Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2019



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

For the transition period from to

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)



Ohio			34-0451060
(State or other jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

6035 Parkland Boulevard,	Cleveland,	Ohio	44124-4141
(Address of Principal Executive Offices)			(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common Shares, $.50 par value	PH	New York Stock Exchange

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of Common Shares outstanding at September 30, 2019: 128,464,710

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended
	September 30,
	2019			2018
Net sales	$	3,334,511		$	3,479,294
Cost of sales	2,479,741			2,594,823
Selling, general and administrative expenses	399,179			394,322
Interest expense	69,956			44,339
Other (income), net	(47,521		)	(13,913		)
Income before income taxes	433,156			459,723
Income taxes	94,115			83,824
Net income	339,041			375,899
Less: Noncontrolling interest in subsidiaries' earnings	143			188
Net income attributable to common shareholders	$	338,898		$	375,711

Earnings per share attributable to common shareholders:
Basic	$	2.64		$	2.84
Diluted	$	2.60		$	2.79

See accompanying notes to consolidated financial statements.

- 2 -

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)



	Three Months Ended
	September 30,
	2019			2018
Net income	$	339,041		$	375,899
Less: Noncontrolling interests in subsidiaries' earnings	143			188
Net income attributable to common shareholders	338,898			375,711

Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment and other	(102,722		)	(35,125		)
Retirement benefits plan activity	31,026			23,873
Other comprehensive loss	(71,696		)	(11,252		)
Less: Other comprehensive loss for noncontrolling interests	(150		)	(89		)
Other comprehensive loss attributable to common shareholders	(71,546		)	(11,163		)
Total comprehensive income attributable to common shareholders	$	267,352		$	364,548

See accompanying notes to consolidated financial statements.

- 3 -

PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

(Unaudited)




	September 30, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	3,627,393		$	3,219,767
Marketable securities and other investments	282,102			150,931
Trade accounts receivable, net	1,983,242			2,131,054
Non-trade and notes receivable	288,762			310,708
Inventories	1,790,044			1,678,132
Prepaid expenses and other	166,536			182,494
Total current assets	8,138,079			7,673,086
Plant and equipment	5,270,756			5,186,730
Less: Accumulated depreciation	3,390,599			3,418,443
Plant and equipment, net	1,880,157			1,768,287
Deferred income taxes	145,476			150,462
Investments and other assets	892,508			747,773
Intangible assets, net	2,693,756			1,783,277
Goodwill	5,818,613			5,453,805
Total assets	$	19,568,589		$	17,576,690
LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year	$	1,736,779		$	587,014
Accounts payable, trade	1,287,420			1,413,155
Accrued payrolls and other compensation	310,417			426,285
Accrued domestic and foreign taxes	188,571			167,312
Other accrued liabilities	634,141			558,007
Total current liabilities	4,157,328			3,151,773
Long-term debt	7,366,912			6,520,831
Pensions and other postretirement benefits	1,261,493			1,304,379
Deferred income taxes	178,454			193,066
Other liabilities	501,610			438,489
Total liabilities	13,465,797			11,608,538
EQUITY
Shareholders’ equity:
Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued	—			—
Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at September 30 and June 30	90,523			90,523
Additional capital	464,440			462,086
Retained earnings	13,003,084			12,777,538
Accumulated other comprehensive (loss)	(2,130,594		)	(2,059,048		)
Treasury shares, at cost; 52,581,418 shares at September 30 and 52,566,086 shares at June 30	(5,330,837		)	(5,309,130		)
Total shareholders’ equity	6,096,616			5,961,969
Noncontrolling interests	6,176			6,183
Total equity	6,102,792			5,968,152
Total liabilities and equity	$	19,568,589		$	17,576,690

See accompanying notes to consolidated financial statements.

- 4 -

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Three Months Ended
	September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	339,041		$	375,899
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	54,856			57,793
Amortization	54,215			54,698
Share incentive plan compensation	52,633			42,941
Deferred income taxes	(15,548		)	31,765
Foreign currency transaction (gain) loss	(1,232		)	3,528
Gain on plant and equipment and intangible assets	(10,269		)	(3,826		)
Loss on sale of businesses	—			3,029
Loss (gain) on marketable securities	201			(3,204		)
Gain on investments	(498		)	(2,536		)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net	213,203			78,369
Inventories	(24,108		)	(124,995		)
Prepaid expenses and other	15,617			(16,801		)
Other assets	(10,902		)	(19,144		)
Accounts payable, trade	(135,569		)	(24,347		)
Accrued payrolls and other compensation	(118,326		)	(106,992		)
Accrued domestic and foreign taxes	23,233			40,670
Other accrued liabilities	19,939			18,974
Pensions and other postretirement benefits	9,738			(187,663		)
Other liabilities	(17,093		)	(58,770		)
Net cash provided by operating activities	449,131			159,388
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (net of cash of $8,179 in 2019 and $690 in 2018)	(1,696,456		)	(2,042		)
Capital expenditures	(50,345		)	(42,106		)
Proceeds from sale of plant and equipment	19,284			10,969
Proceeds from sale of businesses	—			4,515
Purchases of marketable securities and other investments	(159,984		)	(2,844		)
Maturities and sales of marketable securities and other investments	26,477			14,127
Other	8,070			2,318
Net cash used in investing activities	(1,852,954		)	(15,063		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options	912			496
Payments for common shares	(72,897		)	(65,351		)
Proceeds from notes payable, net	1,104,246			258,540
Proceeds from long-term borrowings	922,934			44
Payments for long-term borrowings	(3,466		)	(100,107		)
Dividends paid	(113,352		)	(100,869		)
Net cash provided by (used in) financing activities	1,838,377			(7,247		)
Effect of exchange rate changes on cash	(26,928		)	(7,093		)
Net increase in cash and cash equivalents	407,626			129,985
Cash and cash equivalents at beginning of year	3,219,767			822,137
Cash and cash equivalents at end of period	$	3,627,393		$	952,122

See accompanying notes to consolidated financial statements.

- 5 -

PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

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

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

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



	Three Months Ended
	September 30,
	2019		2018
Net sales
Diversified Industrial:
North America	$	1,624,605	$	1,681,044
International	1,078,850		1,233,766
Aerospace Systems	631,056		564,484
Total net sales	$	3,334,511	$	3,479,294
Segment operating income
Diversified Industrial:
North America	$	275,192	$	275,111
International	168,573		206,094
Aerospace Systems	122,980		109,855
Total segment operating income	566,745		591,060
Corporate general and administrative expenses	48,902		50,325
Income before interest expense and other expense	517,843		540,735
Interest expense	69,956		44,339
Other expense	14,731		36,673
Income before income taxes	$	433,156	$	459,723

- 6 -

PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.

1. Management representation

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 2019, the results of operations for the three months ended September 30, 2019 and 2018 and cash flows for the three months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2019 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior-year amounts have been reclassified to conform to current-year presentation.

The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. On October 29, 2019, we completed the acquisition of LORD Corporation ("Lord") for approximately $3,453 million in cash, including the assumption of debt. Refer to Note 4 for further discussion. Additionally, we fully drew against the $800 million term loan, which will fully mature in May 2022, and used the proceeds to finance a portion of the purchase price for the Lord acquisition.

2. New accounting pronouncements

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

In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases with terms greater than 12 months on their balance sheet by recognizing a liability to make lease payments and an asset representing their right to use the asset during the lease term. We adopted ASU 2016-02 on July 1, 2019 using the optional transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. Upon adoption, we recorded a right-of-use asset and lease liability of approximately $126 million. The adoption of the standard did not have a material impact on the Consolidated Statement of Income or Cash Flows.

3. Revenue recognition

Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.

Diversified Industrial Segment revenues by technology platform:



	Three Months Ended
	September 30,
	2019		2018
Motion Systems	$	766,815	$	859,573
Flow and Process Control	1,011,354		1,061,064
Filtration and Engineered Materials	925,286		994,173
Total	$	2,703,455	$	2,914,810

- 7 -

Aerospace Systems Segment revenues by product platform:



	Three Months Ended
	September 30,
	2019		2018
Flight Control Actuation	$	173,259	$	162,936
Fuel, Inerting and Engine Motion Control	152,214		144,046
Hydraulics	108,375		102,497
Engine Components	93,794		64,386
Airframe and Engine Fluid Conveyance	84,678		70,204
Other	18,736		20,415
Total	$	631,056	$	564,484

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



	Three Months Ended
	September 30,
	2019		2018
North America	$	2,255,751	$	2,246,091
Europe	639,138		726,310
Asia Pacific	397,714		461,640
Latin America	41,908		45,253
Total	$	3,334,511	$	3,479,294

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

Contract balances

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

Total contract assets and contract liabilities are as follows:



	September 30, 2019			June 30, 2019
Contract assets, current (included within Prepaid expenses and other)	$	25,427		$	22,726
Contract assets, noncurrent (included within Investments and other assets)	1,095			1,301
Total contract assets	26,522			24,027
Contract liabilities, current (included within Other accrued liabilities)	(60,839		)	(64,668		)
Contract liabilities, noncurrent (included within Other liabilities)	(411		)	(421		)
Total contract liabilities	(61,250		)	(65,089		)
Net contract liabilities	$	(34,728	)	$	(41,062	)

During the three months ended September 30, 2019, the change in net contract liabilities was due to timing differences between when revenue was recognized and advance payments were received. During the three months ended September 30, 2019, approximately $18 million of revenue was recognized that was included in the contract liabilities at June 30, 2019.

Remaining performance obligations

Our backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at September 30, 2019 was $5,022 million, of which approximately 87 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.

- 8 -

4. Acquisitions

On September 16, 2019, we completed the acquisition of a 100 percent equity interest in EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash.

Exotic designs and manufactures innovative and technically demanding, high temperature, high pressure air and exhaust management solutions for aircraft and engines. Exotic had annual sales of approximately $409 million for its fiscal 2019.

For segment reporting purposes, Exotic is included in the Aerospace Systems Segment. We believe Exotic's products and proprietary manufacturing capabilities are complementary to our portfolio of flight control, fuel and inerting, hydraulics, fluid conveyance and engine components.

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



	Exotic
	September 16, 2019
Assets:
Cash and cash equivalents	$	8,179
Accounts receivable	82,118
Inventories	112,150
Prepaid expenses	1,343
Plant and equipment	156,802
Other assets	108
Intangible assets	977,060
Goodwill	428,488
Total assets acquired	1,766,248
Liabilities:
Accounts payable, trade	25,727
Accrued payrolls and other compensation	8,863
Accrued domestic and foreign taxes	722
Other accrued liabilities	25,370
Total liabilities assumed	60,682
Net assets acquired	$	1,705,566

Goodwill is calculated as the excess of the purchase price over the net assets acquired and is deductible for tax purposes. With respect to the Exotic acquisition, goodwill represents cost synergies and enhancements to our existing technologies. Based upon a preliminary acquisition valuation, we acquired $548,860 of customer-related intangible assets, $337,600 of patents and technology and $90,600 of trademarks, with weighted average estimated useful lives of 19, 20 and 20 years, respectively.

Acquisition-related transaction costs totaled $14,930 for the current-year quarter. These costs are included in selling, general and administrative expenses in the Consolidated Statement of Income.

- 9 -

Subsequent Acquisition of Lord

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

Assets acquired and liabilities assumed will be recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. Due to the limited time since the acquisition date, the preliminary acquisition valuation is incomplete at this time. As a result, we are unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, including the information required for valuation of intangible assets and goodwill.

The unaudited pro forma net sales of the combined entity for the three months ended September 30, 2019 and 2018 are $3,581 million and $3,737 million, respectively. The unaudited pro forma net sales of the combined entity are based on the historical financial net sales of Parker and Lord as if the acquisition had been completed as of the beginning of fiscal year 2019.

The unaudited pro forma net sales are not indicative of the results that actually would have been obtained if the acquisition had occurred as of the beginning of fiscal year 2019 or that may be obtained in the future. Because the initial accounting for the acquisition is incomplete at this time, we are unable to provide the pro forma net earnings of the combined entity.

5. Earnings per share

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ended September 30, 2019 and 2018.



	Three Months Ended
	September 30,
	2019		2018
Numerator:
Net income attributable to common shareholders	$	338,898	$	375,711
Denominator:
Basic - weighted average common shares	128,463,992		132,361,654
Increase in weighted average common shares from dilutive effect of equity-based awards	1,666,084		2,302,842
Diluted - weighted average common shares, assuming exercise of equity-based awards	130,130,076		134,664,496
Basic earnings per share	$	2.64	$	2.84
Diluted earnings per share	$	2.60	$	2.79

For the three months ended September 30, 2019 and 2018, 1,097,639 and 732,095 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

- 10 -

6. Share repurchase program

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized for repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. During the three months ended September 30, 2019, we repurchased 295,094 shares at an average price, including commissions, of $169.44 per share.

7. Trade accounts receivable, net

Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was $9,218 and $8,874 at September 30, 2019 and June 30, 2019, respectively.

8. Non-trade and notes receivable

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



	September 30, 2019		June 30, 2019
Notes receivable	$	121,995	$	147,719
Accounts receivable, other	166,767		162,989
Total	$	288,762	$	310,708

9. Inventories

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



	September 30, 2019		June 30, 2019
Finished products	$	691,010	$	663,068
Work in process	891,985		850,778
Raw materials	207,049		164,286
Total	$	1,790,044	$	1,678,132

10. Leases

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

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

- 11 -

The components of lease expense are as follows:



	Three Months Ended
	September 30, 2019
Operating lease expense	$	11,951
Short-term lease cost	2,325
Variable lease cost	1,274
Total lease cost	$	15,550

Supplemental cash flow information related to operating leases are as follows:



	Three Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	11,850
Right-of-use assets obtained in exchange for operating lease obligations	17,217

Supplemental balance sheet information related to operating leases is as follows:



	September 30, 2019
Operating lease right-of-use assets (included within Investments and other assets)	$	136,769

Current operating lease liabilities (included within Other accrued liabilities)	$	38,658
Long-term operating lease liabilities (included within Other liabilities)	97,339
Total operating lease liabilities	$	135,997

Weighted average remaining lease term	5.52 years
Weighted average discount rate	2.12		%

Maturities of lease liabilities at September 30, 2019 are as follows:



	Operating Leases
2020	$	31,967
2021	33,334
2022	24,173
2023	15,877
2024	10,442
2025	7,958
Thereafter	21,946
Total operating lease payments	$	145,697
Less imputed interest	9,700
Total operating lease liabilities	$	135,997

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

- 12 -

11. Business realignment and acquisition integration charges

We incurred business realignment and acquisition integration charges in fiscal 2020 and 2019. The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity as well as plant closures. The prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR, Inc. ("Clarcor") and primarily consist of severance costs and expenses related to plant closures and relocations.

A majority of the business realignment charges were incurred in North America during the current-year quarter, while a significant portion of the expense was incurred both in North America and Europe during the prior-year quarter. We believe the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.

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



	Three Months Ended
	September 30,
	2019			2018
Diversified Industrial	$	4,725		$	8,558
Aerospace Systems	(7		)	—
Corporate general and administrative expenses	5			—
Other expense	—			55

Workforce reductions in connection with business realignment and Clarcor acquisition integration charges in the Business Segment Information are as follows:



	Three Months Ended
	September 30,
	2019	2018
Diversified Industrial	219	201
Corporate general and administrative expenses	1	—

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



	Three Months Ended
	September 30,
	2019		2018
Cost of sales	$	3,345	$	4,399
Selling, general and administrative expenses	1,378		4,159
Other (income), net	—		55

During the current-year quarter, approximately $5 million in payments were made relating to business realignment and Clarcor acquisition integration charges. Remaining payments related to current-year and prior-year business realignment and acquisition integration actions of approximately $11 million are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet, a majority of which are expected to be paid by September 30, 2020. Additional charges may be recognized in future periods related to the business realignment described above, the timing and amount of which are not known at this time.

During the current-year quarter, we also incurred acquisition integration charges of $4,009 related to Exotic and the subsequent acquisition of Lord, of which $3,414 and $595 are included in the Diversified Industrial and Aerospace Systems Segments, respectively. These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.

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12. Equity

Changes in equity for the three months ended September 30, 2019 and 2018 are as follows:



	Common Stock		Additional Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total Equity
Balance at June 30, 2019	$	90,523	$	462,086	$	12,777,538		$	(2,059,048	)	$	(5,309,130	)	$	6,183		$	5,968,152
Net income					338,898									143			339,041
Other comprehensive loss								(71,546		)				(150		)	(71,696		)
Dividends paid ($0.88 per share)					(113,352		)										(113,352		)
Stock incentive plan activity			2,354								28,293						30,647
Shares purchased at cost											(50,000		)				(50,000		)
Balance at September 30, 2019	$	90,523	$	464,440	$	13,003,084		$	(2,130,594	)	$	(5,330,837	)	$	6,176		$	6,102,792



	Common Stock		Additional Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total Equity
Balance at June 30, 2018	$	90,523	$	496,592	$	11,625,975		$	(1,763,086	)	$	(4,590,138	)	$	5,627		$	5,865,493
Impact of adoption of accounting standards					1,483			(1,734		)							(251		)
Net income					375,711									188			375,899
Other comprehensive loss								(11,163		)				(89		)	(11,252		)
Dividends paid ($0.76 per share)					(100,869		)										(100,869		)
Stock incentive plan activity			6,460								21,626						28,086
Shares purchased at cost											(50,000		)				(50,000		)
Balance at September 30, 2018	$	90,523	$	503,052	$	11,902,300		$	(1,775,983	)	$	(4,618,512	)	$	5,726		$	6,107,106

Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the three months ended September 30, 2019 and 2018 are as follows:



	Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total
Balance at June 30, 2019	$	(1,011,656	)	$	(1,047,392	)	$	(2,059,048	)
Other comprehensive loss before reclassifications	(102,572		)	—			(102,572		)
Amounts reclassified from accumulated other comprehensive (loss)	—			31,026			31,026
Balance at September 30, 2019	$	(1,114,228	)	$	(1,016,366	)	$	(2,130,594	)



	Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total
Balance at June 30, 2018	$	(943,477	)	$	(819,609	)	$	(1,763,086	)
Impact of adoption of ASU 2016-01	(1,734		)	—			(1,734		)
Other comprehensive loss before reclassifications	(38,614		)	—			(38,614		)
Amounts reclassified from accumulated other comprehensive (loss)	3,578			23,873			27,451
Balance at September 30, 2018	$	(980,247	)	$	(795,736	)	$	(1,775,983	)

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Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three months ended September 30, 2019 and 2018 are as follows:



Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)			Consolidated Statement of Income Classification
	Three Months Ended
	September 30, 2019
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(1,483	)	Other (income), net
Recognized actuarial loss	(39,485		)	Other (income), net
Total before tax	(40,968		)
Tax benefit	9,942
Net of tax	$	(31,026	)



Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)			Consolidated Statement of Income Classification
	Three Months Ended
	September 30, 2018
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(1,641	)	Other (income), net
Recognized actuarial loss	(29,297		)	Other (income), net
Total before tax	(30,938		)
Tax benefit	7,065
Net of tax	$	(23,873	)

13. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the three months ended September 30, 2019 are as follows:



	Diversified Industrial Segment			Aerospace Systems Segment			Total
Balance at June 30, 2019	$	5,355,165		$	98,640		$	5,453,805
Acquisition	—			428,488			428,488
Foreign currency translation and other	(63,668		)	(12		)	(63,680		)
Balance at September 30, 2019	$	5,291,497		$	527,116		$	5,818,613

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

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



	September 30, 2019				June 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents and technology	$	600,411	$	132,896	$	265,644	$	130,233
Trademarks	627,253		255,674		542,573		252,388
Customer lists and other	2,957,091		1,102,429		2,435,461		1,077,780
Total	$	4,184,755	$	1,490,999	$	3,243,678	$	1,460,401

Total intangible amortization expense for the three months ended September 30, 2019 was $51,106. The estimated amortization expense for the five years ending June 30, 2020 through 2024 is $215,970, $222,107, $216,099, $205,156 and $199,597, respectively.

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the three months ended September 30, 2019.

14. Retirement benefits

Net pension benefit expense recognized included the following components:



	Three Months Ended
	September 30,
	2019			2018
Service cost	$	19,549		$	20,509
Interest cost	33,993			39,866
Expected return on plan assets	(63,895		)	(62,877		)
Amortization of prior service cost	1,509			1,648
Amortization of net actuarial loss	39,561			29,293
Amortization of initial net obligation	4			4
Net pension benefit expense	$	30,721		$	28,443

During the three months ended September 30, 2019 and 2018, we recognized $457 and $650, respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other (income), net in the Consolidated Statement of Income.

15. Debt

In September 2019, the Company entered into and fully drew against a term loan with an aggregate principal amount of $925 million, which will fully mature in September 2023. We used the proceeds to finance a portion of the purchase price for the acquisition of Exotic. At September 30, 2019, the term loan had an interest rate of LIBOR plus 100 bps. Interest payments are due quarterly.

In addition, we amended and extended our existing multi-currency credit agreement, increasing its capacity to $2,500 million. Commercial paper notes outstanding at September 30, 2019 and June 30, 2019 were $1,691 million and $586 million, respectively. Based on the Company’s rating level at September 30, 2019, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At September 30, 2019, our debt to debt-shareholders' equity ratio was .60 to 1.0. We are in compliance with all covenants set forth in the credit agreement and indentures.

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16. Income taxes

The Company and its subsidiaries file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is open to assessment of its federal income tax returns by the U.S. Internal Revenue Service for fiscal years after 2013, and its state and local returns for fiscal years after 2013. The Company is also open to assessment for foreign jurisdictions for fiscal years after 2009. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.

As of September 30, 2019, the Company had gross unrecognized tax benefits of $134,531, all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, is $25,287. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $100,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.

17. Financial instruments

Our financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.

Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income.

Gross unrealized gains and losses related to equity investments were not material as of September 30, 2019 and June 30, 2019. There were no facts or circumstances that indicated the unrealized losses were other than temporary.

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



	September 30, 2019		June 30, 2019
Carrying value of long-term debt	$	7,488,226	$	6,596,380
Estimated fair value of long-term debt	8,031,347		7,012,641

The fair value of long-term debt is classified within level 2 of the fair value hierarchy.

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

The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.

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

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The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:



	Balance Sheet Caption	September 30, 2019		June 30, 2019
Net investment hedges
Cross-currency swap contracts	Other assets	$	37,547	$	24,545
Cash flow hedges
Forward exchange contracts	Non-trade and notes receivable	15,481		13,242
Forward exchange contracts	Other accrued liabilities	4,990		2,578
Costless collar contracts	Non-trade and notes receivable	352		457
Costless collar contracts	Other accrued liabilities	1,292		1,934

The cross-currency swap, forward exchange contracts and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.

Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.

The cross-currency swap contracts have been designated as hedging instruments. The forward exchange and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three months ended September 30, 2019 and 2018 were not material.

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



	Three Months Ended
	September 30,
	2019		2018
Cross-currency swap contracts	$	10,384	$	1,920
Foreign denominated debt	24,925		4,127

No portion of these financial instruments were excluded from the effectiveness testing during the three months ended September 30, 2019 and 2018.

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



			Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs
	September 30, 2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Equity securities	$	7,133	$	7,133	$	—	$	—
Derivatives	53,380		—		53,380		—
Investments measured at net asset value	2,612
Liabilities:
Derivatives	6,282		—		6,282		—



			Quoted Prices		Significant Other		Significant
	Fair		In Active		Observable		Unobservable
	Value at		Markets		Inputs		Inputs
	June 30, 2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Equity securities	$	7,533	$	7,533	$	—	$	—
Derivatives	38,244		—		38,244		—
Investments measured at net asset value	9,728
Liabilities:
Derivatives	4,512		—		4,512		—

The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.

Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.

Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy. We have the ability to liquidate these investments after giving appropriate notice to the issuer.

The primary investment objective for all investments is the preservation of principal and liquidity while earning income.

There are no other financial assets or financial liabilities that are marked to market on a recurring basis.

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PARKER-HANNIFIN CORPORATION

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019

AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 2018

OVERVIEW

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

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


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


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


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

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



	September 30, 2019	June 30, 2019	September 30, 2018
United States	51.1	50.6	59.8
Eurozone countries	45.7	47.6	53.2
China	51.4	49.4	50.0
Brazil	53.4	51.0	50.9

Global aircraft miles flown increased by approximately four percent, and available revenue passenger miles increased by approximately five percent from their comparable fiscal 2019 levels. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year 2020 will be approximately three percent higher than the comparable fiscal 2019 level.

Housing starts in September 2019 were approximately two percent higher than housing starts in September 2018 and remained flat compared to housing starts in June 2019.

- 20 -

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