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PARKER HANNIFIN CORP - Quarter Report: 2020 March (Form 10-Q)



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 March 31, 2020
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: 
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 March 31, 2020: 128,217,414




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
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Net sales
$
3,702,432

 
$
3,687,518

 
$
10,534,917

 
$
10,638,857

Cost of sales
2,766,693

 
2,766,744

 
7,929,199

 
7,963,906

Selling, general and administrative expenses
413,460

 
360,865

 
1,303,760

 
1,152,446

Interest expense
80,765

 
48,209

 
233,612

 
140,066

Other (income), net
(12,643
)
 
(17,500
)
 
(73,713
)
 
(37,638
)
Income before income taxes
454,157

 
529,200

 
1,142,059

 
1,420,077

Income taxes
86,788

 
117,819

 
231,051

 
320,884

Net income
367,369

 
411,381

 
911,008

 
1,099,193

Less: Noncontrolling interest in subsidiaries' earnings
116

 
133

 
383

 
497

Net income attributable to common shareholders
$
367,253

 
$
411,248

 
$
910,625

 
$
1,098,696

 
 
 
 
 
 
 
 
Earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
2.86

 
$
3.20

 
$
7.09

 
$
8.42

Diluted
$
2.83

 
$
3.14

 
$
7.01

 
$
8.29

See accompanying notes to consolidated financial statements.














- 2 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Net income
$
367,369

 
$
411,381

 
$
911,008

 
$
1,099,193

Less: Noncontrolling interests in subsidiaries' earnings
116

 
133

 
383

 
497

Net income attributable to common shareholders
367,253

 
411,248

 
910,625

 
1,098,696

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
  Foreign currency translation adjustment and other
(282,815
)
 
42,812

 
(233,953
)
 
(36,299
)
  Retirement benefits plan activity
32,125

 
23,814

 
96,567

 
72,214

    Other comprehensive income (loss)
(250,690
)
 
66,626

 
(137,386
)
 
35,915

Less: Other comprehensive income (loss) for noncontrolling interests
(960
)
 
44

 
(972
)
 
10

Other comprehensive income (loss) attributable to common shareholders
(249,730
)
 
66,582

 
(136,414
)
 
35,905

Total comprehensive income attributable to common shareholders
$
117,523

 
$
477,830

 
$
774,211

 
$
1,134,601

See accompanying notes to consolidated financial statements.





- 3 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
March 31,
2020
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
697,617

 
$
3,219,767

Marketable securities and other investments
92,536

 
150,931

Trade accounts receivable, net
2,174,425

 
2,131,054

Non-trade and notes receivable
322,187

 
310,708

Inventories
2,011,367

 
1,678,132

Prepaid expenses and other
183,294

 
182,494

Total current assets
5,481,426

 
7,673,086

Plant and equipment
5,749,736

 
5,186,730

Less: Accumulated depreciation
3,452,746

 
3,418,443

Plant and equipment, net
2,296,990

 
1,768,287

Deferred income taxes
124,515

 
150,462

Investments and other assets
750,743

 
747,773

Intangible assets, net
3,881,827

 
1,783,277

Goodwill
7,829,779

 
5,453,805

Total assets
$
20,365,280

 
$
17,576,690

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Notes payable and long-term debt payable within one year
$
1,035,191

 
$
587,014

Accounts payable, trade
1,422,011

 
1,413,155

Accrued payrolls and other compensation
415,213

 
426,285

Accrued domestic and foreign taxes
151,029

 
167,312

Other accrued liabilities
650,165

 
558,007

Total current liabilities
3,673,609

 
3,151,773

Long-term debt
8,097,922

 
6,520,831

Pensions and other postretirement benefits
1,320,167

 
1,304,379

Deferred income taxes
497,920

 
193,066

Other liabilities
468,235

 
438,489

Total liabilities
14,057,853

 
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 March 31 and June 30
90,523

 
90,523

Additional capital
452,157

 
462,086

Retained earnings
13,348,291

 
12,777,538

Accumulated other comprehensive (loss)
(2,195,462
)
 
(2,059,048
)
Treasury shares, at cost; 52,828,714 shares at March 31 and 52,566,086 shares at June 30
(5,399,519
)
 
(5,309,130
)
Total shareholders’ equity
6,295,990

 
5,961,969

Noncontrolling interests
11,437

 
6,183

Total equity
6,307,427

 
5,968,152

Total liabilities and equity
$
20,365,280

 
$
17,576,690

See accompanying notes to consolidated financial statements.

- 4 -



PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
911,008

 
$
1,099,193

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
187,054

 
170,631

Amortization
203,895

 
160,170

Share incentive plan compensation
91,857

 
84,525

Deferred income taxes
9,954

 
33,279

Foreign currency transaction (gain) loss
(13,040
)
 
5,054

(Gain) loss on plant and equipment and intangible assets
(5,194
)
 
3,993

Loss on sale of businesses

 
623

Loss on marketable securities
434

 
4,487

Gain on investments
(1,849
)
 
(4,175
)
Other
14,303

 

Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable, net
173,310

 
8,144

Inventories
(8,019
)
 
(132,137
)
Prepaid expenses and other
21,783

 
(29,990
)
Other assets
(13,268
)
 
(12,579
)
Accounts payable, trade
(53,875
)
 
(949
)
Accrued payrolls and other compensation
(68,091
)
 
(41,163
)
Accrued domestic and foreign taxes
(19,985
)
 
(10,911
)
Other accrued liabilities
(82,896
)
 
7,235

Pensions and other postretirement benefits
36,229

 
(180,893
)
Other liabilities
(92,751
)
 
(71,940
)
Net cash provided by operating activities
1,290,859

 
1,092,597

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisitions (net of cash of $82,192 in 2020 and $690 in 2019)
(5,076,064
)
 
(2,042
)
Capital expenditures
(182,502
)
 
(145,071
)
Proceeds from sale of plant and equipment
25,398

 
37,158

Proceeds from sale of businesses

 
19,540

Purchases of marketable securities and other investments
(191,277
)
 
(51,736
)
Maturities and sales of marketable securities and other investments
249,306

 
25,103

Other
129,938

 
953

Net cash used in investing activities
(5,045,201
)
 
(116,095
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from exercise of stock options
2,459

 
1,089

Payments for common shares
(194,633
)
 
(770,909
)
Proceeds from notes payable, net
362,346

 
478,952

Proceeds from long-term borrowings
1,721,211

 
1

Payments for long-term borrowings
(278,347
)
 
(100,311
)
Dividends paid
(340,291
)
 
(299,006
)
Net cash provided by (used in) financing activities
1,272,745

 
(690,184
)
Effect of exchange rate changes on cash
(40,553
)
 
(9,726
)
Net (decrease) increase in cash and cash equivalents
(2,522,150
)
 
276,592

Cash and cash equivalents at beginning of year
3,219,767

 
822,137

Cash and cash equivalents at end of period
$
697,617

 
$
1,098,729

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
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2020
 
2019
 
2020
 
2019
Net sales
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
1,775,578

 
$
1,750,554

 
$
5,016,035

 
$
5,063,657

International
 
1,182,273

 
1,284,866

 
3,408,207

 
3,742,311

Aerospace Systems
 
744,581

 
652,098

 
2,110,675

 
1,832,889

Total net sales
 
$
3,702,432

 
$
3,687,518

 
$
10,534,917

 
$
10,638,857

Segment operating income
 
 
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
 
 
North America
 
$
279,628

 
$
287,526

 
$
766,159

 
$
820,411

International
 
176,954

 
208,707

 
499,343

 
603,886

Aerospace Systems
 
127,440

 
134,789

 
371,459

 
366,107

Total segment operating income
 
584,022

 
631,022

 
1,636,961

 
1,790,404

Corporate general and administrative expenses
 
48,342

 
32,802

 
132,904

 
147,017

Income before interest expense and other expense
 
535,680

 
598,220

 
1,504,057

 
1,643,387

Interest expense
 
80,765

 
48,209

 
233,612

 
140,066

Other expense
 
758

 
20,811

 
128,386

 
83,244

Income before income taxes
 
$
454,157

 
$
529,200

 
$
1,142,059

 
$
1,420,077





- 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 March 31, 2020, the results of operations for the three and nine months ended March 31, 2020 and 2019 and cash flows for the nine months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2019 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
The outbreak of novel coronavirus ("COVID-19") around the world has created significant uncertainty in the global economic environment. While the recent outbreak of COVID-19 did not have a material adverse effect on our reported results for our fiscal third quarter, we are actively monitoring the impact of the COVID-19 outbreak, which we expect will negatively impact our business and results of operations for our fiscal fourth quarter and beyond. The ultimate extent to which our business and results of operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted at this time, including among other things, new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or mitigate its economic, public health and other impacts.
The Company has evaluated subsequent events that occurred through the date these financial statements were issued. There were no other events that occurred that required adjustment to or disclosure in these financial statements.

2. New accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. We have not yet determined the effect that ASU 2016-13 will have on our financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases with terms greater than 12 months on their balance sheet by recognizing a liability to make lease payments and an asset representing their right to use the asset during the lease term. We adopted ASU 2016-02 on July 1, 2019 using the optional transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. Upon adoption, we recorded a right-of-use asset and lease liability of approximately $126 million. The adoption of the standard did not have a material impact on the Consolidated Statement of Income or Cash Flows.


- 7 -



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
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2020

2019
 
2020
 
2019
Motion Systems
 
$
778,840

 
$
899,948

 
$
2,297,961

 
$
2,615,878

Flow and Process Control
 
1,015,430

 
1,105,176

 
2,969,033

 
3,181,440

Filtration and Engineered Materials
 
1,163,581

 
1,030,296

 
3,157,248

 
3,008,650

Total
 
$
2,957,851

 
$
3,035,420

 
$
8,424,242

 
$
8,805,968



Aerospace Systems Segment revenues by product platform:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2020
 
2019
 
2020
 
2019
Flight Control Actuation
 
$
175,871

 
$
191,664

 
$
529,553

 
$
544,270

Fuel, Inerting and Engine Motion Control
 
159,837

 
165,642

 
471,525

 
466,950

Hydraulics
 
114,763

 
123,416

 
333,523

 
334,806

Engine Components
 
181,173

 
71,779

 
454,572

 
207,812

Airframe and Engine Fluid Conveyance
 
83,555

 
79,299

 
247,356

 
218,371

Other
 
29,382

 
20,298

 
74,146

 
60,680

Total
 
$
744,581

 
$
652,098

 
$
2,110,675

 
$
1,832,889

Total Company revenues by geographic region based on the Company's selling operation's location:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2020
 
2019
 
2020
 
2019
North America
 
$
2,507,566

 
$
2,398,975

 
$
7,107,655

 
$
6,893,872

Europe
 
726,577

 
786,123

 
2,018,301

 
2,226,983

Asia Pacific
 
430,500

 
458,122

 
1,292,054

 
1,385,736

Latin America
 
37,789

 
44,298

 
116,907

 
132,266

Total
 
$
3,702,432

 
$
3,687,518

 
$
10,534,917

 
$
10,638,857


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.

- 8 -



Total contract assets and contract liabilities are as follows:
 
 
March 31, 2020
 
June 30, 2019
Contract assets, current (included within Prepaid expenses and other)
 
$
27,793

 
$
22,726

Contract assets, noncurrent (included within Investments and other assets)
 
1,476

 
1,301

Total contract assets
 
29,269

 
24,027

Contract liabilities, current (included within Other accrued liabilities)
 
(66,374
)
 
(64,668
)
Contract liabilities, noncurrent (included within Other liabilities)
 
(3,438
)
 
(421
)
Total contract liabilities
 
(69,812
)
 
(65,089
)
Net contract liabilities
 
$
(40,543
)
 
$
(41,062
)

At March 31, 2020, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the nine months ended March 31, 2020, approximately $29 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 March 31, 2020 was $5,543 million, of which approximately 87 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.

4. Acquisitions

On October 29, 2019, we completed the acquisition of a 100 percent equity interest in LORD Corporation ("Lord") for approximately $3,455 million in cash, including the assumption of debt. On September 16, 2019, we completed the acquisition of a 100 percent equity interest in EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash.
Lord is a diversified technology and manufacturing company developing highly reliable adhesives and coatings, as well as vibration and motion control technologies, that significantly reduce risk and improve product performance. Lord’s products are used in mission-critical applications in the aerospace, automotive and industrial markets. Lord had annual sales of approximately $1,025 million for its fiscal 2018. For segment reporting purposes, approximately 95 percent of Lord's sales are included in the Diversified Industrial Segment, while the remaining five percent are included in the Aerospace Systems Segment. Lord’s unique and proprietary products, solutions and technologies for mission-critical applications are expected to increase the Company's overall engineered materials product and solutions offerings to enable a stronger value proposition for customers. 

Exotic designs and manufactures innovative and technically demanding, high temperature, high pressure air and exhaust management solutions for aircraft and engines. Exotic had annual sales of approximately $409 million for its fiscal 2019.
For segment reporting purposes, Exotic is included in the Aerospace Systems Segment. We believe Exotic's products and proprietary manufacturing capabilities are complementary to our portfolio of flight control, fuel and inerting, hydraulics, fluid conveyance and engine components.

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The following presents the preliminary estimated fair values of Lord and Exotic's assets acquired and liabilities assumed on the respective acquisition dates. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party valuations are finalized, additional information becomes available and as additional analysis is performed. Such revisions may have a material impact on our results of operations and financial position within the measurement period. During the current-year quarter and first nine months of fiscal 2020, these revisions, which primarily impacted intangible assets, goodwill, deferred income taxes, other liabilities, and plant and equipment, did not have a material impact on our financial statements.





- 9 -



Purchase price allocation by acquisition:
 
Lord
 
Exotic
 
October 29, 2019
 
September 16, 2019
Assets:
 
 
 
Cash and cash equivalents
$
74,013

 
$
8,179

Accounts receivable
156,541

 
81,336

Inventories
248,600

 
114,661

Prepaid expenses and other
24,160

 
1,343

Plant and equipment
406,553

 
178,393

Deferred income taxes

 
2,057

Other assets
42,220

 
1,226

Intangible assets
1,449,860

 
874,470

Goodwill
1,955,618

 
503,725

Total assets acquired
4,357,565

 
1,765,390

Liabilities:
 
 
 
Notes payable and long-term debt payable within one year
403

 

Accounts payable, trade
56,186

 
23,176

Accrued payrolls and other compensation
57,433

 
8,863

Accrued domestic and foreign taxes
4,498

 
2,123

Other accrued liabilities
87,810

 
25,662

Long-term debt
221,161

 

Pensions and other postretirement benefits
115,265

 

Deferred income taxes
299,634

 

Other liabilities
53,470

 

Noncontrolling interests
6,262

 

Total liabilities and noncontrolling interests assumed
902,122

 
59,824

Net assets acquired
$
3,455,443

 
$
1,705,566



Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Lord and Exotic acquisitions, goodwill represents cost synergies and enhancements to our existing technologies. For tax purposes, Lord's goodwill is not deductible and Exotic's goodwill is deductible. Based upon a preliminary acquisition valuation, intangibles acquired as part of the Exotic acquisition include $502,470 of customer-related intangible assets, $281,400 of patents and technology and $90,600 of trademarks, with weighted average estimated useful lives of 18, 20 and 20 years, respectively. Similarly, the Lord acquisition includes $872,390 of customer-related intangible assets, $458,030 of patents and technology and $119,440 of trademarks, with weighted average estimated useful lives of 13, 21 and 20 years, respectively.

Our consolidated financial statements include the results of operations of Lord and Exotic from their respective acquisition dates through March 31, 2020. Net sales attributable to these acquisitions during this period and included in our consolidated financial statements for the three and nine months ended March 31, 2020 total $343,400 and $650,588, respectively. Segment operating income (loss) attributable to these acquisitions during this period and included in our consolidated financial statements for the three and nine months ended March 31, 2020 total $15,550 and $(4,270), respectively.

Acquisition-related transaction costs totaled $114,777 for fiscal 2020. These costs are included in selling, general and administrative expenses in the Consolidated Statement of Income.



- 10 -



5. Earnings per share
The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2020 and 2019.
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Numerator:
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
367,253

 
$
411,248

 
$
910,625

 
$
1,098,696

Denominator:
 
 
 
 
 
 
 
Basic - weighted average common shares
128,289,720

 
128,706,137

 
128,383,549

 
130,476,355

Increase in weighted average common shares from dilutive effect of equity-based awards
1,456,827

 
2,178,831

 
1,479,266

 
2,022,021

Diluted - weighted average common shares, assuming exercise of equity-based awards
129,746,547

 
130,884,968

 
129,862,815

 
132,498,376

Basic earnings per share
$
2.86

 
$
3.20

 
$
7.09

 
$
8.42

Diluted earnings per share
$
2.83

 
$
3.14

 
$
7.01

 
$
8.29


For the three months ended March 31, 2020 and 2019, 753,028 and 833,239 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 nine months ended March 31, 2020 and 2019, 516,067 and 925,721 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
6. Share repurchase program
The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized for repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. During the three months ended March 31, 2020, we repurchased 263,200 shares at an average price, including commissions, of $177.69 per share. During the nine months ended March 31, 2020, we repurchased 818,581 shares at an average price, including commissions, of $179.29 per share. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic.


7. Trade accounts receivable, net
Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was $11,190 and $8,874 at March 31, 2020 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:
 
 
March 31,
2020
 
June 30,
2019
Notes receivable
 
$
116,722

 
$
147,719

Accounts receivable, other
 
205,465

 
162,989

Total
 
$
322,187

 
$
310,708




- 11 -



9. Inventories

The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
 
 
March 31,
2020
 
June 30,
2019
Finished products
 
$
761,834

 
$
663,068

Work in process
 
968,206

 
850,778

Raw materials
 
281,327

 
164,286

Total
 
$
2,011,367

 
$
1,678,132




10. Leases

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

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

The components of lease expense are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31, 2020
 
March 31, 2020
Operating lease expense
$
13,218

 
$
38,048

Short-term lease cost
1,814

 
6,248

Variable lease cost
999

 
3,958

Total lease cost
$
16,031

 
$
48,254


Supplemental cash flow information related to operating leases are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31, 2020
 
March 31, 2020
Cash paid for amounts included in the measurement of operating lease liabilities
$
12,522

 
$
37,104

Right-of-use assets obtained in exchange for operating lease obligations
3,262

 
29,209



Supplemental balance sheet information related to operating leases is as follows:
 
March 31, 2020
Operating lease right-of-use assets (included within Investments and other assets)
$
137,665

 
 
Current operating lease liabilities (included within Other accrued liabilities)
$
40,866

Long-term operating lease liabilities (included within Other liabilities)
97,317

Total operating lease liabilities
$
138,183

 
 
Weighted average remaining lease term
5.3 years

Weighted average discount rate
2.1
%



- 12 -



Maturities of lease liabilities at March 31, 2020 are as follows:
 
Operating Leases
2020
$
11,818

2021
40,886

2022
29,494

2023
19,666

2024
12,377

Thereafter
32,548

Total operating lease payments
$
146,789

Less imputed interest
8,606

Total operating lease liabilities
$
138,183



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

11. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in fiscal 2020 and 2019. The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity as well as plant closures. The prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR, Inc. ("Clarcor") and primarily consist of severance costs and expenses related to plant closures and relocations. A majority of the business realignment charges were incurred in North America and Europe. We believe the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.
Business realignment and Clarcor acquisition integration charges presented in the Business Segment Information are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Diversified Industrial
$
12,720

 
$
4,599

 
$
27,112

 
$
20,539

Aerospace Systems
613

 

 
658

 

Corporate general and administrative expenses
71

 

 
193

 

Other expense
50

 

 
50

 
275

Workforce reductions in connection with business realignment and Clarcor acquisition integration charges in the Business Segment Information are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Diversified Industrial
336

 
144

 
1,154

 
509

Aerospace Systems
34

 

 
50

 

Corporate general and administrative expenses
3

 

 
8

 



- 13 -



The business realignment and Clarcor acquisition integration charges are presented in the Consolidated Statement of Income as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Cost of sales
$
10,201

 
$
2,804

 
$
21,225

 
$
10,872

Selling, general and administrative expenses
3,203

 
1,795

 
6,738

 
9,667

Other (income), net
50

 

 
50

 
275


During the first nine months of fiscal 2020, approximately $25 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 $14 million, a majority of which are expected to be paid by March 31, 2021, are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment described above, the timing and amount of which are not known at this time.
We also incurred the following acquisition integration charges related to the Lord and Exotic acquisitions:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2020
Diversified Industrial
$
8,364

 
$
18,503

Aerospace Systems
486

 
1,570


These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.

12. Equity

Changes in equity for the three months ended March 31, 2020 and 2019 are as follows:
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at December 31, 2019
$
90,523

 
$
455,862

 
$
13,094,252

 
$
(1,945,732
)
 
$
(5,364,730
)
 
$
12,326

 
$
6,342,501

Net income


 


 
367,253

 


 


 
116

 
367,369

Other comprehensive income (loss)


 


 


 
(249,730
)
 


 
(960
)
 
(250,690
)
Dividends paid ($0.88 per share)


 


 
(113,214
)
 


 


 
(52
)
 
(113,266
)
Stock incentive plan activity


 
(3,705
)
 


 


 
11,978

 


 
8,273

Acquisition activity


 


 


 


 


 
7

 
7

Shares purchased at cost


 


 


 


 
(46,767
)
 


 
(46,767
)
Balance at March 31, 2020
$
90,523

 
$
452,157

 
$
13,348,291

 
$
(2,195,462
)
 
$
(5,399,519
)
 
$
11,437

 
$
6,307,427



 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling
Interests
 
Total Equity
Balance at December 31, 2018
$
90,523

 
$
521,854

 
$
12,114,448

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

 
$
5,821,166

Net income


 


 
411,248

 


 


 
133

 
411,381

Other comprehensive income (loss)


 


 


 
66,582

 


 
44

 
66,626

Dividends paid ($0.76 per share)


 


 
(98,484
)
 


 


 
(64
)
 
(98,548
)
Stock incentive plan activity


 
7,289

 


 


 
8,134

 

 
15,423

Shares purchased at cost


 


 


 


 
(200,000
)
 

 
(200,000
)
Balance at March 31, 2019
$
90,523

 
$
529,143

 
$
12,427,212

 
$
(1,728,915
)
 
$
(5,307,985
)
 
$
6,070

 
$
6,016,048



- 14 -



Changes in equity for the nine months ended March 31, 2020 and 2019 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


 


 
910,625

 


 


 
383

 
911,008

Other comprehensive income (loss)


 


 


 
(136,414
)
 


 
(972
)
 
(137,386
)
Dividends paid ($2.64 per share)


 


 
(339,872
)
 


 


 
(419
)
 
(340,291
)
Stock incentive plan activity


 
(9,929
)
 


 


 
56,378

 


 
46,449

Acquisition activity


 


 


 


 


 
6,262

 
6,262

Shares purchased at cost


 


 


 


 
(146,767
)
 


 
(146,767
)
Balance at March 31, 2020
$
90,523

 
$
452,157

 
$
13,348,291

 
$
(2,195,462
)
 
$
(5,399,519
)
 
$
11,437

 
$
6,307,427


 
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


 


 
1,098,696

 


 


 
497

 
1,099,193

Other comprehensive income (loss)


 


 


 
35,905

 


 
10

 
35,915

Dividends paid ($2.28 per share)


 


 
(298,942
)
 


 


 
(64
)
 
(299,006
)
Stock incentive plan activity


 
32,551

 


 


 
32,153

 

 
64,704

Shares purchased at cost


 


 


 


 
(750,000
)
 

 
(750,000
)
Balance at March 31, 2019
$
90,523

 
$
529,143

 
$
12,427,212

 
$
(1,728,915
)
 
$
(5,307,985
)
 
$
6,070

 
$
6,016,048


Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the nine months ended March 31, 2020 and 2019 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 income (loss) before reclassifications
(232,981
)
 

 
(232,981
)
Amounts reclassified from accumulated other comprehensive (loss)

 
96,567

 
96,567

Balance at March 31, 2020
$
(1,244,637
)
 
$
(950,825
)
 
$
(2,195,462
)


 
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 income (loss) before reclassifications
(39,887
)
 

 
(39,887
)
Amounts reclassified from accumulated other comprehensive (loss)
3,578

 
72,214

 
75,792

Balance at March 31, 2019
$
(981,520
)
 
$
(747,395
)
 
$
(1,728,915
)




- 15 -



Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and nine months ended March 31, 2020 and 2019 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
 
Nine Months Ended
 
 
 
 
March 31, 2020
 
March 31, 2020
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,385
)
 
$
(4,152
)
 
Other (income), net
Recognized actuarial loss
 
(41,154
)
 
(123,342
)
 
Other (income), net
Total before tax
 
(42,539
)
 
(127,494
)
 

Tax benefit
 
10,414

 
30,927

 
 
Net of tax
 
$
(32,125
)
 
$
(96,567
)
 


Details about Accumulated Other Comprehensive (Loss) Components
 
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
 
Consolidated Statement of Income Classification
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 31, 2019
 
March 31, 2019
 
 
Retirement benefit plans
 
 
 
 
 
 
Amortization of prior service cost and initial net obligation
 
$
(1,639
)
 
$
(4,932
)
 
Other (income), net
Recognized actuarial loss
 
(29,763
)
 
(89,756
)
 
Other (income), net
Total before tax
 
(31,402
)
 
(94,688
)
 
 
Tax benefit
 
7,588

 
22,474

 
 
Net of tax
 
$
(23,814
)
 
$
(72,214
)
 
 




13. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the nine months ended March 31, 2020 are as follows:
 
Diversified Industrial
Segment
 
Aerospace
Systems
Segment
 
Total
Balance at June 30, 2019
$
5,355,165

 
$
98,640

 
$
5,453,805

Acquisitions
1,955,561

 
503,782

 
2,459,343

Foreign currency translation and other
(83,361
)
 
(8
)
 
(83,369
)
Balance at March 31, 2020
$
7,227,365

 
$
602,414

 
$
7,829,779


The acquisitions line represents the goodwill allocation during the measurement period subsequent to the applicable acquisition date. Refer to Note 4 for further discussion.
Goodwill is tested for impairment at the reporting unit level annually and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. At December 31, 2019, the Company performed its fiscal 2020 annual goodwill impairment test, which indicated no impairment existed. We did not identify any events or circumstances during the third quarter of fiscal 2020 that required performance of an interim impairment test. However, the effects of COVID-19 on the global economy, including further market disruption, lack of economic recovery or lower than anticipated customer demand, may require the performance of an interim impairment test in future periods.

- 16 -



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:
 
March 31, 2020
 
June 30, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents and technology
$
990,716

 
$
149,247

 
$
265,644

 
$
130,233

Trademarks
747,536

 
274,704

 
542,573

 
252,388

Customer lists and other
3,785,333

 
1,217,807

 
2,435,461

 
1,077,780

Total
$
5,523,585

 
$
1,641,758

 
$
3,243,678

 
$
1,460,401


Total intangible amortization expense for the nine months ended March 31, 2020 was $203,895. The estimated amortization expense for the five years ending June 30, 2020 through 2024 is $276,591, $313,434, $307,402, $296,337 and $290,718, 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 nine months ended March 31, 2020.

14. Retirement benefits
Net pension benefit expense recognized included the following components:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Service cost
$
20,967

 
$
19,126

 
$
61,965

 
$
57,618

Interest cost
36,389

 
40,124

 
106,233

 
120,541

Expected return on plan assets
(68,058
)
 
(62,844
)
 
(198,836
)
 
(188,422
)
Amortization of prior service cost
1,411

 
1,665

 
4,229

 
4,990

Amortization of net actuarial loss
41,200

 
29,988

 
123,540

 
89,973

Amortization of initial net obligation
4

 
4

 
13

 
13

Net pension benefit expense
$
31,913

 
$
28,063

 
$
97,144

 
$
84,713


During the three months ended March 31, 2020 and 2019, we recognized $169 and $114, respectively, in expense related to other postretirement benefits. During the nine months ended March 31, 2020 and 2019, we recognized $1,136 and $1,395, 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 mature in its entirety in September 2023. We used the proceeds to finance a portion of the purchase of the Exotic acquisition. In October 2019, we fully drew against the $800 million term loan, which will mature in its entirety in October 2022. We used the proceeds to finance a portion of the purchase of the Lord acquisition. At March 31, 2020, both term loans had an interest rate of LIBOR plus 112.5 bps. Interest payments are due quarterly.

In September 2019, we also amended and extended our existing multi-currency credit agreement, increasing its capacity to $2,500 million. The amended and extended credit agreement expires in September 2024. Commercial paper notes outstanding at March 31, 2020 and June 30, 2019 were $949 million and $586 million, respectively. Based on the Company’s rating level at March 31, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At March 31, 2020, our debt to debt-shareholders' equity ratio was .59 to 1.0. We are in compliance with all covenants set forth in the credit agreement and indentures.


- 17 -



16. Income taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), a significant tax-and-spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. While the Company continues to examine the impacts the CARES Act may have on its business, it does not expect it will have a material impact to its Consolidated Financial Statements.
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 March 31, 2020, the Company had gross unrecognized tax benefits of $81,717, all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amount above, is $14,425. During the current-year quarter, the Company recorded the settlement of an examination with a foreign jurisdiction that resulted in a $74,057 decrease to the unrecognized tax benefit recorded on the Consolidated Balance Sheet. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $40,000 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 March 31, 2020 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:
 
 
March 31,
2020
 
June 30,
2019
Carrying value of long-term debt
 
$
8,257,273

 
$
6,596,380

Estimated fair value of long-term debt
 
8,417,616

 
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.

- 18 -



The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
 
 
Balance Sheet Caption
 
March 31,
2020
 
June 30,
2019
Net investment hedges
 
 
 
 
 
 
Cross-currency swap contracts
 
Non-trade and notes receivable
 
$
39,497

 
$

Cross-currency swap contracts
 
Investments and other assets
 

 
24,545

Cash flow hedges
 
 
 
 
 
 
Forward exchange contracts
 
Non-trade and notes receivable
 
13,160

 
13,242

Forward exchange contracts
 
Other accrued liabilities
 
50,271

 
2,578

Costless collar contracts
 
Non-trade and notes receivable
 
6,559

 
457

Costless collar contracts
 
Other accrued liabilities
 
1,839

 
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.
Net (losses) of $(48) million and net unrealized gains of $14 million relating to forward exchange contracts were recorded in the Consolidated Statement of Income for the three months ended March 31, 2020 and 2019, respectively. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and nine months ended March 31, 2020 and 2019 were not material.

Gains 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
 
Nine Months Ended
 
March 31,
 
March 31,

2020
 
2019
 
2020
 
2019
Cross-currency swap contracts
$
5,821

 
$
6,748

 
$
12,372

 
$
14,367

Foreign denominated debt
9,574

 
13,287

 
17,898

 
24,558


No portion of these financial instruments were excluded from the effectiveness testing during the nine months ended March 31, 2020 and 2019.

- 19 -



A summary of financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2020 and June 30, 2019 are as follows:
 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
March 31, 2020

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
7,771

 
$
7,771

 
$

 
$

Derivatives
 
59,216

 

 
59,216

 

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
52,110

 

 
52,110

 


 
 
 
 
Quoted Prices

 
Significant Other

 
Significant

 
 
Fair

 
In Active

 
Observable

 
Unobservable

 
 
Value at

 
Markets

 
Inputs

 
Inputs

 
 
June 30, 2019

 
(Level 1)

 
(Level 2)

 
(Level 3)

Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
7,533

 
$
7,533

 
$

 
$

Derivatives
 
38,244

 

 
38,244

 

Investments measured at net asset value
 
9,728

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
4,512

 

 
4,512

 


The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy. We have the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.

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

- 20 -





PARKER-HANNIFIN CORPORATION
FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2020
AND COMPARABLE PERIODS ENDED MARCH 31, 2019

OVERVIEW
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
Our order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. We believe the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:
Purchasing Managers Index ("PMI") on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;
Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and U.S. Department of Defense spending for military aerospace markets; and
Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:
 
March 31, 2020
 
June 30, 2019
 
March 31, 2019
United States
49.1

 
50.6

 
55.3

Eurozone countries
44.5

 
47.6

 
47.5

China
50.1

 
49.4

 
50.8

Brazil
48.4

 
51.0

 
52.8

As of March 31, 2020, global aircraft miles flown decreased by approximately three percent and available revenue passenger miles decreased by approximately five percent from their comparable fiscal 2019 levels. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year 2020 will be approximately two percent higher than the comparable fiscal 2019 level.
Housing starts in March 2020 were approximately one percent higher than housing starts in March 2019 and approximately three percent lower than housing starts in June 2019, respectively.
In March 2020, the World Health Organization declared the recent outbreak of novel coronavirus ("COVID-19") a pandemic. Given the unpredictable nature of COVID-19's impact on the global economy, the statistics included above may not be reflective of recent or future activity.
While the COVID-19 outbreak did not have a material adverse effect on our reported results for our fiscal third quarter, we are actively monitoring the impact of the COVID-19 outbreak, which we expect will negatively impact our business and results of operations for our fiscal fourth quarter and beyond. For example, April 2020 orders are expected to be significantly down across the Company when compared to April 2019 orders. Disruption within the aerospace industry, which is facing the consequences of travel restrictions and considerably lower demand, is expected to be significant. The extent to which our business and results of operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted at this time, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or mitigate its economic, public health and other impacts.

- 21 -



We have taken immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and are taking measures to preserve cash and reduce costs, including but not limited to, global salary reductions, reduced work schedules, elimination of discretionary spending, targeted restructuring and reducing capital expenditures. At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.
In the long-term, we believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

Serving the customer and continuously enhancing its experience with the Company;
Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
Maintaining a 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 our 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. During October 2019, we completed the acquisition of LORD Corporation ("Lord") for approximately $3,455 million in cash, including the assumption of debt. We also completed the acquisition of EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash during September 2019. Refer to Note 4 to the Consolidated Financial Statements for further discussion of the acquisitions.
We continue to assess our existing businesses and may 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, Business Segment Information, Consolidated Balance Sheet and Consolidated Statement of Cash Flows. 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.

CONSOLIDATED STATEMENT OF INCOME
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(dollars in millions)
 
2020
 
2019
 
2020
 
2019
Net sales
 
$
3,702

 
$
3,688

 
$
10,535

 
$
10,639

Gross profit margin
 
25.3
%
 
25.0
%
 
24.7
%
 
25.1
%
Selling, general and administrative expenses
 
$
413

 
$
361

 
$
1,304

 
$
1,152

Selling, general and administrative expenses, as a percent of sales
 
11.2
%
 
9.8
%
 
12.4
%
 
10.8
%
Interest expense
 
$
81

 
$
48

 
$
234

 
$
140

Other (income), net
 
$
(13
)
 
$
(18
)
 
$
(74
)
 
$
(38
)
Effective tax rate
 
19.1
%
 
22.3
%
 
20.2
%
 
22.6
%
Net income
 
$
367

 
$
411

 
$
911

 
$
1,099

Net income, as a percent of sales
 
9.9
%
 
11.2
%
 
8.6
%
 
10.3
%



- 22 -



Net sales for the current-year quarter remained flat compared to the prior-year quarter and decreased slightly during the first nine months of fiscal 2020 compared to the same prior-year period. Lower volume in the Diversified Industrial North American and International businesses and unfavorable changes in foreign currency exchange rates were offset by an increase in sales related to acquisitions. Acquisitions made in the last 12 months contributed approximately $343 million and $651 million in net sales during the current-year quarter and first nine months of fiscal 2020, respectively. The effect of currency rate changes decreased net sales by approximately $56 million in the current-year quarter, which was primarily comprised of a $50 million decrease in the Diversified Industrial International businesses. During the first nine months of fiscal 2020, the effect of currency rate changes decreased net sales by approximately $123 million ($115 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 slightly in the current-year quarter as a decrease in gross profit margin in both the Aerospace Systems Segment and the Diversified Industrial International businesses was more than offset by an increase in the Diversified Industrial North American businesses and a net foreign currency transaction gain of $20 million in the current-year quarter. Gross profit margin decreased slightly during the first nine months of fiscal 2020 due to lower gross profit margin in the Diversified Industrial North American and International businesses and the Aerospace Systems Segment, partially offset by a net foreign currency transaction gain of $13 million during the first nine months of fiscal 2020. Acquisition-related expenses of $18 million and $69 million decreased gross profit margin in the current-year quarter and first nine months of fiscal 2020, respectively. Cost of sales for the current-year quarter and prior-year quarter included business realignment and acquisition integration charges of $11 million and $3 million, respectively, and $22 million and $11 million for the first nine months of fiscal 2020 and 2019, respectively.
Selling, general and administrative expenses ("SG&A") increased during the current-year quarter primarily due to an increase in intangible asset amortization expense related to the Lord and Exotic acquisitions and higher net expense associated with our deferred compensation programs as unfavorable market fluctuations related to investments associated with these programs were partially offset by favorable changes in the related liabilities. SG&A in the current-year quarter benefited from lower research and development spending. During the first nine months of fiscal 2020, SG&A increased primarily due to acquisition-related transaction costs of $115 million and an increase in intangible asset amortization expense associated with the current-year acquisitions. During the first nine months of fiscal 2020, SG&A benefited from lower research and development expense and favorable market fluctuations in deferred compensation program liabilities, partially offset by unfavorable changes in the associated investments. SG&A included business realignment and acquisition integration charges of $12 million and $2 million for the current-year and prior-year quarter, respectively, and $26 million and $10 million for the first nine months of fiscal 2020 and 2019, respectively.
Interest expense for the current-year quarter and first nine months of fiscal 2020 increased from the comparable prior-year periods primarily due to higher average debt outstanding.
Other (income), net included the following:
(dollars in millions)
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
Expense (income)
 
2020
 
2019
 
2020
 
2019
Income related to equity method investments
 
$
(23
)
 
$
(22
)
 
$
(67
)
 
$
(68
)
Non-service components of retirement benefit cost
 
11

 
9

 
36

 
28

(Gain) loss on disposal of assets and divestitures
 
(1
)
 
1

 
(5
)
 
5

Interest income
 
(3
)
 
(4
)
 
(29
)
 
(11
)
Other items, net
 
3

 
(2
)
 
(9
)
 
8

 
 
$
(13
)
 
$
(18
)
 
$
(74
)
 
$
(38
)

Effective tax rates for the current-year quarter and the first nine months of fiscal 2020 were lower than the comparable prior-year periods primarily due to an overall increase in discrete tax benefits primarily related to a favorable resolution of a foreign examination in the current-year quarter and stock-based awards for the first nine months of fiscal 2020.


- 23 -



BUSINESS SEGMENT INFORMATION
Diversified Industrial Segment
 
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(dollars in millions)
 
2020
 
2019
 
2020
 
2019
Net sales
 
 
 
 
 
 
 
 
North America
 
$
1,776

 
$
1,751

 
$
5,016

 
$
5,064

International
 
1,182

 
1,285

 
3,408

 
3,742

Operating income
 
 
 
 
 
 
 
 
North America
 
280

 
288

 
766

 
820

International
 
$
177

 
$
209

 
$
499

 
$
604

Operating margin
 
 
 
 
 
 
 
 
North America
 
15.7
%
 
16.4
%
 
15.3
%
 
16.2
%
International
 
15.0
%
 
16.2
%
 
14.7
%
 
16.1
%
Backlog
 
$
2,384

 
$
2,107

 
$
2,384

 
$
2,107


The Diversified Industrial Segment operations experienced the following percentage changes in net sales in the current-year period versus the comparable prior-year period:
 
 
Period Ending March 31, 2020
 
 
Three Months
 
Nine Months
Diversified Industrial North America – as reported
 
1.4
 %
 
(0.9
)%
Acquisitions
 
8.9
 %
 
5.4
 %
Currency
 
(0.4
)%
 
 %
Diversified Industrial North America – without acquisitions and currency
 
(7.1
)%
 
(6.3
)%
 
 
 
 
 
Diversified Industrial International – as reported
 
(8.0
)%
 
(8.9
)%
Acquisitions
 
6.2
 %
 
3.6
 %
Currency
 
(4.0
)%
 
(3.1
)%
Diversified Industrial International – without acquisitions and currency
 
(10.2
)%
 
(9.4
)%
 
 
 
 
 
Total Diversified Industrial Segment – as reported
 
(2.6
)%
 
(4.3
)%
Acquisitions
 
7.7
 %
 
4.7
 %
Currency
 
(1.8
)%
 
(1.4
)%
Total Diversified Industrial Segment – without acquisitions and currency
 
(8.5
)%
 
(7.6
)%
The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in the Diversified Industrial North American businesses increased 1.4 percent during the current-year quarter and decreased 0.9 percent during the first nine months of fiscal 2020. The effect of acquisitions increased sales by approximately $155 million and $275 million in the current-year quarter and first nine months of fiscal 2020, respectively. The effect of currency exchange rates did not have a significant impact on sales in the current-year quarter and first nine months of fiscal 2020. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial North American sales for the current-year quarter and first nine months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in virtually all markets, including the construction equipment, engines, heavy-duty truck, cars and light truck, farm and agriculture, general industrial machinery and oil and gas markets.
Sales in the current-year quarter and first nine months of fiscal 2020 for the Diversified Industrial International operations decreased 8.0 percent and 8.9 percent from the prior-year quarter and first nine months of fiscal 2019, respectively. The effect of acquisitions increased sales by approximately $79 million and $135 million in the current-year quarter and first nine months

- 24 -



of fiscal 2020, respectively. The effect of currency exchange rates decreased sales by approximately $50 million and $115 million from the prior-year quarter and first nine months of fiscal 2019, respectively. Excluding the effects of acquisitions and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter and first nine months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in both the mobile and industrial markets. During both the current-year quarter and first nine months of fiscal 2020, Europe and the Asia Pacific region accounted for approximately 56 percent and 42 percent, respectively, of the decrease in sales, while Latin America contributed the remainder of the change.
Within Europe, the decrease in sales for both the current-year quarter and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the general industrial machinery, construction equipment, machine tool, heavy-duty truck and material handling markets.
Within the Asia Pacific region, the decrease in current-year quarter sales and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment, railroad equipment, telecommunications and industrial machinery markets. This decrease was partially offset by an increase in end-user demand in the mining, oil and gas and semiconductor markets. The impact of COVID-19 on business conditions in the Asia Pacific region also contributed to lower sales in the current-year quarter.
The decrease in sales in Latin America for the current-year quarter and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment and material handling markets, partially offset by an increase in end-user demand in the oil and gas market.
Diversified Industrial Segment operating margins within the North American businesses decreased in the current-year quarter and first nine months of fiscal 2020 primarily due to lower sales volume, acquisition-related expenses, higher intangible asset amortization expense and higher restructuring and acquisition integration charges, partially offset by benefits from simplification, restructuring and acquisition integration activities, favorable product mix, prior-year pricing actions and lower raw material costs.
Diversified Industrial Segment operating margins within the International businesses decreased in the current-year quarter and first nine months of fiscal 2020 primarily due to lower sales volume, acquisition-related expenses, higher intangible asset amortization expense and higher restructuring and acquisition integration charges. Benefits from simplification, restructuring and acquisition integration activities, prior-year pricing actions and favorable product mix partially offset the decrease in margins.

The following business realignment and acquisition integration charges are included in Diversified Industrial North American and Diversified Industrial International operating income:
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(dollars in millions)
 
2020
 
2019
 
2020
 
2019
Diversified Industrial North America
 
$
10

 
$
2

 
$
23

 
$
10

Diversified Industrial International
 
12

 
3

 
23

 
10


The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative implemented by operating units throughout the world as well as plant closures. Current-year acquisition integration charges relate to the Lord acquisition. Prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR Inc. ("Clarcor"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We believe the cost savings realized from the workforce reduction measures taken during the first nine months of fiscal 2020 will positively impact our operating income. We expect to continue to take actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment, especially in light of the rapidly changing business conditions resulting from the COVID-19 pandemic. We currently anticipate incurring approximately $25 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2020, a majority of which relates to actions taken in response to business conditions resulting from COVID-19. However, continually changing business conditions could impact the ultimate costs we incur.
Diversified Industrial Segment backlog as of March 31, 2020 increased from the prior-year quarter primarily due to the addition of the Lord backlog in the current fiscal year and orders exceeding shipments in the International businesses, partially offset by shipments exceeding orders in the North American businesses. Within the International businesses, orders exceeding shipments in the Asia Pacific region were partially offset by shipments exceeding orders in Europe and Latin America.


- 25 -




As of March 31, 2020, Diversified Industrial Segment backlog increased compared to the June 30, 2019 amount of $2,011 million primarily due to the addition of Lord backlog during the current fiscal year. Excluding the impact of Lord, backlog in the Diversified Industrial Segment remained flat as as shipments exceeding orders in the North American businesses were offset by orders exceeding shipments in the International businesses. Within the International businesses, the Asia Pacific region and Europe accounted for approximately 85 percent and 15 percent of the increase, respectively.
Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Aerospace Systems Segment
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(dollars in millions)
 
2020
 
2019
 
2020
 
2019
Net sales
 
$
745

 
$
652

 
$
2,111

 
$
1,833

Operating income
 
$
127

 
$
135

 
$
371

 
$
366

Operating margin
 
17.1
%
 
20.7
%
 
17.6
%
 
20.0
%
Backlog
 
$
3,159

 
$
2,134

 
$
3,159

 
$
2,134

The increase in net sales in the Aerospace Systems Segment for the current-year quarter and first nine months of fiscal 2020 was primarily due to acquisitions, which contributed approximately $109 million and $241 million in net sales during the current-year quarter and first nine months of fiscal 2020, respectively. In the current-year quarter, the increase in net sales from acquisitions and higher volume in the military and commercial aftermarket businesses was partially offset by lower volume in the commercial and military original equipment manufacturer ("OEM") businesses. During the first nine months of fiscal 2020, net sales benefited from higher volume in the commercial and military aftermarket and military OEM businesses, partially offset by lower volume in the commercial OEM business. Net sales in the current-year quarter were negatively impacted by the halt in production of the Boeing 737 MAX in January 2020, while the first nine months of fiscal 2020 were impacted by both the production rate reduction and production halt of the aircraft.
Operating margin decreased during the current-year quarter and first nine months of fiscal 2020 compared to the prior-year periods primarily due to acquisition-related expenses, acquisition integration charges and higher intangible amortization expense. Higher engineering development expenses in the current-year quarter and the halt in production of the Boeing 737 MAX also contributed to lower operating margin. Operating margin benefited from higher military and commercial aftermarket volume in both the current-year quarter and first nine months of fiscal 2020 and favorable OEM product mix during the first nine months of fiscal 2020.
As a result of the rapidly changing business conditions due to the COVID-19 pandemic, we expect to take the actions necessary to structure appropriately the operations of the Aerospace Systems Segment. These actions are expected to result in approximately $27 million of additional business realignment charges in the remainder of fiscal 2020. However, continually changing business conditions could impact the ultimate costs we incur.
The increase in backlog from both the prior-year quarter and June 30, 2019 amount of $2,209 million is primarily due to the addition of the Exotic backlog in the first nine months of fiscal 2020. Orders exceeding shipments in the military and commercial OEM and military and commercial aftermarket businesses also contributed to the increase in backlog from the prior-year quarter and June 30, 2019 amounts. While orders exceeded shipments in all businesses, they were heavily weighted to the military businesses during the current-year quarter. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

- 26 -



Corporate general and administrative expenses
Corporate general and administrative expenses were $48 million for the current-year quarter compared to $33 million in the prior-year quarter and were $133 million for the first nine months of fiscal 2020 compared to $147 million for the first nine months of fiscal 2019. Corporate general and administrative expenses were 1.3 percent of sales in both the current year-quarter and first nine months of fiscal 2020 compared to 0.9 percent and 1.4 percent of sales in the prior-year quarter and first nine months of fiscal 2019, respectively. Corporate general and administrative expenses increased in the current-year quarter primarily due to higher net expense associated with the Company's deferred compensation programs. Unfavorable market fluctuations related to investments associated with these programs were partially offset by favorable changes in the related liabilities. During the first nine months of fiscal 2020, corporate general and administrative expenses benefited from favorable market fluctuations in deferred compensation program liabilities, partially offset by unfavorable changes in the associated investments. The current-year quarter and first nine months of fiscal 2020 also experienced lower research and development spending.
Other expense (in the Business Segment Information) included the following:
(dollars in millions)
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
Expense (income)
 
2020
 
2019
 
2020
 
2019
Foreign currency transaction
 
$
(20
)
 
$
3

 
$
(13
)
 
$
5

Stock-based compensation
 
7

 
8

 
45

 
44

Pensions
 
6

 
4

 
23

 
14

Acquisition expenses
 

 

 
115

 

(Gain) loss on disposal of assets and divestitures
 
(1
)
 
1

 
(5
)
 
5

Interest income
 
(3
)
 
(4
)
 
(29
)
 
(11
)
Other items, net
 
12

 
9

 
(8
)
 
26

 
 
$
1

 
$
21

 
$
128

 
$
83

Foreign currency transaction primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions.

CONSOLIDATED BALANCE SHEET
(dollars in millions)
 
March 31,
2020
 
June 30,
2019
Cash
 
$
790

 
$
3,371

Trade accounts receivable, net
 
2,174

 
2,131

Inventories
 
2,011

 
1,678

Intangible assets, net
 
3,882

 
1,783

Goodwill
 
7,830

 
5,454

Notes payable and long-term debt payable within one year
 
1,035

 
587

Long-term debt
 
8,098

 
6,521

Shareholders’ equity
 
6,296

 
5,962

Working capital
 
$
1,808

 
$
4,521

Current ratio
 
1.5
 
2.4
Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $697 million and $975 million held by the Company's foreign subsidiaries at March 31, 2020 and June 30, 2019, respectively. The Company has determined it will no longer permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.
Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade accounts receivable was 54 days at March 31, 2020, and 53 days at June 30, 2019. We believe that our receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

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Inventories as of March 31, 2020 increased by $333 million (which includes an increase of $363 million from acquisitions and a decrease of $38 million from the effect of foreign currency translation). After consideration of the effects of acquisitions and foreign currency translation, inventories increased primarily due to an increase in the Aerospace Systems Segment, partially offset by a decrease in the Diversified Industrial Segment. Days supply of inventory on hand was 83 days at March 31, 2020, 69 days at June 30, 2019 and 71 days at March 31, 2019.
Intangible assets, net and Goodwill increased from prior year-end primarily due to the current-year acquisitions of Lord and Exotic. Refer to Note 4 to the Consolidated Financial Statements for further discussion.
Notes payable and long-term debt payable within one year increased from prior year-end primarily due to higher commercial paper notes outstanding of which a portion was used to finance the purchase of the Lord and Exotic acquisitions.
Long-term debt increased by $1,577 million primarily due to outstanding term loans related to the acquisition of Lord and Exotic. Refer to Note 15 to the Consolidated Financial Statements for further discussion.
Shareholders’ equity activity during the first nine months of fiscal 2020 included decreases of approximately $147 million and $233 million as a result of share repurchases and foreign currency translation, respectively.

CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
Nine Months Ended March 31,
(dollars in millions)
 
2020
 
2019
Cash provided by (used in):
 
 
 
 
Operating activities
 
$
1,291

 
$
1,093

Investing activities
 
(5,045
)
 
(116
)
Financing activities
 
1,273

 
(690
)
Effect of exchange rates
 
(41
)
 
(10
)
Net (decrease) increase in cash and cash equivalents
 
$
(2,522
)
 
$
277


Cash flows provided by operating activities for the first nine months of fiscal 2020 was higher than the first nine months of fiscal 2019 due to an increase in cash provided by working capital items. In addition, the first nine months of fiscal 2019 includes a $200 million discretionary pension contribution. We continue to focus on managing our inventory and other working capital requirements.
Cash flows used in investing activities increased primarily due to acquisition activity in the first nine months of fiscal 2020. It also includes $121 million of proceeds from the redemption of company-owned life insurance investments associated with the Company's deferred compensation programs during the current-year quarter.
Cash flows provided by financing activities for the first nine months of fiscal 2020 includes net commercial paper borrowings of $362 million compared to $479 million in the first nine months of fiscal 2019. Cash flows from financing activities in the first nine months of fiscal 2020 also includes proceeds from the $925 million and $800 million term loans related to the acquisition of Exotic and Lord, respectively. Refer to Note 15 to the Consolidated Financial Statements for further discussion.
Our goal is to maintain a strong investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At March 31, 2020, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:
Fitch Ratings
 
BBB+
Moody's Investor Services, Inc.
 
Baa1
Standard & Poor's
 
BBB+
During the current-year quarter, we have taken several meaningful measures to strengthen our liquidity position in light of the COVID-19 pandemic, including limiting capital expenditures to safety-related issues and strategic investments, the suspension of our share repurchase program and other cost reduction efforts. Although we can not reasonably estimate the duration of the pandemic or its impact on our business, we believe these measures, as well as access to committed credit under our credit agreement, position the Company well to manage through the current economic uncertainty and capitalize on our position as the global leader in motion and control technologies as the economy recovers.

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During September 2019, the Company amended and extended its existing multi-currency credit agreement, increasing its capacity to $2,500 million. As of March 31, 2020, the Company had $1,551 million available for borrowing under the credit agreement. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
As of March 31, 2020, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of March 31, 2020, $949 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $1,537 million.
The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at March 31, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At March 31, 2020, the Company's debt to debt-shareholders' equity ratio was .59 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.
CRITICAL ACCOUNTING POLICIES
There were no material changes to our critical accounting policies as disclosed in Part II, Item 7 of our fiscal 2019 Annual Report on Form 10-K, except as follows:

Impairment of Goodwill - Goodwill is tested for impairment at the reporting unit level annually and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. At December 31, 2019, the Company performed its fiscal 2020 annual goodwill impairment test for each of its six reporting units, which are equivalent to its operating segments. The results of this test indicated that the fair value substantially exceeded carrying value for all reporting units.

Additionally, we did not identify any events or circumstances during the third quarter of fiscal 2020 that required performance of an interim impairment test. However, the affects of COVID-19 on the global economy, including further market disruption, lack of economic recovery or lower than anticipated customer demand, may require the performance of an interim impairment test in future periods.


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Forward-Looking Statements
Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may impact the Company's tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.
Among other factors which may affect future performance are:
global economic and political factors, including the impact of the global outbreak of COVID-19 and governmental and other actions taken in response, manufacturing activity, air travel trends, currency exchange rates and monetary policy, trade policy and tariffs, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability, as well as uncertainties associated with the timing and conditions surrounding the return to service of the Boeing 737 MAX;
our ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integrations of Clarcor, Lord and EMFCO Holdings Incorporated, parent company of Exotic; and our ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
our ability to effectively manage expanded operations from the acquisitions of Clarcor, Lord and Exotic;
the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;
increased cybersecurity threats and sophisticated computer crime;
business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;
the development of new products and technologies requiring substantial investment;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs, and changes in product mix;
uncertainties surrounding the ultimate resolution of outstanding legal and regulatory proceedings, including the outcome of any appeals;
additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
potential product liability risks;
our ability to enter into, own, renew and maintain intellectual property and know-how;
our leverage and future debt service obligations;
potential impairment of goodwill;
compliance costs associated with environmental laws and climate change regulations;
our ability to manage costs related to insurance and employee retirement and health care benefits;
compliance with federal rules, regulations, audits and investigations associated with being a provider of products to the United States government; and
our ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases.

The Company makes these statements as of the date of this disclosure and undertakes no obligation to update them unless otherwise required by law.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and 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.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 17 to the Consolidated Financial Statements. Gains or losses on derivatives that are not hedges are adjusted to fair value through the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates.
As discussed elsewhere in this report, we expect the recent outbreak of COVID-19 to negatively impact our business and results of operations in the future.  As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated, but could be material.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2020. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of March 31, 2020, the Company’s disclosure controls and procedures were effective.
In response to the COVID-19 pandemic, many of our team members began working from home during the third quarter of fiscal 2020. We are continually monitoring and assessing the changing business environment resulting from COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness. Management has taken measures to ensure that our disclosure controls and procedures and internal controls over financial reporting remained effective and were not materially affected during this period.
The Company acquired Lord and Exotic during October 2019 and September 2019, respectively, and is currently integrating their processes and internal controls. Except for the Lord and Exotic acquisitions, there were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.





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PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION


ITEM 1A. Risk Factors.

The following disclosure modifies the discussion of certain risks and uncertainties previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2019. In addition to the other information set forth in this report, you should carefully consider the other risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2019. The impact of COVID-19 may also exacerbate any of these risks, which could have a material effect on us.
The COVID-19 pandemic has disrupted our operations and could have a material adverse effect on our business and financial condition.
The COVID-19 pandemic, along with the response to the pandemic by governmental and other actors, has disrupted our operations and is expected to continue to negatively impact our operations in the future, which impact may be material. We have experienced, and may continue to experience, mandatory and voluntary facility closures in certain jurisdictions in which we operate. Furthermore, several of our customers have temporarily suspended operations and we have experienced less demand for our products. Disruptions to our customers in the aerospace industry, which is facing the consequences of travel restrictions and severely diminished demand, have been and are expected to continue to be especially acute. Additionally, the COVID-19 outbreak has, and could further, disrupt our supply chain. Facility closures or other restrictions, as well as supply chain disruptions, could materially adversely affect our ability to adequately staff, supply or otherwise maintain our operations. Moreover, because a large number of our employees have transitioned to working from home, we may be subject to increased vulnerability to cyber and other information technology risks. We have modified, and may further modify, our business practices in response to the risks and negative impacts associated with the COVID-19 pandemic. However, there can be no assurance that these measures will be temporary or successful.

The impact of the COVID-19 pandemic continues to evolve and its ultimate duration, severity and disruption to our business, customers and supply chain, and the related financial impact to us, cannot be accurately forecasted at this time. Should such disruption continue for an extended period, the adverse effect on our business, results of operations and financial condition could be more severe than previously anticipated. Additionally, continued weak economic conditions generally could result in impairment in value of our tangible or intangible assets. Furthermore, future public health crises are possible and could involve some or all of the risks discussed above.


ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)
Unregistered Sales of Equity Securities. Not applicable.
(b)
Use of Proceeds. Not applicable.
(c)
Issuer Purchases of Equity Securities.
Period
 
(a) Total
Number of
Shares
Purchased
 
(b) Average
Price Paid
Per Share
 
(c) Total Number  of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
(d) Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
January 1, 2020 through January 31, 2020
 
81,700

 
$
204.03

 
81,700

 
10,209,739

February 1, 2020 through February 29, 2020
 
73,000

 
$
206.96

 
73,000

 
10,136,739

March 1, 2020 through March 31, 2020
 
108,500

 
$
138.11

 
108,500

 
10,028,239

Total:
 
263,200

 
 
 
263,200

 


 
(1)
On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a fiscal year. There is no expiration date for this program. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic.

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ITEM 6. Exhibits.
The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:
Exhibit
No.
 
Description of Exhibit
 
 
 
31(a)
 
 
 
31(b)
 
 
 
 
32
 
 
 
 
101.INS
 
Inline XBRL Instance Document.*
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document. *
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document.*
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104
 
Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
*
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended March 31, 2020 and 2019, (ii) Consolidated Statement of Income for the nine months ended March 31, 2020 and 2019, (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2020 and 2019, (iv) Consolidated Statement of Comprehensive Income for the nine months ended March 31, 2020 and 2019, (v) Consolidated Balance Sheet at March 31, 2020 and June 30, 2019, (vi) Consolidated Statement of Cash Flows for the nine months ended March 31, 2020 and 2019, and (vii) Notes to Consolidated Financial Statements for the nine months ended March 31, 2020.



- 33 -




SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
PARKER-HANNIFIN CORPORATION
 
 
(Registrant)
 
 
 
 
 
/s/ Catherine A. Suever
 
 
Catherine A. Suever
 
 
Executive Vice President - Finance & Administration and
 
 
Chief Financial Officer
 
 
 
 
 
 
Date:
May 6, 2020
 




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