Company Quick10K Filing
Quick10K
Parker Hannifin
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$188.62 129 $24,400
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 2019-01-31 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
MHK Mohawk Industries 9,490
CR Crane 5,280
CRI Carters 4,770
IPHI Inphi 2,120
CLI Mack-Cali Realty 1,960
VAPO Vapotherm 306
NIHD NII Holdings 188
HNNA Hennessy Advisors 75
MYDP Dougherty's Pharmacy 0
DENR Discovery Energy 0
PH 2018-12-31
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-3.A ph10q12312018ex3a2.htm
EX-10.A phc-10qx12312018exhibit10a.htm
EX-10.B ph10q12312018ex10b.htm
EX-10.C ph10q12312018ex10c.htm
EX-10.D ph-12312018exhibit10d.htm
EX-10.E ph10q12312018exhibit10e.htm
EX-10.F ph10q12312018ex10f.htm
EX-10.G phc10q2q12312018ex10g3.htm
EX-31.A ph12312018ex31a.htm
EX-31.B ph12312018ex31b.htm
EX-32 ph12312018ex32.htm

Parker Hannifin Earnings 2018-12-31

PH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ph-10qxq212312018.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
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)
 
(IRS Employer
Identification No.)
 
 
6035 Parkland Blvd., Cleveland, Ohio
 
44124-4141
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (216) 896-3000
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  ý    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  ý    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
 
ý
  
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  ý
Number of Common Shares outstanding at December 31, 2018: 129,365,355




PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Net sales
$
3,472,045

 
$
3,370,673

 
$
6,951,339

 
$
6,735,324

Cost of sales
2,602,339

 
2,564,449

 
5,197,162

 
5,087,743

Selling, general and administrative expenses
397,259

 
408,338

 
791,581

 
805,322

Interest expense
47,518

 
53,133

 
91,857

 
106,688

Other (income) expense, net
(6,225
)
 
(15,468
)
 
(20,138
)
 
1,048

Income before income taxes
431,154

 
360,221

 
890,877

 
734,523

Income taxes
119,241

 
303,899

 
203,065

 
392,666

Net income
311,913

 
56,322

 
687,812

 
341,857

Less: Noncontrolling interest in subsidiaries' earnings
176

 
163

 
364

 
301

Net income attributable to common shareholders
$
311,737

 
$
56,159

 
$
687,448

 
$
341,556

 
 
 
 
 
 
 
 
Earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
2.39

 
$
0.42

 
$
5.23

 
$
2.57

Diluted
$
2.36

 
$
0.41

 
$
5.15

 
$
2.51

See accompanying notes to consolidated financial statements.














- 2 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Net income
$
311,913

 
$
56,322

 
$
687,812

 
$
341,857

Less: Noncontrolling interests in subsidiaries' earnings
176

 
163

 
364

 
301

Net income attributable to common shareholders
311,737

 
56,159

 
687,448

 
341,556

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
  Foreign currency translation adjustment and other
(43,986
)
 
28,390

 
(79,111
)
 
101,269

  Retirement benefits plan activity
24,527

 
28,312

 
48,400

 
55,047

    Other comprehensive (loss) income
(19,459
)
 
56,702

 
(30,711
)
 
156,316

Less: Other comprehensive income (loss) for noncontrolling interests
55

 
(73
)
 
(34
)
 
(160
)
Other comprehensive (loss) income attributable to common shareholders
(19,514
)
 
56,775

 
(30,677
)
 
156,476

Total comprehensive income attributable to common shareholders
$
292,223

 
$
112,934

 
$
656,771

 
$
498,032

See accompanying notes to consolidated financial statements.





- 3 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
December 31,
2018
 
June 30,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,047,385

 
$
822,137

Marketable securities and other investments
30,956

 
32,995

Trade accounts receivable, net
1,938,709

 
2,145,517

Non-trade and notes receivable
324,254

 
328,399

Inventories
1,804,564

 
1,621,304

Prepaid expenses and other
188,868

 
134,886

Total current assets
5,334,736

 
5,085,238

Plant and equipment
5,192,144

 
5,215,253

Less: Accumulated depreciation
3,398,339

 
3,359,016

Plant and equipment, net
1,793,805

 
1,856,237

Deferred income taxes
98,779

 
57,623

Investments and other assets
733,987

 
801,049

Intangible assets, net
1,883,825

 
2,015,520

Goodwill
5,462,555

 
5,504,420

Total assets
$
15,307,687

 
$
15,320,087

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Notes payable and long-term debt payable within one year
$
1,144,347

 
$
638,466

Accounts payable, trade
1,307,178

 
1,430,306

Accrued payrolls and other compensation
319,787

 
427,500

Accrued domestic and foreign taxes
182,617

 
198,878

Other accrued liabilities
555,005

 
502,333

Total current liabilities
3,508,934

 
3,197,483

Long-term debt
4,303,331

 
4,318,559

Pensions and other postretirement benefits
937,938

 
1,177,605

Deferred income taxes
286,622

 
234,858

Other liabilities
449,696

 
526,089

Total liabilities
9,486,521

 
9,454,594

EQUITY
 
 
 
Shareholders’ equity:
 
 
 
Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued

 

Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at December 31 and June 30
90,523

 
90,523

Additional capital
521,854

 
496,592

Retained earnings
12,114,448

 
11,625,975

Accumulated other comprehensive (loss)
(1,795,497
)
 
(1,763,086
)
Treasury shares, at cost; 51,680,773 shares at December 31 and 48,632,105 shares at June 30
(5,116,119
)
 
(4,590,138
)
Total shareholders’ equity
5,815,209

 
5,859,866

Noncontrolling interests
5,957

 
5,627

Total equity
5,821,166

 
5,865,493

Total liabilities and equity
$
15,307,687

 
$
15,320,087

See accompanying notes to consolidated financial statements.

- 4 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
687,812

 
$
341,857

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
115,000

 
120,335

Amortization
107,543

 
113,881

Share incentive plan compensation
64,615

 
64,267

Deferred income tax expense
47,401

 
(74,101
)
Foreign currency transaction loss
2,526

 
12,620

Loss (gain) on plant and equipment and intangible assets
3,428

 
(26,529
)
Loss on sale of businesses
623

 

Loss (gain) on marketable securities
5,701

 
(1
)
(Gain) loss on investments
(3,213
)
 
33,759

Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable, net
185,638

 
49,986

Inventories
(176,094
)
 
(207,334
)
Prepaid expenses
(40,555
)
 
(81,168
)
Other assets
14,214

 
(45,710
)
Accounts payable, trade
(120,253
)
 
(92,267
)
Accrued payrolls and other compensation
(104,726
)
 
(111,687
)
Accrued domestic and foreign taxes
(14,758
)
 
5,796

Other accrued liabilities
18,960

 
59,003

Pensions and other postretirement benefits
(173,040
)
 
25,379

Other liabilities
(79,782
)
 
268,688

Net cash provided by operating activities
541,040

 
456,774

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisitions (net of cash acquired of $690 in 2018)
(2,042
)
 

Capital expenditures
(94,426
)
 
(144,781
)
Proceeds from sale of plant and equipment
34,121

 
59,848

Proceeds from sale of businesses
19,540

 

Purchases of marketable securities and other investments
(2,845
)
 
(78,309
)
Maturities and sales of marketable securities and other investments
14,432

 
12,710

Other
(90
)
 
8,706

Net cash (used in) investing activities
(31,310
)
 
(141,826
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from exercise of stock options
635

 
2,076

Payments for common shares
(565,970
)
 
(136,436
)
Proceeds from notes payable, net
606,019

 
138,900

Proceeds from long-term borrowings
1

 
1,718

Payments for long-term borrowings
(100,209
)
 
(12,895
)
Dividends
(200,459
)
 
(176,187
)
Net cash (used in) financing activities
(259,983
)
 
(182,824
)
Effect of exchange rate changes on cash
(24,499
)
 
7,760

Net increase in cash and cash equivalents
225,248

 
139,884

Cash and cash equivalents at beginning of year
822,137

 
884,886

Cash and cash equivalents at end of period
$
1,047,385

 
$
1,024,770

See accompanying notes to consolidated financial statements.

- 5 -



PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION
(Dollars in thousands)
(Unaudited)
The Company operates in two reportable business segments: Diversified Industrial and Aerospace Systems.
Diversified Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment and has a significant portion of international operations. Sales are made directly to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket.
Aerospace Systems - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Systems Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
1,632,059

 
$
1,565,416

 
$
3,313,103

 
$
3,160,107

International
 
1,223,679

 
1,255,569

 
2,457,445

 
2,494,343

Aerospace Systems
 
616,307

 
549,688

 
1,180,791

 
1,080,874

Total net sales
 
$
3,472,045

 
$
3,370,673

 
$
6,951,339

 
$
6,735,324

Segment operating income
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
257,774

 
$
225,807

 
$
532,885

 
$
481,834

International
 
189,085

 
164,806

 
395,179

 
356,597

Aerospace Systems
 
121,463

 
87,148

 
231,318

 
164,582

Total segment operating income
 
568,322

 
477,761

 
1,159,382

 
1,003,013

Corporate general and administrative expenses
 
63,890

 
46,942

 
114,215

 
88,292

Income before interest expense and other expense
 
504,432

 
430,819

 
1,045,167

 
914,721

Interest expense
 
47,518

 
53,133

 
91,857

 
106,688

Other expense
 
25,760

 
17,465

 
62,433

 
73,510

Income before income taxes
 
$
431,154

 
$
360,221

 
$
890,877

 
$
734,523




- 6 -



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

1. Management representation
In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of December 31, 2018, the results of operations for the three and six months ended December 31, 2018 and 2017 and cash flows for the six months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2018 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. No subsequent events have occurred that required adjustment to these financial statements.

2. New accounting pronouncements
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-14, "Compensation--Retirement Benefits--Defined Benefit Plans--General." ASU 2018-14 aims to improve disclosure effectiveness by adding, removing or clarifying certain disclosure requirements related to defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company has not yet determined the effect that ASU 2018-14 will have on its financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement." ASU 2018-13 aims to improve disclosure effectiveness by adding, modifying or removing certain disclosure requirements for both recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU for any removed or modified disclosure. Adoption of additional disclosures may be delayed until their effective dates. The Company has not yet determined the effect that ASU 2018-13 will have on its financial statements.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (TCJ Act) reduction of the U.S. federal corporate income tax rate. The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any period after the issuance of the update. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act is recognized. The Company has not yet determined the effect that ASU 2018-02 will have on its financial statements.
In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides targeted improvements to Topic 815 accounting for hedging activities by expanding an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early application is permitted in any interim period after issuance of the update. ASU 2017-12 should be applied using a modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption and prospectively for presentation and disclosure requirements. The Company has not yet determined the effect that ASU 2017-12 will have on its financial statements.
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost component is eligible for capitalization, when applicable. ASU 2017-07 should be applied retrospectively for the income

- 7 -



statement presentation of net periodic pension cost and net periodic postretirement benefit cost and prospectively, on or after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost. On July 1, 2018, the Company retrospectively adopted ASU 2017-07 and reclassified prior-year amounts using a practical expedient that permits the usage of amounts previously disclosed in the retirement benefits note. As a result, $4,621 and $4,125 of expense was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for the prior-year quarter. Expense of $14,205 and $8,812 was reclassified from cost of sales and selling, general and administrative expenses, respectively, to other (income) expense, net for the first six months of fiscal 2018.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16 provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. The Company adopted ASU 2016-16 on July 1, 2018 and recorded a cumulative effect adjustment of approximately $19 million to reduce retained earnings.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides specific guidance on several cash flow classification issues to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. On July 1, 2018, the Company adopted ASU 2016-15 and retrospectively adjusted its Statement of Cash Flows. These retrospective adjustments were not material.
In June 2016, the FASB issued 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. The Company has not yet determined the effect that ASU 2016-13 will have on its 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. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election, by class of underlying asset, not to recognize the corresponding assets and lease liabilities. Lessee recognition, measurement, and presentation of expenses and cash flows will not change significantly from existing guidance and lessor accounting is largely unchanged. ASU 2016-02 also changes the definition of a lease and requires qualitative and quantitative disclosures that provide information about the amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.  Early adoption is permitted. Adoption of this ASU is planned for the beginning of the first quarter of fiscal 2020. The Company has not yet determined the effect that ASU 2016-02 will have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Liabilities." ASU 2016-01 requires equity investments (excluding equity method investments and investments that are consolidated) to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost, adjusted for impairment and observable price changes. ASU 2016-01 also simplifies the impairment assessment of equity investments, eliminates the disclosure of the assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at cost on the balance sheet and requires the exit price to be used when measuring fair value of financial instruments for disclosure purposes. Under ASU 2016-01, changes in fair value (resulting from instrument-specific credit risk) are presented separately in other comprehensive income for liabilities measured using the fair value option. Financial assets and liabilities are presented separately by measurement category and type, either on the balance sheet or in the financial statement disclosures. The Company adopted ASU 2016-01 on July 1, 2018 and reclassified approximately $2 million of unrealized gains from accumulated other comprehensive (loss) to retained earnings.
In May 2014, the FASB issued ASU 2014-09, “Revenues with Contracts with Customers.” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligation. The Company adopted ASU 2014-09 on July 1, 2018 using the modified retrospective method and recorded a cumulative effect adjustment to increase retained earnings by approximately $5 million. See Note 3 for further discussion.


- 8 -



3. Revenue recognition

Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. Revenues are recognized when control of the promised goods or services in a contract (i.e., performance obligations) are transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of the Company’s revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of the Company’s revenues are recognized over time if the customer simultaneously receives control as the Company performs work under a contract, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment. For contracts recognized over time, the Company uses the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time.

A contract’s transaction price is allocated to each distinct performance obligation. When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers of the same product or service. Revenue is recognized when the appropriate revenue recognition criteria for the individual performance obligations have been satisfied.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration primarily includes prompt pay discounts, rebates and volume discounts and is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and the Company’s best judgment at the time.
Payment terms vary by customer and the geographical location of the customer. The time between when revenue is recognized and payment is due is not significant. The Company’s contracts with customers generally do not include significant financing components or noncash consideration.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. The costs to obtain a contract where the amortization period for the related asset is one year or less are expensed as incurred.
There is generally no unilateral right to return products. The Company primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery. This type of warranty does not represent a separate performance obligation.
Disaggregation of revenue
Revenue from contracts with customers is disaggregated by technology platforms for the Diversified Industrial Segment, by product platforms for the Aerospace Systems Segment and by geographic location for the total Company.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various type of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Contracts consist of individual purchase orders for standard product, blanket purchase orders and production contracts. Blanket purchase orders are often associated with individual purchase orders and have terms and conditions which are subject to a master supply or distributor agreement. Individual production contracts, some of which may include multiple performance obligations, are typically for products to be manufactured to the customer's specifications. Revenue in the Diversified Industrial Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time for installation services or in situations where the product being manufactured has no alternative use and the Company has an enforceable right to payment.
Diversified Industrial Segment revenues by technology platform:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31, 2018
 
December 31, 2018
Motion Systems
 
$
856,357

 
$
1,715,930

Flow and Process Control
 
1,015,200

 
2,076,264

Filtration and Engineered Materials
 
984,181

 
1,978,354

Total
 
$
2,855,738

 
$
5,770,548



- 9 -



The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and which also perform a vital role in naval vessels and land-based weapon systems. Contracts generally consist of blanket purchase orders and individual long-term production contracts. Blanket purchase orders, which have terms and conditions subject to long-term supply agreements, are typically associated with individual purchase orders. Revenue in the Aerospace Systems Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time in situations where the customer controls the asset as it is being produced or the product being manufactured has no alternative use and the Company has an enforceable right to payment.
Aerospace Systems Segment revenues by product platform:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31, 2018
 
December 31, 2018
Flight Control Actuation
 
$
189,670

 
$
352,606

Fuel and Inerting
 
157,262

 
301,308

Hydraulics
 
108,893

 
211,390

Engines
 
71,647

 
136,033

Fluid Conveyance
 
68,868

 
139,072

Other
 
19,967

 
40,382

Total
 
$
616,307

 
$
1,180,791


Total Company revenues by geographic region based on the Company's selling operation's location:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31, 2018
 
December 31, 2018
North America
 
$
2,248,806

 
$
4,494,897

Europe
 
714,550

 
1,440,860

Asia Pacific
 
465,974

 
927,614

Latin America
 
42,715

 
87,968

Total
 
$
3,472,045

 
$
6,951,339


The majority of revenues from the Aerospace Systems Segment is generated from sales to customers within North America.
Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
Total contract assets and contract liabilities are as follows:
 
 
December 31, 2018
Contract assets, current (included within Prepaid expenses and other)
 
$
19,263

Contract assets, noncurrent (included within Investments and other assets)
 
2,328

Total contract assets
 
21,591

Contract liabilities, current (included within Other accrued liabilities)
 
(65,320
)
Contract liabilities, noncurrent (included within Other liabilities)
 
(468
)
Total contract liabilities
 
(65,788
)
Net contract (liabilities)
 
$
(44,197
)


- 10 -



During the six months ended December 31, 2018, net contract liabilities increased $6 million from the July 1, 2018 net contract liabilities amount of $38 million. The increase in net contract liabilities was primarily due to advance payments from customers exceeding revenue recognized during the period. During the six months ended December 31, 2018, approximately $20 million of revenue was recognized that was included in the contract liabilities at July 1, 2018.
Remaining performance obligations
The Company’s 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. The Company believes its backlog represents its unsatisfied or partially unsatisfied performance obligations. Backlog at December 31, 2018 was $4,209 million, of which approximately 92 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
Adoption of ASU 2014-09
On July 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The provisions of ASU 2014-09 were applied only to contracts that were not completed as of July 1, 2018. Comparative prior-period financial information has not been restated and continues to be reported under the accounting standards in effect for the comparative prior-year period.
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of July 1, 2018 related to the adoption of ASU 2014-09 is as follows:
 
 
Balance as of
 
Cumulative Effect
 
Balance as of
 
 
June 30, 2018
 
of Adjustments
 
July 1, 2018
Assets:
 
 
 
 
 
 
Trade accounts receivable, net
 
$
2,145,517

 
$
(11
)
 
$
2,145,506

Inventories
 
1,621,304

 
23,205

 
1,644,509

Prepaid expenses and other
 
134,886

 
14,575

 
149,461

Investments and other assets
 
801,049

 
2,020

 
803,069

Liabilities:
 
 
 
 
 
 
Other accrued liabilities
 
$
502,333

 
$
28,288

 
$
530,621

Other liabilities
 
526,089

 
5,160

 
531,249

Deferred income taxes
 
234,858

 
1,560

 
236,418

Equity:
 
 
 
 
 
 
Retained earnings
 
$
11,625,975

 
$
4,781

 
$
11,630,756


The adoption of ASU 2014-09 had an immaterial impact on the Company’s net sales, results of operations and financial position for the three and six months ended December 31, 2018.



- 11 -



4. Earnings per share
The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and six months ended December 31, 2018 and 2017.
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
311,737

 
$
56,159

 
$
687,448

 
$
341,556

Denominator:
 
 
 
 
 
 
 
Basic - weighted average common shares
130,361,273

 
133,112,568

 
131,361,464

 
133,144,766

Increase in weighted average common shares from dilutive effect of equity-based awards
1,949,937

 
3,082,351

 
2,088,210

 
2,729,764

Diluted - weighted average common shares, assuming exercise of equity-based awards
132,311,210

 
136,194,919

 
133,449,674

 
135,874,530

Basic earnings per share
$
2.39

 
$
0.42

 
$
5.23

 
$
2.57

Diluted earnings per share
$
2.36

 
$
0.41

 
$
5.15

 
$
2.51

For the three months ended December 31, 2018 and 2017, 1,335,187 and 3,245 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the six months ended December 31, 2018 and 2017, 836,099 and 706,512 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.

5. 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-month period ended December 31, 2018, the Company repurchased 3,008,512 shares at an average price, including commissions, of $166.20 per share. During the six-month period ended December 31, 2018, the Company repurchased 3,302,453 shares at an average price, including commissions, of $166.54 per share.


6. 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 $8,178 and $9,672 at December 31, 2018 and June 30, 2018, respectively.


7. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
 
 
December 31,
2018
 
June 30,
2018
Notes receivable
 
$
160,380

 
$
149,254

Accounts receivable, other
 
163,874

 
179,145

Total
 
$
324,254

 
$
328,399



- 12 -




8. Inventories

The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
 
 
December 31,
2018
 
June 30,
2018
Finished products
 
$
737,243

 
$
673,323

Work in process
 
866,357

 
765,835

Raw materials
 
200,964

 
182,146

Total
 
$
1,804,564

 
$
1,621,304


9. Business realignment charges
The Company incurred business realignment charges and acquisition integration costs in fiscal 2019 and fiscal 2018. The acquisition integration costs related to the fiscal 2017 acquisition of CLARCOR, Inc.
Business realignment charges and acquisition integration costs presented in the Business Segment Information are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Diversified Industrial
$
7,382

 
$
24,684

 
$
15,940

 
$
37,947

Aerospace Systems

 
692

 

 
1,455

Other expense
220

 

 
275

 

Work force reductions in connection with such business realignment charges and acquisition integration costs in the Business Segment Information are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Diversified Industrial
164

 
723

 
365

 
1,265

Aerospace Systems

 
19

 

 
56

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, with the majority of the charges incurred in Europe and North America. The Company believes 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.
The business realignment charges and acquisition integration costs are presented in the Consolidated Statement of Income as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$
3,669

 
$
13,657

 
$
8,068

 
$
22,772

Selling, general and administrative expenses
3,713

 
11,719

 
7,872

 
16,630

Other (income) expense, net
220

 

 
275

 

As of December 31, 2018, approximately $7 million in severance payments had been made relating to business realignment charges and acquisition integration charges incurred during fiscal 2019, the remainder of which are expected to be paid by December 31, 2019. Severance payments relating to prior-year business realignment and acquisition integration actions are being made as required. Remaining severance payments related to current-year and prior-year business realignment actions of approximately $18 million are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment and acquisition integration actions described above, the timing and amount of which are not known at this time.

- 13 -



 
10. Equity

Changes in equity for the three months ended December 31, 2018 and 2017 are as follows:
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at September 30, 2018
$
90,523

 
$
503,052

 
$
11,902,300

 
$
(1,775,983
)
 
$
(4,618,512
)
 
$
5,726

 
$
6,107,106

Net income


 


 
311,737

 


 


 
176

 
311,913

Other comprehensive income (loss)


 


 


 
(19,514
)
 


 
55

 
(19,459
)
Dividends paid ($0.76 per share)


 


 
(99,589
)
 


 


 

 
(99,589
)
Stock incentive plan activity


 
18,802

 


 


 
2,393

 


 
21,195

Shares purchased at cost


 


 


 


 
(500,000
)
 


 
(500,000
)
Balance at December 31, 2018
$
90,523

 
$
521,854

 
$
12,114,448

 
$
(1,795,497
)
 
$
(5,116,119
)
 
$
5,957

 
$
5,821,166


 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at September 30, 2017
$
90,523

 
$
528,956

 
$
11,127,641

 
$
(1,824,503
)
 
$
(4,397,677
)
 
$
5,719

 
$
5,530,659

Net income


 


 
56,159

 


 


 
163

 
56,322

Other comprehensive income (loss)


 


 


 
56,775

 


 
(73
)
 
56,702

Dividends paid ($0.66 per share)


 


 
(88,083
)
 


 


 


 
(88,083
)
Stock incentive plan activity


 
5,047

 


 


 
8,563

 

 
13,610

Shares purchased at cost


 


 


 


 
(50,000
)
 

 
(50,000
)
Balance at December 31, 2017
$
90,523

 
$
534,003

 
$
11,095,717

 
$
(1,767,728
)
 
$
(4,439,114
)
 
$
5,809

 
$
5,519,210


Changes in equity for the six months ended December 31, 2018 and 2017 are as follows:
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at June 30, 2018
$
90,523

 
$
496,592

 
$
11,625,975

 
$
(1,763,086
)
 
$
(4,590,138
)
 
$
5,627

 
$
5,865,493

Impact of adoption of accounting standards


 


 
1,483

 
(1,734
)
 


 


 
(251
)
Net income


 


 
687,448

 


 


 
364

 
687,812

Other comprehensive (loss)


 


 


 
(30,677
)
 


 
(34
)
 
(30,711
)
Dividends paid ($1.52 per share)


 


 
(200,458
)
 


 


 

 
(200,458
)
Stock incentive plan activity


 
25,262

 


 


 
24,019

 


 
49,281

Shares purchased at cost


 


 


 


 
(550,000
)
 


 
(550,000
)
Balance at December 31, 2018
$
90,523

 
$
521,854

 
$
12,114,448

 
$
(1,795,497
)
 
$
(5,116,119
)
 
$
5,957

 
$
5,821,166


 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at June 30, 2017
$
90,523

 
$
543,879

 
$
10,930,348

 
$
(1,924,204
)
 
$
(4,378,897
)
 
$
5,697

 
$
5,267,346

Net income


 


 
341,556

 


 


 
301

 
341,857

Other comprehensive income (loss)


 


 


 
156,476

 


 
(160
)
 
156,316

Dividends paid ($1.32 per share)


 


 
(176,187
)
 


 


 


 
(176,187
)
Stock incentive plan activity


 
(9,876
)
 


 


 
39,783

 

 
29,907

Acquisition activity


 


 


 


 


 
(29
)
 
(29
)
Shares purchased at cost


 


 


 


 
(100,000
)
 

 
(100,000
)
Balance at December 31, 2017
$
90,523

 
$
534,003

 
$
11,095,717

 
$
(1,767,728
)
 
$
(4,439,114
)
 
$
5,809

 
$
5,519,210


- 14 -




Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the six months ended December 31, 2018 and 2017 are as follows:
 
Foreign Currency Translation Adjustment and Other
 
Retirement Benefit Plans
 
Total
Balance at June 30, 2018
$
(943,477
)
 
$
(819,609
)
 
$
(1,763,086
)
Impact of adoption of ASU 2016-01
(1,734
)
 

 
(1,734
)
Other comprehensive loss before reclassifications
(82,655
)
 

 
(82,655
)
Amounts reclassified from accumulated other comprehensive (loss)
3,578

 
48,400

 
51,978

Balance at December 31, 2018
$
(1,024,288
)
 
$
(771,209
)
 
$
(1,795,497
)


 
Foreign Currency Translation Adjustment and Other
 
Retirement Benefit Plans
 
Total
Balance at June 30, 2017
$
(925,342
)
 
$
(998,862
)
 
$
(1,924,204
)
Other comprehensive income before reclassifications
101,429

 

 
101,429

Amounts reclassified from accumulated other comprehensive (loss)

 
55,047

 
55,047

Balance at December 31, 2017
$
(823,913
)
 
$
(943,815
)
 
$
(1,767,728
)


Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and six months ended December 31, 2018 and 2017 are as follows:
Details about Accumulated Other Comprehensive (Loss) Components
 
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
 
Consolidated Statement of Income Classification
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31, 2018
 
December 31, 2018
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,652
)
 
$
(3,293
)
 
Other (income) expense, net
Recognized actuarial loss
 
(30,696
)
 
(59,993
)
 
Other (income) expense, net
Total before tax
 
(32,348
)
 
(63,286
)
 

Tax benefit
 
7,821

 
14,886

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


Details about Accumulated Other Comprehensive (Loss) Components
 
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
 
Consolidated Statement of Income Classification
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31, 2017
 
December 31, 2017
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,545
)
 
$
(3,683
)
 
Other (income) expense, net
Recognized actuarial loss
 
(35,929
)
 
(74,960
)
 
Other (income) expense, net
Total before tax
 
(37,474
)
 
(78,643
)
 
 
Tax benefit
 
9,162

 
23,596

 
 
Net of tax
 
$
(28,312
)
 
$
(55,047
)
 
 



- 15 -




11. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the six months ended December 31, 2018 are as follows:
 
Diversified Industrial
Segment
 
Aerospace
Systems
Segment
 
Total
Balance at June 30, 2018
$
5,405,771

 
$
98,649

 
$
5,504,420

Acquisition
2,940

 

 
2,940

Foreign currency translation and other
(44,799
)
 
(6
)
 
(44,805
)
Balance at December 31, 2018
$
5,363,912

 
$
98,643

 
$
5,462,555

The acquisition line represents the goodwill allocation during the measurement period subsequent to the applicable acquisition date.
Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:
 
December 31, 2018
 
June 30, 2018
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents
$
261,548

 
$
123,194

 
$
265,423

 
$
117,440

Trademarks
542,931

 
238,962

 
546,905

 
227,580

Customer lists and other
2,440,534

 
999,032

 
2,482,079

 
933,867

Total
$
3,245,013

 
$
1,361,188

 
$
3,294,407

 
$
1,278,887

Total intangible amortization expense for the six months ended December 31, 2018 was $105,090. The estimated amortization expense for the five years ending June 30, 2019 through 2023 is $196,130, $185,468, $180,870, $175,010 and $167,513, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the six months ended December 31, 2018.


12. Retirement benefits
Net pension benefit cost recognized included the following components:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Service cost
$
17,983

 
$
18,242

 
$
38,492

 
$
41,300

Interest cost
40,551

 
36,138

 
80,417

 
71,824

Expected return on plan assets
(62,701
)
 
(65,350
)
 
(125,578
)
 
(128,526
)
Amortization of prior service cost
1,677

 
1,511

 
3,325

 
3,615

Amortization of net actuarial loss
30,692

 
35,468

 
59,985

 
74,150

Amortization of initial net obligation
4

 
5

 
9

 
10

Net pension benefit cost
$
28,206

 
$
26,014

 
$
56,650

 
$
62,373

During the three months ended December 31, 2018 and 2017, the Company recognized $631 and $1,091, respectively, in expense related to other postretirement benefits. During the six months ended December 31, 2018 and 2017, the Company recognized $1,281 and $2,180, respectively, in expense related to other postretirement benefits. Components of net pension benefit cost and other postretirement benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.
In September 2018, the Company made a discretionary $200 million cash contribution to its domestic qualified defined benefit plan.

- 16 -




13. Income taxes
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, establishing a flat corporate income tax rate of 21 percent and creating a territorial tax system (with a one-time transition tax imposed on previously undistributed foreign earnings and profits).
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118, which provided guidance on accounting for the tax effects of the TCJ Act. SAB 118 provided a measurement period that should not extend beyond one year from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118, and based on the information available, the Company recorded additional tax expense of $14,485 related to the estimated one-time transition tax during the three months ended December 31, 2018. This adjustment is a result of the Company's analysis of related proposed regulations that were issued subsequent to the recording of the previous provisional amount. The company now considers its provisional accounting for the effects of the TCJ Act, which includes the remeasurement of deferred tax balances and related valuation allowances, the one-time transition tax and the repatriation of undistributed foreign earnings, as being complete and as meeting the recognition guidance under Topic 740. The Company is in the process of evaluating the final transition tax regulations that were published on January 16, 2019.
During the period ended September 30, 2018, the Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income as a current period expense when incurred.
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 2011, and its state and local returns for fiscal years after 2012. The Company is also open to assessment for foreign jurisdictions for fiscal years after 2009. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.
As of December 31, 2018, the Company had gross unrecognized tax benefits of $146,632, all of which, if recognized, would affect the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, is $23,411. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $110,000 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.


14. Financial instruments
The Company’s 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, equity investments and available-for-sale debt securities. Deposits are recorded at cost, and equity investments and available-for-sale debt securities are recorded at fair value. Changes in fair value related to available-for-sale debt securities are recorded in accumulated other comprehensive (loss). Upon the adoption of ASU 2016-01 on July 1, 2018, changes in fair value of equity investments are recognized in net income. Prior to the adoption of ASU 2016-01, these changes in fair value were recognized in accumulated other comprehensive (loss).

Gross unrealized gains and losses related to both equity investments and available-for-sale debt securities were not material as of December 31, 2018 and June 30, 2018. There were no facts or circumstances that indicated the unrealized losses were other than temporary.

The contractual maturities of available-for-sale debt securities were predominantly one to three years at December 31, 2018 and June 30, 2018. Actual maturities of available-for-sale debt securities may differ from their contractual maturities as the Company has the ability to liquidate the available-for-sale debt securities after giving appropriate notice to the issuer.

- 17 -



The carrying value of long-term debt and estimated fair value of long-term debt are as follows:
 
 
December 31,
2018
 
June 30,
2018
Carrying value of long-term debt
 
$
4,343,138

 
$
4,460,402

Estimated fair value of long-term debt
 
4,383,759

 
4,548,796

The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
The Company utilizes 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 the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
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.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
 
 
Balance Sheet Caption
 
December 31,
2018
 
June 30,
2018
Net investment hedges
 
 
 
 
 
 
Cross-currency swap contracts
 
Other assets
 
$
17,126

 
$
7,614

Cash flow hedges
 
 
 
 
 
 
Costless collar contracts
 
Non-trade and notes receivable
 
278

 
932

Costless collar contracts
 
Other accrued liabilities
 
4,553

 
236


The cross-currency swap and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The Company has 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 costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and six months ended December 31, 2018 and 2017 were not material.

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

2018
 
2017
 
2018
 
2017
Cross-currency swap contracts
$
5,700

 
$
(2,725
)
 
$
7,619

 
$
(9,298
)
Foreign denominated debt
7,144

 
(10,893
)
 
11,271

 
(27,727
)
There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor was any portion of these financial instruments excluded from the effectiveness testing, during the six months ended December 31, 2018 and 2017.

- 18 -



A summary of financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2018 and June 30, 2018 are as follows:
 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
December 31, 2018

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
12,988

 
$
12,988

 
$

 
$

Corporate bonds
 
4,859

 
4,859

 

 

Asset-backed and mortgage-backed securities
 
6,046

 

 
6,046

 

Derivatives
 
21,377

 

 
21,377

 

Investments measured at net asset value
 
7,064

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
15,856

 

 
15,856

 


 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
June 30, 2018

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
2,956

 
$
2,956

 
$

 
$

Corporate bonds
 
5,331

 
5,331

 

 

Asset-backed and mortgage-backed securities
 
3,911

 

 
3,911

 

Derivatives
 
14,110

 

 
14,110

 

Investments measured at net asset value
 
7,208

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
5,315

 

 
5,315

 

The fair values of the equity securities, corporate bonds and asset-backed and mortgage-backed securities are determined using the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are traded in an active market.
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 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. The Company has 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. Fair values are transferred between levels of the fair value hierarchy when facts and circumstances indicate that a change in the method of estimating the fair value of a financial asset or financial liability is warranted.


- 19 -





PARKER-HANNIFIN CORPORATION
FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2018
AND COMPARABLE PERIODS ENDED DECEMBER 31, 2017
OVERVIEW
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
The Company’s order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a 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 Department of Defense spending for military aerospace markets; and
Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:
 
December 31, 2018

 
June 30, 2018

 
December 31, 2017

United States
54.1

 
60.2

 
59.7

Eurozone countries
51.4

 
54.9

 
60.6

China
49.7

 
51.0

 
51.5

Brazil
52.6

 
49.8

 
52.4

Global aircraft miles flown increased by approximately six percent, and available revenue passenger miles increased by approximately seven percent from their comparable fiscal 2018 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 2019 will be approximately nine percent higher than the comparable fiscal 2018 level.
Housing starts in November 2018 were approximately five percent higher than housing starts in December 2017 and approximately seven percent higher than housing starts in June 2018. United States Census Bureau housing starts data for November 2018 was used as the December 2018 data was unavailable.


- 20 -



The Company believes 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. The Company believes it can meet its strategic objectives by:

Serving the customer and continuously enhancing its experience with the Company;
Successfully executing its Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
Maintaining its decentralized division and sales company structure;
Fostering a safety first and entrepreneurial culture;
Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;
Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;
Acquiring strategic businesses;
Organizing around targeted regions, technologies and markets;
Driving efficiency by implementing lean enterprise principles; and
Creating a culture of empowerment through its values, inclusion and diversity, accountability and teamwork.
Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. In addition, the Company will continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.
The discussion below is structured to separately discuss the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
CONSOLIDATED STATEMENT OF INCOME
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(dollars in millions)
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
3,472.0

 
$
3,370.7

 
$
6,951.3

 
$
6,735.3

Gross profit margin
 
25.0
%
 
23.9
%
 
25.2
%
 
24.5
%
Selling, general and administrative expenses
 
$
397.3

 
$
408.3

 
$
791.6

 
$
805.3

Selling, general and administrative expenses, as a percent of sales
 
11.4
%
 
12.1
%
 
11.4
%
 
12.0
%
Interest expense
 
$
47.5

 
$
53.1

 
$
91.9

 
$
106.7

Other (income) expense, net
 
$
(6.2
)
 
$
(15.5
)
 
$
(20.1
)
 
$
1.0

Effective tax rate
 
27.7
%
 
84.4
%
 
22.8
%
 
53.5
%
Net income
 
$
311.9

 
$
56.3

 
$
687.8

 
$
341.9

Net income, as a percent of sales
 
9.0
%
 
1.7
%
 
9.9
%
 
5.1
%

Net sales for the current-year quarter and first six months of fiscal 2019 increased compared to the comparable prior-year periods primarily due to higher sales in the Diversified Industrial North American businesses and the Aerospace Systems Segment. The effect of currency rate changes decreased net sales by approximately $73 million in the current-year quarter ($67 million of which was attributable to the Diversified Industrial International businesses) and $130 million for the first six months of fiscal 2019 ($118 million of which was attributable to the Diversified Industrial International businesses).
Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter and the first six months of fiscal 2019 primarily due to higher margins in the Aerospace Systems Segment driven by increased aftermarket and original equipment manufacturer (OEM) volume and profitability. Diversified Industrial Segment margins remained relatively flat for the current-year quarter and first six months of fiscal 2019. Cost of sales for the current-year quarter and prior-year quarter also included business realignment charges and acquisition integration costs of $3.7 million and $13.7 million, respectively, and $8.1 million and $22.8 million for the first six months of fiscal 2019 and 2018, respectively.

- 21 -



Selling, general and administrative expenses decreased for the current-year quarter and the first six months of fiscal 2019 primarily due to the benefits from prior-year restructuring activities and the Company's simplification initiative. These benefits were partially offset by higher net expense associated with the Company's deferred compensation programs due to unfavorable market fluctuations related to investments associated with these programs more than offsetting favorable changes in the related liabilities. Selling, general and administrative expenses for the current-year quarter and prior-year quarter also included business realignment charges and acquisition integration costs of $3.7 million and $11.7 million, respectively, and $7.9 million and $16.6 million for the first six months of fiscal 2019 and 2018, respectively.
Interest expense for the current-year quarter and first six months of fiscal 2019 decreased from the comparable prior-year periods due to lower average debt outstanding.
Other (income) expense, net included the following:
(dollars in millions)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
Expense (income)
 
2018
 
2017
 
2018
 
2017
Income related to equity method investments
 
$
(23.0
)
 
$
(11.5
)
 
$
(45.8
)
 
$
(18.5
)
Non-service components of retirement benefit cost
 
10.8

 
8.7

 
19.3

 
23.0

Divestitures and asset sales and writedowns
 
5.4

 
(26.0
)
 
4.5

 
(26.2
)
Sale and writedown of investments
 

 
20.0

 

 
33.8

Other items, net
 
0.6

 
(6.7
)
 
1.9

 
(11.1
)
 
 
$
(6.2
)
 
$
(15.5
)
 
$
(20.1
)
 
$
1.0


Effective tax rate for the current-year quarter and the first six months of fiscal 2019 was lower than the comparable prior-year periods primarily due to a net decrease in discrete tax costs resulting from the enactment of the U.S Tax Cuts and Jobs Act (TCJ Act) that were recorded in the prior year periods. The Company expects the fiscal 2019 effective tax rate will be approximately 23.5 percent.
RESULTS BY BUSINESS SEGMENT
Diversified Industrial Segment