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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR 
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)
(I.R.S. Employer
Identification No.)
 
 
 
 
6035 Parkland Boulevard,
Cleveland,
Ohio
44124-4141
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on which Registered
Common Shares, $.50 par value
 
PH
 
New York Stock Exchange
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      No  
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      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: 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
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  
Number of Common Shares outstanding at December 31, 2019: 128,363,097




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
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
3,497,974

 
$
3,472,045

 
$
6,832,485

 
$
6,951,339

Cost of sales
2,682,765

 
2,602,339

 
5,162,506

 
5,197,162

Selling, general and administrative expenses
491,121

 
397,259

 
890,300

 
791,581

Interest expense
82,891

 
47,518

 
152,847

 
91,857

Other (income), net
(13,549
)
 
(6,225
)
 
(61,070
)
 
(20,138
)
Income before income taxes
254,746

 
431,154

 
687,902

 
890,877

Income taxes
50,148

 
119,241

 
144,263

 
203,065

Net income
204,598

 
311,913

 
543,639

 
687,812

Less: Noncontrolling interest in subsidiaries' earnings
124

 
176

 
267

 
364

Net income attributable to common shareholders
$
204,474

 
$
311,737

 
$
543,372

 
$
687,448

 
 
 
 
 
 
 
 
Earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
1.59

 
$
2.39

 
$
4.23

 
$
5.23

Diluted
$
1.57

 
$
2.36

 
$
4.17

 
$
5.15

See accompanying notes to consolidated financial statements.














- 2 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
204,598

 
$
311,913

 
$
543,639

 
$
687,812

Less: Noncontrolling interests in subsidiaries' earnings
124

 
176

 
267

 
364

Net income attributable to common shareholders
204,474

 
311,737

 
543,372

 
687,448

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
  Foreign currency translation adjustment and other
151,583

 
(43,986
)
 
48,862

 
(79,111
)
  Retirement benefits plan activity
33,416

 
24,527

 
64,442

 
48,400

    Other comprehensive income (loss)
184,999

 
(19,459
)
 
113,304

 
(30,711
)
Less: Other comprehensive income (loss) for noncontrolling interests
137

 
55

 
(12
)
 
(34
)
Other comprehensive income (loss) attributable to common shareholders
184,862

 
(19,514
)
 
113,316

 
(30,677
)
Total comprehensive income attributable to common shareholders
$
389,336

 
$
292,223

 
$
656,688

 
$
656,771

See accompanying notes to consolidated financial statements.





- 3 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
December 31,
2019
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
948,355

 
$
3,219,767

Marketable securities and other investments
145,120

 
150,931

Trade accounts receivable, net
1,973,187

 
2,131,054

Non-trade and notes receivable
319,126

 
310,708

Inventories
2,014,260

 
1,678,132

Prepaid expenses and other
261,103

 
182,494

Total current assets
5,661,151

 
7,673,086

Plant and equipment
5,817,798

 
5,186,730

Less: Accumulated depreciation
3,481,858

 
3,418,443

Plant and equipment, net
2,335,940

 
1,768,287

Deferred income taxes
114,032

 
150,462

Investments and other assets
941,588

 
747,773

Intangible assets, net
4,036,108

 
1,783,277

Goodwill
7,955,170

 
5,453,805

Total assets
$
21,043,989

 
$
17,576,690

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Notes payable and long-term debt payable within one year
$
1,604,318

 
$
587,014

Accounts payable, trade
1,311,733

 
1,413,155

Accrued payrolls and other compensation
372,549

 
426,285

Accrued domestic and foreign taxes
165,265

 
167,312

Other accrued liabilities
637,257

 
558,007

Total current liabilities
4,091,122

 
3,151,773

Long-term debt
8,141,220

 
6,520,831

Pensions and other postretirement benefits
1,366,814

 
1,304,379

Deferred income taxes
569,582

 
193,066

Other liabilities
532,750

 
438,489

Total liabilities
14,701,488

 
11,608,538

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 December 31 and June 30
90,523

 
90,523

Additional capital
455,862

 
462,086

Retained earnings
13,094,252

 
12,777,538

Accumulated other comprehensive (loss)
(1,945,732
)
 
(2,059,048
)
Treasury shares, at cost; 52,683,031 shares at December 31 and 52,566,086 shares at June 30
(5,364,730
)
 
(5,309,130
)
Total shareholders’ equity
6,330,175

 
5,961,969

Noncontrolling interests
12,326

 
6,183

Total equity
6,342,501

 
5,968,152

Total liabilities and equity
$
21,043,989

 
$
17,576,690

See accompanying notes to consolidated financial statements.

- 4 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
543,639

 
$
687,812

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
119,741

 
115,000

Amortization
133,559

 
107,543

Share incentive plan compensation
73,069

 
64,615

Deferred income taxes
8,608

 
47,401

Foreign currency transaction loss
6,569

 
2,526

(Gain) loss on plant and equipment and intangible assets
(4,478
)
 
3,428

Loss on sale of businesses

 
623

(Gain) loss on marketable securities
(1,969
)
 
5,701

Gain on investments
(1,849
)
 
(3,213
)
Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable, net
379,536

 
185,638

Inventories
25,724

 
(176,094
)
Prepaid expenses and other
(50,153
)
 
(40,555
)
Other assets
(38,747
)
 
14,214

Accounts payable, trade
(178,013
)
 
(120,253
)
Accrued payrolls and other compensation
(117,882
)
 
(104,726
)
Accrued domestic and foreign taxes
(7,699
)
 
(14,758
)
Other accrued liabilities
(76,616
)
 
18,960

Pensions and other postretirement benefits
32,316

 
(173,040
)
Other liabilities
(19,387
)
 
(79,782
)
Net cash provided by operating activities
825,968

 
541,040

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisitions (net of cash of $82,192 in 2019 and $690 in 2018)
(5,075,605
)
 
(2,042
)
Capital expenditures
(118,593
)
 
(94,426
)
Proceeds from sale of plant and equipment
20,993

 
34,121

Proceeds from sale of businesses

 
19,540

Purchases of marketable securities and other investments
(190,129
)
 
(2,845
)
Maturities and sales of marketable securities and other investments
198,872

 
14,432

Other
9,374

 
(90
)
Net cash used in investing activities
(5,155,088
)
 
(31,310
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from exercise of stock options
1,923

 
635

Payments for common shares
(136,815
)
 
(565,970
)
Proceeds from notes payable, net
931,546

 
606,019

Proceeds from long-term borrowings
1,721,181

 
1

Payments for long-term borrowings
(236,505
)
 
(100,209
)
Dividends paid
(227,025
)
 
(200,459
)
Net cash provided by (used in) financing activities
2,054,305

 
(259,983
)
Effect of exchange rate changes on cash
3,403

 
(24,499
)
Net (decrease) increase in cash and cash equivalents
(2,271,412
)
 
225,248

Cash and cash equivalents at beginning of year
3,219,767

 
822,137

Cash and cash equivalents at end of period
$
948,355

 
$
1,047,385

See accompanying notes to consolidated financial statements.

- 5 -



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
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
1,615,852

 
$
1,632,059

 
$
3,240,457

 
$
3,313,103

International
 
1,147,084

 
1,223,679

 
2,225,934

 
2,457,445

Aerospace Systems
 
735,038

 
616,307

 
1,366,094

 
1,180,791

Total net sales
 
$
3,497,974

 
$
3,472,045

 
$
6,832,485

 
$
6,951,339

Segment operating income
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
211,339

 
$
257,774

 
$
486,531

 
$
532,885

International
 
153,816

 
189,085

 
322,389

 
395,179

Aerospace Systems
 
121,039

 
121,463

 
244,019

 
231,318

Total segment operating income
 
486,194

 
568,322

 
1,052,939

 
1,159,382

Corporate general and administrative expenses
 
35,660

 
63,890

 
84,562

 
114,215

Income before interest expense and other expense
 
450,534

 
504,432

 
968,377

 
1,045,167

Interest expense
 
82,891

 
47,518

 
152,847

 
91,857

Other expense
 
112,897

 
25,760

 
127,628

 
62,433

Income before income taxes
 
$
254,746

 
$
431,154

 
$
687,902

 
$
890,877





- 6 -



PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.
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 December 31, 2019, the results of operations for the three and six months ended December 31, 2019 and 2018 and cash flows for the 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 2019 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to these financial statements.

2. New accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. We have not yet determined the effect that ASU 2016-13 will have on our 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. We adopted ASU 2016-02 on July 1, 2019 using the optional transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. Upon adoption, we recorded a right-of-use asset and lease liability of approximately $126 million. The adoption of the standard did not have a material impact on the Consolidated Statement of Income or Cash Flows.

3. Revenue recognition

Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.
Diversified Industrial Segment revenues by technology platform:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019

2018
 
2019
 
2018
Motion Systems
 
$
752,306

 
$
856,357

 
$
1,519,120

 
$
1,715,930

Flow and Process Control
 
942,249

 
1,015,200

 
1,953,604

 
2,076,264

Filtration and Engineered Materials
 
1,068,381

 
984,181

 
1,993,667

 
1,978,354

Total
 
$
2,762,936

 
$
2,855,738

 
$
5,466,391

 
$
5,770,548




- 7 -



Aerospace Systems Segment revenues by product platform:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Flight Control Actuation
 
$
180,423

 
$
189,670

 
$
353,682

 
$
352,606

Fuel, Inerting and Engine Motion Control
 
159,474

 
157,262

 
311,687

 
301,308

Hydraulics
 
110,385

 
108,893

 
218,760

 
211,390

Engine Components
 
179,605

 
71,647

 
273,400

 
136,033

Airframe and Engine Fluid Conveyance
 
79,123

 
68,868

 
163,802

 
139,072

Other
 
26,028

 
19,967

 
44,763

 
40,382

Total
 
$
735,038

 
$
616,307

 
$
1,366,094

 
$
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,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
North America
 
$
2,344,338

 
$
2,248,806

 
$
4,600,089

 
$
4,494,897

Europe
 
652,586

 
714,550

 
1,291,724

 
1,440,860

Asia Pacific
 
463,840

 
465,974

 
861,554

 
927,614

Latin America
 
37,210

 
42,715

 
79,118

 
87,968

Total
 
$
3,497,974

 
$
3,472,045

 
$
6,832,485

 
$
6,951,339


The majority of revenues from the Aerospace Systems Segment are 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, 2019
 
June 30, 2019
Contract assets, current (included within Prepaid expenses and other)
 
$
26,981

 
$
22,726

Contract assets, noncurrent (included within Investments and other assets)
 
1,146

 
1,301

Total contract assets
 
28,127

 
24,027

Contract liabilities, current (included within Other accrued liabilities)
 
(58,323
)
 
(64,668
)
Contract liabilities, noncurrent (included within Other liabilities)
 
(406
)
 
(421
)
Total contract liabilities
 
(58,729
)
 
(65,089
)
Net contract liabilities
 
$
(30,602
)
 
$
(41,062
)

At December 31, 2019, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the six months ended December 31, 2019, approximately $22 million of revenue was recognized that was included in the contract liabilities at June 30, 2019.
Remaining performance obligations
Our 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. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at December 31, 2019 was $5,503 million, of which approximately 89 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.

- 8 -




4. Acquisitions

On October 29, 2019, we completed the acquisition of a 100 percent equity interest in LORD Corporation ("Lord") for approximately $3,453 million in cash, including the assumption of debt. On September 16, 2019, we completed the acquisition of a 100 percent equity interest in EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash.
Lord is a diversified technology and manufacturing company developing highly reliable adhesives and coatings, as well as vibration and motion control technologies, that significantly reduce risk and improve product performance. Lord’s products are used in mission-critical applications in the aerospace, automotive and industrial markets. Lord had annual sales of approximately $1,025 million for its fiscal 2018. For segment reporting purposes, approximately 95 percent of Lord's sales are included in the Diversified Industrial Segment, while the remaining five percent are included in the Aerospace Systems Segment. Lord’s unique and proprietary products, solutions and technologies for mission-critical applications are expected to increase the Company's overall engineered materials product and solutions offerings to enable a stronger value proposition for customers. 

Exotic designs and manufactures innovative and technically demanding, high temperature, high pressure air and exhaust management solutions for aircraft and engines. Exotic had annual sales of approximately $409 million for its fiscal 2019.
For segment reporting purposes, Exotic is included in the Aerospace Systems Segment. We believe Exotic's products and proprietary manufacturing capabilities are complementary to our portfolio of flight control, fuel and inerting, hydraulics, fluid conveyance and engine components.

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The following presents the preliminary estimated fair values of Lord and Exotic's assets acquired and liabilities assumed on the respective acquisition dates. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party valuations are finalized, additional information becomes available and as additional analysis is performed. Such revisions may have a material impact on our results of operations and financial position within the measurement period. During the current-year quarter, these revisions, which primarily impacted intangible assets, goodwill, and plant and equipment, did not have a material impact on our financial statements.


- 9 -



 
Lord
 
Exotic
 
October 29, 2019
 
September 16, 2019
Assets:
 
 
 
Cash and cash equivalents
$
74,013

 
$
8,179

Accounts receivable
156,670

 
81,336

Inventories
251,312

 
114,661

Prepaid expenses and other
27,624

 
1,343

Plant and equipment
406,356

 
178,393

Deferred income taxes

 
2,057

Other assets
34,185

 
1,226

Intangible assets
1,492,960

 
873,710

Goodwill
1,978,526

 
504,485

Total assets acquired
4,421,646

 
1,765,390

Liabilities:
 
 
 
Notes payable and long-term debt payable within one year
630

 

Accounts payable, trade
56,186

 
23,176

Accrued payrolls and other compensation
57,371

 
8,863

Accrued domestic and foreign taxes
4,498

 
2,123

Other accrued liabilities
91,101

 
25,662

Long-term debt
223,313

 

Pensions and other postretirement benefits
115,265

 

Deferred income taxes
383,759

 

Other liabilities
30,106

 

Noncontrolling interests
6,255

 

Total liabilities and noncontrolling interests assumed
968,484

 
59,824

Net assets acquired
$
3,453,162

 
$
1,705,566



Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Lord and Exotic acquisitions, goodwill represents cost synergies and enhancements to our existing technologies. For tax purposes, Lord's goodwill is not deductible and Exotic's goodwill is deductible. Based upon a preliminary acquisition valuation, intangibles acquired as part of the Exotic acquisition include $501,610 of customer-related intangible assets, $281,500 of patents and technology and $90,600 of trademarks, with weighted average estimated useful lives of 18, 20 and 20 years, respectively. Similarly, Lord's acquisition includes $917,640 of customer-related intangible assets, $456,680 of patents and technology and $118,640 of trademarks, with weighted average estimated useful lives of 13, 21 and 20 years, respectively.

Our consolidated financial statements include the results of operations of Lord and Exotic from their respective acquisition dates through December 31, 2019. Net sales attributable to these acquisitions during this period and included in our consolidated financial statements for the three and six months ended December 31, 2019 total $285,905 and $307,188, respectively. Segment operating (loss) attributable to these acquisitions during this period and included in our consolidated financial statements for the three and six months ended December 31, 2019 total $(20,054) and $(19,820), respectively.

Acquisition-related transaction costs totaled $114,672 for fiscal 2020. These costs are included in selling, general and administrative expenses in the Consolidated Statement of Income.



- 10 -



5. 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 six months ended December 31, 2019 and 2018.
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
204,474

 
$
311,737

 
$
543,372

 
$
687,448

Denominator:
 
 
 
 
 
 
 
Basic - weighted average common shares
128,396,933

 
130,361,273

 
128,430,463

 
131,361,464

Increase in weighted average common shares from dilutive effect of equity-based awards
2,098,448

 
1,949,937

 
1,723,616

 
2,088,210

Diluted - weighted average common shares, assuming exercise of equity-based awards
130,495,381

 
132,311,210

 
130,154,079

 
133,449,674

Basic earnings per share
$
1.59

 
$
2.39

 
$
4.23

 
$
5.23

Diluted earnings per share
$
1.57

 
$
2.36

 
$
4.17

 
$
5.15


For the three months ended December 31, 2019 and 2018, 2,718 and 1,335,187 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 six months ended December 31, 2019 and 2018, 767,692 and 836,099 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.

6. 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 months ended December 31, 2019, we repurchased 260,287 shares at an average price, including commissions, of $192.10 per share. During the six months ended December 31, 2019, we repurchased 555,381 shares at an average price, including commissions, of $180.06 per share.


7. 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 $11,352 and $8,874 at December 31, 2019 and June 30, 2019, respectively.


8. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
 
 
December 31,
2019
 
June 30,
2019
Notes receivable
 
$
141,483

 
$
147,719

Accounts receivable, other
 
177,643

 
162,989

Total
 
$
319,126

 
$
310,708



- 11 -




9. Inventories

The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
 
 
December 31,
2019
 
June 30,
2019
Finished products
 
$
786,891

 
$
663,068

Work in process
 
948,968

 
850,778

Raw materials
 
278,401

 
164,286

Total
 
$
2,014,260

 
$
1,678,132




10. Leases

We primarily enter into lease agreements for office space, distribution centers, certain manufacturing facilities and equipment. The majority of our leases are operating leases. Finance leases are immaterial to our financial statements. In addition, leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheet. Certain leases contain options that provide us with the ability to extend the lease term. Such options are included in the lease term when it is reasonably certain that the option will be exercised. When accounting for leases, we combine payments for leased assets, related services and other components of a lease. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.

The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on lease term and the currency in which lease payments are made.

The components of lease expense are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31, 2019
 
December 31, 2019
Operating lease expense
$
12,879

 
$
24,830

Short-term lease cost
2,109

 
4,434

Variable lease cost
1,685

 
2,959

Total lease cost
$
16,673

 
$
32,223


Supplemental cash flow information related to operating leases are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31, 2019
 
December 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
12,732

 
$
24,582

Right-of-use assets obtained in exchange for operating lease obligations
8,730

 
25,947



Supplemental balance sheet information related to operating leases is as follows:
 
December 31, 2019
Operating lease right-of-use assets (included within Investments and other assets)
$
155,869

 
 
Current operating lease liabilities (included within Other accrued liabilities)
$
42,661

Long-term operating lease liabilities (included within Other liabilities)
112,442

Total operating lease liabilities
$
155,103

 
 
Weighted average remaining lease term
6.4 years

Weighted average discount rate
2.3
%


- 12 -




Maturities of lease liabilities at December 31, 2019 are as follows:
 
Operating Leases
2020
$
24,277

2021
40,670

2022
29,237

2023
19,609

2024
12,439

Thereafter
43,544

Total operating lease payments
$
169,776

Less imputed interest
14,673

Total operating lease liabilities
$
155,103



Future minimum rental commitments as of June 30, 2019, under non-cancelable operating leases, which expire at various dates, are as follows: 2020-$45,920; 2021-$31,115; 2022-$21,625; 2023-$13,228; 2024-$7,591 and after 2024-$22,723.

11. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in fiscal 2020 and 2019. 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. The prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR, Inc. ("Clarcor") and primarily consist of severance costs and expenses related to plant closures and relocations. A majority of the business realignment charges were incurred in North America and Europe. We believe 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.
Business realignment and Clarcor acquisition integration charges presented in the Business Segment Information are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Diversified Industrial
$
9,667

 
$
7,382

 
$
14,392

 
$
15,940

Aerospace Systems
52

 

 
45

 

Corporate general and administrative expenses
117

 

 
122

 

Other expense

 
220

 

 
275

Workforce reductions in connection with business realignment and Clarcor acquisition integration charges in the Business Segment Information are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Diversified Industrial
599

 
164

 
818

 
365

Aerospace Systems
16

 

 
16

 

Corporate general and administrative expenses
4

 

 
5

 



- 13 -



The business realignment and Clarcor acquisition integration charges are presented in the Consolidated Statement of Income as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Cost of sales
$
7,679

 
$
3,669

 
$
11,024

 
$
8,068

Selling, general and administrative expenses
2,157

 
3,713

 
3,535

 
7,872

Other (income), net

 
220

 

 
275


During the first six months of fiscal 2020, approximately $15 million in payments were made relating to business realignment and Clarcor acquisition integration charges. Remaining payments related to current-year and prior-year business realignment and acquisition integration actions of approximately $11 million, a majority of which are expected to be paid by December 31, 2020, 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 described above, the timing and amount of which are not known at this time.
We also incurred the following acquisition integration charges related to the Lord and Exotic acquisitions:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2019
Diversified Industrial
$
6,725

 
$
10,139

Aerospace Systems
489

 
1,084


These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.

12. Equity

Changes in equity for the three months ended December 31, 2019 and 2018 are as follows:
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at September 30, 2019
$
90,523

 
$
464,440

 
$
13,003,084

 
$
(2,130,594
)
 
$
(5,330,837
)
 
$
6,176

 
$
6,102,792

Net income


 


 
204,474

 


 


 
124

 
204,598

Other comprehensive income


 


 


 
184,862

 


 
137

 
184,999

Dividends paid ($0.88 per share)


 


 
(113,306
)
 


 


 
(366
)
 
(113,672
)
Stock incentive plan activity


 
(8,578
)
 


 


 
16,107

 


 
7,529

Acquisition activity


 


 


 


 


 
6,255

 
6,255

Shares purchased at cost


 


 


 


 
(50,000
)
 


 
(50,000
)
Balance at December 31, 2019
$
90,523

 
$
455,862

 
$
13,094,252

 
$
(1,945,732
)
 
$
(5,364,730
)
 
$
12,326

 
$
6,342,501


 
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



- 14 -



Changes in equity for the six months ended December 31, 2019 and 2018 are as follows:
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at June 30, 2019
$
90,523

 
$
462,086

 
$
12,777,538

 
$
(2,059,048
)
 
$
(5,309,130
)
 
$
6,183

 
$
5,968,152

Net income


 


 
543,372

 


 


 
267

 
543,639

Other comprehensive income (loss)


 


 


 
113,316

 


 
(12
)
 
113,304

Dividends paid ($1.76 per share)


 


 
(226,658
)
 


 


 
(367
)
 
(227,025
)
Stock incentive plan activity


 
(6,224
)
 


 


 
44,400

 


 
38,176

Acquisition activity


 


 


 


 


 
6,255

 
6,255

Shares purchased at cost


 


 


 


 
(100,000
)
 


 
(100,000
)
Balance at December 31, 2019
$
90,523

 
$
455,862

 
$
13,094,252

 
$
(1,945,732
)
 
$
(5,364,730
)
 
$
12,326

 
$
6,342,501


 
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


Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the six months ended December 31, 2019 and 2018 are as follows:
 
Foreign Currency Translation Adjustment and Other
 
Retirement Benefit Plans
 
Total
Balance at June 30, 2019
$
(1,011,656
)
 
$
(1,047,392
)
 
$
(2,059,048
)
Other comprehensive income before reclassifications
48,874

 

 
48,874

Amounts reclassified from accumulated other comprehensive (loss)

 
64,442

 
64,442

Balance at December 31, 2019
$
(962,782
)
 
$
(982,950
)
 
$
(1,945,732
)


 
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
)




- 15 -



Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and six months ended December 31, 2019 and 2018 are as follows:
Details about Accumulated Other Comprehensive (Loss) Components
 
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
 
Consolidated Statement of Income Classification
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31, 2019
 
December 31, 2019
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,284
)
 
$
(2,767
)
 
Other (income), net
Recognized actuarial loss
 
(42,703
)
 
(82,188
)
 
Other (income), net
Total before tax
 
(43,987
)
 
(84,955
)
 

Tax benefit
 
10,571

 
20,513

 
 
Net of tax
 
$
(33,416
)
 
$
(64,442
)
 


Details about Accumulated Other Comprehensive (Loss) Components
 
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
 
Consolidated Statement of Income Classification
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31, 2018
 
December 31, 2018
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,652
)
 
$
(3,293
)
 
Other (income), net
Recognized actuarial loss
 
(30,696
)
 
(59,993
)
 
Other (income), net
Total before tax
 
(32,348
)
 
(63,286
)
 
 
Tax benefit
 
7,821

 
14,886

 
 
Net of tax
 
$
(24,527
)
 
$
(48,400
)
 
 




13. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the six months ended December 31, 2019 are as follows:
 
Diversified Industrial
Segment
 
Aerospace
Systems
Segment
 
Total
Balance at June 30, 2019
$
5,355,165

 
$
98,640

 
$
5,453,805

Acquisitions
1,978,234

 
504,777

 
2,483,011

Foreign currency translation and other
18,354

 

 
18,354

Balance at December 31, 2019
$
7,351,753

 
$
603,417

 
$
7,955,170


The acquisitions line represents the goodwill allocation during the measurement period subsequent to the applicable acquisition date. Refer to Note 4 for further discussion.

- 16 -



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:
 
December 31, 2019
 
June 30, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents and technology
$
992,729

 
$
138,740

 
$
265,644

 
$
130,233

Trademarks
753,804

 
269,734

 
542,573

 
252,388

Customer lists and other
3,874,382

 
1,176,333

 
2,435,461

 
1,077,780

Total
$
5,620,915

 
$
1,584,807

 
$
3,243,678

 
$
1,460,401


Total intangible amortization expense for the six months ended December 31, 2019 was $128,174. The estimated amortization expense for the five years ending June 30, 2020 through 2024 is $277,637, $314,987, $308,949, $297,923 and $292,311, 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 material intangible asset impairments occurred during the six months ended December 31, 2019.

14. Retirement benefits
Net pension benefit expense recognized included the following components:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Service cost
$
21,449

 
$
17,983

 
$
40,998

 
$
38,492

Interest cost
35,851

 
40,551

 
69,844

 
80,417

Expected return on plan assets
(66,883
)
 
(62,701
)
 
(130,778
)
 
(125,578
)
Amortization of prior service cost
1,309

 
1,677

 
2,818

 
3,325

Amortization of net actuarial loss
42,779

 
30,692

 
82,340

 
59,985

Amortization of initial net obligation
5

 
4

 
9

 
9

Net pension benefit expense
$
34,510

 
$
28,206

 
$
65,231

 
$
56,650


During the three months ended December 31, 2019 and 2018, we recognized $510 and $631, respectively, in expense related to other postretirement benefits. During the six months ended December 31, 2019 and 2018, we recognized $967 and $1,281, respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other (income), net in the Consolidated Statement of Income.


15. Debt

In September 2019, the Company entered into and fully drew against a term loan with an aggregate principal amount of $925 million, which will mature in its entirety in September 2023. We used the proceeds to finance a portion of the purchase of the Exotic acquisition. In October 2019, we fully drew against the $800 million term loan, which will mature in its entirety in May 2022. We used the proceeds to finance a portion of the purchase of the Lord acquisition. At December 31, 2019, both term loans had an interest rate of LIBOR plus 112.5 bps. Interest payments are due quarterly.

In September 2019, we also amended and extended our existing multi-currency credit agreement, increasing its capacity to $2,500 million. Commercial paper notes outstanding at December 31, 2019 and June 30, 2019 were $1,518 million and $586 million, respectively. Based on the Company’s rating level at December 31, 2019, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At December 31, 2019, our debt to debt-shareholders' equity ratio was .61 to 1.0. We are in compliance with all covenants set forth in the credit agreement and indentures.


- 17 -



16. Income taxes
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 2013, and its state and local returns for fiscal years after 2013. The Company is also open to assessment for foreign jurisdictions for fiscal years after 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 December 31, 2019, the Company had gross unrecognized tax benefits of $136,103, all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, is $26,617. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $100,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.


17. Financial instruments
Our 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 and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income.

Gross unrealized gains and losses related to equity investments were not material as of December 31, 2019 and June 30, 2019. There were no facts or circumstances that indicated the unrealized losses were other than temporary.
The carrying value of long-term debt and estimated fair value of long-term debt are as follows:
 
 
December 31,
2019
 
June 30,
2019
Carrying value of long-term debt
 
$
8,302,561

 
$
6,596,380

Estimated fair value of long-term debt
 
8,780,550

 
7,012,641


The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
We utilize 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 we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.

- 18 -



The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
 
 
Balance Sheet Caption
 
December 31,
2019
 
June 30,
2019
Net investment hedges
 
 
 
 
 
 
Cross-currency swap contracts
 
Other assets
 
$
32,485

 
$
24,545

Cash flow hedges
 
 
 
 
 
 
Forward exchange contracts
 
Non-trade and notes receivable
 
16,663

 
13,242

Forward exchange contracts
 
Other accrued liabilities
 
1,450

 
2,578

Costless collar contracts
 
Non-trade and notes receivable
 
1,559

 
457

Costless collar contracts
 
Other accrued liabilities
 
2,857

 
1,934



The cross-currency swap, forward exchange contracts and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.
Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.
The cross-currency swap contracts have been designated as hedging instruments. The forward exchange and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and six months ended December 31, 2019 and 2018 were not material.

Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) in the Consolidated Balance Sheet are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,

2019
 
2018
 
2019
 
2018
Cross-currency swap contracts
$
(3,833
)
 
$
5,700

 
$
6,551

 
$
7,619

Foreign denominated debt
(16,600
)
 
7,144

 
8,324

 
11,271


No portion of these financial instruments were excluded from the effectiveness testing during the six months ended December 31, 2019 and 2018.

- 19 -



A summary of financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2019 and June 30, 2019 are as follows:
 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
December 31, 2019

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
9,930

 
$
9,930

 
$

 
$

Derivatives
 
50,707

 

 
50,707

 

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
4,307

 

 
4,307

 


 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
June 30, 2019

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
7,533

 
$
7,533

 
$

 
$

Derivatives
 
38,244

 

 
38,244

 

Investments measured at net asset value
 
9,728

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
4,512

 

 
4,512

 


The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the 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. We have 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.

- 20 -





PARKER-HANNIFIN CORPORATION
FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2019
AND COMPARABLE PERIODS ENDED DECEMBER 31, 2018


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.
Our order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. We believe 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 U.S. 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:
 
December 31, 2019
 
June 30, 2019
 
December 31, 2018
United States
52.4

 
50.6

 
54.1

Eurozone countries
46.3

 
47.6

 
51.4

China
51.5

 
49.4

 
49.7

Brazil
50.2

 
51.0

 
52.6

Global aircraft miles flown and available revenue passenger miles each increased by approximately four percent from their comparable fiscal 2019 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 2020 will be approximately three percent higher than the comparable fiscal 2019 level.
Housing starts in December 2019 were approximately 41 percent and 28 percent higher than housing starts in December 2018 and June 2019, respectively.

- 21 -



We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

Serving the customer and continuously enhancing its experience with the Company;
Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
Maintaining a decentralized division and sales company structure;
Fostering a safety first and entrepreneurial culture;
Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;
Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;
Acquiring strategic businesses;
Organizing around targeted regions, technologies and markets;
Driving efficiency by implementing lean enterprise principles; and
Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.
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. During October 2019, we completed the acquisition of LORD Corporation ("Lord") for approximately $3,453 million in cash, including the assumption of debt. We also completed the acquisition of EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash during September 2019. Refer to Note 4 to the Consolidated Financial Statements for further discussion of the acquisitions.
We continue to assess our existing businesses and may 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, Business Segment Information, Consolidated Balance Sheet and Consolidated Statement of Cash Flows. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.

CONSOLIDATED STATEMENT OF INCOME
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
3,498

 
$
3,472

 
$
6,832

 
$
6,951

Gross profit margin
 
23.3
%
 
25.0
%
 
24.4
%
 
25.2
%
Selling, general and administrative expenses
 
$
491

 
$
397

 
$
890

 
$
792

Selling, general and administrative expenses, as a percent of sales
 
14.0
%
 
11.4
%
 
13.0
%
 
11.4
%
Interest expense
 
$
83

 
$
48

 
$
153

 
$
92

Other (income), net
 
$
(14
)
 
$
(6
)
 
$
(61
)
 
$
(20
)
Effective tax rate
 
19.7
%
 
27.7
%
 
21.0
%
 
22.8
%
Net income
 
$
205

 
$
312

 
$
544

 
$
688

Net income, as a percent of sales
 
5.8
%
 
9.0
%
 
8.0
%
 
9.9
%

Net sales for the current-year quarter remained relatively flat compared to the prior-year quarter and decreased during the first six months of fiscal 2020 compared to the same prior-year period. Lower volume in the Diversified Industrial North American and International businesses, partially offset by higher volume in the Aerospace Systems Segment, was the primary driver for the change in net sales in both periods. The decrease in volume was partially offset by acquisitions made in the last 12 months, which contributed approximately $286 million and $307 million in net sales during the current-year quarter and first six months of fiscal 2020, respectively. The effect of currency rate changes decreased net sales by approximately $15 million in the

- 22 -



current-year quarter, which was primarily comprised of a $17 million decrease in the Diversified Industrial International businesses and a $3 million increase in the Diversified Industrial North American businesses. During the first six months of fiscal 2020, the effect of currency rate changes decreased net sales by approximately $67 million ($65 million of which was attributable to the Diversified Industrial International businesses).
Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) decreased in the current-year quarter and the first six months of fiscal 2020 primarily due to lower margins in both the Aerospace Systems Segment and Diversified Industrial Segment. Margins decreased in the current-year quarter and the first six months of fiscal 2020 primarily due to lower volume in the Diversified Industrial Segment and acquisition-related expenses of $49 million and $51 million, respectively. Cost of sales for the current-year quarter and prior-year quarter included business realignment and acquisition integration charges of $8 million and $4 million, respectively, and $12 million and $8 million for the first six months of fiscal 2020 and 2019, respectively.
Selling, general and administrative expenses increased during the current-year quarter and the first six months of fiscal 2020 primarily due to acquisition-related transaction costs of $100 million and $115 million in the current-year quarter and first six months of fiscal 2020, respectively. Intangible asset amortization expense related to the acquisitions of Lord and Exotic also increased selling, general and administrative in the current-year quarter and first six months of fiscal 2020. These expenses were partially offset by a net benefit associated with the Company's deferred compensation programs. Favorable market fluctuations related to investments associated with these programs more than offset unfavorable changes in the related liabilities. Selling, general and administrative expenses included business realignment and acquisition integration charges of $9 million and $4 million for the current-year and prior-year quarter, respectively, and $14 million and $8 million for the first six months of fiscal 2020 and 2019, respectively.
Interest expense for the current-year quarter and first six months of fiscal 2020 increased from the comparable prior-year periods primarily due to higher average debt outstanding.
Other (income), net included the following:
(dollars in millions)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
Expense (income)
 
2019
 
2018
 
2019
 
2018
Income related to equity method investments
 
$
(21
)
 
$
(23
)
 
$
(44
)
 
$
(46
)
Non-service components of retirement benefit cost
 
14

 
11

 
25

 
19

Loss (gain) on disposal of assets and divestitures
 
6

 
5

 
(4
)
 
5

Interest income
 
(8
)
 
(4
)
 
(26
)
 
(7
)
Other items, net
 
(5
)
 
5

 
(12
)
 
9

 
 
$
(14
)
 
$
(6
)
 
$
(61
)
 
$
(20
)

Effective tax rate for the current-year quarter and the first six months of fiscal 2020 was lower than the comparable prior-year periods primarily due to an overall increase in discrete tax benefits. The Company expects the fiscal 2020 effective tax rate will be approximately 22.5 percent.


- 23 -



BUSINESS SEGMENT INFORMATION
Diversified Industrial Segment
 
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
 
North America
 
$
1,616

 
$
1,632

 
$
3,240

 
$
3,313

International
 
1,147

 
1,224

 
2,226

 
2,457

Operating income
 
 
 
 
 
 
 
 
North America
 
211

 
258

 
487

 
533

International
 
$
154

 
$
189

 
$
322

 
$
395

Operating margin
 
 
 
 
 
 
 
 
North America
 
13.1
%
 
15.8
%
 
15.0
%
 
16.1
%
International
 
13.4
%
 
15.5
%
 
14.5
%
 
16.1
%
Backlog
 
$
2,321

 
$
2,161

 
$
2,321

 
$
2,161


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 December 31, 2019
 
 
Three Months
 
Six Months
Diversified Industrial North America – as reported
 
(1.0
)%
 
(2.2
)%
Acquisitions
 
7.3
 %
 
3.6
 %
Currency
 
0.2
 %
 
 %
Diversified Industrial North America – without acquisitions and currency
 
(8.5
)%
 
(5.8
)%
 
 
 
 
 
Diversified Industrial International – as reported
 
(6.3
)%
 
(9.4
)%
Acquisitions
 
4.5
 %
 
2.3
 %
Currency
 
(1.4
)%
 
(2.7
)%
Diversified Industrial International – without acquisitions and currency
 
(9.4
)%
 
(9.0
)%
 
 
 
 
 
Total Diversified Industrial Segment – as reported
 
(3.2
)%
 
(5.3
)%
Acquisitions
 
6.1
 %
 
3.0
 %
Currency
 
(0.4
)%
 
(1.1
)%
Total Diversified Industrial Segment – without acquisitions and currency
 
(8.9
)%
 
(7.2
)%
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 made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in the current-year quarter and first six months of fiscal 2020 for the Diversified Industrial North American businesses decreased 1.0 percent and 2.2 percent, respectively. The effect of acquisitions increased sales by approximately $119 million in both the current-year quarter and first six months of fiscal 2020. The effect of currency exchange rates did not have a significant impact on sales in the current-year quarter and first six months of fiscal 2020. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial North American sales for the current-year quarter and first six months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in the construction equipment, engines, farm and agriculture, cars and light truck, heavy-duty truck, general industrial machinery and refrigeration markets.
Sales in the current-year quarter and first six months of fiscal 2020 for the Diversified Industrial International operations decreased 6.3 percent and 9.4 percent from the prior-year quarter and first six months of fiscal 2019, respectively. The effect of acquisitions increased sales by approximately $56 million in both the current-year quarter and first six months of fiscal 2020.

- 24 -



The effect of currency exchange rates decreased sales by approximately $17 million and $65 million from the prior-year quarter and first six months of fiscal 2019, respectively. Excluding the effects of acquisitions and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter and first six months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in the mobile and industrial markets. Europe and the Asia Pacific region accounted for approximately 55 percent and 40 percent, respectively, of the decrease in sales during the current-year quarter, while Latin America contributed the remainder of the change. During the first six months of fiscal 2020, the decrease in sales is primarily related to Europe and the Asia Pacific region, which accounted for approximately 65 percent and 30 percent of the decrease, respectively.
Within Europe, the decrease in sales for both the current-year quarter and first six months of fiscal 2020 was primarily due to lower demand from distributors and end users in the general industrial machinery, machine tool, construction equipment, heavy-duty truck, material handling and power generation markets.
Within the Asia Pacific region, the decrease in current-year quarter sales and first six months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment, telecommunications and railroad equipment markets. This decrease was partially offset by an increase in end-user demand in the mining, marine, oil and gas and engine markets.
The decrease in sales in Latin America for the current-year quarter and first six months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment market, partially offset by an increase in end-user demand in the oil and gas market.
Diversified Industrial Segment operating margins within the North American businesses decreased in the current-year quarter and first six months of fiscal 2020 primarily due to lower sales volume, acquisition-related expenses, and higher intangible asset amortization expense, partially offset by benefits from simplification, restructuring and acquisition integration activities, favorable product mix and prior-year pricing actions.
Diversified Industrial Segment operating margins within the International businesses decreased in the current-year quarter and first six months of fiscal 2020 primarily due to lower sales volume and acquisition-related expenses. Benefits from simplification, restructuring and acquisition integration activities, and prior-year pricing actions partially offset the decrease in margins.

The following business realignment and acquisition integration charges are included in Diversified Industrial North American and Diversified Industrial International operating income:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
Diversified Industrial North America
 
$
8

 
$
4

 
$
13

 
$
9

Diversified Industrial International
 
8

 
4

 
11

 
7


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. Current-year acquisition integration charges relate to the Lord acquisition. Prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR Inc. ("Clarcor"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We anticipate that cost savings realized from the workforce reduction measures taken during the first six months of fiscal 2020 will increase operating income by approximately one percent in fiscal 2020 and 2021 for both the Diversified Industrial North American and International businesses. We expect to continue to take the actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment. These actions are expected to result in approximately $40 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2020.
Diversified Industrial Segment backlog as of December 31, 2019 increased from the prior-year quarter primarily due to the addition of the Lord backlog in the current-year quarter, partially offset by shipments exceeding orders in both the North American and International businesses. Excluding the impact of Lord, the Diversified Industrial North American and International backlog accounted for approximately 75 percent and 25 percent of the change, respectively. Within the International businesses, Europe accounted for approximately 80 percent of the change, while the remaining 20 percent primarily related to the Asia Pacific region.


- 25 -



As of December 31, 2019, Diversified Industrial Segment backlog increased compared to the June 30, 2019 amount of $2,011 million primarily due to the addition of Lord backlog during the current-year quarter. Excluding the impact of Lord, backlog in Diversified Industrial Segment decreased as shipments exceeded orders in the North American businesses, partially offset by orders exceeding shipments in the International businesses. Within the International businesses, the Asia Pacific region and Europe accounted for approximately 60 percent and 30 percent of the increase, respectively, while the remainder related to Latin America.
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.
Aerospace Systems Segment
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
735

 
$
616

 
$
1,366

 
$
1,181

Operating income
 
$
121

 
$
121

 
$
244

 
$
231

Operating margin
 
16.5
%
 
19.7
%
 
17.9
%
 
19.6
%
Backlog
 
$
3,183

 
$
2,048

 
$
3,183

 
$
2,048

The increase in net sales in the Aerospace Systems Segment for the current-year quarter and first six months of fiscal 2020 was primarily due to acquisitions, which contributed $111 million and $132 million in net sales during the current-year quarter and first six months of fiscal 2020, respectively. Higher volume in the commercial aftermarket and military original equipment manufacturer ("OEM") businesses, partially offset by lower volume in the military aftermarket and commercial OEM businesses, also contributed to the increase in net sales during the current-year quarter. In the first first six months of fiscal 2020, higher volume in the commercial and military aftermarket and military OEM businesses, partially offset by lower volume in the commercial OEM business, also increased net sales.
Operating margin decreased during the current-year quarter and first six months of fiscal 2020 compared to the prior-year periods primarily due to acquisition-related expenses and higher intangible amortization expense. Acquisition integration charges also decreased margins during the first six months of fiscal 2020. These expenses were partially offset by favorable OEM product mix and higher commercial aftermarket volume during the current-year quarter and higher aftermarket and OEM volume and favorable OEM product mix during the first six months of fiscal 2020.
The increase in backlog from both the prior-year quarter and June 30, 2019 amount of $2,209 million is primarily due to the addition of the Exotic backlog in the first six months of fiscal 2020. Orders exceeding shipments within the commercial and military OEM and commercial and military aftermarket also contributed to the increase in backlog from both the prior-year quarter and June 30, 2019 amounts. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Corporate general and administrative expenses
Corporate general and administrative expenses were $36 million in the current-year quarter compared to $64 million in the prior-year quarter and were $85 million for the first six months of fiscal 2020 compared to $114 million for the first six months of fiscal 2019. As a percent of sales, corporate general and administrative expenses were 1.0 percent and 1.8 percent in the current-year and prior-year quarter, respectively. During the first six months of fiscal 2020 and 2019, corporate general and administrative expenses were 1.2 percent and 1.6 percent of sales, respectively. Corporate general and administrative expenses decreased in the current-year quarter and first six months of fiscal 2020 from the respective prior-year periods primarily due to a net benefit associated with the Company's deferred compensation programs. Favorable market fluctuations related to investments associated with these programs more than offset unfavorable changes in the related liabilities.

- 26 -



Other expense (in the Business Segment Information) included the following:
(dollars in millions)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
Expense (income)
 
2019
 
2018
 
2019
 
2018
Foreign currency transaction
 
$
8

 
$
(1
)
 
$
7

 
$
3

Stock-based compensation
 
8

 
8

 
37

 
37

Pensions
 
8

 
5

 
17

 
10

Acquisition expenses
 
100

 

 
115

 

Loss (gain) on disposal of assets and divestitures
 
6

 
5

 
(4
)
 
5

Interest income
 
(8
)
 
(4
)
 
(26
)
 
(7
)
Other items, net
 
(9
)
 
13

 
(18
)
 
14

 
 
$
113

 
$
26

 
$
128

 
$
62


CONSOLIDATED BALANCE SHEET
(dollars in millions)
 
December 31,
2019
 
June 30,
2019
Cash
 
$
1,093

 
$
3,371

Trade accounts receivable, net
 
1,973

 
2,131

Inventories
 
2,014

 
1,678

Intangible assets, net
 
4,036

 
1,783

Goodwill
 
7,955

 
5,454

Notes payable and long-term debt payable within one year
 
1,604

 
587

Long-term debt
 
8,141

 
6,521

Shareholders’ equity
 
6,330

 
5,962

Working capital
 
$
1,570

 
$
4,521

Current ratio
 
1.4
 
2.4
Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $1,022 million and $975 million held by the Company's foreign subsidiaries at December 31, 2019 and June 30, 2019, respectively. The Company has determined it will no longer permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.
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 December 31, 2019, and 53 days at June 30, 2019. We believe that our receivables are collectible and appropriate allowances for doubtful accounts have been recorded.
Inventories as of December 31, 2019 increased by $336 million (which includes an increase of $366 million from acquisitions and a decrease of $4 million from the effect of foreign currency translation). After consideration of the effects of the acquisitions and foreign currency translation, inventories decreased primarily due to a decrease in the Diversified Industrial Segment, partially offset by an increase in the Aerospace Systems Segment. Days supply of inventory on hand was 84 days at December 31, 2019, 69 days at June 30, 2019 and 77 days at December 31, 2018.
Intangible assets, net and Goodwill increased from prior year-end primarily due to the current-year acquisitions of Lord and Exotic. Refer to Note 4 to the Consolidated Financial Statements for further discussion.
Notes payable and long-term debt payable within one year increased from prior year-end primarily due to higher commercial paper notes outstanding of which a portion was used to finance the purchase of the Lord and Exotic acquisitions.
Long-term debt increased by $1,620 million primarily due to outstanding term loans related to the acquisition of Lord and Exotic. Refer to Note 15 to the Consolidated Financial Statements for further discussion.
Shareholders’ equity activity during the first six months of fiscal 2020 included a decrease of approximately $100 million as a result of share repurchases and an increase of approximately $49 million as a result of foreign currency translation.


- 27 -



CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
Six Months Ended December 31,
(dollars in millions)
 
2019
 
2018
Cash provided by (used in):
 
 
 
 
Operating activities
 
$
826

 
$
541

Investing activities
 
(5,155
)
 
(31
)
Financing activities
 
2,054

 
(260
)
Effect of exchange rates
 
4

 
(25
)
Net (decrease) increase in cash and cash equivalents
 
$
(2,271
)
 
$
225


Cash flows provided by operating activities for the first six months of fiscal 2020 was higher than the first six months of fiscal 2019 primarily due to an increase in cash provided by working capital items. We continue to focus on managing our inventory and other working capital requirements.
Cash flows used in investing activities increased primarily due to acquisition activity in the first six months of fiscal 2020. It also includes $119 million and $94 million of capital expenditures in the first six months of fiscal 2020 and 2019, respectively.
Cash flows provided by financing activities for the first six months of fiscal 2020 includes net commercial paper borrowings of $932 million compared to $606 million in the first six months of fiscal 2019. Cash flows from financing activities in the first six months of fiscal 2020 also includes proceeds from the $925 million and $800 million term loans related to the acquisition of Exotic and Lord, respectively. Refer to Note 15 to the Consolidated Financial Statements for further discussion.
Our goal is to maintain a strong investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At December 31, 2019, 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
 
BBB+
Moody's Investor Services, Inc.
 
Baa1
Standard & Poor's
 
A-
During September 2019, the Company amended and extended its existing multi-currency credit agreement, increasing its capacity to $2,500 million. As of December 31, 2019, the Company had $982 million available for borrowing under the credit agreement. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
As of December 31, 2019, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of December 31, 2019, $1,518 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $1,770 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 December 31, 2019, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At December 31, 2019, the Company's debt to debt-shareholders' equity ratio was .61 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.





- 28 -



Forward-Looking Statements
Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may impact the Company's tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.
Among other factors which may affect future performance are:
global economic and political factors, including manufacturing activity, air travel trends, currency exchange rates and monetary policy, trade policy and tariffs, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability, as well as uncertainties associated with the timing and conditions surrounding the return to service of the Boeing 737 MAX and the recent outbreak of coronavirus in China;
our ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integrations of Clarcor, Lord and EMFCO Holdings Incorporated, parent company of Exotic; and our ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
our ability to effectively manage expanded operations from the acquisitions of Clarcor, Lord and Exotic;
the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;
increased cybersecurity threats and sophisticated computer crime;
business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;
the development of new products and technologies requiring substantial investment;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs, and changes in product mix;
uncertainties surrounding the ultimate resolution of outstanding legal and regulatory proceedings, including the outcome of any appeals;
additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
potential product liability risks;
our ability to enter into, own, renew and maintain intellectual property and know-how;
our leverage and future debt service obligations;
potential impairment of goodwill;
compliance costs associated with environmental laws and climate change regulations;
our ability to manage costs related to insurance and employee retirement and health care benefits;
compliance with federal rules, regulations, audits and investigations associated with being a provider of products to the United States government; and
our ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases.

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




- 29 -



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 we do not anticipate any material non-performance by any of the counterparties. We do 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 17 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. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our 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 December 31, 2019. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures were effective.

The Company acquired Exotic during September 2019 and Lord during October 2019. We are currently integrating the processes and internal controls of Exotic and Lord. Except for the Exotic and Lord acquisitions, there was no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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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)
October 1, 2019 through October 31, 2019
 
100,400

 
$
179.41

 
100,400

 
10,451,326

November 1, 2019 through November 30, 2019
 
79,400

 
$
196.18

 
79,400

 
10,371,926

December 1, 2019 through December 31, 2019
 
80,487

 
$
203.83

 
80,487

 
10,291,439

Total:
 
260,287

 
 
 
260,287

 


 
(1)
On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a fiscal year. There is no expiration date for this program.






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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
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
31(a)
 
 
 
31(b)
 
 
 
 
32
 
 
 
 
101.INS
 
Inline XBRL Instance Document.*
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document. *
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document.*
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104
 
Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
*
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended December 31, 2019 and 2018, (ii) Consolidated Statement of Income for the six months ended December 31, 2019 and 2018, (iii) Consolidated Statement of Comprehensive Income for the three months ended December 31, 2019 and 2018, (iv) Consolidated Statement of Comprehensive Income for the six months ended December 31, 2019 and 2018, (v) Consolidated Balance Sheet at December 31, 2019 and June 30, 2019, (vi) Consolidated Statement of Cash Flows for the six months ended December 31, 2019 and 2018, and (vii) Notes to Consolidated Financial Statements for the six months ended December 31, 2019.



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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:
February 5, 2020
 




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