, Item 1C of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant."
The information set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance""Delinquent Section 16(A) Reports" in the 20162019 Proxy Statement is incorporated herein by reference.
The Company has adopted a Global Code of Business Conduct that applies to its Chief Executive Officer, Chief Financial Officer and Controller. The Global Code of Business Conduct is posted on the Company’s investor relations internet website at www.phstock.com under the Corporate Governance page. Any amendment to, or waiver from, a provision of the Company’s Global Code of Business Conduct that applies to its Chief Executive Officer, Chief Financial Officer or Controller will also be posted at www.phstock.com under the Corporate Governance page.
The information set forth under the captions "The"Committees of Our Board of Directors - The Audit Committee" and "Report of the Audit Committee" in the 20162019 Proxy Statement is incorporated herein by reference.
ITEM 11.Executive Compensation. The information set forth under the captions "Compensation Discussion and Analysis," "Compensation Committee Report," and "Compensation Tables" in the 20162019 Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information set forth under the captions "Principal Shareholders" and "Equity Compensation Plan Information" in the 20162019 Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information. The following table sets forth certain information regarding the Company's equity compensation plans as of June 30, 2019, unless otherwise indicated.
|
| | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under Equity compensation plans |
| Equity compensation plans approved by security holders | 7,347,772(1) | $121.51 | 18,673,701(2) |
| Equity compensation plans not approved by security holders | — | — | — |
| Total | 7,347,772 | $121.51 | 18,673,701 |
(1)Includes the maximum future payouts of common stock that may be issued under the calendar year 2017-18-19, 2018-19-20 and 2019-20-21 long term incentive performance awards ("LTIP awards"). For these LTIP awards, payouts will be determined based on our achieving an average return on average equity of 4% or an average free cash flow margin of 4%. If these performance measures are achieved, the participants will be eligible to receive the maximum payout of 200%. The Human Resources and Compensation Committee will then compare our performance to that of a group of our peers and, if appropriate, apply its discretion to reduce the final payouts based on any performance measures that the Committee determines to be appropriate.
(2)The maximum number of shares of our common stock that may be issued under the 2016 Omnibus Stock Incentive Plan is 16 million shares, of which approximately 8.7 million shares are available for future issuance. The maximum number of shares that may be issued under the Global Employee Stock Purchase Plan is 10 million shares, of which approximately 9.9 million shares are still available for future issuance.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The information set forth under the captions "Review"Other Governance Matters - Review and Approval of Transactions with Related Persons" and "Director"Corporate Governance: Board of Directors - Director Independence" in the 20162019 Proxy Statement is incorporated herein by reference.
ITEM 14.Principal Accountant Fees and Services. The information set forth under the captions "Audit Fees," "Audit-Related Fees," "Tax Fees," "All Other Fees" and "Audit Committee Pre-Approval Policies and Procedures" in the 20162019 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
a. The following are filed as part of this report:
|
| | | |
| | | Page Number in Form 10-K | |
1. Financial Statements | | |
| | Consolidated Statement of Income | | |
| | Consolidated Statement of Comprehensive Income | | |
| | Business Segment Information | | |
| | Consolidated Balance Sheet | | |
| | Consolidated Statement of Cash Flows | | |
| | Consolidated Statement of Equity | | |
| | Notes to Consolidated Financial Statements | | |
| | | |
2. Schedule | | |
| | II - Valuation and Qualifying Accounts | | |
| | | |
3. Exhibits | | |
|
| | |
| Exhibit No. | | Description of Exhibit |
| (2)(a) | | |
| | |
| (2)(b) | | |
| | |
| (2)(c) | | |
| | |
| | Articles of Incorporation and By-Laws: |
| | |
| (3)(a) | | Amended Articles of Incorporation, incorporated by reference to Exhibit 3(a) to Registrant's Report on Form 10-K for the fiscal year ended June 30, 2016 (Commission File No. 1-4982). |
| | |
| (3)(b) | | |
| | | |
| | 3. ExhibitsInstruments Defining Rights of Security Holders:
|
| | |
| (4)(a) | | |
| | |
| | The exhibits listed | Material Contracts: |
| | |
| (10)(a) | | |
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| (10)(b) | | |
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| (10)(c) | | |
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| (31)(a) | | |
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| (32) | | |
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| 101.INS | | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.* |
| | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document.* |
| | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
| | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
| | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
| | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
| | |
| 104 | | Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
+ Certain schedules have been omitted and the Company agrees to furnish supplementally to the Commission a copy of any omitted exhibits and schedules upon request.
| |
| * | Submitted electronically herewith. |
Attached as Exhibit 101 to this Annual Report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the years ended June 30, 2019, 2018 and 2017, (ii) Consolidated Statement of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017, (iii) Consolidated Balance Sheet at June 30, 2019 and 2018, (iv) Consolidated Statement of Cash Flows for the years ended June 30, 2019, 2018 and 2017, (v) Consolidated Statement of Equity for the years ended June 30, 2019, 2018 and 2017, and (vi) Notes to Consolidated Financial Statements.
Shareholders may request a copy of any of the exhibits to this Annual Report on Form 10-K by writing to the Secretary, Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141.
Individual financial statements and related applicable schedules for the Registrant (separately) have been omitted because the Registrant is primarily an operating company and its subsidiaries are considered to be wholly-owned.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
| | | |
| | By: | | /s/ Jon P. MartenCatherine A. Suever |
| | | | Jon P. MartenCatherine A. Suever |
| | | | Executive Vice President - Finance & |
| | | | Administration and Chief Financial Officer |
August 26, 201623, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature and Title
THOMAS L. WILLIAMS, Chairman of the Board of Directors and Principal Executive Officer; CATHERINE A. SUEVER,TODD M. LEOMBRUNO, Principal Accounting Officer; LEE C. BANKS, Director; ROBERT G. BOHN, Director; LINDA S. HARTY, Director; ROBERT J. KOHLHEPP, Director; KEVIN A. LOBO, Director; KLAUS-PETER MÜLLER, Director; CANDY M. OBOURN, Director; JOSEPH SCAMINACE, Director; WOLFGANG R. SCHMITT,ÅKE SVENSSON, Director; ÅKE SVENSSON,LAURA K. THOMPSON, Director; JAMES R. VERRIER, Director; and JAMES L. WAINSCOTT, Director; and DONALD E. WASHKEWICZ, Director.
Date: August 26, 201623, 2019
|
| |
/s/ Jon P. MartenCatherine A. Suever | |
Jon P. Marten,Catherine A. Suever, Executive Vice President –
Finance & Administration and Chief Financial Officer (Principal Financial Officer and Attorney-in-Fact) | |
PARKER-HANNIFIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JuneJUNE 30, 2014, 2015 and 20162017, 2018 AND 2019
(Dollars in Thousands)
|
| | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C | | Column D | | Column E |
| Description | | Balance at Beginning Of Period | | Additions Charged to Costs and Expenses | | Other (Deductions)/ Additions (A) | | Balance At End Of Period |
| Allowance for doubtful accounts: | | | | | | | | |
| Year ended June 30, 2014 | | $ | 14,824 |
| | $ | 9,649 |
| | $ | (8,433 | ) | | $ | 16,040 |
|
| Year ended June 30, 2015 | | $ | 16,040 |
| | $ | 2,685 |
| | $ | (9,441 | ) | | $ | 9,284 |
|
| Year ended June 30, 2016 | | $ | 9,284 |
| | $ | 1,419 |
| | $ | (2,693 | ) | | $ | 8,010 |
|
| Deferred tax asset valuation allowance: | | | | | | | | |
| Year ended June 30, 2014 | | $ | 273,413 |
| | $ | 74,032 |
| | $ | 1,392 |
| | $ | 348,837 |
|
| Year ended June 30, 2015 | | $ | 348,837 |
| | $ | (18,831 | ) | | $ | — |
| | $ | 330,006 |
|
| Year ended June 30, 2016 | | $ | 330,006 |
| | $ | 2,702 |
| | $ | — |
| | $ | 332,708 |
|
|
| | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C | | Column D | | Column E |
| Description | | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Other (Deductions)/ Additions (A) | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | |
| Year ended June 30, 2017 | | $ | 8,010 |
| | $ | 3,559 |
| | $ | 2,767 |
| | $ | 14,336 |
|
| Year ended June 30, 2018 | | $ | 14,336 |
| | $ | 2,861 |
| | $ | (7,525 | ) | | $ | 9,672 |
|
| Year ended June 30, 2019 | | $ | 9,672 |
| | $ | 2,034 |
| | $ | (2,832 | ) | | $ | 8,874 |
|
| Deferred tax asset valuation allowance: | | | | | | | | |
| Year ended June 30, 2017 | | $ | 332,708 |
| | $ | 349,803 |
| | $ | 1,568 |
| | $ | 684,079 |
|
| Year ended June 30, 2018 | | $ | 684,079 |
| | $ | 10,778 |
| | $ | — |
| | $ | 694,857 |
|
| Year ended June 30, 2019 | | $ | 694,857 |
| | $ | 102,835 |
| | $ | — |
| | $ | 797,692 |
|
| |
| (A) | For allowance for doubtful accounts, net balance is comprised of deductions due to divestitures or uncollectible accounts charged off, additions due to acquisitions or recoveries, and currency translation adjustments. For deferred tax asset valuation allowance, the balance primarily represents adjustments due to acquisitions. |
Exhibit Index
|
| | |
Exhibit No. | | Description of Exhibit |
| | Articles of Incorporation and By-Laws:
|
| | |
(3)(a) | | Amended Articles of Incorporation.* |
| | |
(3)(b) | | Code of Regulations, as amended, incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2007 (Commission File No. 1-4982). |
| | |
| | Instruments Defining Rights of Security Holders:
|
| | |
(4)(a) | | Shareholder Protection Rights Agreement, dated as of February 8, 2007, between the Registrant and Wells Fargo Bank, N.A. (as successor to National City Bank), as Rights Agent, incorporated by reference to Exhibit 1 to the Registrant’s Form 8-A filed on February 8, 2007 (Commission File No. 1-4982). |
| | |
(4)(b) | | First Amendment to Shareholder Protection Rights Agreement, dated as of July 6, 2009, between the Registrant and Wells Fargo Bank, N.A. (as successor to National City Bank), as Rights Agent, incorporated by reference to Exhibit 4(a) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2009 (Commission File No. 1-4982). |
| | |
| | The Registrant is a party to other instruments, copies of which will be furnished to the Commission upon request, defining the rights of holders of its long-term debt identified in Note 9 of the Notes to Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on From 10-K. |
| | |
| | Material Contracts:
|
| | |
(10)(a) | | Form of Parker-Hannifin Corporation Amended and Restated Change in Control Severance Agreement entered into by the Registrant and executive officers incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2008 (Commission File No. 1-4982). |
| | |
(10)(b) | | Termination Amendment to Parker-Hannifin Corporation Amended and Restated Change in Control Severance Agreement between Donald E. Washkewicz and the Registrant effective February 1, 2015 incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended March 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(c) | | Form of Parker-Hannifin Corporation Change in Control Severance Agreement for executive officers elected after September 1, 2015 at or above Grade 29.* |
| | |
(10)(d) | | Form of Parker-Hannifin Corporation Change in Control Severance Agreement for executive officers elected after September 1, 2015 below Grade 29.*
|
| | |
(10)(e) | | Parker-Hannifin Corporation Amended and Restated Change in Control Severance Plan incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2008 (Commission File No. 1-4982). |
| | |
(10)(f) | | Form of Indemnification Agreement entered into by the Registrant and its directors and executive officers incorporated by reference to Exhibit 10(c) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2003 (Commission File No. 1-4982). |
| | |
(10)(g) | | Description of the Parker-Hannifin Corporation Officer Life Insurance Plan incorporated by reference to Exhibit 10(h) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 1-4982). |
| | |
(10)(h) | | Parker-Hannifin Corporation Amended and Restated Supplemental Executive Retirement Benefits Program, effective July 1, 2014, incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended March 31, 2016 (Commission File No. 1-4982). |
| | |
(10)(i) | | Parker-Hannifin Corporation Amended and Restated Defined Contribution Supplemental Executive Retirement Program, effective January 22, 2015, incorporated by reference to Exhibit 10(c) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(j) | | Summary of the Parker-Hannifin Corporation Executive Disability Insurance Plan.* |
| | |
|
| | |
(10)(k) | | Parker-Hannifin Corporation Amended and Restated 2003 Stock Incentive Plan incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010 (Commission File No. 1-4982). |
| | |
(10)(l) | | Parker-Hannifin Corporation Amended and Restated 2009 Omnibus Stock Incentive Plan incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement filed with the Commission on September 24, 2012 (Commission File No. 1-4982). |
| | |
(10)(m) | | Parker-Hannifin Corporation 2010 Performance Bonus Plan incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed with the Commission on September 27, 2010 (Commission File No. 1-4982). |
| | |
(10)(n) | | Parker-Hannifin Corporation 2015 Performance Bonus Plan incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed with the Commission on September 28, 2015 (Commission File No. 1-4982). |
| | |
(10)(o) | | Form of 2007 Notice of Grant of Stock Options with Tandem Stock Appreciation Rights for executive officers incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed with the Commission on August 22, 2006 (Commission File No. 1-4982). |
| | |
(10)(p) | | Form of 2008 Notice of Grant of Stock Options with Tandem Stock Appreciation Rights for executive officers incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K/A filed with the Commission on September 5, 2007 (Commission File No. 1-4982). |
| | |
(10)(q) | | Form of 2009 Notice of Stock Options Award with Tandem Stock Appreciation Rights for executive officers incorporated by reference to Exhibit 10(d) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2008 (Commission File No. 1-4982). |
| | |
(10)(r) | | Form of 2010 Notice of Stock Options with Tandem Stock Appreciation Rights for executive officers incorporated by reference to Exhibit 10(d) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2009 (Commission File No. 1-4982). |
| | |
(10)(s) | | Form of FY2011 Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement for executive officers incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed with the Commission on August 17, 2010 (Commission File No. 1-4982). |
| | |
(10)(t) | | FY2011 Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions for executive officers incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K filed with the Commission on August 17, 2010 (Commission File No. 1-4982). |
| | |
(10)(u) | | Form of Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement for executive officers incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2011 (Commission File No. 1-4982). |
| | |
(10)(v) | | Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions for executive officers incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2011(Commission File No. 1-4982). |
| | |
(10)(w) | | Parker-Hannifin Corporation Target Incentive Plan incorporated by reference to Exhibit 10(d) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010 (Commission File No. 1-4982). |
| | |
(10)(x) | | Parker-Hannifin Corporation Target Incentive Plan Subject to Performance Bonus Plan incorporated by reference to Exhibit 10(e) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010 (Commission File No. 1-4982). |
| | |
(10)(y) | | Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended March 31, 2013 (Commission File No. 1-4982). |
| | |
(10)(z) | | Form of Parker-Hannifin Corporation Long-Term Incentive Performance Award Under the Performance Bonus Plan incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed with the Commission on February 1, 2011 (Commission File No. 1-4982). |
| | |
(10)(aa) | | Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan, as amended and restated, effective January 20, 2016.* |
| | |
(10)(bb) | | Form of Notice of Award under the Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan, as amended and restated.* |
| | |
|
| | |
(10)(cc) | | Parker-Hannifin Corporation Restricted Stock Unit Award Agreement dated August 14, 2013 for Jeffery A. Cullman incorporated by reference to Exhibit 10(a) to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 2014 (Commission File No. 1-4982). |
| | |
(10)(dd) | | Parker-Hannifin Corporation Restricted Stock Unit Terms and Conditions for Jeffery A. Cullman incorporated by reference to Exhibit 10(b) to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 2014 (Commission File No. 1-4982). |
| | |
(10)(ee) | | Parker-Hannifin Corporation Profitable Growth Incentive Plan incorporated by reference to Exhibit 10(c) to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 2014 (Commission File No. 1-4982). |
| | |
(10)(ff) | | Form of Notice of RONA Bonus Award Under the Parker-Hannifin Corporation Performance Bonus Plan incorporated by reference to Exhibit 10(h) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2009 (Commission File No. 1-4982). |
| | |
(10)(gg) | | Parker-Hannifin Corporation RONA Plan Subject to Performance Bonus Plan incorporated by reference to Exhibit 10(f) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010 (Commission File No. 1-4982). |
| | |
(10)(hh) | | Parker-Hannifin Corporation Summary of RONA Bonus Awards in Lieu of Certain Executive Perquisites incorporated by reference to Exhibit 10(h) to the Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2008 (Commission File No. 1-4982). |
| | |
(10)(ii) | | Parker-Hannifin Corporation Amended and Restated Savings Restoration Plan, as of September 1, 2004, incorporated by reference to Exhibit 10(t) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982). |
| | |
(10)(jj) | | Parker-Hannifin Corporation Amended and Restated Savings Restoration Plan, effective January 22, 2015, incorporated by reference to Exhibit 10(d) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(kk) | | Parker-Hannifin Corporation Amended and Restated Savings Restoration Plan, effective July 1, 2016.* |
| | |
(10)(ll) | | Parker-Hannifin Corporation Amended and Restated Pension Restoration Plan, effective January 22, 2015, incorporated by reference to Exhibit 10(e) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(mm) | | Parker-Hannifin Corporation Amended and Restated Pension Restoration Plan, effective July 1, 2016.* |
| | |
(10)(nn) | | Parker-Hannifin Corporation Amended and Restated Executive Deferral Plan, as of September 1, 2004, incorporated by reference to Exhibit 10(v) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2004 (Commission File No. 1-4982). |
| | |
(10)(oo) | | Parker-Hannifin Corporation Amended and Restated Executive Deferral Plan, effective January 22, 2015, incorporated by reference to Exhibit 10(f) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(pp) | | Parker-Hannifin Corporation Amended and Restated Executive Deferral Plan, effective September 2, 2015.* |
| | |
(10)(qq) | | Parker-Hannifin Corporation Global Employee Stock Purchase Plan incorporated by reference to Appendix A to the Registrant's Definitive Proxy Statement filed with the Securities and Exchange Commission on September 22, 2014 (Commission File No. 1-4982). |
| | |
(10)(rr) | | Parker-Hannifin Corporation Claw-back Policy incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed with the Commission on August 18, 2009 (Commission File No. 1-4982). |
| | |
(10)(ss) | | Parker-Hannifin Corporation Amended and Restated 2004 Non-Employee Directors’ Stock Incentive Plan incorporated by reference to Exhibit 10(aa) to the Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2009 (Commission File No. 1-4982). |
| | |
(10)(tt) | | Form of Parker-Hannifin Corporation Non-Employee Directors’ Restricted Stock Award Agreement incorporated by reference to Exhibit 10(a) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2011 (Commission File No. 1-4982). |
| | |
(10)(uu) | | Parker-Hannifin Corporation Non-Employee Directors’ Restricted Stock Award Terms and Conditions incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2011 (Commission File No. 1-4982). |
| | |
|
| | |
(10)(vv) | | Form of Parker-Hannifin Corporation Non-Employee Directors' Restricted Stock Unit Award Agreement incorporated by reference to Exhibit 10(g) to the Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(ww) | | Parker-Hannifin Corporation Non-Employee Directors' Restricted Stock Unit Award Terms and Conditions incorporated by reference to Exhibit 10(h) to the Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(xx) | | Amended and Restated Deferred Compensation Plan for Directors of Parker-Hannifin Corporation, effective January 22, 2015, incorporated by reference to Exhibit 10(i) to the Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982). |
| | |
(10)(yy) | | Summary of the Compensation of the Non-Employee Members of the Board of Directors, effective October 22, 2014, incorporated by reference to Exhibit 10(b) to the Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2014 (Commission File No. 1-4982). |
| | |
(12) | | Computation of Ratio of Earnings to Fixed Charges as of June 30, 2016.* |
| | |
(21) | | List of subsidiaries of the Registrant.* |
| | |
(23) | | Consent of Independent Registered Public Accounting Firm.* |
| | |
(24) | | Power of Attorney.* |
| | |
(31)(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)(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 years ended June 30, 2016, 2015 and 2014, (ii) Consolidated Statement of Comprehensive Income for the years ended June 30, 2016, 2015 and 2014, (iii) Consolidated Balance Sheet at June 30, 2016 and 2015, (iv) Consolidated Statement of Cash Flows for the years ended June 30, 2016, 2015 and 2014, (v) Consolidated Statement of Equity for the years ended June 30, 2016, 2015 and 2014, and (vi) Notes to Consolidated Financial Statements.
Shareholders may request a copy of any of the exhibits to this Annual Report on Form 10-K by writing to the Secretary, Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141.