UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~March~~December 31, 2018



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

For the transition period from to

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)



OHIO		34-0451060
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

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

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

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

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 (check one):



Large accelerated filer	ý	Accelerated filer	¨

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

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Number of Common Shares outstanding at ~~March~~December 31, 2018: ~~132,959,431~~129,365,355

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	March 31,						March 31,						December 31,						December 31,
	2018			2017			2018			2017			2018			2017			2018			2017
Net sales	$	3,749,591		$	3,119,139		$	10,484,915		$	8,533,074		$	3,472,045		$	3,370,673		$	6,951,339		$	6,735,324
Cost of sales	2,825,008			2,383,790			7,926,956			6,534,280			2,602,339			2,564,449			5,197,162			5,087,743
Selling, general and administrative expenses	420,595			392,036			1,234,729			1,051,583			397,259			408,338			791,581			805,322
Interest expense	54,145			42,057			160,833			109,649			47,518			53,133			91,857			106,688
Other (income), net	(19,984		)	(13,807		)	(41,953		)	(90,468		)
Other (income) expense, net													(6,225		)	(15,468		)	(20,138		)	1,048
Income before income taxes	469,827			315,063			1,204,350			928,030			431,154			360,221			890,877			734,523
Income taxes	103,697			76,216			496,363			237,545			119,241			303,899			203,065			392,666
Net income	366,130			238,847			707,987			690,485			311,913			56,322			687,812			341,857
Less: Noncontrolling interest in subsidiaries' earnings	141			174			442			378			176			163			364			301
Net income attributable to common shareholders	$	365,989		$	238,673		$	707,545		$	690,107		$	311,737		$	56,159		$	687,448		$	341,556

Earnings per share attributable to common shareholders:
Basic	$	2.75		$	1.79		$	5.32		$	5.17		$	2.39		$	0.42		$	5.23		$	2.57
Diluted	$	2.70		$	1.75		$	5.22		$	5.09		$	2.36		$	0.41		$	5.15		$	2.51

Cash dividends per common share	$	0.66		$	0.66		$	1.98		$	1.92

See accompanying notes to consolidated financial statements.

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended						Three Months Ended						Six Months Ended
	March 31,				March 31,						December 31,						December 31,
	2018		2017		2018			2017			2018			2017			2018			2017
Net income	$	366,130	$	238,847	$	707,987		$	690,485		$	311,913		$	56,322		$	687,812		$	341,857
Less: Noncontrolling interests in subsidiaries' earnings	141		174		442			378			176			163			364			301
Net income attributable to common shareholders	365,989		238,673		707,545			690,107			311,737			56,159			687,448			341,556

Other comprehensive income (loss), net of tax
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment and other	93,567		83,100		194,836			(170,634		)	(43,986		)	28,390			(79,111		)	101,269
Retirement benefits plan activity	25,218		35,512		80,266			105,847			24,527			28,312			48,400			55,047
Other comprehensive income (loss)	118,785		118,612		275,102			(64,787		)
Other comprehensive (loss) income											(19,459		)	56,702			(30,711		)	156,316
Less: Other comprehensive income (loss) for noncontrolling interests	95		301		(64		)	281			55			(73		)	(34		)	(160		)
Other comprehensive income (loss) attributable to common shareholders	118,690		118,311		275,166			(65,068		)
Other comprehensive (loss) income attributable to common shareholders											(19,514		)	56,775			(30,677		)	156,476
Total comprehensive income attributable to common shareholders	$	484,679	$	356,984	$	982,711		$	625,039		$	292,223		$	112,934		$	656,771		$	498,032

See accompanying notes to consolidated financial statements.

PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

(Unaudited)



	March 31, 2018			June 30, 2017			December 31, 2018			June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,089,529		$	884,886		$	1,047,385		$	822,137
Marketable securities and other investments	101,206			39,318			30,956			32,995
Trade accounts receivable, net	2,146,408			1,930,751			1,938,709			2,145,517
Non-trade and notes receivable	328,111			254,987			324,254			328,399
Inventories	1,732,759			1,549,494			1,804,564			1,621,304
Prepaid expenses	165,083			120,282
Prepaid expenses and other							188,868			134,886
Total current assets	5,563,096			4,779,718			5,334,736			5,085,238
Plant and equipment	5,363,208			5,186,748			5,192,144			5,215,253
Less: Accumulated depreciation	3,421,409			3,249,456			3,398,339			3,359,016
Plant and equipment, net	1,941,799			1,937,292			1,793,805			1,856,237
Deferred income taxes	36,935			36,057			98,779			57,623
Investments and other assets	814,637			842,475			733,987			801,049
Intangible assets, net	2,134,659			2,307,484			1,883,825			2,015,520
Goodwill	5,746,358			5,586,878			5,462,555			5,504,420
Total assets	$	16,237,484		$	15,489,904		$	15,307,687		$	15,320,087
LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year	$	1,055,527		$	1,008,465		$	1,144,347		$	638,466
Accounts payable, trade	1,376,457			1,300,496			1,307,178			1,430,306
Accrued payrolls and other compensation	391,994			435,911			319,787			427,500
Accrued domestic and foreign taxes	179,929			153,137			182,617			198,878
Other accrued liabilities	504,610			497,851			555,005			502,333
Total current liabilities	3,508,517			3,395,860			3,508,934			3,197,483
Long-term debt	4,818,570			4,861,895			4,303,331			4,318,559
Pensions and other postretirement benefits	1,351,106			1,406,082			937,938			1,177,605
Deferred income taxes	113,799			221,790			286,622			234,858
Other liabilities	569,209			336,931			449,696			526,089
Total liabilities	10,361,201			10,222,558			9,486,521			9,454,594
EQUITY
Shareholders’ equity:
Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued	—			—			—			—
Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at March 31 and June 30	90,523			90,523
Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at December 31 and June 30							90,523			90,523
Additional capital	528,197			543,879			521,854			496,592
Retained earnings	11,373,676			10,930,348			12,114,448			11,625,975
Accumulated other comprehensive (loss)	(1,649,038		)	(1,924,204		)	(1,795,497		)	(1,763,086		)
Treasury shares, at cost; 48,086,697 shares at March 31 and 47,854,475 shares at June 30	(4,473,005		)	(4,378,897		)
Treasury shares, at cost; 51,680,773 shares at December 31 and 48,632,105 shares at June 30							(5,116,119		)	(4,590,138		)
Total shareholders’ equity	5,870,353			5,261,649			5,815,209			5,859,866
Noncontrolling interests	5,930			5,697			5,957			5,627
Total equity	5,876,283			5,267,346			5,821,166			5,865,493
Total liabilities and equity	$	16,237,484		$	15,489,904		$	15,307,687		$	15,320,087

See accompanying notes to consolidated financial statements.

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended						Six Months Ended
	March 31,						December 31,
	2018			2017			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	707,987		$	690,485		$	687,812		$	341,857
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	179,412			142,959			115,000			120,335
Amortization	171,904			93,584			107,543			113,881
Share incentive plan compensation	89,571			60,916			64,615			64,267
Deferred income tax (benefit) expense	(89,032		)	43,530
Deferred income tax expense							47,401			(74,101		)
Foreign currency transaction loss	16,544			6,204			2,526			12,620
(Gain) loss on sale of plant and equipment	(26,767		)	513
(Gain) on sale of businesses	—			(42,994		)
(Gain) on sale of marketable securities	(1		)	(1,032		)
Loss on sale and impairment of investments	33,759			—
Loss (gain) on plant and equipment and intangible assets							3,428			(26,529		)
Loss on sale of businesses							623			—
Loss (gain) on marketable securities							5,701			(1		)
(Gain) loss on investments							(3,213		)	33,759
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net	(225,447		)	(45,442		)	185,638			49,986
Inventories	(144,669		)	(91,170		)	(176,094		)	(207,334		)
Prepaid expenses	(43,202		)	(1,329		)	(40,555		)	(81,168		)
Other assets	(21,292		)	1,384			14,214			(45,710		)
Accounts payable, trade	40,688			101,143			(120,253		)	(92,267		)
Accrued payrolls and other compensation	(50,761		)	(46,755		)	(104,726		)	(111,687		)
Accrued domestic and foreign taxes	19,928			28,823			(14,758		)	5,796
Other accrued liabilities	(10,594		)	(21,686		)	18,960			59,003
Pensions and other postretirement benefits	41,097			(140,154		)	(173,040		)	25,379
Other liabilities	215,700			10,314			(79,782		)	268,688
Net cash provided by operating activities	904,825			789,293			541,040			456,774
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (net of cash acquired of $157,426 in 2017)	—			(4,067,755		)
Acquisitions (net of cash acquired of $690 in 2018)							(2,042		)	—
Capital expenditures	(194,307		)	(145,236		)	(94,426		)	(144,781		)
Proceeds from sale of plant and equipment	64,203			8,452			34,121			59,848
Proceeds from sale of businesses	—			85,610			19,540			—
Purchases of marketable securities and other investments	(78,488		)	(451,561		)	(2,845		)	(78,309		)
Maturities of marketable securities and other investments	20,260			1,264,721
Maturities and sales of marketable securities and other investments							14,432			12,710
Other	5,350			(2,590		)	(90		)	8,706
Net cash (used in) investing activities	(182,982		)	(3,308,359		)	(31,310		)	(141,826		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	3,624			2,095			635			2,076
Payments for common shares	(202,985		)	(264,343		)	(565,970		)	(136,436		)
(Payments for) proceeds from notes payable, net	(53,923		)	447,799
Proceeds from notes payable, net							606,019			138,900
Proceeds from long-term borrowings	1,602			2,614,756			1			1,718
Payments for long-term borrowings	(19,514		)	(374,794		)	(100,209		)	(12,895		)
Dividends	(264,332		)	(257,161		)	(200,459		)	(176,187		)
Net cash (used in) provided by financing activities	(535,528		)	2,168,352
Net cash (used in) financing activities							(259,983		)	(182,824		)
Effect of exchange rate changes on cash	18,328			(51,376		)	(24,499		)	7,760
Net increase (decrease) in cash and cash equivalents	204,643			(402,090		)
Net increase in cash and cash equivalents							225,248			139,884
Cash and cash equivalents at beginning of year	884,886			1,221,653			822,137			884,886
Cash and cash equivalents at end of period	$	1,089,529		$	819,563		$	1,047,385		$	1,024,770

See accompanying notes to consolidated financial statements.

PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

The Company operates in two reportable business segments: Diversified Industrial and Aerospace Systems.

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

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				December 31,				December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Net sales
Diversified Industrial:
North America	$	1,761,845	$	1,413,302	$	4,921,952	$	3,701,326	$	1,632,059	$	1,565,416	$	3,313,103	$	3,160,107
International	1,389,332		1,128,886		3,883,675		3,149,777		1,223,679		1,255,569		2,457,445		2,494,343
Aerospace Systems	598,414		576,951		1,679,288		1,681,971		616,307		549,688		1,180,791		1,080,874
Total net sales	$	3,749,591	$	3,119,139	$	10,484,915	$	8,533,074	$	3,472,045	$	3,370,673	$	6,951,339	$	6,735,324
Segment operating income
Diversified Industrial:
North America	$	280,694	$	227,419	$	762,528	$	612,043	$	257,774	$	225,807	$	532,885	$	481,834
International	205,251		152,995		561,848		417,708		189,085		164,806		395,179		356,597
Aerospace Systems	106,653		79,967		271,235		225,764		121,463		87,148		231,318		164,582
Total segment operating income	592,598		460,381		1,595,611		1,255,515		568,322		477,761		1,159,382		1,003,013
Corporate general and administrative expenses	54,138		45,747		142,430		120,707		63,890		46,942		114,215		88,292
Income before interest expense and other expense	538,460		414,634		1,453,181		1,134,808		504,432		430,819		1,045,167		914,721
Interest expense	54,145		42,057		160,833		109,649		47,518		53,133		91,857		106,688
Other expense	14,488		57,514		87,998		97,129		25,760		17,465		62,433		73,510
Income before income taxes	$	469,827	$	315,063	$	1,204,350	$	928,030	$	431,154	$	360,221	$	890,877	$	734,523

PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

1. Management representation

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of ~~March~~December 31, 2018, the results of operations for the three and ~~nine~~six months ended ~~March~~December 31, 2018 and 2017 and cash flows for the ~~nine~~six months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s ~~2017~~2018 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior-year amounts have been reclassified to conform to current-year presentation.

The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. In April 2018, the Company completed the divestiture of certain of its aerospace filtration businesses, which were part of the Diversified Industrial Segment. The operating results and net assets of the businesses divested were immaterialNo subsequent events have occurred that required adjustment to ~~the Company's consolidated results of operations and~~these financial position. The Company expects to recognize an after-tax loss on the divestiture of approximately $48 million during the fourth quarter of fiscal 2018. A significant portion of the loss is attributable to tax expense resulting from a tax gain recognized with this transaction.statements.

2. New ~~Accounting Pronouncements~~accounting pronouncements

In ~~February~~August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-14, "Compensation--Retirement Benefits--Defined Benefit Plans--General." ASU 2018-14 aims to improve disclosure effectiveness by adding, removing or clarifying certain disclosure requirements related to defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company has not yet determined the effect that ASU 2018-14 will have on its financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement." ASU 2018-13 aims to improve disclosure effectiveness by adding, modifying or removing certain disclosure requirements for both recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU for any removed or modified disclosure. Adoption of additional disclosures may be delayed until their effective dates. The Company has not yet determined the effect that ASU 2018-13 will have on its financial statements.

In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (TCJ Act) reduction of the U.S. federal corporate income tax rate. The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any period after the issuance of the update. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act is recognized. The Company 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 the first nine months of fiscal 2018.

~~2. New Accounting Pronouncements, cont'd~~

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. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued. 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 has not yet determined the effect that ASU 2017-07 will have on its financial statements.~~

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 fiscalOn July 1, 2018, the Company retrospectively adopted ASU ~~2017-04. The adoption~~2017-07 and reclassified prior-year amounts using a practical expedient that permits the usage of ~~ASU 2017-04 did not affect~~amounts previously disclosed in the ~~Company's financial statements as there were no instances~~retirement benefits note. As a result, $4,621 and $4,125 of ~~a reporting units carrying value exceeding its fair value~~expense was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for ~~any goodwill impairment tests performed during~~the prior-year quarter. Expense of $14,205 and $8,812 was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for the first ~~nine~~six months of fiscal 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. The Company adopted ASU 2016-16 ~~is effective for fiscal years,~~on July 1, 2018 and ~~interim periods within those years, beginning after December 31, 2017. Early adoption is permitted. The Company currently estimates that the adoption~~recorded a cumulative effect adjustment of ~~ASU 2016-16 will eliminate a $58~~approximately $19 million ~~income tax deferred charge recorded in the Consolidated Balance Sheet as of March 31, 2018.~~to reduce retained earnings.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides specific guidance on several cash flow classification issues to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. On July 1, 2018, the Company adopted ASU 2016-15 ~~is effective for fiscal years,~~ and ~~interim periods within those years, beginning after December 15, 2017 and should be applied using a~~retrospectively adjusted its Statement of Cash Flows. These retrospective ~~transition method to each period presented. Early adoption is permitted. The Company has~~adjustments were not ~~yet determined the effect that ASU 2016-15 will have on its financial statements.~~material.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.

In 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. Lessor~~guidance and lessor accounting is ~~also~~ largely ~~unchanged from existing guidance.~~unchanged. ASU 2016-02 also changes the definition of a lease and requires qualitative and quantitative disclosures that provide information about the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Adoption of this ASU is planned for the beginning of the first quarter of fiscal 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. ~~The~~ ASU 2016-01 also simplifies the impairment assessment of equity investments, eliminates the disclosure of the assumptions used to estimate the

~~2. New Accounting Pronouncements, cont'd~~

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~~are presented separately in other comprehensive income for liabilities measured using the fair value ~~option and financial~~option. Financial assets and liabilities ~~will be~~are presented separately by measurement category and type, either on the balance sheet or in the financial statement disclosures. The Company adopted ASU 2016-01 ~~is effective for fiscal years beginning after December 15, 2017,~~on July 1, 2018 and ~~interim periods within those fiscal years. The Company has not yet determined the effect that ASU 2016-01 will have on its financial statements.~~reclassified approximately $2 million of unrealized gains from accumulated other comprehensive (loss) to retained earnings.

In May 2014, the FASB issued ASU 2014-09, ~~"Revenue from~~“Revenues with Contracts with Customers."” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance ~~obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required.~~obligation. The Company adopted 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 currently anticipateson July 1, 2018 using the modified retrospective method and recorded a cumulative effect adjustment to ~~adopt ASU 2014-09.~~ increase retained earnings by approximately $5 million. See Note 3 for further discussion.

3. Revenue recognition

Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. Revenues are recognized when control of the promised goods or services in a contract (i.e., performance obligations) are transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of the Company’s revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of the Company’s revenues are recognized over time if the customer simultaneously receives control as the Company performs work under a contract, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment. For contracts recognized over time, the Company uses the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time.

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 the appropriate revenue recognition criteria for the individual performance obligations have been satisfied.

The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration primarily includes prompt pay discounts, rebates and volume discounts and is ~~still~~included in the ~~process~~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 ~~quantifying~~revenue in a future period. These estimates are based on historical experience, anticipated performance under the ~~impact~~terms of the contract and the Company’s best judgment at the time.

Payment terms vary by customer and the geographical location of the customer. The time between when revenue is recognized and payment is due is not significant. The Company’s contracts with customers generally do not include significant financing components or noncash consideration.

Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. The costs to obtain a contract where the amortization period for the related asset is one year or less are expensed as incurred.

There is generally no unilateral right to return products. The Company primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery. This type of warranty does not represent a separate performance obligation.

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 type of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Contracts consist of individual purchase orders for standard product, blanket purchase orders and production contracts. Blanket purchase orders are often associated with individual purchase orders and have terms and conditions which are subject to a master supply or distributor agreement. Individual production contracts, some of which may include multiple performance obligations, are typically for products to be manufactured to the customer's specifications. Revenue in the Diversified Industrial Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time for installation services or in situations where the product being manufactured has no alternative use and the Company has an enforceable right to payment.

Diversified Industrial Segment revenues by technology platform:



	Three Months Ended		Six Months Ended
	December 31, 2018		December 31, 2018
Motion Systems	$	856,357	$	1,715,930
Flow and Process Control	1,015,200		2,076,264
Filtration and Engineered Materials	984,181		1,978,354
Total	$	2,855,738	$	5,770,548

The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and which also perform a vital role in naval vessels and land-based weapon systems. Contracts generally consist of blanket purchase orders and individual long-term production contracts. Blanket purchase orders, which have terms and conditions subject to long-term supply agreements, are typically associated with individual purchase orders. Revenue in the Aerospace Systems Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time in situations where the customer controls the asset as it is being produced or the product being manufactured has no alternative use and the Company has an enforceable right to payment.

Aerospace Systems Segment revenues by product platform:



	Three Months Ended		Six Months Ended
	December 31, 2018		December 31, 2018
Flight Control Actuation	$	189,670	$	352,606
Fuel and Inerting	157,262		301,308
Hydraulics	108,893		211,390
Engines	71,647		136,033
Fluid Conveyance	68,868		139,072
Other	19,967		40,382
Total	$	616,307	$	1,180,791

Total Company revenues by geographic region based on the Company's selling operation's location:



	Three Months Ended		Six Months Ended
	December 31, 2018		December 31, 2018
North America	$	2,248,806	$	4,494,897
Europe	714,550		1,440,860
Asia Pacific	465,974		927,614
Latin America	42,715		87,968
Total	$	3,472,045	$	6,951,339

The majority of revenues from the Aerospace Systems Segment is generated from sales to customers within North America.

Contract balances

Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.

Total contract assets and contract liabilities are as follows:



	December 31, 2018
Contract assets, current (included within Prepaid expenses and other)	$	19,263
Contract assets, noncurrent (included within Investments and other assets)	2,328
Total contract assets	21,591
Contract liabilities, current (included within Other accrued liabilities)	(65,320		)
Contract liabilities, noncurrent (included within Other liabilities)	(468		)
Total contract liabilities	(65,788		)
Net contract (liabilities)	$	(44,197	)

During the six months ended December 31, 2018, net contract liabilities increased $6 million from the July 1, 2018 net contract liabilities amount of $38 million. The increase in net contract liabilities was primarily due to advance payments from customers exceeding revenue recognized during the period. During the six months ended December 31, 2018, approximately $20 million of revenue was recognized that was included in the contract liabilities at July 1, 2018.

Remaining performance obligations

The Company’s backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. The Company believes its backlog represents its unsatisfied or partially unsatisfied performance obligations. Backlog at December 31, 2018 was $4,209 million, of which approximately 92 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.

Adoption of ASU 2014-09

On July 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The provisions of ASU 2014-09 were applied only to contracts that were not completed as of July 1, 2018. Comparative prior-period financial information has not been restated and continues to be reported under the accounting standards in effect for the comparative prior-year period.

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of July 1, 2018 related to the adoption of ASU 2014-09 ~~but at this time the Company does not expect the~~is as follows:



	Balance as of		Cumulative Effect			Balance as of
	June 30, 2018		of Adjustments			July 1, 2018
Assets:
Trade accounts receivable, net	$	2,145,517	$	(11	)	$	2,145,506
Inventories	1,621,304		23,205			1,644,509
Prepaid expenses and other	134,886		14,575			149,461
Investments and other assets	801,049		2,020			803,069
Liabilities:
Other accrued liabilities	$	502,333	$	28,288		$	530,621
Other liabilities	526,089		5,160			531,249
Deferred income taxes	234,858		1,560			236,418
Equity:
Retained earnings	$	11,625,975	$	4,781		$	11,630,756

The adoption ~~to have a material~~of ASU 2014-09 had an immaterial impact on ~~its~~the Company’s net sales, results of operations and financial ~~statements.~~position for the three and six months ended December 31, 2018.

4. Earnings per share

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and ~~nine~~six months ended ~~March~~December 31, 2018 and 2017.


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				December 31,				December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Numerator:
Net income attributable to common shareholders	$	365,989	$	238,673	$	707,545	$	690,107	$	311,737	$	56,159	$	687,448	$	341,556
Denominator:
Basic - weighted average common shares	133,032,431		133,232,378		133,107,321		133,410,622		130,361,273		133,112,568		131,361,464		133,144,766
Increase in weighted average common shares from dilutive effect of equity-based awards	2,735,849		2,870,596		2,554,064		2,116,573		1,949,937		3,082,351		2,088,210		2,729,764
Diluted - weighted average common shares, assuming exercise of equity-based awards	135,768,280		136,102,974		135,661,385		135,527,195		132,311,210		136,194,919		133,449,674		135,874,530
Basic earnings per share	$	2.75	$	1.79	$	5.32	$	5.17	$	2.39	$	0.42	$	5.23	$	2.57
Diluted earnings per share	$	2.70	$	1.75	$	5.22	$	5.09	$	2.36	$	0.41	$	5.15	$	2.51

For the three months ended ~~March~~December 31, 2018 and 2017, ~~197,560~~1,335,187 and ~~717~~3,245 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, ~~471,008~~836,099 and ~~1,608,245~~706,512 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

4.5. Share repurchase program

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 for 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 fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. During the three-month period ended ~~March~~December 31, 2018, the Company repurchased ~~263,179~~3,008,512 shares at an average price, including commissions, of ~~$189.98~~$166.20 per share. During the ~~nine-month~~six-month period ended ~~March~~December 31, 2018, the Company repurchased ~~839,717~~3,302,453 shares at an average price, including commissions, of ~~$178.63~~$166.54 per share.

6. Trade accounts receivable, net

Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was ~~$10,879~~$8,178 and ~~$14,336~~$9,672 at ~~March~~December 31, 2018 and June 30, ~~2017,~~2018, respectively.

6.7. Non-trade and notes receivable

The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:


	March 31, 2018		June 30, 2017		December 31, 2018		June 30, 2018
Notes receivable	$	163,814	$	118,351	$	160,380	$	149,254
Accounts receivable, other	164,297		136,636		163,874		179,145
Total	$	328,111	$	254,987	$	324,254	$	328,399

7.8. Inventories

The inventories caption in the Consolidated Balance Sheet is comprised of the following components:


	March 31, 2018		June 30, 2017		December 31, 2018		June 30, 2018
Finished products	$	719,902	$	642,788	$	737,243	$	673,323
Work in process	811,898		723,133		866,357		765,835
Raw materials	200,959		183,573		200,964		182,146
Total	$	1,732,759	$	1,549,494	$	1,804,564	$	1,621,304

8.9. Business realignment charges

The Company incurred business realignment charges ~~in fiscal~~ ~~2018~~and ~~fiscal~~ ~~2017. The Company also incurred~~ acquisition integration costs in fiscal 2019 and fiscal 2018. The acquisition integration costs related to the fiscal 2017 acquisition of CLARCOR, Inc.

Business realignment charges and acquisition integration costs presented in the Business Segment Information are as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				December 31,				December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Diversified Industrial	$	15,643	$	14,605	$	53,590	$	32,164	$	7,382	$	24,684	$	15,940	$	37,947
Aerospace Systems	1,815		1,713		3,270		2,796		—		692		—		1,455
Other expense									220		—		275		—

Work force reductions in connection with such business realignment charges and acquisition integration costs in the Business Segment Information are as follows:


	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	March 31,		March 31,		December 31,		December 31,
	2018	2017	2018	2017	2018	2017	2018	2017
Diversified Industrial	110	312	1,375	642	164	723	365	1,265
Aerospace Systems	65	52	121	89	—	19	—	56

The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, as well as plant closures, with the majority of the charges incurred in Europe and North America. The Company believes the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.

The business realignment charges and acquisition integration costs are presented in the Consolidated Statement of Income as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				December 31,				December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Cost of sales	$	9,511	$	10,342	$	32,283	$	24,968	$	3,669	$	13,657	$	8,068	$	22,772
Selling, general and administrative expenses	7,723		5,976		24,353		9,992		3,713		11,719		7,872		16,630
Other (income), net	224		—		224		—
Other (income) expense, net									220		—		275		—

As of ~~March~~December 31, 2018, approximately ~~$23~~$7 million in severance payments had been made relating to business realignment charges and acquisition integration charges incurred during fiscal ~~2018,~~2019, the remainder of which are expected to be paid by ~~March~~December 31, 2019. Severance payments relating to prior-year business realignment and acquisition integration actions are being made as required. Remaining severance payments related to current-year and prior-year business realignment actions of approximately ~~$27~~$18 million are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment and acquisition integration actions described above, the timing and amount of which are not known at this time.

9.10. Equity

Changes in equity for the three months ended ~~March~~December 31, 2018 and 2017 are as follows:



	Common Stock		Additional Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests		Total Equity
Balance at September 30, 2018	$	90,523	$	503,052	$	11,902,300		$	(1,775,983	)	$	(4,618,512	)	$	5,726	$	6,107,106
Net income					311,737									176		311,913
Other comprehensive income (loss)								(19,514		)				55		(19,459		)
Dividends paid ($0.76 per share)					(99,589		)									(99,589		)
Stock incentive plan activity			18,802								2,393					21,195
Shares purchased at cost											(500,000		)			(500,000		)
Balance at December 31, 2018	$	90,523	$	521,854	$	12,114,448		$	(1,795,497	)	$	(5,116,119	)	$	5,957	$	5,821,166

Shareholders’
Equity

Noncontrolling
Interests
Total Equity
Balance at December 31, 2017 $ 5,513,401
$ 5,809
$ 5,519,210
Net income 365,989
141
366,130
Other comprehensive income 118,690
95
118,785
Dividends paid (88,030 ) (115 ) (88,145 )
Stock incentive plan activity 10,303
—
10,303
Shares purchased at cost (50,000 ) —
(50,000 )
Balance at March 31, 2018 $ 5,870,353
$ 5,930
$ 5,876,283

Shareholders’
Equity

Noncontrolling
Interests
Total Equity
Balance at December 31, 2016 $ 4,527,709
$ 3,269
$ 4,530,978
Net income 238,673
174
238,847
Other comprehensive income 118,311
301
118,612
Dividends paid (88,171 ) —
(88,171 )
Stock incentive plan activity (4,383 ) —
(4,383 )
Acquisition activity —
1,843
1,843
Shares purchased at cost (50,000 ) —
(50,000 )
Balance at March 31, 2017 $ 4,742,139
$ 5,587
$ 4,747,726



	Common Stock		Additional Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total Equity
Balance at September 30, 2017	$	90,523	$	528,956	$	11,127,641		$	(1,824,503	)	$	(4,397,677	)	$	5,719		$	5,530,659
Net income					56,159									163			56,322
Other comprehensive income (loss)								56,775						(73		)	56,702
Dividends paid ($0.66 per share)					(88,083		)										(88,083		)
Stock incentive plan activity			5,047								8,563						13,610
Shares purchased at cost											(50,000		)				(50,000		)
Balance at December 31, 2017	$	90,523	$	534,003	$	11,095,717		$	(1,767,728	)	$	(4,439,114	)	$	5,809		$	5,519,210

Changes in equity for the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017 are as follows:



	Common Stock		Additional Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total Equity
Balance at June 30, 2018	$	90,523	$	496,592	$	11,625,975		$	(1,763,086	)	$	(4,590,138	)	$	5,627		$	5,865,493
Impact of adoption of accounting standards					1,483			(1,734		)							(251		)
Net income					687,448									364			687,812
Other comprehensive (loss)								(30,677		)				(34		)	(30,711		)
Dividends paid ($1.52 per share)					(200,458		)										(200,458		)
Stock incentive plan activity			25,262								24,019						49,281
Shares purchased at cost											(550,000		)				(550,000		)
Balance at December 31, 2018	$	90,523	$	521,854	$	12,114,448		$	(1,795,497	)	$	(5,116,119	)	$	5,957		$	5,821,166


	Shareholders’ Equity			Noncontrolling Interests			Total Equity			Common Stock		Additional Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total Equity
Balance at June 30, 2017	$	5,261,649		$	5,697		$	5,267,346		$	90,523	$	543,879		$	10,930,348		$	(1,924,204	)	$	(4,378,897	)	$	5,697		$	5,267,346
Net income	707,545			442			707,987								341,556									301			341,857
Other comprehensive income (loss)	275,166			(64		)	275,102											156,476						(160		)	156,316
Dividends paid	(264,217		)	(115		)	(264,332		)
Dividends paid ($1.32 per share)															(176,187		)										(176,187		)
Stock incentive plan activity	40,210			—			40,210					(9,876		)							39,783						29,907
Acquisition activity	—			(30		)	(30		)															(29		)	(29		)
Shares purchased at cost	(150,000		)	—			(150,000		)												(100,000		)				(100,000		)
Balance at March 31, 2018	$	5,870,353		$	5,930		$	5,876,283

	Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance at June 30, 2016	$	4,575,255		$	3,423		$	4,578,678
Net income	690,107			378			690,485
Other comprehensive income (loss)	(65,068		)	281			(64,787		)
Dividends paid	(256,823		)	(338		)	(257,161		)
Stock incentive plan activity	13,360			—			13,360
Acquisition activity	—			1,843			1,843
Shares purchased at cost	(214,692		)	—			(214,692		)
Balance at March 31, 2017	$	4,742,139		$	5,587		$	4,747,726

Balance at December 31, 2017										$	90,523	$	534,003		$	11,095,717		$	(1,767,728	)	$	(4,439,114	)	$	5,809		$	5,519,210

~~9. Equity, cont'd~~

Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017 are as follows:



	Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total
Balance at June 30, 2018	$	(943,477	)	$	(819,609	)	$	(1,763,086	)
Impact of adoption of ASU 2016-01	(1,734		)	—			(1,734		)
Other comprehensive loss before reclassifications	(82,655		)	—			(82,655		)
Amounts reclassified from accumulated other comprehensive (loss)	3,578			48,400			51,978
Balance at December 31, 2018	$	(1,024,288	)	$	(771,209	)	$	(1,795,497	)


	Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total			Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total
Balance at June 30, 2017	$	(925,342	)	$	(998,862	)	$	(1,924,204	)	$	(925,342	)	$	(998,862	)	$	(1,924,204	)
Other comprehensive income before reclassifications	194,900			—			194,900			101,429			—			101,429
Amounts reclassified from accumulated other comprehensive (loss)	—			80,266			80,266			—			55,047			55,047
Balance at March 31, 2018	$	(730,442	)	$	(918,596	)	$	(1,649,038	)
Balance at December 31, 2017										$	(823,913	)	$	(943,815	)	$	(1,767,728	)

Foreign Currency Translation Adjustment and Other Retirement Benefit Plans Total
Balance at June 30, 2016 $ (844,121 ) $ (1,383,644 ) $ (2,227,765 )
Other comprehensive (loss) before reclassifications (169,883 ) —
(169,883 )
Amounts reclassified from accumulated other comprehensive (loss) (1,032 ) 105,847
104,815
Balance at March 31, 2017 $ (1,015,036 ) $ (1,277,797 ) $ (2,292,833 )

Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and ~~nine~~six months ended ~~March~~December 31, 2018 and 2017 are as follows:


Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)						Consolidated Statement of Income Classification	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)						Consolidated Statement of Income Classification
	Three Months Ended			Nine Months Ended				Three Months Ended			Six Months Ended
	March 31, 2018			March 31, 2018				December 31, 2018			December 31, 2018
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(1,608	)	$	(5,291	)	See Note 11	$	(1,652	)	$	(3,293	)	Other (income) expense, net
Recognized actuarial loss	(35,606		)	(110,566		)	See Note 11	(30,696		)	(59,993		)	Other (income) expense, net
Total before tax	(37,214		)	(115,857		)		(32,348		)	(63,286		)
Tax benefit	11,996			35,591			Income taxes	7,821			14,886
Net of tax	$	(25,218	)	$	(80,266	)		$	(24,527	)	$	(48,400	)


Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)						Consolidated Statement of Income Classification	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)						Consolidated Statement of Income Classification
	Three Months Ended			Nine Months Ended				Three Months Ended			Six Months Ended
	March 31, 2017			March 31, 2017				December 31, 2017			December 31, 2017
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(1,735	)	$	(5,202	)	See Note 11	$	(1,545	)	$	(3,683	)	Other (income) expense, net
Recognized actuarial loss	(53,727		)	(159,946		)	See Note 11	(35,929		)	(74,960		)	Other (income) expense, net
Total before tax	(55,462		)	(165,148		)		(37,474		)	(78,643		)
Tax benefit	19,950			59,301			Income taxes	9,162			23,596
Net of tax	$	(35,512	)	$	(105,847	)		$	(28,312	)	$	(55,047	)

~~10.~~11. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the ~~nine~~six months ended ~~March~~December 31, 2018 are as follows:

Diversified Industrial
Segment

Aerospace
Systems
Segment
Total
Balance at June 30, 2017 $ 5,488,236
$ 98,642
$ 5,586,878
Acquisitions 36,715
—
36,715
Foreign currency translation and other 122,742
23
122,765
Balance at March 31, 2018 $ 5,647,693
$ 98,665
$ 5,746,358



	Diversified Industrial Segment			Aerospace Systems Segment			Total
Balance at June 30, 2018	$	5,405,771		$	98,649		$	5,504,420
Acquisition	2,940			—			2,940
Foreign currency translation and other	(44,799		)	(6		)	(44,805		)
Balance at December 31, 2018	$	5,363,912		$	98,643		$	5,462,555

~~Acquisitions represent adjustments to purchase price allocations~~The acquisition line represents the goodwill allocation during the measurement period subsequent to the applicable acquisition ~~dates. The impact of purchase price allocation adjustments made during the first nine months of fiscal 2018 on the Company's results of operations and financial position were immaterial.~~date.

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


	March 31, 2018				June 30, 2017				December 31, 2018				June 30, 2018
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents	$	269,935	$	116,041	$	254,049	$	100,860	$	261,548	$	123,194	$	265,423	$	117,440
Trademarks	562,788		226,902		553,691		200,413		542,931		238,962		546,905		227,580
Customer lists and other	2,561,179		916,300		2,566,983		765,966		2,440,534		999,032		2,482,079		933,867
Total	$	3,393,902	$	1,259,243	$	3,374,723	$	1,067,239	$	3,245,013	$	1,361,188	$	3,294,407	$	1,278,887

Total intangible amortization expense for the ~~nine~~six months ended ~~March~~December 31, 2018 was ~~$167,317~~.$105,090. The estimated amortization expense for the five years ending June 30, ~~2018~~2019 through ~~2022~~2023 is $~~215,358~~196,130, $~~205,011~~185,468, $~~196,150~~180,870, $~~187,346~~175,010 and $~~151,183~~167,513, respectively.

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No ~~such events or circumstances~~material intangible asset impairments occurred during the ~~nine~~six months ended ~~March~~December 31, 2018.

~~11.~~12. Retirement benefits

Net pension benefit cost recognized included the following components:


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	March 31,						March 31,						December 31,						December 31,
	2018			2017			2018			2017			2018			2017			2018			2017
Service cost	$	20,711		$	23,632		$	62,011		$	70,971		$	17,983		$	18,242		$	38,492		$	41,300
Interest cost	36,027			31,734			107,851			93,202			40,551			36,138			80,417			71,824
Expected return on plan assets	(64,437		)	(59,480		)	(192,963		)	(177,277		)	(62,701		)	(65,350		)	(125,578		)	(128,526		)
Amortization of prior service cost	1,575			1,702			5,190			5,101			1,677			1,511			3,325			3,615
Amortization of net actuarial loss	36,278			52,805			110,428			158,557			30,692			35,468			59,985			74,150
Amortization of initial net obligation	4			4			14			14			4			5			9			10
Net pension benefit cost	$	30,158		$	50,397		$	92,531		$	150,568		$	28,206		$	26,014		$	56,650		$	62,373

During the three months ended ~~March~~December 31, 2018 and 2017, the Company recognized ~~$(100)~~$631 and ~~$1,034,~~$1,091, respectively, in ~~(income)~~ expense related to other postretirement benefits. During the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, the Company recognized ~~$2,080~~$1,281 and ~~$3,266,~~$2,180, respectively, in expense related to other postretirement benefits. Components of net pension benefit cost and other postretirement benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.

In September 2018, the Company made a discretionary $200 million cash contribution to its domestic qualified defined benefit plan.

~~12.~~

13. Income taxes

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 ~~unremitted~~undistributed foreign earnings and profits).

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118, ~~("SAB 118"),~~ which ~~provides~~provided guidance on accounting for the tax effects of the TCJ Act. SAB 118 ~~provides~~provided a measurement period that should not extend beyond one year from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118, and based on the information available, ~~as of December 31, 2017,~~ the Company recorded ~~a net provisional discrete income tax cost of $225 million as a result of the TCJ Act being enacted during the second quarter of fiscal 2018.~~

The reduction in the U.S. corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and liabilities to reflect their value at the reduced corporate tax rate of 21 percent, which resulted in a decrease in incomeadditional tax expense ~~for~~of $14,485 related to the ~~nine months ended March 31, 2018 of approximately $62 million. The~~estimated one-time transition tax on previously unremitted foreign earnings and profits resulted in an increase in income tax expense for the nine months ended March 31, 2018 of $287 million. The Company intends to make the election to pay the one-time transition tax over eight years. The amounts recorded for both the revaluation of certain tax-related assets and liabilities and the one-time transition tax on previously unremitted foreign earnings and profits have been recorded as reasonable estimates based on the Company's analysis. No incremental adjustments have been made to these estimates during the three months ended ~~March~~December 31, ~~2018, as available information has not significantly changed.~~2018. This adjustment is a result of the Company's analysis of related proposed regulations that were issued subsequent to the recording of the previous provisional amount. The ~~Company continues to gather additional information and interpret the law to complete the~~company now considers its provisional accounting for ~~these items.~~

~~Certain provisions~~the effects of the TCJ Act, ~~will impact~~which includes the remeasurement of deferred tax balances and related valuation allowances, the one-time transition tax and the repatriation of undistributed foreign earnings, as being complete and as meeting the recognition guidance under Topic 740. The Company is in the process of evaluating the final transition tax regulations that were published on January 16, 2019.

During the period ended September 30, 2018, the Company ~~starting in fiscal 2019. These provisions include, but are not limited~~made the accounting policy election to ~~the creation of the base erosion anti-abuse tax,~~treat taxes related to Global Intangible Low-Taxed Income as 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 March 31, 2018, has not recorded any impact of the TCJ Act aside from those previously mentioned.current period expense when incurred.

The Company and its subsidiaries file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is open to assessment of its federal income tax returns by the U.S. Internal Revenue Service for fiscal years after 2011, and its state and local returns for fiscal years after ~~2011.~~2012. The Company is also open to assessment for foreign jurisdictions for fiscal years after ~~2007.~~2009. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.

As of ~~March~~December 31, 2018, the Company had gross unrecognized tax benefits of ~~$156,978. The total amount~~$146,632, all of ~~gross unrecognized tax benefits that,~~which, if recognized, would affect the effective tax ~~rate was $102,871. If recognized, a significant portion of the gross unrecognized tax benefits would be offset against an asset currently recorded in the Consolidated Balance Sheet.~~rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, is ~~$19,076.~~$23,411. 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~~$110,000 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 gross unrecognized tax benefits within the next 12 months is expected to be insignificant.

~~13.~~14. 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, ~~which~~equity investments and available-for-sale debt securities. Deposits are recorded at cost, and equity investments ~~classified as~~and available-for-sale ~~which~~debt securities are recorded at fair value. Changes in fair value ~~with unrealized gains and losses~~related to available-for-sale debt securities are recorded in accumulated other

comprehensive (loss). Upon the adoption of ASU 2016-01 on July 1, 2018, changes in fair value of equity investments are recognized in net income. Prior to the adoption of ASU 2016-01, these changes in fair value were recognized in accumulated other comprehensive (loss).

Gross unrealized gains and losses related to both equity investments and available-for-sale debt securities were not material as of ~~March~~December 31, 2018 and June 30, ~~2017.~~2018. There were no facts or circumstances that indicated the unrealized losses were other than temporary.

~~13. Financial instruments, cont'd~~

The contractual maturities of available-for-sale ~~investments~~debt securities were predominantly one to three years at ~~March~~December 31, 2018 and June 30, ~~2017 are as follows:~~

March 31, 2018 June 30, 2017

Amortized
Cost

Fair
Value
Amortized
Cost Fair
Value
Less than one year $ 1,121
$ 1,122
$ 690
$ 693
One to three years 8,736
8,806
7,865
7,924
Above three years 466
467
2,108
2,113

2018. Actual maturities of available-for-sale ~~investments~~debt securities may differ from their contractual maturities as the Company has the ability to liquidate the available-for-sale ~~investments~~debt securities after giving appropriate notice to the issuer.

The carrying value of long-term debt and estimated fair value of long-term debt are as follows:


	March 31, 2018		June 30, 2017		December 31, 2018		June 30, 2018
Carrying value of long-term debt	$	5,437,267	$	5,383,343	$	4,343,138	$	4,460,402
Estimated fair value of long-term debt	5,619,917		5,645,529		4,383,759		4,548,796

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 ~~EUR 700~~€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.

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.

The ~~following summarizes the~~ location and fair value of ~~significant~~ derivative financial instruments reported in the Consolidated Balance Sheet are as ~~of March 31, 2018 and June 30, 2017:~~

follows:


	Balance Sheet Caption	March 31, 2018		June 30, 2017		Balance Sheet Caption	December 31, 2018		June 30, 2018
Net investment hedges
Cross-currency swap contracts	Other assets	$	—	$	15,135	Other assets	$	17,126	$	7,614
Cross-currency swap contracts	Other liabilities	10,403		—
Cash flow hedges
Costless collar contracts	Non-trade and notes receivable	1,850		430		Non-trade and notes receivable	278		932
Costless collar contracts	Other accrued liabilities	3,557		2,027		Other accrued liabilities	4,553		236

The cross-currency swap 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.

~~13. Financial instruments, cont'd~~

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 costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and ~~nine~~six months ended ~~March~~December 31, 2018 and 2017 were not material.

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


	Three Months Ended						Nine Months Ended						Three Months Ended					Six Months Ended
	March 31,						March 31,						December 31,					December 31,
	2018			2017			2018			2017			2018		2017			2018		2017
Cross-currency swap contracts	$	(13,374	)	$	(1,278	)	$	(22,672	)	$	3,741		$	5,700	$	(2,725	)	$	7,619	$	(9,298	)
Foreign denominated debt	(15,423		)	(11,009		)	(43,150		)	(11,005		)	7,144		(10,893		)	11,271		(27,727		)

There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor was any portion of these financial instruments excluded from the effectiveness testing, during the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017.

A summary of financial assets and liabilities that were measured at fair value on a recurring basis at ~~March~~December 31, 2018 and June 30, ~~2017~~2018 are as follows:


			Quoted Prices		Significant Other		Significant				Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable		Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs		Value at		Markets		Inputs		Inputs
	March 31, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Equity securities	$	3,682	$	3,682	$	—	$	—	$	12,988	$	12,988	$	—	$	—
Corporate bonds	6,026		6,026		—		—		4,859		4,859		—		—
Asset-backed and mortgage-backed securities	4,369		—		4,369		—		6,046		—		6,046		—
Derivatives	2,098		—		2,098		—		21,377		—		21,377		—
Investments measured at net asset value	7,614								7,064
Liabilities:
Derivatives	15,495		—		15,495		—		15,856		—		15,856		—

Quoted Prices
Significant Other
Significant
Fair
In Active
Observable
Unobservable
Value at
Markets
Inputs
Inputs
June 30, 2017
(Level 1)
(Level 2)
(Level 3)
Assets:
Equity securities $ 3,008
$ 3,008
$ —
$ —
Corporate bonds 5,968
5,968
—
—
Asset-backed and mortgage-backed securities 4,762
—
4,762
—
Derivatives 16,496
—
16,496
—
Investments measured at net asset value 7,073

Liabilities:
Derivatives 16,064
—
16,064
—

~~13. Financial instruments, cont'd~~



			Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs
	June 30, 2018		(Level 1)		(Level 2)		(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		—

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.

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.

PARKER-HANNIFIN CORPORATION

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~MARCH~~DECEMBER 31, 2018

AND COMPARABLE PERIODS ENDED ~~MARCH~~DECEMBER 31, 2017

OVERVIEW

The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.

The Company’s order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:

Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;

Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and

Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.

A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:


	March 31, 2018	March 31, 2017	June 30, 2017	December 31, 2018	June 30, 2018	December 31, 2017
United States	59.3	56.6	56.7	54.1	60.2	59.7
Eurozone countries	56.6	56.2	57.4	51.4	54.9	60.6
China	51.0	51.2	50.4	49.7	51.0	51.5
Brazil	53.4	49.6	50.5	52.6	49.8	52.4

~~Both global~~Global aircraft miles flown increased by approximately six percent, and available revenue passenger miles increased by approximately ~~six~~seven percent from their comparable fiscal ~~2017~~2018 levels. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year ~~2018~~2019 will be approximately ~~two~~nine percent higher than the comparable fiscal ~~2017~~2018 level.

Housing starts in ~~March~~November 2018 were approximately 11five percent higher than housing starts in ~~March~~December 2017 and approximately ~~nine~~seven percent higher than housing starts in June ~~2017.~~

2018. United States Census Bureau housing starts data for November 2018 was used as the December 2018 data was unavailable.

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 ~~service,~~experience, profitable growth and financial ~~performance and profitable growth;~~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 priced by the value they deliver;

Acquiring strategic businesses;

Organizing around targeted regions, technologies and markets;

Driving efficiency by implementing lean enterprise principles; and

Creating a culture of empowerment through 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 at the same time maintaining the Company’s strong financial position. In addition, the Company will continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

CONSOLIDATED STATEMENT OF INCOME


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(dollars in millions)	2018			2017			2018			2017			2018			2017			2018			2017
Net sales	$	3,749.6		$	3,119.1		$	10,484.9		$	8,533.1		$	3,472.0		$	3,370.7		$	6,951.3		$	6,735.3
Gross profit margin	24.7		%	23.6		%	24.4		%	23.4		%	25.0		%	23.9		%	25.2		%	24.5		%
Selling, general and administrative expenses	$	420.6		$	392.0		$	1,234.7		$	1,051.6		$	397.3		$	408.3		$	791.6		$	805.3
Selling, general and administrative expenses, as a percent of sales	11.2		%	12.6		%	11.8		%	12.3		%	11.4		%	12.1		%	11.4		%	12.0		%
Interest expense	$	54.1		$	42.1		$	160.8		$	109.6		$	47.5		$	53.1		$	91.9		$	106.7
Other (income), net	$	(20.0	)	$	(13.8	)	$	(42.0	)	$	(90.5	)
Other (income) expense, net													$	(6.2	)	$	(15.5	)	$	(20.1	)	$	1.0
Effective tax rate	22.1		%	24.2		%	41.2		%	25.6		%	27.7		%	84.4		%	22.8		%	53.5		%
Net income	$	366.1		$	238.8		$	708.0		$	690.5		$	311.9		$	56.3		$	687.8		$	341.9
Net income, as a percent of sales	9.8		%	7.7		%	6.8		%	8.1		%	9.0		%	1.7		%	9.9		%	5.1		%

Net sales for the current-year quarter and first ~~nine~~six months of fiscal ~~2018~~2019 increased as compared to the comparable prior-year ~~comparable~~ periods primarily due to higher sales in ~~both~~ the Diversified Industrial North American businesses and ~~Diversified Industrial International businesses.~~the Aerospace Systems Segment. The effect of currency rate changes ~~increased~~decreased net sales by approximately ~~$136~~$73 million in the current-year quarter ($~~127~~67 million of which was attributable to the Diversified Industrial International businesses) and ~~$264~~$130 million for the first ~~nine~~six months of fiscal ~~2018~~2019 ($~~239~~118 million of which was attributable to the Diversified Industrial International businesses). ~~Acquisitions made in the last 12 months contributed approximately $233 million and $970 million in sales in the current-year quarter and first nine months of fiscal 2018, respectively.~~

Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter and the first ~~nine~~six months of fiscal ~~2018~~2019 primarily due to higher margins in the Aerospace Systems Segment ~~partially offset~~driven by ~~lower margins in the~~increased aftermarket and original equipment manufacturer (OEM) volume and profitability. Diversified Industrial Segment ~~(refer to "Results by Business Segment" for further discussion). Pension cost included in cost of sales~~margins remained relatively flat for the current-year quarter and ~~prior-year quarter were $20.0 million and $34.6 million, respectively, and $64.2 million and $101.8 million for the~~ first ~~nine~~six months of fiscal ~~2018 and 2017, respectively.~~2019. Cost of sales for the current-year quarter and prior-year quarter also included business realignment charges and acquisition integration costs of ~~$9.5~~$3.7 million and ~~$10.3~~$13.7 million, respectively, and ~~$32.3~~$8.1 million and ~~$25.0~~$22.8 million for the first ~~nine~~six months of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively.

Selling, general and administrative expenses ~~increased~~decreased for the current-year quarter and the first ~~nine~~six months of fiscal ~~2018~~2019 primarily due to the benefits from prior-year restructuring activities and the Company's simplification initiative. These benefits were partially offset by higher ~~amortization~~net expense ~~resulting from recent acquisitions, higher sales expenses resulting from~~associated with the ~~increase in sales, and higher incentive compensation. Selling, general and administrative expenses for the current-year quarter also reflect higher~~Company's deferred compensation ~~expense compared~~programs due to unfavorable market fluctuations related to investments associated with these programs more than offsetting favorable changes in the prior-year quarter. Pension cost included in selling, general and administrative expenses for the current-year quarter and prior-year quarter were $9.2 million and $16.4 million, respectively, and $27.7 million and $48.6 million for the first nine months of fiscal 2018 and 2017, respectively.related liabilities. Selling, general and administrative expenses for the current-year quarter and prior-year quarter also included business realignment charges and acquisition integration costs of ~~$7.7~~$3.7 million and ~~$6.0~~$11.7 million, respectively, and ~~$24.4~~$7.9 million and ~~$10.0~~$16.6 million for the first ~~nine~~six months of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively.

Interest expense for the current-year quarter ~~increased primarily due to higher weighted-average borrowings. Interest expense for the~~and first ~~nine~~six months of fiscal ~~2018 increased primarily~~2019 decreased from the comparable prior-year periods due to ~~both higher weighted-average borrowings and higher weighted-average interest rates.~~lower average debt outstanding.

Other (income), expense, net inincluded the current-year quarter and the first nine months of fiscal 2018 includes income of $15.9 million and $34.4 million, respectively, related to equity method investments compared to income of $10.9 million and $30.0 million for the prior-year quarter and first nine months of fiscal 2017, respectively. Other (income), net in the first nine months of fiscal 2018 includes a writedown of an investment of approximately $20.0 million, a loss of approximately $13.8 million on the sale of an investment and a gain on the sale of real estate of approximately $28.4 million. Other (income), net includes a gain of approximately $45 million in the first nine months of fiscal 2017 related to the sale of a product line.following:



(dollars in millions)	Three Months Ended December 31,						Six Months Ended December 31,
Expense (income)	2018			2017			2018			2017
Income related to equity method investments	$	(23.0	)	$	(11.5	)	$	(45.8	)	$	(18.5	)
Non-service components of retirement benefit cost	10.8			8.7			19.3			23.0
Divestitures and asset sales and writedowns	5.4			(26.0		)	4.5			(26.2		)
Sale and writedown of investments	—			20.0			—			33.8
Other items, net	0.6			(6.7		)	1.9			(11.1		)
	$	(6.2	)	$	(15.5	)	$	(20.1	)	$	1.0

Effective tax rate for the current-year quarter and the first six months of fiscal ~~2018~~2019 was lower than the comparable prior-year ~~quarter~~periods primarily due to ~~the reduced U.S. income~~a net decrease in discrete tax ~~rate~~costs resulting from the enactment of the ~~TCJ Act. The effective tax rate for~~U.S Tax Cuts and Jobs Act (TCJ Act) that were recorded in the first nine months of fiscal 2018 was higher than the comparable prior-year period primarily due to the impact of one-time adjustments recorded as a result of the TCJ Act. See Note 12 to the Consolidated Financial Statements 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 the first nine months of fiscal 2018 was lower primarily due to the reduced U.S. income tax rate resulting from enactment of the TCJ Act and a net increase in discrete tax benefits, partially offset by an increase in taxes related to international activities.prior year periods. The Company expects the fiscal ~~2018~~2019 effective tax rate will be approximately 3723.5 percent. ~~The impact on the fiscal 2018 effective tax rate of the TCJ Act one-time adjustments is approximately 13 percent.~~

RESULTS BY BUSINESS SEGMENT

Diversified Industrial Segment


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(dollars in millions)	2018			2017			2018			2017			2018			2017			2018			2017
Net sales
North America	$	1,761.8		$	1,413.3		$	4,922.0		$	3,701.3		$	1,632.1		$	1,565.4		$	3,313.1		$	3,160.1
International	1,389.3			1,128.9			3,883.7			3,149.8			1,223.7			1,255.6			2,457.4			2,494.3
Operating income
North America	280.7			227.4			762.5			612.0			257.8			225.8			532.9			481.8
International	$	205.3		$	153.0		$	561.8		$	417.7		$	189.1		$	164.8		$	395.2		$	356.6
Operating margin
North America	15.9		%	16.1		%	15.5		%	16.5		%	15.8		%	14.4		%	16.1		%	15.2		%
International	14.8		%	13.6		%	14.5		%	13.3		%	15.5		%	13.1		%	16.1		%	14.3		%
Backlog	$	2,285.8		$	1,969.1		$	2,285.8		$	1,969.1		$	2,161.2		$	2,140.9		$	2,161.2		$	2,140.9

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


	Period Ending March 31, 2018				Period Ending December 31, 2018
	Three Months		Nine Months		Three Months		Six Months
Diversified Industrial North America – as reported	24.7	%	33.0	%	4.3	%	4.8	%
Acquisitions	13.8	%	21.6	%
Divestitures					(0.4	)%	(0.4	)%
Currency	0.5	%	0.6	%	(0.3	)%	(0.4	)%
Diversified Industrial North America – without acquisitions and currency	10.4	%	10.8	%
Diversified Industrial North America – without divestitures and currency					5.0	%	5.6	%

Diversified Industrial International – as reported	23.1	%	23.3	%	(2.5	)%	(1.5	)%
Acquisitions	3.3	%	5.5	%
Divestitures					(0.8	)%	(0.9	)%
Currency	11.2	%	7.6	%	(5.3	)%	(4.7	)%
Diversified Industrial International – without acquisitions and currency	8.6	%	10.2	%
Diversified Industrial International – without divestitures and currency					3.6	%	4.1	%

Total Diversified Industrial Segment – as reported	24.0	%	28.5	%	1.2	%	2.1	%
Acquisitions	9.2	%	14.2	%
Divestitures					(0.6	)%	(0.6	)%
Currency	5.3	%	3.8	%	(2.6	)%	(2.3	)%
Total Diversified Industrial Segment – without acquisitions and currency	9.5	%	10.5	%
Total Diversified Industrial Segment – without divestitures and currency					4.4	%	5.0	%

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~~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.

Excluding the effects of ~~acquisitions~~divestitures and changes in currency exchange rates, Diversified Industrial North American sales increased for the current-year quarter and first ~~nine~~six months of fiscal ~~2018~~2019 primarily due to higher demand from distributors and end-users in ~~most markets. The markets that experienced~~ the ~~largest increase in end-user demand were the~~heavy-duty truck, engines, construction equipment, ~~oil and gas,~~ cars and light ~~trucks, heavy-duty~~ truck, farm and agricultural equipment, refrigeration and ~~engines markets. Higher~~general industrial machinery markets, partially offset by lower demand ~~was also experienced~~from end users in the ~~industrial machinery market for the first nine months of fiscal 2018.~~ semiconductor, machine tool, oil and gas and power generation markets.

Excluding the effects of ~~acquisitions~~divestitures and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter and ~~the~~ first ~~nine~~six months of fiscal ~~2018~~2019 increased primarily due to higher ~~volume~~demand from distributors and end users in ~~all regions.~~the mobile markets. The increase in sales for the current year quarter is primarily due to a 45 percent increase in both Europe and the Asia Pacific region. The Asia Pacific region accounted for ~~approximately 46 percent and 51~~50 percent of the increase in sales ~~increase~~ for the ~~current-year quarter and~~ first ~~nine~~six months of fiscal ~~2018, respectively,~~2019, while Europe and ~~Europe accounted for approximately 45~~Latin America contributed 30 percent and 4220 percent, ~~of the sales increase for the~~

~~current-year quarter and first nine months of fiscal 2018,~~ respectively. Within the Asia Pacific region, the ~~largest~~ increase in sales ~~for both~~in the current-year quarter and first ~~nine~~six months of fiscal ~~2018~~2019 was primarily experienced from distributors and ~~end-users~~end users in the construction equipment and ~~semiconductor markets. An increase in sales was also experienced~~oil and gas markets, partially offset by lower end-user demand in the general industrial machinery ~~engines,~~ and ~~cars and light trucks markets for the first nine months of fiscal 2018.~~semiconductor markets. Within Europe, distributors and ~~end-users~~end users in the ~~mining,~~ construction equipment, ~~oil and gas,~~ heavy-duty truck, ~~machine tools,~~ industrial trucks and material handling, ~~industrial machinery~~ and ~~off-highway forestry~~telecommunications markets experienced the largest increase in ~~sales~~demand during both the current-year quarter and first ~~nine~~six months of fiscal ~~2018.~~

~~Operating margins~~2019, which was partially offset by lower end-user demand in the ~~Diversified Industrial North American businesses~~cars and light truck and general industrial machinery markets. The increase in sales in Latin America for the current-year quarter and first ~~nine~~six months of fiscal ~~2018 were lower as~~2019 was primarily due to higher demand from distributors and end users in the ~~impact of the higher sales volume~~construction equipment and ~~lower operating expenses resulting from prior-year restructuring activities~~farm and ~~the Company's simplification initiative were more than~~agricultural equipment markets, partially offset by ~~higher amortization expense,~~lower end-user demand in the ~~effect of the operations of CLARCOR, Inc. (Clarcor) not being fully integrated and unfavorable raw material prices.~~industrial machinery market.

~~The increase in operating~~Operating margins in both the Diversified Industrial North American and International businesses for the current-year quarter and first ~~nine~~six months of fiscal ~~2018 was primarily~~2019 increased due to ~~the~~ higher sales volume, ~~and~~ lower operating expenses resulting from prior-year ~~restructuring~~business realignment and acquisition integration activities and the Company's simplification initiative, ~~resulting~~and lower restructuring expenses in ~~manufacturing efficiencies,~~the current year. In both businesses these benefits were partially offset by increased manufacturing expenses associated with higher ~~amortization expense, an unfavorable product mix and unfavorable raw material prices.~~sales volume.

The following business realignment expenses and acquisition integration costs are included in Diversified Industrial North American and Diversified Industrial International operating income:


	Three Months Ended March 31,				Nine Months Ended March 31,				Three Months Ended December 31,				Six Months Ended December 31,
(dollars in millions)	2018		2017		2018		2017		2018		2017		2018		2017
Diversified Industrial North America	$	8.4	$	4.0	$	29.2	$	10.0	$	3.8	$	11.0	$	8.5	$	20.8
Diversified Industrial International	7.2		10.6		24.4		22.1		3.6		13.7		7.4		17.2

The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative implemented by operating units throughout the world as well as plant closures. The majority of the Diversified Industrial International business realignment charges were incurred in Europe. The Company anticipates that cost savings realized from the work force reduction measures taken in the first ~~nine~~six months of fiscal ~~2018~~2019 will not materially impact operating income in fiscal ~~2018 and will increase operating income in~~2019 or fiscal ~~2019 by approximately three percent in both the Diversified Industrial North American operations and Diversified Industrial International operations.~~2020. Acquisition integration costs primarily relate to the integration of the fiscal 2017 acquisition of ~~Clarcor~~CLARCOR Inc. and are primarily incurred in the Diversified Industrial North American businesses. The Company expects to continue to take the actions necessary to structure appropriately the operations of the Diversified Industrial Segment. Such actions are expected to result in approximately ~~$40~~$19 million of additional business realignment charges and acquisition integration costs in the remainder of fiscal ~~2018.~~2019.

Diversified Industrial Segment backlog as of December 31, 2018 increased slightly from the prior-year quarter ~~and the June 30, 2017 amount of $2,041.4 million~~ primarily due to orders exceeding shipments in ~~both~~ the Diversified Industrial North American ~~and~~businesses, partially offset by shipments exceeding orders in the Diversified Industrial International businesses. ~~The percentage increase~~Within the International businesses, backlog in ~~backlog~~Europe represented 95 percent of the decrease from the prior-year ~~quarter was experienced~~quarter.

As of December 31, 2018, Diversified Industrial Segment backlog remained relatively ~~evenly between North America, Europe and Asia Pacific. Of~~flat compared to the ~~increase in backlog from~~ June 30, ~~2017, approximately 30 percent was experienced~~2018 amount of $2,167.2 million due to orders exceeding shipments in the International businesses offset by shipments exceeding orders in the North ~~America, approximately 25 percent was experienced~~American businesses. Within the International businesses, orders exceeding shipments in Europe and ~~approximately 40 percent was experienced~~Latin America were partially offset by shipments exceeding orders in the Asia Pacific region.

Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

The Company anticipates Diversified Industrial North American sales for fiscal ~~2018~~2019 will increase between 241.4 percent and 263.9 percent from their fiscal ~~2017~~2018 level, and Diversified Industrial International sales for fiscal ~~2018~~2019 will ~~increase~~decrease between 194.9 percent and 212.5 percent from their fiscal ~~2017~~2018 level. ~~The primary driver for the increase in sales in fiscal 2018 is expected to be the sales contribution from fiscal 2017 acquisitions.~~ Diversified Industrial North American operating margins in fiscal ~~2018~~2019 are expected to range from ~~15.9~~16.6 percent to ~~16.1~~17.2 percent, and Diversified Industrial International operating margins in fiscal ~~2018~~2019 are expected to range from ~~14.2~~15.7 percent to ~~14.4~~16.1 percent.

Aerospace Systems Segment


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(dollars in millions)	2018			2017			2018			2017			2018			2017			2018			2017
Net sales	$	598.4		$	577.0		$	1,679.3		$	1,682.0		$	616.3		$	549.7		$	1,180.8		$	1,080.9
Operating income	$	106.7		$	80.0		$	271.2		$	225.8		$	121.5		$	87.1		$	231.3		$	164.6
Operating margin	17.8		%	13.9		%	16.2		%	13.4		%	19.7		%	15.9		%	19.6		%	15.2		%
Backlog	$	1,981.7		$	1,695.2		$	1,981.7		$	1,695.2		$	2,047.9		$	1,820.9		$	2,047.9		$	1,820.9

The increase in net sales in the Aerospace Systems Segment for the current-year quarter and first six months of fiscal 2019 was primarily due to higher volume in the commercial ~~original equipment manufacturer (OEM)~~ and military aftermarket businesses as well as the commercial and military ~~aftermarket businesses. The decrease in net sales for the first nine months of fiscal 2018 was primarily due to lower commercial and military~~ OEM ~~volume, partially offset by higher volume in the commercial and military aftermarket~~ businesses. The higher operating margin for the current-year quarter and first six months was primarily due to higher aftermarket and OEM volume and profitability, ~~favorable contract settlements when compared to the prior-year quarter,~~higher joint venture earnings, lower engineering and development costs, and lower operating ~~expenses and lower engineering development~~ costs. ~~The higher operating margin for~~Operating margins in the first ~~nine~~six months of fiscal ~~2018 was primarily due to favorable aftermarket to OEM product mix, higher aftermarket profitability, lower operating expenses and lower engineering development costs and favorable~~2019 also benefited from the absence of unfavorable contract settlements ~~when compared to~~that occurred in the ~~first nine months of fiscal 2017.~~comparable prior-year period.

The increase in backlog from the prior-year quarter is due to orders exceeding shipments within the commercial and military OEM and commercial and military aftermarket businesses. The increase in backlog from the June 30, ~~2017~~2018 amount of ~~$1,753.0~~$1,954.0 million is primarily due to orders exceeding shipments ~~in both~~within the military OEM and commercial and military ~~OEM~~aftermarket businesses, ~~and the military aftermarket business,~~ partially offset by shipments exceeding orders in the commercial ~~aftermarket~~OEM 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.

For fiscal ~~2018,~~2019, sales are expected to ~~range from being flat to increasing two~~increase between 4.5 percent and 6.6 percent from the fiscal ~~2017~~2018 level and operating margins are expected to range from ~~16.4~~18.9 percent to ~~16.6~~19.3 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.

Corporate general and administrative expenses

Corporate general and administrative expenses were ~~$54.1~~$63.9 million in the current-year quarter compared to ~~$45.7~~$46.9 million in the comparable prior-year quarter and were ~~$142.4~~$114.2 million for the first ~~nine~~six months of fiscal ~~2018,~~2019 compared to ~~$120.7~~$88.3 million for the first ~~nine~~six months of fiscal ~~2017.~~2018. As a percent of sales, corporate general and administrative expenses were 1.8 percent and 1.4 percent in the current-year ~~quarter~~ and ~~1.5 percent in the~~ prior-year quarter, ~~and were 1.4 percent of sales in both~~respectively. During the first ~~nine~~six months of fiscal 2019 and 2018, ~~and first nine months of fiscal 2017. The primary drivers for the change in corporate~~Corporate general and administrative expenses ~~between~~were 1.6 percent and 1.3 percent of sales, respectively. Corporate general and administrative expenses increased during the current-year quarter and ~~the~~ first ~~nine~~six months of ~~2018 as compared to~~fiscal 2019 from the respective prior-year periods ~~were expenses~~primarily due to unfavorable market fluctuations related to investments associated with the Company's ~~incentive and~~ deferred compensation ~~programs.~~program more than offsetting favorable changes in the related liabilities.

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

(dollars in millions) Three Months Ended
March 31, Nine Months Ended
March 31,
Expense (income) 2018 2017 2018 2017
Foreign currency transaction $ 3.9
$ 7.0
$ 16.5
$ 6.2
Stock-based compensation 8.1
8.4
43.5
43.6
Pensions 5.1
19.5
17.9
59.9
Divestitures and asset sales and writedowns 0.3
1.0
(25.9 ) (43.5 )
Sale and writedown of investments —
—
33.8
—
Acquisition expenses 1.7
20.5
4.3
36.6
Other items, net (4.6 ) 1.1
(2.1 ) (5.7 )
$ 14.5
$ 57.5
$ 88.0
$ 97.1



(dollars in millions)	Three Months Ended December 31,						Six Months Ended December 31,
Expense (income)	2018			2017			2018		2017
Foreign currency transaction	$	(1.0	)	$	9.0		$	2.5	$	12.6
Stock-based compensation	8.2			9.5			36.7		35.4
Pensions	4.9			4.4			10.2		12.9
Divestitures and asset sales and writedowns	5.4			(26.0		)	4.5		(26.2		)
Sale and writedown of investments	—			20.0			—		33.8
Other items, net	8.3			0.6			8.5		5.0
	$	25.8		$	17.5		$	62.4	$	73.5

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 expense is primarily due to a lower level of amortization of past actuarial losses.~~

CONSOLIDATED BALANCE SHEET


(dollars in millions)	March 31, 2018		June 30, 2017		December 31, 2018		June 30, 2018
Cash	$	1,190.7	$	924.2	$	1,078.3	$	855.1
Trade accounts receivable, net	2,146.4		1,930.8		1,938.7		2,145.5
Inventories	1,732.8		1,549.5		1,804.6		1,621.3
Shareholders’ equity	5,870.4		5,261.6		5,815.2		5,859.9
Working capital	$	2,054.6	$	1,383.9	1,825.8		1,887.8
Current ratio	1.59		1.41		1.52		1.59

Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes ~~$1,096~~$994 million and ~~$874~~$836 million held by the Company's foreign subsidiaries at ~~March~~December 31, 2018 and June 30, ~~2017,~~2018, 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~~federal taxes. However, other U.S. or foreign taxes may be incurred should cash be ~~remitted~~distributed between the Company's subsidiaries. The Company has ~~historically considered the~~determined it will no longer permanently reinvest certain foreign earnings. All other undistributed foreign earnings ~~in the Company's non-U.S. subsidiaries to be indefinitely~~remain permanently reinvested. ~~The Company is currently analyzing this position given the enactment of the TCJ Act.~~

Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade accounts receivable was 52 days at ~~March~~December 31, 2018, and 51 days at June 30, ~~2017.~~2018. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Inventories as of ~~March~~December 31, 2018 increased $183 million ~~primarily~~ due to an increase in inventories in both the Diversified Industrial ~~Segment as well as~~and Aerospace Systems Segments, partially offset by a decrease of $13 million related to the effect of foreign currency ~~translation (which accounted for an increase of $40 million). Approximately 57~~translation. Within the Diversified Industrial Segment, approximately 65 percent of the increase in inventories ~~was experienced~~occurred in the Diversified Industrial North American businesses, and approximately 4135 percent of the increase ~~in inventories was experienced~~occurred in the Diversified Industrial International businesses. Days supply of inventory was 6777 days at ~~March~~December 31, 2018, 6764 days at June 30, ~~2017~~2018 and 6978 days at ~~March~~December 31, 2017.

Shareholders’ equity activity during the first ~~nine~~six months of fiscal ~~2018~~2019 included a decrease of approximately ~~$150~~$550 million as a result of share repurchases and ~~an increase~~a decrease of approximately ~~$194~~$79 million as a result of foreign currency translation.

CONSOLIDATED STATEMENT OF CASH FLOWS


	Nine Months Ended March 31,						Six Months Ended December 31,
(dollars in millions)	2018			2017			2018			2017
Cash provided by (used in):
Operating activities	$	904.8		$	789.3		$	541.0		$	456.8
Investing activities	(183.0		)	(3,308.4		)	(31.3		)	(141.8		)
Financing activities	(535.5		)	2,168.4			(260.0		)	(182.8		)
Effect of exchange rates	18.3			(51.4		)	(24.5		)	7.8
Net increase (decrease) in cash and cash equivalents	$	204.6		$	(402.1	)
Net increase in cash and cash equivalents							$	225.2		$	140.0

Cash flows ~~provided by~~from operating activities for the first ~~nine~~six months of fiscal ~~2018~~2019 was higher than the first ~~nine~~six months of fiscal ~~2017~~2018 primarily due to an increase in ~~the amount of adjustments to reconcile~~ net income ~~to net~~and cash ~~from operating activities and the absence of~~provided by working capital items, partially offset by a ~~$220~~$200 million ~~voluntary~~discretionary cash contribution ~~made~~ to the Company's domestic qualified ~~pension plan made in the first nine months of fiscal 2017, partially offset by an increase in cash used for working capital items.~~defined benefit plan. The Company continues to focus on managing its inventory and other working capital requirements.

Cash flows ~~used in~~from investing activities includes net maturities (purchases) of marketable securities and other investments of ~~$(58)~~$12 million and ~~$813~~$(66) million in the first ~~nine~~six months of fiscal 2019 and 2018, ~~and~~respectively. Cash flows from investing activities also includes $94 million of capital expenditures during the first ~~nine~~six months of fiscal ~~2017, respectively. Cash flows used in investing activities included $4,068~~2019 compared to $145 million ~~for acquisitions in the~~of capital expenditures during first ~~nine months of fiscal 2017. No acquisitions were made during the first nine~~six months of fiscal 2018.

Cash flows ~~provided by~~from financing activities for the first ~~nine~~six months of fiscal ~~2018 included $54 million of net commercial paper repayments versus $448 million of~~2019 includes net commercial paper borrowings of $606 million compared to net borrowings of $139 million in the first ~~nine~~six months of fiscal ~~2017.~~2018. During the first six months of fiscal 2019, the Company also repaid $100 million of long-term debt. Cash flows ~~provided by~~from financing activities includes repurchase activity under the Company's share repurchase program. The Company repurchased ~~0.8~~3.3 million common shares for ~~$150~~$550 million in the first ~~nine~~six months of fiscal ~~2018 as~~2019 compared to the repurchase of ~~1.7~~0.6 million common shares for ~~$215~~$100 million in the first ~~nine~~six months of fiscal ~~2017.~~2018.

The Company’s goal is to have no less than an “A” 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 the ratings assigned to the Company's senior debt may be, and at ~~March~~December 31, 2018 was, lower than the stated goal. The Company does not presently 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 temporarily below an "A" level at the time of such borrowings. At ~~March~~December 31, 2018, 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-
Moody's Investor Services, Inc.		Baa1
Standard & Poor's		A

At ~~March~~December 31, 2018, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, ~~$1,526~~$859 million of which was available. The credit agreement expires in October 2021; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which may increase in the event the Company’s credit ratings are lowered. Although a lowering of the Company’s credit ratings would likely increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.

As of ~~March~~December 31, 2018, the Company was authorized to sell up to $2,000 million of short-term commercial paper notes. As of ~~March~~December 31, 2018, ~~$474~~$1,141 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was ~~$673~~$1,233 million.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at ~~March~~December 31, 2018, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .60 to 1.0. At ~~March~~December 31, 2018, the Company's debt to debt-shareholders' equity ratio was ~~.502~~.49 to 1.0. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.

FORWARD-LOOKING STATEMENTS

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. ~~All~~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,” “anticipates,” “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 are forward-looking statements.~~developments. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of the ~~U.S. Tax Cuts and Jobs~~TCJ Act ~~may affect~~on future performance and earnings projections ~~as 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~~change based on subsequent judicial or regulatory interpretations of the ~~U.S. Tax Cuts and Jobs~~TCJ Act that ~~may also affect these estimates and~~impact 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:

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;~~CLARCOR Inc.; 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~~ 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;

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 and credit availability.

The Company makes these statements as of the date of this disclosure, and undertakes no obligation to update them unless otherwise required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 1314 to the Consolidated Financial Statements. Gains or losses on derivatives that are not hedges are adjusted to fair value through the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.

The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company’s objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of ~~March~~December 31, 2018. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of ~~March~~December 31, 2018, the Company’s disclosure controls and procedures were effective.

There was no change in the Company’s internal control over financial reporting during the quarter ended ~~March~~December 31, 2018 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PARKER-HANNIFIN CORPORATION

PART II - OTHER INFORMATION

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


(a)	Unregistered Sales of Equity Securities. Not applicable.


(b)	Use of Proceeds. Not applicable.


(c)	Issuer Purchases of Equity Securities.

Period
(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid
Per Share

(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)

(d) Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
January 1, 2018 through January 31, 2018 83,500
$ 206.36
83,500
16,680,289
February 1, 2018 through February 28, 2018 83,900
$ 185.67
83,900
16,596,389
March 1, 2018 through March 31, 2018 95,779
$ 179.43
95,779
16,500,610
Total: 263,179
$ 189.96
263,179
16,500,610



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 (1)
October 1, 2018 through October 31, 2018	107,400	$	167.35	107,400	15,200,752
November 1, 2018 through November 30, 2018	2,801,208	$	166.53	2,801,208	12,399,544
December 1, 2018 through December 31, 2018	99,904	$	155.00	99,904	12,299,640
Total:	3,008,512			3,008,512

(1)

On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase by the Company of up to 3 million shares of its common stock. From time to time thereafter, the Board of Directors has adjusted the overall maximum number of shares authorized for repurchase under this program. On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under ~~this~~the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on ~~such date,~~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.

ITEM 6. Exhibits.

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



Exhibit No.		Description of Exhibit

123(a)		~~Computation of Ratio of Earnings to Fixed Charges~~Regulations, Amended and Restated as of ~~March 31, 2018.~~January 24, 2019.*

10(a)		Form of 2017 Parker-Hannifin Corporation Restricted Stock Unit Award Agreement.*

10(b)		Form of 2017 Parker-Hannifin Corporation Restricted Stock Unit Award Agreement.*

10(c)		Form of 2017 Parker-Hannifin Corporation Restricted Stock Unit Terms and Conditions for Awards Granted.*

10(d)		Form of 2018 Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement.*

10(e)		2018 Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions.*

10(f)		Form of Notice of Award under the Parker-Hannifin Corporation Long-Term 1ncentive Plan Under the Performance Bonus Plan, as Amended and Restated, effective as of January 1, 2019.*

10(g)		Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan, as Amended and Restated, effective as of January 1, 2019.*

31(a)		Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.**

31(b)		Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.**

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. * *

101.INS		XBRL Instance Document.*

101.SCH		XBRL Taxonomy Extension Schema Document.*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*



*	Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended ~~March~~December 31, 2018 and 2017, (ii) Consolidated Statement of Income for the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, (iii) Consolidated Statement of Comprehensive Income for the three months ended ~~March~~December 31, 2018 and 2017, (iv) Consolidated Statement of Comprehensive Income for the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, (v) Consolidated Balance Sheet at ~~March~~December 31, 2018 and June 30, ~~2017,~~2018, (vi) Consolidated Statement of Cash Flows for the ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, and (vii) Notes to Consolidated Financial Statements for the ~~nine~~six months ended ~~March~~December 31, 2018.

SIGNATURE

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




		PARKER-HANNIFIN CORPORATION
		(Registrant)

		/s/ Catherine A. Suever
		Catherine A. Suever
		Executive Vice President - Finance & Administration and
		Chief Financial Officer


Date:	~~May 2, 2018~~February 7, 2019

- 3132 -



	March 31, 2018				June 30, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Less than one year	$	1,121	$	1,122	$	690	$	693
One to three years	8,736		8,806		7,865		7,924
Above three years	466		467		2,108		2,113