Exhibit (13) to Annual Report
On Form 10-K
for Fiscal Year Ended June 30, 2014
By Parker-Hannifin Corporation
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. 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:
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• | changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments, disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs, and changes in product mix; |
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• | ability to identify acceptable strategic acquisition targets; |
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• | uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions; |
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• | the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures; |
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• | 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; |
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• | the ability to realize anticipated benefits of the consolidation of the Climate & Industrial Controls Group; |
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• | threats associated with and efforts to combat terrorism; |
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• | uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals; |
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• | competitive market conditions and resulting effects on sales and pricing; |
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• | increases in raw material costs that cannot be recovered in product pricing; |
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• | the Company's ability to manage costs related to insurance and employee retirement and health care benefits; and |
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• | global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability. |
The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2014, and undertakes no obligation to update them unless otherwise required by law.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
The Company's order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a correlation to the Company's future order rates are as follows:
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• | Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets; |
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• | Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and |
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• | 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:
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| | | | | | | | |
| June 30, 2014 |
| | March 31, 2014 |
| | June 30, 2013 |
|
United States | 55.3 |
| | 53.7 |
| | 50.9 |
|
Eurozone countries | 51.8 |
| | 53.0 |
| | 48.8 |
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China | 50.7 |
| | 48.0 |
| | 48.2 |
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Brazil | 48.7 |
| | 50.6 |
| | 50.4 |
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Global aircraft miles flown increased six percent from the comparable 2013 level and global revenue passenger miles increased seven percent from the comparable 2013 level. The Company anticipates that U.S. Department of Defense spending with regards to appropriations, and operations and maintenance for the U.S. Government's fiscal year 2015 will increase by approximately one percent from the comparable fiscal 2014 level.
Housing starts in June 2014 were approximately eight percent higher than housing starts in June 2013 and were approximately six percent lower than housing starts in March 2014.
The Company has remained focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The Company continues to generate substantial cash flows from operations, has controlled capital spending and has proactively managed working capital. The Company has been able to borrow needed funds at affordable interest rates and had a debt to debt-shareholders' equity ratio of 25.9 percent at June 30, 2014 compared to 28.6 percent at March 31, 2014 and 33.0 percent at June 30, 2013. Net of cash and cash equivalents and marketable securities, the debt to debt-shareholders' equity ratio was 2.0 percent at June 30, 2014 compared to 7.1 percent at March 31, 2014 and 15.4 percent at June 30, 2013.
The Company believes many opportunities for growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.
The Company believes it can meet its strategic objectives by:
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• | Serving the customer and continuously enhancing its experience with the Company; |
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• | Successfully executing its Win Strategy initiatives relating to premier customer service, financial performance and profitable growth; |
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• | Maintaining its decentralized division and sales company structure; |
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• | Fostering an entrepreneurial culture; |
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• | Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity; |
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• | Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver; |
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• | Acquiring strategic businesses; |
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• | Organizing around targeted regions, technologies and markets; |
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• | Driving efficiency by implementing lean enterprise principles; and |
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• | Creating a culture of empowerment through its values, inclusion and diversity, accountability and teamwork. |
Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. The Company will continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.
The discussion below is structured to separately discuss each of the financial statements presented on pages 13-13 to 13-18. All year references are to fiscal years.
Discussion of Consolidated Statement of Income
The Consolidated Statement of Income summarizes the Company's operating performance over the last three fiscal years.
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| | | | | | | | | | | | |
(dollars in millions) | | 2014 | | 2013 | | 2012 |
Net sales | | $ | 13,216 |
| | $ | 13,016 |
| | $ | 13,146 |
|
Gross profit margin | | 22.9 | % | | 22.5 | % | | 24.2 | % |
Selling, general and administrative expenses | | $ | 1,634 |
| | $ | 1,555 |
| | $ | 1,519 |
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Selling, general and administrative expenses, as a percent of sales | | 12.4 | % | | 11.9 | % | | 11.6 | % |
Goodwill and intangible asset impairment | | $ | 189 |
| | $ | — |
| | $ | — |
|
Interest expense | | 83 |
| | 92 |
| | 93 |
|
Other (income) expense, net | | (26 | ) | | (18 | ) | | 1 |
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(Gain) on disposal of assets | | (409 | ) | | (10 | ) | | (2 | ) |
Effective tax rate | | 33.1 | % | | 27.6 | % | | 26.7 | % |
Net income attributable to common shareholders | | $ | 1,041 |
| | $ | 948 |
| | $ | 1,152 |
|
Net sales in 2014 were 1.5 percent higher than 2013. Acquisitions made in the last 12 months contributed approximately $74 million in sales in 2014 and the effect of currency rate changes decreased net sales in 2014 by approximately $22 million. Excluding the effect of acquisitions and currency rate changes, net sales in 2014 were 1.1 percent higher than 2013. The increase in sales in 2014 is primarily due to higher volume experienced in the Diversified Industrial International businesses partially offset by lower sales in the Aerospace Systems Segment.
Net sales in 2013 were 1.0 percent lower than 2012. Acquisitions made during 2013 contributed approximately $448 million in sales and the effect of currency rate changes decreased net sales in 2013 by approximately $140 million. Excluding the effect of acquisitions and currency rate changes, net sales in 2013 were 3.3 percent lower than 2012. The decrease in sales in 2013 is primarily due to lower volume experienced in the Diversified Industrial Segment.
Gross profit margin increased in 2014 primarily due to lower defined benefit costs, and a favorable product mix in the Diversified Industrial North American businesses, partially offset by higher business realignment charges in the Diversified Industrial International businesses and higher product support costs and an unfavorable product mix in the Aerospace Systems Segment. Gross profit margin decreased in 2013 primarily due to higher defined benefit costs, operating inefficiencies in the Diversified Industrial Segment and higher engineering development costs in the Aerospace Systems Segment. Pension cost included in cost of sales in 2014, 2013 and 2012 were $174.8 million, $205.7 million and $138.5 million, respectively. The lower pension cost in 2014 primarily resulted from a lower amount of actuarial losses, primarily related to domestic defined benefit plans. The higher pension cost in 2013 primarily resulted from a higher amount of actuarial losses, primarily related to the domestic defined benefit plans. Included in cost of sales in 2014, 2013 and 2012 were business realignment charges of $63.6 million, $8.4 million and $12.7 million, respectively.
Selling, general and administrative expenses increased 5.1 percent in 2014 and increased 2.3 percent in 2013. The increase in 2014 was primarily due to higher business realignment expenses and stock compensation expense, partially offset by lower expenses associated with the Company's various other incentive compensation programs. Stock compensation expense increased primarily as result of a higher stock price used in the calculation of the fair value of the stock awards at the date of grant. The increase in 2013 was primarily due to higher amortization expense and charitable contributions, partially offset by lower net expenses associated with the Company's incentive and deferred compensation programs. Pension cost included in selling, general and administrative expenses in 2014, 2013 and 2012 were $64.2 million, $78.5 million and $52.8 million, respectively. The lower pension cost in 2014 primarily resulted from a lower amount of actuarial losses, primarily related to domestic defined benefit plans. The higher pension cost in 2013 primarily resulted from a higher amount of actuarial losses, primarily related to the domestic defined benefit plans. Included in selling, general and administrative expenses in 2014, 2013 and 2012 were business realignment charges of $38.9 million, $3.9 million and $1.0 million, respectively.
Goodwill and intangible asset impairment related to the Worldwide Energy Products Division. Refer to Note 7 to the Consolidated Financial Statements for further discussion.
Interest expense in 2014 decreased primarily due to a lower average interest rate in the debt portfolio, including lower average borrowing rates on commercial paper borrowings, more than offsetting the effect of higher weighted-average borrowings. Interest expense in 2013 decreased primarily due to a lower average interest rate in the debt portfolio during the latter part of 2013 than the debt portfolio during the latter half of 2012 more than offsetting the effect of higher weighted-average borrowings and interest rates on commercial paper borrowings.
Other (income) expense, net in 2014 includes $11.1 million of income related to the Company's equity interests in joint ventures.
(Gain) on disposal of assets in 2014 includes a gain of $412.6 million related to the deconsolidation of a subsidiary. (Gain) on disposal of assets in 2013 includes a net gain of $14.7 million resulting from business divestiture activity. (Gain) on disposal of assets in 2012 included $3.7 million of gains from asset sales.
Effective tax rate in 2014 was unfavorably impacted by discrete tax costs related to a non-deductible goodwill and intangible asset impairment charge, the deconsolidation of a subsidiary, and the expiration of the U.S. Research and Development credit. The effective tax rate in 2013 was higher primarily due to an unfavorable geographical mix of earnings. The effective tax rate in 2013 was favorably impacted by the enactment of the American Taxpayer Relief Act.
Discussion of Business Segment Information
The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making. As of July 1, 2013, the Company consolidated its Climate & Industrial Controls businesses into existing operating groups within the Industrial Segment. As a result of this consolidation and resulting change in management structure made in connection with the strategic divestiture of certain operations in the Climate & Industrial Controls Segment, the Company now has two reporting segments: Diversified Industrial (formerly referred to as Industrial) and Aerospace Systems (formerly referred to as Aerospace). All prior period results have been revised to reflect the new reporting segment structure.
Diversified Industrial Segment (dollars in millions)
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| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Sales | | | | | |
North America | $ | 5,694 |
| | $ | 5,638 |
| | $ | 5,708 |
|
International | 5,288 |
| | 5,110 |
| | 5,335 |
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Operating income | | | | | |
North America | 946 |
| | 909 |
| | 960 |
|
International | 572 |
| | 602 |
| | 752 |
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Operating income as a percent of sales | | | | | |
North America | 16.6 | % | | 16.1 | % | | 16.8 | % |
International | 10.8 | % | | 11.8 | % | | 14.1 | % |
Backlog | $ | 1,861 |
| | $ | 1,803 |
| | $ | 1,974 |
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Assets | 9,502 |
| | 9,388 |
| | 8,696 |
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Return on average assets | 16.1 | % | | 16.7 | % | | 19.2 | % |
Sales in 2014 for the Diversified Industrial North American operations increased 1.0 percent from 2013 compared to a 1.2 percent decrease from 2012 to 2013. Acquisitions completed within the last 12 months contributed approximately $53 million in sales in 2014. The effect of currency rate changes decreased 2014 net sales by approximately $26 million, reflecting the strengthening of the U.S. dollar against the Canadian dollar. Excluding acquisitions and the effect of currency rate changes, the change in sales in 2014 reflects higher demand from distributors as well as from end-users in the construction equipment and oil and gas markets, partially offset by lower end-user demand in the heavy-duty truck, farm and agriculture equipment, engine, and car and light truck markets. Excluding acquisitions, sales in 2013 decreased 4.1 percent reflecting lower demand from distributors as well as from end-users in most markets with the largest decline occurring in the construction equipment, oil and gas, mining, heavy-duty truck and machine tool markets.
Sales in the Diversified Industrial International operations increased 3.5 percent in 2014 compared to a decrease of 4.2 percent from 2012 to 2013. Acquisitions completed within the last 12 months contributed approximately $21 million in sales in 2014. The effect of currency rate changes did not have an overall impact on sales in 2014 as currency rate changes in Europe were offset by currency rate changes in the Asia Pacific region and Latin America. Excluding acquisitions and the effect of currency rate changes, sales in 2014 in the Diversified Industrial International operations increased 3.1 percent, primarily due to higher volume in all regions with 50 percent of the increase occurring in the Asia Pacific region and one-third of the increase occurring in Europe. Excluding acquisitions and the effect of currency rate changes, the sales decrease in 2013 was primarily due to lower volume across most markets in all regions with the largest decrease equally distributed between Europe and the Asia Pacific region.
The absence of sales from divested businesses was also a contributing factor to the sales fluctuation between 2013 and 2014 in both the Diversified Industrial North American and Diversified Industrial International businesses.
The increase in operating margins in 2014 in the Diversified Industrial North American operations was primarily due to the higher sales volume, a favorable product mix and lower raw material prices, partially offset by higher intangible asset amortization expense related to 2013 acquisitions. The decrease in operating margins in 2014 in the Diversified Industrial International operations was primarily due to higher business realignment charges and associated operating inefficiencies partially offset by the impact of the higher sales volume and a favorable product mix. The decrease in operating margins in 2013 in the Diversified Industrial North American operations was primarily due to an unfavorable product mix and operating inefficiencies resulting from the decrease in sales volume, partially offset by the favorable effect of lower raw material prices. The decrease in operating margins in 2013 in the Diversified Industrial International operations was primarily due to the lower sales volume, resulting in operating inefficiencies, as well as the impact of integration costs related to 2013 acquisitions.
The following business realignment charges are included in Diversified Industrial North America and Diversified Industrial International operating income:
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| | | | | | | | | | | | |
(dollars in thousands) | | 2014 | | 2013 | | 2012 |
Diversified Industrial North America | | $ | 2,304 |
| | $ | 2,661 |
| | $ | 3,355 |
|
Diversified Industrial International | | 99,220 |
| | 9,573 |
| | 10,966 |
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The business realignment charges consist primarily of severance costs resulting from plant closures as well as general reductions in work force. The majority of the the Diversified Industrial International business realignment charges were incurred in Europe. The Industrial North America business realignment charges for 2012 also included expenses associated with enhanced retirement benefits. The Company does not anticipate that cost savings realized from the work force reductions taken during 2014 in the Diversified Industrial North American businesses will have a material impact on future operating income and anticipates that cost savings realized from work force reduction measures taken in the Diversified Industrial International businesses will positively impact operating income by approximately nine percent in 2015. In 2015, the Company expects to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. Such actions are expected to result in approximately $55 million in business realignment charges in 2015.
The Company anticipates Diversified Industrial North American sales for 2015 will increase between 3.0 percent and 7.0 percent from the 2014 level and Diversified Industrial International sales for 2015 will increase between 1.0 percent and 4.0 percent from the 2014 level. Diversified Industrial North American operating margins in 2015 are expected to range from 16.5 percent to 16.9 percent and Diversified Industrial International margins are expected to range from 14.7 percent to 15.7 percent.
The increase in total Diversified Industrial Segment backlog in 2014 was primarily due to order rates exceeding shipments in the Diversified Industrial North American businesses. The decline in total Diversified Industrial Segment backlog in 2013 was primarily due to lower order rates in both the Diversified Industrial North American and Diversified Industrial International businesses, partially offset by an increase in backlog from acquisitions. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
The increase in assets in 2014 was primarily due to the effect of currency fluctuations and an increase in accounts receivable, partially offset by decreases in goodwill, intangible assets and inventory. The increase in assets in 2013 was primarily due to acquisitions as well as increases in plant and equipment, net and cash and cash equivalents, partially offset by the effect of currency fluctuations as well as decreases in inventory and intangible assets.
Aerospace Systems Segment (dollars in millions)
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| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Sales | $ | 2,235 |
| | $ | 2,268 |
| | $ | 2,103 |
|
Operating income | 271 |
| | 280 |
| | 290 |
|
Operating income as a percent of sales | 12.1 | % | | 12.4 | % | | 13.8 | % |
Backlog | $ | 1,994 |
| | $ | 1,936 |
| | $ | 1,862 |
|
Assets | 1,359 |
| | 1,140 |
| | 1,033 |
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Return on average assets | 21.7 | % | | 25.8 | % | | 28.6 | % |
Sales in 2014 were lower than the 2013 level as higher volume in the commercial original equipment manufacturer (OEM) business was offset by the absence of sales from the deconsolidated subsidiary whose sales are now reported by the joint venture with GE Aviation as well as lower volume in the military OEM and aftermarket businesses and the commercial aftermarket business. The increase in net sales in 2013 was primarily due to higher volume in all businesses with the largest increase being experienced in the commercial and military OEM businesses.
The lower margin in 2014 was primarily due to an unfavorable product mix, the impact of the joint venture with GE Aviation, and higher product support costs. Margins in 2014 were favorably impacted by the finalization of contract negotiations related to certain programs. The lower margin in 2013 was primarily due to higher engineering development costs, including fuel cell development, more than offsetting the benefit of the higher sales volume.
The increase in backlog in 2014 was primarily due to order rates exceeding shipments in the commercial and military OEM businesses, partially offset by shipments exceeding order rates in the military and commercial aftermarket businesses as well as the absence of backlog of the deconsolidated subsidiary. The increase in backlog in 2013 was primarily due to higher commercial and military OEM orders and commercial aftermarket orders, partially offset by lower military aftermarket orders. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
For 2015, sales are expected to increase between 2.0 percent and 3.0 percent from the 2014 level and operating margins are expected to range from 13.1 percent to 13.9 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.
The increase in assets in 2014 was primarily due to the investment in the joint venture with GE Aviation. The increase in assets in 2013 was primarily due to increases in accounts receivable, inventory and intangible assets.
Corporate assets increased 19.9 percent in 2014 compared to an increase of 39.7 percent from 2012 to 2013. The change in Corporate assets in 2014 and 2013 was primarily due to fluctuations in the amount of cash and cash equivalents and marketable securities. The change in 2013 was also due to a fluctuation in deferred taxes.
Discussion of Consolidated Balance Sheet
The Consolidated Balance Sheet shows the Company's financial position at year-end, compared with the previous year-end. This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.
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| | | | | | | | |
(dollars in millions) | | 2014 |
| | 2013 |
|
Cash | | $ | 2,187 |
| | $ | 1,781 |
|
Trade accounts receivable, net | | 1,858 |
| | 1,841 |
|
Inventories | | 1,372 |
| | 1,377 |
|
Investments and other assets | | 1,019 |
| | 687 |
|
Intangible assets, net | | 1,188 |
| | 1,290 |
|
Goodwill | | 3,171 |
| | 3,224 |
|
Notes payable and long-term debt payable within one year | | 817 |
| | 1,334 |
|
Shareholders' equity | | 6,659 |
| | 5,738 |
|
Working capital | | $ | 2,819 |
| | $ | 2,011 |
|
Current ratio | | 1.9 |
| | 1.6 |
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Cash (comprised of cash and cash equivalents and marketable securities) includes $2,126 million and $1,655 million held by the Company's foreign subsidiaries at June 30, 2014 and June 30, 2013, respectively. Generally, cash and cash equivalents and marketable securities held by foreign subsidiaries are not readily available for use in the United States without adverse tax consequences. The Company's principal sources of liquidity are its cash flows provided by operating activities, commercial paper borrowings or borrowings directly from its line of credit. The Company does not believe the level of its non-U.S. cash position will have an adverse effect on working capital needs, planned growth, repayment of maturing debt, benefit plan funding, dividend payments or share repurchases.
Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade receivables for the Company was 48 days in 2014 and 49 days in 2013. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.
Inventories decreased $6 million (which includes an increase of $22 million from the effect of foreign currency translation and a decrease of $34 million related to the deconsolidation of a subsidiary) primarily due to a decrease in inventory levels in the Aerospace Systems Segment partially offset by an increase in inventory levels in the Diversified Industrial International businesses. Days supply of inventory on hand was 61 days in 2014 and 62 days in 2013.
Investments and other assets at June 30, 2014 includes the fair value of the Company's equity investment in the joint venture with GE Aviation. See Note 2 to the Consolidated Financial Statements for further discussion.
Intangible assets, net and Goodwill decreased from the 2013 amounts primarily due to impairment charges of approximately $44 million and $140 million, respectively, recognized in the second quarter of fiscal 2014. See Note 7 to the Consolidated Financial Statements for further discussion.
Notes payable and long-term debt payable within one year decreased primarily due to a lower amount of commercial paper borrowings outstanding at the end of 2014. The Company from time to time will utilize short-term intercompany loans to repay commercial paper borrowings. At times, the short-term intercompany loans are outstanding at the end of a fiscal quarter.
Shareholders' equity activity during 2014 included a decrease of $200 million related to share repurchases, an increase of $91 million related to pensions and postretirement benefits, and an increase of $193 million related to foreign currency translation adjustments.
Discussion of Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing and financing activities.
A summary of cash flows follows:
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| | | | | | | | | | | | |
(dollars in millions) | | 2014 | | 2013 | | 2012 |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 1,388 |
| | $ | 1,191 |
| | $ | 1,530 |
|
Investing activities | | (646 | ) | | (810 | ) | | (376 | ) |
Financing activities | | (958 | ) | | 576 |
| | (824 | ) |
Effect of exchange rates | | 48 |
| | (14 | ) | | (150 | ) |
Net (decrease) increase in cash and cash equivalents | | $ | (168 | ) | | $ | 943 |
| | $ | 181 |
|
Cash Flows From Operating Activities in 2014 benefited from a $294 million increase in cash provided by working capital items partially offset by a $184 million decrease in net income after consideration of non-cash items, including a $413 million gain on the deconsolidation of a subsidiary and a $189 million impairment charge. Refer to Note 2 and Note 7 to the Consolidated Financial Statements for further discussion of the gain on deconsolidation and impairment charge, respectively. During 2014, the Company also made a $75 million voluntary cash contribution to the Company's domestic qualified defined benefit plan. Cash flow from operating activities decreased from 2012 primarily due to a decrease in net income as well as $226 million of voluntary cash contributions made to the Company's domestic qualified defined benefit pension plan in 2013.
Cash Flows Used In Investing Activities decreased from 2013 primarily due to a lower level of acquisition activity and the proceeds from the sale of a 50 percent equity interest in a subsidiary related to the joint venture with GE Aviation (refer to Note 2 to the Consolidated Financial Statements for further discussion), partially offset by purchases of marketable securities and other investments. Cash flows used in investing activities increased from 2012 primarily due to an increase in acquisition activity and capital expenditures, partially offset by net proceeds from business divestitures.
Cash Flows Used In Financing Activities increased from 2013 primarily due to a lower level of borrowings required to support acquisition activity. The Company repurchased 1.7 million common shares for $200 million during 2014 as compared to the repurchase of approximately 3.0 million common shares for $257 million in 2013 and 6.4 million common shares for $455 million in 2012. Cash flows provided by financing activities in 2013 included a higher level of commercial paper borrowings due to the increase in acquisition activity. In both 2013 and 2012, the Company purchased the outstanding shares not previously owned by the Company in majority-owned subsidiaries. Cash flows used in financing activities in 2012 included a borrowing and a repayment, each for Japanese Yen (JPY) 6 billion (approximately $73 million), under the terms of separate credit facilities.
Dividends have been paid for 256 consecutive quarters, including a yearly increase in dividends for the last 58 fiscal years. The current annual dividend rate is $1.92.
The Company's goal is to maintain no less than an "A" rating on senior debt to ensure availability and reasonable cost of external funds. As one means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-shareholders' equity of no more than 37 percent.
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| | | | | | | | |
Debt to Debt-Shareholders' Equity Ratio (dollars in millions) | | 2014 | | 2013 |
Debt | | $ | 2,325 |
| | $ | 2,830 |
|
Debt & Shareholders' Equity | | 8,984 |
| | 8,568 |
|
Ratio | | 25.9 | % | | 33.0 | % |
As of June 30, 2014, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, of which $1,184 million was available at June 30, 2014. The credit agreement expires in October 2017; 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 revolving credit agreement requires the payment of an annual facility fee, the amount of which would increase in the event the Company's credit ratings are lowered. Although a lowering of the Company's credit ratings would likely increase the cost of future debt, it would not limit the Company's ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
The Company is currently authorized to sell up to $1,850 million of short-term commercial paper notes. As of June 30, 2014, $816 million of commercial paper notes were outstanding and the largest amount of commercial paper notes outstanding during the last quarter of 2014 was $1,079 million.
The Company's credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the applicable agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. Based on the Company's rating level at June 30, 2014, the most restrictive financial covenant contained in the credit agreements and the indentures provides that the ratio of secured debt to net tangible assets be less than 10 percent. However, the Company currently does not have secured debt in its debt portfolio. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.
Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $173.0 million at June 30, 2014. Payment of these obligations would result from settlements with worldwide taxing authorities. Due to the difficulty in determining the timing of the settlements, these obligations are not included in the following summary of the Company's fixed contractual obligations. References to Notes are to the Notes to the Consolidated Financial Statements.
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| | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Payments due by period |
Contractual obligations | | Total |
| | Less than 1 year |
| | 1-3 years |
| | 3-5 years |
| | More than 5 years |
|
Long-term debt (Note 9) | | $ | 1,508 |
| | $ | — |
| | $ | 333 |
| | $ | 550 |
| | $ | 625 |
|
Interest on long-term debt | | 659 |
| | 55 |
| | 91 |
| | 74 |
| | 439 |
|
Operating leases (Note 9) | | 291 |
| | 91 |
| | 101 |
| | 37 |
| | 62 |
|
Retirement benefits (Note 10) | | 118 |
| | 69 |
| | 12 |
| | 12 |
| | 25 |
|
Total | | $ | 2,576 |
| | $ | 215 |
| | $ | 537 |
| | $ | 673 |
| | $ | 1,151 |
|
Quantitative and Qualitative Disclosures About Market Risk
The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 15 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 income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.
The Company's debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company's objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 2014 by approximately $12 million.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.
Revenue Recognition - Substantially all of the Diversified Industrial Segment revenues are recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. The Aerospace Systems Segment recognizes revenues primarily using the percentage of completion method and the extent of progress toward completion is primarily measured using the units-of-delivery method. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves. The estimation of these costs requires substantial judgment on the part of management due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to cost estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.
Impairment of Goodwill and Long-lived Assets - Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. For the Company, a reporting unit is one level below the operating segment level. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistently estimated using primarily a discounted cash flow model. The Company believes that the use of a discounted cash flow model results in the most accurate calculation of a reporting unit's fair value since the market value for a reporting unit is not readily available. The discounted cash flow analysis requires several assumptions including future sales growth and operating margin levels as well as assumptions regarding future industry specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analysis. The Company has consistently used a discount rate commensurate with its cost of capital, adjusted for inherent business risks, and an appropriate terminal growth factor. The Company also reconciles the estimated aggregate fair value of its reporting units as derived from the discounted cash flow analysis to the Company's overall market capitalization.
The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate. During fiscal 2014, the Company made a decision to restructure and change the strategic direction of its Worldwide Energy Products Division (EPD). The Company calculated the fair value of EPD using assumptions reflecting the Company's current strategic direction for this reporting unit, the results of which indicated that the carrying value of EPD exceeded its fair value. As a result, the Company estimated the implied fair value of EPD's goodwill, which resulted in a non-cash impairment charge of $140.3 million. The fair value of EPD was calculated using both a discounted cash flow analysis and estimated fair market values of comparable businesses. The results of the Company's fiscal 2014 annual goodwill impairment test performed as of December 31, 2013 indicated that no additional goodwill impairment existed.
The Company is unaware of any current market trends that are contrary to the assumptions made in the estimation of the fair value of any of its reporting units. If actual experience is not consistent with the assumptions made in the estimation of the fair value of the reporting units, especially assumptions regarding penetration into new markets and the recovery of the current economic environment, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests.
Long-lived assets held for use, which primarily includes finite-lived intangible assets and plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During fiscal 2014, in connection with the goodwill impairment review discussed above, the Company determined certain intangible assets of EPD, primarily trademarks and customer lists, and plant and equipment were impaired resulting in a non-cash impairment charge of $48.6 million. The fair value of EPD's intangible assets and plant and equipment were determined using the income approach for each asset. There were no events or circumstances that indicated that the carrying value of the Company's remaining long-lived assets held for use were not recoverable.
Inventories - Inventories are valued at the lower of cost or market. Cost is determined on the last-in, first-out basis for a majority of domestic inventories and on the first-in, first-out basis for the balance of the Company's inventories. Inventories have been reduced by an allowance for obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales. Changes in the allowance have not had a material effect on the Company's results of operations, financial position or cash flows.
Pensions and Postretirement Benefits Other Than Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels, amortization periods for actuarial gains and losses and health care cost trends.
Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements. For the Company's domestic defined benefit plans, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have an $11 million effect on pension expense and a 50 basis point decrease in the discount rate is estimated to increase pension expense by $18 million. As of June 30, 2014, $1,016 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plans are subject to amortization in the future. These losses will generally be amortized over approximately eight years and will negatively affect earnings in the future. Actuarial gains experienced in future years will help reduce the effect of the actuarial loss amortization.
Further information on pensions and postretirement benefits other than pensions is provided in Note 10 to the Consolidated Financial Statements.
Stock-Based Compensation - The computation of the expense associated with stock-based compensation requires the use of a valuation model. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options and stock appreciation rights. The Black-Scholes model requires assumptions regarding the volatility of the Company's stock, the expected life of the stock award and the Company's dividend ratio. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility, future dividend payments and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. Further information on stock-based compensation is provided in Note 12 to the Consolidated Financial Statements.
Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. Further information on income taxes is provided in Note 4 to the Consolidated Financial Statements.
Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability, litigation and accounts receivable reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss accruals are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including, identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet determined the effect that ASU 2014-09 will have on its results of operations, statement of financial position, or financial statement disclosures.
Consolidated Statement of Income
|
| | | | | | | | | | | | |
| | For the years ended June 30, |
(Dollars in thousands, except per share amounts) | | 2014 |
| | 2013 |
| | 2012 |
|
Net Sales | | $ | 13,215,971 |
| | $ | 13,015,704 |
| | $ | 13,145,942 |
|
Cost of sales | | 10,188,227 |
| | 10,086,675 |
| | 9,958,337 |
|
Gross profit | | 3,027,744 |
| | 2,929,029 |
| | 3,187,605 |
|
Selling, general and administrative expenses | | 1,633,992 |
| | 1,554,973 |
| | 1,519,316 |
|
Goodwill and intangible asset impairment (Note 7) | | 188,870 |
| | — |
| | — |
|
Interest expense | | 82,566 |
| | 91,552 |
| | 92,790 |
|
Other (income) expense, net | | (25,513 | ) | | (18,198 | ) | | 1,295 |
|
(Gain) on disposal of assets (Note 2) | | (408,891 | ) | | (10,299 | ) | | (2,494 | ) |
Income before income taxes | | 1,556,720 |
| | 1,311,001 |
| | 1,576,698 |
|
Income taxes (Note 4) | | 515,302 |
| | 362,217 |
| | 421,206 |
|
Net Income | | 1,041,418 |
| | 948,784 |
| | 1,155,492 |
|
Less: Noncontrolling interest in subsidiaries' earnings | | 370 |
| | 357 |
| | 3,669 |
|
Net Income Attributable to Common Shareholders | | $ | 1,041,048 |
| | $ | 948,427 |
| | $ | 1,151,823 |
|
| | | | | | |
Earnings per Share Attributable to Common Shareholders (Note 5) | | | | | | |
Basic earnings per share | | $ | 6.98 |
| | $ | 6.36 |
| | $ | 7.62 |
|
Diluted earnings per share | | $ | 6.87 |
| | $ | 6.26 |
| | $ | 7.45 |
|
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Comprehensive Income
|
| | | | | | | | | | | | |
| | For the years ended June 30, |
(Dollars in thousands) | | 2014 |
| | 2013 |
| | 2012 |
|
Net Income | | $ | 1,041,418 |
| | $ | 948,784 |
| | $ | 1,155,492 |
|
Less: Noncontrolling interests in subsidiaries' earnings | | 370 |
| | 357 |
| | 3,669 |
|
Net income attributable to common shareholders | | 1,041,048 |
| | 948,427 |
| | 1,151,823 |
|
| | | | | | |
Other comprehensive income (loss), net of tax | | | | | | |
Foreign currency translation adjustment (net of tax of $4,692, $1,239 and $(11,530) in 2014, 2013 and 2012) | | 192,925 |
| | (18,974 | ) | | (392,742 | ) |
Retirement benefits plan activity (net of tax of $(54,473), $(195,884) and $330,984 in 2014, 2013 and 2012) | | 91,182 |
| | 325,066 |
| | (597,979 | ) |
Realized loss (net of tax of $(101), $(101) and $(102) in 2014, 2013 and 2012) | | 205 |
| | 204 |
| | 204 |
|
Other comprehensive income (loss) | | 284,312 |
| | 306,296 |
| | (990,517 | ) |
Less: Other comprehensive (loss) for noncontrolling interests | | (23 | ) | | (1,771 | ) | | (25,607 | ) |
Other comprehensive income (loss) attributable to common shareholders | | 284,335 |
| | 308,067 |
| | (964,910 | ) |
Total Comprehensive Income Attributable to Common Shareholders | | $ | 1,325,383 |
| | $ | 1,256,494 |
| | $ | 186,913 |
|
The accompanying notes are an integral part of the financial statements.
Business Segment Information
By Industry
|
| | | | | | | | | | | | |
(Dollars in thousands) | | 2014 |
| | 2013 |
| | 2012 |
|
Net Sales: | | | | | | |
Diversified Industrial: | | | | | | |
North America | | $ | 5,693,527 |
| | $ | 5,637,657 |
| | $ | 5,708,057 |
|
International | | 5,287,916 |
| | 5,110,332 |
| | 5,335,138 |
|
Aerospace Systems | | 2,234,528 |
| | 2,267,715 |
| | 2,102,747 |
|
| | $ | 13,215,971 |
| | $ | 13,015,704 |
| | $ | 13,145,942 |
|
Segment Operating Income: | | | | | | |
Diversified Industrial: | | | | | | |
North America | | $ | 946,493 |
| | $ | 908,719 |
| | $ | 960,252 |
|
International | | 572,476 |
| | 602,480 |
| | 752,155 |
|
Aerospace Systems | | 271,238 |
| | 280,286 |
| | 290,135 |
|
Total segment operating income | | 1,790,207 |
| | 1,791,485 |
| | 2,002,542 |
|
Corporate administration | | 181,926 |
| | 185,767 |
| | 193,367 |
|
Income before interest expense and other | | 1,608,281 |
| | 1,605,718 |
| | 1,809,175 |
|
Interest expense | | 82,566 |
| | 91,552 |
| | 92,790 |
|
Other (income) expense | | (31,005 | ) | | 203,165 |
| | 139,687 |
|
Income before income taxes | | $ | 1,556,720 |
| | $ | 1,311,001 |
| | $ | 1,576,698 |
|
| | | | | | |
Assets: | | | | | | |
Diversified Industrial | | $ | 9,501,837 |
| | $ | 9,388,027 |
| | $ | 8,696,094 |
|
Aerospace Systems (a) | | 1,359,130 |
| | 1,139,967 |
| | 1,033,449 |
|
Corporate (b) | | 2,413,395 |
| | 2,012,904 |
| | 1,440,739 |
|
| | $ | 13,274,362 |
| | $ | 12,540,898 |
| | $ | 11,170,282 |
|
| | | | | | |
Property Additions (c): | | | | | | |
Diversified Industrial | | $ | 189,832 |
| | $ | 312,392 |
| | $ | 219,872 |
|
Aerospace Systems | | 23,261 |
| | 20,838 |
| | 19,651 |
|
Corporate | | 3,247 |
| | 7,105 |
| | 8,223 |
|
| | $ | 216,340 |
| | $ | 340,335 |
| | $ | 247,746 |
|
| | | | | | |
Depreciation: | | | | | | |
Diversified Industrial | | $ | 187,347 |
| | $ | 187,014 |
| | $ | 182,853 |
|
Aerospace Systems | | 19,193 |
| | 19,498 |
| | 19,395 |
|
Corporate | | 8,425 |
| | 7,210 |
| | 8,260 |
|
| | $ | 214,965 |
| | $ | 213,722 |
| | $ | 210,508 |
|
|
| | | | | | | | | | | | |
(Dollars in thousands) | | 2014 |
| | 2013 |
| | 2012 |
|
By Geographic Area (d) | | | | | | |
Net Sales: | | | | | | |
North America | | $ | 7,853,603 |
| | $ | 7,844,552 |
| | $ | 7,830,517 |
|
International | | 5,362,368 |
| | 5,171,152 |
| | 5,315,425 |
|
| | $ | 13,215,971 |
| | $ | 13,015,704 |
| | $ | 13,145,942 |
|
Long-Lived Assets: | | | | | | |
North America | | $ | 861,300 |
| | $ | 871,958 |
| | $ | 867,159 |
|
International | | 962,994 |
| | 936,282 |
| | 852,809 |
|
| | $ | 1,824,294 |
| | $ | 1,808,240 |
| | $ | 1,719,968 |
|
As of July 1, 2013, the Company consolidated its Climate & Industrial Controls businesses into existing operating groups within the Industrial Segment. As a result of this consolidation and the resulting change in management structure made in connection with the strategic divestiture of certain operations in the Climate & Industrials Control Segment, the Company now has two reporting segments: Diversified Industrial (formerly referred to as Industrial) and Aerospace Systems (formerly referred to as Aerospace). All prior period results have been revised to reflect the new reporting segment structure.
The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a basis that is consistent with the manner in which the Company’s management disaggregates financial information for internal review and decision-making.
| |
(a) | Includes investments in joint-venture companies in which ownership is 50 percent or less and in which the Company does not have operating control (2014 - $263,246). |
| |
(b) | Corporate assets are principally cash and cash equivalents, marketable securities, domestic deferred income taxes, investments, benefit plan assets, headquarters facilities and the major portion of the Company’s domestic data processing equipment. |
| |
(c) | Includes the value of net plant and equipment at the date of acquisition of acquired companies (2013 - $74,439; 2012 - $28,929). |
| |
(d) | Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10 percent of consolidated sales. Long-lived assets are comprised of plant and equipment based on physical location. |
Consolidated Balance Sheet
|
| | | | | | | | |
(Dollars in thousands) | | |
June 30, | | 2014 |
| | 2013 |
|
Assets | | | | |
Current Assets | | | | |
Cash and cash equivalents (Note 1) | | $ | 1,613,555 |
| | $ | 1,781,412 |
|
Marketable securities (Note 1) | | 573,701 |
| | — |
|
Trade accounts receivable, net (Note 1) | | 1,858,176 |
| | 1,840,820 |
|
Non-trade and notes receivable (Note 1) | | 388,437 |
| | 221,925 |
|
Inventories (Note 6) | | 1,371,681 |
| | 1,377,405 |
|
Prepaid expenses | | 129,837 |
| | 182,669 |
|
Deferred income taxes (Notes 1 and 4) | | 136,193 |
| | 126,955 |
|
Total Current Assets | | 6,071,580 |
| | 5,531,186 |
|
Plant and equipment (Note 1) | | 5,152,591 |
| | 4,999,301 |
|
Less accumulated depreciation | | 3,328,297 |
| | 3,191,061 |
|
| | 1,824,294 |
| | 1,808,240 |
|
Investments and other assets (Note 1) | | 1,018,781 |
| | 687,458 |
|
Intangible assets, net (Notes 1 and 7) | | 1,188,282 |
| | 1,290,499 |
|
Goodwill (Notes 1 and 7) | | 3,171,425 |
| | 3,223,515 |
|
Total Assets | | $ | 13,274,362 |
| | $ | 12,540,898 |
|
| | | | |
Liabilities and Equity | | | | |
Current Liabilities | | | | |
Notes payable and long-term debt payable within one year (Notes 8 and 9) | | $ | 816,622 |
| | $ | 1,333,826 |
|
Accounts payable, trade | | 1,252,040 |
| | 1,156,002 |
|
Accrued payrolls and other compensation | | 453,321 |
| | 426,996 |
|
Accrued domestic and foreign taxes | | 223,611 |
| | 136,079 |
|
Other accrued liabilities | | 507,202 |
| | 467,300 |
|
Total Current Liabilities | | 3,252,796 |
| | 3,520,203 |
|
Long-term debt (Note 9) | | 1,508,142 |
| | 1,495,960 |
|
Pensions and other postretirement benefits (Note 10) | | 1,346,224 |
| | 1,372,437 |
|
Deferred income taxes (Notes 1 and 4) | | 94,819 |
| | 102,920 |
|
Other liabilities | | 409,573 |
| | 307,897 |
|
Total Liabilities | | 6,611,554 |
| | 6,799,417 |
|
Equity (Note 11) | | | | |
Shareholders' Equity | | | | |
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued | |
|
| |
|
|
Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2014 and 2013 | | 90,523 |
| | 90,523 |
|
Additional capital | | 595,498 |
| | 608,752 |
|
Retained earnings | | 9,174,189 |
| | 8,421,270 |
|
Accumulated other comprehensive (loss) | | (823,498 | ) | | (1,107,833 | ) |
Treasury shares at cost: 32,143,315 in 2014 and 31,757,604 in 2013 | | (2,377,284 | ) | | (2,274,286 | ) |
Total Shareholders' Equity | | 6,659,428 |
| | 5,738,426 |
|
Noncontrolling interests | | 3,380 |
| | 3,055 |
|
Total Equity | | 6,662,808 |
| | 5,741,481 |
|
Total Liabilities and Equity | | $ | 13,274,362 |
| | $ | 12,540,898 |
|
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Cash Flows
|
| | | | | | | | | | | | |
| | For the years ended June 30, |
(Dollars in thousands) | | 2014 |
| | 2013 |
| | 2012 |
|
Cash Flows From Operating Activities | | | | | | |
Net income | | $ | 1,041,418 |
| | $ | 948,784 |
| | $ | 1,155,492 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation | | 214,965 |
| | 213,722 |
| | 210,508 |
|
Amortization | | 121,737 |
| | 121,902 |
| | 111,421 |
|
Goodwill and intangible asset impairment | | 188,870 |
| | — |
| | — |
|
Stock incentive plan compensation | | 103,161 |
| | 84,996 |
| | 80,935 |
|
Deferred income taxes | | (74,139 | ) | | (1,368 | ) | | (56,452 | ) |
Foreign currency transaction loss | | 5,398 |
| | 19,497 |
| | 4,300 |
|
Loss (gain) on disposal of assets | | 2,997 |
| | 2,746 |
| | (2,494 | ) |
Gain on sale of businesses | | — |
| | (14,637 | ) | | — |
|
Net gain on deconsolidation | | (412,612 | ) | | — |
|
| — |
|
Changes in assets and liabilities, net of effects from acquisitions: | | | | | | |
Accounts receivable | | (99,144 | ) | | (21,206 | ) | | (91,091 | ) |
Inventories | | (3,816 | ) | | 98,518 |
| | (28,333 | ) |
Prepaid expenses | | 58,117 |
| | (47,451 | ) | | (26,981 | ) |
Other assets | | (79,158 | ) | | (16,007 | ) | | (6,578 | ) |
Accounts payable, trade | | 92,927 |
| | (66,082 | ) | | 59,692 |
|
Accrued payrolls and other compensation | | 20,840 |
| | (45,771 | ) | | 16,003 |
|
Accrued domestic and foreign taxes | | 86,745 |
| | (17,054 | ) | | (70,302 | ) |
Other accrued liabilities | | (23,480 | ) | | (62,728 | ) | | 33,512 |
|
Pensions and other postretirement benefits | | 99,569 |
| | (16,691 | ) | | 123,944 |
|
Other liabilities | | 43,498 |
| | 9,765 |
| | 16,809 |
|
Net cash provided by operating activities | | 1,387,893 |
| | 1,190,935 |
| | 1,530,385 |
|
Cash Flows From Investing Activities | | | | | | |
Acquisitions (less cash acquired of $1,780 in 2014, $33,932 in 2013 and $19,161 in 2012) | | (17,593 | ) | | (621,144 | ) | | (156,256 | ) |
Capital expenditures | | (216,340 | ) | | (265,896 | ) | | (218,817 | ) |
Proceeds from disposal of assets | | 14,368 |
| | 25,047 |
| | 20,404 |
|
Proceeds from sale of businesses | | — |
| | 73,515 |
| | — |
|
Net proceeds from deconsolidation | | 202,498 |
| | — |
| | — |
|
Purchase of marketable securities and other investments | | (624,880 | ) | | — |
| | — |
|
Other | | (4,454 | ) | | (21,367 | ) | | (21,099 | ) |
Net cash used in investing activities | | (646,401 | ) | | (809,845 | ) | | (375,768 | ) |
Cash Flows From Financing Activities | | | | | | |
Proceeds from exercise of stock options | | 8,013 |
| | 32,204 |
| | 10,599 |
|
Payments for common shares | | (204,043 | ) | | (258,007 | ) | | (456,969 | ) |
Tax benefit from stock incentive plan compensation | | 33,732 |
| | 66,030 |
| | 16,107 |
|
Acquisition of noncontrolling interests | | — |
| | (1,091 | ) | | (147,441 | ) |
(Payments for) proceeds from notes payable, net | | (515,387 | ) | | 1,319,524 |
| | (1,961 | ) |
Proceeds from long-term borrowings | | 748 |
| | 3,768 |
| | 73,556 |
|
Payments for long-term borrowings | | (2,934 | ) | | (331,245 | ) | | (76,757 | ) |
Dividends paid | | (278,244 | ) | | (255,009 | ) | | (240,654 | ) |
Net cash (used in) provided by financing activities | | (958,115 | ) | | 576,174 |
| | (823,520 | ) |
Effect of exchange rate changes on cash | | 48,766 |
| | (14,169 | ) | | (150,246 | ) |
Net (decrease) increase in cash and cash equivalents | | (167,857 | ) | | 943,095 |
| | 180,851 |
|
Cash and cash equivalents at beginning of year | | 1,781,412 |
| | 838,317 |
| | 657,466 |
|
Cash and cash equivalents at end of year | | $ | 1,613,555 |
| | $ | 1,781,412 |
| | $ | 838,317 |
|
Supplemental Data: | | | | | | |
Cash paid during the year for: | | | | | | |
Interest | | $ | 77,144 |
| | $ | 88,084 |
| | $ | 91,677 |
|
Income taxes | | 472,369 |
| | 311,988 |
| | 494,378 |
|
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Treasury Shares | | Noncontrolling Interests | | Total |
Balance June 30, 2011 | | $ | 90,523 |
| | $ | 668,332 |
| | $ | 6,891,407 |
| | $ | (450,990 | ) | | $ | (1,815,418 | ) | | $ | 104,482 |
| | $ | 5,488,336 |
|
Net income | |
| |
| | 1,151,823 |
| |
| |
| | 3,669 |
| | 1,155,492 |
|
Other comprehensive (loss) | |
| |
| |
| | (964,910 | ) | |
| | (25,607 | ) | | (990,517 | ) |
Dividends paid | |
| |
| | (233,168 | ) | |
| |
| | (7,486 | ) | | (240,654 | ) |
Stock incentive plan activity | |
| | 45,532 |
| | (22,887 | ) | |
| | 65,266 |
| |
| | 87,911 |
|
Acquisition activity | |
| | (73,615 | ) | |
| |
| |
|
| | (65,843 | ) | | (139,458 | ) |
Shares purchased at cost | |
| |
| |
| |
| | (455,380 | ) | |
| | (455,380 | ) |
Balance June 30, 2012 | | $ | 90,523 |
| | $ | 640,249 |
| | $ | 7,787,175 |
| | $ | (1,415,900 | ) | | $ | (2,205,532 | ) | | $ | 9,215 |
| | $ | 4,905,730 |
|
Net income | |
| |
| | 948,427 |
| |
| |
| | 357 |
| | 948,784 |
|
Other comprehensive income (loss) | |
| |
| |
| | 308,067 |
| |
| | (1,771 | ) | | 306,296 |
|
Dividends paid | |
| |
| | (254,283 | ) | |
| |
| | (726 | ) | | (255,009 | ) |
Stock incentive plan activity | |
| | (34,678 | ) | | (60,049 | ) | |
| | 188,423 |
| |
| | 93,696 |
|
Acquisition activity | |
| | 3,181 |
| |
| |
| |
|
| | (4,020 | ) | | (839 | ) |
Shares purchased at cost | |
| |
| |
| |
| | (257,177 | ) | |
| | (257,177 | ) |
Balance June 30, 2013 | | $ | 90,523 |
| | $ | 608,752 |
| | $ | 8,421,270 |
| | $ | (1,107,833 | ) | | $ | (2,274,286 | ) | | $ | 3,055 |
| | $ | 5,741,481 |
|
Net income | |
| |
| | 1,041,048 |
| |
| |
| | 370 |
| | 1,041,418 |
|
Other comprehensive income (loss) | |
| |
| |
|
| | 284,335 |
| |
| | (23 | ) | | 284,312 |
|
Dividends paid | |
| |
| | (278,222 | ) | |
| |
| | (22 | ) | | (278,244 | ) |
Stock incentive plan activity | |
| | (13,254 | ) | | (9,907 | ) | |
| | 97,002 |
| |
|
| | 73,841 |
|
Shares purchased at cost | |
| |
| |
|
| |
| | (200,000 | ) | |
|
| | (200,000 | ) |
Balance June 30, 2014 | | $ | 90,523 |
| | $ | 595,498 |
| | $ | 9,174,189 |
| | $ | (823,498 | ) | | $ | (2,377,284 | ) | | $ | 3,380 |
| | $ | 6,662,808 |
|
The accompanying notes are an integral part of the financial statements.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| |
1. | Significant Accounting Policies |
The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below.
Nature of Operations - The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. The Company evaluates performance based on segment operating income before corporate and administrative expenses, interest expense and income taxes.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Diversified Industrial Segment products are marketed primarily through field sales employees and independent distributors. The Diversified Industrial North American operations have manufacturing plants and distribution networks throughout the United States, Canada and Mexico and primarily service North America. The Diversified Industrial International operations provide Parker products and services to 47 countries throughout Europe, Asia Pacific, Latin America, the Middle East and Africa.
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and also performs a vital role in naval vessels and land-based weapons systems. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Aerospace Systems Segment products are marketed by field sales employees and are sold directly to manufacturers and end users.
See the table of Business Segment Information “By Industry” and “By Geographic Area” on pages 13-15 and 13-16 for further disclosure of business segment information.
There are no individual customers to whom sales are more than three percent of the Company's consolidated sales. Due to the diverse group of customers throughout the world the Company does not consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company's products and geographic operations mitigate the risk that adverse changes with respect to any particular product and geographic operation would materially affect the Company's operating results.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation - The consolidated financial statements include the accounts of all majority-owned domestic and foreign subsidiaries. All intercompany transactions and profits have been eliminated in the consolidated financial statements. The Company does not have off-balance sheet arrangements. Within the Business Segment Information, intersegment and interarea sales have been eliminated.
Revenue Recognition - Revenue is recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. Shipping and handling costs billed to customers are included in net sales and the related costs in cost of sales.
Long-term Contracts - The Company enters into long-term contracts primarily for the production of aerospace products. For financial statement purposes, revenues are primarily recognized using the percentage-of-completion method. The extent of progress toward completion is primarily measured using the units-of-delivery method. Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves. Adjustments to cost estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.
Cash - Cash equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash.
Marketable Securities - Consist of short-term highly liquid investments, with stated maturities of greater than three months from the date of purchase, carried at cost plus accrued interest.
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 $16,040 and $14,824 at June 30, 2014 and June 30, 2013, respectively.
Non-Trade and Notes Receivable - The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
June 30, | | 2014 |
| | 2013 |
|
Notes receivable | | $ | 117,400 |
| | $ | 111,531 |
|
Reverse repurchase agreements | | 54,772 |
| | — |
|
Accounts receivable, other | | 216,265 |
| | 110,394 |
|
Total | | $ | 388,437 |
| | $ | 221,925 |
|
Reverse repurchase agreements are collateralized lending arrangements and have a maturity longer than three months from the date of purchase. The Company does not record an asset or liability for the collateral associated with the reverse repurchase agreements.
Plant, Equipment and Depreciation - Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings, 15 years for land improvements and building equipment, seven to 10 years for machinery and equipment, and three to eight years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. The Company reviews plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income.
The plant and equipment caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
June 30, | | 2014 |
| | 2013 |
|
Land and land improvements | | $ | 326,008 |
| | $ | 316,360 |
|
Buildings and building equipment | | 1,535,634 |
| | 1,431,358 |
|
Machinery and equipment | | 3,210,172 |
| | 3,131,077 |
|
Construction in progress | | 80,777 |
| | 120,506 |
|
Total | | $ | 5,152,591 |
| | $ | 4,999,301 |
|
Investments and Other Assets - Investments in joint-venture companies in which ownership is 50 percent or less and in which the Company does not have operating control are stated at cost plus the Company's equity in undistributed earnings and amounted to $324,610 and $61,117 at June 30, 2014 and June 30, 2013, respectively. The Company's share of earnings from these investments were immaterial to the Company's results of operations.
Goodwill - The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets - Intangible assets primarily include patents, trademarks and customer lists and are recorded at cost and amortized on a straight-line method. Patents are amortized over the shorter of their remaining useful or legal life. Trademarks are amortized over the estimated time period over which an economic benefit is expected to be received. Customer lists are amortized over a period based on anticipated customer attrition rates. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
Income Taxes - Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise. The Company recognizes accrued interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, are recognized in income tax expense.
Product Warranty - In the ordinary course of business the Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual at June 30, 2014 and 2013 is immaterial to the financial position of the Company and the change in the accrual during 2014, 2013 and 2012 was immaterial to the Company's results of operations and cash flows.
Foreign Currency Translation - Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the accumulated other comprehensive (loss) component of shareholders' equity. Such adjustments will affect net income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time. Exchange gains and losses from transactions in a currency other than the local currency of the entity involved, and translation adjustments in countries with highly inflationary economies, are included in net income.
Subsequent Events - The Company has evaluated subsequent events that have occurred through the date of filing of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2014. No subsequent events occurred that required adjustment to or disclosure in these financial statements.
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board issued Accounting (FASB) Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including, identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet determined the effect that ASU 2014-09 will have on its results of operations, statement of financial position, or financial statement disclosures.
| |
2. | Deconsolidation of Subsidiary, Acquisitions and Divestitures |
Deconsolidation of Subsidiary - During 2014, the Company and GE Aviation, a non-related party, finalized a joint venture in which the Company sold a 50 percent equity interest in one of its wholly-owned subsidiaries. The sale of the 50 percent equity interest in the wholly-owned subsidiary resulted in a loss of control of the subsidiary, and therefore it was deconsolidated from the Company's financial statements during the second quarter of fiscal 2014. The Company's equity interest in the joint venture with GE Aviation at June 30, 2014 of $263,246 is accounted for using the equity method of accounting. A significant portion of the underlying net assets of the joint venture are related to goodwill.
The Company recognized a pre-tax gain of $413 million on the deconsolidation, measured as the fair value of the consideration received for the 50 percent equity interest in the former subsidiary and the fair value of the retained investment less the carrying amount of the former subsidiary's net assets. Approximately $186 million of the pre-tax gain is attributable to the remeasurement of the retained investment in the former subsidiary to its current fair value. The gain is reflected in the (gain) on disposal of assets caption in the Consolidated Statement of Income and the other (income) expense caption in the Business Segment Information.
Acquisitions - During 2014, the Company completed three acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $14 million. Total purchase price for the three acquisitions was approximately $19 million in cash.
During 2013, the Company completed eight acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $484 million. Total purchase price for the eight acquisitions was approximately $621 million in cash and $114 million in assumed debt.
During 2012, the Company completed four acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $141 million. Total purchase price for the four acquisitions in 2012 was approximately $156 million in cash. Also during 2012, the Company purchased the outstanding shares not previously owned by the Company in two majority-owned subsidiaries. Total purchase price for the two majority-owned subsidiaries was approximately $147 million in cash.
The results of operations for all acquisitions are included as of the respective dates of acquisition. The initial purchase price allocation and subsequent purchase price adjustments for acquisitions in 2014, 2013 and 2012 are presented below. Some of the 2014 acquisitions are still subject to purchase price adjustments.
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Assets: | | | | | |
Accounts receivable | $ | 954 |
| | $ | 91,668 |
| | $ | 24,833 |
|
Inventories | 2,184 |
| | 93,915 |
| | 29,102 |
|
Prepaid expenses | 57 |
| | 4,672 |
| | 1,541 |
|
Deferred income taxes | 189 |
| | (1,713 | ) | | 5,679 |
|
Plant and equipment | 11,211 |
| | 74,439 |
| | 28,929 |
|
Intangible and other assets | 5,646 |
| | 280,001 |
| | 59,576 |
|
Goodwill | 3,195 |
| | 317,879 |
| | 68,144 |
|
| 23,436 |
| | 860,861 |
| | 217,804 |
|
Liabilities and equity: | | | | | |
Notes payable | — |
| | 11,920 |
| | 1,887 |
|
Accounts payable, trade | 915 |
| | 46,596 |
| | 7,189 |
|
Accrued payrolls and other compensation | 263 |
| | 12,099 |
| | 3,672 |
|
Accrued domestic and foreign taxes | 1 |
| | 7,073 |
| | 2,882 |
|
Other accrued liabilities | 3,864 |
| | 16,805 |
| | 5,984 |
|
Long-term debt | — |
| | 102,122 |
| | 4,365 |
|
Pensions and other postretirement benefits | — |
| | 2,125 |
| | 11,396 |
|
Deferred income taxes | — |
| | 39,214 |
| | 24,062 |
|
Other liabilities | 800 |
| | 689 |
| | 111 |
|
Noncontrolling interests | — |
| | 1,074 |
| | — |
|
| 5,843 |
| | 239,717 |
| | 61,548 |
|
Net assets acquired | $ | 17,593 |
| | $ | 621,144 |
| | $ | 156,256 |
|
Divestitures - During 2013, the Company completed several divestitures, the primary ones being the automotive businesses of its Mobile Climate Systems division and its Turkey refrigeration components business. Under the segment structure effective July 1, 2013, both of these businesses would have been part of the Diversified Industrial Segment and had combined revenues of approximately $158 million for fiscal 2012. The Company recorded a net pre-tax gain during 2013 of approximately $18 million related to these divestitures. The gain is reflected in the (gain) on disposal of assets caption in the Consolidated Statement of Income.
| |
3. | Charges Related to Business Realignment |
To structure its businesses in light of current and anticipated customer demand, the Company incurred business realignment charges in 2014, 2013 and 2012.
Business realignment charges by business segment are as follows:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Diversified Industrial | $ | 101,524 |
| | $ | 12,234 |
| | $ | 14,321 |
|
Aerospace Systems | 925 |
| | — |
| | — |
|
Work force reductions by business segment are as follows:
|
| | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Diversified Industrial | 1,581 |
| | 725 |
| | 521 |
|
Aerospace Systems | 44 |
| | — |
| | — |
|
The charges primarily consist of severance costs related to plant closures as well as general work force reductions implemented by various operating units throughout the world, with the majority of charges relating to realignment activities in Europe. In addition, $1,331 of fixed asset write-downs were recognized in connection with plant closures in the Diversified Industrial Segment, and are reflected in the other (income) expense caption in the Business Segment information for 2014. During 2013, $1,918 of severance costs for 98 people were recognized in connection with the Company's divestiture of its Turkey refrigeration components business and is reflected in the other (income) expense caption in the Business Segment Information. The business realignment charges in 2012 also included charges related to enhanced retirement benefits. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital.
The business realignment charges are presented in the Consolidated Statement of Income as follows:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Cost of sales | $ | 63,575 |
| | $ | 8,354 |
| | $ | 12,669 |
|
Selling, general and administrative expenses | 38,874 |
| | 3,880 |
| | 1,020 |
|
(Gain) on disposal of assets | 1,331 |
| | 1,918 |
| | 632 |
|
As of June 30, 2014, approximately $31 million in severance payments have been made relating to charges incurred during 2014. The majority of the remaining severance payments of approximately $62 million are expected to be paid by June 30, 2015 and are reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. All required severance payments have been made relating to charges incurred in 2013 and 2012. Additional charges may be recognized in future periods related to the realignment actions described above, the timing and amount of which are not known at this time.
Income before income taxes was derived from the following sources:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
United States | $ | 1,115,010 |
| | $ | 653,622 |
| | $ | 810,150 |
|
Foreign | 441,710 |
| | 657,379 |
| | 766,548 |
|
| $ | 1,556,720 |
| | $ | 1,311,001 |
| | $ | 1,576,698 |
|
Income taxes include the following:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Federal | | | | | |
Current | $ | 377,404 |
| | $ | 167,350 |
| | $ | 255,991 |
|
Deferred | (45,643 | ) | | 26,523 |
| | (48,252 | ) |
Foreign | | | | | |
Current | 168,177 |
| | 176,739 |
| | 191,167 |
|
Deferred | (28,016 | ) | | (28,472 | ) | | (29 | ) |
State and local | | | | | |
Current | 43,860 |
| | 19,496 |
| | 30,500 |
|
Deferred | (480 | ) | | 581 |
| | (8,171 | ) |
| $ | 515,302 |
| | $ | 362,217 |
| | $ | 421,206 |
|
A reconciliation of the Company's effective income tax rate to the statutory Federal rate follows:
|
| | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Statutory Federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes | 1.8 |
| | 1.0 |
| | 0.9 |
|
Goodwill and intangible asset impairment | 4.5 |
| | — |
| | — |
|
Tax related to international activities | (5.6 | ) | | (5.8 | ) | | (5.8 | ) |
Cash surrender value of life insurance | (0.9 | ) | | (0.7 | ) | | 0.1 |
|
Federal manufacturing deduction | (1.0 | ) | | (1.0 | ) | | (1.6 | ) |
Research tax credit | (0.3 | ) | | (1.1 | ) | | (0.4 | ) |
Other | (0.4 | ) | | 0.2 |
| | (1.5 | ) |
Effective income tax rate | 33.1 | % | | 27.6 | % | | 26.7 | % |
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows:
|
| | | | | | | |
| 2014 |
| | 2013 |
|
Retirement benefits | $ | 550,034 |
| | $ | 535,260 |
|
Other liabilities and reserves | 128,848 |
| | 113,257 |
|
Long-term contracts | 46,006 |
| | 26,714 |
|
Stock-based incentive compensation | 64,267 |
| | 59,274 |
|
Loss carryforwards | 340,676 |
| | 286,180 |
|
Unrealized currency exchange gains and losses | 25,182 |
| | 14,639 |
|
Inventory | 18,668 |
| | 15,570 |
|
Foreign tax credit carryforward | 51,875 |
| | 25,195 |
|
Depreciation and amortization | (571,107 | ) | | (527,860 | ) |
Valuation allowance | (348,837 | ) | | (273,413 | ) |
Net deferred tax asset | $ | 305,612 |
| | $ | 274,816 |
|
| | | |
Change in net deferred tax asset: | | | |
Provision for deferred tax | $ | 74,139 |
| | $ | 1,368 |
|
Items of other comprehensive (loss) | (49,882 | ) | | (194,746 | ) |
Acquisitions and other | 6,539 |
| | (81,067 | ) |
Total change in net deferred tax | $ | 30,796 |
| | $ | (274,445 | ) |
As of June 30, 2014, the Company has recorded deferred tax assets of $340,676 resulting from $1,212,459 in loss carryforwards. A valuation allowance of $323,358 related to the loss carryforwards has been established due to the uncertainty of realizing certain deferred tax assets. Of this valuation allowance, $296,598 relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years. In addition, a valuation allowance of $25,479 related to future deductible items has been established due to the uncertainty of their realization. These future deductible items are recorded in the other liabilities and reserves line in the table above.
Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings. Accumulated undistributed earnings reinvested in international operations amounted to approximately $2,800,000 at June 30, 2014.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Balance July 1 | $ | 107,440 |
| | $ | 109,735 |
| | $ | 81,156 |
|
Additions for tax positions related to current year | 7,752 |
| | 10,285 |
| | 66,500 |
|
Additions for tax positions of prior years | 55,136 |
| | 10,719 |
| | 11,047 |
|
Reductions for tax positions of prior years | (1,359 | ) | | (20,683 | ) | | (23,456 | ) |
Reductions for settlements | (1,856 | ) | | (4,266 | ) | | (23,434 | ) |
Reductions for expiration of statute of limitations | (5,005 | ) | | (437 | ) | | (1,636 | ) |
Effect of foreign currency translation | 2,705 |
| | 2,087 |
| | (442 | ) |
Balance June 30 | $ | 164,813 |
| | $ | 107,440 |
| | $ | 109,735 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $71,898, $60,876 and $61,601 as of June 30, 2014, 2013 and 2012, respectively. If recognized, a significant portion of the gross unrecognized tax benefits as of June 30, 2014 would be offset against an asset currently recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $8,198, $5,184 and $3,676 as of June 30, 2014, 2013 and 2012, respectively.
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's tax returns are subject to examination by taxing authorities throughout the world. The Company is no longer subject to examinations of its federal income tax returns by the United States Internal Revenue Service for fiscal years through 2012. All significant state, local and foreign tax returns have been examined for fiscal years through 2006. The Company does not anticipate that, within the next twelve months, the total amount of unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statute of limitations.
Basic earnings per share are computed using the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding stock-based awards. The computation of net income per share was as follows:
|
| | | | | | | | | | | |
| 2014 |
| | 2013 |
| | 2012 |
|
Numerator: | | | | | |
Net income attributable to common shareholders | $ | 1,041,048 |
| | $ | 948,427 |
| | $ | 1,151,823 |
|
Denominator: | | | | | |
Basic - weighted-average common shares | 149,099,448 |
| | 149,218,257 |
| | 151,222,033 |
|
Increase in weighted-average common shares from dilutive effect of stock-based awards | 2,344,655 |
| | 2,369,774 |
| | 3,442,477 |
|
Diluted - weighted-average common shares, assuming exercise of stock-based awards | 151,444,103 |
| | 151,588,031 |
| | 154,664,510 |
|
Basic earnings per share | $ | 6.98 |
| | $ | 6.36 |
| | $ | 7.62 |
|
Diluted earnings per share | $ | 6.87 |
| | $ | 6.26 |
| | $ | 7.45 |
|
For 2014, 2013 and 2012, 1.2 million, 1.3 million, and 0.7 million common shares, respectively, subject to stock-based awards were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued by the last-in, first-out (LIFO) cost method and the balance of the Company's inventories are valued by the first-in, first-out cost method.
Inventories valued on the LIFO cost method were approximately 30 percent of total inventories in 2014 and 29 percent of total inventories in 2013. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $208,291 in 2014 and $207,277 in 2013. Progress payments of $61,958 in 2014 and $42,446 in 2013 are netted against inventories.
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
|
| | | | | | | | |
June 30, | | 2014 |
| | 2013 |
|
Finished products | | $ | 532,968 |
| | $ | 531,897 |
|
Work in process | | 732,294 |
| | 733,025 |
|
Raw materials | | 106,419 |
| | 112,483 |
|
Total | | $ | 1,371,681 |
| | $ | 1,377,405 |
|
| |
7. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill are as follows:
|
| | | | | | | | | | | |
| Diversified Industrial Segment | | Aerospace Systems Segment | | Total |
Balance June 30, 2012 | $ | 2,827,182 |
| | $ | 98,674 |
| | $ | 2,925,856 |
|
Acquisitions | 316,857 |
| | — |
| | 316,857 |
|
Divestitures | (20,105 | ) | | — |
| | (20,105 | ) |
Foreign currency translation and other | 1,241 |
| | (334 | ) | | 907 |
|
Balance June 30, 2013 | $ | 3,125,175 |
| | $ | 98,340 |
| | $ | 3,223,515 |
|
Acquisitions | 3,195 | |