Company Quick10K Filing
Quick10K
Parker Hannifin
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$159.28 128 $20,433
10-Q 2019-09-30 Quarter: 2019-09-30
10-K 2019-06-30 Annual: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-10-31 Earnings, Regulation FD, Exhibits
8-K 2019-10-29 M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-10-23 Shareholder Vote, Exhibits
8-K 2019-09-16 M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-09-04 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-08-01 Earnings, Exhibits
8-K 2019-07-26 Enter Agreement, Regulation FD, Exhibits
8-K 2019-06-14 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-06-05 Other Events, Exhibits
8-K 2019-05-22 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-04-26 Enter Agreement, Other Events, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2019-01-23 Officers, Amend Bylaw, Exhibits
8-K 2019-01-23 Officers, Amend Bylaw, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-10-24 Shareholder Vote
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-01 Earnings, Exhibits
NCS NCI Building Systems 2,598
FELE Franklin Electric 2,054
DRQ Dril-Quip 1,669
MWA Mueller Water Products 1,585
WIRE Encore Wire 1,106
MATW Matthews International 935
GIFI Gulf Island Fabrication 96
UAMY United States Antimony 44
ZKIN ZK International Group 25
SOI Solaris Oilfield Infrastructure 0
PH 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis Of
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.A ph9302019ex31a.htm
EX-31.B ph9302019ex31b.htm
EX-32 ph9302019ex32.htm

Parker Hannifin Earnings 2019-09-30

PH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File number 1-4982
 PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
34-0451060
(State or other jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
 
 
6035 Parkland Boulevard,
Cleveland,
Ohio
44124-4141
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on which Registered
Common Shares, $.50 par value
 
PH
 
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (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.

 

- 13 -



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
)




- 14 -



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.

- 15 -



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.


- 16 -



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.

- 17 -



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.

- 18 -



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