PARKER
HANNIFIN
ANNUAL
REPORT
5
1
0
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WINNING
TOGETHER
The Win Strategy™ is the Parker business system and was introduced in 2001.
It has been instrumental in transforming the company’s operations and optimizing performance.
The Win Strategy has served Parker exceptionally well and many of its core principles will remain
in place. However, under new leadership, the company has reached an opportune time to set a
new course for Parker in a fast-changing and increasingly challenging global environment. The
new Win Strategy will position the company to achieve top quartile financial performance among
its diversified industrial proxy peer companies. Over time, executing the new Win Strategy will
ensure Parker is on track
to achieve its vision of Engineering Your Success.
THE YEAR IN
REVIEW
FOR THE YEARS ENDED JUNE 30,
2015
2014
2013
(dollars in thousands, except per share data)
OPERATING DATA
Net sales
Gross profit
$ 12,711,744
$ 13,215,971
$ 13,015,704
3,056,499
3,027,744
2,929,029
Net income attributable to common shareholders
1,012,140
1,041,048
948,427
Net cash provided by operating activities
1,301,941
1,387,893
1,190,935
PER SHARE DATA
Diluted earnings
Dividends
RATIOS
Return on sales
$
6.97
2.37
$
6.87
$
1.86
6.26
1.70
8.0 %
7.9 %
7.3 %
Debt to debt-shareholders’ equity
36.6
25.9
33.0
OTHER
Number of employees
54,754
57,447
58,151
LETTER TO
SHAREHOLDERS
Donald E. Washkewicz Chairman of the Board, Lee C. Banks President and Chief Operating Officer, Thomas L. Williams Chief Executive Officer (left to right).
Competing and winning in today’s
challenging global markets will
require Parker to build on the
strong foundation we have in
place while setting a new course
with strategies that take our
FISCAL YEAR 2015
PERFORMING IN
A CHALLENGING
MARKET
In fiscal year 2015, Parker faced
• Cash flow from operations for
fiscal year 2015 was $1.3 billion,
or 10.2% of sales, representing
the 14th consecutive year that
Parker has generated operating
cash greater than 10% of sales
performance to the next level.
significant challenges such as a
before discretionary pension
The Win Strategy, first introduced
wavering global macroeconomic
contributions.
in 2001, has been the framework
environment, second-half
for how we have operated for a
weakness in key end markets that
• We continued to deploy capital
decade and a half. Its success
pressured order rates and the
efficiently to return value to
serves as a powerful legacy to our
effects of the strengthening U.S.
shareholders. We increased
Chairman, Don Washkewicz, for
dollar. We took actions to adjust
the quarterly dividend by 31%
his visionary leadership as CEO.
to these conditions, including
during the fiscal year, and have
Lee Banks and I are honored to be
the completion of a voluntary
now increased dividends for
handed the responsibility to build
retirement program in the U.S.
59 consecutive fiscal years.
on the success that has come
and a broad range of other cost
In October 2014, we also
before us.
reduction initiatives implemented
announced a plan to purchase
globally. These actions allowed us
$2 to $3 billion worth of our
Six months ago we set out
to deliver another year of strong
own shares over two years
to redefine what it will take to
financial performance.
leverage our strengths and
and, during fiscal year 2015,
we repurchased $1.4 billion in
allow Parker to be a consistent
• Total net sales were $12.7
shares of Parker stock.
top quartile performer among
billion, a 4% decrease from the
our diversified industrial proxy
previous year. The decline in
• Fortune magazine named
peer companies. We met with
sales was driven mainly by the
Parker among its most admired
hundreds of Parker employees
effect of currency rate changes
companies, citing innovation as
and leaders in every region of the
and masked some bright spots
a top reputation attribute.
world, we tapped the minds of
including a double-digit increase
our experienced Board members
in sales from innovative new
Throughout fiscal year 2015,
and engaged collaboratively
products.
with our shareholders. The
we underwent a series of
restructuring activities designed
culmination of that work is a
• Total adjusted segment
to reduce fixed costs and improve
new Win Strategy. Using this as
operating margin was 14.9%,
profitability. Restructuring
a guide to our actions and as a
representing a 50 basis point
programs will continue in fiscal
yardstick for our progress, we are
(bps) improvement from
year 2016 and, combined with
striving to achieve new financial
the previous year. Strong
our new Simplification initiative,
and operational performance
performance despite a decline
are expected to build a stronger,
targets designed to reward Parker
in sales.
shareholders for their investment.
more agile Parker capable of
generating consistent, long-term
• Net income was $1.01 billion,
profitable growth. Going forward
or $6.97 per share. Adjusted
we expect challenging market
earnings per share were $7.25,
conditions with a bottom forming
an increase of 4% compared to
sometime during fiscal year 2016.
the prior year.
Despite a slight overall decrease
3
Th e Win Strategy
Our Vision: Engineering Your Success
Goals
TM
Engaged
People
STRATEGIES
Premier Customer
Experience
STRATEGIES
• Environmental, Health
• Quality Solutions On Time
& Safety
• Entrepreneurial
• High Performance
Teams & Leaders
• eBusiness Leadership
• Ease of Doing Business
Financial
Performance
STRATEGIES
• Simplifi cation
• Lean Enterprise
• Strategic Supply Chain
• Value Pricing
Profi table
Growth
STRATEGIES
Organic
Acquisitions
Services
• Market-Driven Innovation
• System Solutions
• Strong Distribution
• Grow Share
• Engineering Expertise
SEPTEMBER 2015
#1 Motion & Control Company
Goals
Engaged
People
Premier Customer
Experience
Profi table
Growth
Financial
Performance
MEASURES
MEASURES
MEASURES
MEASURES
• Zero Accidents
• 98%+ On-Time Delivery
• Organic Growth 150 bps
• Top Quartile Diversifi ed
• Speed Within
Win Strategy
• Ownership: 80%+ in
High Performance Teams
• Inclusive Environment
• Six Sigma Quality
• Increase eBusiness
Conversion Rate
> Market
Industrial
• 20%+ Market Share
• Year-over-Year Growth in:
• #1, #2 Position Each Group
• EPS
• EBIT
• Cash Flow
• Division Net Earnings
• 17% Operating Income
• Best-in-Class Lead Times
• Grow Distribution
& Quote Speed
& Services
50% DIST
• Engagement Survey > 74%
• Likelihood to
Recommend > 30
• Customer Dashboards
50% OEM
• 21.4% RONA
• 17% ROIC
• Increasing New Product
& System Sales
4
in sales forecasted for the year,
Customer service has been a
Market-driven innovation to
by aggressively managing costs,
longstanding priority for Parker,
improve our products, systems
we expect to increase adjusted
but the new Win Strategy
and services is a key component
margins and earnings per share
introduces the concept of
of our growth strategy. Parker has
to better position the company
customer experience and expands
continued to invest in the research
as the business cycle improves.
the standards we hold ourselves
and development of new products
THE NEW WIN
STRATEGY
We are excited and optimistic
about the opportunities we have
to build on our past successes
as we set course with a new
Win Strategy. While many of the
core principles of the original
Win Strategy remain in place,
there are emerging opportunities
that enable us to ramp up our
performance.
Our future begins with an
increasing focus on our employees
– the Parker team members. High
engagement is directly correlated
to exceptional performance.
To drive this engagement we
will be prioritizing a culture of
environmental, health and safety,
entrepreneurialism and a High
Performance Team structure. We
realize the value of our collective
efforts. The team members closest
to in meeting our customers’
and systems, and established a
needs. We are setting big, bold
beachhead in the delivery of new
delivery and quality goals. In
service capabilities. Both areas
addition, Parker will work to ensure
present exciting new growth
that customers’ expectations
opportunities.
are exceeded, leaving a positive
impression and increasing the
Innovation strategies will
likelihood of repeat or increased
balance the need to develop
sales from Parker.
new-to-the-market, new-to-the-
world solutions with near-term
While numerous touchpoints with
improvements, modifications and
Parker will define the customer
extensions to existing products
experience and make it easier
that can generate more immediate
to do business with us, in an
commercial success. For example,
increasingly digital world, Parker
Parker has partnered with GE,
will place greater emphasis on
a leading supplier to locomotive
building an online experience that
manufacturers, for an innovative
creates a destination point for the
Tier IV engine oil filtration
motion and control industry. Our
system. The technology not only
eBusiness strategy will create
reduces emissions but protects
new opportunities for customers
the engine to greatly improve
to increase their understanding of
reliability and eliminate the threat
Parker’s capabilities, find products
of costly downtime caused by
and services that match their
contamination. Systems innovation
needs, self-serve or get support
will be important as we target
for existing products and place
generating 40% of sales from
to the work know what is needed
orders online.
systems. In fiscal year 2015,
Parker was selected by multiple
to improve performance. Our
strategy is to utilize natural High
Performance Teams with specific
responsibilities and ownership. By
encouraging an “owners” mentality
and aligning incentives with that of
our shareholders, we aim to create
an environment for continuous
improvement and for attracting
and retaining a talented workforce.
Through our engaged team
customers to supply systems
members and by providing a
to transfer energy from battery
premier customer experience,
modules to the utility grid in many
we are in a position to accelerate
global applications.
growth. With the new Win
Strategy, we have built a roadmap
that will re-energize our sales and
help us achieve target organic
growth 150 bps greater than the
market.
5
Our services strategy will center
the design and manufacture of
We have established an
on the significant potential offered
technically advanced, cryogenic
aggressive target to reach 17%
by the Internet of Things (IoT) as
valves for marine liquefied
operating income margin in five
we expand the use of our
natural gas and industrial gas
years. Numerous opportunities
web-enabled solutions across
applications. We also acquired
exist for Parker to drive better
our broad technology platform
Ezi-Hose Pty. Limited based in
margin performance. For example,
to better serve our customers by
Perth, Australia with annual sales
Parker is a key supplier of systems
improving uptime, reducing safety
of approximately $18 million.
to many new aircraft expected
risks and optimizing processes.
to enter into service in the next
To drive this opportunity across
Parker’s distribution network
several years. The amount of
our operations, we recently
has been in development for
research and development
created a new role of Corporate
more than 50 years and stands
expense historically required
Vice President - eBusiness, IoT
as one of our greatest competitive
to support this business has
and Services.
strengths in addressing the
begun to come down. In addition,
maintenance, repair and overhaul
margin improvement strategies
In July 2015, we made an equity
market. Typically counter-cyclical,
within the EMEA region, ongoing
investment in Exosite LLC, a
this channel also carries higher
supply chain reductions, lean
company that has deployed IoT
margin sales. While we target a
enterprise and value pricing are
solutions across several of our
balance of OEM and aftermarket
also expected to contribute to
global operating divisions during
sales in our diversified industrial
profitability.
the past two years. Exosite’s
segment, which we have achieved
industry-leading software has
in the U.S., significant opportunity
A new initiative to increase
already been implemented in the
exists in international markets
margins comes from a strategy
Parker Sporlan Smart Service
to grow this channel to better
we call Simplification. Across
Tool Kit and powers Parker
balance our sales and improve
our entire enterprise, we see
Transair’s SCOUT technology.
margins.
These capabilities and other
a myriad of opportunities to
make improvements that reduce
services will be deployed across
These growth strategies, in unison,
organizational complexity in the
our installed base of products to
create opportunities for Parker to
following four areas:
generate new service revenue
outpace the growth in our markets
streams for Parker.
and increase our share of the $120
• In many of our businesses,
billion motion and control industry.
the last 5% of sales requires
In addition to organic growth
a disproportionate amount of
strategies, we intend to continue
Total shareholder returns are highly
our resources to service those
our long history of being a great
correlated to year-over-year growth
sales. Opportunities exist to
acquirer and integrator in the
in earnings and return on invested
more efficiently service that
highly fragmented motion and
capital. Driving our sales growth
“long tail” of product sales.
control industry. In July 2015, we
and better leveraging that growth
completed two transactions. We
through higher segment operating
• In addition to traditional
purchased President Engineering
margins will be key to increasing
manufacturing restructuring, we
Group Ltd. (PEGL) based in
total shareholder returns.
want to strategically optimize
Sheffield, United Kingdom with
annual sales of approximately
$30 million. PEGL specializes in
6
our organizational structure and
processes.
• While we are committed to
Engaged People
Building on the legacy that has
our decentralized division
High engagement and ownership
come before us is a significant
operating structure, in some
by our team members drives
challenge. Lee and I are fortunate
cases we have sub-optimized
exceptional performance.
to be surrounded by a cadre
divisions and created overlap in
of talented leaders to help us
others. We have already begun
Premier Customer Experience
navigate the path forward and
consolidating divisions in our
Moving from a service mindset
we are thankful for the hard
operating groups.
to creating a great customer
work, dedication and support
experience enables growth.
of all of our team members. We
• We also see opportunities to
reduce the bureaucracy that
Profitable Growth
also appreciate the guidance of
Don and our Board during this
naturally develops as part of a
Implement strategies to grow
leadership transition and you,
large global enterprise.
organically 150 bps faster than the
our shareholders, for sharing our
market.
confidence in Parker’s long-term
We expect our Simplification
success.
strategies to not only reduce
Financial Performance
operating costs but also increase
Top quartile financial performance
speed and growth and create
versus our diversified industrial
Sincerely,
a better experience for our
proxy peer group, with year-over-
customers.
year growth in earnings.
LOOKING AHEAD
Although success under the new
Win Strategy will be achieved in
Beyond these goals, a company like
Thomas L. Williams
Parker owes its success, reputation
Chief Executive Officer
and legacy to a strong culture and
stages, we will not be patient. Many
the values that our team members
actions are already underway and
aspire to each day. We have a
more will be jumpstarted as we roll
competitive and compassionate
Lee C. Banks
out the new strategy to our team
members in the months ahead.
Speed will be a common theme
across our operations because
speed wins tomorrow’s customer.
Throughout this annual report
you will read details about the
culture with a defined set of
President and Chief Operating
values that reflect who we are as
Officer
a company. It is the reinforcement
of this strong foundation, more
than any other measure, that will
determine our success in the future.
Donald E. Washkewicz
Chairman of the Board
All of us at Parker see tremendous
goals, strategies and measures of
opportunities to leverage our
August 2015
success for the new Win Strategy.
strengths and create a meaningful
If I were to sum up what I believe
to be important for each of our
four goals it would include the
following highlights:
and positive contribution to
society, our communities,
our customers and our
shareholders. In doing so, we
create opportunities for our team
members to succeed as we share
a common vision of Engineering
Your Success.
7
ENGAGED
PEOPLE
Parker team members are the foundation of the company’s success. Their collective
knowledge is shaped by a remarkably diverse range of cultures and experiences. The
company understands the powerful value team members offer by leveraging their expertise
to make decisions which improve overall performance.
By creating a culture in which individual perspectives are embraced, and where the
safety of every person is prioritized above all else, Parker has attracted some of the most
driven and talented individuals from around the world. Encouraged to act much the same
as entrepreneurs in control of their own future, Parker team members form deep and
meaningful relationships as they collaborate to improve their portion of the business.
+
0
80%
74%
Zero Accidents
The goal is always zero accidents. In the near term, Parker is driving to
reduce the number of workplace accidents by 50%.
Participation
Parker strives to create an ownership mentality, with most team members
in High Performance Teams, following a principle that those closest to the
work are the most capable of improving performance.
Engaged
There is a direct correlation between high engagement and great
performance, and through a Global Employee Engagement Survey, Parker
can measure and improve its ability to engage team members in driving
the company’s performance.
STRATEGIES
• Environmental, Health & Safety
Nothing is more important to Parker than making sure every team member returns
home safely after each work day. The company is also committed to operating
responsibly and preserving its vibrant communities around the world by serving
as an active steward of the environment through resource conservation, waste
reduction and sustainable product design.
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SAFETY-FIRST
CULTURE
• Entrepreneurial
The entrepreneurial spirit established by founder Art Parker set the company on a distinct path of innovation and growth.
Today, Parker aims to rekindle that spirit by encouraging flexibility, autonomy and the ability to explore and excel.
• High Performance Teams & Leaders
A structured approach to team work and collaborative decision making, High Performance Teams are formed at Parker to apply
the unique knowledge and perspective of team members closest to the product and the customer. This structure empowers people
to leverage their expertise to solve problems, implement decisions and improve the company.
MEASURES
• Zero Accidents
A safety-first environment is not only the right way to run the company, it is also the most productive. Safety, productivity and
profitability are all closely linked.
• Speed Within Win Strategy
Several strategies included in the Win Strategy are intended to increase the speed with which Parker team members perform
tasks and, as a result, cut the time it takes for Parker to respond to customer needs or changes in the market.
• Ownership: 80%+ in High
Performance Teams
Establishing an entrepreneurial framework that empowers team members to make
decisions which impact their work is dependent upon ensuring they are engaged in
High Performance Teams. Parker is targeting an 80% or greater participation rate.
• Inclusive Environment
Parker is committed to building a diverse and inclusive workforce that respects and
embraces the unique perspectives of all people.
THINK AND
ACT LIKE
AN OWNER
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• Engagement Survey > 74%
The level of success Parker achieves in implementing the strategies is dependent on a fully engaged global team. Parker’s
Global Employee Engagement Survey questions are scientifically structured to accurately measure engagement with the goal to
achieve an engagement score of 74% or better, which is top quartile performance.
9
PREMIER
CUSTOMER
EXPERIENCE
Parker’s focus has remained consistent for decades: help customers to improve their
productivity and profitability.
In addition to expanding and improving its broad range of motion and control
technologies, Parker is constantly implementing new practices to improve the customer
experience. Efforts to further improve quality, shorten lead times in production and
ensure on-time delivery are all intended to enable customers to improve performance
and make it easier than ever to do business with Parker.
30
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98%
+
Likelihood to Recommend
A positive customer experience and a high likelihood to recommend score
will lead to steady organic growth. If Parker provides a great customer
experience, promoters will ultimately help to grow the business.
Six Sigma Quality
Great quality and reliability is what customers expect. This will be a
hallmark of their experience with Parker.
On-Time Delivery
Select a product, submit an order and count on receiving a package on or
before the target delivery date. Customers expect this level of service and
Parker strives to meet this standard with every order.
STRATEGIES
• Quality Solutions On Time
Through efficient inventory management, responsive manufacturing and a world-class supply chain, Parker reliably delivers the
products, systems and services needed to help its customers solve problems and keep their business moving forward.
• eBusiness Leadership
Parker’s customers increasingly interact with the company in a multi-channel,
digital environment. By continuing to improve digital capabilities, technologies
and processes, Parker will make it easier than ever for customers to leverage the
unmatched breadth of products, systems and knowledge the company offers.
• Ease of Doing Business
Parker needs to do all of the little things that make it easy to do business with the
company and create a great experience for customers.
POSITIVE
ONLINE
EXPERIENCE
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MEASURES
• 98%+ On-Time Delivery
As a strategic partner, Parker is focused on fulfilling orders on time. A nearly perfect on-time delivery rate is an absolute
requirement, and Parker precisely manages inventory and production schedules to consistently deliver.
• Six Sigma Quality
Each product that leaves the door bearing a Parker logo is held to the highest standards for quality and reliability. Parker
rigorously adheres to Six Sigma techniques for process improvement to minimize variability in its manufacturing processes and
decrease the number of returned parts per million (RPPM).
• Increase eBusiness Conversion Rate
As customers move through the buying process digitally, they perform key actions such as product information gathering,
downloading CAD files, online chat, requesting a quote and completing a purchase. Parker’s success will be measured by its
ability to guide customers along each of these interaction points.
• Best-in-Class Lead Times & Quote Speed
A central component of growing sales is demonstrating that it is easy to do
business with Parker, using speed during the quoting process and throughout
production as a key metric by which the company’s performance is measured.
• Likelihood to Recommend > 30
SPEED WINS
TOMORROW’S
CUSTOMER
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Likelihood to recommend is a measure that generates great feedback from
customers through a short survey after a transaction is completed. It measures the difference between promoters, the
percentage of those that have a positive experience, and detractors, the percentage with a negative experience. Parker’s goal is
to have a positive differential greater than 30 in scores of promoters over detractors.
• Customer Dashboards
Dashboards measure how well the company is performing from the perspective of its customers. If a problem is solved to better
serve a single customer, it enables the improvement of processes across the organization.
11
PROFITABLE
GROWTH
Parker’s approach to achieving profitable growth consists of three main strategies.
The first is to pursue organic growth by expanding and improving its core technology
platform to better serve new and existing customers. Parker also will continue to
strategically acquire and integrate companies which complement Parker’s core
technologies and enable expansion in key growth markets. Finally, Parker will leverage
advancing technology to further improve its services platform, utilizing sensors,
tracking tags and the IoT to reduce maintenance costs, improve uptime and increase
customers’ profitability.
3
50%
150
Paths to Profitable Growth
Organic, acquisition and services. Services represents an exciting way to
create new revenue streams for Parker. Opportunities in eBusiness, IoT
and services such as asset integrity management present excellent growth
potential across all operating groups.
Revenue from Distribution
Parker’s distribution channel is a distinct competitive advantage. The
company’s goal is an evenly balanced distribution-to-OEM industrial
sales mix in every region of the world – a significant growth opportunity in
EMEA, Asia Pacific and Latin America.
Organic Growth 150 bps >
Market
Implementing profitable growth strategies enables organic growth
150 bps greater than the market.
STRATEGIES
• Market-Driven Innovation
Parker’s strategy is to achieve market-driven innovation by spending time with the end users of its products and technologies.
It is through the understanding of their unmet needs that Parker will generate the best innovation ideas.
• System Solutions
With the broadest range of motion and control technologies, one of Parker’s key strengths is delivering efficient, reliable,
high-performance systems which enable customers to improve productivity and profitability and simplify their supply chain.
The company has a target of 40% of its revenue from system sales.
• Strong Distribution
One of Parker’s greatest assets is its world-class distribution channel. Continued focus on expanding this channel in emerging
markets and balancing the distribution-to-OEM industrial sales mix is expected to position Parker for long-term growth.
• Grow Share
A key solution to the challenge of increasing revenue will be to grow share, both
with key accounts and within target markets.
• Engineering Expertise
For Parker to achieve its financial performance goals and make a positive impact on
the world, it will need the right engineering skill sets at each of its global locations
staffed with highly motivated and inventive engineers.
GROWTH
THROUGH
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MEASURES
• Organic Growth 150 bps > Market
Parker’s goal is organic growth at a rate of 150 bps greater than the market each year, which accommodates natural fluctuations
in end market growth while emphasizing the need for Parker to grow share and outperform the market.
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• 20%+ Market Share
Parker will strive to account for at least 20% of the $120 billion motion and control
technologies market.
• #1, #2 Position Each Group
Each of Parker’s seven operating groups strive to establish a leadership position
within their respective markets through organic, acquisition and services growth.
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• Grow Distribution & Services
Measured globally, the mix of industrial sales through distribution and OEMs should be evenly split, as a balanced portfolio
will further ensure healthy margins and future growth. Parker will improve its services platform, leveraging technology to help
increase customer profitability and to reduce costs and downtime.
• Increasing New Product & System Sales
Guided by feedback received from customers, Parker engineers are discovering new ways to reduce weight, improve
performance and increase the efficiency of the products and systems the company delivers.
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FINANCIAL
PERFORMANCE
Financial performance goals are achieved as a result of effectively engaging people,
providing a premier customer experience and profitably growing the business. Parker
team members’ hard work and dedication to executing the Win Strategy will result in the
company earning a spot among the top quartile of diversified industrial companies.
4
4
25%
Simplification Outcomes
The result from Simplification is a reduction in organizational complexity,
increased speed, reduced costs and the ability to better serve customers.
This will enable profitable growth and strong financial performance.
Measures of Financial Growth
Total shareholder return is linked to year-over-year growth in four key
measures: earnings per share, earnings before interest and taxes, cash
flow and division net earnings (DNE).
Top Among Proxy Peer Group
Parker competes globally for talent and investment. The best way to
excel is to achieve performance consistent with top quartile diversified
industrial companies.
STRATEGIES
• Simplification
Key areas of focus include reducing revenue profile complexity, optimizing organizational structure and processes, consolidating
divisions and reducing bureaucracy. Simplification will increase speed, reduce costs and enable growth.
• Lean Enterprise
In recent years, Parker has made a great effort to implement lean principles across manufacturing. Parker is expanding lean
throughout the enterprise to non-manufacturing areas to further reduce costs and increase productivity and profitability.
• Strategic Supply Chain
Parker has built a competitive advantage through best-in-class supply chain management, leveraging purchasing power to
buy at the best value. The company strives to maintain a fully integrated supply chain, and continues to reduce the number of
suppliers to cultivate high-value relationships with key partners.
• Value Pricing
Pricing has a powerful effect on every company’s long-term growth. Utilizing an industry-leading approach to pricing, Parker is able
to provide customers high-quality products and systems at the best price based on the demonstrated value being created.
MEASURES
• Top Quartile Diversified Industrial
Parker’s primary goal is to rank among the top 25% of its proxy peers across a range of financial measures.
• Year-over-Year Growth
Year-over-year growth in four key financial metrics is correlated to driving total
shareholder return. Earnings per share (EPS) and earnings before interest and taxes
(EBIT) are the relevant corporate measures. Cash flow and division net earnings
(DNE) are the relevant division measures.
• 17% Operating Income
Aligned with the company’s goal of ranking among the best of its proxy peers,
Parker aims to achieve 17% operating income margin.
GROW
EARNINGS
YEAR OVER
YEAR
r
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•
• 21.4% RONA
Parker’s return on net assets (RONA) plan is a unique annual incentive available to team members that drives sales growth, profit
and the appropriate management of assets. Achieving 21.4% RONA at the divisions will generate 17% ROIC as a company.
• 17% ROIC
After-tax return on invested capital (ROIC) is a metric used at the corporate level to
determine how efficiently Parker is allocating invested capital to generate income,
and is strongly correlated to total shareholder return.
17%
OPERATING
INCOME AND
ROIC
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15
PARKER
CULTURE
AND VALUES
WINNING CULTURE
Parker insists on integrity, honesty, respect and ethical behavior, and encourages
diversity in all aspects of its global business. The company seeks to raise the standard
of living through responsible, global stewardship.
PASSIONATE PEOPLE
Parker team members are empowered - every idea counts and every role has a voice.
They are dedicated and realize the value of their collective efforts. Parker believes its
strength comes from the relationships Parker team members establish with each other,
customers and the world the company serves.
VALUED CUSTOMERS
Parker aims to delight its customers by partnering with them and responding to their
needs. The company knows its success is only possible through increasing customers’
productivity and profitability, thus ensuring their success as well.
ENGAGED LEADERSHIP
Parker leads by example, demonstrating its values in all circumstances and at all
times. Parker team members’ experience and abilities are the foundation of the
company’s operational excellence. Parker holds itself accountable for achieving the
results stakeholders expect.
It is the Parker culture and values, more than
any strategy or measure that will determine our
success in the future. Thomas L. Williams, Chief Executive Officer
16
Financial Review
Consolidated Statement of Income ............................................................. page 24
Consolidated Statement of Cash Flows ...................................................... page 27
Consolidated Statement of Comprehensive Income ................................... page 24
Consolidated Statement of Equity ............................................................... page 28
Business Segment Information ................................................................... page 25
Notes to Consolidated Financial Statements .............................................. page 29
Consolidated Balance Sheet ....................................................................... page 26
Eleven-Year Financial Summary .................................................................. page 46
15%
12%
9%
6%
3%
0%
5
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Five-Year Compound
Sales Growth
– Goal: 10%
9%
6%
3%
0%
5
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Return on Sales
– Goal: 6.5%
5
1
0
2
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Average Assets/Sales
– Goal: $0.80
25%
20%
15%
10%
5%
0%
5
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Return on
Invested Capital
– Goal: 15%
Management’s Discussion and Analysis
Overview
The Company is a leading worldwide diversified manufacturer of motion
and control technologies and systems, providing precision engineered
solutions for a wide variety of mobile, industrial and aerospace markets.
The Company’s order rates provide a near-term perspective of the
Company’s outlook particularly when viewed in the context of prior and
future order rates. The Company publishes its order rates on a quarterly
basis. The lead time between the time an order is received and revenue
is realized generally ranges from one day to 12 weeks for mobile and
industrial orders and from one day to 18 months for aerospace orders.
The Company believes the leading economic indicators of these markets
that have a correlation to the Company’s future order rates are as
follows:
• Purchasing Managers Index (PMI) on manufacturing activity
specific to regions around the world with respect to most mobile
and industrial markets;
• Global aircraft miles flown and global revenue passenger miles for
commercial aerospace markets and Department of Defense spending
for military aerospace markets; and
• Housing starts with respect to the North American residential air
conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to
a region of the world in the mobile and industrial markets is expanding.
A PMI below 50 indicates the opposite. Recent PMI levels for some
regions around the world were as follows:
June 30, 2015
March 31, 2015
June 30, 2014
United States
Eurozone countries
China
Brazil
53.5
52.5
49.4
46.5
51.5
52.2
49.6
46.2
55.3
51.8
50.7
48.7
Global aircraft miles flown and global revenue passenger miles have
both increased approximately seven percent from their comparable
2014 level. The Company anticipates that U.S. Department of Defense
spending with regards to appropriations, and operations and maintenance
for the U.S. Government’s fiscal year 2015 will increase by approximately
one percent from the comparable fiscal 2014 level.
Housing starts in June 2015 were approximately 27 percent higher
than housing starts in both March 2015 and June 2014.
The Company has remained focused on maintaining its financial
strength by adjusting its cost structure to reflect changing demand
levels, maintaining a strong balance sheet and managing its cash. The
Company continues to generate substantial cash flows from operations,
has controlled capital spending and has proactively managed working
capital. The Company has been able to borrow needed funds at
affordable interest rates and had a debt to debt-shareholders’ equity
ratio of 36.6 percent at June 30, 2015 compared to 39.7 percent at
March 31, 2015 and 25.9 percent at June 30, 2014. Net of cash and
cash equivalents and marketable securities and other investments, the
debt to debt-shareholders’ equity ratio was 16.8 percent at June 30,
2015 compared to 20.9 percent at March 31, 2015 and 2.0 percent
at June 30, 2014.
The Company believes many opportunities for growth are available.
The Company intends to focus primarily on business opportunities
in the areas of energy, water, food, environment, defense, life sciences,
infrastructure and transportation.
17
The Company believes it can meet its strategic objectives by:
• Serving the customer and continuously enhancing its experience
with the Company;
• Successfully executing its Win Strategy initiatives relating to premier
customer service, financial performance and profitable growth;
• Maintaining its decentralized division and sales company structure;
• Fostering an entrepreneurial culture;
• Engineering innovative systems and products to provide superior
customer value through improved service, efficiency and productivity;
• Delivering products, systems and services that have demonstrable
savings to customers and are priced by the value they deliver;
• Acquiring strategic businesses;
• Organizing around targeted regions, technologies and markets;
• Driving efficiency by implementing lean enterprise principles; and
• Creating a culture of empowerment through its values, inclusion
and diversity, accountability and teamwork.
Acquisitions will be considered from time to time to the extent there is
a strong strategic fit, while at the same time maintaining the Company’s
strong financial position. The Company will continue to assess its
existing businesses and initiate efforts to divest businesses that are
not considered to be a good long-term strategic fit for the Company.
Future business divestitures could have a negative effect on the
Company’s results of operations.
The discussion below is structured to separately discuss each of
the financial statements presented on pages 24 to 27. All year
references are to fiscal years.
Discussion of Consolidated Statement of Income
The Consolidated Statement of Income summarizes the Company’s
operating performance over the last three fiscal years.
(dollars in millions)
2015
2014
2013
Net sales
Gross profit margin
Selling, general and
administrative expenses
Selling, general and
administrative expenses,
as a percent of sales
Goodwill and intangible
asset impairment
Interest expense
Other (income), net
Loss (gain) on disposal
of assets
Effective tax rate
Net income attributable to
common shareholders
$12,712
24.0%
$13,216
22.9%
$13,016
22.5%
$ 1,545
$ 1,634
$ 1,555
12.2%
12.4%
11.9%
$ —
118
(43)
$ 189
83
(26)
$ —
92
(18)
4
29.3%
(409)
33.1%
(10)
27.6%
$ 1,012
$ 1,041
$ 948
NET SALES in 2015 were 3.8 percent lower than 2014. Acquisitions
made in the last 12 months contributed approximately $14 million
in sales in 2015 and the effect of currency rate changes decreased
net sales in 2015 by approximately $547 million. Excluding the
effect of acquisitions and currency rate changes, net sales in 2015
were essentially unchanged from 2014 as an increase in volume
experienced in the Diversified Industrial North American operations
and the Aerospace Systems Segment was offset by lower volume
experienced in the Diversified Industrial International operations.
18
Net sales in 2014 were 1.5 percent higher than 2013. Acquisitions
made during 2014 contributed approximately $74 million in sales and
the effect of currency rate changes decreased net sales in 2014 by
approximately $22 million. Excluding the effect of acquisitions and
currency rate changes, net sales in 2014 were 1.1 percent higher than
2013. The increase in sales in 2014 is primarily due to higher volume
experienced in the Diversified Industrial International operations
partially offset by lower sales in the Aerospace Systems Segment.
GROSS PROFIT MARGIN increased in 2015 primarily due to lower
business realignment charges in the Diversified Industrial International
operations and lower product support costs in the Aerospace Systems
Segment. Gross profit margin increased in 2014 primarily due to lower
defined benefit costs, and a favorable product mix in the Diversified
Industrial North American operations, partially offset by higher
business realignment charges in the Diversified Industrial International
operations and higher product support costs and an unfavorable
product mix in the Aerospace Systems Segment. Foreign currency
transaction (gain) loss (relating to cash, marketable securities and
other investments and intercompany transactions) included in cost
of sales for 2015, 2014 and 2013 were $(77.8) million, $5.4 million
and $22.4 million, respectively. Pension cost included in cost of sales
in 2015, 2014 and 2013 were $169.8 million, $174.8 million and $205.7
million, respectively. The lower pension cost in 2014 primarily resulted
from a lower amount of actuarial losses, primarily related to domestic
defined benefit plans. Included in cost of sales in 2015, 2014 and 2013
were business realignment charges of $19.4 million, $63.6 million
and $8.4 million, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased 5.5
percent in 2015 and increased 5.1 percent in 2014. The decrease in
2015 was primarily due to lower business realignment charges and
stock compensation expense, partially offset by higher net expenses
associated with the Company’s deferred compensation programs. Stock
compensation expense decreased primarily as a result of a lower number
of stock awards granted in 2015. The increase in selling, general and
administrative expenses in 2014 was primarily due to higher business
realignment charges and stock compensation expense, partially
offset by lower expenses associated with the Company’s various
other incentive compensation programs. Stock compensation expense
in 2014 increased primarily as result of a higher stock price used in
the calculation of the fair value of the stock awards at the date of grant.
Pension cost included in selling, general and administrative expenses
in 2015, 2014 and 2013 were $69.6 million, $64.2 million and $78.5
million, respectively. The lower pension cost in 2014 primarily resulted
from a lower amount of actuarial losses, primarily related to domestic
defined benefit plans. Included in selling, general and administrative
expenses in 2015, 2014 and 2013 were business realignment charges
of $12.9 million, $38.9 million and $3.9 million, respectively.
GOODWILL AND INTANGIBLE ASSET IMPAIRMENT related to the
Worldwide Energy Products Division. Refer to Note 7 to the Consolidated
Financial Statements for further discussion.
INTEREST EXPENSE in 2015 increased primarily due to a higher
weighted-average interest rate on borrowings. The higher weighted-
average interest rate primarily resulted from the issuance of $1,500
million of medium-term notes during the second quarter of 2015.
Interest expense in 2014 decreased primarily due to a lower average
interest rate in the debt portfolio, including lower average borrowing
rates on commercial paper borrowings, more than offsetting the
effect of higher weighted-average borrowings.
OTHER (INCOME), NET in 2015 and 2014 includes $23.2 million and
$11.1 million of income, respectively, related to the Company’s equity
interests in joint ventures.
LOSS (GAIN) ON DISPOSAL OF ASSETS includes a gain of $412.6 million
related to the deconsolidation of a subsidiary in 2014 and a net gain
of $14.7 million resulting from business divestiture activity in 2013.
EFFECTIVE TAX RATE in 2015 was favorably impacted by the re-enactment
of the U.S. Research and Development credit, an increase in the federal
manufacturing deduction and the absence of discrete tax costs incurred
in the prior year. These benefits were partially offset by an unfavorable
geographic mix of earnings. The effective tax rate in 2014 was unfavorably
impacted by discrete tax costs related to a non-deductible goodwill and
intangible asset impairment charge, the deconsolidation of a subsidiary
and the expiration of the U.S. Research and Development credit.
Discussion of Business Segment Information
The Business Segment information presents sales, operating income
and assets on a basis that is consistent with the manner in which the
Company’s various businesses are managed for internal review and
decision-making.
DIVERSIFIED INDUSTRIAL SEGMENT
(dollars in millions)
2015
2014
2013
Sales
North America
International
Operating income
North America
International
Operating income
as a percent of sales
North America
International
Backlog
Assets
Return on average assets
$5,716
4,741
$5,694
5,288
$5,638
5,110
956
584
946
572
909
602
16.7%
12.3%
$1,586
8,765
16.9%
16.6%
10.8%
$ 1,861
9,502
16.1%
11.8%
$1,803
9,388
16.1%
16.7%
Sales in 2015 for the Diversified Industrial North American operations
remained relatively flat compared to a 1.0 percent increase from 2013
to 2014. Acquisitions completed within the last 12 months contributed
approximately $7 million in sales in 2015 and the effect of currency
exchange rates decreased sales in 2015 by $50 million. Excluding
acquisitions and the effect of currency rate changes, sales in 2015 in
the Diversified Industrial North American operations increased 1.2
percent from 2014 reflecting higher demand from distributors as well
as from end-users in the car and light truck, heavy-duty truck, refrigeration
and air conditioning and construction equipment markets, partially
offset by lower demand in the farm and agriculture equipment market.
Excluding acquisitions and the effect of currency rate changes, sales in
2014 increased slightly as higher demand from distributors as well as
from end-users in the construction equipment and oil and gas markets
was partially offset by lower end-user demand in the heavy-duty truck,
farm and agriculture equipment, engine, and car and light truck markets.
Sales in the Diversified Industrial International operations decreased
10.3 percent in 2015 compared to an increase of 3.5 percent from 2013
to 2014. Acquisitions completed within the last 12 months contributed
approximately $7 million in sales in 2015. The effect of currency rate
changes decreased sales by $487 million, reflecting the strengthening
of the U.S. dollar against most currencies. Excluding acquisitions and
the effect of currency rate changes, sales in 2015 in the Diversified
Industrial International operations decreased 1.3 percent from 2014
primarily due to higher volume in the Asia Pacific region being more
than offset by lower volume in Europe, approximately two-thirds
of which was due to the absence of sales from divested businesses,
and in Latin America. Excluding acquisitions and the effect of currency
rate changes, sales in 2014 in the Diversified Industrial International
operations increased 3.1 percent from 2013, primarily due to higher
volume in all regions with 50 percent of the increase occurring in the
Asia Pacific region and one-third of the increase occurring in Europe.
The absence of sales from divested businesses was also a contributing
factor to the sales fluctuation between 2013 and 2014 in both the
Diversified Industrial North American and Diversified Industrial
International operations.
The increase in operating margins in 2015 in the Diversified Industrial
North American operations was primarily due to the higher sales
volume, a favorable product mix and manufacturing efficiencies,
partially offset by higher warehouse, shipping, and manufacturing
support costs, research and development expenses and raw material
costs. Diversified Industrial North American margins in 2015 were also
adversely affected by a voluntary retirement expense of $12.7 million.
The increase in operating margins in 2015 in the Diversified Industrial
International operations was primarily due to lower fixed overhead
costs and lower business realignment charges in the current-year,
partially offset by higher raw material costs due to changes in currency
exchange rates. The increase in operating margins in 2014 in the
Diversified Industrial North American operations was primarily due
to the higher sales volume, a favorable product mix and lower raw
material prices, partially offset by higher intangible asset amortization
expense related to 2013 acquisitions. The decrease in operating
margins in 2014 in the Diversified Industrial International operations
was primarily due to higher business realignment charges and
associated operating inefficiencies, partially offset by the impact
of the higher sales volume and a favorable product mix.
The following business realignment charges are included in Diversified
Industrial North America and Diversified Industrial International
operating income:
(dollars in millions)
2015
2014
2013
Diversified Industrial
North America
Diversified Industrial
International
$ 4
27
$ 2
99
$ 3
10
The business realignment charges consist primarily of severance
costs resulting from plant closures as well as general reductions
in work force. The majority of the Diversified Industrial International
business realignment charges were incurred in Europe. The Company
does not anticipate that cost savings realized from the work force
reductions taken during 2015 in the Diversified Industrial North
American and International operations will have a material impact
on future operating income. In 2016, the Company expects to continue
to take actions necessary to structure appropriately the operations of
the Diversified Industrial Segment. Such actions are expected to result
in approximately $100 million in business realignment charges in 2016.
The Company anticipates Diversified Industrial North American sales
for 2016 will range from a decrease of three percent to an increase of
one percent from the 2015 level and Diversified Industrial International
sales for 2016 will decrease between six percent and two percent from
the 2015 level. Diversified Industrial North American operating margins
in 2016 are expected to range from 15.9 percent to 16.3 percent and
Diversified Industrial International margins are expected to range
from 12.4 percent to 13.1 percent.
The decrease in total Diversified Industrial Segment backlog in 2015
was primarily due to shipments exceeding orders in all regions. The
increase in total Diversified Industrial Segment backlog in 2014 was
primarily due to orders exceeding shipments in the Diversified Industrial
North American operations. Backlog consists of written firm orders
19
The increase in assets in 2015 was primarily due to an increase in
inventory and other assets, partially offset by a decrease in trade
accounts receivable, net. The increase in assets in 2014 was primarily
due to the investment in the joint venture with GE Aviation.
CORPORATE general and administrative expenses were $215.4 million
in 2015 compared to $181.9 million in 2014 and $185.8 million in 2013.
As a percent of sales, corporate general and administrative expenses
in 2015 increased to 1.7 percent of sales compared to 1.4 percent in
both 2014 and 2013. The higher expense in 2015 was primarily due to
an increase in incentive compensation expense and higher net expenses
associated with the Company’s deferred compensation programs.
Corporate general and administrative expenses in 2015 included $3.1
million in voluntary retirement expense. The lower expense in 2014 was
primarily due to lower compensation expense and lower net expenses
associated with the Company’s deferred compensation programs,
partially offset by higher research and development expense.
Corporate assets decreased 10.8 percent in 2015 compared to an
increase of 19.9 percent from 2013 to 2014. The decrease in Corporate
assets in 2015 was primarily due to the effect of currency rate fluctuations
and changes in cash and cash equivalents, marketable securities and
other investments, non-trade and notes receivable and other assets.
The change in assets in 2014 was primarily due to fluctuations in the
amount of cash and cash equivalents and marketable securities and
other investments.
OTHER EXPENSE (INCOME)
(in the Business Segment Information) (dollars in millions)
Expense (income)
2015
2014
Foreign currency transaction
Stock-based compensation
Pensions
Divestitures and asset sales
and writedowns
Goodwill and intangible
asset impairment
Other items, net
$(77.8)
57.2
96.6
$ 5.4
71.5
108.0
2013
$ 22.4
50.9
139.8
4.5
(408.9)
(11.9)
—
(8.1)
189.1
3.9
—
2.0
$ 72.4
$ (31.0)
$203.2
Foreign currency transaction primarily relates to the impact of changes
in foreign exchange rates on cash, marketable securities and other
investments and intercompany transactions. A significant portion of
the foreign currency transaction gain in 2015 related to intercompany
loans and was attributable to the Swiss National Bank lifting the cap
on the fluctuation of the exchange rate used to measure the Swiss
Franc against the Euro. The Company has since settled these particular
intercompany loans. The decrease in stock-based compensation
expense in 2015 is primarily due to fewer stock awards granted in 2015.
The increase in stock-based compensation in 2014 was primarily due
to a higher stock price used in the calculation of the fair value of the
stock awards at the date of grant. Included in divestitures and asset
sales and writedowns for 2014 is a gain of approximately $413 million
resulting from the deconsolidation of a subsidiary. Refer to Note 2
to the Consolidated Financial Statements for further discussion.
Refer to Note 7 to the Consolidated Financial Statements for further
discussion of the goodwill and intangible asset impairment.
from a customer to deliver products and, in the case of blanket
purchase orders, only includes the portion of the order for which
a schedule or release date has been agreed to with the customer.
The dollar value of backlog is equal to the amount that is expected
to be billed to the customer and reported as a sale.
The decrease in total Diversified Industrial Segment assets in 2015
was primarily due to the effect of currency rate fluctuations and
a decrease in trade accounts receivable, net, non-trade and notes
receivable and intangible assets, partially offset by an increase in
cash and cash equivalents and other assets. The increase in assets
in 2014 was primarily due to the effect of currency rate fluctuations
and an increase in accounts receivable, partially offset by decreases
in goodwill, intangible assets and inventory.
AEROSPACE SYSTEMS SEGMENT
(dollars in millions)
2015
Sales
Operating income
Operating income
as a percent of sales
Backlog
Assets
Return on average assets
$2,255
299
13.3%
$ 1,756
1,376
21.9%
2014
$2,235
271
12.1%
$1,994
1,359
21.7%
2013
$2,268
280
12.4%
$ 1,936
1,140
25.8%
Sales in 2015 were higher than the 2014 level as higher volume in the
commercial original equipment manufacturer (OEM) and aftermarket
businesses was partially offset by lower volume in the military OEM
business. Sales in 2014 were lower than the 2013 level as higher
volume in the commercial OEM business was offset by the absence
of sales from the deconsolidated subsidiary, whose sales are now
reported by the joint venture with GE Aviation, as well as lower volume
in the military OEM and aftermarket businesses and the commercial
aftermarket business.
The higher margin in 2015 was primarily due to the higher sales
volume and lower engineering and development costs partially offset
by a voluntary retirement expense of $5.4 million. The lower margin
in 2014 was primarily due to an unfavorable product mix, the impact
of the joint venture with GE Aviation and higher product support costs.
Margins in 2015 and 2014 were favorably impacted by the finalization
of contract negotiations related to certain programs.
The decrease in backlog in 2015 was primarily due to shipments
exceeding orders in all businesses of the Aerospace Systems Segment.
The increase in backlog in 2014 was primarily due to orders exceeding
shipments in the commercial and military OEM businesses, partially
offset by shipments exceeding orders in the military and commercial
aftermarket businesses as well as the absence of backlog of the
deconsolidated subsidiary. Backlog consists of written firm orders
from a customer to deliver products and, in the case of blanket
purchase orders, only includes the portion of the order for which
a schedule or release date has been agreed to with the customer.
The dollar value of backlog is equal to the amount that is expected
to be billed to the customer and reported as a sale.
For 2016, sales are expected to increase between one percent and
three percent from the 2015 level and operating margins are expected
to range from 14.2 percent to 14.8 percent. A higher concentration
of commercial OEM volume in future product mix and higher than
expected new product development costs could result in lower margins.
20
Discussion of Consolidated Balance Sheet
The Consolidated Balance Sheet shows the Company’s financial
position at year-end, compared with the previous year-end. This
discussion provides information to assist in assessing factors such
as the Company’s liquidity and financial resources.
(dollars in millions)
Cash
Trade accounts receivable, net
Inventories
Long-term debt
Shareholders’ equity
Working capital
Current ratio
2015
$1,914
1,620
1,300
2,724
5,104
$3,233
2.4
2014
$2,187
1,858
1,372
1,508
6,659
$2,819
1.9
CASH (comprised of cash and cash equivalents and marketable
securities and other investments) includes $1,777 million and $2,126
million held by the Company’s foreign subsidiaries at June 30, 2015 and
June 30, 2014, respectively. Generally, cash and cash equivalents and
marketable securities and other investments held by foreign subsidiaries
are not readily available for use in the United States without adverse tax
consequences. The Company’s principal sources of liquidity are its cash
flows provided by operating activities, commercial paper borrowings
or borrowings directly from its line of credit. The Company does not
believe the level of its non-U.S. cash position will have an adverse effect
on working capital needs, planned growth, repayment of maturing debt,
benefit plan funding, dividend payments or share repurchases.
TRADE ACCOUNTS RECEIVABLE, NET are receivables due from
customers for sales of product. Days sales outstanding relating
to trade receivables for the Company was 48 days in both 2015 and
2014. The Company believes that its receivables are collectible and
appropriate allowances for doubtful accounts have been recorded.
INVENTORIES decreased $71 million primarily due to the effect of
foreign currency translation, which decreased inventories by $107
million. Excluding the effect of foreign currency translation, inventory
levels increased in the Aerospace Systems Segment and the Diversified
Industrial International operations and inventory levels decreased
in the Diversified Industrial North American operations. Days supply
of inventory on hand was 65 days in 2015 and 61 days in 2014.
LONG-TERM DEBT increased as the Company issued $1,500 million
of medium-term notes in 2015. Refer to Note 9 to the Consolidated
Financial Statements for further discussion.
SHAREHOLDERS’ EQUITY activity during 2015 included a decrease of
$1,394 million related to share repurchases, a decrease of $765 million
related to foreign currency translation adjustments and a decrease
of $150 million related to pensions and postretirement benefits.
Discussion of Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows reflects cash inflows and
outflows from the Company’s operating, investing and financing activities.
A summary of cash flows follows:
(dollars in millions)
2015
2014
2013
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates
$ 1,302
(579)
(1,045)
(111)
$1,388
(646)
(958)
48
$1,191
(810)
576
(14)
Net (decrease) increase in cash
and cash equivalents
$ (433)
$ (168)
$ 943
CASH FLOWS FROM OPERATING ACTIVITIES in 2015 reflects a reduction
of $257 million for cash used by working capital items. Cash flow from
operating activities in 2014 benefited from a $294 million increase in
cash provided by working capital items, partially offset by a $184
million decrease in net income after consideration of non-cash items,
including a $413 million gain on the deconsolidation of a subsidiary and
a $189 million impairment charge. Refer to Note 2 and Note 7 to the
Consolidated Financial Statements for further discussion of the gain on
deconsolidation and impairment charge, respectively. The Company also
made voluntary cash contributions to the Company’s domestic qualified
defined benefit plan of $75 million and $226 million in 2014 and 2013,
respectively.
CASH FLOWS USED IN INVESTING ACTIVITIES in 2015 includes $356
million in net purchases of marketable securities and other investments.
Cash flows used in investing activities in 2014 includes $625 million
in purchases of marketable securities and other investments and
$202 million in proceeds from the sale of a 50 percent equity interest
in a subsidiary related to the joint venture with GE Aviation (refer to
Note 2 to the Consolidated Financial Statements for further discussion).
CASH FLOWS USED IN FINANCING ACTIVITIES during 2015 includes
the issuance of $1,500 million of medium-term notes and the repayment
of commercial paper notes outstanding at the time of the debt issuance.
The Company repurchased 11.1 million common shares for $1,394
million during 2015 as compared to the repurchase of 1.7 million
common shares for $200 million in 2014 and 3.0 million common
shares for $257 million in 2013. Cash flows used in financing activities
during 2014 increased from 2013 primarily due to a lower level of
borrowings required to support acquisition activity.
Dividends have been paid for 260 consecutive quarters, including
a yearly increase in dividends for the last 59 fiscal years. The current
annual dividend rate is $2.52 per common share.
The Company’s goal is to maintain no less than an “A” rating on senior
debt to ensure availability and reasonable cost of external funds. As
one means of achieving this objective, the Company has established
a financial goal of maintaining a ratio of debt to debt-shareholders’
equity of no more than 37 percent.
DEBT TO DEBT-SHAREHOLDERS’ EQUITY RATIO
2015
(dollars in millions)
Debt
Debt & Shareholders’ Equity
Ratio
$2,947
8,051
36.6%
2014
$2,325
8,984
25.9%
As of June 30, 2015, the Company had a line of credit totaling $2,000
million through a multi-currency revolving credit agreement with a
group of banks, all of which was available at June 30, 2015. Refer to
Note 8 to the Consolidated Financial Statements for further discussion.
The Company is currently authorized to sell up to $1,850 million
of short-term commercial paper notes. There were no outstanding
commercial paper notes as of June 30, 2015, and the largest amount
of commercial paper notes outstanding during the last quarter of
2015 was $475 million.
The Company’s credit agreements and indentures governing certain
debt agreements contain various covenants, the violation of which
would limit or preclude the use of the applicable agreements for future
borrowings, or might accelerate the maturity of the related outstanding
borrowings covered by the applicable agreements. The Company is
in compliance with all covenants and expects to remain in compliance
during the term of the credit agreements and indentures.
21
CONTRACTUAL OBLIGATIONS – The total amount of gross unrecognized
tax benefits, including interest, for uncertain tax positions was $155.2
million at June 30, 2015. Payment of these obligations would result
from settlements with worldwide taxing authorities. Due to the difficulty
in determining the timing of the settlements, these obligations are not
included in the following summary of the Company’s fixed contractual
obligations. References to Notes are to the Notes to the Consolidated
Financial Statements.
(dollars in millions)
Payments due by period
Contractual
obligations
Long-term
debt
(Note 9)
Interest on
long-term
debt
Operating
leases
(Note 9)
Retirement
benefits
(Note 10)
Total
Less than
1 year
Total
1-3 years 3-5 years
More than
5 years
$2,947
$223
$499
$ 100
$ 2,125
1,838
126
242
181
1,289
236
76
333
$5,354
284
$ 709
86
12
31
12
43
25
$839
$324
$3,482
Quantitative and Qualitative Disclosures About
Market Risk
The Company manages foreign currency transaction and translation
risk by utilizing derivative and non-derivative financial instruments,
including forward exchange contracts, costless collar contracts,
cross-currency swap contracts and certain foreign denominated
debt designated as net investment hedges. The derivative financial
instrument contracts are with major investment grade financial
institutions and the Company does not anticipate any material non-
performance by any of the counterparties. The Company does not
hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated
Balance Sheet as either assets or liabilities and are measured at fair
value. Further information on the fair value of these contracts is
provided in Note 15 to the Consolidated Financial Statements.
Gains or losses on derivatives that are not hedges are adjusted to
fair value through the Consolidated Statement of Income. Gains or
losses on derivatives that are hedges are adjusted to fair value through
accumulated other comprehensive income (loss) in the Consolidated
Balance Sheet until the hedged item is recognized in earnings.
The translation of the foreign denominated debt that has been
designated as a net investment hedge is recorded in accumulated
other comprehensive income (loss) and remains there until the
underlying net investment is sold or substantially liquidated.
The Company’s debt portfolio contains variable rate debt, inherently
exposing the Company to interest rate risk. The Company’s objective
is to maintain a 60/40 mix between fixed rate and variable rate debt
thereby limiting its exposure to changes in near-term interest rates.
A 100 basis point increase in near-term interest rates would increase
annual interest expense on variable rate debt existing at June 30, 2015
by approximately $6 million.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet arrangements.
22
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
The policies discussed below are considered by management to be
more critical than other policies because their application places the
most significant demands on management’s judgment.
REVENUE RECOGNITION – Substantially all of the Diversified Industrial
Segment revenues are recognized when persuasive evidence of an
arrangement exists, product has shipped and the risks and rewards
of ownership have transferred or services have been rendered, the price
to the customer is fixed and determinable and collectibility is reasonably
assured, which is generally at the time the product is shipped. The
Aerospace Systems Segment recognizes revenues primarily using the
percentage-of-completion method and the extent of progress toward
completion is primarily measured using the units-of-delivery method.
The Company estimates costs to complete long-term contracts for
purposes of evaluating and establishing contract reserves. The
estimation of these costs requires substantial judgment on the part
of management due to the duration of the contractual agreements as
well as the technical nature of the products involved. Adjustments to
cost estimates are made on a consistent basis and a contract reserve
is established when the estimated costs to complete a contract exceed
the expected contract revenues.
IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS – Goodwill is
tested for impairment, at the reporting unit level, on an annual basis
and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit may exceed its fair value.
For the Company, a reporting unit is one level below the operating
segment level. Determining whether an impairment has occurred
requires the valuation of the respective reporting unit, which the
Company has consistently estimated using primarily a discounted
cash flow model. The Company believes that the use of a discounted
cash flow model results in the most accurate calculation of a reporting
unit’s fair value since the market value for a reporting unit is not
readily available. The discounted cash flow analysis requires several
assumptions including future sales growth and operating margin
levels as well as assumptions regarding future industry specific
market conditions. Each reporting unit regularly prepares discrete
operating forecasts and uses these forecasts as the basis for the
assumptions used in the discounted cash flow analysis. The Company
has consistently used a discount rate commensurate with its cost of
capital, adjusted for inherent business risks, and an appropriate terminal
growth factor. The Company also reconciles the estimated aggregate
fair value of its reporting units as derived from the discounted cash
flow analysis to the Company’s overall market capitalization.
The results of the Company’s 2015 annual goodwill impairment
test performed as of December 31, 2014 indicated that no goodwill
impairment existed. During 2014, the Company made a decision to
restructure and change the strategic direction of its Worldwide Energy
Products Division (EPD). The Company calculated the fair value of
EPD using assumptions reflecting the Company’s current strategic
direction for this reporting unit, the results of which indicated that
the carrying value of EPD exceeded its fair value. As a result, the
Company estimated the implied fair value of EPD’s goodwill, which
resulted in a non-cash impairment charge of $140.3 million. The
fair value of EPD was calculated using both a discounted cash flow
analysis and estimated fair market values of comparable businesses.
The Company continually monitors its reporting units for impairment
indicators and updates assumptions used in the most recent calculation
of the fair value of a reporting unit as appropriate. The Company is
unaware of any current market trends that are contrary to the
assumptions made in the estimation of the fair value of any of
its reporting units. If actual experience is not consistent with the
assumptions made in the estimation of the fair value of the reporting
units, especially assumptions regarding penetration into new markets
and the recovery of the current economic environment, it is possible
that the estimated fair value of certain reporting units could fall below
their carrying value resulting in the necessity to conduct additional
goodwill impairment tests.
Long-lived assets held for use, which primarily includes finite-lived
intangible assets and plant and equipment, are evaluated for impairment
whenever events or circumstances indicate that the undiscounted net
cash flows to be generated by their use over their expected useful
lives and eventual disposition are less than their carrying value. The
long-term nature of these assets requires the estimation of their cash
inflows and outflows several years into the future and only takes
into consideration technological advances known at the time of the
impairment test. During 2015, there were no events or circumstances
that indicated that the carrying value of the Company’s long-lived assets
held for use were not recoverable. During 2014, in connection with the
goodwill impairment review discussed above, the Company determined
certain intangible assets of EPD, primarily trademarks and customer
lists, and plant and equipment were impaired resulting in a non-cash
impairment charge of $48.6 million. The fair value of EPD’s intangible
assets and plant and equipment were determined using the income
approach for each asset.
PENSIONS – The annual net periodic expense and benefit obligations
related to the Company’s defined benefit plans are determined on an
actuarial basis. This determination requires critical assumptions
regarding the discount rate, long-term rate of return on plan assets,
increases in compensation levels and amortization periods for actuarial
gains and losses.
Assumptions are determined based on Company data and appropriate
market indicators, and are evaluated each year as of the plans’
measurement date. Changes in the assumptions to reflect actual
experience as well as the amortization of actuarial gains and losses
could result in a material change in the annual net periodic expense
and benefit obligations reported in the financial statements. For
the Company’s domestic qualified defined benefit plan, a 50 basis
point change in the assumed long-term rate of return on plan assets
is estimated to have an $11 million effect on annual pension expense
and a 50 basis point decrease in the discount rate is estimated to
increase annual pension expense by $22 million. As of June 30, 2015,
$1,225 million of past years’ net actuarial losses related to the
Company’s domestic qualified defined benefit plan are subject to
amortization in the future. These losses will generally be amortized
over approximately eight years and will negatively affect earnings in
the future. Actuarial gains experienced in future years will help reduce
the effect of the actuarial loss amortization. Further information on
pensions is provided in Note 10 to the Consolidated Financial Statements.
INCOME TAXES – Significant judgment is required in determining the
Company’s income tax expense and in evaluating tax positions.
Deferred income tax assets and liabilities have been recorded for the
differences between the financial accounting and income tax basis of
assets and liabilities. Factors considered by the Company in determining
the probability of realizing deferred income tax assets include forecasted
operating earnings, available tax planning strategies and the time period
over which the temporary differences will reverse. The Company reviews
its tax positions on a regular basis and adjusts the balances as new
information becomes available. For those tax positions where it is more
likely than not that a tax benefit will be sustained, the largest amount
of tax benefit with a greater than 50 percent likelihood of being realized
upon examination by a taxing authority that has full knowledge of all
relevant information will be recorded. For those income tax positions
where it is not more likely than not that a tax benefit will be sustained,
no tax benefit has been recognized in the Consolidated Financial
Statements. Further information on income taxes is provided in Note 4
to the Consolidated Financial Statements.
LOSS CONTINGENCIES – The Company has a number of loss
exposures incurred in the ordinary course of business such as
environmental claims, product liability and litigation reserves.
Establishing loss accruals for these matters requires management’s
estimate and judgment with regards to risk exposure and ultimate
liability or realization. These loss accruals are reviewed periodically
and adjustments are made to reflect the most recent facts and
circumstances.
Recently Issued Accounting Pronouncements
In May 2015, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2015-07, “Disclosures
for Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent).” ASU 2015-07 removes the requirement to
categorize all investments within the fair value hierarchy for which
the fair value is measured using the net asset value per share practical
expedient and to make certain disclosures for all investments that
are eligible to be measured at fair value using the net asset value
per share practical expedient. During the fourth quarter of 2015,
the Company adopted ASU 2015-07. The changes resulting from the
adoption of ASU 2015-07, including revising the prior year presentation,
are reflected in the retirement benefits and financial instruments
disclosures within Note 10 and Note 15 to the Consolidated Financial
Statements, respectively. The adoption of ASU 2015-07 did not affect
the Company’s results of operations, statement of financial position
or statement of cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation
of Interest.” ASU 2015-03 requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as
a direct deduction from the carrying amount of that debt liability.
The recognition and measurement guidance for debt issuance costs
are not affected by the amendments in the ASU. ASU 2015-03 is
effective for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal years.
The Company does not expect ASU 2015-03 will have a material impact
on its statement of financial position or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 requires revenue recognition to depict
the transfer of goods or services to customers in an amount that
reflects the consideration that a company expects to be entitled to
in exchange for the goods or services. To achieve this principle,
a company must apply five steps including identifying the contract
with a customer, identifying the performance obligations in the contract,
determining the transaction price, allocating the transaction price to
the performance obligations, and recognizing revenue when (or as)
the company satisfies the performance obligations. Additional
quantitative and qualitative disclosure to enhance the understanding
about the nature, amount, timing, and uncertainty of revenue and cash
flows is also required. ASU 2014-09 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2017.
The Company has not yet determined the effect that ASU 2014-09
will have on its results of operations, statement of financial position
or financial statement disclosures.
23
Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(DOLL A RS IN THOUSA NDS, E XCEPT PER SH A RE A MOUNTS)
For the years ended June 30,
Net Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Goodwill and intangible asset impairment (Note 7)
Interest expense
Other (income), net
Loss (gain) on disposal of assets (Note 2)
Income before income taxes
Income taxes (Note 4)
Net Income
Less: Noncontrolling interest in subsidiaries’ earnings
2015
$12,711,744
9,655,245
3,056,499
1,544,746
—
118,406
(43,374)
4,481
1,432,240
419,687
1,012,553
413
2014
2013
$13,215,971
10,188,227
$13,015,704
10,086,675
3,027,744
1,633,992
188,870
82,566
(25,513)
(408,891)
1,556,720
515,302
1,041,418
370
2,929,029
1,554,973
—
91,552
(18,198)
(10,299)
1,311,001
362,217
948,784
357
Net Income Attributable to Common Shareholders
$ 1,012,140
$ 1,041,048
$ 948,427
Earnings per Share Attributable to
Common Shareholders (Note 5)
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of the financial statements.
$ 7.08
$ 6.98
$ 6.36
$ 6.97
$ 6.87
$ 6.26
CONSOLIDATED STATEMENT OF COMPREHENSIV E INCOME
(DOLL A RS IN THOUSA NDS)
For the years ended June 30,
2015
2014
2013
Net Income
Less: Noncontrolling interests in subsidiaries’ earnings
Net income attributable to common shareholders
$ 1,012,553
413
1,012,140
$ 1,041,418
370
1,041,048
$ 948,784
357
948,427
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment (net of tax
of $(30,923), $4,692 and $1,239 in 2015, 2014 and 2013)
Retirement benefits plan activity (net of tax of $88,547,
$(54,473) and $(195,884) in 2015, 2014 and 2013)
Other (net of tax of $(101) in 2015, 2014 and 2013)
Other comprehensive income (loss)
Less: Other comprehensive (loss) for
noncontrolling interests
Other comprehensive income (loss) attributable to
common shareholders
Total Comprehensive Income Attributable to
Common Shareholders
The accompanying notes are an integral part of the financial statements.
(765,356)
(149,710)
(303)
(915,369)
(249)
192,925
91,182
205
284,312
(18,974)
325,066
204
306,296
(23)
(1,771)
(915,120)
284,335
308,067
$ 97,020
$ 1,325,383
$ 1,256,494
24
BUSINESS SEGMENT INFORM ATION
(DOLL A RS IN THOUSA NDS)
2015
2014
2013
By Geographic Area (d)
Net Sales:
Diversified Industrial:
North America
International
Aerospace Systems
Segment Operating Income:
Diversified Industrial:
North America
International
Aerospace Systems
Total segment
operating income
Corporate administration
Income before
interest expense
and other
Interest expense
Other expense (income)
Income before
income taxes
Assets:
Diversified Industrial
Aerospace Systems (a)
Corporate (b)
Property Additions (c):
Diversified Industrial
Aerospace Systems
Corporate
Depreciation:
Diversified Industrial
Aerospace Systems
Corporate
$ 5,715,742
4,741,376
2,254,626
$ 5,693,527
5,287,916
2,234,528
$ 5,637,657
5,110,332
2,267,715
$ 12,711,744
$13,215,971
$ 13,015,704
$ 955,501
583,937
298,994
$ 946,493
572,476
271,238
$ 908,719
602,480
280,286
1,838,432
215,396
1,790,207
181,926
1,791,485
185,767
Net Sales:
North America
International
Long-Lived Assets:
North America
International
2015
2014
2013
$ 7,891,571
4,820,173
$ 7,853,603
5,362,368
$ 7,844,552
5,171,152
$12,711,744
$13,215,971
$13,015,704
$ 856,947
807,075
$ 861,300
962,994
$ 871,958
936,282
$ 1,664,022
$ 1,824,294
$ 1,808,240
The accounting policies of the business segments are the same
as those described in the Significant Accounting Policies footnote
except that the business segment results are prepared on a basis
that is consistent with the manner in which the Company’s
management disaggregates financial information for internal
review and decision-making.
1,623,036
118,406
72,390
1,608,281
82,566
(31,005)
1,605,718
91,552
203,165
(a) Includes an investment in a joint venture in which ownership
is 50 percent or less and in which the Company does not have
operating control (2015 – $251,365; 2014 – $263,246).
(b) Corporate assets are principally cash and cash equivalents,
marketable securities and other investments, domestic deferred
income taxes, deferred compensation plan assets, headquarters
facilities and the major portion of the Company’s domestic data
processing equipment.
(c) Includes the value of net plant and equipment at the date
of acquisition of acquired companies (2013 – $74,439).
(d) Net sales are attributed to countries based on the location
of the selling unit. North America includes the United States,
Canada and Mexico. No country other than the United States
represents greater than 10 percent of consolidated sales.
Long-lived assets are comprised of plant and equipment
based on physical location.
$ 1,432,240
$ 1,556,720
$ 1,311,001
$ 8,765,468
1,375,913
2,153,656
$ 9,501,837
1,359,130
2,413,395
$ 9,388,027
1,139,967
2,012,904
$12,295,037
$13,274,362
$12,540,898
$ 190,580
18,427
6,520
$ 189,832
23,261
3,247
$ 312,392
20,838
7,105
$ 215,527
$ 216,340
$ 340,335
$ 174,102
19,509
9,165
$ 187,347
19,193
8,425
$ 187,014
19,498
7,210
$ 202,776
$ 214,965
$ 213,722
25
CONSOLIDATED BAL ANCE SHEET
June 30,
Assets
Current Assets
Cash and cash equivalents (Note 1)
Marketable securities and other investments (Note 1)
Trade accounts receivable, net (Note 1)
Non-trade and notes receivable (Note 1)
Inventories (Note 6)
Prepaid expenses
Deferred income taxes (Notes 1 and 4)
Total Current Assets
Plant and equipment (Note 1)
Less: Accumulated depreciation
Investments and other assets (Note 1)
Intangible assets, net (Notes 1 and 7)
Goodwill (Notes 1 and 7)
Total Assets
Liabilities and Equity
Current Liabilities
Notes payable and long-term debt payable within one year (Notes 8 and 9)
Accounts payable, trade
Accrued payrolls and other compensation
Accrued domestic and foreign taxes
Other accrued liabilities
Total Current Liabilities
Long-term debt (Note 9)
Pensions and other postretirement benefits (Note 10)
Deferred income taxes (Notes 1 and 4)
Other liabilities
Total Liabilities
Equity (Note 11)
Shareholders’ Equity
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
Common stock, $.50 par value, authorized 600,000,000 shares; issued
181,046,128 shares in 2015 and 2014
Additional capital
Retained earnings
Accumulated other comprehensive (loss)
Treasury shares at cost: 42,487,389 in 2015 and 32,143,315 in 2014
Total Shareholders’ Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of the financial statements.
(DOLL A RS IN THOUSA NDS)
2015
2014
$ 1,180,584
733,490
1,620,194
364,534
1,300,459
241,684
142,147
5,583,092
4,862,611
3,198,589
1,664,022
1,091,805
1,013,439
2,942,679
$ 1,613,555
573,701
1,858,176
388,437
1,371,681
129,837
136,193
6,071,580
5,152,591
3,328,297
1,824,294
1,018,781
1,188,282
3,171,425
$12,295,037
$13,274,362
$ 223,142
1,092,138
409,762
140,295
484,793
2,350,130
2,723,960
1,699,197
77,967
336,214
7,187,468
$ 816,622
1,252,040
453,321
223,611
507,202
3,252,796
1,508,142
1,346,224
94,819
409,573
6,611,554
—
—
90,523
622,729
9,841,885
(1,738,618)
(3,712,232)
5,104,287
3,282
5,107,569
90,523
595,498
9,174,189
(823,498)
(2,377,284)
6,659,428
3,380
6,662,808
$12,295,037
$13,274,362
26
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLL A RS IN THOUSA NDS)
For the years ended June 30,
2015
2014
2013
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization
Goodwill and intangible asset impairment
Stock incentive plan compensation
Deferred income taxes
Foreign currency transaction (gain) loss
Loss on disposal of assets
Gain on sale of businesses
Net gain on deconsolidation
Loss on sale of marketable securities
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable
Inventories
Prepaid expenses
Other assets
Accounts payable, trade
Accrued payrolls and other compensation
Accrued domestic and foreign taxes
Other accrued liabilities
Pensions and other postretirement benefits
Other liabilities
$1,012,553
$ 1,041,418
$ 948,784
202,776
114,715
—
96,093
18,865
(77,784)
14,953
(6,420)
—
3,817
143,179
(70,377)
(116,561)
20,976
(86,750)
(12,657)
(66,870)
(46,633)
156,859
1,207
214,965
121,737
188,870
103,161
(74,139)
5,398
2,997
—
(412,612)
—
(99,144)
(3,816)
58,117
(79,158)
92,927
20,840
86,745
(23,480)
99,569
43,498
213,722
121,902
—
84,996
(1,368)
19,497
2,746
(14,637)
—
—
(21,206)
98,518
(47,451)
(16,007)
(66,082)
(45,771)
(17,054)
(62,728)
(16,691)
9,765
Net cash provided by operating activities
Cash Flows From Investing Activities
Acquisitions (less cash acquired of $8,332 in 2015,
$1,780 in 2014 and $33,932 in 2013)
Capital expenditures
Proceeds from disposal of assets
Proceeds from sale of businesses
Net proceeds from deconsolidation
Purchase of marketable securities and other investments
Maturities and sales of marketable securities and
other investments
Other
Net cash used in investing activities
Cash Flows From Financing Activities
Proceeds from exercise of stock options
Payments for common shares
Tax benefit from stock incentive plan compensation
Acquisition of noncontrolling interests
(Payments for) proceeds from notes payable, net
Proceeds from long-term borrowings
Payments for long-term borrowings
Dividends paid
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Data:
Cash paid during the year for:
Interest
Income taxes
The accompanying notes are an integral part of the financial statements.
1,301,941
1,387,893
1,190,935
(18,618)
(215,527)
19,655
37,265
—
(1,747,333)
1,391,396
(46,001)
(579,163)
3,355
(1,398,446)
23,429
—
(815,171)
1,483,015
(537)
(340,389)
(1,044,744)
(111,005)
(432,971)
1,613,555
$1,180,584
(17,593)
(216,340)
14,368
—
202,498
(624,880)
—
(4,454)
(646,401)
8,013
(204,043)
33,732
—
(515,387)
748
(2,934)
(278,244)
(958,115)
48,766
(167,857)
1,781,412
(621,144)
(265,896)
25,047
73,515
—
—
—
(21,367)
(809,845)
32,204
(258,007)
66,030
(1,091)
1,319,524
3,768
(331,245)
(255,009)
576,174
(14,169)
943,095
838,317
$1,613,555
$1,781,412
$ 105,202
515,350
$ 77,144
472,369
$ 88,084
311,988
27
CONSOLIDATED STATEMENT OF EQUIT Y
(DOLL A RS IN THOUSA NDS)
Common
Stock
Additional
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Treasury
Shares
Noncontrolling
Interests
Total
Balance June 30, 2012
$90,523
$640,249
$ 7,787,175
$(1,415,900) $(2,205,532)
$ 9,215
$ 4,905,730
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
948,427
(254,283)
(60,049)
308,067
(34,678)
3,181
357
(1,771)
(726)
(4,020)
948,784
306,296
(255,009)
93,696
(839)
(257,177)
188,423
(257,177)
Balance June 30, 2013
$90,523
$ 608,752
$8,421,270
$ (1,107,833) $(2,274,286)
$ 3,055
$ 5,741,481
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Shares purchased at cost
1,041,048
(278,222)
(9,907)
(13,254)
284,335
370
(23)
(22)
1,041,418
284,312
(278,244)
73,841
(200,000)
97,002
(200,000)
Balance June 30, 2014
$90,523
$ 595,498
$ 9,174,189
$ (823,498) $(2,377,284)
$ 3,380
$6,662,808
Net income
Other comprehensive (loss)
Dividends paid
Stock incentive plan activity
Liquidation activity
Shares purchased at cost
1,012,140
(340,132)
(4,312)
27,231
(915,120)
413
(249)
(257)
(5)
1,012,553
(915,369)
(340,389)
81,549
(5)
(1,393,578)
58,630
(1,393,578)
Balance June 30, 2015
$90,523
$ 622,729
$9,841,885
$(1,738,618) $ (3,712,232)
$ 3,282
$ 5,107,569
The accompanying notes are an integral part of the financial statements.
28
Notes to Consolidated Financial Statements
(DOLL A RS IN THOUSA NDS, E XCEPT PER SH A RE A MOUNTS)
NOTE 1. Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are summarized below.
NATURE OF OPERATIONS – The Company is a leading worldwide
diversified manufacturer of motion and control technologies and
systems, providing precision engineered solutions for a wide variety
of mobile, industrial and aerospace markets. The Company evaluates
performance based on segment operating income before corporate
and administrative expenses, interest expense and income taxes.
The Diversified Industrial Segment is an aggregation of several business
units, which manufacture motion-control and fluid power system
components for builders and users of various types of manufacturing,
packaging, processing, transportation, agricultural, construction,
and military vehicles and equipment. Diversified Industrial Segment
products are marketed primarily through field sales employees and
independent distributors. The Diversified Industrial North American
operations have manufacturing plants and distribution networks
throughout the United States, Canada and Mexico and primarily service
North America. The Diversified Industrial International operations
provide Parker products and services to 47 countries throughout
Europe, Asia Pacific, Latin America, the Middle East and Africa.
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic
and electro-mechanical systems and components, which are utilized
on virtually every domestic commercial, military and general aviation
aircraft and also performs a vital role in naval vessels and land-based
weapons systems. This Segment serves original equipment and
maintenance, repair and overhaul customers worldwide. Aerospace
Systems Segment products are marketed by field sales employees
and are sold directly to manufacturers and end-users.
See the table of Business Segment Information on page 25 for further
disclosure of business segment information.
There are no individual customers to whom sales are more than
four percent of the Company’s consolidated sales. Due to the diverse
group of customers throughout the world, the Company does not
consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout
the world. Although certain risks and uncertainties exist, the diversity
and breadth of the Company’s products and geographic operations
mitigate the risk that adverse changes with respect to any particular
product and geographic operation would materially affect the
Company’s operating results.
USE OF ESTIMATES – The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
BASIS OF CONSOLIDATION – The consolidated financial statements
include the accounts of all majority-owned domestic and foreign
subsidiaries. All intercompany transactions and profits have been
eliminated in the consolidated financial statements. The Company
does not have off-balance sheet arrangements. Within the Business
Segment Information, intersegment and interarea sales have been
eliminated.
REVENUE RECOGNITION – Revenue is recognized when persuasive
evidence of an arrangement exists, product has shipped and the
risks and rewards of ownership have transferred or services have
been rendered, the price to the customer is fixed and determinable
and collectibility is reasonably assured, which is generally at the time
the product is shipped. Shipping and handling costs billed to customers
are included in net sales and the related costs in cost of sales. Taxes
collected from customers and remitted to governmental authorities
are excluded from revenue.
LONG-TERM CONTRACTS – The Company enters into long-term
contracts primarily for the production of aerospace products. For
financial statement purposes, revenues are primarily recognized using
the percentage-of-completion method. The extent of progress toward
completion is primarily measured using the units-of-delivery method.
Unbilled costs on these contracts are included in inventory. Progress
payments are netted against the inventory balances. The Company
estimates costs to complete long-term contracts for purposes of
evaluating and establishing contract reserves. Adjustments to cost
estimates are made on a consistent basis and a contract reserve is
established when the estimated costs to complete a contract exceed
the expected contract revenues.
CASH – Cash equivalents consist of short-term highly liquid
investments, with a three-month or less maturity, carried at cost
plus accrued interest, which are readily convertible into cash.
MARKETABLE SECURITIES AND OTHER INVESTMENTS – Consist
of short-term highly liquid investments, with stated maturities of
greater than three months from the date of purchase, carried at cost
plus accrued interest, and investments classified as available-for-sale,
which are carried at fair value with unrealized gains and losses recorded
in accumulated other comprehensive (loss). Gains and losses on
available-for-sale investments are calculated based on the first-in,
first-out method. The Company has the ability to liquidate the available-
for-sale investments after giving appropriate notice to the issuer.
TRADE ACCOUNTS RECEIVABLE, NET – Trade accounts receivable are
initially recorded at their net collectible amount and are generally
recorded at the time the revenue from the sales transaction is recorded.
Receivables are written off to bad debt primarily when, in the judgment
of the Company, the receivable is deemed to be uncollectible due to
the insolvency of the debtor. Allowance for doubtful accounts was
$9,284 and $16,040 at June 30, 2015 and June 30, 2014, respectively.
NON-TRADE AND NOTES RECEIVABLE – The non-trade and notes
receivable caption in the Consolidated Balance Sheet is comprised
of the following components:
June 30,
Notes receivable
Reverse repurchase agreements
Accounts receivable, other
Total
2015
2014
$ 90,470
113,558
160,506
$ 117,400
54,772
216,265
$364,534
$388,437
Reverse repurchase agreements are collateralized lending arrangements
and have a maturity longer than three months from the date of
purchase. The Company does not record an asset or liability for the
collateral associated with the reverse repurchase agreements.
PLANT, EQUIPMENT AND DEPRECIATION – Plant and equipment are
recorded at cost and are depreciated principally using the straight-line
method for financial reporting purposes. Depreciation rates are based
on estimated useful lives of the assets, generally 40 years for buildings,
15 years for land improvements and building equipment, seven to 10
years for machinery and equipment, and three to eight years for vehicles
and office equipment. Improvements, which extend the useful life of
property, are capitalized, and maintenance and repairs are expensed.
The Company reviews plant and equipment for impairment whenever
events or changes in circumstances indicate that their carrying value
29
may not be recoverable. When plant and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are
removed from the appropriate accounts and any gain or loss is
included in current income.
in a currency other than the local currency of the entity involved
are included within cost of goods sold caption in the Consolidated
Statement of Income and were $(77,784), $5,398 and $22,380,
in 2015, 2014 and 2013, respectively.
The plant and equipment caption in the Consolidated Balance Sheet
is comprised of the following components:
June 30,
Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress
Total
2015
2014
$ 294,537
1,457,650
3,017,011
93,413
$ 326,008
1,535,634
3,210,172
80,777
$4,862,611
$5,152,591
INVESTMENTS AND OTHER ASSETS – Investments in joint-venture
companies in which ownership is 50 percent or less and in which
the Company does not have operating control are stated at cost
plus the Company’s equity in undistributed earnings and amounted
to $315,989 and $324,610 at June 30, 2015 and June 30, 2014,
respectively. A significant portion of the underlying net assets
of the joint ventures are related to goodwill. The Company’s share of
earnings from these investments were immaterial to the Company’s
results of operations.
GOODWILL – The Company conducts a formal impairment test of
goodwill on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value.
INTANGIBLE ASSETS – Intangible assets primarily include patents,
trademarks and customer lists and are recorded at cost and amortized
on a straight-line method. Patents are amortized over the shorter
of their remaining useful or legal life. Trademarks are amortized over
the estimated time period over which an economic benefit is expected
to be received. Customer lists are amortized over a period based on
anticipated customer attrition rates. The Company reviews intangible
assets for impairment whenever events or changes in circumstances
indicate that their carrying value may not be recoverable.
INCOME TAXES – Income taxes are provided based upon income for
financial reporting purposes. Deferred income taxes arise from
temporary differences in the recognition of income and expense for
tax purposes. Tax credits and similar tax incentives are applied to
reduce the provision for income taxes in the year in which the credits
arise. The Company recognizes accrued interest related to unrecognized
tax benefits in income tax expense. Penalties, if incurred, are recognized
in income tax expense.
PRODUCT WARRANTY – In the ordinary course of business the
Company warrants its products against defect in design, materials
and workmanship over various time periods. The warranty accrual at
June 30, 2015 and 2014 is immaterial to the financial position of the
Company and the change in the accrual during 2015, 2014 and 2013
was immaterial to the Company’s results of operations and cash flows.
FOREIGN CURRENCY TRANSLATION – Assets and liabilities of foreign
subsidiaries are translated at current exchange rates, and income
and expenses are translated using weighted-average exchange rates.
The effects of these translation adjustments, as well as gains and
losses from certain intercompany transactions, are reported in the
accumulated other comprehensive (loss) component of shareholders’
equity. Such adjustments will affect net income only upon sale or
liquidation of the underlying foreign investments, which is not
contemplated at this time. Exchange (gains) losses from transactions
SUBSEQUENT EVENTS – The Company has evaluated subsequent
events that have occurred through the date of filing of the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
No subsequent events occurred that required adjustment to or
disclosure in these financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS – In May 2015, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2015-07, “Disclosures for Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent).” ASU 2015-07 removes the requirement to categorize
all investments within the fair value hierarchy for which the fair value
is measured using the net asset value per share practical expedient
and to make certain disclosures for all investments that are eligible to
be measured at fair value using the net asset value per share practical
expedient. During the fourth quarter of 2015, the Company adopted
ASU 2015-07. The changes resulting from the adoption of ASU 2015-07,
including revising the prior year presentation, are reflected in the
retirement benefits and financial instruments disclosures within Note
10 and Note 15 to the Consolidated Financial Statements, respectively.
The adoption of ASU 2015-07 did not affect the Company’s results of
operations, statement of financial position or statement of cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of
Interest.” ASU 2015-03 requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability. The recognition
and measurement guidance for debt issuance costs are not affected
by the amendments in the ASU. ASU 2015-03 is effective for financial
statements issued for fiscal years beginning after December 15, 2015,
and interim periods within those fiscal years. The Company does not
expect ASU 2015-03 will have a material impact on its statement of
financial position or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 requires revenue recognition to depict
the transfer of goods or services to customers in an amount that reflects
the consideration that a company expects to be entitled to in exchange
for the goods or services. To achieve this principle, a company must
apply five steps including identifying the contract with a customer,
identifying the performance obligations in the contract, determining
the transaction price, allocating the transaction price to the performance
obligations, and recognizing revenue when (or as) the company satisfies
the performance obligations. Additional quantitative and qualitative
disclosure to enhance the understanding about the nature, amount,
timing, and uncertainty of revenue and cash flows is also required.
ASU 2014-09 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2017. The Company has
not yet determined the effect that ASU 2014-09 will have on its results
of operations, statement of financial position or financial statement
disclosures.
NOTE 2. Acquisitions, Deconsolidation of Subsidiary
and Divestitures
ACQUISITIONS – During 2015, the Company completed four
acquisitions whose aggregate sales for their most recent fiscal year
prior to acquisition were approximately $27 million. Total purchase
price for the four acquisitions was approximately $27 million in cash.
30
During 2014, the Company completed three acquisitions whose
aggregate sales for their most recent fiscal year prior to acquisition
were approximately $14 million. Total purchase price for the three
acquisitions was approximately $19 million in cash.
During 2013, the Company completed eight acquisitions whose
aggregate sales for their most recent fiscal year prior to acquisition
were approximately $484 million. Total purchase price for the eight
acquisitions was approximately $621 million in cash and $114 million
in assumed debt.
The results of operations for all acquisitions are included as of the
respective dates of acquisition. The initial purchase price allocation
and subsequent purchase price adjustments for acquisitions in 2015,
2014 and 2013 are presented below. Some of the 2015 acquisitions
are still subject to purchase price adjustments.
2015
2014
2013
Assets:
Accounts receivable
Inventories
Prepaid expenses
Deferred income taxes
Plant and equipment
Intangible and other assets
Goodwill
Liabilities and equity:
Notes payable
Accounts payable, trade
Accrued payrolls and
other compensation
Accrued domestic and
foreign taxes
Other accrued liabilities
Long-term debt
Pensions and other
postretirement benefits
Deferred income taxes
Other liabilities
Noncontrolling interests
$ 7,656
3,099
91
5
1,123
7,794
10,430
30,198
—
2,689
243
777
5,267
—
—
2,604
—
—
$ 954
2,184
57
189
11,211
5,646
3,195
23,436
—
915
263
1
3,864
—
—
—
800
—
$ 91,668
93,915
4,672
(1,713)
74,439
280,001
317,879
860,861
11,920
46,596
12,099
7,073
16,805
102,122
2,125
39,214
689
1,074
Net assets acquired
11,580
$ 18,618
5,843
239,717
$17,593
$621,144
DECONSOLIDATION OF SUBSIDIARY – During 2014, the Company and
GE Aviation, a non-related party, finalized a joint venture in which
the Company sold a 50 percent equity interest in one of its wholly-
owned subsidiaries. The sale of the 50 percent equity interest in the
wholly-owned subsidiary resulted in a loss of control of the subsidiary,
and therefore it was deconsolidated from the Company’s financial
statements during 2014.
The Company recognized a pre-tax gain of $413 million on the
deconsolidation, measured as the fair value of the consideration
received for the 50 percent equity interest in the former subsidiary
and the fair value of the retained investment less the carrying amount
of the former subsidiary’s net assets. Approximately $186 million
of the pre-tax gain is attributable to the remeasurement of the
retained investment in the former subsidiary to its current fair value.
The gain is reflected in the loss (gain) on disposal of assets caption
in the Consolidated Statement of Income and the other expense
(income) caption in the Business Segment Information.
DIVESTITURES – During 2013, the Company completed several
divestitures, the primary ones being the automotive businesses
of its Mobile Climate Systems division and its Turkey refrigeration
components business. The Company recorded a net pre-tax gain
during 2013 of approximately $18 million related to these divestitures.
The gain is reflected in the loss (gain) on disposal of assets caption
in the Consolidated Statement of Income.
NOTE 3. Charges Related to Business Realignment
To structure its businesses in light of current and anticipated customer
demand, the Company incurred business realignment charges in 2015,
2014 and 2013.
Business realignment charges by business segment are as follows:
Diversified Industrial
Aerospace Systems
2015
$30,882
967
2014
$101,524
925
2013
$12,234
—
Work force reductions by business segment are as follows:
Diversified Industrial
Aerospace Systems
2015
668
21
2014
1,581
44
2013
725
—
The charges primarily consist of severance costs related to plant
closures as well as general work force reductions implemented by
various operating units throughout the world, with the majority of
charges relating to realignment activities in Europe. Also in 2015,
$458 of severance costs for 18 people were included in the Corporate
administration caption in the Business Segment Information. In addition,
$2,399 and $1,331 of fixed asset write-downs were recognized during
2015 and 2014, respectively, in connection with plant closures in the
Diversified Industrial Segment and are reflected in the other expense
(income) caption in the Business Segment Information. During 2013,
$1,918 of severance costs for 98 people were recognized in connection
with the Company’s divestiture of its Turkey refrigeration components
business and is reflected in the other expense (income) caption in the
Business Segment Information. The Company believes the realignment
actions taken will positively impact future results of operations, but
will have no material effect on liquidity and sources and uses of capital.
The business realignment charges are presented in the Consolidated
Statement of Income as follows:
Cost of sales
Selling, general and
administrative expenses
Loss (gain) on disposal of assets
2015
2014
$19,419
$63,575
12,888
2,399
38,874
1,331
2013
$8,354
3,880
1,918
As of June 30, 2015, approximately $17 million in severance payments
have been made relating to charges incurred during 2015, the remainder
of which are expected to be paid by June 30, 2016. Severance payments
relating to prior-year actions are being made as required. Remaining
severance payments related to current-year and prior-year actions of
approximately $34 million are primarily reflected within the other
accrued liabilities caption in the Consolidated Balance Sheet. Additional
charges may be recognized in future periods related to the realignment
actions described above, the timing and amount of which are not known
at this time.
31
NOTE 4. Income Taxes
Income before income taxes was derived from the following sources:
United States
Foreign
2015
2014
2013
$ 779,782
652,458
$ 1,115,010
441,710
$ 653,622
657,379
$1,432,240
$1,556,720
$1,311,001
Income taxes include the following:
Federal
Current
Deferred
Foreign
Current
Deferred
State and local
Current
Deferred
2015
2014
2013
$ 185,761
28,108
$ 377,404
(45,643)
$ 167,350
26,523
189,826
(11,208)
168,177
(28,016)
176,739
(28,472)
25,235
1,965
43,860
(480)
19,496
581
$ 419,687
$ 515,302
$ 362,217
A reconciliation of the Company’s effective income tax rate to the
statutory Federal rate follows:
Statutory Federal income
tax rate
State and local income taxes
Goodwill and intangible
asset impairment
Tax related to international
activities
Cash surrender value
of life insurance
Federal manufacturing
deduction
Research tax credit
Other
2015
2014
2013
35.0%
1.1
35.0%
1.8
35.0%
1.0
—
(4.5)
(0.1)
(1.6)
(0.8)
0.2
4.5
(5.6)
(0.9)
(1.0)
(0.3)
(0.4)
—
(5.8)
(0.7)
(1.0)
(1.1)
0.2
Effective income tax rate
29.3%
33.1%
27.6%
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities. The differences comprising the net deferred taxes shown
on the Consolidated Balance Sheet at June 30 were as follows:
Retirement benefits
Other liabilities and reserves
Long-term contracts
Stock-based incentive compensation
Loss carryforwards
Unrealized currency exchange gains
and losses
Inventory
Foreign tax credit carryforward
Depreciation and amortization
Valuation allowance
2015
2014
$ 614,127
127,838
49,929
66,015
316,994
(17,218)
16,659
29,965
(531,258)
(330,006)
$ 550,034
128,848
46,006
64,267
340,676
25,182
18,668
51,875
(571,107)
(348,837)
Net deferred tax asset
$ 343,045
$ 305,612
Change in net deferred tax asset:
Provision for deferred tax
Items of other comprehensive (loss)
Acquisitions and other
$ (18,865)
57,523
(1,225)
$ 74,139
(49,882)
6,539
Total change in net deferred tax
$ 37,433
$ 30,796
32
As of June 30, 2015, the Company has recorded deferred tax assets of
$316,994 resulting from $1,112,078 in loss carryforwards. A valuation
allowance of $305,825 related to the loss carryforwards has been
established due to the uncertainty of their realization. Of this valuation
allowance, $279,850 relates to non-operating entities whose loss
carryforward utilization is considered to be remote. Some of the loss
carryforwards can be carried forward indefinitely; others can be carried
forward from three to 20 years. In addition, a valuation allowance of
$24,181 related to future deductible items has been established due
to the uncertainty of their realization. These future deductible items
are recorded in the other liabilities and reserves line in the table above.
Provision has not been made for additional U.S. or foreign taxes on
undistributed earnings of certain international operations as those
earnings will continue to be reinvested. It is not practicable to estimate
the additional taxes, including applicable foreign withholding taxes,
that might be payable on the eventual remittance of such earnings.
Accumulated undistributed earnings reinvested in international
operations amounted to approximately $3,000,000 at June 30, 2015.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
Balance July 1
Additions for tax positions
related to current year
Additions for tax positions
of prior years
Reductions for tax positions
of prior years
Reductions for settlements
Reductions for expiration
of statute of limitations
Effect of foreign currency
translation
2015
2014
2013
$164,813
$107,440
$109,735
6,090
7,752
10,285
14,989
55,136
10,719
(6,945)
—
(1,359)
(1,856)
(20,683)
(4,266)
(6,251)
(5,005)
(437)
(27,008)
2,705
2,087
Balance June 30
$145,688
$164,813
$107,440
The total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $83,471, $71,898 and $60,876 as of
June 30, 2015, 2014 and 2013, respectively. If recognized, a significant
portion of the gross unrecognized tax benefits as of June 30, 2015
would be offset against an asset currently recorded in the Consolidated
Balance Sheet. The accrued interest related to the gross unrecognized
tax benefits, excluded from the amounts above, was $9,514, $8,198
and $5,184 as of June 30, 2015, 2014 and 2013, respectively.
It is reasonably possible that within the next 12 months, the amount of
gross unrecognized tax benefits could be reduced by up to approximately
$100,000 as a result of the revaluation of existing uncertain tax positions
arising from developments in the examination process or the closure
of tax statutes. Any increase in the amount of unrecognized tax benefits
within the next 12 months is expected to be insignificant.
The Company and its subsidiaries file income tax returns in the United
States and in various foreign jurisdictions. In the normal course of
business, the Company is subject to examination by taxing authorities
throughout the world. The Company is open to assessment of its federal
income tax returns by the U.S. Internal Revenue Service for fiscal years
after 2011. The Company is also open to assessment for all significant
state, local and foreign jurisdictions for fiscal years after 2006.
NOTE 5. Earnings Per Share
NOTE 7. Goodwill and Intangible Assets
Basic earnings per share are computed using the weighted-average
number of common shares outstanding during the year. Diluted
earnings per share are computed using the weighted-average number
of common shares and common share equivalents outstanding during
the year. Common share equivalents represent the dilutive effect of
outstanding stock-based awards. The computation of net income per
share was as follows:
2015
2014
2013
Numerator:
Net income attributable
to common shareholders
Denominator:
Basic – weighted-average
common shares
Increase in weighted-
average common shares
from dilutive effect of
stock-based awards
Diluted – weighted-average
common shares,
assuming exercise of
stock-based awards
$1,012,140
$1,041,048
$948,427
142,925,327
149,099,448
149,218,257
2,186,823
2,344,655
2,369,774
145,112,150
151,444,103
151,588,031
Basic earnings per share
Diluted earnings per share
$ 7.08
$ 6.97
$ 6.98
$ 6.87
$ 6.36
$ 6.26
For 2015, 2014 and 2013, 1.1 million, 1.2 million and 1.3 million
common shares, respectively, subject to stock-based awards were
excluded from the computation of diluted earnings per share because
the effect of their exercise would be anti-dilutive.
NOTE 6. Inventories
Inventories are stated at the lower of cost or market. The majority
of domestic inventories are valued by the last-in, first-out (LIFO)
cost method and the balance of the Company’s inventories are valued
by the first-in, first-out cost method.
Inventories valued on the LIFO cost method were approximately 32
percent of total inventories in 2015 and 30 percent of total inventories
in 2014. The current cost of these inventories exceeds their valuation
determined on the LIFO basis by $206,233 in 2015 and $208,291
in 2014. Progress payments of $34,820 in 2015 and $61,958 in 2014
are netted against inventories.
The changes in the carrying amount of goodwill are as follows:
Diversified
Industrial
Segment
Aerospace
Systems
Segment
Total
Balance June 30, 2013
$3,125,175
$98,340
$3,223,515
Acquisitions
Impairment
Foreign currency translation
and other
3,195
(140,334)
—
—
3,195
(140,334)
84,688
361
85,049
Balance June 30, 2014
$ 3,072,724
$ 98,701
$ 3,171,425
Acquisitions
Divestitures
Foreign currency translation
and other
10,430
(4,757)
—
—
10,430
(4,757)
(234,352)
(67)
(234,419)
Balance June 30, 2015
$2,844,045
$98,634
$2,942,679
Acquisitions represent the original goodwill allocation, purchase price
adjustments and final adjustments to the purchase price allocation
for the acquisitions during the measurement period subsequent to
the applicable acquisition dates. The Company’s previously reported
results of operations and financial position would not be materially
different had the goodwill adjustments recorded during 2015 and 2014
been reflected in the same reporting period that the initial purchase
price allocations for those acquisitions were made.
In 2014, the Company made a decision to restructure and change the
strategic direction of its Worldwide Energy Products Division (EPD).
The Company calculated the fair value of EPD using assumptions
reflecting the Company’s updated strategic direction for this reporting
unit, the results of which indicated that the carrying value of EPD
exceeded its fair value. As a result, the Company estimated the implied
fair value of EPD’s goodwill, which resulted in a non-cash impairment
charge of $140,334. The impairment charge is reflected in the goodwill
and intangible asset impairment caption in the Consolidated Statement
of Income and in the other expense (income) caption in the Business
Segment Information. The fair value of EPD was calculated using both
a discounted cash flow analysis and estimated fair market values of
comparable businesses with each valuation method having equal
weight. Fair value calculated using a discounted cash flow analysis
is classified within level 3 of the fair value hierarchy and requires
several assumptions including a risk-adjusted interest rate and future
sales and operating margin levels.
The inventories caption in the Consolidated Balance Sheet is comprised
of the following components:
The Company’s annual impairment tests performed in 2015, 2014
and 2013 resulted in no impairment loss being recognized.
June 30,
Finished products
Work in process
Raw materials
Total
2015
2014
$ 526,708
688,727
85,024
$ 532,968
732,294
106,419
$1,300,459
$1,371,681
Intangible assets are amortized on a straight-line method over their
legal or estimated useful life. The gross carrying value and accumulated
amortization for each major category of intangible asset at June 30 are
as follows:
2015
2014
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization
Amount Amortization
$ 149,066
355,108
$ 88,540
172,187
$ 160,030
391,268
$ 86,708
174,114
1,369,380
599,388
1,481,560
583,754
Patents
Trademarks
Customer lists
and other
Total
$1,873,554
$860,115
$2,032,858
$844,576
33
During 2015, the Company acquired intangible assets, either individually
or as part of a group of assets, with an initial purchase price allocation
and weighted-average life as follows:
Purchase Price
Allocation
Weighted-
Average Life
Patents
Trademarks
Customer lists
and other
$ 2,642
1,093
12 years
14 years
11,797
16 years
Total
$15,532
15 years
Total intangible amortization expense in 2015, 2014 and 2013 was
$109,887, $118,782 and $118,516, respectively. Estimated intangible
amortization expense for the five years ending June 30, 2016 through
2020 is $100,289, $95,756, $90,872, $83,257 and $75,588,
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. In 2014, in
connection with the goodwill impairment review of EPD discussed
above, the Company determined that certain intangible assets of EPD,
primarily trademarks and customer lists, were impaired resulting
in the recognition of a non-cash impairment charge of $43,664.
The impairment charge is reflected in the goodwill and intangible
asset impairment caption in the Consolidated Statement of Income
and in the other expense (income) caption in the Business Segment
Information. The fair value of EPD’s intangible assets were determined
using an income approach for the individual intangible assets. Fair
value calculated using an income approach is classified within level
3 of the fair value hierarchy and requires several assumptions including
future sales and operating margins expected to be generated from
the use of the individual intangible asset.
NOTE 8. Financing Arrangements
The Company has a line of credit totaling $2,000,000 through a
multi-currency revolving credit agreement with a group of banks, all
of which was available at June 30, 2015. The credit agreement expires
in October 2017; however, the Company has the right to request a one-
year extension of the expiration date on an annual basis, which request
may result in changes to the current terms and conditions of the credit
agreement. Advances from the credit agreement can be used for general
corporate purposes, including acquisitions, and for the refinancing
of existing indebtedness. The credit agreement requires the payment of
an annual facility fee, the amount of which would increase in the event
the Company’s credit ratings are lowered. Although a lowering of the
Company’s credit ratings would likely increase the cost of future debt,
it would not limit the Company’s ability to use the credit agreement
nor would it accelerate the repayment of any outstanding borrowings.
The Company is currently authorized to sell up to $1,850,000 of
short-term commercial paper notes. No commercial paper notes
were outstanding at June 30, 2015 and $816,100 were outstanding
at June 30, 2014.
In addition to commercial paper notes, notes payable includes short-
term lines of credit and borrowings from foreign banks. At June 30,
2015, the Company had $62,548 in lines of credit from various foreign
banks, none of which was outstanding at June 30, 2015. Most of these
agreements are renewed annually. The weighted-average interest rate
on notes payable during both 2015 and 2014 was 0.2 percent.
34
The Company’s foreign locations in the ordinary course of business
may enter into financial guarantees through financial institutions which
enable customers to be reimbursed in the event of nonperformance
by the Company.
The Company’s credit agreements and indentures governing certain
debt agreements contain various covenants, the violation of which
would limit or preclude the use of the applicable agreements for future
borrowings, or might accelerate the maturity of the related outstanding
borrowings covered by the applicable agreements. At the Company’s
present rating level, the most restrictive covenant contained in the
credit agreements and the indentures provides that the ratio of secured
debt to net tangible assets be less than 10 percent. As of June 30, 2015,
the Company does not have any secured debt outstanding. The
Company is in compliance with all covenants.
NOTE 9. Debt
June 30,
Domestic:
Fixed rate medium-term notes
3.30% to 6.55%, due 2018-2045
Foreign:
Bank loans, including revolving credit
1% to 11.75%, due 2016
Euro bonds 4.125%, due 2016
Japanese Yen credit facility
JPY Libor plus 55 bps, due 2017
Other long-term debt, including
capitalized leases
Total long-term debt
Less: Long-term debt payable
within one year
Long-term debt, net
2015
2014
$2,675,000
$1,175,000
322
222,820
322
273,860
48,960
59,220
—
236
2,947,102
1,508,638
223,142
496
$2,723,960
$1,508,142
Principal amounts of long-term debt payable in the five years ending
June 30, 2016 through 2020 are $223,142, $48,960, $450,000,
$100,000 and $0, respectively.
During 2015, the Company issued $500,000 aggregate principal
amount of ten-year medium-term notes, $500,000 aggregate principal
amount of twenty-year medium-term notes and $500,000 aggregate
principal amount of thirty-year medium-term notes. The ten-year
medium-term notes are due in a balloon payment in November 2024
and carry an interest rate of 3.30 percent. The twenty-year medium-
term notes are due in a balloon payment in November 2034 and carry
an interest rate of 4.20 percent. The thirty-year medium-term notes
are due in a balloon payment in November 2044 and carry an interest
rate of 4.45 percent. Interest payments are due semi-annually. Debt
issuance costs for all medium-term notes issued were approximately
$15,018 and will be amortized over the term of the notes. The Company
used a portion of the net proceeds from the notes issuance to repay
outstanding commercial paper borrowings.
LEASE COMMITMENTS – Future minimum rental commitments
as of June 30, 2015, under non-cancelable operating leases,
which expire at various dates, are as follows: 2016 – $76,433;
2017 – $53,066; 2018 – $32,781; 2019 – $17,935; 2020 – $12,976
and after 2020 – $42,851.
Rental expense in 2015, 2014 and 2013 was $125,657, $131,948
and $133,478, respectively.
NOTE 10. Retirement Benefits
PENSIONS – The Company has noncontributory defined benefit pension
plans covering eligible employees, including certain employees in foreign
countries. Plans for most salaried employees provide pay-related benefits
based on years of service. Plans for hourly employees generally provide
benefits based on flat-dollar amounts and years of service. The Company
also has arrangements for certain key employees which provide for
supplemental retirement benefits. In general, the Company’s policy is
to fund these plans based on legal requirements, tax considerations,
local practices and investment opportunities. The Company also
sponsors defined contribution plans and participates in government-
sponsored programs in certain foreign countries.
A summary of the Company’s defined benefit pension plans follows:
Benefit cost
2015
2014
2013
Service cost
Interest cost
Special termination cost
Expected return on
plan assets
Amortization of prior
service cost
Amortization of unrecognized
actuarial loss
Amortization of initial
net obligation
$ 97,960
176,556
21,174
$ 99,929
190,999
—
$ 107,519
174,152
—
(218,938)
(226,884)
(211,694)
9,437
14,644
14,472
152,664
159,584
200,849
17
19
22
Net periodic benefit cost
$ 238,870
$ 238,291
$ 285,320
Change in benefit obligation
2015
2014
Benefit obligation at beginning of year
Service cost
Interest cost
Special termination cost
Actuarial loss
Benefits paid
Plan amendments
Foreign currency translation and other
$ 4,749,447
97,960
176,556
21,174
237,896
(261,473)
3,033
(156,890)
$ 4,382,563
99,929
190,999
—
277,098
(286,066)
(3,503)
88,427
Benefit obligation at end of year
$ 4,867,703
$ 4,749,447
Change in plan assets
Fair value of plan assets
at beginning of year
Actual gain on plan assets
Employer contributions
Benefits paid
Foreign currency translation and other
$ 3,499,274
51,514
62,852
(261,473)
(113,860)
$ 3,096,616
469,984
146,237
(286,066)
72,503
Fair value of plan assets at end of year
$ 3,238,307
$ 3,499,274
Funded status
$(1,629,396)
$(1,250,173)
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement
benefits
$ (31,206)
$.....(11,333)
(1,598,190)
(1,238,840)
Net amount recognized
$(1,629,396)
$(1,250,173)
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service cost
Transition obligation
$ 1,639,010
32,126
103
$ 1,434,645
37,137
143
Net amount recognized
$ 1,671,239
$ 1,471,925
The presentation of the amounts recognized on the Consolidated
Balance Sheet and in accumulated other comprehensive (loss) is on
a debit (credit) basis and excludes the effect of income taxes.
During the fourth quarter of 2015, the Company initiated a voluntary
retirement program under which certain participants in its U.S. qualified
defined benefit pension plan were offered enhanced retirement benefits.
As a result of the program, the Company incurred an increase in its net
pension benefit cost of $21,174.
During 2015 and 2014, the Company offered lump-sum distributions
to certain participants in its U.S. qualified defined benefit plan. Included
in benefits paid in 2015 and 2014 is $81,496 and $110,000, respectively,
related to participants who elected to receive lump-sum distributions.
No settlement charges were required to be recognized for the lump-sum
distribution offerings.
The estimated amount of net actuarial loss, prior service cost and
transition obligation that will be amortized from accumulated other
comprehensive (loss) into net periodic benefit pension cost in 2016
is $166,683, $7,176 and $16, respectively.
The accumulated benefit obligation for all defined benefit plans was
$4,451,047 and $4,258,743 at June 30, 2015 and 2014, respectively.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $4,761,438, $4,352,369 and
$3,129,803, respectively, at June 30, 2015, and $4,691,350, $4,206,557
and $3,443,515, respectively, at June 30, 2014. The projected benefit
obligation and fair value of plan assets for pension plans with projected
benefit obligations in excess of plan assets were $4,821,675 and
$3,188,293, respectively, at June 30, 2015, and $4,709,493 and
$3,459,097, respectively, at June 30, 2014.
The Company expects to make cash contributions of approximately
$278 million to its defined benefit pension plans in 2016, the majority
of which relate to its U.S. qualified defined benefit plan. Estimated
future benefit payments in the five years ending June 30, 2016 through
2020 are $225,953, $244,912, $209,742, $241,699 and $258,332,
respectively and $1,325,348 in the aggregate for the five years ending
June 30, 2021 through June 30, 2025.
The assumptions used to measure net periodic benefit cost for the
Company’s significant defined benefit plans are:
U.S. defined benefit plans
Discount rate
Average increase in
compensation
Expected return on
plan assets
Non-U.S. defined benefit
plans
Discount rate
Average increase in
compensation
Expected return on
plan assets
2015
2014
2013
4.05%
4.52%
3.91%
5.12%
5.13%
5.21%
7.5%
8.0%
8.0%
0.9 to 4.2%
1.5 to 4.59%
1.75 to 4.7%
2.0 to 5.0%
2.0 to 6.0%
2.0 to 6.0%
1.0 to 6.25%
1.0 to 6.25%
1.0 to 6.4%
The assumptions used to measure the benefit obligation for the
Company’s significant defined benefit plans are:
U.S. defined benefit plans
Discount rate
Average increase in compensation
Non-U.S. defined benefit plans
Discount rate
Average increase in compensation
2015
2014
4.19%
5.14%
4.05%
5.12%
0.7 to 6.0%
2.0 to 5.5%
0.9 to 4.2%
2.0 to 5.0%
35
The fair values of pension plan assets at June 30, 2015 and at June 30,
2014, by asset class, are as follows:
Quoted
Prices
Significant
Significant
Other
In Active Observable Unobservable
Inputs
Inputs
Markets
(Level 3)
(Level 2)
(Level 1)
June 30,2015
$ 75,015 $ 75,015
$ —
$ —
Cash and cash
equivalents
Equity securities
U.S. based
companies
Non-U.S. based
companies
Fixed income
securities
Corporate
bonds
Government
issued
securities
Mutual funds
Equity funds
Fixed income
funds
Mutual funds
measured at
net asset value
Common/
Collective trusts
Equity funds
Fixed income
funds
Common/
Collective
trusts
measured at
net asset
value
Limited
Partnerships
measured at
net asset
value
Miscellaneous
299,321
299,321
203,199
203,199
—
—
165,226
77,224
88,002
143,697
90,785
52,912
149,383
149,383
135,949
135,949
5,564
77,429
77,429
46,184
46,184
—
—
—
—
—
—
—
—
—
—
—
—
1,635,135
290,904
11,301
—
11,301
—
Total
$3,238,307 $1,154,489
$152,215
$ —
The discount rate assumption is based on current rates of high-quality
long-term corporate bonds over the same estimated time period that
benefit payments will be required to be made. The expected return
on plan assets assumption is based on the weighted-average expected
return of the various asset classes in the plans’ portfolio. The asset
class return is developed using historical asset return performance
as well as current market conditions such as inflation, interest rates
and equity market performance.
The weighted-average allocation of the majority of the assets related
to defined benefit plans is as follows:
Equity securities
Debt securities
Other investments
2015
41%
47%
12%
100%
2014
42%
48%
10%
100%
The weighted-average target asset allocation as of June 30, 2015 is
41 percent equity securities, 47 percent debt securities and 12 percent
other investments. The investment strategy for the Company’s
worldwide defined benefit pension plan assets focuses on achieving
prudent actuarial funding ratios while maintaining acceptable levels of
risk in order to provide adequate liquidity to meet immediate and future
benefit requirements. This strategy requires investment portfolios
that are broadly diversified across various asset classes and external
investment managers. Assets held in the U.S. defined benefit plans
account for approximately 71 percent of the Company’s total defined
benefit plan assets. The Company’s overall investment strategy with
respect to the Company’s U.S. defined benefit plans is to opportunistically
migrate from its traditional mix between growth seeking assets (primarily
consisting of global public equities in developed and emerging countries
and hedge fund of fund strategies) and income generating assets
(primarily consisting of high quality bonds, both domestic and global,
emerging market bonds, high yield bonds and Treasury Inflation
Protected Securities) to an allocation more heavily weighted toward
income generating assets. Over time, long duration fixed income assets
are being added to the portfolio. These securities are highly correlated
with the Company’s pension liabilities and will serve to hedge a portion
of the Company’s interest rate risk.
36
Quoted
Prices
Significant
Significant
Other
In Active Observable Unobservable
Inputs
Inputs
Markets
(Level 3)
(Level 2)
(Level 1)
June 30,2014
$ 46,297 $ 45,976
$ 321
$ —
Cash and cash
equivalents
Equity securities
U.S. based
companies
Non-U.S. based
companies
Fixed income
securities
Corporate
bonds
Government
issued
securities
Mutual funds
Equity funds
Fixed income
funds
Mutual funds
measured at
net asset value
Common/
Collective trusts
Equity funds
Fixed income
funds
Common/
Collective
trusts
measured at
net asset
value
Limited
Partnerships
Limited
Partnerships
measured at
net asset
value
Miscellaneous
346,145
346,145
220,911
220,911
—
—
234,719
101,227
133,492
161,131
101,083
60,048
191,301
191,301
189,375
189,375
35,279
85,461
85,461
48,649
48,649
—
—
—
—
—
—
—
—
—
—
—
—
1,630,292
777
777
—
—
288,236
20,701
—
20,701
—
Total
$3,499,274 $1,330,905
$214,562
$ —
Cash and cash equivalents, which include repurchase agreements and
other short-term investments, are valued at cost, which approximates
fair value.
Equity securities are valued at the closing price reported on the active
market on which the individual securities are traded. U.S. based
companies include Company stock with a fair value of $154,660 as
of June 30, 2015 and $167,157 as of June 30, 2014.
Fixed income securities are valued using both market observable inputs
for similar assets that are traded on an active market and the closing
price on the active market on which the individual securities are traded.
Mutual funds are valued using the closing market price reported on the
active market on which the fund is traded or at net asset value per share
and primarily consist of equity and fixed income funds. The equity funds
primarily provide exposure to U.S. and international equities, real estate
and commodities. The fixed income funds primarily provide exposure
to high-yield securities and emerging market fixed income instruments.
Mutual funds measured at fair value using the net asset value per share
practical expedient have not been categorized in the fair value hierarchy
and are being presented in the tables above to permit a reconciliation
of the fair value hierarchy to the Consolidated Balance Sheet.
Common/Collective trusts primarily consist of equity and fixed income
funds and are valued using the closing market price reported on the
active market on which the fund is traded or at net asset value per
share. Common/Collective trust investments can be redeemed daily
and without restriction. Redemption of the entire investment balance
generally requires a 30-day notice period. The equity funds provide
exposure to large, mid and small cap U.S. equities, international large
and small cap equities and emerging market equities. The fixed income
funds provide exposure to U.S., international and emerging market
debt securities. Common/Collective trusts measured at fair value using
the net asset value per share practical expedient have not been
categorized in the fair value hierarchy and are being presented in
the tables above to permit a reconciliation of the fair value hierarchy
to the Consolidated Balance Sheet.
Limited Partnerships primarily consist of hedge funds valued using a
net asset value per share and provide exposure to a variety of hedging
strategies including long/short equity, relative value, event driven and
global macro. Limited Partnership investments can be redeemed daily
and without restriction. Redemption of the entire investment balance
generally requires a 30-day notice period. Limited Partnerships
measured at fair value using the net asset value per share practical
expedient have not been categorized in the fair value hierarchy and
are being presented in the tables above to permit a reconciliation
of the fair value hierarchy to the Consolidated Balance Sheet.
Miscellaneous primarily includes real estate funds, insurance contracts
held in the asset portfolio of the Company’s non-U.S. defined benefit
pension plans, and net payables for securities purchased but not settled
in the asset portfolio of the Company’s U.S. defined benefit pension
plans. Insurance contracts are valued at the present value of future
cash flows promised under the terms of the insurance contracts.
The primary investment objective of equity securities and equity funds,
within both the mutual fund and common/collective trust asset class,
is to obtain capital appreciation in an amount that at least equals
various market-based benchmarks. The primary investment objective
of fixed income securities and fixed income funds, within both the
mutual fund and common/collective trust asset class, is to provide
for a constant stream of income while preserving capital. The primary
investment objective of limited partnerships is to achieve capital
appreciation through an investment program focused on specialized
investment strategies. The primary investment objective of insurance
contracts, included in the miscellaneous asset class, is to provide
a stable rate of return over a specified period of time.
EMPLOYEE SAVINGS PLAN – The Company sponsors an employee
stock ownership plan (ESOP) as part of its existing savings and
investment 401(k) plan. The ESOP is available to eligible domestic
employees. Company matching contributions, up to a maximum
of four percent of an employee’s annual compensation, are recorded
as compensation expense. Prior to August 1, 2014, Company stock
was used to match employee contributions. Effective August 1, 2014,
participants may direct company matching contributions to any
investment option within the savings and investment 401(k) plan.
Shares held by ESOP
Company matching
contributions
2015
2014
2013
8,407,858
8,944,697
9,686,238
$63,914
$63,441
$61,067
In addition to shares within the ESOP, as of June 30, 2015, employees
have elected to invest in 2,408,854 shares of common stock within
a company stock fund of the savings and investment 401(k) plan.
37
The Company has a retirement income account (RIA) within the employee
savings plan. The Company makes a cash contribution to the participant’s
RIA each year, the amount of which is based on the participant’s age
and years of service. Participants do not contribute to the RIA. The
Company recognized $29,570, $25,247 and $22,046 in expense related
to the RIA in 2015, 2014 and 2013, respectively.
OTHER POSTRETIREMENT BENEFITS – The Company provides
postretirement medical and life insurance benefits to certain retirees
and eligible dependents. Most plans are contributory, with retiree
contributions adjusted annually. The plans are unfunded and pay stated
percentages of covered medically necessary expenses incurred by
retirees, after subtracting payments by Medicare or other providers
and after stated deductibles have been met. For most plans, the
Company has established cost maximums to more effectively control
future medical costs. The Company has reserved the right to change
these benefit plans.
Certain employees are covered under benefit provisions that include
prescription drug coverage for Medicare eligible retirees. The impact
of the subsidy received under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 on the Company’s
other postretirement benefits was immaterial.
The Company recognized $4,340, $4,478 and $4,930 in expense related
to other postretirement benefits in 2015, 2014 and 2013, respectively.
Change in benefit obligation
2015
2014
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
$ 76,207
632
2,723
655
(4,264)
$ 75,544
623
2,971
1,963
(4,894)
Benefit obligation at end of year
$ 75,953
$ 76,207
Funded status
$(75,953)
$(76,207)
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement benefits
$ (5,629)
(70,324)
$ (5,874)
(70,333)
Net amount recognized
$(75,953)
$(76,207)
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service credit
Net amount recognized
$ 13,626
(676)
$ 14,074
(797)
$ 12,950
$ 13,277
The presentation of the amounts recognized on the Consolidated Balance
Sheet and in accumulated other comprehensive (loss) is on a debit
(credit) basis and is before the effect of income taxes. The amount
of net actuarial loss and prior service credit that will be amortized
from accumulated other comprehensive (loss) into net periodic
postretirement cost in 2016 is $1,128 and $(121), respectively.
The assumptions used to measure the net periodic benefit cost for
postretirement benefit obligations are:
Discount rate
Current medical cost
trend rate
Ultimate medical cost
trend rate (Pre-65 participants)
Ultimate medical cost
trend rate (Post-65 participants)
Medical cost trend rate
decreases to ultimate in year
(Pre-65 participants)
Medical cost trend rate
decreases to ultimate in year
(Post-65 participants)
2015
3.74%
2014
4.1%
7.75%
7.75%
5.6%
6.2%
5.0%
5.0%
2013
3.62%
8.0%
5.0%
5.0%
2041
2021
2019
2045
2021
2019
The discount rate assumption used to measure the benefit obligation
was 3.96 percent in 2015 and 3.74 percent in 2014.
Estimated future benefit payments for other postretirement benefits in
the five years ending June 30, 2016 through 2020 are $5,644, $5,770,
$5,751, $5,598 and $5,176, respectively, and $22,449 in the aggregate
for the five years ending June 30, 2021 through June 30, 2025.
A one percentage point change in assumed health care cost trend rates
would not have a material effect on the benefit cost or benefit obligation.
OTHER – The Company has established nonqualified deferred
compensation programs, which permit officers, directors and certain
management employees annually to elect to defer a portion of their
compensation, on a pre-tax basis, until their retirement. The retirement
benefit to be provided is based on the amount of compensation deferred,
Company matching contributions and earnings on the deferrals. During
2015, 2014 and 2013, the Company recorded expense relating to deferred
compensation of $5,676, $24,549 and $19,182, respectively.
The Company has invested in corporate-owned life insurance policies
to assist in meeting the obligation under these programs. The policies
are held in a rabbi trust and are recorded as assets of the Company.
NOTE 11. Equity
Changes in accumulated other comprehensive (loss) in shareholders’
equity by component:
Foreign
Currency Retirement
Benefit
Translation
Adjustment
Plans Other
Total
Balance June 30, 2013
$ (68,328) $(1,039,072) $ (433) $ (1,107,833)
192,948
(20,636)
—
172,312
Balance June 30, 2014
$ 124,620 $ (947,890) $ (228) $ (823,498)
—
111,818
205
112,023
Other comprehensive
income (loss) before
reclassifications
Amounts reclassified from
accumulated other
comprehensive (loss)
Other comprehensive
(loss) before
reclassifications
Amounts reclassified from
accumulated other
comprehensive (loss)
(765,107)
(253,206) (4,324)
(1,022,637)
—
103,496
4,021
107,517
Balance June 30, 2015
$(640,487) $ (1,097,600) $ (531) $(1,738,618)
38
Reclassifications out of accumulated other comprehensive (loss) in
shareholders’ equity during 2015:
Details about Accumulated
Other Comprehensive
(Loss) Components
Retirement benefit plans
Amortization of prior
service cost and initial
net obligation
Recognized actuarial loss
Total before tax
Tax benefit
Net of tax
Other
Realized loss on cash
flow hedges
Realized loss on
available-for-sale
investments
Total before tax
Tax benefit
Net of tax
Income (Expense)
Reclassified from
Accumulated Other
Comprehensive (Loss)
Consolidated
Statement of
Income
Classification
$ (9,333)
(153,770)
(163,103)
59,607
$(103,496)
See Note 10
See Note 10
Income taxes
$ (305)
Interest expense
(3,817) Other (income), net
(4,122)
101
$ (4,021)
Income taxes
Reclassifications out of accumulated other comprehensive (loss) in
shareholders’ equity during 2014:
Details about Accumulated
Other Comprehensive
(Loss) Components
Retirement benefit plans
Amortization of prior
service cost and initial
net obligation
Recognized actuarial loss
Total before tax
Tax benefit
Net of tax
Other
Realized loss on cash
flow hedges
Tax benefit
Net of tax
Income (Expense)
Reclassified from
Accumulated Other
Comprehensive (Loss)
Consolidated
Statement of
Income
Classification
$ (14,535)
(160,596)
(175,131)
63,313
$ (111,818)
$ (306)
101
$ (205)
See Note 10
See Note 10
Income taxes
Interest expense
Income taxes
NOTE 12. Stock Incentive Plans
The Company’s 2009 Omnibus Stock Incentive Plan provides for the
granting of share-based incentive awards in the form of nonqualified
stock options, stock appreciation rights (SARs), restricted stock units
(RSUs) and restricted and unrestricted stock to officers and key
employees of the Company. The aggregate number of shares authorized
for issuance under the 2009 Omnibus Stock Incentive Plan is 14,700,000.
The Company satisfies share-based incentive award obligations by
issuing shares of common stock out of treasury, which have been
repurchased pursuant to the Company’s share repurchase program
described in Note 11 to the Consolidated Financial Statements, or
through the issuance of previously unissued common stock.
STOCK OPTIONS/SARs – Stock options allow the participant to purchase
shares of common stock at a price not less than 100 percent of the
fair market value of the stock on the date of grant. Upon exercise, SARs
entitle the participant to receive shares of common stock equal to the
increase in value of the award between the grant date and the exercise
date. Stock options and SARs are exercisable from one to three years
after the date of grant and expire no more than 10 years after grant.
The fair value of each stock option and SAR award granted in 2015,
2014 and 2013 was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
Risk-free interest rate
Expected life of award
Expected dividend yield of stock
Expected volatility of stock
Weighted-average fair value
2015
2.0%
5.4 yrs
1.8%
32.3%
2014
1.55%
5.1 yrs
1.9%
39.1%
2013
0.8%
4.9 yrs
1.7%
39.0%
$30.50
$32.57
$24.76
The risk-free interest rate was based on U.S. Treasury yields with a term
similar to the expected life of the award. The expected life of the award
was derived by referring to actual exercise and post-vesting employment
termination experience. The expected dividend yield was based on the
Company’s historical dividend rate and stock price over a period similar
to the expected life of the award. The expected volatility of stock was
derived by referring to changes in the Company’s historical common
stock prices over a time-frame similar to the expected life of the award.
Stock option and SAR activity during 2015 is as follows (aggregate
intrinsic value in millions):
Weighted-
Average
Weighted-
Remaining
Average
Exercise Contractual
Term
Price
Number
of Shares
Aggregate
Intrinsic
Value
SHARE REPURCHASES – 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 to 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. Repurchases may be funded
primarily from operating cash flows and commercial paper borrowings
and the shares are initially held as treasury shares. The number of
common shares repurchased at the average purchase price follows:
Shares repurchased
Average price per share
11,091,759
$125.64
1,741,143
$114.87
3,006,005
$85.55
2015
2014
2013
Outstanding
June 30, 2014
Granted
Exercised
Canceled
Outstanding
June 30, 2015
Exercisable
June 30, 2015
8,208,699
$ 72.87
1,128,279
(1,159,101)
(43,671)
113.92
62.82
101.10
8,134,206
$ 79.84
5.2 years
$298.0
5,824,117
$ 69.43
4.0 years
$273.9
39
A summary of the status and changes of shares subject to stock option
and SAR awards and the related average price per share follows:
Nonvested June 30, 2014
Granted
Vested
Canceled
Nonvested June 30, 2015
Number of
Shares
Weighted-Average
Grant Date
Fair Value
2,484,971
1,128,279
(1,264,918)
(38,243)
2,310,089
$28.89
30.50
26.93
31.00
$30.71
At June 30, 2015, $19,061 of expense with respect to nonvested stock
option and SAR awards has yet to be recognized and will be amortized
into expense over a weighted-average period of approximately
20 months. The total fair value of shares vested during 2015, 2014
and 2013 was $34,064, $42,363 and $29,777, respectively.
Information related to stock options and SAR awards exercised during
2015, 2014 and 2013 is as follows:
Net cash proceeds
Intrinsic value
Income tax benefit
2015
$ 3,355
72,140
17,355
2014
2013
$ 8,013
155,903
37,993
$ 32,204
208,426
47,659
During 2015, 2014 and 2013, the Company recognized stock-based
compensation expense of $34,617, $49,998 and $33,018, respectively,
relating to stock option and SAR awards. The Company derives a tax
deduction measured by the excess of the market value over the grant
price at the date stock-based awards are exercised. The related tax
benefit is credited to additional capital as the Company is currently
in a windfall tax benefit position.
Shares surrendered upon exercise of stock options and SARs: 2015 –
243,799; 2014 – 775,163; 2013 – 1,947,148.
RSUs – RSUs constitute an agreement to deliver shares of common
stock to the participant at the end of a vesting period. Generally, the
RSUs vest and the underlying stock is issued ratably over a three-year
graded vesting period. Unvested RSUs may not be transferred and do
not have dividend or voting rights. For each unvested RSU, recipients
are entitled to receive a dividend equivalent, payable in cash or common
shares, equal to the cash dividend per share paid to common
shareholders.
The fair value of each RSU award granted in 2015, 2014 and 2013 was
based on the fair market value of the Company’s common stock on the
date of grant. A summary of the status and changes of shares subject
to RSU awards and the related average price per share follows:
Nonvested June 30, 2014
Granted
Vested
Canceled
Nonvested June 30, 2015
Number of
Shares
Weighted-Average
Grant Date
Fair Value
471,530
211,088
(213,986)
(19,344)
449,288
$ 94.59
113.02
88.57
105.91
$105.63
During 2015, 2014 and 2013, the Company recognized stock-based
compensation expense of $22,547, $21,475 and $17,852 respectively,
relating to RSU awards. At June 30, 2015, $18,395 of expense with
respect to nonvested RSU awards has yet to be recognized and will be
amortized into expense over a weighted-average period of approximately
19 months. The total fair value of RSU awards vested during 2015, 2014
and 2013 was $18,953, $18,007 and $12,488, respectively. The Company
recognized a tax benefit of $704, $2,509 and $976 relating to the
issuance of common stock for RSU awards that vested during 2015,
2014 and 2013, respectively.
LTIP/RESTRICTED STOCK – The Company’s Long Term Incentive Plans
(LTIP) provide for the issuance of unrestricted stock to certain officers
and key employees based on the attainment of certain goals relating
to the Company’s revenue growth, earnings per share growth and return
on invested capital during the 3-year performance period. No dividends
or dividend equivalents are paid on unearned shares.
Stock issued for LTIP
2015
2014
2013
LTIP 3-year plan
Number of shares issued
Average share value
on date of issuance
Total value
2012-13-14
185,063
2011-12-13
298,813
2010-11-12
792,428
$ 119.06
$22,034
$126.17
$37,701
$ 83.64
$66,278
Under the Company’s 2013-14-15 LTIP, a payout of unrestricted stock
will be issued in April 2016.
The fair value of each LTIP award granted in 2015, 2014 and 2013 was
based on the fair market value of the Company’s common stock on the
date of grant. A summary of the status and changes of shares relating
to the LTIP and the related average price per share follows:
Nonvested June 30, 2014
Granted
Vested
Canceled
Number of
Shares
Weighted-Average
Grant Date
Fair Value
920,096
297,728
(333,239)
(8,414)
$ 94.83
120.21
79.46
96.98
Nonvested June 30, 2015
876,171
$109.27
During 2015, 2014 and 2013, the Company recorded stock-based
compensation expense of $38,929, $31,688 and $34,127, respectively,
relating to the LTIP.
Shares surrendered in connection with the LTIP: 2015 – 42,394;
2014 – 140,406; 2013 – 311,110.
In 2015, 2014 and 2013, 12,716, 12,353 and 14,580 restricted shares,
respectively, were issued to certain non-employee members of the
Board of Directors. Transferability of these shares is restricted for
one to three years following issuance. These shares vest ratably, on
an annual basis, over the term of office of the director. The fair value
of the restricted shares issued in 2015, 2014 and 2013 was based on
the fair market value of the Company’s common stock on the date of
grant. During 2015, 2014 and 2013, the Company recognized expense
of $1,401, $1,304 and $1,137, respectively, related to restricted shares.
During 2015, 2014 and 2013, the Company recognized a tax benefit
(cost) of $5,370, $(6,770) and $17,395, respectively, relating to
the LTIP and restricted shares issued to non-employee members
of the Board of Directors.
At June 30, 2015, the Company had approximately 6 million common
shares reserved for issuance in connection with its stock incentive plans.
40
NOTE 13. Shareholders’ Protection Rights Agreement
On January 25, 2007, the Board of Directors of the Company
declared a dividend of one Shareholders’ Right for each common
share outstanding on February 17, 2007 in relation to the Company’s
Shareholders Protection Rights Agreement. As of June 30, 2015,
138,558,739 common shares were reserved for issuance under this
Agreement. Under certain conditions involving acquisition of, or an
offer for, 15 percent or more of the Company’s common shares, all
holders of Shareholders’ Rights would be entitled to purchase one
common share at an exercise price currently set at $160. In addition,
in certain circumstances, all holders of Shareholders’ Rights (other
than the acquiring entity) would be entitled to purchase a number
of common shares equal to twice the exercise price, or at the option
of the Board of Directors, to exchange each Shareholders’ Right for
one common share. The Shareholders’ Rights remain in existence until
February 17, 2017, unless extended by the Board of Directors or earlier
redeemed (at one cent per Shareholders’ Right), exercised or exchanged
under the terms of the agreement. In the event of an unfriendly business
combination attempt, the Shareholders’ Rights will cause substantial
dilution to the person attempting the business combination. The
Shareholders’ Rights should not interfere with any merger or other
business combination that is in the best interest of the Company and
its shareholders since the Shareholders’ Rights may be redeemed.
NOTE 14. Research and Development
Research and development costs amounted to $403,085 in 2015,
$410,132 in 2014 and $406,613 in 2013. These amounts include both
costs incurred by the Company related to independent research and
development initiatives as well as costs incurred in connection with
research and development contracts. Costs incurred in connection
with research and development contracts amounted to $57,799 in 2015,
$55,916 in 2014 and $58,916 in 2013. These costs are included in the
total research and development cost for each of the respective years.
NOTE 15. Financial Instruments
The Company’s financial instruments consist primarily of cash and
cash equivalents, marketable securities and other investments,
accounts receivable and long-term investments, as well as obligations
under accounts payable, trade, notes payable and long-term debt.
Due to their short-term nature, the carrying values for cash and cash
equivalents, accounts receivable, accounts payable, trade and notes
payable approximate fair value.
Marketable securities and other investments include deposits, which are
recorded at cost, and investments classified as available-for-sale, which
are recorded at fair value with unrealized gains and losses recorded in
accumulated other comprehensive (loss). The amortized cost and fair
value of available-for-sale investments at June 30, 2015 are as follows:
Amortized
Cost
$187,467
60,543
146,202
Gross
Gross
Unrealized Unrealized
Losses
Gains
Fair
Value
$101
12
2
$ 34
43
487
$187,534
60,512
145,717
11,028
—
58
10,970
Fixed income
mutual funds
Government bonds
Corporate bonds
Asset-backed and
mortgage-backed
securities
At June 30, 2015, there were no facts or circumstances that indicated
the unrealized losses were other than temporary. All available-for-sale
investments in an unrealized loss position have been in that position
for less than 12 months.
The contractual maturities of available-for-sale investments at June 30,
2015 are as follows:
Less than one year
One to three years
Over three years
Amortized
Cost
$ 13,561
188,539
15,673
Fair
Value
$ 13,555
188,057
15,587
Actual maturities of available-for-sale investments may differ from
their contractual maturities as the Company has the ability to liquidate
the available-for-sale investments after giving appropriate notice to
the issuer.
During 2015, the Company recognized $3,817 of net realized losses
on its available-for sale investments related to sales and maturities,
which are reflected in the other (income), net caption within the
Consolidated Statement of Income.
The carrying value of long-term debt (excluding capital leases) and
estimated fair value of long-term debt (excluding capital leases) at
June 30 are as follows:
Carrying value of long-term debt
(excluding capital leases)
Estimated fair value of long-term debt
(excluding capital leases)
2015
2014
$2,947,102
$1,508,420
3,107,735
1,708,723
The fair value of long-term debt was determined based on observable
market prices in the active market in which the security is traded and
is classified within level 2 of the fair value hierarchy.
The Company utilizes derivative and non-derivative financial instruments,
including forward exchange contracts, costless collar contracts,
cross-currency swap contracts and certain foreign denominated debt
designated as net investment hedges, to manage foreign currency
transaction and translation risk. The derivative financial instrument
contracts are with major investment grade financial institutions and
the Company does not anticipate any material non-performance by
any of the counterparties. The Company does not hold or issue
derivative financial instruments for trading purposes.
The Company’s Euro bonds and Japanese Yen credit facility have
each been designated as a hedge of the Company’s net investment
in certain foreign subsidiaries. The translation of the Euro bonds
and Japanese Yen credit facility 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.
41
The location and fair value of derivative financial instruments reported
in the Consolidated Balance Sheet are as follows:
A summary of financial assets and liabilities that were measured at fair
value on a recurring basis at June 30, 2015 and 2014 are as follows:
Balance Sheet Caption
2015
2014
Other assets
$17,994
$ —
June 30, 2015
Prices
Quoted Significant
Significant
Other
In Active Observable Unobservable
Inputs
Inputs
Markets
(Level 3)
(Level 2)
(Level 1)
Net investment hedges
Cross-currency swap
contracts
Cross-currency
swap contracts
Cash flow hedges
Costless collar
contracts
Forward exchange
contracts
Costless collar
contracts
Other liabilities
—
45,790
Non-trade and
notes receivable
Non-trade and
notes receivable
Other accrued
liabilities
5,627
3,508
(23)
(41)
1,970
378
The cross-currency swap and costless collar contracts are reflected
on a gross basis in the Consolidated Balance Sheet. The presentation
of forward exchange contracts is on a net basis, the effect of which
is immaterial to the Consolidated Balance Sheet. The Company has
not entered into any master netting arrangements.
Gains or losses on derivatives that are not hedges are adjusted to fair
value through the cost of sales caption in the Consolidated Statement
of Income. Gains or losses on derivatives that are hedges are adjusted
to fair value through accumulated other comprehensive (loss) in
the Consolidated Balance Sheet until the hedged item is recognized
in earnings.
The cross-currency swap contracts have been designated as hedging
instruments. The costless collar contracts and forward exchange
contracts have not been designated as hedging instruments and are
considered to be economic hedges of forecasted transactions.
Gains (losses) on derivative financial instruments that were recorded
in the Consolidated Statement of Income are as follows:
Forward exchange contracts
Costless collar contracts
$ 59
(1,865)
2015
2014
$ (81)
7,052
2013
$(1,821)
502
Gains (losses) on derivative and non-derivative financial instruments
that were recorded in accumulated other comprehensive (loss) in the
Consolidated Balance Sheet are as follows:
Cross-currency swap contracts
Foreign denominated debt
2015
$39,406
37,871
2014
$(14,426)
7,611
There was no ineffectiveness of the cross-currency swap contracts
or foreign denominated debt, nor were any portion of these financial
instruments excluded from the effectiveness testing, during 2015,
2014 and 2013.
42
Assets:
Government
bonds
Corporate
bonds
Asset-backed and
mortgage-backed
securities
Derivatives
Investments
measured at
net asset value
Liabilities:
Derivatives
$ 60,512
$ 60,512
$ —
$ —
145,717
145,717
—
—
—
10,970
23,598
10,970
23,598
187,534
—
—
—
1,970
—
1,970
—
Prices
Quoted Significant
Significant
Other
In Active Observable Unobservable
Inputs
Inputs
Markets
(Level 3)
(Level 2)
(Level 1)
June 30, 2014
Assets:
Derivatives
Liabilities:
Derivatives
$ 3,467
$ —
$ 3,467
$ —
46,168
—
46,168
—
The fair values of the government bonds, corporate bonds and
asset-backed and mortgage-backed securities are determined using
the closing market price reported in the active market in which the
fund is traded or the market price for similar assets that are traded
in an active market.
Derivatives consist of forward exchange, costless collar and cross-
currency swap contracts, the fair values of which are calculated using
market observable inputs including both spot and forward prices for
the same underlying currencies. The calculation of fair value of the
cross-currency swap contracts also utilizes a present value cash flow
model that has been adjusted to reflect the credit risk of either the
Company or the counterparty.
Investments measured at net asset value primarily consist of investments
in fixed income mutual funds, which are measured at fair value using
the net asset value per share practical expedient. These investments
have not been categorized in the fair value hierarchy and are presented
in the table above to permit reconciliation of the fair value hierarchy
to the Consolidated Balance Sheet. The Company has the ability to
liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation
of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked
to market on a recurring basis. Fair values are transferred between
levels of the fair value hierarchy when facts and circumstances indicate
that a change in the method of estimating the fair value of a financial
asset or financial liability is warranted.
NOTE 16. Contingencies
The Company is involved in various litigation matters arising in the
normal course of business, including proceedings based on product
liability claims, workers’ compensation claims and alleged violations
of various environmental laws. The Company is self-insured in the
United States for health care, workers’ compensation, general liability
and product liability up to predetermined amounts, above which third
party insurance applies. Management regularly reviews the probable
outcome of these proceedings, the expenses expected to be incurred,
the availability and limits of the insurance coverage, and the established
accruals for liabilities. While the outcome of pending proceedings
cannot be predicted with certainty, management believes that any
liabilities that may result from these proceedings will not have a
material adverse effect on the Company’s liquidity, financial condition
or results of operations.
ENVIRONMENTAL – The Company is currently responsible for
environmental remediation at various manufacturing facilities
presently or formerly operated by the Company and has been
named as a “potentially responsible party,” along with other
companies, at off-site waste disposal facilities and regional sites.
NOTE 17. Quarterly Information (Unaudited)
2015
Net sales
Gross profit
Net income attributable to common shareholders
Diluted earnings per share
2014
Net sales
Gross profit
Net income attributable to common shareholders
Diluted earnings per share
1st
$3,269,932
810,067
280,089
1.85
1st
$ 3,226,144
749,735
244,316
1.61
As of June 30, 2015, the Company had an accrual of $16,957 for
environmental matters, which are probable and reasonably estimable.
The accrual is recorded based upon the best estimate of costs to be
incurred in light of the progress made in determining the magnitude
of remediation costs, the timing and extent of remedial actions required
by governmental authorities and the amount of the Company’s liability
in proportion to other responsible parties.
The Company’s estimated total liability for environmental matters
ranges from a minimum of $17.0 million to a maximum of $80.2 million.
The largest range for any one site is approximately $8.4 million. The
actual costs to be incurred by the Company will be dependent on final
determination of contamination and required remedial action, negotiations
with governmental authorities with respect to cleanup levels, changes
in regulatory requirements, innovations in investigatory and remedial
technologies, effectiveness of remedial technologies employed, the
ability of other responsible parties to pay, and any insurance or other
third-party recoveries.
2nd
$3,134,993
733,409
267,252
1.80
2nd
$3,106,006
686,035
253,288
1.66
3rd
$ 3,162,311
789,295
285,345
2.02
3rd
$3,358,406
752,513
242,406
1.60
4th
Total
$3,144,508
723,728
179,454
1.27
4th
$ 3,525,415
839,461
301,038
1.98
$ 12,711,744
3,056,499
1,012,140
6.97
Total
$13,215,971
3,027,744
1,041,048
6.87
Earnings per share amounts are computed independently for each of the quarters presented, therefore, the sum of the quarterly earnings per share
amounts may not equal the total computed for the year.
NOTE 18. Stock Prices and Dividends (Unaudited)
(In dollars)
2015
2014
2013
High
Low
Dividends
High
Low
Dividends
High
Low
Dividends
1st
$127.60
105.91
0.48
$110.21
94.81
0.45
$ 87.71
70.42
0.41
2nd
$133.41
99.82
0.63
$129.77
103.36
0.45
$ 87.04
75.80
0.41
3rd
$129.54
115.86
0.63
$129.40
108.66
0.48
$ 98.15
86.51
0.43
4th
Fiscal Year
$125.33
115.65
0.63
$130.44
118.46
0.48
$ 101.88
84.50
0.45
$133.41
99.82
2.37
$130.44
94.81
1.86
$101.88
70.42
1.70
Common Stock Listing: New York Stock Exchange, Stock Symbol PH
43
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders
of Parker-Hannifin Corporation:
We have audited the accompanying consolidated balance sheets of
Parker-Hannifin Corporation and subsidiaries (the “Company”) as
of June 30, 2015 and 2014, and the related consolidated statements
of income, comprehensive income, equity, and cash flows for each
of the three years in the period ended June 30, 2015. We also have
audited the Company’s internal control over financial reporting as
of June 30, 2015, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management
is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on
these financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits
of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Parker-Hannifin Corporation and subsidiaries as of June 30, 2015 and
2014, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2015, in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
June 30, 2015, based on the criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 26, 2015
44
Management’s Report on
Internal Control Over
Financial Reporting
Our management, including the principal executive officer and
the principal financial officer, is responsible for establishing
and maintaining adequate internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). We
assessed the effectiveness of our internal control over financial
reporting as of June 30, 2015. In making this assessment, we
used the criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission in “Internal Control-
Integrated Framework (2013).” We concluded that based on
our assessment, the Company’s internal control over financial
reporting was effective as of June 30, 2015.
Deloitte & Touche LLP, the independent registered public accounting
firm that audited the Company’s consolidated financial statements,
has issued an attestation report on the Company’s internal control
over financial reporting as of June 30, 2015, which is included herein.
Thomas L. Williams
Chief Executive Officer
Jon P. Marten
Executive Vice President –
Finance & Administration
and Chief Financial Officer
Forward-Looking Statements
Forward-looking statements contained in this and other written and
oral reports are made based on known events and circumstances at
the time of release, and as such, are subject in the future to unforeseen
uncertainties and risks. All statements regarding future performance,
earnings projections, events or developments are forward-looking
statements. It is possible that the future performance and earnings
projections of the Company, including its individual segments, may
differ materially from current expectations, depending on economic
conditions within its mobile, industrial and aerospace markets, and
the Company’s ability to maintain and achieve anticipated benefits
associated with announced realignment activities, strategic initiatives
to improve operating margins, actions taken to combat the effects of
the current economic environment, and growth, innovation and global
diversification initiatives. A change in the economic conditions in
individual markets may have a particularly volatile effect on segment
performance.
Among other factors which may affect future performance are:
• changes in business relationships with and purchases by or from
major customers, suppliers or distributors, including delays or
cancellations in shipments, disputes regarding contract terms or
significant changes in financial condition, changes in contract cost
and revenue estimates for new development programs, and changes
in product mix;
• ability to identify acceptable strategic acquisition targets;
• uncertainties surrounding timing, successful completion or
integration of acquisitions and similar transactions;
• the ability to successfully divest businesses planned for divestiture
and realize the anticipated benefits of such divestitures;
• 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;
• ability to implement successfully the Company’s capital allocation
initiatives, including timing, price and execution of share repurchases;
• increases in raw material costs that cannot be recovered in
product pricing;
• the Company’s ability to manage costs related to insurance
and employee retirement and health care benefits;
• threats associated with and efforts to combat terrorism and
cyber-security risks;
• uncertainties surrounding the ultimate resolution of outstanding
legal proceedings, including the outcome of any appeals;
• competitive market conditions and resulting effects on sales
and pricing; and
• global economic factors, including manufacturing activity, air travel
trends, currency exchange rates, difficulties entering new markets
and general economic conditions such as inflation, deflation, interest
rates and credit availability.
The Company makes these statements as of the date of the filing of
its Annual Report on Form 10-K for the year ended June 30, 2015,
and undertakes no obligation to update them unless otherwise required
by law.
45
Eleven-Year Financial Summary
Net sales
Cost of sales
Selling, general and administrative expenses
Goodwill and intangible asset impairment
Interest expense
Income taxes
Income – continuing operations
Net Income attributable to common shareholders
Basic earnings per share - continuing operations
Diluted earnings per share - continuing operations
Basic earnings per share
Diluted earnings per share
Average number of shares outstanding - Basic
Average number of shares outstanding - Diluted
Cash dividends per share
Net income attributable to common shareholders
as a percent of net sales
Return on average assets
Return on average shareholders’ equity
Book value per share
Working capital
Ratio of current assets to current liabilities
Plant and equipment, net
Total assets
Long-term debt
Shareholders’ equity
Debt to debt-shareholders’ equity percent
Depreciation
Capital expenditures
Number of employees
Number of shares outstanding at year-end
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
$ 12,711,744
9,655,245
1,544,746
118,406
419,687
1,012,140
1,012,140
7.08
6.97
7.08
$ 6.97
142,925
145,112
$ 2.370
$13,215,971
10,188,227
1,633,992
188,870
82,566
515,302
1,041,048
1,041,048
6.98
6.87
6.98
$ 6.87
149,099
151,444
$ 1.860
$13,015,704
10,086,675
1,554,973
91,552
362,217
948,427
948,427
6.36
6.26
6.36
$ 6.26
149,218
151,588
$ 1.700
$13,145,942
9,958,337
1,519,316
92,790
421,206
1,151,823
1,151,823
7.62
7.45
7.62
$ 7.45
151,222
154,665
$ 1.540
$12,345,870
9,387,457
1,467,773
$9,993,166
7,847,067
1,277,080
$10,309,015
$12,145,605
$10,718,059
8,181,348
1,290,379
9,339,072
1,364,082
8,272,949
1,226,861
$9,385,888
7,367,618
1,036,646
$8,068,805
6,391,477
860,278
112,071
172,939
508,515
508,515
3.15
3.13
3.15
161,564
162,719
98,996
377,058
949,466
949,466
5.64
5.53
5.64
168,285
171,644
83,414
329,236
830,046
830,046
4.75
4.68
4.75
174,643
177,495
75,763
261,682
638,276
673,167
3.57
3.52
3.76
178,817
181,326
$ 6.37
$ 3.40
$ 3.13
$ 5.53
$ 4.68
$ 3.71
$ 3.35
$ 1.250
$ 1.010
$ 1.000
$ .840
$ .692
$ .612
$ .520
8.0%
7.9%
17.2%
7.9%
8.1%
16.8%
7.3%
8.0%
17.8%
8.8%
10.4%
22.4%
8.5%
10.1%
21.5%
5.5%
5.6%
12.8%
4.9%
5.0%
10.7%
7.8%
10.1%
19.1%
7.7%
10.0%
18.5%
7.2%
9.0%
17.8%
7.5%
9.3%
19.1%
$ 36.84
$ 3,232,962
2.4
$ 1,664,022
12,295,037
2,723,960
$ 5,104,587
$ 44.72
$ 2,818,784
1.9
$ 1,824,294
13,274,362
1,508,142
$ 6,659,428
$ 38.44
$ 2,010,983
1.6
$ 1,808,240
12,540,898
1,495,960
$ 5,738,426
$ 32.72
$ 2,012,101
1.8
$ 1,719,968
11,170,282
1,503,946
$ 4,896,515
36.6%
25.9%
33.0%
26.1%
24.7%
28.9%
35.2%
28.3%
21.4%
21.1%
22.5%
$ 202,776
$ 215,527
54,754
138,559
$ 214,965
$ 216,340
57,447
148,903
$ 213,722
$ 265,896
58,151
149,289
$ 210,508
$ 218,817
59,331
149,631
$ 26.59
$ 1,118,027
1.6
$ 1,880,554
9,855,902
1,839,705
$ 4,268,199
$ 252,599
$ 270,733
51,639
160,489
$ 31.35
$ 1,912,369
1.9
$ 1,926,522
10,386,854
1,952,452
$ 5,251,553
$ 257,570
$ 280,327
61,722
167,512
$ 27.14
$ 1,460,930
1.8
$ 23.64
$ 1,457,873
1.9
$ 1,736,372
$ 1,693,794
8,441,413
1,089,916
8,173,432
1,059,461
$ 4,712,680
$4,240,904
$ 245,058
$ 237,827
57,338
173,618
$ 245,681
$ 198,113
57,073
179,417
99,704
356,751
1,049,130
1,049,130
6.51
6.37
6.51
161,126
164,798
$ 34.71
$ 1,914,213
1.8
$ 1,797,179
10,886,805
1,691,086
$ 5,383,854
$ 229,238
$ 207,294
58,409
155,091
103,599
198,452
554,065
554,065
3.44
3.40
3.44
160,910
162,902
$ 27.09
$1,383,905
1.6
$ 1,697,881
9,910,382
1,413,634
$4,367,965
$ 245,295
$ 129,222
54,794
161,256
66,869
205,105
533,166
604,692
2.99
2.95
3.39
178,193
180,674
$ 18.76
$ 1,454,883
2.1
$ 1,581,348
6,860,703
938,424
$ 3,340,157
$ 245,206
$ 154,905
50,019
178,034
5
1
0
2
13,500
12,500
11,500
10,500
9,500
8,500
7,500
6,500
5,500
4,500
3,500
2,500
1,500
1,500
500
0
5
1
0
2
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
5
1
0
2
9.00
8.25
7.50
6.75
6.00
5.25
4.50
3.75
3.00
2.25
1.50
0.75
0.00
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Diluted Earnings Per Share
Dollars
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Net Income Attributable To
Common Shareholders
Millions of Dollars
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Net Sales
Millions of Dollars
46
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
(A MOUNTS IN THOUSA NDS, E XCEPT PER SH A RE INFORM ATION)
$12,345,870
9,387,457
1,467,773
99,704
356,751
1,049,130
1,049,130
6.51
6.37
6.51
$ 6.37
161,126
164,798
$ 1.250
8.5%
10.1%
21.5%
$ 34.71
$ 1,914,213
1.8
$ 1,797,179
10,886,805
1,691,086
$ 5,383,854
$9,993,166
7,847,067
1,277,080
103,599
198,452
554,065
554,065
3.44
3.40
3.44
$ 3.40
160,910
162,902
$ 1.010
5.5%
5.6%
12.8%
$ 27.09
$1,383,905
1.6
$ 1,697,881
9,910,382
1,413,634
$4,367,965
$10,309,015
8,181,348
1,290,379
112,071
172,939
508,515
508,515
3.15
3.13
3.15
$ 3.13
161,564
162,719
$ 1.000
$12,145,605
9,339,072
1,364,082
98,996
377,058
949,466
949,466
5.64
5.53
5.64
$ 5.53
168,285
171,644
$ .840
4.9%
5.0%
10.7%
7.8%
10.1%
19.1%
$ 26.59
$ 1,118,027
1.6
$ 1,880,554
9,855,902
1,839,705
$ 4,268,199
$ 31.35
$ 1,912,369
1.9
$ 1,926,522
10,386,854
1,952,452
$ 5,251,553
$10,718,059
8,272,949
1,226,861
83,414
329,236
830,046
830,046
4.75
4.68
4.75
$ 4.68
174,643
177,495
$ .692
7.7%
10.0%
18.5%
$ 27.14
$ 1,460,930
1.8
$ 1,736,372
8,441,413
1,089,916
$ 4,712,680
$9,385,888
7,367,618
1,036,646
75,763
261,682
638,276
673,167
3.57
3.52
3.76
$ 3.71
178,817
181,326
$ .612
7.2%
9.0%
17.8%
$ 23.64
$ 1,457,873
1.9
$ 1,693,794
8,173,432
1,059,461
$4,240,904
$8,068,805
6,391,477
860,278
66,869
205,105
533,166
604,692
2.99
2.95
3.39
$ 3.35
178,193
180,674
$ .520
7.5%
9.3%
19.1%
$ 18.76
$ 1,454,883
2.1
$ 1,581,348
6,860,703
938,424
$ 3,340,157
Debt to debt-shareholders’ equity percent
36.6%
25.9%
33.0%
26.1%
24.7%
28.9%
35.2%
28.3%
21.4%
21.1%
22.5%
$ 229,238
$ 207,294
58,409
155,091
$ 245,295
$ 129,222
54,794
161,256
$ 252,599
$ 270,733
51,639
160,489
$ 257,570
$ 280,327
61,722
167,512
$ 245,058
$ 237,827
57,338
173,618
$ 245,681
$ 198,113
57,073
179,417
$ 245,206
$ 154,905
50,019
178,034
$ 6.97
$ 6.87
$ 6.26
$ 7.45
Cash dividends per share
$ 2.370
$ 1.860
$ 1.700
$ 1.540
Net sales
Cost of sales
Interest expense
Income taxes
Selling, general and administrative expenses
Goodwill and intangible asset impairment
Income – continuing operations
Net Income attributable to common shareholders
Basic earnings per share - continuing operations
Diluted earnings per share - continuing operations
Basic earnings per share
Diluted earnings per share
Average number of shares outstanding - Basic
Average number of shares outstanding - Diluted
Net income attributable to common shareholders
as a percent of net sales
Return on average assets
Return on average shareholders’ equity
Ratio of current assets to current liabilities
Book value per share
Working capital
Plant and equipment, net
Total assets
Long-term debt
Shareholders’ equity
Depreciation
Capital expenditures
Number of employees
Number of shares outstanding at year-end
$ 12,711,744
9,655,245
1,544,746
118,406
419,687
1,012,140
1,012,140
7.08
6.97
7.08
142,925
145,112
$ 36.84
$ 3,232,962
2.4
$ 1,664,022
12,295,037
2,723,960
$ 5,104,587
$ 202,776
$ 215,527
54,754
138,559
$13,215,971
10,188,227
1,633,992
188,870
82,566
515,302
1,041,048
1,041,048
6.98
6.87
6.98
149,099
151,444
$ 44.72
$ 2,818,784
1.9
$ 1,824,294
13,274,362
1,508,142
$ 6,659,428
$ 214,965
$ 216,340
57,447
148,903
$13,015,704
10,086,675
1,554,973
$13,145,942
9,958,337
1,519,316
91,552
362,217
948,427
948,427
6.36
6.26
6.36
149,218
151,588
92,790
421,206
1,151,823
1,151,823
7.62
7.45
7.62
151,222
154,665
$ 38.44
$ 2,010,983
1.6
$ 1,808,240
12,540,898
1,495,960
$ 5,738,426
$ 213,722
$ 265,896
58,151
149,289
$ 32.72
$ 2,012,101
1.8
$ 1,719,968
11,170,282
1,503,946
$ 4,896,515
$ 210,508
$ 218,817
59,331
149,631
8.0%
7.9%
17.2%
7.9%
8.1%
16.8%
7.3%
8.0%
17.8%
8.8%
10.4%
22.4%
5
1
0
2
13,500
12,500
11,500
10,500
9,500
8,500
7,500
6,500
5,500
4,500
3,500
2,500
1,500
1,500
500
0
5
1
0
2
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Long-Term Debt
Millions of Dollars
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Total Assets
Millions of Dollars
5
1
0
2
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
47
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
Shareholders’ Equity
Millions of Dollars
Corporate Management
OFFICE OF THE CHIEF EXECUTIVE
THOMAS L. WILLIAMS
Chief Executive Officer
Age: 56
Years of Parker service: 12
LEE C. BANKS
President and Chief Operating
Officer
Age: 52
Years of Parker service: 23
JON P. MARTEN
Executive Vice President –
Finance & Administration
and Chief Financial Officer
Age: 59
Years of Parker service: 28
GROUP PRESIDENTS & OFFICERS
YOON “MICHAEL” CHUNG
Vice President and President –
Automation Group
Age: 52
Years of Parker service: 29
JOHN R. GRECO
Vice President and President –
Instrumentation Group
Age: 61
Years of Parker service: 39
KURT A. KELLER
Vice President and President –
Asia Pacific Group
Age: 57
Years of Parker service: 35
ROBERT W. MALONE
Vice President and President –
Filtration Group
Age: 51
Years of Parker service: 2
JENNIFER A. PARMENTIER
Vice President and President –
Engineered Materials Group
Age: 48
Years of Parker service: 7
CORPORATE OFFICERS
ROBERT W. BOND
Vice President – eBusiness,
IoT and Services
Age: 57
Years of Parker service: 38
JEFFERY A. CULLMAN
Vice President
Age: 60
Years of Parker service: 37
JOHN G. DEDINSKY, JR.
Vice President –
Global Supply Chain
and Procurement
Age: 58
Years of Parker service: 36
WILLIAM G. ELINE
Vice President –
Chief Information Officer
Age: 59
Years of Parker service: 36
JOSEPH R. LEONTI
Vice President, General
Counsel and Secretary
Age: 43
Years of Parker service: 9
48
WITH APPRECIATION
PAMELA J. HUGGINS
The Board of Directors and management
of Parker Hannifin acknowledge the
retirement of Pamela J. Huggins after
31 years of dedicated service. Ms. Huggins
held leadership responsibility for all treasury
functions, corporate credit, risk management,
the company’s retirement plans and investor
relations as Vice President and Treasurer
and an officer of the company. She is noted
for serving as Parker’s voice to the investment
community, for directing best practice
improvements in treasury and for reshaping
the design and structure of the company’s
pension plans worldwide.
PETER POPOFF
The Board of Directors and management of
Parker Hannifin acknowledge the retirement
of Peter Popoff after 36 years of dedicated
service. As president of the Filtration Group
and an officer of the company, Mr. Popoff’s
leadership was essential in establishing
Parker’s filtration business globally. He had
the foresight to organize the groups global
structure to optimize engineering, business
development and operations. Mr. Popoff is
noted for his focus on growth and innovation,
his dedication to serving Parker’s customers
and for his commitment to upholding
Parker’s values.
GROUP PRESIDENTS
ANDREW D. ROSS
Vice President and President –
Fluid Connectors Group
Age: 48
Years of Parker service: 16
ROGER S. SHERRARD
Vice President and President –
Aerospace Group
Age: 49
Years of Parker service: 26
ANDREW M. WEEKS
Vice President and President –
Hydraulics Group
Age: 52
Years of Parker service: 2
JOACHIM GUHE
President –
Europe, Middle East
and Africa (EMEA) Group
Age: 51
Years of Parker service: 21
CANDIDO LIMA
President –
Latin America Group
Age: 50
Years of Parker service: 13
INVESTOR RELATIONS
M. CRAIG MAXWELL
Vice President –
Chief Technology and
Innovation Officer
Age: 57
Years of Parker service: 19
DANIEL S. SERBIN
Executive Vice President –
Human Resources and
External Affairs
Age: 61
Years of Parker service: 35
CATHERINE A. SUEVER
Vice President and Controller
Age: 56
Years of Parker service: 28
DONALD E. WASHKEWICZ
Chairman of the Board
Age: 65
Years of Parker service: 43
ROBIN J. DAVENPORT
Vice President –
Corporate Finance
Age: 53
Years of Parker service: 11
4949
Board of Directors
CHAIRMAN OF THE BOARD
DIRECTORS
DONALD E. WASHKEWICZ
Chairman of the Board
Parker Hannifin Corporation
Age: 65, Director since 2000
Chairman since 2004
LEE C. BANKS
President and Chief Operating
Officer
Parker Hannifin Corporation
Age: 52
Years of Parker service: 23
ROBERT G. BOHN 1, 2
Former Chairman of the Board
and Chief Executive Officer (retired)
Oshkosh Corporation
(specialty vehicles)
Age: 62, Director since 2010
LINDA S. HARTY 1, 4
Treasurer
Medtronic, Inc.
(medical technology)
Age: 55, Director since 2007
WILLIAM E. KASSLING 1, 2
Lead Director of
Wabtec Corporation
(services for the rail industry)
Age: 71, Director since 2001
ROBERT J. KOHLHEPP 2, 3
Chairman of the Board
Cintas Corporation
(uniform rental)
Age: 71, Director since 2002
KEVIN A. LOBO 1, 4
Chairman, Chief Executive Officer
and President
Stryker Corporation
(medical technologies)
Age: 50, Director since 2013
KLAUS-PETER MÜLLER 3, 4
Chairman of the Supervisory Board
Commerzbank AG
(international banking)
Age: 70, Director since 1998
CANDY M. OBOURN 2, 3
Chairman
Isoflux Incorporated
(coatings technologies)
Age: 65, Director since 2002
JOSEPH SCAMINACE 2, 3
Chairman and
Chief Executive Officer
OM Group, Inc.
(metal-based specialty chemicals)
Age: 62, Director since 2004
COMMITTEES OF THE BOARD
(1) AUDIT
Chair: L. S. Harty
(2) HUMAN RESOURCES
AND COMPENSATION
Chair: C. M. Obourn
(3) CORPORATE GOVERNANCE
AND NOMINATING
Chair and Lead Director:
R. J. Kohlhepp
(4) FINANCE
Chair: J. L. Wainscott
WOLFGANG R. SCHMITT 1, 3
Former Chief Executive
Officer (retired)
Trends 2 Innovation
(strategic growth consultants)
Age: 71, Director since 1992
ÅKE SVENSSON 1, 4
Director General
Association of Swedish
Engineering Industries
Age: 63, Director since 2010
JAMES L. WAINSCOTT 2, 4
Chairman, Chief Executive
Officer and President
AK Steel Holding Corporation
(steel producer)
Age: 58, Director since 2009
THOMAS L. WILLIAMS
Chief Executive Officer
Parker Hannifin Corporation
Age: 56
Years of Parker service: 12
50
Corporate Information
ETHICAL CONDUCT
Observing high ethical standards has contributed to
Parker Hannifin’s reputation for excellence. Parker
Hannifin’s Global Code of Business Conduct requires
compliance with all applicable laws, while acting with
honesty, fairness and integrity. Parker Hannifin is
committed to meeting its ethical obligations to
customers and suppliers, fellow employees,
shareholders and the public.
EQUAL OPPORTUNITY
Parker Hannifin is an affirmative action/equal
opportunity employer that extends its commitment
beyond equal opportunity and nondiscriminatory
practices to take positive steps to create an inclusive
and empowered employee environment.
It is the policy of Parker Hannifin to provide all
employees with a working environment free from all
forms of discrimination and harassment. Parker
Hannifin will not tolerate discrimination or harassment
against any person for any reason.
Parker Hannifin’s policy is to make all employment
decisions on the basis of an individual’s job-related
qualifications, abilities and performance – not on the
basis of personal characteristics unrelated to
successful job performance.
ANNUAL MEETING
The 2015 Annual Meeting of Shareholders will be held
on Wednesday, October 28, 2015, at Parker Hannifin
Global Headquarters, 6035 Parkland Blvd., Cleveland,
Ohio 44124-4141, at 9:00 a.m. EDT.
Telephone 216 896 3000
FORM 10-K
Shareholders may request a free copy of Parker
Hannifin’s Annual Report to the Securities and
Exchange Commission on Form 10-K by writing to the
Secretary, Parker Hannifin Corporation,
6035 Parkland Blvd., Cleveland, Ohio 44124-4141.
TRANSFER AGENT & REGISTRAR
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
DIVIDEND REINVESTMENT PLAN
Parker Hannifin provides a Dividend Reinvestment Plan
for its shareholders. Under the Plan, Parker Hannifin
pays all bank service charges and brokerage
commissions. Supplemental cash payments are also
an option. For information, contact:
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche, LLP, Cleveland, Ohio
PARKER HANNIFIN CORPORATION
6035 Parkland Boulevard
Cleveland, Ohio 44124-4141
216 896 3000
PRODUCT INFORMATION & DISTRIBUTOR
LOCATIONS
North America:
1-800-C-PARKER (1 800 272 7537)
Outside North America:
00800-C-PARKER-H (0800 2727 5374)
Visit us online at: www.parker.com
STOCK INFORMATION
New York Stock Exchange
Ticker symbol: PH
On the Internet at:
www.phstock.com
As of July 31, 2015, Parker Hannifin’s number of
shareholders of record was 3,906.
WORLDWIDE CAPABILITIES
Parker Hannifin is the world’s leading diversified
manufacturer of motion and control technologies and
systems. The company’s engineering expertise spans
the core motion technologies – electromechanical,
hydraulic and pneumatic – with a full complement of
fluid handling, filtration, sealing and shielding, climate
control, process control and aerospace technologies.
The company partners with its customers to increase
their productivity and profitability.
www.parker.com
INVESTOR CONTACT
Robin J. Davenport
Vice President - Corporate Finance
216 896 2265, rjdavenport@parker.com
MEDIA CONTACT
Aidan Gormley
Director, Global Communications and Branding
216 896 3258, aidan.gormley@parker.com
CAREER OPPORTUNITIES
Search for job openings and apply online at:
www.parker.com/careers
Comparison of 5-Year Cumulative Total Return*
Among Parker-Hannifin Corporation, the S&P 500 Index and the S&P Industrials Index
Parker-Hannifin Corporation
S&P 500
S&P Industrials
6/10
6/11
6/12
6/13
6/14
6/15
2010
2011
2012
2013
2014
2015
Parker-Hannifin Corporation 100.00
100.00
S&P 500
100.00
S&P Industrials
164.32
130.69
138.07
143.51
137.81
136.39
181.62
166.20
166.75
243.29
207.10
214.41
229.52
222.47
219.49
*$100 invested on 6/30/10 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2015 S&P, a division of McGraw Hill Financial. All rights reserved.
$350
300
250
200
150
100
50
Diversified Industrial Segment
Global Technology Platforms
Motion Systems
Flow & Process Control
Product Groups
Hydraulics
Automation
Fluid Connectors
Instrumentation
Key Markets
Aerial lift
Agriculture
Automotive
Construction machinery
Forestry
Industrial machinery
Machine tools
Marine
Material handling
Mining
Oil & gas
Power generation
Refuse vehicles
Renewable energy
Truck hydraulics
Turf equipment
Key Products
Accumulators
Cartridge valves
Coolers
Electrohydraulic actuators
Electronic displays & human
machine interfaces
Electronic I/O controllers
Fan drives
Hybrid drives
Hydraulic cylinders
Hydraulic motors & pumps
Hydraulic systems
Hydraulic valves & controls
Hydrostatic steering
Integrated hydraulic circuits
Power take-offs
Power units
Rotary actuators
Sensors
Telematic controllers
Key Markets
Automotive
Conveyor & material handling
Factory automation
Food & beverage
Industrial machinery
Life sciences
Machine tools
Medical
Mobile
Oil & gas
Packaging machinery
Paper machinery
Plastics machinery
Primary metals
Renewable energy
Safety & security
Semiconductor & electronics
Transportation
Key Products
AC/DC drives & systems
Air preparation
Electric actuators, gantry
robots
Fluidic valves & pumps
Human machine interfaces
Inverters
Manifolds
Pneumatic actuators
& grippers
Pneumatic valves & controls
Rotary actuators
Solenoid valves
Stepper motors, servo motors,
drives & controls
Structural extrusions
Vacuum generators, cups
& sensors
© 2015 PARKER HANNIFIN CORPORATION
Key Markets
Aerial lift
Agriculture
Bulk chemical handling
Construction machinery
Food & beverage
Fuel & gas delivery
Industrial machinery
Life sciences
Marine
Mining
Mobile
Oil & gas
Renewable energy
Transportation
Key Products
Check valves
Connectors for low pressure
fluid conveyance
Deep sea umbilicals
Diagnostic equipment
Hose couplings
Industrial hose
Mooring systems &
power cables
PTFE hose & tubing
Quick couplings
Rubber & thermoplastic hose
Tube fittings & adapters
Tubing & plastic fittings
Key Markets
Air conditioning
Alternative fuels
Biopharmaceuticals
Chemical
Food & beverage
Life sciences
Microelectronics
Mining
Oil & gas
Pharmaceuticals
Power generation
Precision cooling
Refining
Refrigeration
Water/wastewater
Key Products
Accumulators
Analytical instruments
& sample conditioning systems
CNG dispensers
CO2 controls
Electronic controllers
Electronic valves
Filter driers
Fluid system fittings, valves,
regulators & manifold valves
Fluid system mass flow meters/
controllers
Fluoropolymer chemical
delivery fittings, valves & pumps
High pressure fittings, valves,
pumps & systems
High purity gas delivery
fittings, valves & regulators
Medical devices
Natural gas on-board fuel systems
Pressure regulating valves
Refrigeration electronic controls
& monitoring
Safety relief valves
Thermostatic & electronic
expansion valves
Filtration & Engineered Materials
Aerospace
Aerospace Systems
Segment
Filtration
Key Markets
Aerospace
Food & beverage
Industrial machinery
Life sciences
Marine
Mobile
Oil & gas
Power generation
Renewable energy
Transportation
Water purification
Key Products
Analytical gas generators
Compressed air & gas treatment
solutions
Engine fuel, oil, air & CCV filtration
systems
Fluid condition monitoring systems
Hydraulic & lubrication filters
Instrumentation filters
Membrane & fiber filters
Nitrogen & hydrogen generators
Sterile air filtration
Water desalination and purification
filters & systems
Engineered Materials
Aerospace
Key Markets
Aerospace
Chemical processing
Consumer
Fluid power
General industrial
Information technology
Life sciences
Microelectronics
Military
Oil & gas
Power generation
Renewable energy
Telecommunications
Transportation
Key Products
Dynamic seals
Elastomeric o-rings
Electro-medical instrument
design & assembly
EMI shielding
Extruded & precision-cut,
fabricated elastomeric seals
High temperature metal seals
Homogeneous & inserted
elastomeric shapes
Medical device fabrication
& assembly
Metal & plastic retained
composite seals
Shielded optical windows
Silicone tubing & extrusions
Thermal management
Vibration dampening
Key Markets
Aftermarket services
Business jets
Commercial transports
Engines
General aviation
Helicopters
Military aircraft
Missiles
Power generation
Regional transports
Unmanned aerial vehicles
Key Products
Control actuation systems
& components
Engine systems & components
Fluid conveyance systems
& components
Fluid metering, delivery
& atomization devices
Fuel systems & components
Fuel tank inerting systems
Hydraulic systems
& components
Lubrication components
Power conditioning &
management systems
Thermal management
Wheels & brakes
UNMATCHED
BREADTH OF
TECHNOLOGY
& ENGINEERING
EXPERTISE
Parker Hannifin Corporation
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
216 896 3000 www.parker.com