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, 20182021
OR
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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)
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Identification No.)
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6035 Parkland Boulevard, Cleveland, Ohio | Cleveland, | Ohio | 44124-4141 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (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
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| 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.
Yes ý☒ 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 ¨☐ No ý☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ 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). Yes ý☒ 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 ¨.☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "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 | ¨☐ |
(Do not check if a smaller reporting company) | | | |
| Emerging Growth Company | ¨☐ | | |
If an emerging growth company, indicate by check mark if the registrantRegistrant 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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, 2017: $26,411,763,329.2020: $34,984,991,426.
The number of Common Shares outstanding on July 31, 20182021 was 132,360,024.129,101,437.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company’s 20182021 Annual Meeting of Shareholders, to be held on October 24, 2018,27, 2021, 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. | | |
| Item 4. | | |
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PART I | | |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 1C. | | |
Item 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, 20182021
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, Corporate Governance Guidelines 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 3938 states within the United States and in 4944 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 455,000505,000 customers in virtually every significant manufacturing, transportation and processing industry.
The Company hasWe have two reporting segments: Diversified Industrial and Aerospace Systems. During 2018, the Company's2021, our technologies and systems were used in the products of these two reporting segments. For 2018,2021, the Company's net sales were $14.3 billion. Diversified Industrial Segment products accounted for 84%83 percent and Aerospace Systems Segment products accounted for 16%17 percent of those net sales.
Markets
The Company’sOur technologies and systems are used throughout various industries and in various applications. The approximately 455,000505,000 customers who purchase the Company’sParker products are found throughout nearlyin almost every significant manufacturing, transportation and processing industry. No single customer accounted for more than 3%three percent of the Company’sour total net sales for the year ended June 30, 2018.2021.
Diversified Industrial Segment. Sales of Our Diversified Industrial Segment sells products are made to both original equipment manufacturers ("OEMs") and distributors 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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| Engineered Materials Group: | • Aerospace • Agriculture • Chemical processing • ConsumerConstruction • Fluid power • General industrialDefense
• Information technology • Life sciences
| • Microelectronics • Military
• Oil & gas • Power generation • Renewable energy • Telecommunications • Transportation • Truck & bus |
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Filtration
Group: | • Agriculture
• Aerospace & defense • Agriculture • Construction • Food & beverage • Heating, ventilation & air conditioning (HVAC) • Industrial machinery • Life sciences
| • Marine • Mining • Oil & gas • Power generation • Renewable energy • Transportation • Water purification
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Fluid Connectors
Group: | • Aerial lift • Agriculture • Bulk chemical handling • Construction • Food & beverage • Fuel & gas delivery Forestry • Industrial machinery | • Life sciences • MarineMaterial handling • Mining • Mobile
• Oil & gas • Renewable energy • Transportation
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Instrumentation
Group:
| • Air conditioning • Alternative fuels • Analytical • Chemical • Diesel engine
• Food & beverage • Industrial machinery
| • Life sciences | • Microelectronics
• Oil & gas
• Packaging
• Refining
• Refrigeration
• Transportation
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Motion Systems
Group: | Mobile: • Agriculture • Construction • Marine • Material handling • Military • Transportation • Truck & bus • Turf | Industrial: • Distribution • General machinery • Machine tool • Mining • Oil & gas • Power generation • Semiconductor
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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 transportstransport aircraft • Engines • General & business aviation • Helicopters | • Military aircraft • Missiles • Power generation (industrial gas turbines) • Regional transportstransport aircraft • Unmanned aerial vehicles |
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%one percent to the Company’sour total net sales for the year ended June 30, 2018.2021. 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:
Engineered Materials Group: staticsealing, shielding, thermal products and dynamic sealing devices,systems, adhesives, coatings and noise vibration and harshness solutions, including:
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• Active vibration control systems • Bearings & dampers • Coatings • Dynamic seals • Elastomeric o-ringsmounts & isolators • Electro-medical instrument design & assemblyElastomeric o-rings • Electromagnetic interference shielding • ExtrudedExtrusion & precision-cut fabricated elastomeric seals • High-temperature metal seals
| • Homogeneous & inserted elastomeric shapes • Medical deviceproducts fabrication & assembly • Metal & plastic retained composite bonded seals • Shielded optical windowsPrecision-cut seals • Silicone tubing & extrusionsRubber-to-substrate adhesives • Specialty chemicals • Structural adhesives • Thermal management • Vibration dampeningWireless sensing systems
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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 & systems • Air pollution control & dust collection systems & filters • Compressed air & gas treatment solutions • Engine fuel, oil, air & closed crankcase ventilation filtration systems • Filtration & purification systems • Fluid condition monitoring systems • Gas turbine air inlet filters • Heating, ventilation & air conditioning (HVAC) filters | • Hydraulic & lubrication filters & systems • Industrial & analytical gas generators • Instrumentation filters • Membrane, fiber, & sintered metal filters • Natural gas filters • Process liquid, air & gas filters • Sterile air filters • Water purification filters & systems |
Fluid Connectors Group: connectors, which control, transmit and contain fluid, including:
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• Check valves • Diagnostic equipmentand Internet of Things ("IoT") sensors • Hose couplings • Hose crimpers • Industrial hose • Low pressure fittings & adapters | • Polytetrafluoroethylene (PTFE) hose & tubing • Quick couplings • Rubber & thermoplastic hose • Tube fittings & adapters • Tubing & plastic fittings |
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 & sample conditioning systems • Compressed natural gas dispensers • Cryogenic valves • Diesel exhaust treatment systems • Electronic valves • Emissions • Filter driers • Fluid system & control fittings, meters, valves, regulators & manifold valves
| • Fluoropolymer chemical delivery fittings, valves & pumps | • High pressure fittings, valves, pumps & systems • High-purity gas delivery fittings, valves & regulators • Miniature valves & pumps • Natural gas on-board fuel systems • Pressure regulating valves • Refrigeration & air conditioning electronic controls & monitoring • Solenoid valves |
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: • Accumulators • Coolers • Cylinders • RotaryElectrohydraulic actuators • Helical actuators • Accumulators • ElectrohydraulicRotary actuators
• Coolers
Hydraulic Pumps & Motors: • Drive controlled pumps • Electrohydraulic pumps • Fan drives • Gerotor pumps & motors • Integrated hydrostatic transmissions • Piston pumps & motors • Power take-offs • Screw pumps • Vane pumps & motors • Gerotor pumps & motors
• Power take-off
• Fan drives
• Electrohydraulic pump
• Drive controlled pump
• Screw pump
• Integrated hydrostatic transmissions
Hydraulic &and Electro Hydraulic Systems | Hydraulic Valves:Systems:
• Cartridge valves • Hydraulic valves • Industrial valves • Mobile valves Pneumatics:
• Pneumatic valves
| Pneumatics: • Air preparation (FRL) & dryers • Pneumatic cylinders • Grippers
• IO link controllers • Pneumatic cylinders • Pneumatic valves Electronics: • Clusters • Controllers & human machine interfaces ("HMI") • Drives (AC/DC Servo) • Electric actuators & positioners • Electronic displays & human machine interfaces (HMI) • Controllers & HMI
• Sensors
• IoT
• Electric motors & gearheads
• Drives (AC/DC Servo)Electronic displays & HMI • IoT • Joysticks • ClustersSensors • 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 16,900 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 & components • Engine build-up ducting • Engine exhaust nozzles & assemblies • Engine systems & components • Fluid conveyance systems & components • Fluid metering, delivery & atomization devices • Fuel systems & components
| • Fuel tank inerting systems | • Hydraulic systems & components • Lubrication components • Pilot controls • Pneumatic control components • Power conditioning & management systems
• Thermal management • Wheels & brakes
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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 50 countries and consequently has45 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 alliancesrelationships 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 and 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., UTCSenior plc., Raytheon 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 deployers 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 $327.9 million in 2018, $336.7 million in 2017 and $359.8 million in 2016. 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 2018, 2017 and 2016 were $40.8 million, $65.3 million and $58.0 million, respectively.cycle.
Patents, Trademarks, Copyrights, Trade Secrets, Licenses
The Company ownsWe own a number of patents, trademarks, copyrights, trade secrets and licenses related to its products and hasour products. We also have exclusive and non-exclusive rights to use patents, trademarks and trademarkscopyrights owned by others. In addition, patent and trademark applications are 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, trade secret or license or group of patents, trademarks, copyrights, trade secrets 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 $4.1$6.5 billion at June 30, 20182021 and $3.8$5.1 billion at June 30, 2017.2020. Approximately 89%84 percent of the Company’sour backlog at June 30, 20182021 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, 2018, the Company2021, 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, 2018, the Company had aOur reserve of $18.0 million for environmental matters that were probableis discussed in Note 17 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 $18.0 million to a maximum of $81.0 million. The largest range of the estimated total liability for any one site is approximately $9.5 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 is 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 are expected to be available from numerous sources in quantities sufficient to meet the requirements of the Company.
Employees
The Company employed approximately 57,170 persons as of June 30, 2018, of whom approximately 29,410 were employed by foreign subsidiaries.
Business Segment Information
The Company’s net sales, segment operating income and assets by business segment and net sales and long-lived assets by geographic area for the past three years are included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
our requirements.
Acquisitions
The Company made no acquisitions during 2018. Prior-yearin 2021. On August 2, 2021, the Company announced that it reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt plc ("Meggitt"). The proposed Meggitt acquisition and prior year acquisitions are discussed in Note 2Notes 1 and 3 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
At Parker, we align employment levels with the global needs of our business and our customers. As of June 30, 2021, we employed approximately 54,640 persons that we refer to as “team members,” of whom approximately 28,290 were employed by foreign subsidiaries.
Our talented and passionate team members are the foundation of Parker’s enduring growth, bringing new ideas and perspectives to enhance our safety performance, improve productivity and inspire a diverse and inclusive culture. We see a clear path to a brighter future, and it begins with providing our people the resources that enable them to find personal and professional satisfaction in their work, responsibly move our company forward and strengthen our communities, fulfilling our purpose of Enabling Engineering Breakthroughs that Lead to a Better Tomorrow.
The Win Strategy™ 3.0, Purpose and Values
The Win Strategy 3.0 is Parker’s business system that defines the goals and initiatives that drive growth, transformation and success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth.
The Win Strategy has four overarching goals: Engaged People, Customer Experience, Profitable Growth and Financial Performance, supported by our shared values of a Winning Culture, Passionate People, Valued Customers and Engaged Leadership. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.
Safety
The safety and well-being of Parker team members is our highest priority. Our safety goal is simple: to achieve an incident-free workplace. We have reduced our Recordable Incident Rate by 72% from fiscal year 2015 through fiscal year 2020. In fiscal year 2021, the recordable incidents per 100 team members was 0.40, a 29% reduction from fiscal year 2020 (inclusive of recent acquisitions).
Building on the great progress we have made, we recently established new long-term safety goals. We are targeting to be best in our peer group by 2023 and to eliminate serious safety incidents by 2025.
To help support these goals we are adopting eight standards aimed at preventing serious safety incidents or an environmental impact. We also developed a new field safety program that provides guidance for team members working outside our facilities to help them identify or anticipate safety risks.
High Performance Teams ("HPTs") are fundamental to our success in driving safety performance, and nearly all of our manufacturing locations have an active, chartered Safety HPT. Approximately 90% of our team members participate in at least one HPT. We will continue to encourage every team member to take action when needed to fulfill our shared responsibility to workplace safety.
Engaged People
Engagement directly influences business performance. We strongly believe in empowering our team members to think as owners and take action to improve their areas of the business. Engagement is deeply ingrained in our culture, and as an overarching goal of The Win Strategy it is key to achieving top quartile financial performance.
Parker activates engagement through our HPTs, which apply the expertise and perspective of team members who are closest to the product and customer to drive improvement throughout the company. Approximately 90% of our people participate in these teams, and more than 6,500 HPTs have already been established worldwide. We closely track our progress toward support of a high performing work environment through our Global Engagement Survey, and in our most recent engagement survey our engagement scores increased to 75%, ranking within the top quartile among our proxy peers.
Diversity and Inclusion
An inclusive environment is a core tenet of Parker’s values and one of our key measures of success within our Win Strategy. Throughout our history, we have been committed to building a welcoming and inclusive workplace that respects every team member’s unique perspective. Our team members come from a diverse range of personal and professional backgrounds, and their collective talent and expertise is the driving force behind the growth and success Parker has achieved.
In 2015, we launched Peer W, our first Business Resource Group focused on supporting the recruitment, development and retention of women at Parker. Peer W has grown into a well-developed global network of 24 local chapters and established a Mentoring Circles program in 2020. We are preparing to introduce additional Business Resource Groups that will enable team members with common interests or backgrounds to come together, share their experiences and establish new and lasting relationships.
We have also established four global HPTs focused on Talent Attraction, Talent Development, Governance and Knowledge. Each team is led by a senior executive and tasked with rethinking the way we attract and develop diverse team members, share knowledge and measure our progress in fostering an inclusive culture.
In 2020, Parker appointed its first Vice President of Diversity and Inclusion to lead our continuing journey.
Compensation and Benefits
As a global employer, we are committed to offering competitive compensation and benefits, tailored in form and amount to geography, industry, experience and performance. Our programs are designed to attract team members, motivate and reward performance, drive growth and support retention. We provide benefit programs with the goal of improving physical, mental and financial wellness of our team members throughout their lifetime. Some examples include base and variable pay, health and insurance benefits, paid time off, and retirement saving plans.
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.
Business and Operational Risks
The Companynovel coronavirus ("COVID-19") pandemic has disrupted our operations and could have a material adverse effect on our business and financial condition.
The COVID-19 pandemic, along with the response to the pandemic by governmental and other actors, has disrupted our operations and is expected to continue to negatively impact our operations in the future, which impact may be material. We have experienced, and may continue to experience, mandatory and voluntary facility closures in certain jurisdictions in which we operate. Furthermore, several of our customers temporarily suspended their operations and we have experienced less demand for our products. Disruptions to our customers in the aerospace industry, which is facing diminished demand, have been and may continue to be challenging. Additionally, the COVID-19 outbreak has, and could further, disrupt our supply chain. Facility closures or other restrictions, as well as supply chain disruptions, could materially adversely affect our ability to adequately staff, supply or otherwise maintain our operations. Moreover, because certain of our employees continue to work from home, we may be subject to increased vulnerability to cyber and other information technology risks. We have modified, and may further modify, our business practices in response to the risks and negative impacts associated with the COVID-19 pandemic. However, there can be no assurance that these measures will be temporary or successful.
The impact of the COVID-19 pandemic continues to evolve and its ultimate duration, severity and disruption to our business, customers and supply chain, and the related financial impact to us, cannot be accurately forecasted at this time. Should such disruption continue for an extended period, the adverse effect on our business, results of operations and financial condition could be more severe than previously anticipated. Additionally, weak economic conditions generally as a result of the COVID-19 pandemic could result in impairment in value of our tangible or intangible assets. Furthermore, future public health crises are possible and could involve some or all of the risks discussed above.
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. Moderate economic growth persists in the economic regions in which the Company conducts substantial operations. Future 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 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, global pandemics, 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 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 remain 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 subject
As 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 41%40 percent in 2018, 40%2021, 37 percent in 20172020 and 41%39 percent in 2016.2019. 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;
•public health crises, including pandemics;
•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.
Increased cybersecurity threats and more sophisticated and targeted computer crime could pose a risk to our information technology systems.
We rely extensively on information technology systems to manage and operate our 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, criminal acts, including hardware or software break-ins or extortion attempts, or viruses, or other cybersecurity incidents) and we suffer any resulting interruption in our ability to manage and operate our business or if our products are affected, our results of operations and financial condition could be materially adversely affected. As a result of the COVID-19 pandemic, certain of our employees continue to work from home, which may increase our vulnerability to cyber and other information technology risks. 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 privacy 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 the compromise or improper use of such sensitive, confidential, or personal data or information, resulting in possible negative consequences, such as fines, ransom demands, 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 our products may adversely affect our financial results, financial condition and cash flow.
Demand for and supply of our products has been and may be adversely affected by numerous factors, some of which we 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, including changes as a result of the COVID-19 pandemic;
•changes in product mix;
•changes in the market acceptance of our products;
•increased competition in the markets we serve;
•declines in the general level of industrial production, including as a result of the COVID-19 pandemic;
•weakness in the end-markets we serve, including as a result of the COVID-19 pandemic;
•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 our products could suffer, which could materially adversely affect the Company’s results of operations.
The development of new products and 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 we serve are characterized by rapidly changing technologies and frequent introductions of new products and services. Our ability to develop new products based on technological innovation can affect our competitive position and often requires the investment of significant resources. If we cannot develop, or have difficulties or delays developing new and enhanced products and services, or if we fail to gain market or regulatory acceptance of new products and technologies, our revenues may be materially reduced and our competitive position could be materially adversely affected. In addition, we 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.
Price and supply fluctuations of the raw materials used in our production processes and by our suppliers of component parts could negatively impact our financial results.
Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Furthermore, changes to United States and other countries' tariff and import/export regulations have in the past and may in the future 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 our results of operations and profit margins. Our efforts to manage these fluctuations by, among other things, passing along price increases to our customers, may be subject to a time delay between the increased raw material prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure, contract terms or other factors. Any such inability to manage fluctuations could adversely impact our results of operations and cash flows.
Our 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, we may not be able to increase our prices commensurately with our increased costs. Consequently, our results of operations or financial condition could be materially adversely affected.
Changes in the competitive environment in which we operate may eliminate any competitive advantages that we currently have, which could adversely impact our business.
Our operations are subject to competition from a wide variety of global, regional and local competitors, which could adversely affect our results of operations by creating downward pricing pressure and/or a decline in our margins or market shares. To compete successfully, we must excel in terms of product quality and innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness, and customer experience.
Strategic Transactions Risks
We are subject to risks relating to the pending acquisition of Meggitt.
On August 2, 2021, we announced our proposed acquisition of Meggitt. Meggitt is a leader in design, manufacturing and aftermarket support of technically differentiated systems and equipment in aerospace, defense and selected energy markets.
The proposed acquisition of Meggitt would expand the size of our Aerospace Systems Segment relative to our other segment, increasing our susceptibility to conditions in the end markets served by our Aerospace Systems Segment. There are numerous risks and uncertainties associated with the proposed acquisition, including:
•completion of the acquisition is subject to a number of conditions, some of which are outside of our control. Among these conditions are the approval by Meggitt’s stockholders of the acquisition and the receipt of certain regulatory approvals, including the expiration or termination of any applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and under the antitrust and foreign investment/national security laws of certain other non-U.S. jurisdictions including the United Kingdom and European Union;
•the Company’s and Meggitt’s existing business relationships with third parties, including customers and service providers, may be disrupted due to uncertainty associated with the acquisition, which could have an adverse effect on our results of operations, cash flows and financial position or those of the combined company;
•failure to complete the acquisition could negatively impact our stock price and our future business and financial results;
•both we and Meggitt will incur significant transaction costs in connection with the acquisition, which costs may exceed those currently anticipated;
•we intend to pay for the acquisition of Meggitt and pay other fees and expenses required to be paid in connection with the acquisition with cash on hand and proceeds of new indebtedness. There can be no assurance that we will be able to execute such financing transactions on acceptable terms, in a timely manner or at all;
•the COVID-19 pandemic may delay or prevent the completion of the acquisition;
•after completion of the acquisition, we may be unable to successfully integrate our and Meggitt’s business and, as a result, may fail to realize the anticipated benefits and cost savings of the transaction in the intended timeframe or at all, which could adversely affect the value of our common stock;
•our results after the proposed acquisition of Meggitt may suffer if we do not effectively manage our expanded operations following the acquisition; and
•Meggitt may have difficulty retaining, motivating, and attracting executives and other employees in light of the pending acquisition, and failure to do so could harm the company.
Any of the foregoing risks and uncertainties could have a material adverse effect on our earnings, cash flows and 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.Lord Corporation ("Clarcor"Lord"). and Exotic Metals Forming Company ("Exotic") and the potential acquisition of Meggitt.
The Company expectsWe expect to continue itsour strategy of identifying and acquiring businesses with complementary products and services, and entering into joint ventures, which it believeswe believe will enhance itsour operations and profitability. However, there can be no assurance that the Companywe will be able to continue to find suitable businesses to purchase or joint venture opportunities, or that itwe will be able to acquire such businesses or enter into such joint ventures on acceptable terms. Furthermore, there are no assurances that the Companywe will be able to avoid acquiring or assuming unexpected liabilities. If the Company iswe are unable to avoid these risks, itsour results of operations and financial condition could be materially adversely affected.
In addition, the Companywe may not be able to integrate successfully any businesses that it purchaseswe purchase into itsour existing business orand it is possible that any acquired businesses or joint ventures willmay not be profitable. Specifically, the Company is devotingFor example, we have devoted significant management attention and resources to integrating the business practices and operations of Clarcor with the businesses of the Company. The CompanyLord and Exotic. We may encounter, or hashave encountered, the following difficulties during the integration process of Clarcor:process:
•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 acquisitionacquisitions 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, into the Company’s,acquired companies 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 the Company’sour ability to manage these new businesses and cut excess costs. If the Company iswe are unable to avoid these risks, itsour results of operations and financial condition could be materially adversely affected.
The Company’sOur results may be adversely affected if expanded operations from the acquisition of ClarcorLord and Exotic, and the potential acquisition of Meggitt, are not effectively managed.
The Company’s acquisition of ClarcorOur recent acquisitions have greatly expanded the size and complexity of itsour business. The Company’sOur 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 the Companywe will realize the expected benefits of the acquisition of Clarcor.acquisitions.
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 to risks relating to its information technology systems.Financial Risks
Increasing costs of certain employee and retiree benefits could adversely affect our liability for such benefits.
The Company relies extensivelyfunding requirements and the amount of expenses recorded for our defined benefit pension plans are dependent on information technology systems to managechanges in market interest rates and operate its business, somethe value of plan assets, 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 suffers any resulting interruption in its ability to manage and operate its business or if its products are effected, the Company's results of operations and financial condition could be materially adversely affected. In addition to existing risks, any adoption or deployment of new technologies may increase our exposure to risks, breaches, or failures, which could materially adversely affect the Company's 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 privacy and security laws, regulations, or other contractually-imposed controls. Despite the Company's 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 the 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 or competitiveness, or other negative impacts to the Company's results of operations or financial condition.
The Company may be subject to risks relating todependent on actual plan asset returns. Significant changes in the demand formarket interest rates and supply of its products.
Demand for and supply of the Company’s products may be adversely affected by numerous factors, some of which the Company 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;
changesdecreases in the market acceptancefair value of the Company’s products;
increased competition in the markets the Company serves;
declines in the general level of industrial production;
weakness in the end-markets the Company serves;
fluctuations in the availability or the prices of raw materials;plan assets and
fluctuations in currency exchange rates.
If any of these factors occur, the demand for investment losses on plan assets would increase funding requirements and supply of the Company’s products could suffer, which could materiallyexpenses and may adversely affect the Company’simpact our results of operations.
The Company may be subject to risks relating to the developmentabsorbs a portion of new products and technologies.
The markets in which the Company operates are characterized by rapidly changing technologies and frequent introductions of new products and services. The Company’s ability to develop new products based on technological innovation can affect its competitive position and often requires the investment of significant resources. If the Company does not develop, or has difficulties or delays in the development of, innovative new and enhanced products and services, or fails to gain market or regulatory acceptance of new products and technologies, the Company's revenues may be materially reduced and the Company's competitive position could be materially adversely affected. In addition, the Company 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 and supply fluctuations in raw materials used in the Company’s production processes and by its suppliers of component parts.
The Company’s supply of raw materialshealthcare costs for its businesses could be interrupted for a varietyemployees. If healthcare costs rise significantly and we continue to absorb the majority of reasons, including availability and pricing. Furthermore, recently implemented changes to U.S.and other countries' tariff and import/export regulationsthese costs, these increasing costs may have a negativeadversely 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 future results of operations and profit margins. Efforts by the Company to manage these fluctuations by, among other things, passing along price increases to its customers, may be subject to a time delay between the increased raw material prices and the Company’s ability to increase the priceoperations.
The Company’s 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 Company may not be able to increase its prices commensurately with its increased costs. Consequently, the Company’s results of operations or financial condition could be materially adversely affected.
The Company may be subject to risks arising from changes in the competitive environment in which it operates.
The Company’s operations are subject to competition from a wide variety of global, regional and local competitors, which could adversely affect the Company’s results of operations by creating downward pricing pressure and/or a decline in the Company’s margins or market shares. To compete successfully, the Company must excel in terms of product quality and innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness, and customer experience.
The Company may be subject to risksAdditional 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 Company isWe are 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. On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJ Act, was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by, among other things, establishing a flat corporate U.S. income tax rate of 21 percent and creating a territorial tax system (with a one-time transition tax imposed on previously unremitted foreign earnings and profits). 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 regulationsjudicial or theregulatory interpretation thereof, (including regulations under and interpretations of the TCJ Act), the mix of earnings in countries with differing statutory tax rates, changes in overall profitability, changes in U.S. generally accepted accounting principles ("GAAP"), or changes in the valuation of deferred tax assets or changes in tax laws or regulations. For example, the Company’s estimate of the net one-time charge incurred related to the TCJ Act could differ materially from the Company’s actual liability, due to, among other things, further refinement of the calculations, changes in interpretations and assumptions the Company has made, additional guidance that may be issued by the U.S. Treasury Department and Internal Revenue Service, and any other actions the Company may make as a result of the TCJ Act.assets. In addition, the amount of income taxes paid by the Company is subject to ongoing audits by U.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 CompanyOur indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility.
We have incurred significant indebtedness, and may, and expect to if the potential acquisition of Meggitt is completed, incur additional debt for acquisitions, operations, research and development and capital expenditures, or for other reasons related to our overall capital deployment strategy. 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.
Legal and Regulatory Risks
As a provider of products to the U.S. government, we are subject to additional risks related to future government spending as well as unusual performance conditions and enhanced compliance risks.
In addition to the risks identified herein, doing business with the U.S. government subjects us to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental acquisition regulations. Agreements relating to the sale of products to government entities may be subject to product liability risks.
The Company’s businesses expose ittermination, reduction or modification, either at the convenience of the government or for our failure to potential product liability risks thatperform, or other unsatisfactory performance under the applicable contract. We are inherent in the design, manufacturesubject to government investigations of our business practices and sale of its products and the products of third-party vendors thatcompliance with government acquisition regulations. If the Company useswere charged with wrongdoing as a result of any such investigation, it could be suspended from bidding on or resells. Significant product liability claimsreceiving 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’s financial condition, liquidity andour results of operations. Although the Company currently maintains what it believes to be suitable and adequate product liability insurance, there can be no assurance that the Company will be able to maintain its insurance on acceptable terms or that its insurance will provide adequate protection against all potential significant liabilities.
The Company may be subject to risks arising from litigation,
Litigation and legal and regulatory proceedings against the Company could decrease our liquidity, impair our financial condition and obligations.adversely affect our results of operations.
From time to time, the Company iswe are subject to litigation or other commercial disputes and other legal and regulatory proceedings relating to itsour business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, the Companywe cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’sour business, financial condition orand results of operations. Furthermore, as required by U.S. generally accepted accounting principles, the Company establishesGAAP, we establish reserves based on itsour assessment of contingencies, including contingencies related to legal claims asserted against it.us. Subsequent developments in legal proceedings may affect the Company'sour assessment and estimates of the loss contingency recorded as a reserve and require the Companyus to make payments in excess of our reserves, which could have an adverse effect on the Company'sour results of operations.
The Company isWe 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 itsour business and itsour employees. Despite the Company'sour policies, procedures and compliance programs, itsour internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by itsour employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject itus 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'sour business, financial condition orand results of operations.
The CompanyFurther, 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 risks relatingcivil 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.
Due to the preservationnature of itsour business and products, we may be liable for damages based on product liability claims.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and the products of third-party vendors that we use or resell. Significant product liability claims could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Although we currently maintain what we believe to be suitable and adequate product liability insurance, there can be no assurance that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against all potential significant liabilities.
Failure to protect our intellectual property.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 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 and in the operation of itsour business. The CompanyWe also hashave exclusive and non-exclusive rights to intellectual property owned by others. The Company’sOur intellectual property may be challenged, stolen or otherwise 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, theft 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 protect intellectual property and preserve existingassociated intellectual property rights could lead to reputational harm and/or adversely impact the Company’sour competitive position and results of operations.
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 U.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 U.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 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 change 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 increasing costs of certain employee and retiree benefits.
The funding requirements and the amount of expenses recorded for the Company’s 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’s results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and the Company continues to absorb the majority of these costs, these increasing costs may adversely impact the Company's future results of operations.
The Company may be subject to risks arising from regulations applicable to companies doing business with the United States government.
In addition to the risks identified herein, doing business with the United States government subjects the Company to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental acquisition 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’s failure to perform under the applicable contract. The Company is subject to government investigations of business practices and compliance with government acquisition 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 the Company 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’s 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, 2018,2021, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Name | | Position | | Officer Since(1) | | Age as of
8/15/2021 |
| Thomas L. Williams | | Chairman of the Board, Chief Executive Officer and Director | | 2005 | | 62 | |
| Lee C. Banks | | Vice Chairman and President and Director | | 2001 | | 58 | |
| Jennifer A. Parmentier | | Chief Operating Officer | | 2015 | | 54 | |
| Todd M. Leombruno | | Executive Vice President and Chief Financial Officer | | 2017 | | 51 | |
| Mark J. Hart | | Executive Vice President – Human Resources & External Affairs | | 2016 | | 56 | |
| William R. "Skip" Bowman | | Vice President and President - Instrumentation Group | | 2016 | | 63 | |
| Berend Bracht | | Vice President and President – Motion Systems Group | | 2021 | | 55 | |
| Mark T. Czaja | | Vice President - Chief Technology and Innovation Officer | | 2021 | | 59 | |
| Angela R. Ives | | Vice President and Controller | | 2021 | | 48 | |
| Thomas C. Gentile | | Vice President – Global Supply Chain | | 2017 | | 49 | |
| Joseph R. Leonti | | Vice President, General Counsel and Secretary | | 2014 | | 49 | |
| Robert W. Malone | | Vice President and President – Filtration Group | | 2014 | | 57 | |
| Dinu J. Parel | | Vice President and Chief Digital and Information Officer | | 2018 | | 40 | |
| Andrew D. Ross | | Vice President and President – Fluid Connectors Group | | 2012 | | 54 | |
| Roger S. Sherrard | | Vice President and President – Aerospace Group | | 2003 | | 55 | |
| Andrew M. Weeks | | Vice President and President – Engineered Materials Group | | 2015 | | 58 | |
|
| | | | | | | |
| Name | | Position | | Officer Since(1) | | Age as of 8/15/2018 |
| Thomas L. Williams | | Chairman of the Board, Chief Executive Officer and Director | | 2005 | | 59 |
|
| Lee C. Banks | | President, Chief Operating Officer and Director | | 2001 | | 55 |
|
| Catherine A. Suever | | Executive Vice President – Finance & Administration and Chief Financial Officer | | 2010 | | 59 |
|
| Mark J. Hart | | Executive Vice President – Human Resources & External Affairs | | 2016 | | 53 |
|
| William R. "Skip" Bowman | | Vice President and President - Instrumentation Group | | 2016 | | 60 |
|
| William G. Eline | | Vice President – Chief Information Officer | | 2002 | | 62 |
|
| Thomas C. Gentile | | Vice President – Global Supply Chain | | 2017 | | 46 |
|
| Kurt A. Keller | | Vice President and President – Asia Pacific Group | | 2009 | | 60 |
|
| Todd M. Leombruno | | Vice President and Controller | | 2017 | | 48 |
|
| Joseph R. Leonti | | Vice President, General Counsel and Secretary | | 2014 | | 46 |
|
| Robert W. Malone | | Vice President and President – Filtration Group | | 2014 | | 54 |
|
| M. Craig Maxwell | | Vice President – Chief Technology and Innovation Officer | | 2003 | | 60 |
|
| Jennifer A. Parmentier | | Vice President and President – Engineered Materials Group | | 2015 | | 51 |
|
| Andrew D. Ross | | Vice President and President – Fluid Connectors Group | | 2012 | | 51 |
|
| Roger S. Sherrard | | Vice President and President – Aerospace Group | | 2003 | | 52 |
|
| Andrew M. Weeks | | Vice President and President – Motion Systems Group | | 2015 | | 55 |
|
(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. Eline, Keller, Maxwell,Williams, Banks, Hart, Leonti, Malone, Ross and Sherrard have served in the executive capacities indicated above opposite their respective names 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.The Goodyear Tire & Rubber Company.
Mr. Banks has been a Director since January 2015 and Vice Chairman and President since August 2021. He was President and Chief Operating Officer sincefrom February 2015.2015 to August 2021. 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 NordsonWabtec Corporation.
Ms. SueverParmentier has been Executive Vice President - Finance & Administration and Chief FinancialOperating Officer since April 2017.August 2021. She was Vice President and ControllerPresident of the Motion Systems Group from December 2010February 2019 to April 2017.August 2021. She was Vice President and President of the Engineered Materials Group from September 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. She is also a Director of Nordson 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.
Mr. Leombruno has been Executive Vice President and Chief Financial Officer since January 2021. He was Vice President and Controller from July 2017 to January 2021. He was Vice President and Controller - Engineered Materials Group from January 2015 to June 2017; and Director of Investor Relations from June 2012 to December 2014.
Mr. Bowman has been Vice President and President - Instrumentation Group since September 2016. He was Vice President, Operations - Filtration Group from March 2015 to August 2016; and Vice President, Operations - Fluid Connectors Group from November 2007 to February 2015.
Mr. Bracht has been Vice President and President of the Motion Systems Group since August 2021. He was Vice President of Operations of the Engineered Materials Group since joining the Company in July 2018. He was President and Chief Executive Officer of Bendix Commercial Vehicle Systems LLC from 2015 to 2018. Bendix designs, develops and supplies products under the Bendix brand name for medium- and heavy-duty trucks, tractors, trailers, buses, and other commercial vehicles throughout North America. Prior to Bendix, he held several executive leadership positions during his 24-year career at Bosch Rexroth, including President and Chief Executive Officer of Bosch Rexroth Americas.
Mr. Czaja has been Vice President - Chief Technology and Innovation Officer since January 2021. He was Vice President of Technology and Innovation - Motion Systems Group from August 2019 to December 2020; Vice President of Technology and Innovation - Aerospace Group from August 2004 to July 2019; and Division Engineering Director from October 2000 to July 2004.
Mr. Gentile has been Vice President - Global Supply Chain since July 2017. He was General Manager of the Company's domnick hunter Process Filtration Division from December 2013 to July 2017;2017 and was Vice President of Supply Chain - Filtration Group from July 2008 to DecemberNovember 2013.
Mr. LeombrunoMs. Ives has been Vice President and Controller since July 2017. HeJanuary 2021. She was Vice President, andAssistant Controller - Engineered Materialsfrom September 2020 to December 2020; Group VP Controller for the Instrumentation Group from January 2015November 2019 to June 2017;August 2020; and Director of Investor Relationswas Division Controller for the Electromechanical and Drives Division from June 2012August 2010 to December 2014.
October 2019.
Mr. Leonti has been Vice President, General Counsel and Secretary since July 2014. He was Assistant Secretary from April 2011 to July 2014; 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.
Ms. ParmentierMr. Parel has been Vice President and Chief Digital and Information Officer since October 2020. He was Vice President of the Engineered Materials Group since September 2015. Sheand Chief Information Officer from October 2018 to October 2020. He was General Manager of the Hose Products DivisionVice President and Chief Information Officer at Dover Corporation from May 20142016 through October 2018. Prior to September 2015; and General Manager of the Sporlan DivisionDover, he held several IT leadership roles at Baker Hughes from May 2012March 2010 to May 2014.2016, including IT Integration Leader and Senior Director, IT North America.
Mr. Ross has been Vice President since July 2012 and President of the- Fluid Connectors Group since September 2015. He was Vice President and President of the Engineered Materials Group from July 2012 to September 2015.
Mr. Sherrard has been Vice President and President of the Aerospace Group since July 2012. He was President of the Automation Group from March 2005 to July 2012. Prior to that he was President of the Instrumentation Group and has been a Corporate Vice President since November 2003.
Mr. Weeks has been Vice President and President of the Engineered Materials Group since February 2019. He was Vice President and President of the Motion Systems Group sincefrom September 2015.2015 to February 2019. He was Vice President - Operations of the Aerospace Group from April 2013 to September 2015.
ITEM 2. Properties. The Company’sOur corporate headquarters is located in Cleveland, Ohio, and, at June 30, 2018,2021, the Company had 310maintained approximately 315 manufacturing plants, 119 distribution centers and 157plants. We also maintain various sales and administrative offices and distribution centers throughout the world, noneworld. None of which werethese manufacturing plants, administrative offices or distribution centers are individually material to itsour operations. The facilities are situated in 3938 states within the United States and in 4944 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 | 291 |
| | 115 |
| | 144 |
|
| Aerospace Systems | 19 |
| | 4 |
| | 13 |
|
| Total | 310 |
| | 119 |
| | 157 |
|
|
| | | | | | | | | | | |
| | Geographic Location |
| | North America | | Europe | | Asia-Pacific | | Latin America |
| Diversified Industrial | 271 |
| | 154 |
| | 113 |
| | 12 |
|
| Aerospace Systems | 30 |
| | 4 |
| | 2 |
| | — |
|
| Total | 301 |
| | 158 |
| | 115 |
| | 12 |
|
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. None.From time to time we are involved in matters that involve governmental authorities as a party under federal, state and local laws that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. We will report such matters that exceed, or that we reasonably believe may exceed, $1.0 million or more in monetary sanctions.
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)(a)Market for the Registrant’s Common Equity. The Company’s common stock is listed for trading on the New York Stock Exchange ("NYSE") under the symbol "PH". Information regarding stock price as reported on the NYSE and dividend information with respect to the Company’s common stock, is included in the table below. |
|
| | | | | | | | | | | | | | | | | | | | |
| (In dollars) | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Fiscal Year |
|
| 2018 | High | $ | 177.61 |
| | $ | 200.82 |
| | $ | 212.80 |
| | $ | 183.91 |
| | $ | 212.80 |
|
| | Low | 153.65 |
| | 170.66 |
| | 167.50 |
| | 152.47 |
| | 152.47 |
|
| | Dividends | 0.66 |
| | 0.66 |
| | 0.66 |
| | 0.76 |
| | 2.74 |
|
| | | | | | | | | | | |
| 2017 | High | $ | 126.59 |
| | $ | 145.44 |
| | $ | 161.23 |
| | $ | 166.60 |
| | $ | 166.60 |
|
| | Low | 105.00 |
| | 118.77 |
| | 139.92 |
| | 151.17 |
| | 105.00 |
|
| | Dividends | 0.63 |
| | 0.63 |
| | 0.66 |
| | 0.66 |
| | 2.58 |
|
| | | | | | | | | | | |
| 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 |
|
As of July 31, 2018,2021, the number of shareholders of record of the Company was 3,478.3,292.
| |
(b) | Use of Proceeds. Not Applicable.
|
(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, 2021 through April 30, 2021 | | 52,600 | | | $ | 317.78 | | | 52,600 | | | 9,805,825 | |
| May 1, 2021 through May 31, 2021 | | 50,500 | | | $ | 311.38 | | | 50,500 | | | 9,755,325 | |
| June 1, 2021 through June 30, 2021 | | 58,345 | | | $ | 300.92 | | | 58,345 | | | 9,696,980 | |
| Total | | 161,445 | | | | | 161,445 | | | |
(1)On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum 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 fiscal year. There is no expiration date for this program. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During 2021, the Company reinitiated the share repurchase program and began repurchasing shares under the program in February 2021.
|
| | | | | | | | | | | | | |
| 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, 2018 through April 30, 2018 | | 96,100 |
| | $ | 170.96 |
| | 96,100 |
| | 16,404,510 |
|
| May 1, 2018 through May 31, 2018 | | 704,770 |
| | $ | 166.21 |
| | 704,770 |
| | 15,699,740 |
|
| June 1, 2018 through June 30, 2018 | | 97,647 |
| | $ | 168.11 |
| | 97,647 |
| | 15,602,093 |
|
| Total | | 898,517 |
| | $ | 166.92 |
| | 898,517 |
| | 15,602,093 |
|
| |
(1) | 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.[Reserved]
|
| | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share information) | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | 14,302,392 |
| | $ | 12,029,312 |
| | $ | 11,360,753 |
| | $ | 12,711,744 |
| | $ | 13,215,971 |
|
| Net income attributable to common shareholders | | 1,060,801 |
| | 983,412 |
| | 806,840 |
| | 1,012,140 |
| | 1,041,048 |
|
| Basic earnings per share | | 7.98 |
| | 7.37 |
| | 5.96 |
| | 7.08 |
| | 6.98 |
|
| Diluted earnings per share | | 7.83 |
| | 7.25 |
| | 5.89 |
| | 6.97 |
| | 6.87 |
|
| Cash dividends per share | | 2.74 |
| | 2.58 |
| | 2.52 |
| | 2.37 |
| | 1.86 |
|
| Total assets | | 15,320,087 |
| | 15,489,904 |
| | 12,034,142 |
| | 12,254,279 |
| | 13,249,907 |
|
| Long-term debt | | 4,318,559 |
| | 4,861,895 |
| | 2,652,457 |
| | 2,698,957 |
| | 1,498,234 |
|
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. AllOften but not always, these statements may be identified from the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “should,” “could,” “potential,” “continues,” “plans,” “forecasts,” “estimates,” “projects,” “predicts,” “would,” “intends,” “expects,” “targets,” “is likely,” “will,” or the negative of these terms and similar expressions, and include all statements regarding future performance, earnings projections, events or developments aredevelopments. Neither the Company nor any of its respective associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this document will actually occur. The Company cautions readers not to place undue reliance on these statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from past performance or current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company'sCompany’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 U.S. Tax CutsUnited States and Jobs Act (TCJ Act) may affectforeign jurisdictions and any judicial or regulatory interpretation thereof on future performance and earnings projections asmay impact the amounts reflected in this period are preliminary estimates and exact amounts will not be determined until a later date, and there may be other judicial or regulatory interpretations of the TCJ Act that may also affect these estimates and the actual impact on the Company.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:
•the impact of the global outbreak of COVID-19 and governmental and other actions taken in response;
•changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;
•disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs and changes in product mix;
•ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integration of CLARCOR Inc. (Clarcor);Lord and Exotic and the proposed acquisition of Meggitt; and our ability to effectively manage expanded operations from the acquisitions of Lord and Exotic and the proposed acquisition of Meggitt;
•the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
•the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;
•ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases;
•availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
•ability to manage costs related to insurance and employee retirement and health care benefits;
•legal and regulatory developments and changes;
•additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
•ability to enter into, own, renew, protect and maintain intellectual property and know-how;
•leverage and future debt service obligations;
•potential impairment of goodwill;
•compliance costs associated with environmental laws and regulations;
•potential labor disruptions;
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;
•global competitive market conditions, including global reactions to U.S. trade polices,policies 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, credit availability and credit availability.changes in consumer habits and preferences;
•local and global political and economic conditions;
•inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;
•government actions and natural phenomena such as floods, earthquakes, hurricanes and pandemics;
•increased cyber security threats and sophisticated computer crime; and
•success of business and operating initiatives.
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, 2018,2021, and undertakes no obligation to update them unless otherwise required by law.
Overview
The Company is a leading worldwide diversified manufacturer ofglobal leader in motion and control technologies and systems, providing precisiontechnologies. For more than a century, the Company has engineered solutions forthe success of its customers in a wide varietyrange of mobile,diversified industrial and aerospace markets.
By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.
The Company'sWin Strategy 3.0 is Parker's business system that defines the goals and initiatives that drive growth, transformation and success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.
We 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. We believe we can meet our strategic objectives by:
•Serving the customer and continuously enhancing its experience with the Company;
•Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
•Maintaining a decentralized division and sales company structure;
•Fostering a 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;
•Enabling a sustainable future by providing innovative technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;
•Acquiring strategic businesses;
•Organizing around targeted regions, technologies and markets;
•Driving efficiency by implementing lean enterprise principles; and
•Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.
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 believes
In March 2020, the leading economic indicatorsWorld Health Organization declared the outbreak of these markets that haveCOVID-19 a correlationpandemic. We continue to monitor the Company's future order rates are as follows:
Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;
Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and
Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a regionimpact of the world inCOVID-19 pandemic, which has negatively impacted demand and continues to create economic uncertainty. Disruption within the mobileaerospace industry, which is facing the consequences of travel restrictions and industrial marketsconsiderably lower demand, was significant and is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:
|
| | | | | | | | |
| | June 30, 2018 |
| | March 31, 2018 |
| | June 30, 2017 |
|
| United States | 60.2 |
| | 59.3 |
| | 57.8 |
|
| Eurozone countries | 54.9 |
| | 56.6 |
| | 57.4 |
|
| China | 51.0 |
| | 51.0 |
| | 50.4 |
|
| Brazil | 49.8 |
| | 53.4 |
| | 50.5 |
|
Global aircraft miles flown increased by approximately six percentexpected to continue. The extent to which our business and global revenue passenger miles increased approximately seven percent from their comparable 2017 levels. The Company anticipates that U.S. Departmentresults of Defense spending with regards to appropriations and operations and maintenance for the U.S. Government's fiscal year 2018 will increase by approximately two percent from their fiscal 2017 level.
Housing starts in June 2018 were 11 percent lower than housing starts in March 2018 and four percent lower than housing starts in June 2017.
The Company believes many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.
The Company believes it can meet its strategic objectives by:
Serving the customer and continuously enhancing its experience with the Company;
Successfully executing its Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
Maintaining its decentralized division and sales company structure;
Fostering a 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 pricedbe impacted by the value they deliver;pandemic over the long term will depend on future developments that cannot be accurately predicted at this time. These developments include the availability, acceptance, distribution and effectiveness of vaccines; new information concerning the severity and spread of COVID-19 and its variants; and actions by government authorities to contain the pandemic or mitigate its economic, public health and other impacts.
AcquiringWe continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented rigorous prevention, screening and hygiene protocols. Additionally, we are strategically managing costs through reductions in discretionary spending. We continue to prioritize capital expenditures related to safety and strategic businesses;investments.
Organizing around targeted regions, technologies and markets;
Driving efficiency by implementing lean enterprise principles; and
Creating a culture of empowerment through its values, inclusion and diversity, accountability and teamwork.
Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while atAt the same time, maintainingwe are appropriately addressing the Company’s strong financial position. In addition, the Company willongoing needs of our business so that we may continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.
serve our customers.
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 the 2019 financial statements is included in Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K.
CONSOLIDATED STATEMENT OF INCOME
The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance overin 2021 and 2020.
| | | | | | | | | | | | | | |
| (dollars in millions) | | 2021 | | 2020* |
| Net sales | | $ | 14,348 | | | $ | 13,696 | |
| Gross profit margin | | 27.2 | % | | 24.8 | % |
| Selling, general and administrative expenses | | $ | 1,527 | | | $ | 1,657 | |
| Selling, general and administrative expenses, as a percent of sales | | 10.6 | % | | 12.1 | % |
| | | | |
| Interest expense | | $ | 250 | | | $ | 308 | |
| Other (income), net | | (17) | | | (67) | |
| Gain on disposal of assets | | (109) | | | (1) | |
| Effective tax rate | | 22.3 | % | | 20.2 | % |
| Net income attributable to common shareholders | | $ | 1,746 | | | $ | 1,202 | |
*Year ended June 30, 2020 amounts have been adjusted to reflect the last three years.change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| (dollars in millions) | | 2018 | | 2017 | | 2016 |
| Net sales | | $ | 14,302 |
| | $ | 12,029 |
| | $ | 11,361 |
|
| Gross profit margin | | 24.7 | % | | 23.6 | % | | 22.3 | % |
| Selling, general and administrative expenses | | $ | 1,657 |
| | $ | 1,454 |
| | $ | 1,359 |
|
| Selling, general and administrative expenses, as a percent of sales | | 11.6 | % | | 12.1 | % | | 12.0 | % |
| Interest expense | | $ | 214 |
| | $ | 162 |
| | $ | 137 |
|
| Other (income), net | | (29 | ) | | (61 | ) | | (62 | ) |
| (Gain) on disposal of assets | | (4 | ) | | (43 | ) | | (11 | ) |
| Effective tax rate | | 37.7 | % | | 26.0 | % | | 27.6 | % |
| Net income attributable to common shareholders | | $ | 1,061 |
| | $ | 983 |
| | $ | 807 |
|
Net salesin 2018 were 18.9 percent2021 increased from the 2020 amount due to higher than 2017. The increase in net sales in 2018 was a result of an increase in volume in both the Diversified Industrial North AmericanInternational and Diversified Industrial International operations and acquisitions completed during 2017, which contributed approximately $970 million to current-year incremental net sales.North American businesses, partially offset by lower volume in the Aerospace Systems Segment. The effect of currency rate changes increased net sales in 20182021 by approximately $295$257 million, of which $270$244 million was attributable to the Diversified Industrial International operations. Net salesin 2017 were 5.9 percent higher than 2016. The increasePrior-year acquisitions contributed approximately $394 million in net sales in 2017 was primarily a result of acquisitions made in 2017 (which contributed approximately $558 million in sales in 2017) and an increase in volume in both the Diversified Industrial International operations and the Aerospace Systems Segment, partially offset by the effect of currency rate changes (which decreased net sales in 2017 by approximately $84 million).during 2021.
Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 20182021 primarily due to higher margins in all businesses. Gross profit margin in 2021 included net foreign currency transaction gains of $11 million and $10 million in 2021 and 2020, respectively. Gross profit margin also benefited from the Aerospace Systems Segmentabsence of acquisition-related expenses, which were included in cost of sales in 2020, of $69 million. Cost of sales included business realignment and acquisition integration charges of $35 million in 2021 compared to $60 million in 2020.
Selling, general and administrative expenses ("SG&A") decreased eight percent in 2021 primarily due to benefits from lower discretionary spending and wage and salary expense resulting from a favorable product mix. All segmentsactions taken in response to business conditions resulting from the COVID-19 pandemic. During 2021, SG&A also benefited from lower operatingthe absence of acquisition-related expenses related to simplification and realignment efforts.of $119 million, which were incurred in 2020. These benefits were partially offset by unfavorable product mix, unfavorable raw material prices and inefficiencies created by manufacturing facility consolidations which contributed to lower margins in the Diversified Industrial North American and Diversified Industrial International operations during 2018. Gross profit margin increased in 2017 primarily due to lower operating expenses resulting from the Company's simplification initiative and other restructuring activities, primarily experienced in the Diversified Industrial Segment, partially offset by lower margins in the Aerospace Systems Segment. Foreign currency transaction loss (relating to cash, marketable securities and other investments and intercompany transactions) included in cost of sales for 2018, 2017 and 2016 was $7.3 million, $8.1 million and $22.7 million, respectively. Pension cost included in cost of sales in 2018, 2017 and 2016 was $86.1 million, $135.0 million and $172.4 million, respectively. Included in cost of sales in 2018, 2017 and 2016 were business realignment charges of $44.9 million, $35.9 million and $76.2 million, respectively.
Selling, general and administrative expensesincreased 14.0 percent in 2018 and increased 7.0 percent in 2017. The increase in 2018 was primarily due to higher sales expense resulting from an increase in sales, higherintangible asset amortization expense resulting from recentrelated to prior-year acquisitions and higher incentivestock compensation partially offset by lowerexpense. SG&A also included business realignment and acquisition expenses. The increaseintegration charges of $23 million and $38 million in 2017 was primarily2021 and 2020, respectively.
Interest expense in 2021 decreased due to higher amortization expense resulting from recent acquisitions and higher acquisition expenses, partially offset byboth lower expenses resulting from the Company's simplification initiative, lower expenses associated with the Company's deferred compensation programinterest rates and lower professional services expenses. Pension cost included in selling, general and administrative expenses in 2018, 2017 and 2016 was $36.9 million, $65.8 million and $74.4 million, respectively. Included in selling, general and administrative expenses in 2018, 2017 and 2016 were business realignment charges of $36.8 million, $19.7 million and $21.1 million, respectively.average debt outstanding.
Interest expense in 2018 increased primarily due to higher weighted-average borrowings and higher weighted-average interest rates. Interest expense in 2017 increased primarily due to higher weighted-average borrowings, partially offset by lower weighted-average interest rates.
Other (income), net in 2018, 2017 and 2016 includes $50.5 million, $42.4 million, and $25.6 million included the following:
| | | | | | | | | | | | | | |
| (dollars in millions) | | 2021 | | 2020 |
| Expense (income) | | | | |
| Income related to equity method investments | | $ | (41) | | | $ | (75) | |
| Non-service components of retirement benefit cost | | 49 | | | 49 | |
| Interest income | | (7) | | | (31) | |
| Other items, net | | (18) | | | (10) | |
| | $ | (17) | | | $ | (67) | |
(Gain)Gain on disposal of assets includes in 2021 primarily consists of a lossgain of $20$101 million on the sale of a business in 2018, a gainland. In 2020, it includes gains of $42$12 million related toon the sale of a product line in 2017real estate, partially offset by net losses on divestitures and a gain of $11.5 million related to the sale of businesses in 2016.asset sales and writedowns.
Effective tax rate in 20182021 was higher than the comparable prior-year period2020 primarily due to the net impact of one-time adjustments recorded as a result of the TCJ Act. See Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the impact of the TCJ Act. Excluding the impact of the TCJ Act one-time adjustments, the effective tax rate for 2018 was lower primarily due to the reduced U.S. income tax rate resulting from enactment of the TCJ Act and a net increasean overall decrease in discrete tax benefits, partially offset by an increase in taxes related to international activities. The effective tax rate in 2017 was favorably impacted by an increase of discrete tax benefits, mostly related to stock-based compensation expense.benefits.
BUSINESS SEGMENT INFORMATION
The Business Segment information presents sales and 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) | | 2021 | | 2020 |
| Net Sales | | | | |
| North America | | $ | 6,676 | | | $ | 6,456 | |
| International | | 5,284 | | | 4,505 | |
| Operating income | | | | |
| North America | | 1,247 | | | 986 | |
| International | | 988 | | | 675 | |
| Operating income as a percent of sales | | | | |
| North America | | 18.7 | % | | 15.3 | % |
| International | | 18.7 | % | | 15.0 | % |
| Backlog | | $ | 3,239 | | | $ | 2,117 | |
|
| | | | | | | | | | | |
| (dollars in millions) | 2018 | | 2017 | | 2016 |
| Sales | | | | | |
| North America | $ | 6,727 |
| | $ | 5,367 |
| | $ | 4,955 |
|
| International | 5,260 |
| | 4,378 |
| | 4,145 |
|
| Operating income | | | | | |
| North America | 1,076 |
| | 874 |
| | 790 |
|
| International | 765 |
| | 579 |
| | 448 |
|
| Operating income as a percent of sales | | | | | |
| North America | 16.0 | % | | 16.3 | % | | 15.9 | % |
| International | 14.5 | % | | 13.2 | % | | 10.8 | % |
| Backlog | $ | 2,167 |
| | $ | 2,041 |
| | $ | 1,455 |
|
| Assets | 13,369 |
| | 13,367 |
| | 8,729 |
|
| Return on average assets | 13.8 | % | | 13.1 | % | | 14.2 | % |
The Diversified Industrial Segment operations experienced the following percentage changes in net sales: |
| | | | | | |
| | | 2018 | | 2017 |
| Diversified Industrial North America – as reported | | 25.3 | % | | 8.3 | % |
| Acquisitions | | 14.9 | % | | 8.8 | % |
| Divestitures | | (0.1 | )% | | — | % |
| Currency | | 0.4 | % | | (0.3 | )% |
| Diversified Industrial North America – without acquisitions, divestitures and currency | | 10.1 | % | | (0.2 | )% |
| | | | | |
| Diversified Industrial International – as reported | | 20.1 | % | | 5.6 | % |
| Acquisitions | | 3.9 | % | | 2.9 | % |
| Divestitures | | (0.2 | )% | | — | % |
| Currency | | 6.2 | % | | (1.6 | )% |
| Diversified Industrial International – without acquisitions, divestitures and currency | | 10.2 | % | | 4.3 | % |
| | | | | |
| Total Diversified Industrial Segment – as reported | | 23.0 | % | | 7.1 | % |
| Acquisitions | | 10.0 | % | | 6.1 | % |
| Divestitures | | (0.2 | )% | | — | % |
| Currency | | 3.0 | % | | (0.9 | )% |
| Total Diversified Industrial Segment – without acquisitions, divestitures and currency | | 10.2 | % | | 1.9 | % |
| | | | | | | | |
| | 2021 |
| Diversified Industrial North America – as reported | | 3.4 | % |
| Acquisitions | | 2.9 | % |
| | |
| Currency | | 0.1 | % |
| Diversified Industrial North America – without acquisitions and currency | | 0.4 | % |
| | |
| Diversified Industrial International – as reported | | 17.3 | % |
| Acquisitions | | 3.0 | % |
| | |
| Currency | | 5.4 | % |
| Diversified Industrial International – without acquisitions and currency | | 8.9 | % |
| | |
| Total Diversified Industrial Segment – as reported | | 9.1 | % |
| Acquisitions | | 2.9 | % |
| | |
| Currency | | 2.3 | % |
| Total Diversified Industrial Segment – without acquisitions and currency | | 3.9 | % |
The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions and divestitures made within the prior four fiscal quarters as well as the effects of currency exchange rates (a non-GAAP measure). The effects of acquisitions divestitures and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in 20182021 for the Diversified Industrial North American operations increased 25.33.4 percent from 2017 as compared to increasing 8.3 percent from 2016 to 2017.2020. Acquisitions completed during 2017 contributed approximately $798increased sales by $188 million, in incremental sales in 2018, and the effect of currency exchange rates increased sales in 2018 by $20approximately $8 million. Excluding acquisitions divestitures and the effect of currency rate changes, sales in 20182021 for the Diversified Industrial North American operations increased 10.10.4 percent from prior-year levels reflecting higher demand from distributors and end users in the construction equipment,refrigeration, cars and light trucks, heavy-duty truck, farm and agriculture and life sciences markets, partially offset by a decrease in end-user demand in the oil and gas and general industrial machinery markets. Excluding acquisitions and the effect
Sales in the Diversified Industrial International operations increased 20.117.3 percent in 2018 as compared to increasing 5.6 percent from 2016 to 2017.2021. Acquisitions completed in 2017 contributedincreased sales by approximately $173$136 million in incremental sales in 2018.2021. The effect of currency rate changes increased sales by $270$244 million, reflecting the weakening of the U.S. dollar primarily against currencies in the Eurozone countries, China and the United Kingdom. Excluding acquisitions divestitures and the effect of currency rate changes, sales in 20182021 for the Diversified Industrial International operations increased 10.28.9 percent from 20172020 levels due to higher volume in all regions. The Asia Pacific region contributed approximately 50 percent of the increase in salesprimarily due to higher demand from distributors as well asand end users in both the construction equipment, semiconductormobile and engine markets, partially offset by lower end-user demand inindustrial markets. During 2021, the telecommunicationsAsia Pacific region, Europe, and marine markets. Europe contributedLatin America accounted for approximately 4060 percent, 26 percent, and 14 percent, respectively, of the increase in sales.
Within the Asia Pacific region, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, mining, heavy-dutysemiconductor, cars and light truck, general industrial machinery, engine and enginelife sciences markets, partially offset by lowera decrease in end-user demand in the power generationoil and gas market.
Within Latin America,Europe, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, and heavy-duty truck markets contributed to the increase in sales.
Excluding acquisitions and the effect of currency rate changes, sales in 2017 in the Diversified Industrial International operations increased 4.3 percent from 2016, primarily due to higher volume in the Asia Pacific region and Latin America,power generation markets, partially offset by lower volumea decrease in Europe. Within the Asia Pacific region, higher demand was experienced from distributors as well as end users in the semiconductor, cars and light trucks, telecommunications, construction equipment and engine markets. Within Latin America, higher demand was experienced from distributors and end-user demand in the agriculture equipment market. Within Europe, higher demand from distributors and end-user demand in the construction equipment, forestry, and miscellaneous manufacturing markets was more than offset by lower end-user demand in the general industrial machinery, oil and gas and marine markets.
The lower operatingWithin Latin America, the increase in sales was primarily due to higher demand from distributors and end users in the farm and agriculture, construction equipment, cars and light truck and heavy-duty truck markets, partially offset by a decrease in end-user demand in the oil and gas market.
Operating margins in 20182021 increased in both the Diversified Industrial North American operations were primarily due to an unfavorable product mix, unfavorable raw material prices, higher amortization expense and inefficiencies created by manufacturing facility consolidations, partially offset by the impact of higher sales volume and lower operating expenses resulting from prior-year restructuring activities and the Company's simplification initiative. The increase in operating margins in 2018 for the Diversified Industrial International operations was primarily due to higher sales volume and benefits from overall cost reductions, including lower operating expenses resulting fromdiscretionary spending, wage and salary reductions, current and prior-year restructuring activities and the Company's simplification initiative, partially offset by higher amortization expense, inefficiencies created by manufacturing facility consolidations and an unfavorable product mix.
The increaseactions in operating margins in 2017 in the Diversified Industrial North American operations was primarily dueresponse to lower operating expensesbusiness conditions resulting from the Company's simplification initiative and other restructuring activities, resulting in manufacturing efficiencies, partially offset by higherCOVID-19 pandemic, the absence of acquisition-related expenses, and higher amortization expense. The increase in operating margins in 2017 in the Diversified Industrial International operations was primarily due to the higher sales volume, lower operating expenses resulting from restructuring activities and the Company's simplification initiative, resulting in manufacturing efficiencies.productivity improvements.
The following business realignment charges and acquisition integration costscharges are included in Diversified Industrial North America and Diversified Industrial International operating income:
| | | | | | | | | | | | | | |
| (dollars in millions) | | 2021 | | 2020 |
| Diversified Industrial North America | | $ | 14 | | | $ | 41 | |
| Diversified Industrial International | | 36 | | | 32 | |
|
| | | | | | | | | | | | |
| (dollars in millions) | | 2018 | | 2017 | | 2016 |
| Diversified Industrial North America | | $ | 37 |
| | $ | 20 |
| | $ | 31 |
|
| Diversified Industrial International | | 41 |
| | 33 |
| | 60 |
|
TheDuring 2021, business realignment charges consist primarily include actions taken to address the impact of severance and plant closure costsCOVID-19 on our business, but also include charges related to actions taken under the Company'sCompany’s simplification initiative. The simplification initiative is aimed at reducing organizational and process complexity whichand is being implemented by its operating units throughoutaround the world. During 2020, business realignment charges primarily include charges related to the Company’s simplification initiative, but also include permanent workforce reductions to address the impact of COVID-19 on our business. Acquisition integration charges relate to the 2020 acquisition of Lord.
The majority of the Diversified Industrial International business realignment and acquisition integration 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 anticipatesWe anticipate that cost savings realized from the work forceworkforce reduction measures taken during 20182021 will increase 2019 operating income for 2022 by approximately threeone percent in both the Diversified Industrial North American and Diversified Industrial International operations. In 2019, the Company expects2022, we expect to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment, including the continued integration of 2017 acquisitions. SuchSegment. These actions are expected to result in approximately $35$40 million in business realignment and acquisition integration charges in 2019.2022. However, continually changing business conditions could impact the ultimate costs we incur.
The Company anticipates Diversified Industrial North American sales for 2019 will increase between 2.6 and 5.6 percent from the 2018 level and Diversified Industrial International sales for 2019 will range between a 2.5 percent decrease and 0.5 percent increase from the 2018 level. Diversified Industrial North American operating margins in 2019 are expected to range from 16.4 to 17.2 percent and Diversified Industrial International margins are expected to range from 15.3 to 15.7 percent.
The increase in total Diversified Industrial Segment backlog in 20182021 was primarily due to orders exceeding shipments in both the Asia Pacific regionNorth American and North America,International businesses, with the Asia Pacific regioneach business accounting for approximately 6050 percent of the increase and North America accounting for approximately 40 percent ofchange. Within the increase. TheInternational business, this increase in total Diversified Industrial Segment backlog in 2017 was primarily duerelated to recent acquisitions as well as orders exceeding shipments in all regions, with North Americaboth Europe and Europe each accounting for approximately 40 percent of the increase.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.
Diversified Industrial Segment assets in 2018 remained flat as compared to the 2017 balance. At June 30, 2018, increases in cash and cash equivalents and trade accounts receivable were offset by a decrease in intangible assets. The increase in total Diversified Industrial Segment assets in 2017 was primarily due to acquisitions, partially offset by the effect of currency rate fluctuations.
Aerospace Systems Segment
| | | | | | | | | | | | | | |
| (dollars in millions) | | 2021 | | 2020 |
| Sales | | $ | 2,388 | | | $ | 2,735 | |
| Operating income | | 403 | | | 477 | |
| Operating income as a percent of sales | | 16.9 | % | | 17.4 | % |
| Backlog | | $ | 3,264 | | | $ | 3,021 | |
|
| | | | | | | | | | | |
| (dollars in millions) | 2018 | | 2017 | | 2016 |
| Sales | $ | 2,316 |
| | $ | 2,285 |
| | $ | 2,260 |
|
| Operating income | 398 |
| | 337 |
| | 338 |
|
| Operating income as a percent of sales | 17.2 | % | | 14.8 | % | | 14.9 | % |
| Backlog | $ | 1,954 |
| | $ | 1,753 |
| | $ | 1,762 |
|
| Assets | 1,447 |
| | 1,413 |
| | 1,431 |
|
| Return on average assets | 27.8 | % | | 23.7 | % | | 24.1 | % |
Sales in 20182021 were higherlower than the 20172020 level primarily due to higher volume in the commercial and military aftermarket businesses, partially offset by lower volume in the commercial OEM and military original equipment manufacturer (OEM) businesses. Sales in 2017 were higher than the 2016 level primarilyaftermarket businesses due to the market conditions as a result of COVID-19. This decrease was partially offset by higher volume in the military OEM and commercial and military aftermarket businesses partially offset byas well as a $71 million increase in sales from prior-year acquisitions.
Operating margin decreased in 2021 primarily due to lower sales volume in the commercial OEM business.
The higher margin in 2018 was primarily due to a favorable product mix resulting from higherand aftermarket businesses and lower aftermarket profitability. Lower sales volume and aftermarket profitability andwere partially offset by lower engineering development expenses, overall cost reductions, lower business realignment and operating expenses, partially offset by unfavorable contract settlementsacquisition integration charges and higher product support costs. the benefits from such actions.
The slightly lower margindisruption in 2017 was primarilythe aerospace industry due to an unfavorable OEM product mix, higher warranty-related costs, higher favorable contract settlements in 2016the COVID-19 pandemic has been significant and higherwe have taken actions necessary to structure appropriately the operations of the Aerospace Systems Segment. We do not currently intend to incur significant additional business realignment expenses, partially offsetand acquisition integration charges in 2022. However, continually changing business conditions could impact the ultimate costs we incur. We anticipate that cost savings realized from the workforce reduction measures taken during 2021 will increase segment operating income for 2022 by higher aftermarket profitability and lower engineering development and operating expenses.
approximately two percent.
The increase in backlog in 20182021 was primarily due to orders exceeding shipments in the commercial and military OEM businesses and the commercial and military aftermarket businesses. The decrease in backlog in 2017 was primarily due tobusiness, partially offset by shipments exceeding orders in the military aftermarket and commercial and military OEM businesses, partially offset by orders exceeding shipments in the commercial and military aftermarket businesses. 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.
Corporate general & administrative expenses
For 2019, sales are expected to increase between 2.5 | | | | | | | | | | | | | | |
| (dollars in millions) | | 2021 | | 2020 |
| Expense (income) | | | | |
| Corporate general and administrative expense | | $ | 178 | | | $ | 171 | |
| Corporate general and administrative expense, as a percent of sales | | 1.2 | % | | 1.2 | % |
Corporate general and 4.5 percent from the 2018 level and operating margins are expected to range from 17.2 to 17.6 percent. A higher concentration of commercial OEM volumeadministrative expenses increased slightly in future product mix and higher than expected new product development costs could result in lower margins.
The increase in assets in 2018 was2021 primarily due to increases in trade accounts receivablestock compensation expense, deferred compensation expense and other receivables,charitable contributions. These increases were partially offset by benefits from lower discretionary spending and wage and salary expense as a decreaseresult of actions taken in other assets. The decrease in assets in 2017 was primarily dueresponse to a decrease in trade accounts receivable, intangible assets and other assets, partially offset by an increase in cash and cash equivalents and inventory.
Corporate general and administrative expenses were $200.9 million in 2018 compared to $172.6 million in 2017 and $173.2 million in 2016. As a percent of sales, corporate general and administrative expenses in both 2018 and 2017 were 1.4 percent compared to 1.5 percent in 2016. The higher expense in 2018 was primarily due to higher expenses associated with the Company's incentive compensation programs. The lower expense in 2017 was primarily due to lower expenses associated with the Company's deferred compensation program as well as lower professional services fees.
Corporate assets decreased 28.9 percent in 2018 compared to a decrease of 62.1 percent from 2016 to 2017. The decrease in Corporate assets in 2018 was primarily due to a decrease in cash and cash equivalents, partially offset by an increase in non-current deferred taxes. The decrease in Corporate assets in 2017 was primarily due to decreases in cash and cash equivalents, marketable securities and non-current deferred taxes. Decreases in these assets in 2017 primarily resultedbusiness conditions resulting from the Clarcor acquisition.COVID-19 pandemic.
Other (income) expense (in the Business Segment Information)
| | | (dollars in millions) | | | | | | (dollars in millions) | | 2021 | | 2020* |
| Expense (income) | 2018 | | 2017 | | 2016 | Expense (income) | | | | |
| Foreign currency transaction | $ | 7 |
| | $ | 8 |
| | $ | 23 |
| Foreign currency transaction | | $ | (11) | | | $ | (10) | |
| Stock-based compensation | 51 |
| | 52 |
| | 49 |
| Stock-based compensation | | 61 | | | 52 | |
| Pensions | 26 |
| | 78 |
| | 116 |
| Pensions | | 22 | | | 30 | |
| Divestitures and asset sales and writedowns | (4 | ) | | (43 | ) | | (11 | ) | |
| Sale and writedown of investments | 41 |
| | — |
| | — |
| |
| Acquisition expenses | | Acquisition expenses | | 5 | | | 119 | |
| Gain on disposal of assets | | Gain on disposal of assets | | (109) | | | (1) | |
| Interest income | (15 | ) | | (12 | ) | | (18 | ) | Interest income | | (7) | | | (31) | |
| Acquisition expenses | 5 |
| | 41 |
| | — |
| |
| Other items, net | 11 |
| | 3 |
| | (8 | ) | Other items, net | | 2 | | | (7) | |
| | $ | 122 |
| | $ | 127 |
| | $ | 151 |
| | $ | (37) | | | $ | 152 | |
Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. The lower pension expensePrior-year acquisition expenses primarily relate to the acquisitions of Lord and Exotic. Gain on disposal of assets in 2018 is2021 primarily due toconsists of a lower levelgain of amortization$101 million on the sale of past actuarial losses. The lower pension expense in 2017 is primarily due to a change in methodology to useland. In 2020, it includes gains of $12 million on the spot yield curve approach to estimate the interest cost componentsale of real estate, partially offset by net periodic pension cost instead of the single-weighted average discount rate. Divestitureslosses on divestitures and asset sales and writedowns in 2018 includes a net gain on the sale of assets, partially offset by a loss on the sale of the global Facet filtration business. Divestitures and asset sales and writedowns in 2017 includes a gain on the sale of the Company's Autoline product line. Acquisition expenses in 2017 primarily relate to Clarcor (see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion).writedowns..
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) | | 2021 | | 2020* |
| Cash | | $ | 772 | | | $ | 756 | |
| Trade accounts receivable, net | | 2,184 | | | 1,854 | |
| Inventories | | 2,091 | | | 1,964 | |
| | | | |
| | | | |
| Notes payable and long-term debt payable within one year | | 3 | | | 810 | |
| Long-term debt | | 6,582 | | | 7,652 | |
| Shareholders' equity | | 8,398 | | | 6,227 | |
| Working capital | | $ | 2,520 | | | $ | 1,886 | |
| Current ratio | | 1.8 | | | 1.6 | |
*Year ended June 30, 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements. |
| | | | | | | | |
| (dollars in millions) | | 2018 | | 2017 |
| Cash | | $ | 855 |
| | $ | 924 |
|
| Trade accounts receivable, net | | 2,146 |
| | 1,931 |
|
| Inventories | | 1,621 |
| | 1,549 |
|
| Shareholders' equity | | 5,860 |
| | 5,262 |
|
| Working capital | | $ | 1,888 |
| | $ | 1,384 |
|
| Current ratio | | 1.6 |
| | 1.4 |
|
Cash (comprised of cash and cash equivalents and marketable securities and other investments)includes $836$467 million and $874$726 million held by the Company's foreign subsidiaries at June 30, 20182021 and 2017,2020, respectively. 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 be distributed between the Company's subsidiaries. The Company has determined it will no longerdoes not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested. Refer to Note 45 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on 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 5150 days in both 20182021 and 2017. The Company believes54 days in 2020. We believe that itsour receivables are collectible and appropriate allowances for doubtful accountscredit losses have been recorded.
Inventories as of June 30, 2021 increased $72by $127 million (which includes an increase of $41 million from 2017the effect of foreign currency translation). After consideration of the effect of foreign currency translation, inventories increased primarily due to a $107 millionan increase in inventories in the Diversified Industrial Segment, partially offset by a decrease of $20 million related to a sale of a business and a decrease of $10 million in the Aerospace Systems Segment. Days supply of inventory on hand was 6475 days in 20182021 and 6789 days in 2017.2020.
Notes payable and long-term debt payable within one year decreased from 2020 primarily due to the repayment of commercial paper notes outstanding. Refer to Note 9to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Long-term debt decreasedfrom 2020 primarily due to the repayment of term loans. 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 20182021 included a decrease of $300$100 million related to share repurchases, an increase of $179$664 million related to pensions and postretirement benefits resulting from net actuarialinvestment gains on plan assets and amortizations and a decreasean increase of $18$328 million related to foreign currency translation adjustments.
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) | | 2021 | | 2020 |
| Cash provided by (used in): | | | | |
| Operating activities | | $ | 2,575 | | | $ | 2,071 | |
| Investing activities | | — | | | (5,024) | |
| Financing activities | | (2,623) | | | 449 | |
| Effect of exchange rates | | 96 | | | (30) | |
| Net increase (decrease) in cash and cash equivalents | | $ | 48 | | | $ | (2,534) | |
|
| | | | | | | | | | | | |
| (dollars in millions) | | 2018 | | 2017 | | 2016 |
| Cash provided by (used in): | | | | | | |
| Operating activities | | $ | 1,600 |
| | $ | 1,302 |
| | $ | 1,211 |
|
| Investing activities | | 20 |
| | (3,365 | ) | | (265 | ) |
| Financing activities | | (1,682 | ) | | 1,783 |
| | (843 | ) |
| Effect of exchange rates | | (1 | ) | | (57 | ) | | (62 | ) |
| Net (decrease) increase in cash and cash equivalents | | $ | (63 | ) | | $ | (337 | ) | | $ | 41 |
|
Cash flows from operating activities in 20182021 reflects an increase in net income from 2017 of $77$545 million and a reduction of $251 million for cash used by working capital items. Cash flows from operating activities in 2017 reflects an increase in net income from 2016 of $177 million and a reduction of $28 million for cash used by working capital items. Cash flows from operating activities in 2016 reflects an increase of $120$12 million forfrom cash provided by working capital items. The Company also made discretionary cash contributions to the Company's domestic qualified defined benefit plan of $220 million in 2017We remain focused on managing our inventory and $200 million in 2016.other working capital requirements.
Cash flows from investing activities in 2018 benefited2021 includes net proceeds from proceeds related to the sale of the global Facet filtration business, and saleland of plant and equipment. Cash flows from investing activity in 2017 includes $4,069 million related to acquisition activities, primarily for the Clarcor acquisition.approximately $111 million. Cash flows from investing activities in 2018, 2017, and 20162020 includes $5,076 million of acquisition-related activity. It also includes $3$121 million $814of proceeds from the redemption of company-owned life insurance investments associated with the Company's deferred compensation programs as well as proceeds of $44 million and $(51) million, respectively, in net maturities (purchases)related to the settlement of marketable securities and other investments.a cross-currency swap.
Cash flows from financing activities during 2018 included the repaymentin 2021 includes net commercial paper repayments of long-term debt$723 million and term loan repayments of approximately $945$1,210 million. Cash flows from financing activities during 2017 includedin 2020 includes proceeds from the issuance of the $925 million and $800 million term loans and therepayment of approximately $2,646$740 million of notional borrowingslong-term debt. Refer to Note 10to the Consolidated Financial Statements in Part II, Item 8 of long-term debt as well as the repayment of long-term debt of approximately $381 million, which includes debt assumed in the Clarcor acquisition.this Annual Report on Form 10-K for further discussion. The Company repurchased 1.70.3 million common shares for $300$100 million during 2018 as2021 compared to the repurchase of 2.00.8 million common shares for $265$147 million in 2017 and 5.1 million common shares for $558 million in 2016.2020.
Dividends have been paid for 272284 consecutive quarters, including a yearly increase in dividends for the last 6265 years. The current annual dividend rate is $3.04$4.12 per common share.
The Company’sOur goal is to maintain no less than an “A”investment-grade credit profile. The rating on senior debt to ensure availability and reasonable cost of external funds. In periods following significant capital deployment, including for share repurchases or acquisitions, certain of theagencies periodically update our credit ratings assigned to the Company's senior debt may be, and at June 30, 2018 and 2017 were, lower than the stated goal. The Company's ability to borrow funds at desirable tenors and interest rates in 2018 and 2017 was not significantly impacted by certain ratings on senior debt that were below an "A" level. The Company does not believe that its ability to borrow funds in the future at desirable tenors and affordable interest rates will be impacted if certain of its ratings are below an "A" level at the time of such borrowings.as events occur. At June 30, 2018,2021, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:
|
| | | | | | | |
| Fitch Ratings | | A-BBB+ |
| Moody's Investor Services, Inc. | | Baa1 |
| Standard & Poor's | | ABBB+ |
As of June 30, 2018,We continue to actively monitor our liquidity position and working capital needs and prioritize capital expenditures related to safety and strategic investments. The Company remains in a stable overall capital resources and liquidity position that is adequate to meet its projected needs. In March 2020, the Company hadsuspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During February 2021, the Company reinitiated the share repurchase program and repurchased shares totaling $100 million during the remainder of the fiscal year.
The Company has a line of credit totaling $2,000$2,500 million through a multi-currency revolving credit agreement with a group of banks, all of which $1,466 million was available atas of June 30, 2018.2021. The credit agreement expires in September 2024; 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 is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would 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. 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 $2,000$2,500 million of short-term commercial paper notes. There were $534 millionno outstanding commercial paper notes as of June 30, 2018,2021, and the largest amount of commercial paper notes outstanding during the last quarter of 20182021 was $736$203 million.
The Company'sCompany’s credit agreements and indentures governing certain debt agreementssecurities contain various covenants, the violation of which would limit or preclude the use of the applicablecredit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. The Company isindentures. Based on the Company’s rating level at June 30, 2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At June 30, 2021, the Company's debt to debt-shareholders' equity ratio was 0.44 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and expects to remain in compliance duringindentures.
On August 2, 2021, the termCompany announced that it reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt for 800 pence per share, or approximately £6,308 million. We intend to fund the proposed acquisition with cash and new debt. The proposed acquisition remains subject to customary closing conditions, including regulatory clearances and approval by Meggitt’s shareholders.
In connection with the proposed acquisition, the Company entered into a bridge credit agreements and indentures.agreement (the "Bridge Credit Agreement") on August 2, 2021. Under the Bridge Credit Agreement, lenders are committed to provide senior, unsecured financing in the aggregate principal amount of £6,524 million. Any borrowings made under the Bridge Credit Agreement would mature 364 days from the initial funding date. The commitments are intended to be drawn to finance the proposed acquisition of Meggitt only to the extent that we do not arrange for alternative financing prior to closing.
Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $175$119 million at June 30, 2018.2021. 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 | (dollars in millions) | | Payments due by period |
| Contractual obligations | | Total |
| | Less than 1 year |
| | 1-3 years |
| | 3-5 years |
| | More than 5 years |
| Contractual obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Transition tax payments related to TCJ Act (Note 4) | | $ | 255 |
| | $ | 20 |
| | $ | 41 |
| | $ | 41 |
| | $ | 153 |
| |
Long-term debt (Note 9) | | 4,460 |
| | 100 |
| | — |
| | 417 |
| | 3,943 |
| |
Transition tax payments related to U.S. Tax Cuts and Jobs Act ("TCJ Act") (Note 5) | | Transition tax payments related to U.S. Tax Cuts and Jobs Act ("TCJ Act") (Note 5) | | $ | 187 | | | $ | — | | | $ | 59 | | | $ | 128 | | | $ | — | |
Long-term debt (Note 10) | | Long-term debt (Note 10) | | 6,646 | | | 3 | | | 879 | | | 1,331 | | | 4,433 | |
| Interest on long-term debt | | 2,375 |
| | 152 |
| | 303 |
| | 279 |
| | 1,641 |
| Interest on long-term debt | | 3,207 | | | 227 | | | 436 | | | 363 | | | 2,181 | |
Operating leases (Note 9) | | 226 |
| | 79 |
| | 92 |
| | 27 |
| | 28 |
| |
Retirement benefits (Note 10) | | 124 |
| | 76 |
| | 12 |
| | 11 |
| | 25 |
| |
Operating leases (Note 11) | | Operating leases (Note 11) | | 142 | | | 42 | | | 49 | | | 26 | | | 25 | |
Retirement benefits (Note 12) | | Retirement benefits (Note 12) | | 146 | | | 108 | | | 10 | | | 9 | | | 19 | |
| Total | | $ | 7,440 |
| | $ | 427 |
| | $ | 448 |
| | $ | 775 |
| | $ | 5,790 |
| Total | | $ | 10,328 | | | $ | 380 | | | $ | 1,433 | | | $ | 1,857 | | | $ | 6,658 | |
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") 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 Diversified Industrial Segmentcontract, 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 our 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 our revenues are recognized over time if the customer simultaneously receives control as we perform work under a contract, if the customer controls the asset as it is being produced, or if the product has no alternative use and we have a contractual right to payment.
For contracts where revenue is shipped. The Aerospace Systems Segment recognizes revenues primarily usingrecognized over time, we use the percentage-of-completioncost-to-cost, efforts expended or units of delivery method anddepending on the extentnature of progress toward completion is primarily measured using the units-of-delivery method. The Company estimates costs to complete long-term contracts for purposescontract, including length of evaluating and establishing contract reserves.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.
We consider 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 our best judgment at the time.
Impairment of Goodwilland Long-Lived Assets - Goodwill is testedWe test 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 Company, aOur six reporting unit is one level below theunits are equivalent to our operating segment level. Determiningsegments. As quoted market prices are not available for our reporting units, determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistentlyis estimated using primarily a discounted cash flow model.both income-based and market-based valuation methods. The Company believes that the use ofincome-based valuation method utilizes 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 analysiswhich requires 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 consistently useduses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor. The Companymarket-based valuation performed for each reporting unit includes an analysis consisting of market-adjusted multiples based on key data points for guideline public companies. We also reconcilesreconcile the estimated aggregate fair value of itsour reporting units as derivedresulting from the discounted cash flow analysisthese procedures to the Company'sour overall market capitalization.
The results of
At December 31, 2020, the Company's 2018Company performed its annual goodwill impairment test performed asfor each of December 31, 2017its six reporting units. The results of this test indicated that no goodwill impairment existed. However, certainthe fair value substantially exceeded carrying value for all reporting units within the Diversified Industrial Segment had estimated fair values that the Company determined, from a quantitative and qualitative perspective, were not significantly in excess of their carrying values. For these reporting units, the sales growth assumptions had the most significant influence on the estimation of fair value. The key uncertainties in these sales growth assumptions include end-market growth, the ability to secure business with new customers and new product development. The Companyunits. We continually monitors itsmonitor our reporting units for impairment indicators and updatesupdate assumptions used in the most recent calculation of thea reporting unit's fair value of a reporting unit as appropriate. The Company is unawareWe did not identify any events or circumstances during 2021 that required performance 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, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwillan interim impairment tests.test.
Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2018, there were no events or circumstances that indicated that2021, the carrying valueCompany did not record any material impairment 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 changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs from the single-weighted average discount rate to spot yield curve approach. 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 was accounted for as a change in estimate prospectively beginning in the first quarter of 2017. Annual net periodic pension expense in 2017 was lower by approximately $30 million compared to the previous method. Annual net periodic postretirement cost was not 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 $14an $18 million effect onincrease in annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $17$27 million. As of June 30, 2018, $8412021, $707 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 seven 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 1012 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.
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, lowering the U.S. corporate income tax rate and creating a territorial tax system (with a one time transition tax imposed on previously unremitted foreign earnings and profits). The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year of the TCJ Act’s enactment date, to complete the applicable accounting of the related tax impacts of the TCJ Act. The final impact of the TCJ Act may differ from the provisional amounts recorded in the current period, due to, among other things, any updates to estimates that have been utilized in the calculation of the tax impacts, changes in interpretation of the existing law, or additional guidance from U. S. Treasury department or the Internal Revenue Service.
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. TheseWe review these loss accruals are reviewed periodically and make adjustments are made to reflect the most recent facts and circumstances.
RECENTLY 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.
In November 2020, the SEC issued Final Rule Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. This rule, which became effective on February 10, 2021, amended certain SEC disclosure requirements in order to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the amendments eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend Management's Discussion and Analysis. The final rule is applicable for fiscal years ending on or after August 9, 2021, however, early adoption on an Item-by-Item basis is permitted after February 10, 2021. We early adopted the amendments to two items resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of this report and the omission of Regulation S-K Item 302(a), Supplementary Financial Information, from the notes to our consolidated financial statements in Part II, Item 8 of this report.
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 doeswe do 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 derivativesDerivatives that are not designated as hedges are adjusted to fair value by recording gains and losses through the Consolidated Statement of Income. Gains or losses on derivativesDerivatives that are designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. For cross-currency swaps measured using the spot method, the periodic interest settlements are recognized directly in earnings through interest expense. 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. AAt June 30, 2021, our debt portfolio did not include any variable rate debt. However, a 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 2018weighted average commercial paper balances during 2021 by approximately $7$5 million.
As discussed elsewhere in this report, the COVID-19 pandemic is having, and likely will continue to have, an adverse effect on our business, and its future impacts remain unpredictable. As we cannot anticipate the ultimate duration or scope of the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.
ITEM 8. Financial Statements and Supplementary Data. | | | | | | | | |
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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, 20182021 and 2017,2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended June 30, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”"financial statements"). We also have audited the Company'sCompany’s internal control over financial reporting as of June 30, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018,2021, 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, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Notes 1 and 7 to the consolidated financial statements, the Company elected to change its method of accounting for certain inventories from the last-in, first-out (“LIFO”) cost method to the first-in, first-out (“FIFO”) cost method which has been retrospectively applied to the consolidated financial statements as of June 30, 2020 and 2019.
Basis for Opinions
The Company's Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company'sCompany’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 PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to frauderror or error,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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial 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'scompany’s internal control over financial reporting is a process designed 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'scompany’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'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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.
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 financial statements, taken as a whole, 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.
Revenue — Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
The Company is a highly diversified business with revenue derived from the sales of products in a variety of industrial and aerospace markets. The Company’s business activities are carried out by numerous individual business units, which offer unique technology and product platforms within specific geographic areas.
We identified revenue as a critical audit matter given the geographical dispersion of the Company’s operations and business units generating revenue. This required extensive audit effort due to the volume of the underlying transactions and distinctiveness of each individual business unit. High levels of auditor judgement were necessary to determine the nature, timing, and extent of audit procedures performed within the Company.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s revenue transactions included the following, among others:
•We tested the design and effectiveness of internal controls within the revenue business processes, including controls over revenue recognition and controls over the review of operating results.
•For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recorded as revenue to source documents and determined that revenue was recognized appropriately.
•For the revenue populations subject to detail testing, we tested the completeness of revenue by making selections from a reciprocal population (e.g. sales order listing) and determined whether the sales order was recorded as a sale in the general ledger.
•For revenue transactions not subject to detail transaction testing, we performed substantive analytical procedures. We developed independent expectations of revenue based on data derived from published industry indices, market and customer trends, and the results of our detail revenue testing and compared these expectations to the revenue recorded by management.
/S/s/ DELOITTE & TOUCHE, LLP
Cleveland, Ohio
August 24, 201825, 2021
We have served as the Company's auditor since 2008.
CONSOLIDATED STATEMENT OF INCOME
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended June 30, |
| (Dollars in thousands, except per share amounts) | | 2021 | | 2020* | | 2019* |
| Net Sales | | $ | 14,347,640 | | | $ | 13,695,520 | | | $ | 14,320,324 | |
| Cost of sales | | 10,449,680 | | | 10,292,291 | | | 10,688,970 | |
| | | | | | |
| Selling, general and administrative expenses | | 1,527,302 | | | 1,656,553 | | | 1,543,939 | |
| | | | | | |
| Interest expense | | 250,036 | | | 308,161 | | | 190,138 | |
| Other income, net | | (17,003) | | | (67,112) | | | (61,247) | |
| (Gain) loss on disposal of assets | | (109,332) | | | (1,227) | | | 9,049 | |
| Income before income taxes | | 2,246,957 | | | 1,506,854 | | | 1,949,475 | |
| Income taxes | | 500,096 | | | 304,522 | | | 424,392 | |
| Net Income | | 1,746,861 | | | 1,202,332 | | | 1,525,083 | |
| Less: Noncontrolling interest in subsidiaries' earnings | | 761 | | | 362 | | | 567 | |
| Net Income Attributable to Common Shareholders | | $ | 1,746,100 | | | $ | 1,201,970 | | | $ | 1,524,516 | |
| | | | | | |
| Earnings per Share Attributable to Common Shareholders | | | | | | |
| Basic earnings per share | | $ | 13.54 | | | $ | 9.36 | | | $ | 11.73 | |
| Diluted earnings per share | | $ | 13.35 | | | $ | 9.26 | | | $ | 11.57 | |
|
| | | | | | | | | | | | |
| | | For the years ended June 30, |
| (Dollars in thousands, except per share amounts) | | 2018 |
| | 2017 |
| | 2016 |
|
| Net Sales | | $ | 14,302,392 |
| | $ | 12,029,312 |
| | $ | 11,360,753 |
|
| Cost of sales | | 10,762,841 |
| | 9,188,962 |
| | 8,823,384 |
|
| Selling, general and administrative expenses | | 1,657,152 |
| | 1,453,935 |
| | 1,359,360 |
|
| Interest expense | | 213,873 |
| | 162,436 |
| | 136,517 |
|
| Other (income), net | | (29,268 | ) | | (61,401 | ) | | (62,199 | ) |
| (Gain) on disposal of assets (Note 2) | | (4,483 | ) | | (43,261 | ) | | (11,037 | ) |
| Income before income taxes | | 1,702,277 |
| | 1,328,641 |
| | 1,114,728 |
|
| Income taxes (Note 4) | | 640,962 |
| | 344,797 |
| | 307,512 |
|
| Net Income | | 1,061,315 |
| | 983,844 |
| | 807,216 |
|
| Less: Noncontrolling interest in subsidiaries' earnings | | 514 |
| | 432 |
| | 376 |
|
| Net Income Attributable to Common Shareholders | | $ | 1,060,801 |
| | $ | 983,412 |
| | $ | 806,840 |
|
| | | | | | | |
| Earnings per Share Attributable to Common Shareholders (Note 5) | | | | | | |
| Basic earnings per share | | $ | 7.98 |
| | $ | 7.37 |
| | $ | 5.96 |
|
| Diluted earnings per share | | $ | 7.83 |
| | $ | 7.25 |
| | $ | 5.89 |
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended June 30, |
| (Dollars in thousands) | | 2021 | | 2020* | | 2019* |
| Net Income | | $ | 1,746,861 | | | $ | 1,202,332 | | | $ | 1,525,083 | |
| Less: Noncontrolling interests in subsidiaries' earnings | | 761 | | | 362 | | | 567 | |
| Net income attributable to common shareholders | | 1,746,100 | | | 1,201,970 | | | 1,524,516 | |
| | | | | | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Foreign currency translation adjustment and other (net of tax of $(3,664), $4,820 and $709 in 2021, 2020 and 2019) | | 328,792 | | | (182,957) | | | (66,392) | |
| Retirement benefits plan activity (net of tax of $(205,845), $97,477 and $71,821 in 2021, 2020 and 2019) | | 664,076 | | | (317,546) | | | (227,783) | |
| Other comprehensive income (loss) | | 992,868 | | | (500,503) | | | (294,175) | |
| Less: Other comprehensive income (loss) for noncontrolling interests | | 720 | | | (676) | | | 53 | |
| Other comprehensive income (loss) attributable to common shareholders | | 992,148 | | | (499,827) | | | (294,228) | |
| Total Comprehensive Income Attributable to Common Shareholders | | $ | 2,738,248 | | | $ | 702,143 | | | $ | 1,230,288 | |
|
| | | | | | | | | | | | |
| | | For the years ended June 30, |
| (Dollars in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
| Net Income | | $ | 1,061,315 |
| | $ | 983,844 |
| | $ | 807,216 |
|
| Less: Noncontrolling interests in subsidiaries' earnings | | 514 |
| | 432 |
| | 376 |
|
| Net income attributable to common shareholders | | 1,060,801 |
| | 983,412 |
| | 806,840 |
|
| | | | | | | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Foreign currency translation adjustment and other (net of tax of $16,964, $40,935 and $(2,342) in 2018, 2017 and 2016) | | (18,575 | ) | | (80,865 | ) | | (203,299 | ) |
| Retirement benefits plan activity (net of tax of $(82,506), $(218,590) and $152,203 in 2018, 2017 and 2016) | | 179,253 |
| | 384,784 |
| | (286,044 | ) |
| Other comprehensive income (loss) | | 160,678 |
| | 303,919 |
| | (489,343 | ) |
| Less: Other comprehensive income (loss) for noncontrolling interests | | (440 | ) | | 358 |
| | (196 | ) |
| Other comprehensive income (loss) attributable to common shareholders | | 161,118 |
| | 303,561 |
| | (489,147 | ) |
| Total Comprehensive Income Attributable to Common Shareholders | | $ | 1,221,919 |
| | $ | 1,286,973 |
| | $ | 317,693 |
|
The accompanying notes are an integral part of the consolidated financial statements.
BUSINESS SEGMENT INFORMATION
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020* | | 2019* |
| Net Sales: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 6,676,449 | | | $ | 6,456,298 | | | $ | 6,808,948 | |
| International | | 5,283,710 | | | 4,504,587 | | | 5,000,599 | |
| Aerospace Systems | | 2,387,481 | | | 2,734,635 | | | 2,510,777 | |
| | $ | 14,347,640 | | | $ | 13,695,520 | | | $ | 14,320,324 | |
| Segment Operating Income: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 1,247,419 | | | $ | 985,944 | | | $ | 1,138,586 | |
| International | | 988,054 | | | 674,763 | | | 804,890 | |
| Aerospace Systems | | 402,895 | | | 476,900 | | | 487,757 | |
| Total segment operating income | | 2,638,368 | | | 2,137,607 | | | 2,431,233 | |
| Corporate administration | | 178,427 | | | 170,903 | | | 194,994 | |
| Income before interest expense and other expense | | 2,459,941 | | | 1,966,704 | | | 2,236,239 | |
| Interest expense | | 250,036 | | | 308,161 | | | 190,138 | |
| Other (income) expense | | (37,052) | | | 151,689 | | | 96,626 | |
| Income before income taxes | | $ | 2,246,957 | | | $ | 1,506,854 | | | $ | 1,949,475 | |
| | | | | | |
| Assets: | | | | | | |
| Diversified Industrial | | $ | 16,518,688 | | | $ | 15,973,576 | | | $ | 13,189,204 | |
Aerospace Systems(a) | | 3,077,395 | | | 3,251,522 | | | 1,546,053 | |
| Corporate | | 745,117 | | | 662,655 | | | 2,996,771 | |
| | $ | 20,341,200 | | | $ | 19,887,753 | | | $ | 17,732,028 | |
| | | | | | |
| Property Additions: | | | | | | |
| Diversified Industrial | | $ | 186,233 | | | $ | 183,981 | | | $ | 172,348 | |
| Aerospace Systems | | 20,705 | | | 44,546 | | | 20,748 | |
| Corporate | | 3,019 | | | 4,064 | | | 1,993 | |
| | $ | 209,957 | | | $ | 232,591 | | | $ | 195,089 | |
| | | | | | |
| Depreciation: | | | | | | |
| Diversified Industrial | | $ | 229,891 | | | $ | 218,092 | | | $ | 203,144 | |
| Aerospace Systems | | 32,151 | | | 27,749 | | | 16,268 | |
| Corporate | | 7,901 | | | 7,058 | | | 6,263 | |
| | $ | 269,943 | | | $ | 252,899 | | | $ | 225,675 | |
| | | | | | |
| Amortization: | | | | | | |
| Diversified Industrial | | $ | 274,368 | | | $ | 243,714 | | | $ | 196,680 | |
| Aerospace Systems | | 51,079 | | | 40,918 | | | 3,072 | |
| | $ | 325,447 | | | $ | 284,632 | | | $ | 199,752 | |
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
| Net Sales: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 6,726,900 |
| | $ | 5,366,809 |
| | $ | 4,955,211 |
|
| International | | 5,259,793 |
| | 4,377,776 |
| | 4,145,272 |
|
| Aerospace Systems | | 2,315,699 |
| | 2,284,727 |
| | 2,260,270 |
|
| | | $ | 14,302,392 |
| | $ | 12,029,312 |
| | $ | 11,360,753 |
|
| Segment Operating Income: | | | | | | |
| Diversified Industrial: | | | | | | |
| North America | | $ | 1,076,021 |
| | $ | 873,552 |
| | $ | 789,667 |
|
| International | | 765,188 |
| | 579,207 |
| | 448,457 |
|
| Aerospace Systems | | 397,970 |
| | 337,496 |
| | 337,531 |
|
| Total segment operating income | | 2,239,179 |
| | 1,790,255 |
| | 1,575,655 |
|
| Corporate administration | | 200,901 |
| | 172,632 |
| | 173,203 |
|
| Income before interest expense and other expense | | 2,038,278 |
| | 1,617,623 |
| | 1,402,452 |
|
| Interest expense | | 213,873 |
| | 162,436 |
| | 136,517 |
|
| Other expense | | 122,128 |
| | 126,546 |
| | 151,207 |
|
| Income before income taxes | | $ | 1,702,277 |
| | $ | 1,328,641 |
| | $ | 1,114,728 |
|
| | | | | | | |
| Assets: | | | | | | |
| Diversified Industrial | | $ | 13,368,619 |
| | $ | 13,366,981 |
| | $ | 8,728,671 |
|
| Aerospace Systems (a) | | 1,446,745 |
| | 1,412,707 |
| | 1,430,577 |
|
| Corporate | | 504,723 |
| | 710,216 |
| | 1,874,894 |
|
| | | $ | 15,320,087 |
| | $ | 15,489,904 |
| | $ | 12,034,142 |
|
| | | | | | | |
| Property Additions: | | | | | | |
| Diversified Industrial | | $ | 196,469 |
| | $ | 148,765 |
| | $ | 134,618 |
|
| Aerospace Systems | | 15,225 |
| | 16,929 |
| | 10,857 |
|
| Corporate | | 35,973 |
| | 38,054 |
| | 3,932 |
|
| | | $ | 247,667 |
| | $ | 203,748 |
| | $ | 149,407 |
|
| | | | | | | |
| Depreciation: | | | | | | |
| Diversified Industrial | | $ | 211,648 |
| | $ | 176,823 |
| | $ | 163,014 |
|
| Aerospace Systems | | 16,737 |
| | 17,484 |
| | 18,469 |
|
| Corporate | | 9,421 |
| | 8,561 |
| | 8,825 |
|
| | | $ | 237,806 |
| | $ | 202,868 |
| | $ | 190,308 |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
By Geographic Area(b) | | | | | | |
| Net Sales: | | | | | | |
| North America | | $ | 9,046,162 | | | $ | 9,166,773 | | | $ | 9,318,195 | |
| International | | 5,301,478 | | | 4,528,747 | | | 5,002,129 | |
| | $ | 14,347,640 | | | $ | 13,695,520 | | | $ | 14,320,324 | |
| Long-Lived Assets: | | | | | | |
| North America | | $ | 1,448,109 | | | $ | 1,494,858 | | | $ | 1,052,263 | |
| International | | 818,367 | | | 797,877 | | | 716,024 | |
| | $ | 2,266,476 | | | $ | 2,292,735 | | | $ | 1,768,287 | |
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
| By Geographic Area (b) | | | | | | |
| Net Sales: | | | | | | |
| North America | | $ | 8,978,490 |
| | $ | 7,585,689 |
| | $ | 7,144,481 |
|
| International | | 5,323,902 |
| | 4,443,623 |
| | 4,216,272 |
|
| | | $ | 14,302,392 |
| | $ | 12,029,312 |
| | $ | 11,360,753 |
|
| Long-Lived Assets: | | | | | | |
| North America | | $ | 1,103,308 |
| | $ | 1,145,127 |
| | $ | 817,872 |
|
| International | | 752,929 |
| | 792,165 |
| | 750,228 |
|
| | | $ | 1,856,237 |
| | $ | 1,937,292 |
| | $ | 1,568,100 |
|
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) | 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 (2018 - $235,665; 2017 - $240,182; 2016 - $241,728). |
| |
(b) | 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.
|
(a) 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 (2021 - $219,081; 2020 - $237,911; 2019 - $234,703).
(b) 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 property, plant and equipment based on physical location.
*Years ended June 30, 2020 and 2019 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | |
| June 30, | | 2021 | | 2020* |
| Assets | | | | |
| Current Assets | | | | |
| Cash and cash equivalents | | $ | 733,117 | | | $ | 685,514 | |
| Marketable securities and other investments | | 39,116 | | | 70,805 | |
| Trade accounts receivable, net | | 2,183,594 | | | 1,854,398 | |
| Non-trade and notes receivable | | 326,315 | | | 244,870 | |
| Inventories | | 2,090,642 | | | 1,964,195 | |
| Prepaid expenses and other | | 243,966 | | | 214,986 | |
| Total Current Assets | | 5,616,750 | | | 5,034,768 | |
| Property, plant and equipment | | 6,040,220 | | | 5,810,681 | |
| Less: Accumulated depreciation | | 3,773,744 | | | 3,517,946 | |
| Property, plant and equipment, net | | 2,266,476 | | | 2,292,735 | |
| Deferred income taxes | | 104,251 | | | 126,839 | |
| Investments and other assets | | 774,239 | | | 764,563 | |
| Intangible assets, net | | 3,519,797 | | | 3,798,913 | |
| Goodwill | | 8,059,687 | | | 7,869,935 | |
| Total Assets | | $ | 20,341,200 | | | $ | 19,887,753 | |
| | | | |
| Liabilities and Equity | | | | |
| Current Liabilities | | | | |
| Notes payable and long-term debt payable within one year | | $ | 2,824 | | | $ | 809,529 | |
| Accounts payable, trade | | 1,667,878 | | | 1,111,759 | |
| Accrued payrolls and other compensation | | 507,027 | | | 424,231 | |
| Accrued domestic and foreign taxes | | 236,384 | | | 195,314 | |
| Other accrued liabilities | | 682,390 | | | 607,540 | |
| Total Current Liabilities | | 3,096,503 | | | 3,148,373 | |
| Long-term debt | | 6,582,053 | | | 7,652,256 | |
| Pensions and other postretirement benefits | | 1,055,638 | | | 1,887,414 | |
| Deferred income taxes | | 553,981 | | | 418,851 | |
| Other liabilities | | 639,355 | | | 539,089 | |
| Total Liabilities | | 11,927,530 | | | 13,645,983 | |
| Equity | | | | |
| Shareholders' Equity | | | | |
| Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued | | — | | | — | |
| Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2021 and 2020 | | 90,523 | | | 90,523 | |
| Additional capital | | 329,619 | | | 416,585 | |
| Retained earnings | | 14,915,497 | | | 13,643,907 | |
| Accumulated other comprehensive (loss) | | (1,566,727) | | | (2,558,875) | |
| Treasury shares at cost: 51,900,460 in 2021 and 52,490,165 in 2020 | | (5,370,605) | | | (5,364,916) | |
| Total Shareholders' Equity | | 8,398,307 | | | 6,227,224 | |
| Noncontrolling interests | | 15,363 | | | 14,546 | |
| Total Equity | | 8,413,670 | | | 6,241,770 | |
| Total Liabilities and Equity | | $ | 20,341,200 | | | $ | 19,887,753 | |
|
| | | | | | | | |
| (Dollars in thousands) | | |
| June 30, | | 2018 |
| | 2017 |
|
| Assets | | | | |
| Current Assets | | | | |
| Cash and cash equivalents (Note 1) | | $ | 822,137 |
| | $ | 884,886 |
|
| Marketable securities and other investments (Note 1) | | 32,995 |
| | 39,318 |
|
| Trade accounts receivable, net (Note 1) | | 2,145,517 |
| | 1,930,751 |
|
| Non-trade and notes receivable (Note 1) | | 328,399 |
| | 254,987 |
|
| Inventories (Note 6) | | 1,621,304 |
| | 1,549,494 |
|
| Prepaid expenses | | 134,886 |
| | 120,282 |
|
| Total Current Assets | | 5,085,238 |
| | 4,779,718 |
|
| Plant and equipment (Note 1) | | 5,215,253 |
| | 5,186,748 |
|
| Less: Accumulated depreciation | | 3,359,016 |
| | 3,249,456 |
|
| Plant and equipment, net | | 1,856,237 |
| | 1,937,292 |
|
| Deferred income taxes (Notes 1 and 4) | | 57,623 |
| | 36,057 |
|
| Investments and other assets (Note 1) | | 801,049 |
| | 842,475 |
|
| Intangible assets, net (Notes 1 and 7) | | 2,015,520 |
| | 2,307,484 |
|
| Goodwill (Notes 1 and 7) | | 5,504,420 |
| | 5,586,878 |
|
| Total Assets | | $ | 15,320,087 |
| | $ | 15,489,904 |
|
| | | | | |
| Liabilities and Equity | | | | |
| Current Liabilities | | | | |
| Notes payable and long-term debt payable within one year (Notes 8 and 9) | | $ | 638,466 |
| | $ | 1,008,465 |
|
| Accounts payable, trade | | 1,430,306 |
| | 1,300,496 |
|
| Accrued payrolls and other compensation | | 427,500 |
| | 435,911 |
|
| Accrued domestic and foreign taxes | | 198,878 |
| | 153,137 |
|
| Other accrued liabilities | | 502,333 |
| | 497,851 |
|
| Total Current Liabilities | | 3,197,483 |
| | 3,395,860 |
|
| Long-term debt (Note 9) | | 4,318,559 |
| | 4,861,895 |
|
| Pensions and other postretirement benefits (Note 10) | | 1,177,605 |
| | 1,406,082 |
|
| Deferred income taxes (Notes 1 and 4) | | 234,858 |
| | 221,790 |
|
| Other liabilities | | 526,089 |
| | 336,931 |
|
| Total Liabilities | | 9,454,594 |
| | 10,222,558 |
|
Equity (Note 11) | | | | |
| Shareholders' Equity | | | | |
| Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued | | — |
| | — |
|
| Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2018 and 2017 | | 90,523 |
| | 90,523 |
|
| Additional capital | | 496,592 |
| | 543,879 |
|
| Retained earnings | | 11,625,975 |
| | 10,930,348 |
|
| Accumulated other comprehensive (loss) | | (1,763,086 | ) | | (1,924,204 | ) |
| Treasury shares at cost: 48,632,105 in 2018 and 47,854,475 in 2017 | | (4,590,138 | ) | | (4,378,897 | ) |
| Total Shareholders' Equity | | 5,859,866 |
| | 5,261,649 |
|
| Noncontrolling interests | | 5,627 |
| | 5,697 |
|
| Total Equity | | 5,865,493 |
| | 5,267,346 |
|
| Total Liabilities and Equity | | $ | 15,320,087 |
| | $ | 15,489,904 |
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | | | For the years ended June 30, | | For the years ended June 30, |
| (Dollars in thousands) | | 2018 |
| | 2017 |
| | 2016 |
| (Dollars in thousands) | | 2021 | | 2020* | | 2019* |
| Cash Flows From Operating Activities | | | | | | | Cash Flows From Operating Activities | | | | | | |
| Net income | | $ | 1,061,315 |
| | $ | 983,844 |
| | $ | 807,216 |
| Net income | | $ | 1,746,861 | | | $ | 1,202,332 | | | $ | 1,525,083 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation | | 237,806 |
| | 202,868 |
| | 190,308 |
| Depreciation | | 269,943 | | | 252,899 | | | 225,675 | |
| Amortization | | 228,279 |
| | 152,361 |
| | 116,535 |
| Amortization | | 325,447 | | | 284,632 | | | 210,514 | |
| | Stock incentive plan compensation | | 118,831 |
| | 80,339 |
| | 71,293 |
| Stock incentive plan compensation | | 121,483 | | | 111,375 | | | 104,078 | |
| Deferred income taxes | | (41,412 | ) | | 37,024 |
| | (65,686 | ) | Deferred income taxes | | (51,500) | | | 12,290 | | | 36,435 | |
| Foreign currency transaction loss | | 7,284 |
| | 8,060 |
| | 22,750 |
| |
| (Gain) loss on sale of plant and equipment | | (24,422 | ) | | 1,494 |
| | 414 |
| |
| Loss (gain) on sale of businesses | | 19,666 |
| | (41,285 | ) | | (10,666 | ) | |
| Loss on sale and impairment of investments | | 41,219 |
| | — |
| | — |
| |
| (Gain) on sale of marketable securities | | (2 | ) | | (1,032 | ) | | (723 | ) | |
| Foreign currency transaction (gain) loss | | Foreign currency transaction (gain) loss | | (10,948) | | | (10,018) | | | 5,888 | |
| (Gain) loss on sale of property, plant and equipment | | (Gain) loss on sale of property, plant and equipment | | (109,332) | | | (1,850) | | | 5,091 | |
| Loss on sale of businesses | | Loss on sale of businesses | | — | | | — | | | 5,854 | |
| Gain on sale and impairment of investments | | Gain on sale and impairment of investments | | (12,616) | | | (2,084) | | | (16,749) | |
| | (Gain) loss on marketable securities | | (Gain) loss on marketable securities | | (11,570) | | | (587) | | | 7,563 | |
| Other | | Other | | 14,424 | | | 17,984 | | | — | |
| Changes in assets and liabilities, net of effects from acquisitions: | | | | | | | Changes in assets and liabilities, net of effects from acquisitions: | |
| Accounts receivable | | (301,978 | ) | | (95,347 | ) | | 17,549 |
| Accounts receivable | | (298,511) | | | 578,853 | | | 2,452 | |
| Inventories | | (92,209 | ) | | (73,673 | ) | | 120,243 |
| Inventories | | (85,597) | | | 206,937 | | | (67,867) | |
| Prepaid expenses | | (16,206 | ) | | 2,410 |
| | 136,034 |
| |
| Prepaid expenses and other | | Prepaid expenses and other | | (25,508) | | | (9,312) | | | (33,335) | |
| Other assets | | (13,293 | ) | | (3,887 | ) | | (5,033 | ) | Other assets | | (8,779) | | | (23,547) | | | 2,677 | |
| Accounts payable, trade | | 125,907 |
| | 174,761 |
| | (52,378 | ) | Accounts payable, trade | | 526,781 | | | (370,765) | | | (12,397) | |
| Accrued payrolls and other compensation | | (4,614 | ) | | 5,922 |
| | (22,865 | ) | Accrued payrolls and other compensation | | 72,412 | | | (62,715) | | | 2,088 | |
| Accrued domestic and foreign taxes | | 44,019 |
| | 18,165 |
| | (6,285 | ) | Accrued domestic and foreign taxes | | 36,552 | | | 30,918 | | | (30,593) | |
| Other accrued liabilities | | (5,567 | ) | | (59,738 | ) | | (31,633 | ) | Other accrued liabilities | | 11,397 | | | (148,531) | | | 16,698 | |
| Pensions and other postretirement benefits | | 31,239 |
| | (103,866 | ) | | (45,796 | ) | Pensions and other postretirement benefits | | 17,875 | | | 55,522 | | | (168,368) | |
| Other liabilities | | 184,425 |
| | 14,051 |
| | (30,499 | ) | Other liabilities | | 46,187 | | | (53,384) | | | (90,647) | |
| Net cash provided by operating activities | | 1,600,287 |
| | 1,302,471 |
| | 1,210,778 |
| Net cash provided by operating activities | | 2,575,001 | | | 2,070,949 | | | 1,730,140 | |
| Cash Flows From Investing Activities | | | | | | | Cash Flows From Investing Activities | |
| Acquisitions (less cash acquired of $157,426 in 2017 and $3,814 in 2016) | | — |
| | (4,069,197 | ) | | (67,552 | ) | |
| Acquisitions (net of cash acquired of $82,192 in 2020 and $690 in 2019) | | Acquisitions (net of cash acquired of $82,192 in 2020 and $690 in 2019) | | — | | | (5,076,064) | | | (2,042) | |
| Capital expenditures | | (247,667 | ) | | (203,748 | ) | | (149,407 | ) | Capital expenditures | | (209,957) | | | (232,591) | | | (195,089) | |
| Proceeds from sale of plant and equipment | | 81,881 |
| | 14,648 |
| | 18,821 |
| |
| Proceeds from sale of property, plant and equipment | | Proceeds from sale of property, plant and equipment | | 140,590 | | | 26,345 | | | 46,592 | |
| Proceeds from sale of businesses | | 177,741 |
| | 85,610 |
| | 24,325 |
| Proceeds from sale of businesses | | — | | | — | | | 19,678 | |
| | Purchase of marketable securities and other investments | | (80,607 | ) | | (465,666 | ) | | (1,351,464 | ) | Purchase of marketable securities and other investments | | (34,809) | | | (194,742) | | | (181,780) | |
| Maturities and sales of marketable securities and other investments | | 83,905 |
| | 1,279,318 |
| | 1,300,633 |
| Maturities and sales of marketable securities and other investments | | 79,419 | | | 275,483 | | | 74,908 | |
| Other | | 4,837 |
| | (6,113 | ) | | (39,995 | ) | Other | | 24,744 | | | 177,576 | | | 19,223 | |
| Net cash provided by (used in) investing activities | | 20,090 |
| | (3,365,148 | ) | | (264,639 | ) | |
| Net cash used in investing activities | | Net cash used in investing activities | | (13) | | | (5,023,993) | | | (218,510) | |
| Cash Flows From Financing Activities | | | | | | | Cash Flows From Financing Activities | |
| Proceeds from exercise of stock options | | 3,682 |
| | 2,202 |
| | 126 |
| Proceeds from exercise of stock options | | 4,684 | | | 2,623 | | | 2,475 | |
| Payments for common shares | | (381,041 | ) | | (338,078 | ) | | (587,365 | ) | Payments for common shares | | (218,818) | | | (216,049) | | | (860,052) | |
| Proceeds from notes payable, net | | 4,115 |
| | 230,499 |
| | 303,624 |
| |
| Acquisition of noncontrolling interests | | Acquisition of noncontrolling interests | | — | | | (1,200) | | | — | |
| (Payments of) proceeds from notes payable, net | | (Payments of) proceeds from notes payable, net | | (723,496) | | | 136,744 | | | 48,828 | |
| Proceeds from long-term borrowings | | 1,189 |
| | 2,614,463 |
| | 2,287 |
| Proceeds from long-term borrowings | | 1,213 | | | 1,721,211 | | | 2,336,749 | |
| Payments for long-term borrowings | | (944,629 | ) | | (381,078 | ) | | (220,068 | ) | Payments for long-term borrowings | | (1,211,748) | | | (740,181) | | | (213,226) | |
| Dividends paid | | (365,288 | ) | | (345,380 | ) | | (341,962 | ) | Dividends paid | | (475,174) | | | (453,838) | | | (412,468) | |
| Net cash (used in) provided by financing activities | | (1,681,972 | ) | | 1,782,628 |
| | (843,358 | ) | Net cash (used in) provided by financing activities | | (2,623,339) | | | 449,310 | | | 902,306 | |
| Effect of exchange rate changes on cash | | (1,154 | ) | | (56,718 | ) | | (61,712 | ) | Effect of exchange rate changes on cash | | 95,954 | | | (30,519) | | | (16,306) | |
| Net (decrease) increase in cash and cash equivalents | | (62,749 | ) | | (336,767 | ) | | 41,069 |
| |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | 47,603 | | | (2,534,253) | | | 2,397,630 | |
| Cash and cash equivalents at beginning of year | | 884,886 |
| | 1,221,653 |
| | 1,180,584 |
| Cash and cash equivalents at beginning of year | | 685,514 | | | 3,219,767 | | | 822,137 | |
| Cash and cash equivalents at end of year | | $ | 822,137 |
| | $ | 884,886 |
| | $ | 1,221,653 |
| Cash and cash equivalents at end of year | | $ | 733,117 | | | $ | 685,514 | | | $ | 3,219,767 | |
| Supplemental Data: | | | | | | | Supplemental Data: | | | | | | |
| Cash paid during the year for: | | | | | | | Cash paid during the year for: | |
| Interest | | $ | 200,860 |
| | $ | 131,937 |
| | $ | 133,999 |
| Interest | | $ | 236,979 | | | $ | 308,199 | | | $ | 169,378 | |
| Income taxes | | 408,765 |
| | 268,127 |
| | 250,155 |
| Income taxes | | 485,885 | | | 307,959 | | | 454,699 | |
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Common Stock | | Additional Capital | | Retained Earnings* | | | Accumulated Other Comprehensive (Loss) | | Treasury Shares | | Noncontrolling Interests | | Total* |
| Balance July 1, 2018 (As reported) | | $ | 90,523 | | | $ | 496,592 | | | $ | 11,625,975 | | | | $ | (1,763,086) | | | $ | (4,590,138) | | | $ | 5,627 | | | $ | 5,865,493 | |
| Inventory accounting method change | | | | | | 105,460 | | | | | | | | | | 105,460 | |
| Balance July 1, 2018* | | $ | 90,523 | | | $ | 496,592 | | | $ | 11,731,435 | | | | $ | (1,763,086) | | | $ | (4,590,138) | | | $ | 5,627 | | | $ | 5,970,953 | |
| Impact of adoption of accounting standards | | | | | | 51,603 | | | | (1,734) | | | | | | | 49,869 | |
| Net income* | | | | | | 1,524,516 | | | | | | | | 567 | | | 1,525,083 | |
| Other comprehensive income (loss) | | | | | | | | | (294,228) | | | | | 53 | | | (294,175) | |
| Dividends paid ($3.16 per share) | | | | | | (412,404) | | | | | | | | (64) | | | (412,468) | |
| Stock incentive plan activity | | | | (34,506) | | | | | | | | 81,007 | | | | | 46,501 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Shares purchased at cost | | | | | | | | | | | (799,999) | | | | | (799,999) | |
| Balance June 30, 2019* | | $ | 90,523 | | | $ | 462,086 | | | $ | 12,895,150 | | | | $ | (2,059,048) | | | $ | (5,309,130) | | | $ | 6,183 | | | $ | 6,085,764 | |
| | | | | | | | | | | | | | | |
| Net income* | | | | | | 1,201,970 | | | | | | | | 362 | | | 1,202,332 | |
| Other comprehensive (loss) | | | | | | | | | (499,827) | | | | | (676) | | | (500,503) | |
| Dividends paid ($3.52 per share) | | | | | | (453,213) | | | | | | | | (625) | | | (453,838) | |
| Stock incentive plan activity | | | | (46,265) | | | | | | | | 90,981 | | | | | 44,716 | |
| | | | | | | | | | | | | | | |
| Acquisition activity | | | | 764 | | | | | | | | | | 9,302 | | | 10,066 | |
| Shares purchased at cost | | | | | | | | | | | (146,767) | | | | | (146,767) | |
| Balance June 30, 2020* | | $ | 90,523 | | | $ | 416,585 | | | $ | 13,643,907 | | | | $ | (2,558,875) | | | $ | (5,364,916) | | | $ | 14,546 | | | $ | 6,241,770 | |
| Net income | | | | | | 1,746,100 | | | | | | | | 761 | | | 1,746,861 | |
| Other comprehensive income | | | | | | | | | 992,148 | | | | | 720 | | | 992,868 | |
| Dividends paid ($3.67 per share) | | | | | | (474,510) | | | | | | | | (664) | | | (475,174) | |
| Stock incentive plan activity | | | | (86,966) | | | | | | | | 94,311 | | | | | 7,345 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Shares purchased at cost | | | | | | | | | | | (100,000) | | | | | (100,000) | |
| Balance June 30, 2021 | | $ | 90,523 | | | $ | 329,619 | | | $ | 14,915,497 | | | | $ | (1,566,727) | | | $ | (5,370,605) | | | $ | 15,363 | | | $ | 8,413,670 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Treasury Shares | | Noncontrolling Interests | | Total |
| 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 income (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 |
|
| Net income | |
| |
| | 983,412 |
| |
| |
| | 432 |
| | 983,844 |
|
| Other comprehensive income (loss) | |
| |
| |
| | 303,561 |
| |
| | 358 |
| | 303,919 |
|
| Dividends paid | |
| |
| | (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 | |
| |
| | 1,060,801 |
| |
| |
| | 514 |
| | 1,061,315 |
|
| Other comprehensive income (loss) | |
| |
| |
|
| | 161,118 |
| |
| | (440 | ) | | 160,678 |
|
| Dividends paid | |
| |
| | (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 |
|
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)amounts or as otherwise noted)
The term "year" and references to specific years refer to the applicable fiscal years.
| |
1. | Significant Accounting Policies |
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 evaluatesWe evaluate performance based on segment operating income before corporate 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 4742 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 segment 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.
There are no individual customers to whom sales are more than three3 percent of the Company's consolidated sales. Due to theour diverse group of customers throughout the world, the Company doeswe do not consider itselfourself 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'sour products and geographic operations mitigate the risk that adverse changes with respect to any particular product and geographic operation would materially affect the Company'sour operating results.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP 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.
Change in Accounting Principle - During the fourth quarter of 2021, the Company changed its method of accounting for certain domestic inventory previously valued by the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. All prior periods presented have been retrospectively adjusted to apply the new method of accounting. Refer to Note 7 for more information on the change in inventory accounting method.
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 - 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 at a point in time, control generally transfers at time of 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 no alternative use and the Company has a contractual right to payment.
For contracts where revenue is recognized over time, we use 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 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. We make adjustments to these estimates on a consistent basis and establish a contract reserve 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 persuasive evidencecontrol of an arrangement exists, product has shippedthe individual performance obligations is transferred to the customer.
We consider 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 our best judgment at the time.
Payment terms vary by customer and the risksgeographic location of the customer. The time between when revenue is recognized and rewards of ownership have transferredpayment is due is not significant. Our contracts with customers generally do not include significant financing components or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. Shipping and handling costs billed to customers are included in net sales and the related costs in cost of sales.noncash consideration.
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 Shipping and handling costs are primarily recognized using the percentage-of-completion method. The extent of progress toward completion is primarily measured using the units-of-delivery method. Unbilledtreated as fulfillment costs on these contractsand are included in inventory. Progress paymentscost of sales. The costs to obtain a contract where the amortization period for the related asset is one year or less are netted against the inventory balances.expensed as incurred.
There is generally no unilateral right to return products. The Company estimates costsprimarily offers an assurance-type standard warranty that the product will conform to complete long-term contractscertain specifications for purposesa defined period of evaluating and establishing contract reserves. Adjustments to cost estimates are made ontime or usage after delivery. This type of warranty does not represent a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.separate performance obligation.
Cash - Cash equivalents consist of short-term, highly liquid investments with a three-monthmaturity of three months or less maturity,less. 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 as available-for-sale,also include investments in equity securities which are carried at fair value. Changes in fair value with unrealized gains and lossesrelated to equity securities are recorded in accumulated other comprehensive (loss). Gains and losses on available-for-sale investments are calculated based on the first-in, first-out method. The Company hasnet income. We have 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. ReceivablesWe evaluate the collectibility of our receivables based on historical experience and current and forecasted economic conditions based on management's judgment. Additionally, receivables are written off to bad debt primarily when in the judgmentmanagement makes a final determination of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor.uncollectibility. Allowance for doubtful accountscredit losses was $9,672$12,078 and $14,336$11,644 at June 30, 20182021 and 2017,2020, 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, | | 2018 |
| | 2017 |
| June 30, | | 2021 | | 2020 |
| Notes receivable | | $ | 149,254 |
| | $ | 118,351 |
| Notes receivable | | $ | 144,441 | | | $ | 97,370 | |
| | Accounts receivable, other | | 179,145 |
| | 136,636 |
| Accounts receivable, other | | 181,874 | | | 147,500 | |
| Total | | $ | 328,399 |
| | $ | 254,987 |
| Total | | $ | 326,315 | | | $ | 244,870 | |
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 reviewsWe review 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, | | 2021 | | 2020 |
| Land and land improvements | | $ | 342,950 | | | $ | 345,746 | |
| Buildings and building equipment | | 1,848,141 | | | 1,773,041 | |
| Machinery and equipment | | 3,653,566 | | | 3,515,842 | |
| Construction in progress | | 195,563 | | | 176,052 | |
| Total | | $ | 6,040,220 | | | $ | 5,810,681 | |
|
| | | | | | | | |
| June 30, | | 2018 |
| | 2017 |
|
| Land and land improvements | | $ | 289,686 |
| | $ | 321,331 |
|
| Buildings and building equipment | | 1,578,701 |
| | 1,575,464 |
|
| Machinery and equipment | | 3,218,639 |
| | 3,167,885 |
|
| Construction in progress | | 128,227 |
| | 122,068 |
|
| Total | | $ | 5,215,253 |
| | $ | 5,186,748 |
|
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 $304,389$292,217 and $341,869$317,975 at June 30, 20182021 and 2017,2020, respectively. A significant portion of the underlying net assets of the joint ventures are related to goodwill. The Company's share of earnings from investments in joint-venture companies were $50,473, $42,352$41,048, $74,517 and $25,650$93,239 in 2018, 20172021, 2020 and 2016,2019, respectively.
Intangible Assets- Intangible assets primarily include patents and technology, trademarks and customer lists and contracts and are recorded at cost and amortized on a straight-line method. Patents and technology are amortized over the shorter of their remaining useful or legal life. Trademarks and customer contracts 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 recognizesWe recognize 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.
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. Exchange (gains) losses (gains) from transactions in a currency other than the local currency of the entity involved are included within the cost of sales caption in the Consolidated Statement of Income and were $7,284, $8,060$(10,948), $(10,018) and $22,750,$5,888, in 2018, 20172021, 2020 and 2016,2019, respectively.
Subsequent Events - The Company hasWe 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, 2018. No subsequent events occurred2021. On August 2, 2021, the Company announced that required adjustmentit reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt plc ("Meggitt") for 800 pence per share (the "Acquisition"), or disclosureapproximately £6,308 million. We intend to fund the proposed Acquisition with cash and new debt. The proposed Acquisition remains subject to customary closing conditions, including regulatory clearances and approval by Meggitt’s shareholders.
In connection with the proposed Acquisition, the Company entered into a bridge credit agreement (the "Bridge Credit Agreement") on August 2, 2021. Under the Bridge Credit Agreement, lenders are committed to provide senior, unsecured financing in these financial statements.the aggregate principal amount of £6,524 million. Any borrowings made under the Bridge Credit Agreement would mature 364 days from the initial funding date. The commitments are intended to be drawn to finance the proposed Acquisition only to the extent that we do not arrange for alternative financing prior to closing.
Recent Accounting Pronouncements - In February 2018,June 2016, the Financial Accounting Standards Board (FASB)("FASB") issued Accounting Standards Update (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 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 has not yet determined the effect that ASU 2018-02 will have on its 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 has not yet determined the effect that ASU 2017-12 will have on its financial statements.
In May 2017, the FASB issued ASU 2017-09, "Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: (1) the fair value of the modified award is the same as fair value of the original award; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. During the first quarter of fiscal 2018, the Company adopted ASU 2017-09. The adoption of ASU 2017-09 did not affect the Company's financial statements as there were no modifications of any share-based awards during 2018.
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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. 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. The Company expects that adoption of this standard will result in a reclassification of expense from cost of sales and selling, general and administrative expenses to other (income) of approximately $25 million and $17 million, respectively, for 2018 and $70 million and $41 million, respectively, for 2017.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. During the first quarter of 2018, the Company adopted ASU 2017-04. The adoption of ASU 2017-04 did not affect the Company's financial statements as there were no instances of a reporting unit's carrying value exceeding its fair value for any goodwill impairment tests performed during 2018.
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. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2017. Early adoption is permitted. The Company expects that the cumulative effect of the adoption of ASU 2016-16 will result in a reduction to retained earnings of approximately $18 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. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. After consideration of the current level of transactions within the scope of ASU 2016-15, the Company does not expect that the retrospective adoption of this standard at the beginning of the first quarter of 2019 will have a material impact on its financial statements.
In June 2016, the FASB issued ASU("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 within those years, beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect thatWe adopted ASU 2016-13 will have on its 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 and lessor accounting is largely 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. EarlyJuly 1, 2020. The adoption is permitted. Adoption of this ASU is planned for the beginning of the first quarter of 2020. The Company has not yet determined the effect that ASU 2016-02 will have on its financial statements.
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. 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 measuredguidance, using the fair value option. Financial assetsmodified retrospective method, did not result in a cumulative-effect adjustment to retained earnings 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 doesdid not expect that the retrospective adoption of ASU 2016-01 at the beginning of the first quarter of 2019 will have a material impact on itsthe consolidated financial statements.statements or related disclosures.
In May 2014,
2. Revenue recognition
Revenue is derived primarily from the FASB issued ASU 2014-09, "Revenuesale of products in a variety of mobile, industrial and aerospace markets. A majority of the 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 by 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 Customers." ASU 2014-09 requiresindividual 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 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 recognitionmay be recognized over time for installation services or in situations where the product has no alternative use and we have an enforceable right to depictpayment.
Diversified Industrial Segment revenues by technology platform: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Motion Systems | | $ | 3,081,366 | | | $ | 2,996,645 | |
| Flow and Process Control | | 4,108,080 | | | 3,795,952 | |
| Filtration and Engineered Materials | | 4,770,713 | | | 4,168,288 | |
| Total | | $ | 11,960,159 | | | $ | 10,960,885 | |
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. Aerospace Systems Segment products 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 transferAerospace Systems Segment is typically recognized at the time of goodsproduct shipment, but a portion of revenue may be recognized over time in situations where the customer controls the asset as it is produced or servicesthe product has no alternative use and we have an enforceable right to payment.
Aerospace Systems Segment revenues by product platform: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Flight Control Actuation | | $ | 698,877 | | | $ | 711,017 | |
| Fuel and Inerting | | 509,687 | | | 592,543 | |
| Hydraulics | | 308,835 | | | 411,823 | |
| Engines | | 575,804 | | | 616,747 | |
| Fluid Conveyance | | 196,348 | | | 304,769 | |
| Other | | 97,930 | | | 97,736 | |
| Total | | $ | 2,387,481 | | | $ | 2,734,635 | |
Total revenues by geographic region based on the Company's selling operation's location: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| North America | | $ | 9,046,162 | | | $ | 9,166,773 | |
| Europe | | 2,919,025 | | | 2,596,125 | |
| Asia Pacific | | 2,215,686 | | | 1,790,032 | |
| Latin America | | 166,767 | | | 142,590 | |
| Total | | $ | 14,347,640 | | | $ | 13,695,520 | |
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 an amount that reflectsadvance of customer billing. Contract liabilities relate to payments received in advance of the consideration that a company expects to be entitled tosatisfaction of performance under the contract. Payments from customers are received based on the terms established 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 obligationscustomer.
Total contract assets and contract liabilities are as follows: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Contract assets, current (included within Prepaid expenses and other) | | $ | 34,190 | | | $ | 30,827 | |
| Contract assets, noncurrent (included within Investments and other assets) | | 1,884 | | | 1,497 | |
| Total contract assets | | 36,074 | | | 32,324 | |
| Contract liabilities, current (included within Other accrued liabilities) | | (51,211) | | | (51,278) | |
| Contract liabilities, noncurrent (included within Other liabilities) | | (3,080) | | | (3,232) | |
| Total contract liabilities | | (54,291) | | | (54,510) | |
| Net contract liabilities | | $ | (18,217) | | | $ | (22,186) | |
At June 30, 2021, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During 2021, approximately $33 million of revenue was recognized that was included in the contract determining theliabilities at June 30, 2020.
transaction price, allocating the transaction price to theRemaining performance obligations
Our backlog represents written firm orders from a customer to deliver products and, recognizing revenue when (or as)in the company satisfiescase of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Additional quantitativeBacklog at June 30, 2021 was $6,503 million, of which approximately 84 percent is expected to be recognized as revenue within the next 12 months and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. 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 ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09. The Company has elected to adopt ASU 2014-09 using the modified retrospective method. The Company does not expect that the cumulative effect of the adoption of ASU 2014-09 at the beginning of the first quarter of 2019 will have a material impact on retained earnings. We expect to provide the required additional disclosures in periods subsequent to the adoption.balance thereafter.
| |
2. | Acquisitions and Divestitures |
Acquisitions - During 2017, On October 29, 2019, we completed the Company completed three acquisitions, including Clarcor, whose aggregate salesacquisition of a 100 percent equity interest in LORD Corporation ("Lord") for their most recent fiscal year prior to acquisition were approximately $1,522 million. Total purchase price for the three acquisitions was approximately $4,227$3,455 million in cash, and $316including the assumption of debt. On September 16, 2019, we completed the acquisition of a 100 percent equity interest in EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in assumed debt.cash.
Lord is a diversified technology and manufacturing company developing highly reliable adhesives and coatings, as well as vibration and motion control technologies, that significantly reduce risk and improve product performance. Lord’s products are used in mission-critical applications in the Company completed two acquisitions whose aggregateaerospace, automotive and industrial markets. Lord had annual sales of approximately $1,025 million for their most recentits fiscal year prior2018. For segment reporting purposes, approximately 95 percent of Lord's sales are included in the Diversified Industrial Segment, while the remaining 5 percent are included in the Aerospace Systems Segment. Lord’s unique and proprietary products, solutions and technologies for mission-critical applications are expected to acquisition wereincrease the Company's overall engineered materials product and solutions offerings to enable a stronger value proposition for customers.
Exotic designs and manufactures innovative and technically demanding, high temperature, high pressure air and exhaust management solutions for aircraft and engines. Exotic had annual sales of approximately $48$409 million. Total purchase price for its fiscal 2019.
For segment reporting purposes, Exotic is included in the two acquisitions was approximately $71 million in cashAerospace Systems Segment. We believe Exotic's products and $2 million in assumed debt.proprietary manufacturing capabilities are complementary to our portfolio of flight control, fuel and inerting, hydraulics, fluid conveyance and engine components.
The results of operations for all acquisitions were included as of the respective dates of acquisition.
Assets acquired and liabilities assumed wereare recognized at their respective fair values as of the acquisition date. The process 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 occurThe following presents the estimated fair values of Lord's and Exotic's assets acquired and liabilities assumed on the respective acquisition dates. These estimates are based on available information and are revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party 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 initialfinal purchase price allocationallocations for acquisitions in 2017 and 2016 are2020 is as follows:
| | | | | | | | | | | | | |
| Lord | | Exotic | | |
| October 29, 2019 | | September 16, 2019 | | |
| Assets: | | | | | |
| Cash and cash equivalents | $ | 74,013 | | | $ | 8,179 | | | |
| Accounts receivable | 153,765 | | | 81,336 | | | |
| Inventories | 248,600 | | | 114,661 | | | |
| Prepaid expenses | 24,230 | | | 1,343 | | | |
| Property, plant and equipment | 409,163 | | | 178,393 | | | |
| Deferred income taxes | — | | | 2,057 | | | |
| Other assets | 41,335 | | | 1,226 | | | |
| Intangible assets | 1,446,660 | | | 874,470 | | | |
| Goodwill | 1,970,603 | | | 503,725 | | | |
| Total assets acquired | 4,368,369 | | | 1,765,390 | | | |
| Liabilities: | | | | | |
| Notes payable and long-term debt payable within one year | 156 | | | — | | | |
| Accounts payable, trade | 56,186 | | | 23,176 | | | |
| Accrued payrolls and other compensation | 57,571 | | | 8,863 | | | |
| Accrued domestic and foreign taxes | 2,898 | | | 2,123 | | | |
| Other accrued liabilities | 88,394 | | | 25,662 | | | |
| Long-term debt | 221,161 | | | — | | | |
| Pensions and other postretirement benefits | 115,017 | | | — | | | |
| Deferred income taxes | 304,445 | | | — | | | |
| Other liabilities | 55,832 | | | — | | | |
| Noncontrolling interests | 11,266 | | | — | | | |
| Total liabilities and noncontrolling interests assumed | 912,926 | | | 59,824 | | | |
| Net assets acquired | $ | 3,455,443 | | | $ | 1,705,566 | | | |
|
| | | | | | | | |
| | | 2017 |
| | 2016 |
|
| Assets: | | | | |
| Accounts receivable | | $ | 263,616 |
| | $ | 6,793 |
|
| Inventories | | 302,422 |
| | 12,041 |
|
| Prepaid expenses | | 18,342 |
| | 1,350 |
|
| Deferred income taxes | | 4,658 |
| | — |
|
| Plant and equipment | | 376,826 |
| | 5,647 |
|
| Intangible and other assets | | 1,526,909 |
| | 26,849 |
|
| Goodwill | | 2,677,489 |
| | 31,134 |
|
| | | 5,170,262 |
| | 83,814 |
|
| Liabilities: | | | | |
| Notes payable | | 20,162 |
| | 720 |
|
| Accounts payable, trade | | 84,753 |
| | 2,536 |
|
| Accrued payrolls and other compensation | | 45,942 |
| | 1,310 |
|
| Accrued domestic and foreign taxes | | 5,435 |
| | 604 |
|
| Other accrued liabilities | | 80,515 |
| | 1,804 |
|
| Long-term debt | | 296,240 |
| | 1,743 |
|
| Pensions and other postretirement benefits | | 33,929 |
| | — |
|
| Deferred income taxes | | 520,389 |
| | 7,545 |
|
| Other liabilities | | 11,878 |
| | — |
|
| Noncontrolling interests | | 1,822 |
| | — |
|
| | | 1,101,065 |
| | 16,262 |
|
| Net assets acquired | | $ | 4,069,197 |
| | $ | 67,552 |
|
Goodwill is calculated as the excess of the purchase price over the net assets acquired, primarily all of which is not deductible for tax purposes.acquired. With respect to the Clarcor acquisition,Lord and Exotic acquisitions, goodwill represents cost synergies and enhancements to the Company'sour existing filtration technologies.
The remaining disclosures in Note 2 pertain only to the Clarcor For tax purposes, Lord's goodwill is not deductible, and Exotic's goodwill is deductible. Based upon an acquisition valuation, intangibles acquired as the other two acquisitions completed during 2017 were immaterial.
Clarcor is a major manufacturer of filtration 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 Purolator. Clarcor had annual sales of approximately $1,400 million for its fiscal 2016. For segment reporting purposes, Clarcor is part of the Diversified Industrial Segment.Exotic acquisition include $502,470 of customer-related intangible assets, $281,400 of patents and technology and $90,600 of trademarks, with weighted average estimated useful lives of 18, 20 and 20 years, respectively. Similarly, the Lord acquisition includes $869,190 of customer-related intangible assets, $458,030 of patents and technology and $119,440 of trademarks, with weighted average estimated useful lives of 13, 21 and 20 years, respectively. These intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth and discount rates. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
The Company believes that Clarcor is a highly complementary acquisition that providesOur consolidated financial statements for 2020 include 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 operationsLord and Exotic from the date oftheir respective acquisition February 28, 2017,dates through June 30, 2017.2020. Net sales and segment operating (loss)income attributable to Clarcorthese acquisitions during this period was $487,388 and $(16,164),included in our consolidated financial statements totaled $949,066 and $22,330, 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,Acquisition-related transaction and Clarcor had beenintegration costs totaled $119,214 in 2020. These costs are included in the Company's results of operations for 2017 and 2016.
|
| | | | | | | |
| | 2017 |
| | 2016 |
|
| Net sales | $ | 12,935,834 |
| | $ | 12,772,097 |
|
| Net income attributable to common shareholders | 1,027,693 |
| | 748,634 |
|
| Diluted earnings per share | 7.58 |
| | 5.47 |
|
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)Income.
4. Business Realignment 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 and decreased pro forma net income attributable to common shareholders by $39,121 for 2016. 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.Acquisition Integration Charges
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 related to the divestiture. The pre-tax loss is reflected in the (gain) on disposal of assets caption in the Consolidated Statement of Income and the other expense 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 (gain) on disposal of assets caption in the Consolidated Statement of Income and the other expense caption in the Business Segment Information.
| |
3. | Charges Related to Business Realignment |
The Company incurred business realignment charges in 2018, 2017 and 2016. The Company also incurred acquisition integration costs in 2018 and 2017 related to the 2017 acquisition of Clarcor.
Business realignment charges and acquisition integration costs presentedcharges in the Business Segment Information are as follows: |
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Diversified Industrial | $ | 78,558 |
| | $ | 52,939 |
| | $ | 91,404 |
|
| Aerospace Systems | 3,428 |
| | 2,674 |
| | 3,629 |
|
| Corporate administration | — |
| | — |
| | 2,215 |
|
| Other expense | 1,009 |
| | 784 |
| | 116 |
|
Work force reductions in connection with such business realignment charges2021, 2020 and acquisition integration costs in the Business Segment Information are as follows:
|
| | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Diversified Industrial | 1,757 |
| | 1,102 |
| | 3,515 |
|
| Aerospace Systems | 265 |
| | 89 |
| | 81 |
|
| Corporate administration | — |
| | — |
| | 53 |
|
The2019. During 2021, business realignment charges primarily relateconsisted of actions taken to address the impact of COVID-19 on our business. Such charges were also incurred in 2020, especially within the Aerospace Systems Segment. In 2021, 2020, and 2019 business realignment charges included severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity. Business realignment charges andcomplexity as well as plant closures. The 2019 acquisition integration costscharges relate to the 2017 acquisition of CLARCOR, Inc. ("Clarcor") and primarily consist of severance costs as well asand expenses related to plant closures with theand relocations. A majority of the business realignment charges were incurred in EuropeNorth America 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 believesEurope. We believe 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.
Business realignment and acquisition integration charges presented in the Business Segment Information are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Diversified Industrial | $ | 38,557 | | | $ | 52,288 | | | $ | 27,830 | |
| Aerospace Systems | 6,680 | | | 22,101 | | | — | |
| Corporate administration | 1,399 | | | 1,175 | | | — | |
| Other expense | 1,226 | | | 50 | | | 305 | |
Workforce reductions in connection with such business realignment and acquisition integration charges in the Business Segment Information are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Diversified Industrial | 820 | | | 2,394 | | | 598 | |
| Aerospace Systems | 327 | | | 1,254 | | | — | |
| Corporate administration | 20 | | | 31 | | | — | |
| | | | | |
The business realignment charges and acquisition integration costscharges are presented in the Consolidated Statement of Income as follows:
| | | | 2018 |
| | 2017 |
| | 2016 |
| | 2021 | | 2020 | | 2019 |
| Cost of sales | $ | 44,949 |
| | $ | 35,932 |
| | $ | 76,197 |
| Cost of sales | $ | 33,746 | | | $ | 58,791 | | | $ | 14,650 | |
| Selling, general and administrative expenses | 36,813 |
| | 19,681 |
| | 21,051 |
| Selling, general and administrative expenses | 12,890 | | | 16,773 | | | 13,180 | |
| (Gain) on disposal of assets | 1,233 |
| | 784 |
| | 116 |
| |
| (Gain) loss on disposal of assets | | (Gain) loss on disposal of assets | 1,226 | | | 50 | | | 305 | |
As of June 30, 2018,2021, approximately $40$56 million in severance payments have beenwere made relating to business realignment charges. Remaining payments related to current-year and acquisition integration charges incurred during 2018, the remainderprior-year business realignment actions of approximately $15 million, a majority of which are expected to be paid by June 30, 2019. 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 $26 million2022, 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.
We also incurred the following acquisition integration charges related to the Lord and Exotic acquisitions: | | | | | | | | | | | |
| | | |
| | | |
| | 2021 | | 2020 |
| Diversified Industrial | $ | 11,222 | | | $ | 20,669 | |
| Aerospace Systems | 719 | | | 1,908 | |
| | | |
| | | |
These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, establishing a flat corporate income tax rate of 21 percent and creating a territorial tax system (with a one-time transition tax imposed on previously undistributed foreign earnings and profits).
The Securities and Exchange Commission staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJ Act. SAB 118 provides 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 as of June 30, 2018, the Company recorded a net provisional discrete income tax cost of $233 million as a result of the TCJ Act being enacted.
5. Income Taxes
The reduction in the U.S. corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and liabilitiesCertain amounts below have been adjusted to reflect their value at the reduced corporate tax rateretrospective application of 21 percent, which resultedour change in a decreaseinventory accounting method as described in income tax expense of approximately $80 million. The one-time transition tax on undistributed foreign earningsNotes 1 and profits resulted in an increase in income tax expense of $297 million. Incremental adjustments have been made to these estimates during the three months ended June 30, 2018, based on the availability of additional information. The Company has not yet completed the accounting for the one-time transition tax and continues to analyze undistributed foreign earnings and profits for purposes of filing the tax return for 2018. In addition, the Company continues to interpret the law and guidance issued as of the date of these financial statements. On August 1, 2018, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time transition tax. The proposed regulations are subject to a 60-day comment period. Final regulations are expected to be issued after consideration of the comments. The Company is currently evaluating the impact of the proposed regulations. The Company intends to make the election to pay the one-time transition tax over eight years. The amount of cash payments will be less than the amount of the income tax expense due to the utilization of available credits.
Certain provisions of the TCJ Act will impact the Company starting in 2019. These provisions include, but are not limited to, the creation of the base erosion anti-abuse tax, a general limitation of U.S. federal income taxes on dividends from foreign subsidiaries, a new provision designed to tax global intangible low-taxed income and the repeal of the domestic production activities deduction. The Company continues to evaluate the future impacts of these provisions and, as of June 30, 2018, has not recorded any impact of any of these future provisions.
7.
Income before income taxes was derived from the following sources:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| United States | $ | 1,273,037 | | | $ | 828,160 | | | $ | 1,140,983 | |
| Foreign | 973,920 | | | 678,694 | | | 808,492 | |
| $ | 2,246,957 | | | $ | 1,506,854 | | | $ | 1,949,475 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| United States | $ | 963,843 |
| | $ | 722,925 |
| | $ | 672,907 |
|
| Foreign | 738,434 |
| | 605,716 |
| | 441,821 |
|
| | $ | 1,702,277 |
| | $ | 1,328,641 |
| | $ | 1,114,728 |
|
Income taxes include the following:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Federal | | | | | |
| Current | $ | 247,094 | | | $ | 105,796 | | | $ | 160,858 | |
| Deferred | (52,960) | | | 24,905 | | | 18,133 | |
| Foreign | | | | | |
| Current | 269,607 | | | 167,680 | | | 206,167 | |
| Deferred | 8,851 | | | (14,247) | | | 3,202 | |
| State and local | | | | | |
| Current | 34,895 | | | 18,756 | | | 20,932 | |
| Deferred | (7,391) | | | 1,632 | | | 15,100 | |
| $ | 500,096 | | | $ | 304,522 | | | $ | 424,392 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Federal | | | | | |
| Current | $ | 453,821 |
| | $ | 132,420 |
| | $ | 235,557 |
|
| Deferred | (23,876 | ) | | 37,316 |
| | (45,797 | ) |
| Foreign | | | | | |
| Current | 210,385 |
| | 157,518 |
| | 113,146 |
|
| Deferred | (17,454 | ) | | (5,319 | ) | | (7,006 | ) |
| State and local | | | | | |
| Current | 18,168 |
| | 17,835 |
| | 24,495 |
|
| Deferred | (82 | ) | | 5,027 |
| | (12,883 | ) |
| | $ | 640,962 |
| | $ | 344,797 |
| | $ | 307,512 |
|
A reconciliation of the Company's effective income tax rate to the statutory federal rate follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Statutory federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local income taxes | 1.0 | | | 1.4 | | | 1.7 | |
| | | | | |
| Tax related to international activities | 3.6 | | | 1.8 | | | 2.9 | |
| Transition tax related to the TCJ Act | — | | | (0.7) | | | 0.8 | |
| Remeasurement of deferred tax assets and liabilities related to the TCJ Act | — | | | — | | | (0.9) | |
| Cash surrender value of life insurance | (0.6) | | | (0.3) | | | (0.1) | |
| Federal manufacturing deduction | — | | | — | | | 0.1 | |
| Foreign derived intangible income deduction | (1.0) | | | (1.5) | | | (1.0) | |
| Research tax credit | (0.4) | | | (0.6) | | | (0.5) | |
| Share-based compensation | (1.6) | | | (1.5) | | | (1.7) | |
| Other | 0.3 | | | 0.6 | | | (0.5) | |
| Effective income tax rate | 22.3 | % | | 20.2 | % | | 21.8 | % |
|
| | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Statutory federal income tax rate | 28.1 | % | | 35.0 | % | | 35.0 | % |
| State and local income taxes | 1.2 |
| | 1.7 |
| | 0.6 |
|
| Tax related to international activities | (1.0 | ) | | (5.5 | ) | | (5.2 | ) |
| Transition tax related to the TCJ Act | 17.5 |
| | — |
| | — |
|
| Remeasurement of deferred tax assets and liabilities related to the TCJ Act | (4.8 | ) | | — |
| | — |
|
| Cash surrender value of life insurance | (0.4 | ) | | (0.9 | ) | | 0.2 |
|
| Federal manufacturing deduction | (1.0 | ) | | (0.9 | ) | | (1.0 | ) |
| Research tax credit | (0.7 | ) | | (0.8 | ) | | (1.9 | ) |
| Share-based compensation | (2.2 | ) | | (2.7 | ) | | — |
|
| Other | 1.0 |
| | 0.1 |
| | (0.1 | ) |
| Effective income tax rate | 37.7 | % | | 26.0 | % | | 27.6 | % |
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a significant tax-and-spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act did not result in a material impact on our effective tax rate.
On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law. In addition to providing funding for the government, this law provides further COVID-19 economic relief, and extends certain expiring tax provisions. This act did not result in a material impact on our effective tax rate.
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:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Retirement benefits | $ | 322,931 | | | $ | 504,747 | |
| Other liabilities and reserves | 136,710 | | | 139,872 | |
| Long-term contracts | 5,562 | | | 7,392 | |
| Stock-based compensation | 30,165 | | | 35,483 | |
| Loss carryforwards | 861,013 | | | 754,655 | |
| Unrealized currency exchange gains and losses | 18,841 | | | 39,256 | |
| Inventory | (11,753) | | | (31,081) | |
| Tax credit carryforwards | 19,709 | | | 33,176 | |
| Undistributed foreign earnings | (21,722) | | | (15,196) | |
| Depreciation and amortization | (945,422) | | | (988,886) | |
| Valuation allowance | (865,764) | | | (771,430) | |
| Net deferred tax (liability) | $ | (449,730) | | | $ | (292,012) | |
| | | |
| Change in net deferred tax (liability): | | | |
| Provision for deferred tax | $ | 51,500 | | | $ | (12,290) | |
| Items of other comprehensive (loss) income | (209,509) | | | 102,297 | |
| Acquisitions and other | 291 | | | (301,690) | |
| Total change in net deferred tax | $ | (157,718) | | | $ | (211,683) | |
|
| | | | | | | |
| | 2018 |
| | 2017 |
|
| Retirement benefits | $ | 340,480 |
| | $ | 571,022 |
|
| Other liabilities and reserves | 112,935 |
| | 144,885 |
|
| Long-term contracts | 17,496 |
| | 61,375 |
|
| Stock-based compensation | 38,535 |
| | 59,725 |
|
| Loss carryforwards | 679,880 |
| | 678,486 |
|
| Unrealized currency exchange gains and losses | 27,228 |
| | 22,212 |
|
| Inventory | (9,612 | ) | | 17,809 |
|
| Foreign tax credit carryforward | — |
| | 23,050 |
|
| Depreciation and amortization | (689,320 | ) | | (1,080,218 | ) |
| Valuation allowance | (694,857 | ) | | (684,079 | ) |
| Net deferred tax (liability) | $ | (177,235 | ) | | $ | (185,733 | ) |
| | | | |
| Change in net deferred tax asset (liability): | | | |
| Provision for deferred tax | $ | 41,412 |
| | $ | (37,024 | ) |
| Items of other comprehensive (loss) | (65,542 | ) | | (177,655 | ) |
| Acquisitions and other | 32,628 |
| | (521,814 | ) |
| Total change in net deferred tax | $ | 8,498 |
| | $ | (736,493 | ) |
As of June 30, 2018, the Company2021, we recorded deferred tax assets of $679,880$861,013 resulting from $2,633,218$3,473 million in loss carryforwards. A valuation allowance of $675,045$841,789 related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $640,239$816,388 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 years to 20 years. In addition, a valuation allowance of $19,812$23,975 related to other 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.
Historically, all foreign undistributed earnings were permanently reinvested in international operations. No tax was provided on such earnings as it was not practicable to estimate the additional tax that might be payable on the eventual distribution. The enactment of the TCJ Act created a territorial tax system significantly reducing the U.S. federal tax cost of future distributions. Although future distributions of foreign earnings to the U.S.United States should not be subject to U.S. federal income taxes, other U.S. or foreign taxes may be imposed on such earnings. The Company hasWe have analyzed existing factors and determined itwe will no longer permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $274$712 million that are no longer permanently reinvested outside of the U.S., the Company hasUnited States, we have recorded a deferred tax liability of $12$16 million. The remaining undistributed foreign earnings of approximately $2,700$1,609 million remain permanently reinvested outside the U.S.United States at June 30, 2018.2021. Of these undistributed earnings, we have recorded a deferred tax liability of $4$6 million where certain 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 potential distribution of such permanently reinvested foreign earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Balance July 1 | $ | 86,277 | | | $ | 140,662 | | | $ | 153,091 | |
| Additions for tax positions related to current year | 10,145 | | | 4,955 | | | 2,272 | |
| Additions for tax positions of prior years | 10,320 | | | 798 | | | 45 | |
| Additions for acquisitions | 2,376 | | | 43,532 | | | — | |
| Reductions for tax positions of prior years | (1,996) | | | (41,726) | | | (927) | |
| Reductions for settlements | (7,165) | | | (53,520) | | | (832) | |
| Reductions for expiration of statute of limitations | (2,252) | | | (3,820) | | | (9,388) | |
| Effect of foreign currency translation | 3,054 | | | (4,604) | | | (3,599) | |
| Balance June 30 | $ | 100,759 | | | $ | 86,277 | | | $ | 140,662 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Balance July 1 | $ | 147,506 |
| | $ | 139,907 |
| | $ | 145,688 |
|
| Additions for tax positions related to current year | 4,195 |
| | 4,735 |
| | 7,025 |
|
| Additions for tax positions of prior years | 8,333 |
| | 2,618 |
| | 2,582 |
|
| Additions for acquisitions | — |
| | 3,939 |
| | — |
|
| Reductions for tax positions of prior years | (3,790 | ) | | (1,175 | ) | | (627 | ) |
| Reductions for settlements | (315 | ) | | (3,020 | ) | | (10,284 | ) |
| Reductions for expiration of statute of limitations | (4,480 | ) | | (2,792 | ) | | (4,142 | ) |
| Effect of foreign currency translation | 1,642 |
| | 3,294 |
| | (335 | ) |
| Balance June 30 | $ | 153,091 |
| | $ | 147,506 |
| | $ | 139,907 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $153,091, $95,460$100,759, $86,277 and $80,722 as of June 30, 2018, 2017 and 2016, respectively. If recognized, a significant portion of the gross unrecognized tax benefits$140,662 as of June 30, 2017,2021, 2020 and 2016, would have been offset against an asset that had been recorded in the Consolidated Balance Sheet.2019, respectively. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $21,737, $15,432$17,862, $14,247 and $12,357$25,214 as of June 30, 2018, 20172021, 2020 and 2016,2019, 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 $120,000$40,000 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 subsidiariesWe file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, the Company iswe are subject to examination by taxing authorities throughout the world. The Company isWe are open to assessment of itsour U.S. federal income tax returns by the Internal Revenue Service for years after 2011,2013, and itsour state and local income tax returns for years after 2011. The Company is2013. We are open to assessment for significant foreign jurisdictions for years after 2009.2011.
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 equity-based awards. The reconciliation of the numerator and denominator of basic and diluted earnings per share was as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020* | | 2019* |
| Numerator: | | | | | |
| Net income attributable to common shareholders | $ | 1,746,100 | | | $ | 1,201,970 | | | $ | 1,524,516 | |
| Denominator: | | | | | |
| Basic - weighted-average common shares | 128,999,879 | | | 128,418,495 | | | 129,997,640 | |
| Increase in weighted-average common shares from dilutive effect of equity-based awards | 1,834,599 | | | 1,386,539 | | | 1,783,977 | |
| Diluted - weighted-average common shares, assuming exercise of equity-based awards | 130,834,478 | | | 129,805,034 | | | 131,781,617 | |
| Basic earnings per share | $ | 13.54 | | | $ | 9.36 | | | $ | 11.73 | |
| Diluted earnings per share | $ | 13.35 | | | $ | 9.26 | | | $ | 11.57 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Numerator: | | | | | |
| Net income attributable to common shareholders | $ | 1,060,801 |
| | $ | 983,412 |
| | $ | 806,840 |
|
| Denominator: | | | | | |
| Basic - weighted-average common shares | 133,004,613 |
| | 133,377,547 |
| | 135,353,321 |
|
| Increase in weighted-average common shares from dilutive effect of equity-based awards | 2,422,221 |
| | 2,182,217 |
| | 1,558,369 |
|
| Diluted - weighted-average common shares, assuming exercise of equity-based awards | 135,426,834 |
| | 135,559,764 |
| | 136,911,690 |
|
| Basic earnings per share | $ | 7.98 |
| | $ | 7.37 |
| | $ | 5.96 |
|
| Diluted earnings per share | $ | 7.83 |
| | $ | 7.25 |
| | $ | 5.89 |
|
For 2018, 20172021, 2020 and 2016, 0.52019, 0.4 million,, 1.4 0.6 million and 3.10.9 million common shares, respectively, subject to equity-based awards were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
7. Inventories
The majority of domestic inventories are valued by the last-in, first-out (LIFO) cost method and the balance of the Company's inventories are valued by the first-in, first-out (FIFO) cost method. Inventories valued by the FIFO cost method are stated at the lower of cost or net realizable value. InventoriesDuring the fourth quarter of 2021, the Company voluntarily changed its method of accounting for certain domestic inventory previously valued by the LIFO method to the FIFO method. The cumulative effect of this change on periods presented prior to 2019 resulted in an increase in Retained earnings of $105,460 at July 1, 2018. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting, it aligns the inventory cost method are stated at lowerflow assumption with the physical flow of cost or market.goods, and improves comparability within the industry.
Inventories valued on the LIFO cost method were approximately 41 percent of total inventories in 2018 and 39 percent of total inventories in 2017. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $203,192 in 2018 and $193,933 in 2017. Progress payments of $25,026 in 2018 and $44,231 in 2017 are netted against inventories.
The inventories caption in the Consolidated Balance Sheet is comprised of the following components: | | | | | | | | | | | | | | |
| June 30, | | 2021 | | 2020* |
| Finished products | | $ | 733,744 | | | $ | 703,630 | |
| Work in process | | 1,089,976 | | | 988,564 | |
| Raw materials | | 266,922 | | | 272,001 | |
| Total | | $ | 2,090,642 | | | $ | 1,964,195 | |
*Year ended June 30, 2020 amounts have been revised to reflect the change in inventory accounting method, as described above and in Note 1 to the consolidated financial statements.
As a result of the retrospective application of this change in accounting method, the following financial statement line items within the accompanying financial statements were adjusted, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Dollars in thousands, except per share amounts | As Computed Under LIFO | | As Reported Under FIFO | | Effect of Change | | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change |
| Consolidated Statements of Income | | | | | | | | | | | | | | |
| Cost of sales | $ | 10,464,495 | | | $ | 10,449,680 | | | $ | (14,815) | | | $ | 10,286,518 | | | $ | 10,292,291 | | | $ | 5,773 | | | $ | 10,703,484 | | | $ | 10,688,970 | | | $ | (14,514) | |
| Income before income taxes | 2,232,142 | | | 2,246,957 | | | 14,815 | | | 1,512,627 | | | 1,506,854 | | | (5,773) | | | 1,933,425 | | | 1,949,475 | | | 16,050 | |
| Income tax expense | 499,269 | | | 500,096 | | | 827 | | | 305,924 | | | 304,522 | | | (1,402) | | | 420,494 | | | 424,392 | | | 3,898 | |
| Net income | 1,732,873 | | | 1,746,861 | | | 13,988 | | | 1,206,703 | | | 1,202,332 | | | (4,371) | | | 1,512,931 | | | 1,525,083 | | | 12,152 | |
| Net income attributable to common shareholders | 1,732,112 | | | 1,746,100 | | | 13,988 | | | 1,206,341 | | | 1,201,970 | | | (4,371) | | | 1,512,364 | | | 1,524,516 | | | 12,152 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share attributable to common shareholders: | | | | | | | | | | | | | | |
| Basic | $ | 13.43 | | | $ | 13.54 | | | $ | 0.11 | | | $ | 9.39 | | | $ | 9.36 | | | $ | (0.03) | | | $ | 11.63 | | | $ | 11.73 | | | $ | 0.10 | |
| Diluted | $ | 13.24 | | | $ | 13.35 | | | $ | 0.11 | | | $ | 9.29 | | | $ | 9.26 | | | $ | (0.03) | | | $ | 11.48 | | | $ | 11.57 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | | |
| Consolidated Statements of Comprehensive Income | | | | | | | | | | | | | | |
| Net income | $ | 1,732,873 | | | $ | 1,746,861 | | | $ | 13,988 | | | $ | 1,206,703 | | | $ | 1,202,332 | | | $ | (4,371) | | | $ | 1,512,931 | | | $ | 1,525,083 | | | $ | 12,152 | |
| Net income attributable to common shareholders | 1,732,112 | | | 1,746,100 | | | 13,988 | | | 1,206,341 | | | 1,201,970 | | | (4,371) | | | 1,512,364 | | | 1,524,516 | | | 12,152 | |
| Total comprehensive income attributable to common shareholders | 2,724,260 | | | 2,738,248 | | | 13,988 | | | 706,514 | | | 702,143 | | | (4,371) | | | 1,218,136 | | | 1,230,288 | | | 12,152 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | |
| June 30, | | 2018 |
| | 2017 |
|
| Finished products | | $ | 673,323 |
| | $ | 642,788 |
|
| Work in process | | 765,835 |
| | 723,133 |
|
| Raw materials | | 182,146 |
| | 183,573 |
|
| Total | | $ | 1,621,304 |
| | $ | 1,549,494 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Dollars in thousands, except per share amounts | As Computed Under LIFO | | As Reported Under FIFO | | Effect of Change | | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change |
| Consolidated Balance Sheets | | | | | | | | | | | | | | | | |
| Inventories | $ | 1,926,263 | | | $ | 2,090,642 | | | $ | 164,379 | | | $ | 1,814,631 | | | $ | 1,964,195 | | | $ | 149,564 | | | 0 | | 0 | | 0 |
| | | | | | | | | | | | | | | | | |
| Deferred income taxes - noncurrent liability | 516,831 | | | 553,981 | | | 37,150 | | | 382,528 | | | 418,851 | | | 36,323 | | | 0 | | 0 | | 0 |
| Retained earnings | 14,788,268 | | | 14,915,497 | | | 127,229 | | | 13,530,666 | | | 13,643,907 | | | 113,241 | | | 0 | | 0 | | 0 |
| | | | | | | | | | | | | | | | | |
| Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | |
| Net income | $ | 1,732,873 | | | $ | 1,746,861 | | | $ | 13,988 | | | $ | 1,206,703 | | | $ | 1,202,332 | | | $ | (4,371) | | | $ | 1,512,931 | | | $1,525,083 | | $ | 12,152 | |
| Deferred income taxes | (52,327) | | | (51,500) | | | 827 | | | 13,692 | | | 12,290 | | | (1,402) | | | 32,537 | | | 36,435 | | 3,898 | |
| Inventories | (70,782) | | | (85,597) | | | (14,815) | | | 201,164 | | | 206,937 | | | 5,773 | | | (51,817) | | | (67,867) | | | (16,050) | |
| | | | | | | | | | | | | | | | | |
The effect of change in inventory in 2020 represents the excess of gross FIFO inventories over the cost of such inventories valued on a LIFO basis of $219,854 less the related excess and obsolete reserve of $70,290.
As a result of the retrospective application of this change in accounting principle, the following financial statement line items within the unaudited interim 2021 and 2020 quarterly condensed consolidated financial statements were adjusted, as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| (Unaudited) | September 30, 2020 | | December 31, 2020 | | March 31, 2021 |
| Dollars in thousands, except per share amounts | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change |
| Consolidated Statements of Income | | | | | | | | | | | | | | |
| Cost of sales | $ | 2,384,328 | | | $ | 2,386,449 | | | $ | 2,121 | | | $ | 2,519,545 | | | $ | 2,518,165 | | | $ | (1,380) | | | $ | 2,714,773 | | | $ | 2,712,785 | | | $ | (1,988) | |
| Income before income taxes | 415,295 | | | 413,174 | | | (2,121) | | | 576,512 | | | 577,892 | | | 1,380 | | | 597,352 | | | 599,340 | | | 1,988 | |
| Income tax expense | 93,578 | | | 93,063 | | | (515) | | | 129,015 | | | 129,350 | | | 335 | | | 125,619 | | | 126,101 | | | 482 | |
| Net income | 321,717 | | | 320,111 | | | (1,606) | | | 447,497 | | | 448,542 | | | 1,045 | | | 471,733 | | | 473,239 | | | 1,506 | |
| Net income attributable to common shareholders | 321,409 | | | 319,803 | | | (1,606) | | | 447,306 | | | 448,351 | | | 1,045 | | | 471,647 | | | 473,153 | | | 1,506 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share attributable to common shareholders: | | | | | | | | | | | | | | |
| Basic | $ | 2.50 | | | $ | 2.48 | | | $ | (0.02) | | | $ | 3.47 | | | $ | 3.48 | | | $ | 0.01 | | | $ | 3.65 | | | $ | 3.67 | | | $ | 0.02 | |
| Diluted | $ | 2.47 | | | $ | 2.45 | | | $ | (0.02) | | | $ | 3.41 | | | $ | 3.42 | | | $ | 0.01 | | | $ | 3.59 | | | $ | 3.60 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | |
| |
7. | Goodwill and Intangible Assets |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| (Unaudited) | September 30, 2019 | | December 31, 2019 | | March 31, 2020 |
| Dollars in thousands, except per share amounts | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change | | As Reported | | Adjusted | | Effect of Change |
| Consolidated Statements of Income | | | | | | | | | | | | | | | | |
| Cost of sales | $ | 2,479,741 | | | $ | 2,480,992 | | | $ | 1,251 | | | $ | 2,682,765 | | | $2,686,131 | | $ | 3,366 | | | $2,766,693 | | $2,759,637 | | $ | (7,056) | |
| Income before income taxes | 433,156 | | | 431,905 | | (1,251) | | | 254,746 | | | 251,380 | | (3,366) | | | 454,157 | | 461,213 | | 7,056 | |
| Income tax expense | 94,115 | | | 93,811 | | (304) | | | 50,148 | | | 49,331 | | (817) | | | 86,788 | | 88,501 | | 1,713 | |
| Net income | 339,041 | | | 338,094 | | (947) | | | 204,598 | | | 202,049 | | (2,549) | | | 367,369 | | 372,712 | | 5,343 | |
| Net income attributable to common shareholders | 338,898 | | | 337,951 | | (947) | | | 204,474 | | | 201,925 | | (2,549) | | | 367,253 | | 372,596 | | 5,343 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share attributable to common shareholders: | | | | | | | | | | | | | | | | |
| Basic | $ | 2.64 | | | $ | 2.63 | | | $ | (0.01) | | | $ | 1.59 | | | $ | 1.57 | | | $ | (0.02) | | | $ | 2.86 | | | $ | 2.90 | | | $ | 0.04 | |
| Diluted | $ | 2.60 | | | $ | 2.60 | | | $ | — | | | $ | 1.57 | | | $ | 1.55 | | | $ | (0.02) | | | $ | 2.83 | | | $ | 2.87 | | | $ | 0.04 | |
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, 2019 | $ | 5,355,165 | | | $ | 98,640 | | | $ | 5,453,805 | |
| Acquisitions | 1,966,865 | | | 503,725 | | | 2,470,590 | |
| | | | | |
| | | | | |
| Foreign currency translation and other | (54,457) | | | (3) | | | (54,460) | |
| Balance June 30, 2020 | $ | 7,267,573 | | | $ | 602,362 | | | $ | 7,869,935 | |
| Acquisitions | 3,738 | | | — | | | 3,738 | |
| | | | | |
| | | | | |
| Foreign currency translation and other | 185,998 | | | 16 | | | 186,014 | |
| Balance June 30, 2021 | $ | 7,457,309 | | | $ | 602,378 | | | $ | 8,059,687 | |
|
| | | | | | | | | | | |
| | Diversified Industrial Segment | | Aerospace Systems Segment | | Total |
| Balance June 30, 2016 | $ | 2,804,403 |
| | $ | 98,634 |
| | $ | 2,903,037 |
|
| Acquisitions | 2,677,489 |
| | — |
| | 2,677,489 |
|
| Divestitures | (22,618 | ) | | — |
| | (22,618 | ) |
| Foreign currency translation and other | 28,962 |
| | 8 |
| | 28,970 |
|
| 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 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 ofRefer to Note 3 for further discussion.
We test goodwill for impairment at the purchase price adjustmentsreporting unit level on an annual basis and final adjustments tobetween annual tests whenever events or circumstances indicate that the purchase price allocation on the Company's results of operations and financial position were immaterial. Divestitures primarily represent goodwill associated with the salecarrying value of a business in 2018 and a product line in 2017 (see Note 2 for further discussion).
The Company'sreporting unit may exceed its fair value. Our annual impairment tests performed in 2018, 20172021, 2020 and 20162019 resulted in no impairment loss being recognized. We did not identify any events or circumstances during 2021 that required performance of an interim impairment test.
Intangible assets are amortized on a straight-line method over their legal or estimated useful lives. The gross carrying value and accumulated amortization for each major category of intangible asset at June 30 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents and technology | $ | 999,952 | | | $ | 216,314 | | | $ | 991,596 | | | $ | 162,528 | |
| Trademarks | 762,130 | | | 331,905 | | | 748,326 | | | 285,197 | |
| Customer lists and other | 3,869,772 | | | 1,563,838 | | | 3,791,505 | | | 1,284,789 | |
| Total | $ | 5,631,854 | | | $ | 2,112,057 | | | $ | 5,531,427 | | | $ | 1,732,514 | |
|
| | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents | $ | 265,423 |
| | $ | 117,440 |
| | $ | 254,049 |
| | $ | 100,860 |
|
| Trademarks | 546,905 |
| | 227,580 |
| | 553,691 |
| | 200,413 |
|
| Customer lists and other | 2,482,079 |
| | 933,867 |
| | 2,566,983 |
| | 765,966 |
|
| Total | $ | 3,294,407 |
| | $ | 1,278,887 |
| | $ | 3,374,723 |
| | $ | 1,067,239 |
|
Total intangible asset amortization expense in 2018, 20172021, 2020 and 20162019 was $221,494, $145,128$325,447, $284,632 and $108,019,$205,164, respectively. Estimated intangible asset amortization expense for the five years ending June 30, 20192022 through 20232026 is $197,451, $187,040, $182,406, $176,495$319,900, $304,906, $297,945, $287,617 and $168,961,$282,431, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No such events or circumstancesmaterial intangible asset impairments occurred in 2018, 20172021, 2020 or 2016.2019.
9. Financing Arrangements
The Company has a line of credit totaling $2,000,000$2,500 million through a multi-currency revolving credit agreement with a group of banks, of which $1,466,200$2,500 million was available atas of June 30, 2018.2021. The credit agreement expires in October 2021;September 2024; 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'sour credit ratings are lowered. Although a lowering of the Company'sour credit ratings would likely increase the cost of future debt, it would not limit the Company'sour 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 $2,000,000$2,500 million of short-term commercial paper notes. CommercialThere were no commercial paper notes outstanding at June 30, 20182021 and 2017 were $533,800 and $534,200, respectively.
In addition to commercial paper notes, notes payable includes short-term lines of credit and borrowings from foreign banks. At June 30, 2018 and 2017, the Company had $48,338 and $62,946, respectively, in lines of credit from various foreign banks, none of which were$723,500 outstanding at June 30, 2018 and 2017. Most of these agreements are renewed annually.2020. The Company had no outstanding borrowings from foreign banks of $4,255 at June 30, 2018.2021 and 2020. The weighted-average interest rate on notes payable during 20182021 and 20172020 was 1.80.2 percent and 1.02.2 percent, respectively.
The Company's foreign locations inIn the ordinary course of business, some of our locations 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. Based on the Company'sour rating level at June 30, 2018,2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.600.65 to 1.0. As of June 30, 2018, the Company's2021, our debt to debt-shareholders' equity ratio was 0.460.44 to 1.0. The Company isWe are in compliance with all covenants.
| | | June 30, | | 2018 |
| | 2017 |
| June 30, | | 2021 | | 2020 |
| Domestic: | | | | | Domestic: | | | | |
| Fixed rate medium-term notes, 3.30% to 6.55%, due 2019-2045 | | $ | 2,225,000 |
| | $ | 2,675,000 |
| |
| Senior Notes, 3.25% to 4.10%, due 2027 - 2047 | | 1,300,000 |
| | 1,300,000 |
| |
| Term loan, Libor plus 100 bps, due 2020 | | — |
| | 493,750 |
| |
| Fixed rate medium-term notes, 3.30% to 6.25%, due 2023 - 2045 | | Fixed rate medium-term notes, 3.30% to 6.25%, due 2023 - 2045 | | $ | 2,125,000 | | | $ | 2,125,000 | |
| Senior Notes, 2.70% to 4.10%, due 2024 - 2049 | | Senior Notes, 2.70% to 4.10%, due 2024 - 2049 | | 3,675,000 | | | 3,675,000 | |
| Term loans, Libor plus 112.5 bps, due 2023 - 2024 | | Term loans, Libor plus 112.5 bps, due 2023 - 2024 | | — | | | 1,210,313 | |
| Foreign: | | | | | Foreign: | |
| Euro Senior Notes, 1.125%, due 2025 | | 817,810 |
| | 799,890 |
| Euro Senior Notes, 1.125%, due 2025 | | 830,060 | | | 786,520 | |
| Euro Term loan, Libor plus 150 bps, due 2022 | | 116,830 |
| | 114,270 |
| |
| | Other long-term debt | | 762 |
| | 433 |
| Other long-term debt | | 15,968 | | | 12,708 | |
| Deferred debt issuance costs | | (41,432 | ) | | (47,183 | ) | Deferred debt issuance costs | | (61,156) | | | (71,256) | |
| Total long-term debt | | 4,418,970 |
| | 5,336,160 |
| Total long-term debt | | 6,584,872 | | | 7,738,285 | |
| Less: Long-term debt payable within one year | | 100,411 |
| | 474,265 |
| Less: Long-term debt payable within one year | | 2,819 | | | 86,029 | |
| Long-term debt, net | | $ | 4,318,559 |
| | $ | 4,861,895 |
| Long-term debt, net | | $ | 6,582,053 | | | $ | 7,652,256 | |
During 2021, we repaid the remaining $890 million and $320 million balances related to the $925 million and $800 million term loans, respectively.
Principal amounts of long-term debt payable in the five years ending June 30, 20192022 through 20232026 are $100,411, $240, $32, $116,841$2,819, $302,396, $576,224, $1,330,535 and $300,006,$439, 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
11. Leases
We primarily enter into lease agreements for office space, distribution centers, certain manufacturing facilities and equipment. The majority of our leases are operating leases. Finance leases are immaterial to our financial statements. In addition, leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Certain leases contain options that provide us with the ability to extend the lease term. Such options are included in the lease term when it is reasonably certain that the option will be exercised. When accounting for leases, we combine payments for leased assets, related services and other components of a lease. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on lease term and the currency in which expire at various dates,lease payments are made.
The components of lease expense are as follows:2019-$78,812; 2020-$56,889; 2021-$35,102; 2022-$18,326; 2023-$9,172 and after 2023-$28,390. | | | | | | | | | | | |
| 2021 | | 2020 |
| Operating lease expense | $ | 48,171 | | | $ | 50,267 | |
| Short-term lease cost | 7,674 | | | 8,566 | |
| Variable lease cost | 5,835 | | | 5,108 | |
| Total lease cost | $ | 61,680 | | | $ | 63,941 | |
Supplemental cash flow information related to operating leases are as follows: | | | | | | | | | | | |
| 2021 | | 2020 |
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 47,080 | | | $ | 48,562 | |
| Right-of-use assets obtained in exchange for operating lease obligations | 41,637 | | | 41,069 | |
Supplemental balance sheet information related to operating leases is as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Operating lease right-of-use assets (included within Investments and other assets) | $ | 131,880 | | | $ | 138,601 |
| | | |
| Current operating lease liabilities (included within Other accrued liabilities) | $ | 40,193 | | | $ | 43,327 | |
| Long-term operating lease liabilities (included within Other liabilities) | 93,904 | | | 96,446 | |
| Total operating lease liabilities | $ | 134,097 | | | $ | 139,773 | |
| | | |
| Weighted average remaining lease term | 5.5 years | | 5.2 years |
| Weighted average discount rate | 1.8 | % | | 2.1 | % |
Maturities of lease liabilities at June 30, 2021 are as follows: | | | | | |
| Operating Leases |
| 2022 | $ | 42,101 | |
| 2023 | 29,349 | |
| 2024 | 19,633 | |
| 2025 | 15,068 | |
| 2026 | 10,700 | |
| Thereafter | 24,715 | |
| Total operating lease payments | $ | 141,566 | |
| Less imputed interest | 7,469 | |
| Total operating lease liabilities | $ | 134,097 | |
Rental expense in 2018, 2017 and 20162019 was $126,940, $118,723 and $119,004, respectively.$126,752.
12. 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 CompanyWe also hashave 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 CompanyWe also sponsorssponsor defined contribution plans and participatesparticipate in government-sponsored programs in certain foreign countries.
A summary of the Company's defined benefit pension plans follows: | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Benefit cost | | | | | |
| Service cost | $ | 84,188 | | | $ | 82,743 | | | $ | 76,647 | |
| Interest cost | 102,475 | | | 142,479 | | | 160,542 | |
| | | | | |
| | | | | |
| Expected return on plan assets | (267,579) | | | (266,674) | | | (251,072) | |
| Amortization of prior service cost | 5,325 | | | 5,633 | | | 6,655 | |
| Amortization of unrecognized actuarial loss | 207,897 | | | 165,815 | | | 121,823 | |
| Amortization of transition obligation | 18 | | | 18 | | | 18 | |
| Net periodic benefit cost | $ | 132,324 | | | $ | 130,014 | | | $ | 114,613 | |
Components of net pension benefit cost, other than service cost, are included in other (income), net in the Consolidated Statement of Income.
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Benefit cost | | | | | |
| Service cost | $ | 82,993 |
| | $ | 94,356 |
| | $ | 94,650 |
|
| Interest cost | 144,339 |
| | 126,131 |
| | 181,469 |
|
| Special termination cost | — |
| | — |
| | 7,088 |
|
| Settlement cost | — |
| | — |
| | 5,102 |
|
| Expected return on plan assets | (258,490 | ) | | (239,537 | ) | | (221,629 | ) |
| Amortization of prior service cost | 6,570 |
| | 8,116 |
| | 7,470 |
|
| Amortization of unrecognized actuarial loss | 147,387 |
| | 212,433 |
| | 170,407 |
|
| Amortization of initial net obligation | 18 |
| | 18 |
| | 17 |
|
| Net periodic benefit cost | $ | 122,817 |
| | $ | 201,517 |
| | $ | 244,574 |
|
| | | | | | | | | | | |
| 2021 | | 2020 |
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 6,405,623 | | | $ | 5,487,574 | |
| Service cost | 84,188 | | | 82,743 | |
| Interest cost | 102,475 | | | 142,479 | |
| Acquisition | — | | | 380,237 | |
| | | |
| Plan amendments | 2,311 | | | 3,286 | |
| | | |
| Actuarial (gain) loss | (91,719) | | | 569,306 | |
| Benefits paid | (264,062) | | | (232,048) | |
| Foreign currency translation and other | 84,187 | | | (27,954) | |
| Benefit obligation at end of year | $ | 6,323,003 | | | $ | 6,405,623 | |
| | | |
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 4,594,106 | | | $ | 4,244,969 | |
| Actual gain on plan assets | 831,762 | | | 253,684 | |
| Acquisition | — | | | 280,103 | |
| | | |
| Employer contributions | 76,936 | | | 72,753 | |
| Benefits paid | (264,062) | | | (232,048) | |
| Foreign currency translation and other | 66,835 | | | (25,355) | |
| Fair value of plan assets at end of year | $ | 5,305,577 | | | $ | 4,594,106 | |
| Funded status | $ | (1,017,426) | | | $ | (1,811,517) | |
| | | | | | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (4,944) | | | $ | (1,423) | |
| Pensions and other postretirement benefits | (1,012,482) | | | (1,810,094) | |
| Net amount recognized | $ | (1,017,426) | | | $ | (1,811,517) | |
| | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 1,090,343 | | | $ | 1,921,389 | |
| Prior service cost | 15,006 | | | 17,184 | |
| Transition obligation | 8 | | | 26 | |
| Net amount recognized | $ | 1,105,357 | | | $ | 1,938,599 | |
|
| | | | | | | |
| | 2018 |
| | 2017 |
|
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 5,217,857 |
| | $ | 5,315,655 |
|
| Service cost | 82,993 |
| | 94,356 |
|
| Interest cost | 144,339 |
| | 126,131 |
|
| Acquisition | — |
| | 201,283 |
|
| Plan amendments | 2,932 |
| | 3,265 |
|
| Divestiture | (9,535 | ) | | (851 | ) |
| Actuarial gain | (182,588 | ) | | (268,370 | ) |
| Benefits paid | (216,169 | ) | | (250,289 | ) |
| Foreign currency translation and other | (5,832 | ) | | (3,323 | ) |
| Benefit obligation at end of year | $ | 5,033,997 |
| | $ | 5,217,857 |
|
| | | | |
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 3,896,001 |
| | $ | 3,307,047 |
|
| Actual gain on plan assets | 174,951 |
| | 341,344 |
|
| Acquisition | — |
| | 168,264 |
|
| Divestiture | (12,231 | ) | | — |
|
| Employer contributions | 81,518 |
| | 330,932 |
|
| Benefits paid | (216,169 | ) | | (250,289 | ) |
| Foreign currency translation and other | (8,181 | ) | | (1,297 | ) |
| Fair value of plan assets at end of year | $ | 3,915,889 |
| | $ | 3,896,001 |
|
| Funded status | $ | (1,118,108 | ) | | $ | (1,321,856 | ) |
|
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (11,333 | ) | | $ | (12,793 | ) |
| Pensions and other postretirement benefits | (1,106,775 | ) | | (1,309,063 | ) |
| Net amount recognized | $ | (1,118,108 | ) | | $ | (1,321,856 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 1,216,612 |
| | $ | 1,461,017 |
|
| Prior service cost | 18,900 |
| | 22,761 |
|
| Transition obligation | 61 |
| | 77 |
|
| Net amount recognized | $ | 1,235,573 |
| | $ | 1,483,855 |
|
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.
BeginningAt June 30, 2021, the benefit obligation decreased primarily due to slightly higher discount rates, partially offset by updated census data and assumptions.
The benefit obligation increased in 2017,2020 upon acquisition of the Company changedLord pension plans. Significant reductions in the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs from the single-weighted average discount raterates also contributed to the spot yield curve approach.increase in the benefit obligation, which was partially offset by a reduced salary scale and updated mortality assumptions for the domestic qualified defined benefit plan.
Investment gains are the primary contributing factor for the increase in plan assets' fair value during 2021. The change does not affectincrease in the measurementplan assets' fair value in 2020 is attributable to the acquisition of the Company's benefit obligations. The new method provides a more precise measureLord pension plans and investment gains.
During 2016, the Company provided enhanced retirement benefits in connection with a plant closure, which resulted in an increase in net pension benefit cost of $7,088.
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 2019 is $114,825, $6,286 and $18, respectively.
The accumulated benefit obligation for all defined benefit plans was $4,751,111$6,069 million and $4,890,058$6,102 million at June 30, 20182021 and 2017,2020, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets
Information for pension plans with accumulated benefit obligations in excess of plan assets were $4,933,863, $4,665,272 and $3,807,859, respectively, at June 30, 2018, and $5,120,268, $4,805,485 and $3,793,696, respectively, at June 30, 2017. The projected benefit obligation and fair value of plan assetsassets: | | | | | | | | | | | |
| 2021 | | 2020 |
| Accumulated benefit obligation | $ | 5,358,817 | | | $ | 6,028,952 | |
| Fair value of plan assets | 4,546,301 | | | 4,503,316 | |
Information for pension plans with projected benefit obligations in excess of plan assets were $4,970,120 and $3,842,539, respectively, at June 30, 2018, and $5,142,881 and $3,815,815, respectively, at June 30, 2017.assets: | | | | | | | | | | | |
| 2021 | | 2020 |
| Projected benefit obligation | $ | 5,620,693 | | | $ | 6,348,500 | |
| Fair value of plan assets | 4,568,113 | | | 4,523,545 | |
The Company expectsWe expect to make cash contributions of approximately $70$102 million to itsour defined benefit pension plans in 2019,2022, the majority of which relaterelates to itsour non-U.S. defined benefit plans. Estimated future benefit payments in the five years ending June 30,2019 2022 through 20232026 are $240,163, $242,051, $259,402, $305,553$303,856, $283,530, $327,149, $302,877 and $267,258,$305,135, respectively, and $1,454,646$1,644,821 in the aggregate for the five years ending June 30, 2024 2027 through June 30, 2028. 2031.
The assumptions used to measure net periodic benefit cost for the Company's significant defined benefit plans are:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| U.S. defined benefit plan | | | | | |
| Discount rate | 2.36 | % | | 3.28 | % | | 4.01 | % |
| Average increase in compensation | 2.98 | % | | 3.60 | % | | 3.65 | % |
| Expected return on plan assets | 6.75 | % | | 7.00 | % | | 7.00 | % |
| Non-U.S. defined benefit plans | | | | | |
| Discount rate | 0.2 to 3.03% | | 0.2 to 2.96% | | 0.3 to 3.37% |
| Average increase in compensation | 1.75 to 4.50% | | 1.75 to 3.90% | | 1.75 to 5.50% |
| Expected return on plan assets | 1.0 to 5.40% | | 1.0 to 5.75% | | 1.0 to 5.75% |
|
| | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| U.S. defined benefit plans | | | | | |
| Discount rate | 3.64 | % | | 3.33 | % | | 4.19 | % |
| Average increase in compensation | 3.89 | % | | 5.02 | % | | 5.14 | % |
| Expected return on plan assets | 7.5 | % | | 7.5 | % | | 7.5 | % |
| Non-U.S. defined benefit plans | | | | | |
| Discount rate | 0.30 to 7.57% |
| | 0.23 to 7.75% |
| | 0.7 to 6.0% |
|
| Average increase in compensation | 2.0 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% |
|
The assumptions used to measure the benefit obligation for the Company's significant defined benefit plans are: | | | | | | | | | | | |
| 2021 | | 2020 |
| U.S. defined benefit plan | | | |
| Discount rate | 2.55 | % | | 2.36 | % |
| Average increase in compensation | 3.05 | % | | 2.98 | % |
| Non-U.S. defined benefit plans | | | |
| Discount rate | 0.25 to 2.95% | | 0.2 to 3.03% |
| Average increase in compensation | 1.75 to 4.50% | | 1.75 to 4.50% |
|
| | | | | |
| | 2018 |
| | 2017 |
|
| U.S. defined benefit plans | | | |
| Discount rate | 4.01 | % | | 3.64 | % |
| Average increase in compensation | 3.65 | % | | 3.89 | % |
| Non-U.S. defined benefit plans | | | |
| Discount rate | 0.30 to 3.37% |
| | 0.30 to 7.57% |
|
| Average increase in compensation | 1.75 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.
The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Equity securities | 38 | % | | 41 | % |
| Debt securities | 41 | % | | 49 | % |
| Other investments | 21 | % | | 10 | % |
| 100 | % | | 100 | % |
|
| | | | | |
| | 2018 |
| | 2017 |
|
| Equity securities | 44 | % | | 45 | % |
| Debt securities | 49 | % | | 47 | % |
| Other investments | 7 | % | | 8 | % |
| | 100 | % | | 100 | % |
The weighted-average target asset allocation as of June 30, 20182021 is 4140 percent equity securities, 4743 percent debt securities and 1217 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 7475 percent of the Company'sour total defined benefit plan assets. The Company's overall investment strategy with respect to the Company'sour 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) to an allocationuse a funding strategy more heavily weighted toward income generating assets.liability-hedging assets as the funded status improves. Over time, we will continue to add long duration fixed income assets are being addedinvestments to the portfolio. These securities are highly correlated with the Company'sour 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, 20182021 and at June 30, 2017,2020, by asset class, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | Quoted Prices In
Active Markets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Cash and cash equivalents | $ | 248,525 | | | $ | 241,421 | | | $ | 7,104 | | | $ | — | |
| Equity securities | | | | | | | |
| U.S. based companies | 408,301 | | | 408,301 | | | — | | | — | |
| Non-U.S. based companies | 12,834 | | | 12,834 | | | — | | | — | |
| Fixed income securities | | | | | | | |
| Corporate debt securities | 531,497 | | | 1,440 | | | 530,057 | | | — | |
| Government issued securities | 151,458 | | | 105,167 | | | 46,291 | | | — | |
| Mutual funds | | | | | | | |
| Equity funds | 6,768 | | | 6,768 | | | — | | | — | |
| Fixed income funds | 6,506 | | | 6,506 | | | — | | | — | |
| Mutual funds measured at net asset value | 368,340 | | | | | | | |
| | | | | | | |
| Common/Collective trusts measured at net asset value | 3,161,683 | | | | | | | |
| Limited Partnerships measured at net asset value | 126,606 | | | | | | | |
| Miscellaneous | 283,059 | | | — | | | 283,059 | | | — | |
| Total at June 30, 2021 | $ | 5,305,577 | | | $ | 782,437 | | | $ | 866,511 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | 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 bonds | 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, 2017 | | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | June 30, 2020 | | Quoted Prices In
Active Markets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Cash and cash equivalents | $ | 76,057 |
| | $ | 75,370 |
| | $ | 687 |
| | $ | — |
| Cash and cash equivalents | $ | 97,112 | | | $ | 96,004 | | | $ | 1,108 | | | $ | — | |
| Equity securities |
| | | | | | | Equity securities | |
| U.S. based companies | 416,830 |
| | 416,830 |
| | — |
| | — |
| U.S. based companies | 243,656 | | | 243,656 | | | — | | | — | |
| Non-U.S. based companies | 236,134 |
| | 236,134 |
| | — |
| | — |
| Non-U.S. based companies | 9,152 | | | 9,152 | | | — | | | — | |
| Fixed income securities | | | | | | | | Fixed income securities | |
| Corporate bonds | 176,135 |
| | 91,982 |
| | 84,153 |
| | — |
| |
| Corporate debt securities | | Corporate debt securities | 616,582 | | | 1,477 | | | 615,105 | | | — | |
| Government issued securities | 199,389 |
| | 144,616 |
| | 54,773 |
| | — |
| Government issued securities | 471,059 | | | 379,128 | | | 91,931 | | | — | |
| Mutual funds | | | | | | | | Mutual funds | |
| Equity funds | 306,168 |
| | 306,168 |
| | — |
| | — |
| Equity funds | 111,466 | | | 111,466 | | | — | | | — | |
| Fixed income funds | 204,628 |
| | 204,628 |
| | — |
| | — |
| Fixed income funds | 12,912 | | | 12,912 | | | — | | | — | |
| Mutual funds measured at net asset value | 233,234 |
| | | | | | | Mutual funds measured at net asset value | 259,776 | | |
| Common/Collective trusts | | | | | | | | Common/Collective trusts | |
| Equity funds | 70,389 |
| | 70,389 |
| | — |
| | — |
| |
| Fixed income funds | 46,003 |
| | 46,003 |
| | — |
| | — |
| |
| | Common/Collective trusts measured at net asset value | 1,677,942 |
| | | | | | | Common/Collective trusts measured at net asset value | 2,711,736 | | |
| | Limited Partnerships measured at net asset value | 262,092 |
| | | | | | | Limited Partnerships measured at net asset value | 104,760 | | |
| Miscellaneous | (9,000 | ) | | — |
| | (9,000 | ) | | — |
| Miscellaneous | (44,105) | | | — | | | (44,105) | | | — | |
| Total at June 30, 2017 | $ | 3,896,001 |
| | $ | 1,592,120 |
| | $ | 130,613 |
| | $ | — |
| |
| Total at June 30, 2020 | | Total at June 30, 2020 | $ | 4,594,106 | | | $ | 853,795 | | | $ | 664,039 | | | $ | — | |
Cash and cash equivalents which include repurchase agreements and other short-term investments, are valued at cost, which approximates fair value. During 2021, the U.S. defined benefit plan implemented a new liability-hedging initiative that requires the plan to maintain a certain cash balance. At June 30, 2021, this required cash balance totaled approximately $162 million.
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 $207,202$408,301 and $212,480$243,656 as of June 30, 20182021 and 2017,2020, 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. Redemption of a certain mutual fund is subject to a lock-up period, lasting throughout its duration, scheduled to terminate July 2026. However, this mutual fund may extend its duration up to an additional two years under certain conditions.
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 without restriction after giving appropriate notice to the issuer. Generally, redemption of the entire investment balance of all common/collective trusts requires no more than a 60-day90-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 aPartnerships' interest in venture capital investments are measured at fair value based on net asset value per share and provide exposureas determined by the respective fund investment. A certain limited partnership investment, subject to a varietyone year lock-up period expiring June 30, 2022, is restricted to a maximum redemption of hedging strategies including long/short equity, relative value, event driven and global macro. Limited Partnership investments can be redeemed either monthly or quarterly and without restriction after giving appropriate notice to the issuer. Redemption20 percent of the entire investmentits account balance generally requires no more thanevery six months upon a 95-day notice90-day notification 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, includedthe investments in the miscellaneous asset class,category is to provide a stable rate of return over a specified period of time.
Employee Savings Plan - The Company sponsors We sponsor an employee stock ownership plan (ESOP)("ESOP") as part of its existingour legacy savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Company matching contributions, up to a maximum of four4 percent of an employee's annual compensation, are recorded as compensation expense. Participants may direct company matching contributions to any investment option within the savings and investment 401(k) plan.
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Shares held by ESOP | 4,497,902 | | | 5,306,643 | | | 6,134,280 | |
| Company matching contributions | $ | 66,249 | | | $ | 69,434 | | | $ | 72,032 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Shares held by ESOP | 6,476,154 |
| | 6,911,436 |
| | 7,728,332 |
|
| Company matching contributions | $ | 65,262 |
| | $ | 57,766 |
| | $ | 58,922 |
|
In addition to shares within the ESOP, as of June 30, 2018,2021, employees have elected to invest in 1,870,2861,258,763 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 employeeour legacy savings and investment 401(k) plan. The Company makesWe make a cash contribution to the participant's RIA each year and participants do not contribute to the RIA. Prior to January 1, 2021, the amount of which isthe annual contribution was based on the participant's age and years of service. Participants do not contribute toBeginning January 1, 2021, we amended the RIA.RIA ensuring most participants receive a flat 3 percent annual contribution of eligible compensation with some grandfathered participants receiving annual contribution calculated at a higher percent of eligible compensation. Under the amended RIA, no participant will receive less than the flat 3 percent contribution. The Company recognized $29,023, $29,309$41,680, $38,387 and $25,780$30,603 in expense related to the RIA in 2018, 20172021, 2020 and 2016,2019, respectively.
During 2017, the Company assumed various2020, we acquired several defined contribution plans previously sponsored by Clarcor. The Company recognizedcomprised of similar company matching contributions and RIA features as our legacy plan. We recorded additional company matching expense of $4,481$4,623 and $2,199$4,190 and RIA expense of $5,425 and $7,439, respectively, for these acquired plans in 20182021 and 2017, respectively, related to2020. During 2021, these defined contribution plans. In January 2018, the former employees of Clarcor became eligible to participate in theacquired plans were merged into our legacy 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 hasWe have reserved the right to change these benefit plans.
The Company recognized $2,755, $4,357$1,237, $1,551 and $8,754$1,838 in expense related to other postretirement benefits in 2018, 20172021, 2020 and 2016,2019, 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), net in the Consolidated Statement of $4,521.
Income.
| | | | 2018 |
| | 2017 |
| | 2021 | | 2020 |
| Change in benefit obligation | | | | Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 79,933 |
| | $ | 89,785 |
| Benefit obligation at beginning of year | $ | 72,130 | | | $ | 60,998 | |
| Service cost | 320 |
| | 469 |
| Service cost | 328 | | | 250 | |
| Interest cost | 2,003 |
| | 1,922 |
| Interest cost | 983 | | | 1,686 | |
| Acquisition | — |
| | 291 |
| Acquisition | — | | | 12,638 | |
| Actuarial gain | (11,259 | ) | | (8,235 | ) | |
| | Actuarial (gain) loss | | Actuarial (gain) loss | (4,139) | | | 1,276 | |
| Benefits paid | (4,476 | ) | | (4,299 | ) | Benefits paid | (5,563) | | | (4,718) | |
| Benefit obligation at end of year | $ | 66,521 |
| | $ | 79,933 |
| Benefit obligation at end of year | $ | 63,739 | | | $ | 72,130 | |
| Funded status | $ | (66,521 | ) | | $ | (79,933 | ) | Funded status | $ | (63,739) | | | $ | (72,130) | |
| | | | | | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (5,634) | | | $ | (6,374) | |
| Pensions and other postretirement benefits | (58,105) | | | (65,756) | |
| Net amount recognized | $ | (63,739) | | | $ | (72,130) | |
| | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial gain | $ | (4,311) | | | $ | (173) | |
| Prior service credit | — | | | (73) | |
| Net amount recognized | $ | (4,311) | | | $ | (246) | |
|
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheet | | | |
| Other accrued liabilities | $ | (6,180 | ) | | $ | (6,532 | ) |
| Pensions and other postretirement benefits | (60,341 | ) | | (73,401 | ) |
| Net amount recognized | $ | (66,521 | ) | | $ | (79,933 | ) |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive (Loss) | | | |
| Net actuarial loss | $ | 1,232 |
| | $ | 12,828 |
|
| Prior service credit | (314 | ) | | (435 | ) |
| Net amount recognized | $ | 918 |
| | $ | 12,393 |
|
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 2021, largely reflected in the net actuarial lossgain component, is primarily due to a slightly higher discount rate and prior service credit that will be amortized from accumulated other comprehensive (loss) into net periodicupdated census data and actuarial assumptions. The increase in the benefit obligation in 2020, primarily reflected in the acquisition component, is a result of assuming Lord's postretirement cost in 2019 is $14 and $(121), respectively.plans.
The assumptions used to measure the net periodic benefit cost for postretirement benefit obligations are:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Discount rate | 2.14 | % | | 3.15 | % | | 3.92 | % |
| Current medical cost trend rate (Pre-65 participants) | 6.73 | % | | 7.09 | % | | 7.47 | % |
| Current medical cost trend rate (Post-65 participants) | 7.03 | % | | 7.43 | % | | 7.87 | % |
| Ultimate medical cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Medical cost trend rate decreases to ultimate in year | 2028 | | 2028 | | 2026 |
|
| | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Discount rate | 3.46 | % | | 3.15 | % | | 3.96 | % |
| Current medical cost trend rate (Pre-65 participants) | 8.19 | % | | 7.35 | % | | 7.61 | % |
| Current medical cost trend rate (Post-65 participants) | 9.79 | % | | 8.68 | % | | 9.00 | % |
| Ultimate medical cost trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Medical cost trend rate decreases to ultimate in year | 2025 |
| | 2025 |
| | 2025 |
|
The discount rate assumption used to measure the benefit obligation was 3.922.36 percent and 2.14 percent in 20182021 and 3.46 percent in 2017.2020, respectively.
Estimated future benefit payments for other postretirement benefits in the five years ending June 30,2019 2022 through 20232026 are $6,463, $6,358, $5,967, $5,804$5,634, $5,155, $4,828, $4,540 and $5,564,$4,317, respectively, and $24,842$18,566 in the aggregate for the five years ending June 30, 2024 2027 through June 30, 2028. 2031.
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 to 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, Companycompany matching contributions and earnings on the deferrals. In addition, the Company maintainswe maintain a defined contribution nonqualified supplemental executive pension plan in which the Company is the only contributor. During 2018, 20172021, 2020 and 2016, the Company2019, we recorded expense (income) relating to these programs of $13,420, $20,400$44,906, $5,863 and $(2,917),$5,916, respectively.
The Company has invested in corporate-owned life insurance policies to assist in meeting the obligationobligations under these programs. The policies are held in a rabbi trust and are recorded as assets of the Company.
13. Equity
Changes in accumulated other comprehensive (loss) in shareholders' equity by component:
|
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustment and Other | | Retirement Benefit Plans | | Total |
| Balance June 30, 2016 | $ | (844,121 | ) | | $ | (1,383,644 | ) | | $ | (2,227,765 | ) |
| Other comprehensive income (loss) before reclassifications | (80,189 | ) | | 242,414 |
| | 162,225 |
|
| Amounts reclassified from accumulated other comprehensive (loss) | (1,032 | ) | | 142,368 |
| | 141,336 |
|
| 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 | ) |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 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 | ) | | See Note 10 |
| Recognized actuarial loss | | (147,611 | ) | | See Note 10 |
| Total before tax | | (154,078 | ) | | |
| Tax benefit | | 51,242 |
| | Income taxes |
| Net of tax | | $ | (102,836 | ) | | |
| | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment and Other | | Retirement Benefit Plans | | Total |
| Balance June 30, 2019 | $ | (1,011,656) | | | $ | (1,047,392) | | | $ | (2,059,048) | |
| | | | | |
| Other comprehensive (loss) before reclassifications | (182,281) | | | (447,161) | | | (629,442) | |
| Amounts reclassified from accumulated other comprehensive (loss) | — | | | 129,615 | | | 129,615 | |
| Balance June 30, 2020 | $ | (1,193,937) | | | $ | (1,364,938) | | | $ | (2,558,875) | |
| | | | | |
| Other comprehensive income before reclassifications | 328,072 | | | 502,853 | | | 830,925 | |
| Amounts reclassified from accumulated other comprehensive (loss) | — | | | 161,223 | | | 161,223 | |
| Balance June 30, 2021 | $ | (865,865) | | | $ | (700,862) | | | $ | (1,566,727) | |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2017:2021:
| | | | | | | | | | | | | | |
| 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 | | $ | (5,270) | | | Other (income) expense, net |
| Recognized actuarial loss | | (207,896) | | | Other (income) expense, net |
| Total before tax | | (213,166) | | | |
| Tax benefit | | 51,943 | | | |
| Net of tax | | $ | (161,223) | | | |
|
| | | | | | |
| 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 | | $ | (8,014 | ) | | See Note 10 |
| Recognized actuarial loss | | (214,284 | ) | | See Note 10 |
| Total before tax | | (222,298 | ) | | |
| Tax benefit | | 79,930 |
| | Income taxes |
| Net of tax | | $ | (142,368 | ) | | |
| | | | | | | | | | | | | | |
| 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 | | $ | (5,531) | | | Other (income) expense, net |
| Recognized actuarial loss | | (165,550) | | | Other (income) expense, net |
| Total before tax | | (171,081) | | | |
| Tax benefit | | 41,466 | | | |
| Net of tax | | $ | (129,615) | | | |
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. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During 2021, the Company reinitiated the share repurchase program and began repurchasing shares under the program in February 2021.
The number of common shares repurchased at the average purchase price follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Shares repurchased | 331,259 | | | 818,581 | | | 4,755,273 | |
| Average price per share including commissions | $ | 301.88 | | | $ | 179.29 | | | $ | 168.23 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Shares repurchased | 1,738,234 |
| | 1,976,778 |
| | 5,121,051 |
|
| Average price per share including commissions | $ | 172.59 |
| | $ | 133.90 |
| | $ | 108.87 |
|
14. Stock Incentive Plans
The Company's 2016 Omnibus Stock Incentive Plan ("2016 SIP") 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 aggregateOn October 23, 2019, the number of shares of common stock authorized for issuance under the 2016 Omnibus Stock Incentive Plan is 16 million.SIP increased to 23.8 million shares. At June 30, 2018, 11.62021, 11.3 million common stock shares were available for future issuance.
The Company satisfiesWe satisfy share-based incentive award obligations by issuing shares of common stock out of treasury, which have been repurchased pursuant to the Company'sour share repurchase program described in Note 11,13, or through the issuance of previously unissued common stock.
SARs - 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. 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 SAR award granted in 2018, 20172021, 2020 and 20162019 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Risk-free interest rate | 0.4 | % | | 1.5 | % | | 2.8 | % |
| Expected life of award | 5.4 years | | 5.1 years | | 5.1 years |
| Expected dividend yield of stock | 2.0 | % | | 2.0 | % | | 1.9 | % |
| Expected volatility of stock | 35.2 | % | | 25.9 | % | | 24.2 | % |
| Weighted-average fair value | $ | 53.92 | | | $ | 31.68 | | | $ | 35.09 | |
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Risk-free interest rate | 1.9 | % | | 1.4 | % | | 1.9 | % |
| Expected life of award | 5.2 years |
| | 5.3 years |
| | 5.4 years |
|
| Expected dividend yield of stock | 2.0 | % | | 2.0 | % | | 1.9 | % |
| Expected volatility of stock | 23.4 | % | | 28.5 | % | | 28.7 | % |
| Weighted-average fair value | $ | 29.71 |
| | $ | 27.39 |
| | $ | 26.88 |
|
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'sour 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'sour historical common stock prices over a time-frame similar to the expected life of the award.
SAR activity during 20182021 is as follows (aggregate intrinsic value in millions):
| | | | | | | | | | | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Outstanding June 30, 2017 | 6,533,406 |
| | $ | 94.18 |
| | | |
| Outstanding June 30, 2020 | | Outstanding June 30, 2020 | 5,183,970 | | | $ | 132.42 | | | | | |
| Granted | 907,626 |
| | $ | 158.79 |
| | | Granted | 741,852 | | | $ | 209.56 | | |
| Exercised | (1,351,120 | ) | | $ | 78.61 |
| | | Exercised | (1,741,352) | | | $ | 116.51 | | |
| Canceled | (43,031 | ) | | $ | 146.84 |
| | | Canceled | (35,884) | | | $ | 185.29 | | |
| Outstanding June 30, 2018 | 6,046,881 |
| | $ | 106.98 |
| | 5.8 years | | $ | 298.1 |
| |
| Exercisable June 30, 2018 | 4,168,672 |
| | $ | 92.74 |
| | 4.6 years | | $ | 263.1 |
| |
| Outstanding June 30, 2021 | | Outstanding June 30, 2021 | 4,148,586 | | | $ | 152.44 | | | 6.3 years | | $ | 641.7 | |
| Exercisable June 30, 2021 | | Exercisable June 30, 2021 | 2,677,757 | | | $ | 134.55 | | | 5.1 years | | $ | 462.1 | |
A summary of the status and changes of shares subject to SAR awards and the related average price per share follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2020 | 1,539,502 | | | $ | 32.41 | |
| Granted | 741,852 | | | $ | 53.92 | |
| Vested | (774,721) | | | $ | 32.09 | |
| Canceled | (35,804) | | | $ | 42.50 | |
| Nonvested June 30, 2021 | 1,470,829 | | | $ | 43.19 | |
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2017 | 1,947,569 |
| | $ | 27.80 |
|
| Granted | 907,626 |
| | $ | 29.71 |
|
| Vested | (933,955 | ) | | $ | 28.33 |
|
| Canceled | (43,031 | ) | | $ | 28.34 |
|
| Nonvested June 30, 2018 | 1,878,209 |
| | $ | 28.44 |
|
At June 30, 2018, $13,458 of expense with respect to nonvested SAR awards has yet to be recognizedDuring 2021, 2020 and will be amortized into expense over a weighted-average period of approximately 17 months. The total fair value of shares vested during 2018, 2017 and 2016 was $26,461, $33,094 and $34,706, respectively.
Information related to SAR awards exercised during 2018, 2017 and 2016 is as follows:
|
| | | | | | | | | | | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Net cash proceeds | $ | 3,682 |
| | $ | 2,202 |
| | $ | 126 |
|
| Intrinsic value | 136,000 |
| | 153,908 |
| | 40,612 |
|
| Income tax benefit | 28,701 |
| | 31,193 |
| | 7,188 |
|
During 2018, 2017 and 2016, the Company2019, we recognized stock-based compensation expense of $27,422, $28,535$35,212, $26,108 and $28,129,$26,568, respectively, relating to 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 was credited to income tax expense.
At June 30, 2021, $13,089 of expense in 2018with respect to nonvested SAR awards has yet to be recognized and 2017will be amortized into expense over a weighted-average period of approximately 16 months. The total fair value of shares vested during 2021, 2020 and 2019 was $24,857, $27,209 and $25,365, respectively.
Information related to additional capital in 2016.SAR awards exercised during 2021, 2020 and 2019 is as follows: | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net cash proceeds | $ | 4,684 | | | $ | 2,623 | | | $ | 2,475 | |
| Intrinsic value | 225,025 | | | 133,641 | | | 95,502 | |
| Income tax benefit | $ | 37,437 | | | $ | 21,132 | | | $ | 15,584 | |
| Number of shares surrendered | 316,330 | | | 228,986 | | | 158,610 | |
Shares surrendered upon exercise of SARs: 2018 - 269,670; 2017 - 371,246; 2016 - 158,808.
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. Nonvested RSUs may not be transferred and do not have dividend or voting rights. For each nonvested 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 2018, 20172021, 2020 and 20162019 was based on the fair market value of the Company'sour 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, 2020 | 350,573 | | | $ | 160.66 | |
| Granted | 137,488 | | | $ | 218.17 | |
| Vested | (130,121) | | | $ | 161.75 | |
| Canceled | (8,354) | | | $ | 188.20 | |
| Nonvested June 30, 2021 | 349,586 | | | $ | 182.22 | |
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2017 | 394,329 |
| | $ | 120.92 |
|
| Granted | 157,086 |
| | $ | 159.26 |
|
| Vested | (176,855 | ) | | $ | 116.94 |
|
| Canceled | (13,949 | ) | | $ | 139.61 |
|
| Nonvested June 30, 2018 | 360,611 |
| | $ | 138.85 |
|
During 2018, 20172021, 2020 and 2016, the Company2019, we recognized stock-based compensation expense of $24,073, $23,025$26,009, $25,560 and $21,190$25,258, respectively, relating to RSU awards for employees. At June 30, 2018, $18,6272021, $20,543 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 21 months.20 months. The total fair value of RSU awards vested during 2018, 20172021, 2020 and 20162019 was $20,681, $21,576$21,048, $23,380 and $21,173,$20,475, respectively. The CompanyWe recognized an income tax benefit of $2,451, $939$796, $1,037 and $870$1,548 relating to the issuance of common stock for RSU awards that vested during 2018, 20172021, 2020 and 2016,2019, respectively.
During 2018, 2017 and 2016, 9,900, 12,430 and 14,404 RSU awards, respectively,Additionally, we granted RSUs with a one-year vesting period were granted to non-employee members of the Board of Directors. Although nonvested shares do not have dividend or voting rights, recipientsRecipients receive a dividend equivalent payable in common shares, equal to the cash dividend per share paid to common shareholders. A summary of the status and changes of shares subject to Board of Directors RSU awards and the related average price per share follows: | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2020 | 8,262 | | | $ | 187.49 | |
| Granted | 8,122 | | | $ | 214.46 | |
| Vested | (8,298) | | | $ | 187.49 | |
| Canceled | (610) | | | $ | 203.23 | |
| Nonvested June 30, 2021 | 7,476 | | | $ | 215.51 | |
The fair value of each RSU award granted to the Board of Directors in 2021, 2020 and 2019 was based on the fair market value of our common stock on the date of grant. In 2018, 20172021, 2020 and 2016, the Company2019, we recognized stock-based compensation expense of $1,697, $1,560,$1,458, $1,434, and $824,$1,345, respectively, relating to these awards. During 2021, 2020 and 2019, we recognized an income tax benefit (cost) of $2,115, $86 and $(82), respectively, related to the vesting of Board of Directors RSU awards. At June 30, 2018, $5962021, $649 of expense with respect to 9,845 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 fourfive months. During 2018 and 2017, the Company recognized an income tax benefit of $270 and $105, respectively, related to the vesting of 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'sour 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 | | 2018 |
| | 2017 |
| | 2016 |
| |
| Stock issued and surrendered for LTIP | | Stock issued and surrendered for LTIP | | 2021 | | 2020 | | 2019 |
| LTIP three-year plan | | 2015-16-17 |
| | 2014-15-16 |
| | 2013-14-15 |
| LTIP three-year plan | | 2018-19-20 | | 2017-18-19 | | 2016-17-18 |
| Number of shares issued | | 308,278 |
| | 227,707 |
| | 175,291 |
| Number of shares issued | | 210,864 | | | 279,469 | | | 293,136 | |
| Number of shares surrendered | | Number of shares surrendered | | 105,402 | | | 132,449 | | | 134,169 | |
| Share value on date of issuance | | $ | 176.39 |
| | $ | 157.07 |
| | $ | 113.91 |
| Share value on date of issuance | | $ | 317.60 | | | $ | 134.95 | | | $ | 183.00 | |
| Total value | | $ | 54,377 |
| | $ | 35,766 |
| | $ | 19,967 |
| |
| Total value of shares issued | | Total value of shares issued | | $ | 66,970 | | | $ | 37,714 | | | $ | 53,644 | |
Under the Company's 2016-17-182019-20-21 LTIP, a payout of unrestricted stock will be issued in April 2019.2022.
The fair value of each LTIP award granted in 2018, 20172021, 2020 and 20162019 was based on the fair market value of the Company'sour common stock on the date of grant. These nonvested LTIP awards entitle participants 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. 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, 2020 | 539,059 | | | $ | 186.75 | |
| Granted | 141,122 | | | $ | 242.80 | |
| Vested | (173,582) | | | $ | 208.83 | |
| Canceled | (11,548) | | | $ | 199.95 | |
| Nonvested June 30, 2021 | 495,051 | | | $ | 194.68 | |
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Nonvested June 30, 2017 | 734,744 |
| | $ | 119.56 |
|
| Granted | 191,986 |
| | $ | 206.99 |
|
| Vested | (256,071 | ) | | $ | 122.11 |
|
| Canceled | (12,388 | ) | | $ | 128.63 |
|
| Nonvested June 30, 2018 | 658,271 |
| | $ | 143.90 |
|
During 2018, 20172021, 2020 and 2016, the Company2019, we recorded stock-based compensation expense of $65,640, $27,219$58,804, $58,273 and $21,150,$50,908, respectively, relating to the LTIP. During 2018, 20172021, 2020 and 2016, the Company2019, we recognized an income tax benefit (cost) of $3,893, $1,701$1,974, $(1,251) and $3,119,$14,101, respectively, relating to the LTIP.
Shares surrendered in connection with the LTIP: 2018 - 139,918; 2017 - 113,074; 2016 - 78,173.
15. Research and Development
Restricted Shares - Prior to 2016, the Company issued restricted shares to non-employee members of the Board of Directors. 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, the Company recognized expense of $468 and tax cost of $(32) related to restricted shares.
| |
13. | Research and Development |
Research and development costs amounted to $327,877$259,039 in 2018, $336,6752021, $293,837 in 20172020 and $359,796$294,852 in 2016.2019. 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 $40,823$54,051 in 2018, $65,2922021, $56,964 in 20172020 and $57,999$44,484 in 2016.2019. These costs are included in the total research and development cost for each of the respective years.
16. Financial Instruments
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 whichand equity investments. Deposits are recorded at cost, and equity investments classified as available-for-sale, which are recorded at fair value. Changes in fair value with unrealized gains and losses recordedof equity investments are recognized in accumulated other comprehensive (loss). Gross unrealized gains and losses were not material asnet income.
The contractual maturities of available-for-sale investments were predominantly one to three years at June 30, 2018 and 2017. 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, which excludes the impact of net unamortized debt issuance costs, and estimated fair value of long-term debt at June 30 are as follows:
| | | | | 2018 |
| | 2017 |
| | 2021 | | 2020 |
| Carrying value of long-term debt | | $ | 4,460,402 |
| | $ | 5,383,343 |
| Carrying value of long-term debt | | $ | 6,646,029 | | | $ | 7,809,541 | |
| Estimated fair value of long-term debt | | 4,548,796 |
| | 5,645,529 |
| Estimated fair value of long-term debt | | 7,527,268 | | | 8,574,401 | |
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 €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior 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.
During 2020, we settled the cross-currency swap with an aggregate notional amount of €235 million, which was designated as a net investment hedge, for proceeds of $44 million. These proceeds are included in cash flows from investing activities in the Consolidated Statement of Cash Flows. Additionally, we entered into 2 cross-currency swaps with aggregate notional amounts of €359 million and ¥2,149 million due June 2029. These cross-currency swaps have been designated as hedges of net investments in certain foreign subsidiaries.
During 2021, we amended the 2 cross-currency swaps with aggregate notional amounts of €359 million and ¥2,149 million due June 2029 to cross-currency swaps with aggregate notional amounts of €69 million due November 2034, €290 million due May 2038 and ¥2,149 million due November 2034. These cross-currency swaps are each subject to a credit support annex ("CSA") where either party is obligated to post collateral if the outstanding position exceeds a certain threshold governed by the CSA's starting in June 2029. These cross-currency swaps have been designated as hedges of net investments in certain foreign subsidiaries.
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 inon the Consolidated Balance Sheet are as follows:
| | | | Balance Sheet Caption | | 2018 |
| | 2017 |
| | Balance Sheet Caption | | 2021 | | 2020 |
| Net investment hedges | | | | | Net investment hedges | | | | | |
| | Cross-currency swap contracts | Other assets | | $ | 7,614 |
| | $ | 15,135 |
| Cross-currency swap contracts | Other liabilities | | $ | 71,798 | | | $ | 30,860 | |
| Cash flow hedges | | | | | Cash flow hedges | |
| Forward exchange contracts | | Forward exchange contracts | Non-trade and notes receivable | | 5,376 | | | 5,311 | |
| Forward exchange contracts | | Forward exchange contracts | Other accrued liabilities | | 9,435 | | | 3,474 | |
| Costless collar contracts | Non-trade and notes receivable | | 932 |
| | 430 |
| Costless collar contracts | Non-trade and notes receivable | | 110 | | | 2,250 | |
| Costless collar contracts | Other accrued liabilities | | 236 |
| | 2,027 |
| Costless collar contracts | Other accrued liabilities | | 901 | | | 661 | |
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 hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (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.
GainsDerivatives not designated as hedges are adjusted to fair value by recording gains and losses through the cost of sales caption in the Consolidated Statement of Income.
Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We elected to assess the effectiveness of the €69 million, €290 million and ¥2,149 million cross-currency swap hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.
Net gains (losses) of $16 million and $(27) million relating to forward exchange contracts were recorded within cost of sales on the Consolidated Statement of Income for the year ended June 30, 2021 and 2020, respectively. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income during 2018, 20172021, 2020 and 20162019 were not material.
(Losses) gains on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) in the Consolidated Balance Sheet are as follows: | | | | | | | | | | | |
| 2021 | | 2020 |
| Cross-currency swap contracts | $ | (31,988) | | | $ | (9,435) | |
| Foreign denominated debt | (32,882) | | | 7,205 | |
|
| | | | | | | |
| | 2018 |
| | 2017 |
|
| Cross-currency swap contracts | $ | (9,209 | ) | | $ | (6,003 | ) |
| Foreign denominated debt | (9,543 | ) | | (16,175 | ) |
There was no ineffectiveness ofDuring 2021 and 2020, the periodic interest settlements related to the cross-currency swap contracts or foreign denominated debt, norswaps were anynot material. No portion of these financial instruments were excluded from the effectiveness testing during 2018, 2017 and 2016.2019.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 20182021 and 20172020 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | Quoted Prices In
Active Markets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | | |
| Equity securities | | $ | 20,517 | | | $ | 20,517 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Derivatives | | 5,486 | | | — | | | 5,486 | | | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Derivatives | | 82,134 | | | — | | | 82,134 | | | — | |
|
| | | | | | | | | | | | | | | | |
| | | 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, 2017 |
| | Quoted Prices In Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | June 30, 2020 | | Quoted Prices In
Active Markets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | | | Assets: | | | | | | | | |
| Equity securities | | $ | 3,008 |
| | $ | 3,008 |
| | $ | — |
| | $ | — |
| Equity securities | | $ | 7,901 | | | $ | 7,901 | | | $ | — | | | $ | — | |
| Corporate bonds | | 5,968 |
| | 5,968 |
| | — |
| | — |
| |
| Asset-backed and mortgage-backed securities | | 4,762 |
| | — |
| | 4,762 |
| | — |
| |
| | Derivatives | | 16,496 |
| | — |
| | 16,496 |
| | — |
| Derivatives | | 7,561 | | | — | | | 7,561 | | | — | |
| Investments measured at net asset value | | 7,073 |
| | | | | | | |
| | Liabilities: | | | | | | | | | Liabilities: | |
| Derivatives | | 16,064 |
| | — |
| | 16,064 |
| | — |
| Derivatives | | 34,995 | | | — | | | 34,995 | | | — | |
The fair values of the equity securities, 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.traded.
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. 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 isWe are 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'sour 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, 2018, the Company2021, we had an accrual of $18,024$17,059 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'sour liability in proportion to other responsible parties.
The Company'sOur estimated total liability for environmental matters ranges from a minimum of $18.0$17.1 million to a maximum of $81.0 million.$73.5 million. The largest range for any one site is approximately $9.5 million.$11.4 million. The actual costs to be incurred by the Companywe will beincur are 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.
| |
16. | Quarterly Information (Unaudited)
|
|
| | | | | | | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 1st |
| | 2nd |
| | 3rd |
| | 4th |
| | Total |
|
| Net sales | | $ | 2,743,131 |
| | $ | 2,670,804 |
| | $ | 3,119,139 |
| | $ | 3,496,238 |
| | $ | 12,029,312 |
|
| Net income attributable to common shareholders | | 210,129 |
| | 241,305 |
| | 238,673 |
| | 293,305 |
| | 983,412 |
|
| Diluted earnings per share | | 1.55 |
| | 1.78 |
| | 1.75 |
| | 2.15 |
| | 7.25 |
|
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, 2018.2021. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2018,2021, the Company’s disclosure controls and procedures were effective.
In response to the COVID-19 pandemic, many of our team members have been working remotely. We are continually monitoring and assessing the changing business environment resulting from COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness. Management has taken measures to ensure that our disclosure controls and procedures and internal controls over financial reporting remained effective and were not materially affected during this period.
There waswere no changechanges in the Company’s internal controlcontrols over financial reporting during the quarter ended June 30, 20182021 that materially affected, or isare reasonably likely to materially affect, the Company’sits internal controlcontrols 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, 2018.2021. 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, 2018.2021.
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, 2018,2021, 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 20182021 Annual Meeting of Shareholders, to be held October 24, 201827, 2021 (the "2018"2021 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."Information about our Executive Officers."
The information set forth under the caption "Other Governance Matters -"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance"Reports" in the 20182021 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 "Committees of Ourour Board of Directors - The Audit Committee" and "Report"Committees of the Audit Committee"Our Board of Directors - Board Committees; Committee Charters" in the 20182021 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 20182021 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" in the 20182021 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, 2018,2021, 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 | 5,498,710(1) | $154.85 | 21,200,533(2) |
| Equity compensation plans not approved by security holders | — | — | — |
| Total | 5,498,710 | $154.85 | 21,200,533 |
|
| | | |
| 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 | 7,754,599(1) | $108.89 | 21,597,846(2) |
| Equity compensation plans not approved by security holders | — | — | — |
| Total | 7,754,599 | $108.89 | 21,597,846 |
(1)Includes the maximum future payouts of common stock that may be issued under the calendar year 2016-17-18, 2017-18-192019-20-21, 2020-21-22 and 2018-19-202021-22-23 long term incentive performance awards (LTIP awards)("LTIP awards"). For these LTIP awards, payouts will be determined based on our achieving an average return on average equity of 4%four percent or an average free cash flow margin of 4%.four percent. If these performance measures are achieved, the participants will be eligible to receive the maximum payout of 200%.200 percent. 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 Amended and Restated 2016 Omnibus Stock Incentive Plan is 1623.8 million shares, of which approximately 11.611.3 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 "Other Governance Matters - Review and Approval of Transactions with Related Persons" and "Corporate Governance: Board of Directors - Director Independence" in the 20182021 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 and All Other Fees" and "Audit Committee Pre-Approval Policies and Procedures" in the 20182021 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 | | |
| | | |
| | Page Number
in Form 10-K2. Schedule
| | |
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 |
| | Plans of Acquisition, Reorganization, Arrangement, Liquidation or Succession: |
| | |
Exhibit No.(2)(a) | | Description of Exhibit |
(2)(a) | | |
| | |
| (2)(b) | | |
| | |
| (2)(c) | | |
| | |
| (2)(d) | | |
| | |
| | Articles of Incorporation and By-Laws: |
| | |
| (3)(a) | | |
| | |
| (3)(b) | | |
| | |
| | Instruments Defining Rights of Security Holders: |
| | |
| (4)(a) | | Registration Rights Agreement, dated February 24, 2017, among Registrant and Morgan Stanley & Co. LLC and Citigroup Global Markets Inc., as RepresentativesDescription of the Initial Purchasers, incorporated by reference to Exhibit 4.1 of Registrant's Current Report on Form 8-K filed with the SEC on February 28, 2017 (Commission File No. 1-4982). |
| | |
(4)(b) | | Parker-Hannifin's SecuritiesRegistration Rights Agreement, dated February 24, 2017, among Registrant and the Initial Purchasers (as defined therein), incorporated by reference to Exhibit 4.2 of4(a) to Registrant's Current Report on Form 8-K filed with10-K for the SEC on February 28, 2017year ended June 30, 2019 (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 Form 10-K.Material Contracts: |
| | |
| | | | | | | | |
| (10)(a) | | Material Contracts:
|
| | |
(10)(a) | | |
| | |
| (10)(b) | | |
|
| | |
| (10)(c) | | |
(10)(c) | | |
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| (10)(d) | | |
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| (10)(e) | | |
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| (10)(f) | | |
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| (10)(g) | | |
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| (10)(h) | | |
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| (10)(i) | | |
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| (10)(j) | | |
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| (10)(k) | | |
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| (10)(l) | | |
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| (10)(m) | | |
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| (10)(n) | | |
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| (10)(o) | | |
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| (10)(p) | | |
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(10)(q) | | |
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(10)(r) | | |
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(10)(s) | | |
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(10)(v)(s) | | |
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(10)(w)(t) | | |
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(10)(x)(u) | | |
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| (10)(w) | | |
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(10)(y)(x) | | |
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(10)(z)(y) | | |
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(10)(aa) | | |
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(10)(bb) | | |
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(10)(cc)(z) | | |
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(10)(dd)(aa) | | |
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(10)(tt) | | |
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(10)(uu)(xx) | | |
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(12)(10)(zz) | | Computation of Ratio of EarningsBridge Credit Agreement, by and between Parker-Hannifin Corporation, Citibank, N.A., as administrative agent, and certain financial institution parties thereto, dated August 2, 2021, incorporated by reference to Fixed Charges as of June 30, 2018.Exhibit 10.2 to Registrant’s Report on Form 8-K filed with the SEC on August 3, 2021* (Commission File No. 1-4982). |
| | |
(21)(18) | | |
| | |
| (21) | | |
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| (23) | | |
| | |
| | | | | | | | |
| (24) | | |
| | |
| (31)(a) | | |
| | |
| (31)(b) | | |
| | |
| (32) | | |
| | |
| 101.INS | | The instance document does not appear in the Interactive Data File because its XBRL Instance Document.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.* |
+ 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.
| | |
*104 | | Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
* 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, 2018, 20172021, 2020 and 2016,2019, (ii) Consolidated Statement of Comprehensive Income for the years ended June 30, 2018, 20172021, 2020 and 2016,2019, (iii) Consolidated Balance Sheet at June 30, 20182021 and 2017,2020, (iv) Consolidated Statement of Cash Flows for the years ended June 30, 2018, 20172021, 2020 and 2016,2019, (v) Consolidated Statement of Equity for the years ended June 30, 2018, 20172021, 2020 and 2016,2019, 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/ Catherine A. SueverTodd M. Leombruno |
| | | Catherine A. SueverTodd M. Leombruno |
| | | Executive Vice President - Finance & |
| | | Administration and Chief Financial Officer |
| | | |
August 24, 201825, 2021
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; TODD M. LEOMBRUNO,ANGELA R. IVES, Principal Accounting Officer; LEE C. BANKS, Director; ROBERT G. BOHN,JILLIAN C. EVANKO, Director; LANCE M. FRITZ, Director; LINDA S.A. HARTY, Director; ROBERT J. KOHLHEPP,WILLIAM F. LACEY, 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.
Date: August 24, 201825, 2021
|
| | | | |
/s/ Catherine A. SueverTodd M. Leombruno | |
Catherine A. Suever,Todd M. Leombruno, 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, 2016, 2017 and 20182019, 2020 AND 2021
(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 credit losses: | | | | | | | | |
| Year ended June 30, 2019 | | $ | 9,672 | | | $ | 2,034 | | | $ | (2,832) | | | $ | 8,874 | |
| Year ended June 30, 2020 | | $ | 8,874 | | | $ | 4,860 | | | $ | (2,090) | | | $ | 11,644 | |
| Year ended June 30, 2021 | | $ | 11,644 | | | $ | 4,673 | | | $ | (4,239) | | | $ | 12,078 | |
| Deferred tax asset valuation allowance: | | | | | | | | |
| Year ended June 30, 2019 | | $ | 694,857 | | | $ | 102,835 | | | $ | — | | | $ | 797,692 | |
| Year ended June 30, 2020 | | $ | 797,692 | | | $ | (42,217) | | | $ | 15,955 | | | $ | 771,430 | |
| Year ended June 30, 2021 | | $ | 771,430 | | | $ | 94,781 | | | $ | (447) | | | $ | 865,764 | |
(A)For allowance for credit losses, 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.
|
| | | | | | | | | | | | | | | | |
| 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, 2016 | | $ | 9,284 |
| | $ | 1,419 |
| | $ | (2,693 | ) | | $ | 8,010 |
|
| 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 |
|
| Deferred tax asset valuation allowance: | | | | | | | | |
| Year ended June 30, 2016 | | $ | 330,006 |
| | $ | 2,702 |
| | $ | — |
| | $ | 332,708 |
|
| Year ended June 30, 2017 | | $ | 332,708 |
| | $ | 349,803 |
| | $ | 1,568 |
| | $ | 684,079 |
|
| Year ended June 30, 2018 | | $ | 684,079 |
| | $ | 10,778 |
| | $ | — |
| | $ | 694,857 |
|
| |
(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. |