SEC Filing - Parker Hannifin Corporation

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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



☐	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		)