Parker Hannifin Corporation
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
216 896 3000 www.parker.com
BOARD OF
DIRECTORS
EXECUTIVE
MANAGEMENT
INVESTOR
INFORMATION
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
Parker-Hannifin Corporation
LEE C. BANKS
President and Chief Operating Officer
Parker-Hannifin Corporation
ROBERT G. BOHN
Former Chairman and Chief Executive Officer
Oshkosh Corporation (specialty vehicles)
LINDA S. HARTY
Former Treasurer
Medtronic plc (medical technology)
ROBERT J. KOHLHEPP*
Former Chairman
Cintas Corporation (uniform rental)
KEVIN A. LOBO
Chairman, Chief Executive Officer
and President
Stryker Corporation (medical technologies)
KLAUS-PETER MÜLLER*
Chairman of the Supervisory Board
Commerzbank AG (international banking)
CANDY M. OBOURN
Chairman
Isoflux Incorporated (coatings technologies)
JOSEPH SCAMINACE
Former Chairman and Chief Executive Officer
OM Group, Inc. (metal-based specialty
chemicals)
WOLFGANG R. SCHMITT*
Former Chief Executive Officer
Trends 2 Innovation (strategic growth
consultants)
ÅKE SVENSSON
Chairman
Swedavia AB (transport infrastructure)
JAMES R. VERRIER
Former President, Chief Executive Officer
and Director
BorgWarner Inc. (powertrain solutions)
JAMES L. WAINSCOTT
Former Chairman, Chief Executive Officer
and President
AK Steel Holding Corporation (steel producer)
* Retired from the Board of Directors as of
October 24, 2018.
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
LEE C. BANKS
President and Chief Operating Officer
CATHERINE A. SUEVER
Executive Vice President - Finance &
Administration and Chief Financial Officer
MARK J. HART
Executive Vice President - Human Resources
and External Affairs
WILLIAM “SKIP” BOWMAN
Vice President and President -
Instrumentation Group
ROBIN J. DAVENPORT
Vice President - Corporate Finance
WILLIAM G. ELINE
Vice President - Chief Information Officer
THOMAS C. GENTILE
Vice President - Global Supply Chain
JOACHIM GUHE
President - Europe, Middle East and Africa
(EMEA) Group
KURT A. KELLER
Vice President
TODD M. LEOMBRUNO
Vice President and Controller
JOSEPH R. LEONTI
Vice President, General Counsel
and Secretary
CANDIDO LIMA
President - Latin America Group
ROBERT W. MALONE
Vice President and President -
Filtration Group
M. CRAIG MAXWELL
Vice President - Chief Technology
and Innovation Officer
MICHAEL J. O’HARA
Vice President - Global Sales and Marketing
JENNIFER A. PARMENTIER
Vice President and President -
Engineered Materials Group
ANDREW D. ROSS
Vice President and President -
Fluid Connectors Group
ROGER S. SHERRARD
Vice President and President -
Aerospace Group
MICHAEL WEE
President - Asia Pacific Group
ANDREW M. WEEKS
Vice President and President -
Motion Systems Group
ANNUAL MEETING
The 2018 Annual Meeting of Shareholders
will be held on Wednesday, October 24, 2018,
at Parker-Hannifin Global Headquarters,
6035 Parkland Blvd., Cleveland, Ohio 44124-4141,
at 9:00 a.m. EDT.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche, LLP, Cleveland, Ohio
TRANSFER AGENT & REGISTRAR
Equiniti Trust Company
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
STOCK INFORMATION
New York Stock Exchange
Ticker symbol: PH
www.phstock.com
PARKER CORPORATE HEADQUARTERS
Parker-Hannifin Corporation
6035 Parkland Boulevard
Cleveland, Ohio 44124-4141
216 896 3000
INVESTOR CONTACT
ROBIN J. DAVENPORT
Vice President - Corporate Finance
216 896 2265
rjdavenport@parker.com
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
$250
200
150
100
50
6/13
6/14
6/15
6/16
6/17
6/18
2013
2014
2015
2016
2017
2018
Parker-Hannifin Corporation 100.00
S&P 500
100.00
100.00
S&P Industrials
133.96
124.61
128.58
126.37
133.86
131.62
120.22
139.20
140.89
181.16
164.11
172.26
179.50
187.70
181.46
*$100 invested on 6/30/13 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.
PARKER
HANNIFIN
ANNUAL
REPORT
8
1
0
2
2018 Annual Report Cover.indd 1
8/31/18 6:13 AM
FISCAL YEAR 2018
RECORDS
#1 Motion & Control Company
Billion
OPERATING MARGIN
$14.3 TOTAL NET SALES
15.7%TOTAL SEGMENT
$7.83 EARNINGS PER SHARE
$1.6 CASH FLOW FROM
OPERATIONS
Billion
Product Groups
Motion Systems
Key Markets
Agriculture
Construction
Distribution
General machinery
Machine tool
Marine
Material handling
Military
Mining
Oil & gas
Power generation
Semiconductor
Transportation
Truck & bus
Turf
Aerospace
Fluid Connectors
Instrumentation
Filtration
Engineered Materials
Key Markets
Aftermarket services
Commercial transports
Engines
General & business 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
Pneumatic control components
Power conditioning & management
systems
Thermal management
Wheels & brakes
Key Markets
Aerial lift
Agriculture
Bulk chemical handling
Construction
Food & beverage
Fuel & gas delivery
Industrial machinery
Life sciences
Marine
Mining
Mobile
Oil & gas
Renewable energy
Transportation
Key Products
Check valves
Diagnostic equipment
Hose couplings
Industrial hose
Low pressure fittings & adapters
Polytetrafluoroethylene (PTFE)
hose & tubing
Quick couplings
Rubber & thermoplastic hose
Tube fittings & adapters
Tubing & plastic fittings
Key Products
Accumulators
Air preparation (FRL) & dryers
Cartridge valves
Clusters
Controllers & human machine
interfaces (HMI)
Coolers
Cylinders
Drive controlled pumps
Drives (AC/DC Servo)
Electric actuators & positioners
Electric motors & gearheads
Electrohydraulic actuators
Electrohydraulic pumps
Electronic displays & HMI
Fan drives
Gerotor pumps & motors
Grippers
Helical actuators
Integrated hydrostatic transmissions
Industrial valves
IO link controllers
IoT
Joysticks
Mobile valves
Piston pumps & motors
Pneumatic cylinders
Pneumatic valves
Power take-offs
Rotary actuators
Screw pumps
Sensors
Software
Vane pumps & motors
Key Markets
Air conditioning
Alternative fuels
Analytical
Chemical
Diesel engine
Food & beverage
Industrial machinery
Life sciences
Microelectronics
Oil & gas
Packaging
Refining
Refrigeration
Transportation
Key Products
Accumulators
Analytical instruments & sample
conditioning systems
Compressed natural gas dispensers
Cryogenic valves
Electronic valves
Emissions
Filter driers
Fluid system & control fittings, meters,
valves, regulators & manifold valves
Fluoropolymer chemical delivery
fittings, valves & pumps
High-pressure fittings, valves,
pumps & systems
High-purity gas delivery fittings,
valves & regulators
Miniature valves & pumps
Natural gas on-board fuel systems
Pressure regulating valves
Refrigeration & air conditioning
electronic controls & monitoring
Solenoid valves
Key Markets
Agriculture
Aerospace & defense
Construction
Food & beverage
Heating, ventilation & air conditioning
(HVAC)
Industrial machinery
Life sciences
Marine
Mining
Oil & gas
Power generation
Renewable energy
Transportation
Water purification
Key Products
Aerospace filters & systems
Air pollution control & dust collection
systems & filters
Compressed air & gas treatment
solutions
Engine fuel, oil, air & closed crankcase
ventilation filtration systems
Filtration & purification systems
Fluid condition monitoring systems
Gas turbine air inlet filters
HVAC filters
Hydraulic & lubrication filters & systems
Industrial & analytical gas generators
Instrumentation filters
Membrane, fiber & sintered metal
filters
Natural gas filters
Process liquid, air & gas filters
Sterile air filters
Water purification filters & systems
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
Electromagnetic interference 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
© 2018 PARKER HANNIFIN CORPORATION
UNMATCHED BREADTH OF
TECHNOLOGY & ENGINEERING EXPERTISE
2018 Annual Report Cover.indd 2
8/31/18 6:56 AM
LETTER TO
SHAREHOLDERS
Fiscal year 2018 was the strongest
year of financial performance in the
company’s history and delivered
significant returns for our shareholders.
The ongoing implementation of the
new Win Strategy™ continues to put
Parker on a clear path to achieving
even greater improvements across our
operations. Given our progress, we
have established new five-year targets
that reflect our confidence in Parker’s
future.
While the strategy sets our direction,
our success is only achieved by
Parker’s highly engaged team
members, who continue to
demonstrate incredible responsiveness
and adaptability to the changes we are
making together. Their commitment to
owning and improving their portion of
the business reflects the entrepreneurial
spirit that has defined the Parker culture
for more than a century.
Thomas L. Williams, Chairman and Chief Executive Officer (L)
Lee C. Banks, President and Chief Operating Officer (R)
2018 Annual Report Inside.indd 1
8/29/18 8:02 AM
• We used cash to extend our record
of increasing annual dividends paid
ENGAGED PEOPLE
Parker’s highest priority is safety, and
to 62 consecutive fiscal years, we
reduced debt by $945 million and
we repurchased $300 million in
Parker shares in fiscal year 2018.
We will continue to generate and
deploy cash efficiently to create
long-term value for shareholders.
Fiscal year 2018 was one to celebrate
and reflect upon. We now have an
opportunity to carry forward the
significant momentum of a record year
and build on it in fiscal year 2019. We
anticipate continued, healthy organic
sales growth, and with ongoing
improvement across our operations we
are forecasting another record year for
sales, segment operating margins, net
income and earnings per share.
WIN STRATEGY
PRODUCING
TRANSFORMATIVE
RESULTS
We are still early in the process of
implementing the new Win Strategy and
there is much room to make continued
improvements. The strategies and
measures we adopted have proven an
effective guide to delivering improved
business performance.
eliminating all work-related accidents is
something we strive for each day. Our
Recordable Incident Rate has dropped
by 54% since 2014, including a 21%
reduction this year. Team members are
working together in High Performance
Teams to deliver these improvements
and create a safety-first environment.
High Performance Teams are an
effective tool for us to enable an
ownership culture at Parker and drive
better performance. Today more
than 80% of our people participate in
these teams, with more than 5,000
established worldwide. We are in the
process of extending these teams
to focus on improvements in other
important areas of our business such
as quality, cost and on-time delivery.
80%
WORKFORCE
ON HIGH
PERFORMANCE
TEAMS
FISCAL YEAR 2018
RECORD FINANCIAL
PERFORMANCE
In fiscal year 2018, the impact of the
Win Strategy and broad-based market
growth positioned Parker to achieve
a number of records for financial
performance:
• Total net sales were a record at
$14.3 billion, a 19% increase from
the previous year. Organic growth of
8% far outpaced the growth rate of
global industrial production.
• Total segment operating margin
reached a record 15.7%, or 16.2%
adjusted, representing a 40 basis
point (bps) improvement compared
with adjusted segment operating
margin of 15.8% the prior year.
• Net income increased 8% to
$1.1 billion, or a record $7.83 per
share. Adjusted earnings per share
were $10.42, an increase of 28%
compared to the prior year.
• Cash flow from operations for
fiscal year 2018 was another
record for Parker at $1.6 billion or
11.2% of sales and free cash flow
conversion was 127%. This is the
17th consecutive fiscal year that
Parker has generated cash flow
from operations (before discretionary
pension contributions) greater than
10% of sales.
2018 Annual Report Inside.indd 2
9/7/18 12:49 PM
54%
REDUCTION IN
ENERGY USE
We also realize that Parker’s operations
can have a positive and widespread
impact on the world, and recognize the
importance of acting responsibly with
the planet’s natural resources. Over
the past decade Parker has reduced
energy use by 54%, today we recycle
85% of the waste generated from
our manufacturing processes, and
our Carbon Disclosure Project (CDP)
ranking is among the top quartile of our
Parker offers.
our customers’ challenges, doing
Parker’s ability to address the
so with speed and accuracy and
aftermarket through our global
communicating clearly and consistently.
distribution network is among our
most important growth strategies. It’s
We are seeing positive results of
a channel more than 50 years in the
eBusiness initiatives that improve
making, and one that competitors
customers’ online experience through
have been unable to duplicate. We’ve
faster response times, increased
added 362 distributors since fiscal year
support tools, improved navigation and
2015 with an emphasis on international
ongoing user research and feedback.
growth, so Parker can be there to
Digital platforms play a prominent
support our customers directly, even
role in driving customer experience in
on the most remote job sites around
today’s increasingly connected world,
the world. This also provides us a more
and we’re making it easier than ever
stable revenue source that typically
to leverage the unmatched breadth
carries higher operating margins.
of products, systems and knowledge
PROFITABLE
GROWTH
Understanding the unmet needs
FINANCIAL
PERFORMANCE
Within our Win Strategy goal for
Financial Performance we have four
key strategic initiatives: Simplification,
of our customers and addressing
Lean Enterprise, Strategic Supply
them by improving our products
Chain and Value Pricing. Our business
and technologies is the foundation
leaders utilize standard work designed
of Parker’s organic growth strategy.
for each of these initiatives in order
To better leverage our investment
to increase speed, reduce cost and
in innovation, we are enhancing
improve the overall experience for our
our technology development by
customers.
establishing Parker Technology
Centers. These centers will focus on
technologies and processes such as
additive manufacturing, robotics, the
Internet of Things (IoT), filtration, motion
technologies and advanced material
science development. This engineering
cost-neutral strategy offers the best
of both worlds: traditional division
product and application engineering
expertise supplemented with advanced
design and manufacturing processes,
ultimately improving outcomes for our
customers.
84%
peer companies.
85%
WASTE RECYCLED
PREMIER CUSTOMER
EXPERIENCE
Parker’s success is rooted in our ability
to provide a premier experience for
our customers. Through transactional
surveys and relationship interviews,
we are actively measuring Likelihood-
to-Recommend, a reliable indicator
of our customers’ experience when
doing business with Parker. These
surveys have indicated opportunities
for improvement. As a result we
launched the I Am Parker initiative,
designed to engage all team
members in addressing three areas
of opportunity: owning and resolving
2018 Annual Report Inside.indd 3
9/4/18 12:07 PM
ENGINEERING YOUR
SUCCESS
The strength and interconnectivity
we have established new five-year
of our portfolio continues to be
financial performance targets through
The Win Strategy, along with our capital
allocation and portfolio strategies,
shape our approach to engineering the
success of our key stakeholders and
will together enable us to achieve top
quartile financial performance.
Parker’s capital allocation priorities are
to continue our record 62 consecutive
fiscal years of increased annual
dividends, capital expenditures to drive
both organic growth and productivity
improvements across our operations,
our 10b5-1 share repurchase program,
strategic acquisitions and discretionary
share repurchase. Our goal is to deploy
capital in the most effective way to
drive long-term shareholder value.
Parker’s acquisition strategy is to
continue as the consolidator of choice
in our industry, by identifying companies
which generate strategic value for
our key stakeholders. The CLARCOR
acquisition is an excellent example of
this approach. It was transformational
for our portfolio and has proven to be a
strong cultural fit. As a result, we have
increased our synergy targets for fiscal
year 2020 from $140 million to $160
million in cost synergies, and established
a target of $100 million in incremental
revenue synergies over that period.
a competitive differentiator. No
fiscal year 2023:
other company can match Parker’s
technology expertise or breadth of
• Organic sales growth at 150 basis
product in the motion and control
points greater than the Global
industry, a $130 billion global market in
Industrial Production Index. This
which there is significant opportunity
target is best-in-class, and we are
for Parker to grow. We will continue to
committed to demonstrating this
focus on highly engineered products
over a cycle.
and systems with protected intellectual
property, long product lifecycles and a
• Profitability as measured by
balance between OEM and aftermarket
segment operating margins of 19%
and EBITDA margins of 20%, both of
which will position us well within the
top quartile among our diversified
industrial peer group.
• Free cash flow conversion of
greater than 100%. This has long
been a key indicator of our ability
to generate cash, and we’ve now
achieved 17 consecutive years of
converting better than 100% of net
income.
• A greater than 10% compound
annual growth rate in adjusted
earnings per share.
Continued progress toward achieving
our new five-year financial targets will
maintain Parker’s position among the
best performing diversified industrial
companies and generate significant
long-term value for our shareholders.
solutions across our portfolio.
Million
COST SYNERGIES
$160
$100
INCREMENTAL
REVENUE SYNERGIES
Million
NEW FIVE-YEAR
FINANCIAL
PERFORMANCE
TARGETS
While Parker has made meaningful
advancements over the past several
years, our team members are
committed to continuous improvement
and we intend to build upon our
strong financial position and distinct
competitive advantages. As a result,
2018 Annual Report Inside.indd 4
8/29/18 8:03 AM
FISCAL YEAR 2023
TARGETS
Basis Points
150
ORGANIC GROWTH GREATER THAN THE
GLOBAL INDUSTRIAL PRODUCTION INDEX
19%
SEGMENT OPERATING MARGINS
20%
EBITDA MARGINS
100%
FREE CASH FLOW CONVERSION
10%
COMPOUND ANNUAL GROWTH RATE IN
ADJUSTED EARNINGS PER SHARE
LEADERSHIP WITH
A PURPOSE
Given the scale of our operations and
the breadth of our capabilities, Parker is
in a unique position to make a positive
and meaningful impact in communities
around the world. We are fortunate to
be able to lead Parker into the future
with a purpose that involves partnering
with our customers to develop
innovative solutions that help improve
the quality of life for people around
the world and create a positive impact
on our team members and in local
communities.
We would like to thank our remarkable
team members, as Parker’s success is
a direct result of their engagement and
dedication, and our shareholders for
their confidence. We hope you share
our excitement for Parker’s future.
Sincerely,
Thomas L. Williams
Chairman and Chief Executive Officer
Lee C. Banks
President and Chief Operating Officer
August 2018
2018 Annual Report Inside.indd 5
9/7/18 12:51 PM
Looking ahead, Parker team members will carry forward
the momentum of a record year to generate significant
long-term value for shareholders and achieve top quartile
financial performance.
2018 Annual Report Inside.indd 6
8/29/18 8:03 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
Incorporation or Organization)
6035 Parkland Boulevard, Cleveland, Ohio
(Address of Principal Executive Offices)
34-0451060
(I.R.S. Employer
Identification No.)
44124-4141
(Zip Code)
Registrant’s telephone number, including area code (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares, $.50 par value
Name of Each Exchange
on which Registered
New York Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K
.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer:
Non-Accelerated Filer:
(Do not check if a smaller reporting company)
Emerging Growth Company
Accelerated Filer:
Smaller Reporting Company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the outstanding common stock held by non-affiliates of the Registrant as of December 31, 2017:
$26,411,763,329.
The number of Common Shares outstanding on July 31, 2018 was 132,360,024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company’s 2018 Annual Meeting of Shareholders to be held on October 24, 2018,
are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Executive Officers of the Registrant
Item 2.
Item 3.
Properties
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
2
9
13
14
15
15
15
16
16
17
28
29
65
65
65
65
65
66
66
66
67
72
1
PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 2018
PART I
ITEM 1. Business. Parker-Hannifin Corporation 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 was incorporated in Ohio in 1938. Its principal executive offices are located at 6035 Parkland
Boulevard, Cleveland, Ohio 44124-4141, telephone (216) 896-3000. As used in this Annual Report on Form 10-K, unless the
context otherwise requires, the term "Company" refers to Parker-Hannifin Corporation and its subsidiaries and the term "year"
and references to specific years refer to the applicable fiscal year.
The Company’s investor relations internet website address is www.phstock.com. The Company makes available free of
charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after filing or furnishing such material electronically with the Securities and Exchange
Commission. The information contained on or accessible through the Company’s website is not part of this Annual Report on
Form 10-K.
The Board of Directors has adopted a written charter for each of the committees of the Board of Directors. These charters,
as well as the Company’s Global Code of Business Conduct, Corporate Governance Guidelines and Independence Standards for
Directors, are posted and available on the Company’s investor relations internet website at www.phstock.com under the
Corporate Governance page. Shareholders may request copies of these corporate governance documents, free of charge, by
writing to Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, Attention: Secretary, or by
calling (216) 896-3000.
The Company’s manufacturing, service, sales, distribution and administrative facilities are located in 39 states within the
United States and in 49 other countries. The Company’s products are sold as original and replacement equipment through sales
and distribution centers worldwide. The Company markets its products through direct-sales employees, independent distributors
and sales representatives. The Company's products are supplied to approximately 455,000 customers in virtually every
significant manufacturing, transportation and processing industry.
The Company has two reporting segments: Diversified Industrial and Aerospace Systems. During 2018, the
Company's technologies and systems were used in the products of these two reporting segments. For 2018, the Company's net
sales were $14.3 billion. Diversified Industrial Segment products accounted for 84% and Aerospace Systems Segment products
accounted for 16% of those net sales.
Markets
The Company’s technologies and systems are used throughout various industries and in various applications. The
approximately 455,000 customers who purchase the Company’s products are found throughout nearly every significant
manufacturing, transportation and processing industry. No single customer accounted for more than 3% of the Company’s total
net sales for the year ended June 30, 2018.
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Diversified Industrial Segment. Sales of Diversified Industrial Segment products are made to both original equipment
manufacturers ("OEMs") and distributors who serve the replacement markets in manufacturing, packaging, processing,
transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment
industries. The major markets for products of the Diversified Industrial Segment are listed below by group:
Engineered Materials
Group:
• Aerospace
• Chemical processing
Filtration
Group:
• Consumer
• Fluid power
• General industrial
• Information technology
• Life sciences
• Agriculture
• Aerospace & defense
• Construction
• Food & beverage
• Heating, ventilation & air conditioning
(HVAC)
• Industrial machinery
• Life sciences
Fluid Connectors
Group:
• Aerial lift
• Agriculture
Instrumentation
Group:
• Bulk chemical handling
• Construction
• Food & beverage
• Fuel & gas delivery
• Industrial machinery
• Air conditioning
• Alternative fuels
• Analytical
• Chemical
• Diesel engine
• Food & beverage
• Industrial machinery
• Microelectronics
• Military
• Oil & gas
• Power generation
• Renewable energy
• Telecommunications
• Transportation
• Marine
• Mining
• Oil & gas
• Power generation
• Renewable energy
• Transportation
• Water purification
• Life sciences
• Marine
• Mining
• Mobile
• Oil & gas
• Renewable energy
• Transportation
• Life sciences
• Microelectronics
• Oil & gas
• Packaging
• Refining
• Refrigeration
• Transportation
3
Motion Systems
Group:
Mobile:
• Agriculture
• Construction
• Marine
• Material handling
• Military
• Transportation
• Truck & bus
• Turf
Industrial:
• Distribution
• General machinery
• Machine tool
• Mining
• Oil & gas
• Power generation
• Semiconductor
Aerospace Systems Segment. Sales of the Aerospace Systems Segment products are made primarily in the commercial
and military aerospace markets to both OEMs and to end users for spares, maintenance, repair and overhaul. The major markets
for products of the Aerospace Systems Segment are listed below:
• Aftermarket services
• Commercial transports
• Engines
• General & business aviation
• Helicopters
• Military aircraft
• Missiles
• Power generation
• Regional transports
• Unmanned aerial vehicles
Principal Products and Methods of Distribution
Although the Company offers hundreds of thousands of individual products, no single product contributed more than 1%
to the Company’s total net sales for the year ended June 30, 2018. Listed below are some of the Company’s principal products.
Diversified Industrial Segment. The products produced by the Company’s Diversified Industrial Segment consist of a
broad range of motion-control and fluid systems and components, which are described below by group:
Engineered Materials Group: static and dynamic sealing devices, including:
• Dynamic seals
• Elastomeric o-rings
• Homogeneous & inserted elastomeric shapes
• Medical device fabrication & assembly
• Electro-medical instrument design & assembly
• Metal & plastic retained composite seals
• Electromagnetic interference shielding
• Shielded optical windows
• Extruded & precision-cut fabricated elastomeric
• Silicone tubing & extrusions
seals
• High-temperature metal seals
• Thermal management
• Vibration dampening
4
Filtration Group: filters, systems and diagnostics solutions to monitor and remove contaminants from fuel, air, oil, water
and other liquids and gases, including:
• Aerospace filters & systems
• Hydraulic & lubrication filters & systems
• Air pollution control & dust collection systems &
• Industrial & analytical gas generators
filters
• Compressed air & gas treatment solutions
• Engine fuel, oil, air & closed crankcase ventilation
filtration systems
• Filtration & purification systems
• Fluid condition monitoring systems
• Gas turbine air inlet filters
• Heating, ventilation & air conditioning (HVAC)
filters
• Instrumentation filters
• Membrane, fiber, & sintered metal filters
• Natural gas filters
• Process liquid, air & gas filters
• Sterile air filters
• Water purification filters & systems
Fluid Connectors Group: connectors which control, transmit and contain fluid, including:
• Check valves
• Diagnostic equipment
• Hose couplings
• Industrial hose
• Low pressure fittings & adapters
• Polytetrafluoroethylene (PTFE) hose & tubing
• Quick couplings
• Rubber & thermoplastic hose
• Tube fittings & adapters
• Tubing & plastic fittings
Instrumentation Group: high quality critical flow components for process instrumentation, healthcare and ultra-high-
purity applications and components for use in refrigeration and air conditioning systems and in fluid control applications for
processing, fuel dispensing, beverage dispensing and mobile emissions, including:
• Accumulators
• Analytical instruments & sample conditioning
systems
• Fluoropolymer chemical delivery fittings, valves
& pumps
• High pressure fittings, valves, pumps & systems
• Compressed natural gas dispensers
• High-purity gas delivery fittings, valves &
• Cryogenic valves
• Electronic valves
• Emissions
• Filter driers
• Fluid system & control fittings, meters, valves,
regulators, & manifold valves
regulators
• Miniature valves & pumps
• Natural gas on-board fuel systems
• Pressure regulating valves
• Refrigeration & air conditioning electronic
controls & monitoring
• Solenoid valves
5
Motion Systems Group: hydraulic, pneumatic, and electromechanical components and systems for builders and users of
mobile and industrial machinery and equipment, including:
Hydraulic Actuation:
• Cylinders
• Rotary actuators
• Helical actuators
• Accumulators
• Electrohydraulic actuators
• Coolers
Hydraulic Pumps & Motors:
• Piston pumps & motors
• Vane pumps & motors
• Gerotor pumps & motors
• Power take-off
• Fan drives
• Electrohydraulic pump
• Drive controlled pump
• Screw pump
• Integrated hydrostatic transmissions
Hydraulic & Electro Hydraulic Systems
Hydraulic Valves:
• Cartridge valves
• Industrial valves
• Mobile valves
Pneumatics:
• Pneumatic valves
• Air preparation (FRL) & dryers
• Pneumatic cylinders
• Grippers
• IO link controllers
Electronics:
• Electric actuators & positioners
• Electronic displays & human machine interfaces
(HMI)
• Controllers & HMI
• Sensors
• IoT
• Electric motors & gearheads
• Drives (AC/DC Servo)
• Joysticks
• Clusters
• Software
Diversified Industrial Segment products include standard products, as well as custom products which are engineered and
produced to OEMs’ specifications for application to particular end products. Both standard and custom products are also used in
the replacement of original products. Diversified Industrial Segment products are marketed primarily through field sales
employees and approximately 16,900 independent distributor locations throughout the world.
Aerospace Systems Segment. The principal products of the Company’s Aerospace Systems Segment are used on
commercial and military airframe and engine programs and include:
• Control actuation systems & components
• Hydraulic systems & components
• Engine systems & components
• Fluid conveyance systems & components
• Lubrication components
• Pneumatic control components
• Fluid metering, delivery & atomization devices
• Power conditioning & management systems
• Fuel systems & components
• Fuel tank inerting systems
• Thermal management
• Wheels & brakes
Aerospace Systems Segment products are marketed by the Company’s regional sales organizations and are sold directly
to original equipment manufacturers and end users throughout the world.
Competition
The Company’s business operates in highly competitive markets and industries. The Company offers its products over
numerous, varied markets through its divisions operating in 50 countries and consequently has hundreds of competitors when
viewed across its various markets and product offerings. The Company’s competitors include U.S. and non-U.S. companies.
6
These competitors and the degree of competition vary widely by product lines, end markets, geographic scope and/or
geographic locations. Although each of the Company’s segments has numerous competitors, given the Company’s market and
product breadth, no single competitor competes with the Company with respect to all products manufactured and sold by the
Company.
In the Diversified Industrial Segment, the Company competes on the basis of product quality and innovation, customer
service, manufacturing and distribution capability, and price competitiveness. The Company believes that it is one of the market
leaders in most of the major markets for its most significant Diversified Industrial Segment products. The Company has
comprehensive motion and control packages for the broadest systems capabilities. While the Company’s primary global
competitors include Bosch Rexroth AG, Danaher Corporation, Danfoss A/S, Donaldson Company, Inc., Eaton Corporation plc,
Emerson Climate Technologies, Inc., Emerson/ASCO, Festo AG & Co., Freudenberg-NOK, Gates Corporation, IMI/Norgren,
SMC Corporation, Swagelok Company, and Trelleborg AB, none of these businesses compete with every group in the
Company's Diversified Industrial Segment and every product line offered by this segment.
In the Aerospace Systems Segment, the Company has developed alliances with key customers based on the Company’s
advanced technological and engineering capabilities, superior performance in quality, delivery, and service, and price
competitiveness, which has enabled the Company to obtain significant original equipment business on new aircraft programs
for its systems and components and to thereby obtain the follow-on repair and replacement business for these programs.
Further, the Aerospace Systems Segment is able to utilize low-cost manufacturing techniques and best cost region strategies to
achieve a lower cost producer status. Although the Company believes that it is one of the market leaders in most of the major
markets for its most significant Aerospace Systems Segment products, the Company’s primary global competitors for the most
significant Aerospace Systems Segment products include Eaton Corporation plc, Honeywell International, Inc., Moog Inc.,
Triumph Group, Inc., UTC Aerospace Systems, Woodward, Inc. and Zodiac Aerospace SA.
The Company believes that its platform utilizing nine core technologies, which consist of aerospace, electromechanical,
filtration, fluid handling, hydraulics, pneumatics, process control, refrigeration, and sealing and shielding, is a positive factor in
its ability to compete effectively with both large and small competitors. For both of its segments, the Company believes that the
following factors also contribute to its ability to compete effectively:
•
•
•
•
decentralized operating structure that allows each division to focus on its customers and respond quickly at the local
level;
systems solution capabilities that use the Company’s core technologies from both of its segments;
global presence; and
a strong global distribution network.
Research and Product Development
The Company continually researches the feasibility of new products and services through its development laboratories
and testing facilities in many of its worldwide manufacturing locations. Its research and product development staff includes
chemists, physicists, and mechanical, chemical and electrical engineers.
Total research and development costs relating to the development of new products and services and the improvement of
existing products and services amounted to $327.9 million in 2018, $336.7 million in 2017 and $359.8 million in 2016. These
amounts include 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 and included in the total research and development costs reported above for 2018, 2017 and 2016 were $40.8 million,
$65.3 million and $58.0 million, respectively.
Patents, Trademarks, Licenses
The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-
exclusive rights to use patents and trademarks owned by others. In addition, patent and trademark applications are pending,
although there can be no assurance that further patents and trademarks will be issued. The Company is not dependent to any
material extent on any single patent, trademark or license or group of patents, trademarks or licenses.
Backlog and Seasonal Nature of Business
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
7
value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale. The Company's
backlog by business segment for the past two years is included in Part II, Item 7 of this Annual Report on Form 10-K and is
incorporated herein by reference. The Company’s backlog was $4.1 billion at June 30, 2018 and $3.8 billion at June 30, 2017.
Approximately 89% of the Company’s backlog at June 30, 2018 is scheduled for delivery in the succeeding twelve months. The
Company’s business is generally not seasonal in nature.
Environmental Regulation
Certain of the Company’s operations necessitate the use and handling of hazardous materials and, as a result, the
Company is subject to United States federal, state, and local laws and regulations as well as non-U.S. laws and regulations
designed to protect the environment and regulate the discharge of materials into the environment. These laws impose penalties,
fines and other sanctions for non-compliance and liability for response costs, property damage and personal injury resulting
from past and current spills, disposals or other releases of, or exposures to, hazardous materials. Among other environmental
laws, the Company is subject to the United States federal "Superfund" law, under which the Company has been designated as a
"potentially responsible party" and may be liable for cleanup costs associated with various waste sites, some of which are on the
United States Environmental Protection Agency’s Superfund priority list.
As of June 30, 2018, the Company was involved in environmental remediation at various United States and non-U.S.
manufacturing facilities presently or formerly operated by the Company and as a "potentially responsible party," along with
other companies, at off-site waste disposal facilities and regional sites.
The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and
regulations requires continuing management efforts and expenditures by the Company. Compliance with environmental laws
and regulations has not had in the past, and, the Company believes, will not have in the future, a material adverse effect on the
capital expenditures, earnings, or competitive position of the Company.
As of June 30, 2018, the Company had a reserve of $18.0 million for environmental matters that were probable and
reasonably estimable. This reserve was 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 the above mentioned sites ranges from a minimum of $18.0 million to a
maximum of $81.0 million. The largest range of the estimated total liability for any one site is approximately $9.5 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 the
other responsible parties to pay, and any insurance or other third-party recoveries.
Energy Matters and Sources and Availability of Raw Materials
The Company’s primary energy source for both of its business segments is electric power. While the Company cannot
predict future costs of electric power, the primary source for production of the required electric power is expected to be coal and
natural gas from substantial, proven coal and natural gas reserves available to electric utilities. The Company is subject to
governmental regulations in regard to energy supplies in the United States and elsewhere. To date, the Company has not
experienced any significant disruptions of its operations due to energy curtailments.
Steel, brass, copper, aluminum, nickel, rubber and thermoplastic materials and chemicals are the principal raw materials
used by the Company. These materials are expected to be available from numerous sources in quantities sufficient to meet the
requirements of the Company.
Employees
The Company employed approximately 57,170 persons as of June 30, 2018, of whom approximately 29,410 were
employed by foreign subsidiaries.
Business Segment Information
The Company’s net sales, segment operating income and assets by business segment and net sales and long-lived assets
by geographic area for the past three years are included in Part II, Item 8 of this Annual Report on Form 10-K and are
incorporated herein by reference.
8
Acquisitions
The Company made no acquisitions during 2018. Prior-year acquisitions are discussed in Note 2 to the Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
ITEM 1A. Risk Factors.
The following "risk factors" identify what the Company believes to be the risks that could materially adversely affect the
Company’s financial and/or operational performance. These risk factors should be considered and evaluated together with
information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K. Additional risks
not currently known to the Company or that the Company currently believes are immaterial also may impair the Company’s
business, financial condition, results of operations and cash flows.
The Company may be subject to risks arising from uncertainty in worldwide and regional economic conditions.
The Company's business is sensitive to global macro-economic conditions. Moderate economic growth persists in the
economic regions in which the Company conducts substantial operations. Future macroeconomic downturns may have an
adverse effect on the business, results of operations and financial condition of the Company and its distributors, customers and
suppliers, and on activity in many of the industries and markets in which the Company and its distributors, customers and
suppliers operate. Among the economic factors which may have such an effect are manufacturing and other end-market activity,
currency exchange rates, air travel trends, difficulties entering new markets, tariffs and governmental trade policies, and general
economic conditions such as inflation, deflation, interest rates and credit availability. These factors may, among other things,
negatively impact the level of purchases, capital expenditures, and creditworthiness of the Company and its distributors,
customers and suppliers, and, therefore, the Company’s revenues, operating profits, margins, and order rates.
The Company cannot predict changes in worldwide or regional economic conditions, as such conditions are highly
volatile and beyond the Company’s control. If these conditions deteriorate or remain at depressed levels for extended periods,
however, the Company’s business, results of operations and financial condition could be materially adversely affected.
The Company may be subject to risks relating to its non-U.S. operations.
The Company’s net sales derived from customers outside the United States were approximately 41% in 2018, 40% in
2017 and 41% in 2016. In addition, many of the Company’s manufacturing operations and suppliers are located outside the
United States. The Company expects net sales from non-U.S. markets to continue to represent a significant portion of its total
net sales. The Company’s non-U.S. operations are subject to risks in addition to those facing its domestic operations, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates;
limitations on ownership and on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
government embargoes or trade restrictions;
the imposition of duties and tariffs and other trade barriers;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on the Company’s ability to enforce legal rights and remedies;
potentially adverse tax consequences; and
difficulties in implementing restructuring actions on a timely basis.
9
If the Company is unable to successfully manage the risks associated with expanding its global business or adequately
manage operational fluctuations internationally, the risks could have a material adverse effect on the Company’s business,
results of operations or financial condition.
The Company may be subject to risks relating to acquisitions and joint ventures, and risks relating to the integration of
acquired companies, including risks related to the integration of CLARCOR Inc. ("Clarcor").
The Company expects to continue its strategy of identifying and acquiring businesses with complementary products and
services, and entering into joint ventures, which it believes will enhance its operations and profitability. However, there can be
no assurance that the Company will be able to continue to find suitable businesses to purchase or joint venture opportunities or
that it will be able to acquire such businesses or enter into such joint ventures on acceptable terms. Furthermore, there are no
assurances that the Company will be able to avoid acquiring or assuming unexpected liabilities. If the Company is unable to
avoid these risks, its results of operations and financial condition could be materially adversely affected.
In addition, the Company may not be able to integrate successfully any businesses that it purchases into its existing
business or that any acquired businesses or joint ventures will be profitable. Specifically, the Company is devoting significant
management attention and resources to integrating the business practices and operations of Clarcor with the businesses of the
Company. The Company may encounter or has encountered the following difficulties during the integration process of Clarcor:
•
•
•
•
•
•
•
the consequences of a change in tax treatment, including the cost of integration and compliance and the possibility that
the full benefits anticipated to result from the Clarcor acquisition may not be realized;
delays in the integration of management teams, strategies, operations, products, and services;
differences in business backgrounds, corporate cultures, and management philosophies that may delay successful
integration;
the ability to retain key employees;
the ability to create and enforce uniform standards, controls, procedures, policies, and information systems;
challenges of integrating complex systems, technologies, networks, and other assets of Clarcor, into the Company’s, in
a manner that minimizes any adverse impact or disruptions to customers, suppliers, employees, and other
constituencies; and
unknown liabilities and unforeseen increased expenses or delays associated with the integration beyond current
estimates.
The successful integration of new businesses and the success of joint ventures also depend on the Company’s ability to
manage these new businesses and cut excess costs. If the Company is unable to avoid these risks, its results of operations and
financial condition could be materially adversely affected.
The Company’s results may be adversely affected if expanded operations from the acquisition of Clarcor are not
effectively managed.
The Company’s acquisition of Clarcor greatly expanded the size and complexity of its business. The Company’s future
success depends, in part, on the ability to manage this expanded business, which may pose or has posed substantial challenges
for management, including challenges related to the management and monitoring of the expanded global operations and new
manufacturing processes and products, and the associated costs and complexity. There can be no assurance of successful
management of these matters or that the Company will realize the expected benefits of the acquisition of Clarcor.
The Company may be subject to risks relating to organizational changes.
The Company regularly executes organizational changes such as acquisitions, divestitures and realignments to support its
growth and cost management strategies. The Company also engages in initiatives aimed to increase productivity, efficiencies
and cash flow and to reduce costs. The Company further commits significant resources to identify, develop and retain key
employees to ensure uninterrupted leadership and direction. If the Company is unable to successfully manage these and other
organizational changes, the ability to complete such activities and realize anticipated synergies or cost savings as well as the
Company's results of operations and financial condition could be materially adversely affected. The Company also cannot offer
assurances that any of these initiatives will continue to be beneficial to the extent anticipated, or that the estimated efficiency
improvements, incremental cost savings or cash flow improvements will be realized as anticipated or at all.
The Company may be subject to risks relating to its information technology systems.
The Company relies extensively on information technology systems to manage and operate its business, some of which
are managed by third parties. The security and functionality of these information technology systems, and the processing of
data by these systems, are critical to our business operations. If these systems, or any part of the systems, are damaged,
10
intruded upon, attacked, shutdown or cease to function properly (whether by planned upgrades, force majeure,
telecommunications failures, hardware or software break-ins or viruses, or other cybersecurity incidents) and the Company
suffers any resulting interruption in its ability to manage and operate its business or if its products are effected, the Company's
results of operations and financial condition could be materially adversely affected. In addition to existing risks, any adoption
or deployment of new technologies may increase our exposure to risks, breaches, or failures, which could materially adversely
affect the Company's results of operations or financial condition. Furthermore, the Company may have access to sensitive,
confidential, or personal data or information that may be subject to privacy and security laws, regulations, or other
contractually-imposed controls. Despite the Company's use of reasonable and appropriate controls, material security breaches,
theft, misplaced, lost or corrupted data, programming or employee errors, and/or malfeasance, could lead to the compromise or
improper use of such sensitive, confidential, or personal data or information, resulting in possible negative consequences, such
as fines, penalties, loss of reputation or competitiveness, or other negative impacts to the Company's results of operations or
financial condition.
The Company may be subject to risks relating to changes in the demand for and supply of its products.
Demand for and supply of the Company’s products may be adversely affected by numerous factors, some of which the
Company cannot predict or control. Such factors include:
•
•
•
•
•
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, and changes in contract cost and revenue estimates for new development programs;
changes in product mix;
changes in the market acceptance of the Company’s products;
increased competition in the markets the Company serves;
declines in the general level of industrial production;
• weakness in the end-markets the Company serves;
•
•
fluctuations in the availability or the prices of raw materials; and
fluctuations in currency exchange rates.
If any of these factors occur, the demand for and supply of the Company’s products could suffer, which could materially
adversely affect the Company’s results of operations.
The Company may be subject to risks relating to the development of new products and technologies.
The markets in which the Company operates are characterized by rapidly changing technologies and frequent
introductions of new products and services. The Company’s ability to develop new products based on technological innovation
can affect its competitive position and often requires the investment of significant resources. If the Company does not develop,
or has difficulties or delays in the development of, innovative new and enhanced products and services, or fails to gain market
or regulatory acceptance of new products and technologies, the Company's revenues may be materially reduced and the
Company's competitive position could be materially adversely affected. In addition, the Company may invest in research and
development of products and services, or in acquisitions or other investments, that do not lead to significant revenue, which
could adversely affect our profitability.
The Company may be subject to risks arising from price and supply fluctuations in raw materials used in the
Company’s production processes and by its suppliers of component parts.
The Company’s supply of raw materials for its businesses could be interrupted for a variety of reasons, including
availability and pricing. Furthermore, recently implemented changes to U.S.and other countries' tariff and import/export
regulations may have a negative impact on the availability and pricing of raw materials. Prices for raw materials necessary for
production have fluctuated significantly in the past and significant increases could adversely affect the Company’s results of
operations and profit margins. Efforts by the Company to manage these fluctuations by, among other things, passing along price
increases to its customers, may be subject to a time delay between the increased raw material prices and the Company’s ability
to increase the price of its products, or the Company may be unable to increase the prices of its products due to pricing
pressure, contract terms or other factors. Any such inability to manage fluctuations could adversely impact results of operations
and cash flows.
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The Company’s suppliers of component parts may significantly and quickly increase their prices in response to increases
in costs of raw materials that they use to manufacture the component parts. As a result, the Company may not be able to
increase its prices commensurately with its increased costs. Consequently, the Company’s results of operations or financial
condition could be materially adversely affected.
The Company may be subject to risks arising from changes in the competitive environment in which it operates.
The Company’s operations are subject to competition from a wide variety of global, regional and local competitors, which
could adversely affect the Company’s results of operations by creating downward pricing pressure and/or a decline in the
Company’s margins or market shares. To compete successfully, the Company must excel in terms of product quality and
innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness,
and customer experience.
The Company may be subject to risks relating to changes in its tax rates or exposure to additional income tax liabilities.
The Company is subject to income taxes in the United States and various non-U.S. jurisdictions. The Company's
domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. On
December 22, 2017, the Tax Cuts and Jobs Act, or the TCJ Act, was enacted into law. The TCJ Act significantly reforms the
Internal Revenue Code of 1986, as amended, by, among other things, establishing a flat corporate U.S. income tax rate of 21
percent and creating a territorial tax system (with a one-time transition tax imposed on previously unremitted foreign earnings
and profits). The Company’s future results of operation could be adversely affected by changes in the Company's effective tax
rate as a result of changes in tax laws and regulations or the interpretation thereof (including regulations under and
interpretations of the TCJ Act), the mix of earnings in countries with differing statutory tax rates, changes in overall
profitability, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets or changes in
tax laws or regulations. For example, the Company’s estimate of the net one-time charge incurred related to the TCJ Act could
differ materially from the Company’s actual liability, due to, among other things, further refinement of the calculations, changes
in interpretations and assumptions the Company has made, additional guidance that may be issued by the U.S. Treasury
Department and Internal Revenue Service, and any other actions the Company may make as a result of the TCJ Act. In addition,
the amount of income taxes paid by the Company is subject to ongoing audits by U.S. federal, state and local tax authorities and
by non-U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may
include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s
results of operations.
The Company may be subject to product liability risks.
The Company’s businesses expose it to potential product liability risks that are inherent in the design, manufacture and
sale of its products and the products of third-party vendors that the Company uses or resells. Significant product liability claims
could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Although the
Company currently maintains what it believes to be suitable and adequate product liability insurance, there can be no assurance
that the Company will be able to maintain its insurance on acceptable terms or that its insurance will provide adequate
protection against all potential significant liabilities.
The Company may be subject to risks arising from litigation, and legal and regulatory proceedings and obligations.
From time to time, the Company is subject to litigation or other commercial disputes and other legal and regulatory
proceedings relating to its business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or
regulatory proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related
appeals. An unfavorable outcome could materially adversely impact the Company’s business, financial condition or results of
operations. Furthermore, as required by U.S. generally accepted accounting principles, the Company establishes reserves based
on its assessment of contingencies, including contingencies related to legal claims asserted against it. Subsequent
developments in legal proceedings may affect the Company's assessment and estimates of the loss contingency recorded as a
reserve and require the Company to make payments in excess of our reserves, which could have an adverse effect on the
Company's results of operations.
The Company is subject to national and international laws and regulations, such as the anti-corruption laws of the U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to its business and its employees. Despite the Company's
policies, procedures and compliance programs, its internal controls and compliance systems may not be able to protect the
Company from prohibited acts willfully committed by its employees, agents or business partners that would violate such
applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject it to civil or criminal
judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely
impact the Company's business, financial condition or results of operations.
12
The Company may be subject to risks relating to the preservation of its intellectual property.
Protecting the Company’s intellectual property is critical to its innovation efforts. The Company owns a number of
patents, trade secrets, copyrights, trademarks, trade names and other forms of intellectual property in its products and services
throughout the world and in the operation of its business. The Company also has exclusive and non-exclusive rights to
intellectual property owned by others. The Company’s intellectual property may be challenged or infringed upon by third
parties or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of
intellectual property on reasonable terms. In addition, the global nature of the Company’s business increases the risk that the
Company’s intellectual property may be subject to infringement or other unauthorized use or disclosure by others. In some
cases, the Company’s ability to protect its intellectual property rights by legal recourse or otherwise may be limited, particularly
in countries where laws or enforcement practices are inadequate or undeveloped. Unauthorized use or disclosure of the
Company’s intellectual property rights or the Company's inability to preserve existing intellectual property rights could
adversely impact the Company’s competitive position and results of operations.
The Company may be subject to risks arising from the impact of environmental regulations.
The Company’s operations necessitate the use and handling of hazardous materials and, as a result, it is subject to various
U.S. federal, state and local laws and regulations, as well as non-U.S. laws, designed to protect the environment and to regulate
the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other
releases of, or the exposure to, hazardous materials. Among other laws, the Company is subject to the U.S. federal "Superfund"
law, under which it has been designated as a "potentially responsible party" and may be liable for clean-up costs associated with
various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list. The
Company could incur substantial costs as a result of non-compliance with or liability for cleanup or other costs or damages
under environmental laws, including the Superfund law.
In addition, increased worldwide focus on climate change issues has led to legislative and regulatory efforts to limit
greenhouse gas emissions, including regulation of such emissions through a "cap-and-trade" system globally. Increased
regulation of greenhouse gas emissions and other climate change concerns could subject the Company to additional costs and
restrictions, including increased energy and raw material costs. Until definitive regulations are adopted, the Company is not
able to predict how such regulations would affect the Company’s business, operations or financial results.
The Company may be subject to other more stringent environmental laws in the future. If more stringent environmental
laws are enacted in the future, these laws could have a material adverse effect on the Company’s business, results of operations
and financial condition.
The Company may be subject to risks relating to increasing costs of certain employee and retiree benefits.
The funding requirements and the amount of expenses recorded for the Company’s defined benefit pension plans are
dependent on changes in market interest rates and the value of plan assets, which are dependent on actual plan asset returns.
Significant changes in market interest rates and decreases in the fair value of plan assets and investment losses on plan assets
would increase funding requirements and expenses and may adversely impact the Company’s results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and the
Company continues to absorb the majority of these costs, these increasing costs may adversely impact the Company's future
results of operations.
The Company may be subject to risks arising from regulations applicable to companies doing business with the United
States government.
In addition to the risks identified herein, doing business with the United States government subjects the Company to
unusual risks, including dependence on the level of government spending and compliance with and changes in governmental
acquisition regulations. Agreements relating to the sale of products to government entities may be subject to termination,
reduction or modification, either at the convenience of the government or for the Company’s failure to perform under the
applicable contract. The Company is subject to government investigations of business practices and compliance with
government acquisition regulations. If the Company were charged with wrongdoing as a result of any such investigation, it
could be suspended from bidding on or receiving awards of new government contracts, and the Company could be subject to
fines or penalties associated with contract non-compliance or resulting from such investigations, which could have a material
adverse effect on the Company’s results of operations.
ITEM 1B. Unresolved Staff Comments. None.
13
ITEM 1C. Executive Officers of the Registrant.
The Company’s executive officers as of August 15, 2018, were as follows:
Name
Position
Thomas L. Williams
Chairman of the Board, Chief Executive Officer and Director
Lee C. Banks
Catherine A. Suever
Mark J. Hart
William R. "Skip"
Bowman
William G. Eline
Thomas C. Gentile
Kurt A. Keller
Todd M. Leombruno
Joseph R. Leonti
Robert W. Malone
M. Craig Maxwell
President, Chief Operating Officer and Director
Executive Vice President – Finance & Administration and Chief
Financial Officer
Executive Vice President – Human Resources & External Affairs
Vice President and President - Instrumentation Group
Vice President – Chief Information Officer
Vice President – Global Supply Chain
Vice President and President – Asia Pacific Group
Vice President and Controller
Vice President, General Counsel and Secretary
Vice President and President – Filtration Group
Vice President – Chief Technology and Innovation Officer
Jennifer A. Parmentier
Vice President and President – Engineered Materials Group
Andrew D. Ross
Roger S. Sherrard
Andrew M. Weeks
Vice President and President – Fluid Connectors Group
Vice President and President – Aerospace Group
Vice President and President – Motion Systems Group
Officer
Since(1)
Age as of
8/15/2018
2005
2001
2010
2016
2016
2002
2017
2009
2017
2014
2014
2003
2015
2012
2003
2015
59
55
59
53
60
62
46
60
48
46
54
60
51
51
52
55
(1) Executive officers of the Company are elected by the Board of Directors to serve for a term of one year or until their
respective successors are elected, except in the case of death, resignation or removal. Messrs. Eline, Keller, Maxwell, and
Sherrard have served in the executive capacities indicated above opposite their respective names during each of the past five
years.
Mr. Williams has been a Director since January 2015; Chief Executive Officer since February 2015; and Chairman of the
Board since January 2016. He was an Executive Vice President from August 2008 to February 2015 and an Operating Officer
from November 2006 to February 2015. He is also a Director of Chart Industries, Inc.
Mr. Banks has been a Director since January 2015 and President and Chief Operating Officer since February 2015. He
was an Executive Vice President from August 2008 to February 2015 and an Operating Officer from November 2006 to
February 2015. He is also a Director of Nordson Corporation.
Ms. Suever has been Executive Vice President - Finance & Administration and Chief Financial Officer since April 2017.
She was Vice President and Controller from December 2010 to April 2017.
Mr. Hart has been Executive Vice President - Human Resources & External Affairs since January 2016. He was Vice
President - Total Rewards from August 2013 to January 2016.
Mr. Bowman has been Vice President and President - Instrumentation Group since September 2016. He was Vice
President, Operations - Filtration Group from March 2015 to August 2016; and Vice President, Operations - Fluid Connectors
Group from November 2007 to February 2015.
Mr. Gentile has been Vice President - Global Supply Chain since July 2017. He was General Manager of the Company's
domnick hunter Process Filtration Division from December 2013 to July 2017; and Vice President, Supply Chain - Filtration
Group from July 2008 to December 2013.
Mr. Leombruno has been Vice President and Controller since July 2017. He was Vice President and Controller -
Engineered Materials Group from January 2015 to June 2017; and Director of Investor Relations from June 2012 to December
2014.
14
Mr. Leonti has been Vice President, General Counsel and Secretary since July 2014. He was Assistant Secretary from
April 2011 to July 2014; and Associate General Counsel from January 2008 to July 2014.
Mr. Malone has been Vice President and President of the Filtration Group since December 2014. He was Vice President -
Operations of the Filtration Group from January 2013 to December 2014.
Ms. Parmentier has been Vice President and President of the Engineered Materials Group since September 2015. She
was General Manager of the Hose Products Division from May 2014 to September 2015; and General Manager of the Sporlan
Division from May 2012 to May 2014.
Mr. Ross has been Vice President since July 2012 and President of the Fluid Connectors Group since September 2015.
He was President of the Engineered Materials Group from July 2012 to September 2015.
Mr. Weeks has been Vice President and President of the Motion Systems Group since September 2015. He was Vice
President - Operations of the Aerospace Group from April 2013 to September 2015.
ITEM 2. Properties. The Company’s corporate headquarters is located in Cleveland, Ohio, and, at June 30, 2018, the
Company had 310 manufacturing plants, 119 distribution centers and 157 sales and administrative offices throughout the world,
none of which were individually material to its operations. The facilities are situated in 39 states within the United States and in
49 other countries. The Company owns the majority of its manufacturing plants, and its leased properties primarily consist of
sales and administrative offices and distribution centers. The number of facilities used by each of the Company’s operating
segments is summarized by type and geographic location in the tables below:
Diversified Industrial
Aerospace Systems
Total
Diversified Industrial
Aerospace Systems
Total
Type of Facility
Manufacturing
Plants
Distribution
Centers
Sales and
Administrative
Offices
291
19
310
115
4
119
144
13
157
North America
Europe
Asia-Pacific
Latin America
Geographic Location
271
30
301
154
4
158
113
2
115
12
—
12
Several facilities are shared between the Company’s operating segments. To avoid double counting, each shared facility is
counted once, primarily in the Diversified Industrial Segment.
The Company believes that its properties have been adequately maintained, are in good condition generally and are
suitable and adequate for its business as presently conducted. The extent to which the Company uses its properties varies by
property and from time to time. The Company believes that its restructuring efforts have brought capacity levels closer to
present and anticipated needs. Most of the Company’s manufacturing facilities remain capable of handling volume increases.
ITEM 3. Legal Proceedings. None.
ITEM 4. Mine Safety Disclosures. Not applicable.
15
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
(a) Market for the Registrant’s Common Equity. The Company’s common stock is listed for trading on the New York
Stock Exchange (NYSE) under the symbol "PH". Information regarding stock price as reported on the NYSE and
dividend information with respect to the Company’s common stock, is included in the table below.
(In dollars)
2018 High
Low
Dividends
2017 High
Low
Dividends
2016 High
Low
Dividends
1st
2nd
3rd
4th
Fiscal Year
$
177.61
$
200.82
$
212.80
$
183.91
$
212.80
153.65
0.66
170.66
0.66
167.50
0.66
152.47
0.76
152.47
2.74
$
126.59
$
145.44
$
161.23
$
166.60
$
166.60
105.00
0.63
117.98
94.64
0.63
$
118.77
0.63
108.00
93.47
0.63
139.92
0.66
113.51
83.32
0.63
151.17
0.66
117.78
99.10
0.63
$
$
$
$
105.00
2.58
117.98
83.32
2.52
As of July 31, 2018, the number of shareholders of record of the Company was 3,478.
(b) Use of Proceeds. Not Applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
April 1, 2018 through April 30, 2018
May 1, 2018 through May 31, 2018
June 1, 2018 through June 30, 2018
Total
(a) Total
Number
of Shares
Purchased
96,100
704,770
97,647
898,517
(b) Average
Price Paid
Per Share
$
$
$
$
170.96
166.21
168.11
166.92
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
(d) Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased
Under the Plans or
Programs
96,100
704,770
97,647
898,517
16,404,510
15,699,740
15,602,093
15,602,093
(1)
On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum
number of shares authorized for repurchase under this program so that, beginning on such date, the aggregate number
of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be
repurchased in a year. There is no expiration date for this program.
ITEM 6. Selected Financial Data.
(Amounts in thousands, except per share information)
2018
2017
2016
2015
2014
Net sales
$
14,302,392
$
12,029,312
$
11,360,753
$
12,711,744
$
13,215,971
Net income attributable to common shareholders
1,060,801
983,412
806,840
1,012,140
1,041,048
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Total assets
Long-term debt
7.98
7.83
2.74
7.37
7.25
2.58
5.96
5.89
2.52
7.08
6.97
2.37
6.98
6.87
1.86
15,320,087
4,318,559
15,489,904
4,861,895
12,034,142
2,652,457
12,254,279
2,698,957
13,249,907
1,498,234
16
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Forward-looking statements contained in this and other written and oral reports are made based on known events and
circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements
regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that
the future performance and earnings projections of the Company, including its individual segments, may differ materially from
current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the
Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic
initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth,
innovation and global diversification initiatives. Additionally, the actual impact of the U.S. Tax Cuts and Jobs Act (TCJ Act)
may affect future performance and earnings projections as the amounts reflected in this period are preliminary estimates and
exact amounts will not be determined until a later date, and there may be other judicial or regulatory interpretations of the TCJ
Act that may also affect these estimates and the actual impact on the Company. 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, including the integration of CLARCOR Inc. (Clarcor);
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;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be
recovered in product pricing;
ability to manage costs related to insurance and employee retirement and health care benefits;
compliance costs associated with environmental laws and regulations;
potential labor disruptions;
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;
global competitive market conditions, including global reactions to U.S. trade polices, 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, 2018, and undertakes no obligation to update them unless otherwise required by law.
17
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, 2018
March 31, 2018
June 30, 2017
United States
Eurozone countries
China
Brazil
60.2
54.9
51.0
49.8
59.3
56.6
51.0
53.4
57.8
57.4
50.4
50.5
Global aircraft miles flown increased by approximately six percent and global revenue passenger miles increased
approximately seven percent from their comparable 2017 levels. 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 2018 will
increase by approximately two percent from their fiscal 2017 level.
Housing starts in June 2018 were 11 percent lower than housing starts in March 2018 and four percent lower than housing
starts in June 2017.
The Company believes many opportunities for profitable growth are available. The Company intends to focus primarily on
business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.
The Company believes it can meet its strategic objectives by:
•
•
Serving the customer and continuously enhancing its experience with the Company;
Successfully executing its Win Strategy initiatives relating to engaged people, premier customer experience, profitable
growth and financial performance;
• Maintaining its decentralized division and sales company structure;
•
Fostering a safety first and entrepreneurial culture;
• Engineering innovative systems and products to provide superior customer value through improved service, efficiency
and productivity;
• Delivering products, systems and services that have demonstrable savings to customers and are priced by the value
they deliver;
• Acquiring strategic businesses;
• Organizing around targeted regions, technologies and markets;
• Driving efficiency by implementing lean enterprise principles; and
• Creating a culture of empowerment through its values, inclusion and diversity, accountability and teamwork.
18
Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining
the Company’s strong financial position. In addition, the Company will continue to assess its existing businesses and initiate
efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business
divestitures could have a negative effect on the Company’s results of operations.
The discussion below is structured to separately discuss the financial statements presented in Part II, Item 8 of this Annual
Report on Form 10-K. The term "year" and references to specific years refer to the applicable fiscal year.
CONSOLIDATED STATEMENT OF INCOME
The Consolidated Statement of Income summarizes the Company's operating performance over the last three years.
(dollars in millions)
Net sales
Gross profit margin
Selling, general and administrative expenses
Selling, general and administrative expenses, as a percent of sales
Interest expense
Other (income), net
(Gain) on disposal of assets
Effective tax rate
$
$
$
$
$
$
2018
14,302
24.7%
1,657
11.6%
214
(29)
(4)
37.7%
$
$
$
2017
12,029
23.6%
1,454
12.1%
162
(61)
(43)
26.0%
Net income attributable to common shareholders
$
1,061
$
983
$
2016
11,361
22.3%
1,359
12.0%
137
(62)
(11)
27.6%
807
Net sales in 2018 were 18.9 percent higher than 2017. The increase in net sales in 2018 was a result of an increase in volume
in both the Diversified Industrial North American and Diversified Industrial International operations and acquisitions
completed during 2017, which contributed approximately $970 million to current-year incremental net sales. The effect of
currency rate changes increased net sales in 2018 by approximately $295 million, of which $270 million was attributable to the
Diversified Industrial International operations. Net sales in 2017 were 5.9 percent higher than 2016. The increase in net sales
in 2017 was primarily a result of acquisitions made in 2017 (which contributed approximately $558 million in sales in 2017)
and an increase in volume in both the Diversified Industrial International operations and the Aerospace Systems Segment,
partially offset by the effect of currency rate changes (which decreased net sales in 2017 by approximately $84 million).
Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2018 primarily due to higher
margins in the Aerospace Systems Segment resulting from a favorable product mix. All segments benefited from lower
operating expenses related to simplification and realignment efforts. These benefits were partially offset by unfavorable
product mix, unfavorable raw material prices and inefficiencies created by manufacturing facility consolidations which
contributed to lower margins in the Diversified Industrial North American and Diversified Industrial International operations
during 2018. Gross profit margin increased in 2017 primarily due to lower operating expenses resulting from the Company's
simplification initiative and other restructuring activities, primarily experienced in the Diversified Industrial Segment, partially
offset by lower margins in the Aerospace Systems Segment. Foreign currency transaction loss (relating to cash, marketable
securities and other investments and intercompany transactions) included in cost of sales for 2018, 2017 and 2016 was $7.3
million, $8.1 million and $22.7 million, respectively. Pension cost included in cost of sales in 2018, 2017 and 2016 was $86.1
million, $135.0 million and $172.4 million, respectively. Included in cost of sales in 2018, 2017 and 2016 were business
realignment charges of $44.9 million, $35.9 million and $76.2 million, respectively.
Selling, general and administrative expenses increased 14.0 percent in 2018 and increased 7.0 percent in 2017. The increase
in 2018 was primarily due to higher sales expense resulting from an increase in sales, higher amortization expense resulting
from recent acquisitions and higher incentive compensation, partially offset by lower acquisition expenses. The increase in
2017 was primarily due to higher amortization expense resulting from recent acquisitions and higher acquisition expenses,
partially offset by lower expenses resulting from the Company's simplification initiative, lower expenses associated with the
Company's deferred compensation program and lower professional services expenses. Pension cost included in selling, general
and administrative expenses in 2018, 2017 and 2016 was $36.9 million, $65.8 million and $74.4 million, respectively. Included
in selling, general and administrative expenses in 2018, 2017 and 2016 were business realignment charges of $36.8 million,
$19.7 million and $21.1 million, respectively.
19
Interest expense in 2018 increased primarily due to higher weighted-average borrowings and higher weighted-average interest
rates. Interest expense in 2017 increased primarily due to higher weighted-average borrowings, partially offset by lower
weighted-average interest rates.
Other (income), net in 2018, 2017 and 2016 includes $50.5 million, $42.4 million, and $25.6 million of income, respectively,
related to the Company's equity interests in joint ventures. Other (income), net in 2018 also includes a writedown of an
investment of $27.4 million and a loss on the sale of an investment of $13.8 million.
(Gain) on disposal of assets includes a loss of $20 million on the sale of a business in 2018, a gain of $42 million related to the
sale of a product line in 2017 and a gain of $11.5 million related to the sale of businesses in 2016.
Effective tax rate in 2018 was higher than the comparable prior-year period primarily due to the net impact of one-time
adjustments recorded as a result of the TCJ Act. See Note 4 to the Consolidated Financial Statements included in Part II, Item
8 of this Annual Report on Form 10-K for further discussion of the impact of the TCJ Act. Excluding the impact of the TCJ Act
one-time adjustments, the effective tax rate for 2018 was lower primarily due to the reduced U.S. income tax rate resulting
from enactment of the TCJ Act and a net increase in discrete tax benefits, partially offset by an increase in taxes related to
international activities. The effective tax rate in 2017 was favorably impacted by an increase of discrete tax benefits, mostly
related to stock-based compensation expense.
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)
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
2018
2017
2016
$
$
$
$
6,727
5,260
1,076
765
16.0%
14.5%
2,167
13,369
13.8%
$
5,367
4,378
874
579
16.3%
13.2%
2,041
13,367
13.1%
$
4,955
4,145
790
448
15.9%
10.8%
1,455
8,729
14.2%
20
The Diversified Industrial Segment operations experienced the following percentage changes in net sales:
Diversified Industrial North America – as reported
Acquisitions
Divestitures
Currency
Diversified Industrial North America – without acquisitions, divestitures and currency
Diversified Industrial International – as reported
Acquisitions
Divestitures
Currency
Diversified Industrial International – without acquisitions, divestitures and currency
Total Diversified Industrial Segment – as reported
Acquisitions
Divestitures
Currency
Total Diversified Industrial Segment – without acquisitions, divestitures and currency
2018
2017
25.3 %
14.9 %
(0.1)%
0.4 %
10.1 %
20.1 %
3.9 %
(0.2)%
6.2 %
10.2 %
23.0 %
10.0 %
(0.2)%
3.0 %
10.2 %
8.3 %
8.8 %
— %
(0.3)%
(0.2)%
5.6 %
2.9 %
— %
(1.6)%
4.3 %
7.1 %
6.1 %
— %
(0.9)%
1.9 %
The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in
accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions and divestitures
made within the prior four fiscal quarters as well as the effects of currency exchange rates (a non-GAAP measure). The effects
of acquisitions, divestitures and currency exchange rates are removed to allow investors and the Company to meaningfully
evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in 2018 for the Diversified Industrial North American operations increased 25.3 percent from 2017 as compared to
increasing 8.3 percent from 2016 to 2017. Acquisitions completed during 2017 contributed approximately $798 million in
incremental sales in 2018, and the effect of currency exchange rates increased sales in 2018 by $20 million. Excluding
acquisitions, divestitures and the effect of currency rate changes, sales in 2018 for the Diversified Industrial North American
operations increased 10.1 percent from prior-year levels reflecting higher demand from distributors and end users in the
construction equipment, cars and light trucks, heavy-duty truck, oil and gas, and general industrial machinery markets.
Excluding acquisitions and the effect of currency rate changes, sales in 2017 for the Diversified Industrial North American
operations remained flat from 2016 levels reflecting higher demand from distributors offset by lower demand from end users in
the heavy-duty truck, cars and light trucks, life sciences, and oil and gas markets.
Sales in the Diversified Industrial International operations increased 20.1 percent in 2018 as compared to increasing 5.6 percent
from 2016 to 2017. Acquisitions completed in 2017 contributed approximately $173 million in incremental sales in 2018. The
effect of currency rate changes increased sales by $270 million, reflecting the weakening of the U.S. dollar primarily against
currencies in the Eurozone countries, China and the United Kingdom. Excluding acquisitions, divestitures and the effect of
currency rate changes, sales in 2018 for the Diversified Industrial International operations increased 10.2 percent from 2017
levels due to higher volume in all regions. The Asia Pacific region contributed approximately 50 percent of the increase in sales
due to higher demand from distributors as well as end users in the construction equipment, semiconductor and engine markets,
partially offset by lower end-user demand in the telecommunications and marine markets. Europe contributed approximately
40 percent of the increase in sales due to higher demand from distributors and end users in the construction equipment, mining,
heavy-duty truck and engine markets, partially offset by lower end-user demand in the power generation market. Within Latin
America, higher demand from distributors and end users in the construction equipment and heavy-duty truck markets
contributed to the increase in sales.
21
Excluding acquisitions and the effect of currency rate changes, sales in 2017 in the Diversified Industrial International
operations increased 4.3 percent from 2016, primarily due to higher volume in the Asia Pacific region and Latin America,
partially offset by lower volume in Europe. Within the Asia Pacific region, higher demand was experienced from distributors
as well as end users in the semiconductor, cars and light trucks, telecommunications, construction equipment and engine
markets. Within Latin America, higher demand was experienced from distributors and end-user demand in the agriculture
equipment market. Within Europe, higher demand from distributors and end-user demand in the construction equipment,
forestry, and miscellaneous manufacturing markets was more than offset by lower end-user demand in the general industrial
machinery, oil and gas, and marine markets.
The lower operating margins in 2018 in the Diversified Industrial North American operations were primarily due to an
unfavorable product mix, unfavorable raw material prices, higher amortization expense and inefficiencies created by
manufacturing facility consolidations, partially offset by the impact of higher sales volume and lower operating expenses
resulting from prior-year restructuring activities and the Company's simplification initiative. The increase in operating margins
in 2018 for the Diversified Industrial International operations was primarily due to higher sales volume and lower operating
expenses resulting from restructuring activities and the Company's simplification initiative, partially offset by higher
amortization expense, inefficiencies created by manufacturing facility consolidations and an unfavorable product mix.
The increase in operating margins in 2017 in the Diversified Industrial North American operations was primarily due to lower
operating expenses resulting from the Company's simplification initiative and other restructuring activities, resulting in
manufacturing efficiencies, partially offset by higher acquisition-related expenses and higher amortization expense. The
increase in operating margins in 2017 in the Diversified Industrial International operations was primarily due to the higher sales
volume, lower operating expenses resulting from restructuring activities and the Company's simplification initiative, resulting
in manufacturing efficiencies.
The following business realignment charges and acquisition integration costs are included in Diversified Industrial North
America and Diversified Industrial International operating income:
(dollars in millions)
Diversified Industrial North America
Diversified Industrial International
2018
2017
2016
$
$
37
41
$
20
33
31
60
The business realignment charges consist primarily of severance and plant closure costs related to actions taken under the
Company's simplification initiative aimed at reducing organizational and process complexity, which is being implemented by
its operating units throughout the world. The majority of the Diversified Industrial International business realignment charges
were incurred in Europe. In addition to the business realignment charges presented in the table above, the Company recognized
$12 million of expense associated with enhanced retirement benefits in connection with a plant closure during 2016. The
Company anticipates that cost savings realized from the work force reduction measures taken during 2018 will increase 2019
operating income by approximately three percent in both the Diversified Industrial North American and Diversified Industrial
International operations. In 2019, the Company expects to continue to take actions necessary to structure appropriately the
operations of the Diversified Industrial Segment, including the continued integration of 2017 acquisitions. Such actions are
expected to result in approximately $35 million in charges in 2019.
The Company anticipates Diversified Industrial North American sales for 2019 will increase between 2.6 and 5.6 percent from
the 2018 level and Diversified Industrial International sales for 2019 will range between a 2.5 percent decrease and 0.5 percent
increase from the 2018 level. Diversified Industrial North American operating margins in 2019 are expected to range from 16.4
to 17.2 percent and Diversified Industrial International margins are expected to range from 15.3 to 15.7 percent.
The increase in total Diversified Industrial Segment backlog in 2018 was primarily due to orders exceeding shipments in the
Asia Pacific region and North America, with the Asia Pacific region accounting for approximately 60 percent of the increase
and North America accounting for approximately 40 percent of the increase. The increase in total Diversified Industrial
Segment backlog in 2017 was primarily due to recent acquisitions as well as orders exceeding shipments in all regions, with
North America and Europe each accounting for approximately 40 percent of the increase. 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.
22
Diversified Industrial Segment assets in 2018 remained flat as compared to the 2017 balance. At June 30, 2018, increases in
cash and cash equivalents and trade accounts receivable were offset by a decrease in intangible assets. The increase in total
Diversified Industrial Segment assets in 2017 was primarily due to acquisitions, partially offset by the effect of currency rate
fluctuations.
Aerospace Systems Segment
(dollars in millions)
Sales
Operating income
Operating income as a percent of sales
Backlog
Assets
Return on average assets
$
$
2018
2017
2016
2,316
$
2,285
$
398
17.2%
1,954
1,447
27.8%
$
337
14.8%
1,753
1,413
23.7%
$
2,260
338
14.9%
1,762
1,431
24.1%
Sales in 2018 were higher than the 2017 level primarily due to higher volume in the commercial and military aftermarket
businesses, partially offset by lower volume in the commercial and military original equipment manufacturer (OEM)
businesses. Sales in 2017 were higher than the 2016 level primarily due to higher volume in the military OEM and commercial
and military aftermarket businesses, partially offset by lower volume in the commercial OEM business.
The higher margin in 2018 was primarily due to a favorable product mix resulting from higher aftermarket volume and
profitability and lower engineering development and operating expenses, partially offset by unfavorable contract settlements
and higher product support costs. The slightly lower margin in 2017 was primarily due to an unfavorable OEM product mix,
higher warranty-related costs, higher favorable contract settlements in 2016 and higher business realignment expenses, partially
offset by higher aftermarket profitability and lower engineering development and operating expenses.
The increase in backlog in 2018 was primarily due to orders exceeding shipments in the commercial and military OEM
businesses and the commercial and military aftermarket businesses. The decrease in backlog in 2017 was primarily due to
shipments exceeding orders in the commercial and military OEM businesses, partially offset by orders exceeding shipments in
the commercial and military aftermarket businesses. 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 2019, sales are expected to increase between 2.5 and 4.5 percent from the 2018 level and operating margins are expected to
range from 17.2 to 17.6 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.
The increase in assets in 2018 was primarily due to increases in trade accounts receivable and other receivables, partially offset
by a decrease in other assets. The decrease in assets in 2017 was primarily due to a decrease in trade accounts receivable,
intangible assets and other assets, partially offset by an increase in cash and cash equivalents and inventory.
Corporate general and administrative expenses were $200.9 million in 2018 compared to $172.6 million in 2017 and $173.2
million in 2016. As a percent of sales, corporate general and administrative expenses in both 2018 and 2017 were 1.4 percent
compared to 1.5 percent in 2016. The higher expense in 2018 was primarily due to higher expenses associated with the
Company's incentive compensation programs. The lower expense in 2017 was primarily due to lower expenses associated with
the Company's deferred compensation program as well as lower professional services fees.
Corporate assets decreased 28.9 percent in 2018 compared to a decrease of 62.1 percent from 2016 to 2017. The decrease in
Corporate assets in 2018 was primarily due to a decrease in cash and cash equivalents, partially offset by an increase in non-
current deferred taxes. The decrease in Corporate assets in 2017 was primarily due to decreases in cash and cash equivalents,
marketable securities and non-current deferred taxes. Decreases in these assets in 2017 primarily resulted from the Clarcor
acquisition.
23
Other expense (in the Business Segment Information)
(dollars in millions)
Expense (income)
Foreign currency transaction
Stock-based compensation
Pensions
Divestitures and asset sales and writedowns
Sale and writedown of investments
Interest income
Acquisition expenses
Other items, net
2018
2017
2016
$
$
7
51
26
(4)
41
(15)
5
11
$
8
52
78
(43)
—
(12)
41
3
$
122
$
127
$
23
49
116
(11)
—
(18)
—
(8)
151
Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities
and other investments and intercompany transactions. The lower pension expense in 2018 is primarily due to a lower level of
amortization of past actuarial losses. The lower pension expense in 2017 is primarily due to a change in methodology to use of
the spot yield curve approach to estimate the interest cost component of net periodic pension cost instead of the single-weighted
average discount rate. Divestitures and asset sales and writedowns in 2018 includes a net gain on the sale of assets, partially
offset by a loss on the sale of the global Facet filtration business. Divestitures and asset sales and writedowns in 2017 includes
a gain on the sale of the Company's Autoline product line. Acquisition expenses in 2017 primarily relate to Clarcor (see Note 2
to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion).
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
Shareholders' equity
Working capital
Current ratio
$
$
2018
2017
$
$
855
2,146
1,621
5,860
1,888
1.6
924
1,931
1,549
5,262
1,384
1.4
Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $836 million and
$874 million held by the Company's foreign subsidiaries at June 30, 2018 and 2017, respectively. As a result of the TCJ Act,
the prior worldwide tax system was replaced by a territorial tax system, which generally allows companies to repatriate future
foreign source earnings without incurring additional U.S. federal taxes. However, other U.S. or foreign taxes may be incurred
should cash be distributed between the Company's subsidiaries. The Company has determined it will no longer permanently
reinvest certain foreign earnings. All other undistributed foreign earnings remain permanently reinvested. Refer to Note 4 to
the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to
trade receivables for the Company was 51 days in both 2018 and 2017. The Company believes that its receivables are
collectible and appropriate allowances for doubtful accounts have been recorded.
Inventories increased $72 million from 2017 primarily due to a $107 million increase in inventories in the Diversified
Industrial Segment, partially offset by a decrease of $20 million related to a sale of a business and a decrease of $10 million in
the Aerospace Systems Segment. Days supply of inventory on hand was 64 days in 2018 and 67 days in 2017.
24
Shareholders' equity activity during 2018 included a decrease of $300 million related to share repurchases, an increase of
$179 million related to pensions and postretirement benefits resulting from net actuarial gains and amortizations and a decrease
of $18 million related to foreign currency translation adjustments.
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)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates
Net (decrease) increase in cash and cash equivalents
2018
2017
2016
$
$
1,600
$
20
(1,682)
(1)
(63) $
$
1,302
(3,365)
1,783
(57)
(337) $
1,211
(265)
(843)
(62)
41
Cash flows from operating activities in 2018 reflects an increase in net income from 2017 of $77 million and a reduction of
$251 million for cash used by working capital items. Cash flows from operating activities in 2017 reflects an increase in net
income from 2016 of $177 million and a reduction of $28 million for cash used by working capital items. Cash flows from
operating activities in 2016 reflects an increase of $120 million for cash provided by working capital items. The Company also
made discretionary cash contributions to the Company's domestic qualified defined benefit plan of $220 million in 2017 and
$200 million in 2016.
Cash flows from investing activities in 2018 benefited from proceeds related to the sale of the global Facet filtration business,
and sale of plant and equipment. Cash flows from investing activity in 2017 includes $4,069 million related to acquisition
activities, primarily for the Clarcor acquisition. Cash flows from investing activities in 2018, 2017, and 2016 also includes $3
million, $814 million, and $(51) million, respectively, in net maturities (purchases) of marketable securities and other
investments.
Cash flows from financing activities during 2018 included the repayment of long-term debt of approximately $945 million.
Cash flows from financing activities during 2017 included the issuance of approximately $2,646 million of notional borrowings
of long-term debt as well as the repayment of long-term debt of approximately $381 million, which includes debt assumed in
the Clarcor acquisition. The Company repurchased 1.7 million common shares for $300 million during 2018 as compared to the
repurchase of 2.0 million common shares for $265 million in 2017 and 5.1 million common shares for $558 million in 2016.
Dividends have been paid for 272 consecutive quarters, including a yearly increase in dividends for the last 62 years. The
current annual dividend rate is $3.04 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. In periods following significant capital deployment, including for share repurchases or acquisitions, certain of
the ratings assigned to the Company's senior debt may be, and at June 30, 2018 and 2017 were, lower than the stated goal. The
Company's ability to borrow funds at desirable tenors and interest rates in 2018 and 2017 was not significantly impacted by
certain ratings on senior debt that were below an "A" level. The Company does not believe that its ability to borrow funds in
the future at desirable tenors and affordable interest rates will be impacted if certain of its ratings are below an "A" level at the
time of such borrowings. At June 30, 2018, the long-term credit ratings assigned to the Company's senior debt securities by the
credit rating agencies engaged by the Company were as follows:
Fitch Ratings
Moody's Investor Services, Inc.
Standard & Poor's
A-
Baa1
A
25
As of June 30, 2018, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit
agreement with a group of banks, of which $1,466 million was available at June 30, 2018. Refer to Note 8 to the Consolidated
Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
The Company is currently authorized to sell up to $2,000 million of short-term commercial paper notes. There were $534
million outstanding commercial paper notes as of June 30, 2018, and the largest amount of commercial paper notes outstanding
during the last quarter of 2018 was $736 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.
Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions
was $175 million at June 30, 2018. 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 in Part II, Item 8 of this Annual Report on Form 10-K.
(dollars in millions)
Contractual obligations
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Transition tax payments related to TCJ Act (Note 4)
$
255
$
20
$
Long-term debt (Note 9)
Interest on long-term debt
Operating leases (Note 9)
Retirement benefits (Note 10)
Total
4,460
2,375
226
124
100
152
79
76
41
—
303
92
12
$
41
$
417
279
27
11
153
3,943
1,641
28
25
$
7,440
$
427
$
448
$
775
$
5,790
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements.
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 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.
26
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 2018 annual goodwill impairment test performed as of December 31, 2017 indicated that no
goodwill impairment existed. However, certain reporting units within the Diversified Industrial Segment had estimated fair
values that the Company determined, from a quantitative and qualitative perspective, were not significantly in excess of their
carrying values. For these reporting units, the sales growth assumptions had the most significant influence on the estimation of
fair value. The key uncertainties in these sales growth assumptions include end-market growth, the ability to secure business
with new customers and new product development. 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, 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 2018, 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.
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. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of
net periodic pension and other postretirement benefit costs from the single-weighted average discount rate to spot yield curve
approach. The change does not affect the measurement of the Company's benefit obligations. The new method provides a
more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the
discrete spot yield curve rates and was accounted for as a change in estimate prospectively beginning in the first quarter of
2017. Annual net periodic pension expense in 2017 was lower by approximately $30 million compared to the previous method.
Annual net periodic postretirement cost was not materially different.
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 a $14 million effect on annual pension expense and a 50 basis point decrease in the discount
rate is estimated to increase annual pension expense by $17 million. As of June 30, 2018, $841 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 seven years and will negatively affect earnings in the future.
Actuarial gains experienced in future years will help reduce the effect of the net actuarial loss amortization. Further
information on pensions is provided in Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K.
27
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.
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of
1986, as amended, by among other things, lowering the U.S. corporate income tax rate and creating a territorial tax system
(with a one time transition tax imposed on previously unremitted foreign earnings and profits). The Securities and Exchange
Commission staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects
of the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year of the TCJ Act’s enactment
date, to complete the applicable accounting of the related tax impacts of the TCJ Act. The final impact of the TCJ Act may
differ from the provisional amounts recorded in the current period, due to, among other things, any updates to estimates that
have been utilized in the calculation of the tax impacts, changes in interpretation of the existing law, or additional guidance
from U. S. Treasury department or the Internal Revenue Service.
Further information on income taxes is provided in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K.
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
Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part
II, Item 8 of this Annual Report on Form 10-K.
ITEM 7A. 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 Part II, Item 8 of this Annual
Report on Form 10-K. 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, 2018 by approximately $7 million.
28
ITEM 8. Financial Statements and Supplementary Data.
Financial Statements
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Business Segment Information
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Equity
Notes to Consolidated Financial Statements
Page Number
in Form 10-K
32
33
34
36
37
38
39
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Parker-Hannifin Corporation
Cleveland, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Parker-Hannifin Corporation and subsidiaries (the
"Company") as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and
cash flows, for each of the three years in the period ended June 30, 2018, and the related notes and the schedule listed in the
Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company's internal control
over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2018, 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by
COSO.
Basis for Opinions
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
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
fraud or error, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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.
30
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness 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.
/S/ DELOITTE & TOUCHE, LLP
Cleveland, Ohio
August 24, 2018
We have served as the Company's auditor since 2008.
31
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
Net Sales
Cost of sales
Selling, general and administrative expenses
Interest expense
Other (income), net
(Gain) on disposal of assets (Note 2)
Income before income taxes
Income taxes (Note 4)
Net Income
Less: Noncontrolling interest in subsidiaries' earnings
Net Income Attributable to Common Shareholders
For the years ended June 30,
2018
2017
2016
$ 14,302,392
$ 12,029,312
$ 11,360,753
10,762,841
1,657,152
213,873
(29,268)
(4,483)
1,702,277
640,962
1,061,315
514
9,188,962
1,453,935
162,436
(61,401)
(43,261)
1,328,641
344,797
983,844
432
8,823,384
1,359,360
136,517
(62,199)
(11,037)
1,114,728
307,512
807,216
376
$
1,060,801
$
983,412
$
806,840
Earnings per Share Attributable to Common Shareholders (Note 5)
Basic earnings per share
Diluted earnings per share
$
$
7.98
7.83
$
$
7.37
7.25
$
$
5.96
5.89
The accompanying notes are an integral part of the consolidated financial statements.
32
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net Income
Less: Noncontrolling interests in subsidiaries' earnings
Net income attributable to common shareholders
For the years ended June 30,
2018
2017
2016
$
1,061,315
$
983,844
$
807,216
514
1,060,801
432
983,412
376
806,840
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment and other (net of tax of
$16,964, $40,935 and $(2,342) in 2018, 2017 and 2016)
Retirement benefits plan activity (net of tax of $(82,506), $(218,590)
and $152,203 in 2018, 2017 and 2016)
Other comprehensive income (loss)
Less: Other comprehensive income (loss) for noncontrolling interests
Other comprehensive income (loss) attributable to common
shareholders
Total Comprehensive Income Attributable to Common
Shareholders
(18,575)
(80,865)
(203,299)
179,253
160,678
(440)
161,118
384,784
303,919
358
303,561
(286,044)
(489,343)
(196)
(489,147)
$
1,221,919
$
1,286,973
$
317,693
The accompanying notes are an integral part of the consolidated financial statements.
33
BUSINESS SEGMENT INFORMATION
(Dollars in thousands)
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 expense
Interest expense
Other expense
Income before income taxes
Assets:
Diversified Industrial
Aerospace Systems (a)
Corporate
Property Additions:
Diversified Industrial
Aerospace Systems
Corporate
Depreciation:
Diversified Industrial
Aerospace Systems
Corporate
2018
2017
2016
6,726,900
$
5,366,809
$
5,259,793
2,315,699
4,377,776
2,284,727
4,955,211
4,145,272
2,260,270
14,302,392
$
12,029,312
$
11,360,753
1,076,021
$
873,552
$
765,188
397,970
2,239,179
200,901
2,038,278
213,873
122,128
579,207
337,496
1,790,255
172,632
1,617,623
162,436
126,546
789,667
448,457
337,531
1,575,655
173,203
1,402,452
136,517
151,207
1,702,277
$
1,328,641
$
1,114,728
13,368,619
$
13,366,981
$
1,446,745
504,723
1,412,707
710,216
8,728,671
1,430,577
1,874,894
15,320,087
$
15,489,904
$
12,034,142
196,469
$
148,765
$
15,225
35,973
16,929
38,054
247,667
$
203,748
$
211,648
$
176,823
$
16,737
9,421
17,484
8,561
237,806
$
202,868
$
134,618
10,857
3,932
149,407
163,014
18,469
8,825
190,308
$
$
$
$
$
$
$
$
$
$
34
(Dollars in thousands)
By Geographic Area (b)
Net Sales:
North America
International
Long-Lived Assets:
North America
International
2018
2017
2016
$
$
$
$
8,978,490
$
7,585,689
$
7,144,481
5,323,902
4,443,623
4,216,272
14,302,392
$
12,029,312
$
11,360,753
1,103,308
$
1,145,127
$
752,929
792,165
817,872
750,228
1,856,237
$
1,937,292
$
1,568,100
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.
(a)
(b)
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 (2018 - $235,665; 2017 - $240,182; 2016 - $241,728).
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.
35
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
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
Total Current Assets
Plant and equipment (Note 1)
Less: Accumulated depreciation
Plant and equipment, net
Deferred income taxes (Notes 1 and 4)
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 2018 and 2017
Additional capital
Retained earnings
Accumulated other comprehensive (loss)
Treasury shares at cost: 48,632,105 in 2018 and 47,854,475 in 2017
Total Shareholders' Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
2018
2017
$
822,137
$
32,995
2,145,517
328,399
1,621,304
134,886
5,085,238
5,215,253
3,359,016
1,856,237
57,623
801,049
884,886
39,318
1,930,751
254,987
1,549,494
120,282
4,779,718
5,186,748
3,249,456
1,937,292
36,057
842,475
$
$
2,015,520
5,504,420
15,320,087
$
2,307,484
5,586,878
15,489,904
638,466
$
1,430,306
427,500
198,878
502,333
3,197,483
4,318,559
1,177,605
234,858
526,089
9,454,594
—
90,523
496,592
11,625,975
(1,763,086)
(4,590,138)
5,859,866
5,627
5,865,493
1,008,465
1,300,496
435,911
153,137
497,851
3,395,860
4,861,895
1,406,082
221,790
336,931
10,222,558
—
90,523
543,879
10,930,348
(1,924,204)
(4,378,897)
5,261,649
5,697
5,267,346
$
15,320,087
$
15,489,904
The accompanying notes are an integral part of the consolidated financial statements.
36
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
For the years ended June 30,
2018
2017
2016
$
1,061,315
$
983,844
$
807,216
Depreciation
Amortization
Stock incentive plan compensation
Deferred income taxes
Foreign currency transaction loss
(Gain) loss on sale of plant and equipment
Loss (gain) on sale of businesses
Loss on sale and impairment of investments
(Gain) 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
Net cash provided by operating activities
Cash Flows From Investing Activities
Acquisitions (less cash acquired of $157,426 in 2017 and $3,814 in 2016)
Capital expenditures
Proceeds from sale of plant and equipment
Proceeds from sale of businesses
Purchase of marketable securities and other investments
Maturities and sales of marketable securities and other investments
Other
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities
Proceeds from exercise of stock options
Payments for common shares
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
237,806
228,279
118,831
(41,412)
7,284
(24,422)
19,666
41,219
(2)
(301,978)
(92,209)
(16,206)
(13,293)
125,907
(4,614)
44,019
(5,567)
31,239
184,425
1,600,287
—
(247,667)
81,881
177,741
(80,607)
83,905
4,837
20,090
3,682
(381,041)
4,115
1,189
(944,629)
(365,288)
(1,681,972)
(1,154)
(62,749)
884,886
202,868
152,361
80,339
37,024
8,060
1,494
(41,285)
—
(1,032)
(95,347)
(73,673)
2,410
(3,887)
174,761
5,922
18,165
(59,738)
(103,866)
14,051
1,302,471
(4,069,197)
(203,748)
14,648
85,610
(465,666)
1,279,318
(6,113)
(3,365,148)
2,202
(338,078)
230,499
2,614,463
(381,078)
(345,380)
1,782,628
(56,718)
(336,767)
1,221,653
822,137
$
884,886
$
190,308
116,535
71,293
(65,686)
22,750
414
(10,666)
—
(723)
17,549
120,243
136,034
(5,033)
(52,378)
(22,865)
(6,285)
(31,633)
(45,796)
(30,499)
1,210,778
(67,552)
(149,407)
18,821
24,325
(1,351,464)
1,300,633
(39,995)
(264,639)
126
(587,365)
303,624
2,287
(220,068)
(341,962)
(843,358)
(61,712)
41,069
1,180,584
1,221,653
200,860
408,765
$
$
131,937
268,127
133,999
250,155
$
$
The accompanying notes are an integral part of the consolidated financial statements.
37
CONSOLIDATED STATEMENT OF EQUITY
(Dollars in thousands)
Balance June 30, 2015
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Shares purchased at cost
Balance June 30, 2016
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
Balance June 30, 2017
Net income
Other comprehensive income (loss)
Dividends paid
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
Balance June 30, 2018
Common
Stock
Additional
Capital
Retained
Earnings
Accumulated Other
Comprehensive
(Loss)
Treasury
Shares
Noncontrolling
Interests
Total
$
90,523
$
622,729
$
9,841,885
$
(1,738,618) $ (3,712,232) $
3,282
$
5,107,569
806,840
(341,923)
(3,936)
5,722
(489,147)
50,916
(557,504)
376
(196)
(39)
807,216
(489,343)
(341,962)
52,702
(557,504)
$
90,523
$
628,451
$ 10,302,866
$
(2,227,765) $ (4,218,820) $
3,423
$
4,578,678
983,412
(345,042)
(10,888)
(84,572)
303,561
432
358
(338)
1,822
983,844
303,919
(345,380)
9,155
1,822
(264,692)
104,615
(264,692)
$
90,523
$
543,879
$ 10,930,348
$
(1,924,204) $ (4,378,897) $
5,697
$
5,267,346
1,060,801
(365,174)
161,118
(47,287)
514
(440)
(114)
(30)
1,061,315
160,678
(365,288)
41,472
(30)
(300,000)
88,759
(300,000)
$
90,523
$
496,592
$ 11,625,975
$
(1,763,086) $ (4,590,138) $
5,627
$
5,865,493
The accompanying notes are an integral part of the consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The term "year" and references to specific years refer to the applicable fiscal years.
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 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.
There are no individual customers to whom sales are more than three 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 consolidated 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.
39
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 $9,672 and $14,336 at June 30, 2018 and 2017, 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
Accounts receivable, other
Total
2018
149,254
179,145
328,399
$
$
2017
118,351
136,636
254,987
$
$
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 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.
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
2018
2017
$
289,686
$
321,331
1,578,701
3,218,639
128,227
1,575,464
3,167,885
122,068
$
5,215,253
$
5,186,748
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 $304,389 and $341,869 at June 30, 2018 and 2017, respectively. A significant portion of the underlying net
assets of the joint ventures are related to goodwill. The Company's share of earnings from investments in joint-venture
companies were $50,473, $42,352 and $25,650 in 2018, 2017 and 2016, respectively.
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.
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.
Income Taxes - Income taxes are provided based upon income for financial reporting 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. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax
purposes.
40
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. Exchange losses (gains) from transactions in a currency other than the local currency of the entity
involved are included within the cost of sales caption in the Consolidated Statement of Income and were $7,284, $8,060 and
$22,750, in 2018, 2017 and 2016, respectively.
Subsequent Events - The Company has evaluated subsequent events that have occurred through the date of filing of
this Annual Report on Form 10-K for the year ended June 30, 2018. No subsequent events occurred that required adjustment to
or disclosure in these financial statements.
Recent Accounting Pronouncements - In February 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the TCJ Act reduction of the U.S. federal corporate income tax rate.
The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any period after the
issuance of the update. The amendments in this update should be applied either in the period of adoption or retrospectively to
each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act is recognized. The
Company has not yet determined the effect that ASU 2018-02 will have on its financial statements.
In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." ASU
2017-12 provides targeted improvements to Topic 815 accounting for hedging activities by expanding an entity’s ability to
hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The
guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire
change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The
guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded
from the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018. Early application is permitted in any interim period after issuance of the update. ASU
2017-12 should be applied using a modified retrospective approach for cash flow and net investment hedge relationships that
exist on the date of adoption and prospectively for presentation and disclosure requirements. The Company has not yet
determined the effect that ASU 2017-12 will have on its financial statements.
In May 2017, the FASB issued ASU 2017-09, "Scope of Modification Accounting." ASU 2017-09 provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in
Topic 718. An entity should account for the effects of a modification unless all of the following are met: (1) the fair value of
the modified award is the same as fair value of the original award; (2) the vesting conditions of the modified award are the
same as the vesting conditions of the original award immediately before the original award is modified; and (3) the
classification of the award as an equity instrument or a liability instrument is the same as the classification of the original award
immediately before the original award is modified. ASU 2017-09 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 should be applied prospectively to an
award modified on or after the adoption date. During the first quarter of fiscal 2018, the Company adopted ASU 2017-09. The
adoption of ASU 2017-09 did not affect the Company's financial statements as there were no modifications of any share-based
awards during 2018.
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item
or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other
components of net benefit cost are required to be presented in the income statement separately from the service cost component
and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost
component is eligible for capitalization, when applicable. ASU 2017-07 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2017. ASU 2017-07 should be applied retrospectively for the income statement
presentation of net periodic pension cost and net periodic postretirement benefit cost and prospectively, on or after the effective
date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit
cost. The Company expects that adoption of this standard will result in a reclassification of expense from cost of sales and
selling, general and administrative expenses to other (income) of approximately $25 million and $17 million, respectively, for
2018 and $70 million and $41 million, respectively, for 2017.
41
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates
Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. During the first quarter of
2018, the Company adopted ASU 2017-04. The adoption of ASU 2017-04 did not affect the Company's financial statements as
there were no instances of a reporting unit's carrying value exceeding its fair value for any goodwill impairment tests performed
during 2018.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16
provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory
when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of
an asset other than inventory. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after
December 31, 2017. Early adoption is permitted. The Company expects that the cumulative effect of the adoption of ASU
2016-16 will result in a reduction to retained earnings of approximately $18 million.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15
provides specific guidance on several cash flow classification issues to reduce diversity in practice in how certain transactions
are classified within the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. After consideration of the current level of transactions within the scope of ASU
2016-15, the Company does not expect that the retrospective adoption of this standard at the beginning of the first quarter of
2019 will have a material impact on its financial statements.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13
requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected
to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the
financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses
relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is
permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases with terms
greater than 12 months on their balance sheet by recognizing a liability to make lease payments and an asset representing their
right to use the asset during the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an
accounting policy election, by class of underlying asset, not to recognize the corresponding assets and lease liabilities. Lessee
recognition, measurement, and presentation of expenses and cash flows will not change significantly from existing guidance
and lessor accounting is largely unchanged. ASU 2016-02 also changes the definition of a lease and requires qualitative, and
quantitative disclosures that provide information about the amount, timing, and uncertainty of cash flows arising from
leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018. Early adoption is permitted. Adoption of this ASU is planned for the beginning of the first quarter of 2020. The
Company has not yet determined the effect that ASU 2016-02 will have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Liabilities." ASU
2016-01 requires equity investments (excluding equity method investments and investments that are consolidated) to be
measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily
determinable fair value may be measured at cost, adjusted for impairment and observable price changes. ASU 2016-01 also
simplifies the impairment assessment of equity investments, eliminates the disclosure of the assumptions used to estimate the
fair value that is required to be disclosed for financial instruments measured at cost on the balance sheet and requires the exit
price to be used when measuring fair value of financial instruments for disclosure purposes. Under ASU 2016-01, changes in
fair value (resulting from instrument-specific credit risk) will be presented separately in other comprehensive income for
liabilities measured using the fair value option. Financial assets and liabilities will be presented separately by measurement
category and type, either on the balance sheet or in the financial statement disclosures. ASU 2016-01 is effective for fiscal
years beginning after December 15, 2017 and interim periods within those fiscal years. The Company does not expect that the
retrospective adoption of ASU 2016-01 at the beginning of the first quarter of 2019 will have a material impact on its financial
statements.
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
42
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. In April 2016, the FASB issued ASU
2016-10, "Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies the following two aspects of ASU
2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is
the same as the effective date of ASU 2014-09. The Company has elected to adopt ASU 2014-09 using the modified
retrospective method. The Company does not expect that the cumulative effect of the adoption of ASU 2014-09 at the
beginning of the first quarter of 2019 will have a material impact on retained earnings. We expect to provide the required
additional disclosures in periods subsequent to the adoption.
2.
Acquisitions and Divestitures
Acquisitions - During 2017, the Company completed three acquisitions, including Clarcor, whose aggregate sales for their
most recent fiscal year prior to acquisition were approximately $1,522 million. Total purchase price for the three acquisitions
was approximately $4,227 million in cash and $316 million in assumed debt.
During 2016, the Company completed two acquisitions whose aggregate sales for their most recent fiscal year prior to
acquisition were approximately $48 million. Total purchase price for the two acquisitions was approximately $71 million in
cash and $2 million in assumed debt.
The results of operations for all acquisitions were included as of the respective dates of acquisition. Assets acquired and
liabilities assumed were recognized at their respective fair values as of the acquisition date. The process of estimating the fair
values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in
determining the appropriate assumptions and estimates. Revisions occur as valuations are finalized, additional information
becomes available and as additional analysis is performed. All measurement period adjustments were completed within a year
from the acquisition date, and such adjustments did not have a material impact on the Company's results of operations and
financial position. The initial purchase price allocation for acquisitions in 2017 and 2016 are as follows:
Assets:
Accounts receivable
Inventories
Prepaid expenses
Deferred income taxes
Plant and equipment
Intangible and other assets
Goodwill
Liabilities:
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
Net assets acquired
43
2017
2016
$
263,616
$
302,422
18,342
4,658
376,826
1,526,909
2,677,489
5,170,262
20,162
84,753
45,942
5,435
80,515
296,240
33,929
520,389
11,878
1,822
6,793
12,041
1,350
—
5,647
26,849
31,134
83,814
720
2,536
1,310
604
1,804
1,743
—
7,545
—
—
1,101,065
$
4,069,197
$
16,262
67,552
Goodwill is calculated as the excess of the purchase price over the net assets acquired, primarily all of which is not deductible
for tax purposes. With respect to the Clarcor acquisition, goodwill represents cost synergies and enhancements to the
Company's existing filtration technologies.
The remaining disclosures in Note 2 pertain only to the Clarcor acquisition as the other two acquisitions completed during 2017
were immaterial.
Clarcor is a major manufacturer of filtration products under more than a dozen respected brands, including CLARCOR,
Baldwin, Fuel Manager, PECOFacet, Airguard, Altair, BHA, Clearcurrent, Clark Filter, Hastings, United Air Specialists,
Keddeg and Purolator. Clarcor had annual sales of approximately $1,400 million for its fiscal 2016. For segment reporting
purposes, Clarcor is part of the Diversified Industrial Segment.
The Company believes that Clarcor is a highly complementary acquisition that provides the Company with additional
proprietary media, industrial and process filtration products and technologies, as well as a broad portfolio of replacement
filters. The acquisition of Clarcor also offers significant expected operating synergies.
The Company's results of operations for 2017 include Clarcor's results of operations from the date of acquisition, February 28,
2017, through June 30, 2017. Net sales and segment operating (loss) attributable to Clarcor during this period was $487,388
and $(16,164), respectively.
The following unaudited pro forma information gives effect to the Company's acquisition of Clarcor as if the acquisition had
occurred on July 1, 2015, and Clarcor had been included in the Company's results of operations for 2017 and 2016.
Net sales
Net income attributable to common shareholders
Diluted earnings per share
$
2017
12,935,834
1,027,693
7.58
$
2016
12,772,097
748,634
5.47
The unaudited pro forma financial information in the table above includes adjustments related to amortization expense,
depreciation, interest expense and transaction costs incurred as well as adjustments to cost of sales for the step-up in inventory
to estimated acquisition-date fair value and related income tax effects and was based on a preliminary purchase price allocation
using information available at that time. Transaction costs incurred (which are reflected in the selling, general and
administrative expenses caption in the Consolidated Statement of Income) and the adjustment to cost of sales for the step-up in
inventory to estimated acquisition-date fair value are considered to be non-recurring. Adjustments for non-recurring items
increased pro forma net income attributable to common shareholders by $108,078 for 2017 and decreased pro forma net
income attributable to common shareholders by $39,121 for 2016. The unaudited pro forma financial information does not
give effect to any synergies, operating efficiencies or cost savings that may result or have resulted from the Clarcor acquisition.
Divestitures - During 2018, the Company divested its global Facet filtration business, which was part of the Diversified
Industrial Segment. The operating results and net assets of the global Facet filtration business were immaterial to the
Company's consolidated results of operations and financial position. The Company recorded a pre-tax loss in 2018 of
approximately $20 million and tax expense of approximately $29 million resulting from a tax gain related to the divestiture.
The pre-tax loss is reflected in the (gain) on disposal of assets caption in the Consolidated Statement of Income and the other
expense caption in the Business Segment Information.
During 2017, the Company divested its Autoline product line, which was part of the Diversified Industrial Segment. The
operating results and net assets of the Autoline product line were immaterial to the Company's consolidated results of
operations and financial position. The Company recorded a net pre-tax gain in 2017 of approximately $45 million related to
the divestiture. The gain is reflected in the (gain) on disposal of assets caption in the Consolidated Statement of Income and the
other expense caption in the Business Segment Information.
44
3.
Charges Related to Business Realignment
The Company incurred business realignment charges in 2018, 2017 and 2016. The Company also incurred acquisition
integration costs in 2018 and 2017 related to the 2017 acquisition of Clarcor.
Business realignment charges and acquisition integration costs presented in the Business Segment Information are as follows:
Diversified Industrial
Aerospace Systems
Corporate administration
Other expense
2018
$
78,558
$
3,428
—
1,009
$
2017
52,939
2,674
—
784
2016
91,404
3,629
2,215
116
Work force reductions in connection with such business realignment charges and acquisition integration costs in the Business
Segment Information are as follows:
Diversified Industrial
Aerospace Systems
Corporate administration
2018
1,757
265
—
2017
1,102
89
—
2016
3,515
81
53
The business realignment charges primarily relate to actions taken under the Company's simplification initiative aimed at
reducing organizational and process complexity. Business realignment charges and acquisition integration costs primarily
consist of severance costs as well as plant closures, with the majority of charges incurred in Europe and North America. In
connection with a plant closure during 2016, the Company recognized an expense associated with enhanced retirement benefits
(refer to Note 10 for further discussion). The Company believes the realignment and acquisition integration actions taken will
positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.
The business realignment charges and acquisition integration costs are presented in the Consolidated Statement of Income as
follows:
Cost of sales
Selling, general and administrative expenses
(Gain) on disposal of assets
2018
$
44,949
$
36,813
1,233
$
2017
35,932
19,681
784
2016
76,197
21,051
116
As of June 30, 2018, approximately $40 million in severance payments have been made relating to business realignment and
acquisition integration charges incurred during 2018, the remainder of which are expected to be paid by June 30, 2019.
Severance payments relating to prior-year actions are being made as required. Remaining severance payments related to
current-year and prior-year business realignment and acquisition integration actions of approximately $26 million are primarily
reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized
in future periods related to the business realignment and acquisition integration actions described above, the timing and amount
of which are not known at this time.
4.
Income Taxes
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of
1986, as amended, by among other things, establishing a flat corporate income tax rate of 21 percent and creating a territorial
tax system (with a one-time transition tax imposed on previously undistributed foreign earnings and profits).
The Securities and Exchange Commission staff issued SAB 118, which provides guidance on accounting for the tax effects of
the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year from the TCJ Act's enactment
date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118, and based on the
information available as of June 30, 2018, the Company recorded a net provisional discrete income tax cost of $233 million as
a result of the TCJ Act being enacted.
45
The reduction in the U.S. corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and
liabilities to reflect their value at the reduced corporate tax rate of 21 percent, which resulted in a decrease in income tax
expense of approximately $80 million. The one-time transition tax on undistributed foreign earnings and profits resulted in an
increase in income tax expense of $297 million. Incremental adjustments have been made to these estimates during the three
months ended June 30, 2018, based on the availability of additional information. The Company has not yet completed the
accounting for the one-time transition tax and continues to analyze undistributed foreign earnings and profits for purposes of
filing the tax return for 2018. In addition, the Company continues to interpret the law and guidance issued as of the date of
these financial statements. On August 1, 2018, the U.S. Treasury and Internal Revenue Service released proposed regulations
relating to the one-time transition tax. The proposed regulations are subject to a 60-day comment period. Final regulations are
expected to be issued after consideration of the comments. The Company is currently evaluating the impact of the proposed
regulations. The Company intends to make the election to pay the one-time transition tax over eight years. The amount of cash
payments will be less than the amount of the income tax expense due to the utilization of available credits.
Certain provisions of the TCJ Act will impact the Company starting in 2019. These provisions include, but are not limited to,
the creation of the base erosion anti-abuse tax, a general limitation of U.S. federal income taxes on dividends from foreign
subsidiaries, a new provision designed to tax global intangible low-taxed income and the repeal of the domestic production
activities deduction. The Company continues to evaluate the future impacts of these provisions and, as of June 30, 2018, has
not recorded any impact of any of these future provisions.
Income before income taxes was derived from the following sources:
United States
Foreign
Income taxes include the following:
Federal
Current
Deferred
Foreign
Current
Deferred
State and local
Current
Deferred
2018
963,843
738,434
1,702,277
$
$
2017
722,925
605,716
1,328,641
$
$
2016
672,907
441,821
1,114,728
2018
2017
2016
453,821
(23,876)
$
132,420
37,316
$
235,557
(45,797)
210,385
(17,454)
157,518
(5,319)
18,168
(82)
640,962
$
17,835
5,027
344,797
$
113,146
(7,006)
24,495
(12,883)
307,512
$
$
$
$
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
Tax related to international activities
Transition tax related to the TCJ Act
Remeasurement of deferred tax assets and liabilities related to the TCJ Act
Cash surrender value of life insurance
Federal manufacturing deduction
Research tax credit
Share-based compensation
Other
Effective income tax rate
46
2018
28.1%
1.2
(1.0)
17.5
(4.8)
(0.4)
(1.0)
(0.7)
(2.2)
1.0
37.7%
2017
35.0%
1.7
(5.5)
—
—
(0.9)
(0.9)
(0.8)
(2.7)
0.1
26.0%
2016
35.0%
0.6
(5.2)
—
—
0.2
(1.0)
(1.9)
—
(0.1)
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 compensation
Loss carryforwards
Unrealized currency exchange gains and losses
Inventory
Foreign tax credit carryforward
Depreciation and amortization
Valuation allowance
Net deferred tax (liability)
Change in net deferred tax asset (liability):
Provision for deferred tax
Items of other comprehensive (loss)
Acquisitions and other
Total change in net deferred tax
2018
$
340,480
$
2017
571,022
144,885
61,375
59,725
678,486
22,212
17,809
23,050
(1,080,218)
(684,079)
(185,733)
112,935
17,496
38,535
679,880
27,228
(9,612)
—
(689,320)
(694,857)
(177,235) $
$
41,412
(65,542)
32,628
8,498
$
(37,024)
(177,655)
(521,814)
(736,493)
$
$
$
As of June 30, 2018, the Company recorded deferred tax assets of $679,880 resulting from $2,633,218 in loss carryforwards. A
valuation allowance of $675,045 related to the loss carryforwards has been established due to the uncertainty of their
realization. Of this valuation allowance, $640,239 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 $19,812 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.
Historically, all foreign undistributed earnings were permanently reinvested in international operations. No tax was provided
on such earnings as it was not practicable to estimate the additional tax that might be payable on the eventual distribution. The
enactment of the TCJ Act created a territorial tax system significantly reducing the U.S. federal tax cost of future distributions.
Although future distributions of foreign earnings to the U.S. should not be subject to U.S. federal income taxes, other U.S. or
foreign taxes may be imposed on such earnings. The Company has analyzed existing factors and determined it will no longer
permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $274 million that are
no longer permanently reinvested outside of the U.S., the Company has recorded a deferred tax liability of $12 million. The
remaining undistributed foreign earnings of approximately $2,700 million remain permanently reinvested outside the U.S. at
June 30, 2018. Of these undistributed earnings, we have recorded a deferred tax liability of $4 million where certain foreign
holding companies are not permanently reinvested in their subsidiaries. It is not practicable to estimate the additional taxes,
including applicable foreign withholding taxes, that might be payable on the potential distribution of such permanently
reinvested foreign earnings.
47
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
Additions for acquisitions
Reductions for tax positions of prior years
Reductions for settlements
Reductions for expiration of statute of limitations
Effect of foreign currency translation
Balance June 30
2018
2017
2016
$
147,506
$
139,907
$
145,688
4,195
8,333
—
(3,790)
(315)
(4,480)
1,642
4,735
2,618
3,939
(1,175)
(3,020)
(2,792)
3,294
$
153,091
$
147,506
$
7,025
2,582
—
(627)
(10,284)
(4,142)
(335)
139,907
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $153,091, $95,460 and
$80,722 as of June 30, 2018, 2017 and 2016, respectively. If recognized, a significant portion of the gross unrecognized tax
benefits as of June 30, 2017, and 2016, would have been offset against an asset that had been recorded in the Consolidated
Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was
$21,737, $15,432 and $12,357 as of June 30, 2018, 2017 and 2016, 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 $120,000 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 U.S. federal income tax returns by the Internal Revenue Service for years after 2011, and its state and
local tax returns for years after 2011. The Company is open to assessment for significant foreign jurisdictions for years after
2009.
5.
Earnings Per Share
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 equity-based awards. The
reconciliation of the numerator and denominator of basic and diluted earnings per share was as follows:
Numerator:
Net income attributable to common shareholders
Denominator:
Basic - weighted-average common shares
Increase in weighted-average common shares from dilutive effect of
equity-based awards
Diluted - weighted-average common shares, assuming exercise of
equity-based awards
Basic earnings per share
Diluted earnings per share
2018
2017
2016
$
1,060,801
$
983,412
$
806,840
133,004,613
133,377,547
135,353,321
2,422,221
2,182,217
1,558,369
135,426,834
135,559,764
136,911,690
$
$
7.98
7.83
$
$
7.37
7.25
$
$
5.96
5.89
For 2018, 2017 and 2016, 0.5 million, 1.4 million and 3.1 million common shares, respectively, subject to equity-based awards
were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
48
6.
Inventories
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 (FIFO) cost method. Inventories valued by the FIFO cost method are stated at
the lower of cost or net realizable value. Inventories valued by the LIFO cost method are stated at lower of cost or market.
Inventories valued on the LIFO cost method were approximately 41 percent of total inventories in 2018 and 39 percent of total
inventories in 2017. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $203,192 in
2018 and $193,933 in 2017. Progress payments of $25,026 in 2018 and $44,231 in 2017 are netted against inventories.
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
June 30,
Finished products
Work in process
Raw materials
Total
7.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
Balance June 30, 2016
Acquisitions
Divestitures
Foreign currency translation and other
Balance June 30, 2017
Acquisitions
Divestitures
Foreign currency translation and other
Balance June 30, 2018
2018
$
673,323
$
765,835
182,146
2017
642,788
723,133
183,573
$
1,621,304
$
1,549,494
Diversified
Industrial
Segment
Aerospace
Systems Segment
Total
$
2,804,403
$
98,634
$
2,903,037
$
2,677,489
(22,618)
28,962
5,488,236
37,489
(138,541)
18,587
—
—
8
$
$
98,642
—
—
7
2,677,489
(22,618)
28,970
5,586,878
37,489
(138,541)
18,594
$
5,405,771
$
98,649
$
5,504,420
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 impact of the
purchase price adjustments and final adjustments to the purchase price allocation on the Company's results of operations and
financial position were immaterial. Divestitures primarily represent goodwill associated with the sale of a business in 2018 and
a product line in 2017 (see Note 2 for further discussion).
The Company's annual impairment tests performed in 2018, 2017 and 2016 resulted in no impairment loss being recognized.
Intangible assets are amortized on a straight-line method over their legal or estimated useful lives. The gross carrying value
and accumulated amortization for each major category of intangible asset at June 30 are as follows:
Patents
Trademarks
Customer lists and other
Total
2018
2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
265,423
$
117,440
$
254,049
$
546,905
2,482,079
227,580
933,867
553,691
2,566,983
100,860
200,413
765,966
$
3,294,407
$
1,278,887
$
3,374,723
$
1,067,239
49
Total intangible asset amortization expense in 2018, 2017 and 2016 was $221,494, $145,128 and $108,019, respectively.
Estimated intangible asset amortization expense for the five years ending June 30, 2019 through 2023 is $197,451, $187,040,
$182,406, $176,495 and $168,961, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows
to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value.
No such events or circumstances occurred in 2018, 2017 or 2016.
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, of which $1,466,200 was available at June 30, 2018. The credit agreement expires in October 2021; 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 may 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 $2,000,000 of short-term commercial paper notes. Commercial paper notes
outstanding at June 30, 2018 and 2017 were $533,800 and $534,200, respectively.
In addition to commercial paper notes, notes payable includes short-term lines of credit and borrowings from foreign banks. At
June 30, 2018 and 2017, the Company had $48,338 and $62,946, respectively, in lines of credit from various foreign banks,
none of which were outstanding at June 30, 2018 and 2017. Most of these agreements are renewed annually. The Company
had borrowings from foreign banks of $4,255 at June 30, 2018. The weighted-average interest rate on notes payable during
2018 and 2017 was 1.8 percent and 1.0 percent, respectively.
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. Based on the Company's rating level at June 30,
2018, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.60 to
1.0. As of June 30, 2018, the Company's debt to debt-shareholders' equity ratio was 0.46 to 1.0. The Company is in
compliance with all covenants.
9.
Debt
June 30,
Domestic:
Fixed rate medium-term notes, 3.30% to 6.55%, due 2019-2045
Senior Notes, 3.25% to 4.10%, due 2027 - 2047
Term loan, Libor plus 100 bps, due 2020
Foreign:
Euro Senior Notes, 1.125%, due 2025
Euro Term loan, Libor plus 150 bps, due 2022
Other long-term debt
Deferred debt issuance costs
Total long-term debt
Less: Long-term debt payable within one year
Long-term debt, net
50
2018
2017
$
2,225,000
$
2,675,000
1,300,000
—
1,300,000
493,750
817,810
116,830
762
(41,432)
4,418,970
100,411
799,890
114,270
433
(47,183)
5,336,160
474,265
$
4,318,559
$
4,861,895
Principal amounts of long-term debt payable in the five years ending June 30, 2019 through 2023 are $100,411, $240, $32,
$116,841 and $300,006, respectively. The principal amounts of long-term debt payable exclude the impact of the amortization
of debt issuance costs.
Lease Commitments - Future minimum rental commitments as of June 30, 2018, under non-cancelable operating leases,
which expire at various dates, are as follows: 2019-$78,812; 2020-$56,889; 2021-$35,102; 2022-$18,326; 2023-$9,172 and
after 2023-$28,390.
Rental expense in 2018, 2017 and 2016 was $126,940, $118,723 and $119,004, respectively.
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
Service cost
Interest cost
Special termination cost
Settlement cost
Expected return on plan assets
Amortization of prior service cost
Amortization of unrecognized actuarial loss
Amortization of initial net obligation
Net periodic benefit cost
2018
2017
2016
$
82,993
$
94,356
$
144,339
126,131
—
—
(258,490)
6,570
147,387
18
—
—
(239,537)
8,116
212,433
18
94,650
181,469
7,088
5,102
(221,629)
7,470
170,407
17
$
122,817
$
201,517
$
244,574
51
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Acquisition
Plan amendments
Divestiture
Actuarial gain
Benefits paid
Foreign currency translation and other
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual gain on plan assets
Acquisition
Divestiture
Employer contributions
Benefits paid
Foreign currency translation and other
Fair value of plan assets at end of year
Funded status
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement benefits
Net amount recognized
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service cost
Transition obligation
Net amount recognized
2018
2017
$
5,217,857
$
5,315,655
82,993
144,339
—
2,932
(9,535)
(182,588)
(216,169)
(5,832)
5,033,997
3,896,001
174,951
$
$
—
(12,231)
81,518
(216,169)
(8,181)
3,915,889
$
(1,118,108) $
94,356
126,131
201,283
3,265
(851)
(268,370)
(250,289)
(3,323)
5,217,857
3,307,047
341,344
168,264
—
330,932
(250,289)
(1,297)
3,896,001
(1,321,856)
(11,333) $
(1,106,775)
(1,118,108) $
(12,793)
(1,309,063)
(1,321,856)
$
$
$
$
$
$
$
1,216,612
$
1,461,017
18,900
61
22,761
77
$
1,235,573
$
1,483,855
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.
Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic
pension and other postretirement benefit costs from the single-weighted average discount rate to the spot yield curve approach.
The change does not affect the measurement of the Company's benefit obligations. The new method provides a more precise
measure of these components by improving the correlation between projected benefit cash flows and the discrete spot yield
curve rates and is accounted for as a change in estimate prospectively. As a result of the method change, net pension benefit
cost for 2017 is lower than the net pension benefit cost for 2016 by $29,777.
During 2016, the Company provided enhanced retirement benefits in connection with a plant closure, which resulted in an
increase in net pension benefit cost of $7,088.
52
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 2019 is $114,825, $6,286 and $18, respectively.
The accumulated benefit obligation for all defined benefit plans was $4,751,111 and $4,890,058 at June 30, 2018 and 2017,
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 $4,933,863, $4,665,272 and $3,807,859, respectively, at
June 30, 2018, and $5,120,268, $4,805,485 and $3,793,696, respectively, at June 30, 2017. The projected benefit obligation
and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $4,970,120 and
$3,842,539, respectively, at June 30, 2018, and $5,142,881 and $3,815,815, respectively, at June 30, 2017.
The Company expects to make cash contributions of approximately $70 million to its defined benefit pension plans in 2019, the
majority of which relate to its non-U.S. defined benefit plans. Estimated future benefit payments in the five years ending
June 30, 2019 through 2023 are $240,163, $242,051, $259,402, $305,553 and $267,258, respectively and $1,454,646 in the
aggregate for the five years ending June 30, 2024 through June 30, 2028.
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
2018
2017
2016
3.64%
3.89%
7.5%
3.33%
5.02%
7.5%
4.19%
5.14%
7.5%
0.30 to 7.57% 0.23 to 7.75%
2.0 to 5.5%
2.0 to 5.5%
1.0 to 5.75% 1.0 to 5.75%
0.7 to 6.0%
2.0 to 5.5%
1.0 to 5.75%
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
2018
2017
4.01%
3.65%
3.64%
3.89%
0.30 to 3.37% 0.30 to 7.57%
1.75 to 5.5%
2.0 to 5.5%
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
2018
44%
49%
7%
100%
2017
45%
47%
8%
100%
53
The weighted-average target asset allocation as of June 30, 2018 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 74 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.
The fair values of pension plan assets at June 30, 2018 and at June 30, 2017, by asset class, are as follows:
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
Total at June 30, 2018
June 30, 2018
Quoted Prices In
Active Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
57,307
$
54,322
$
2,985
$
447,553
243,253
225,929
272,604
176,846
179,562
232,050
89,578
46,620
1,737,543
243,536
(36,492)
3,915,889
$
447,553
243,253
115,534
184,636
176,846
179,562
89,578
46,620
—
—
110,395
87,968
—
—
—
—
—
$
1,537,904
$
(36,492)
164,856
$
—
—
—
—
—
—
—
—
—
—
—
54
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
Total at June 30, 2017
June 30, 2017
Quoted Prices In
Active Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
76,057
$
75,370
$
687
$
416,830
236,134
176,135
199,389
306,168
204,628
233,234
70,389
46,003
1,677,942
262,092
(9,000)
3,896,001
$
416,830
236,134
91,982
144,616
306,168
204,628
70,389
46,003
—
—
84,153
54,773
—
—
—
—
—
$
1,592,120
$
(9,000)
130,613
$
—
—
—
—
—
—
—
—
—
—
—
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 $207,202 and $212,480 as of June 30, 2018 and 2017,
respectively.
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 without restriction after giving appropriate notice to the issuer. Generally, redemption of the entire investment
balance requires a 60-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.
55
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 either monthly or quarterly and without restriction after giving appropriate notice to the issuer.
Redemption of the entire investment balance generally requires no more than a 95-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. 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
2018
6,476,154
2017
6,911,436
2016
7,728,332
$
65,262
$
57,766
$
58,922
In addition to shares within the ESOP, as of June 30, 2018, employees have elected to invest in 1,870,286 shares of common
stock within a company stock fund of the savings and investment 401(k) plan.
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 $29,023, $29,309 and $25,780 in expense related to the
RIA in 2018, 2017 and 2016, respectively.
During 2017, the Company assumed various defined contribution plans previously sponsored by Clarcor. The Company
recognized expense of $4,481 and $2,199 in 2018 and 2017, respectively, related to these defined contribution plans. In
January 2018, the former employees of Clarcor became eligible to participate in the savings and investment 401(k) plan.
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.
The Company recognized $2,755, $4,357 and $8,754 in expense related to other postretirement benefits in 2018, 2017 and
2016, respectively. During 2016, the Company provided enhanced retirement benefits in connection with a plant closure,
which resulted in an increase in expense related to other postretirement benefits of $4,521.
56
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Acquisition
Actuarial gain
Benefits paid
Benefit obligation at end of year
Funded status
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities
Pensions and other postretirement benefits
Net amount recognized
Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss
Prior service credit
Net amount recognized
2018
2017
$
79,933
$
89,785
320
2,003
—
(11,259)
(4,476)
66,521
$
(66,521) $
469
1,922
291
(8,235)
(4,299)
79,933
(79,933)
(6,180) $
(60,341)
(66,521) $
(6,532)
(73,401)
(79,933)
1,232
(314)
918
$
$
12,828
(435)
12,393
$
$
$
$
$
$
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 2019 is $14 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 (Pre-65 participants)
Current medical cost trend rate (Post-65 participants)
Ultimate medical cost trend rate
Medical cost trend rate decreases to ultimate in year
2018
3.46%
8.19%
9.79%
4.50%
2025
2017
3.15%
7.35%
8.68%
4.50%
2025
2016
3.96%
7.61%
9.00%
4.50%
2025
The discount rate assumption used to measure the benefit obligation was 3.92 percent in 2018 and 3.46 percent in 2017.
Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2019 through 2023 are
$6,463, $6,358, $5,967, $5,804 and $5,564, respectively, and $24,842 in the aggregate for the five years ending June 30, 2024
through June 30, 2028.
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. In addition, the Company maintains a defined contribution nonqualified
supplemental executive pension plan in which the Company is the only contributor. During 2018, 2017 and 2016, the
Company recorded expense (income) relating to these programs of $13,420, $20,400 and $(2,917), 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.
57
11.
Equity
Changes in accumulated other comprehensive (loss) in shareholders' equity by component:
Balance June 30, 2016
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive (loss)
Balance June 30, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive (loss)
Balance June 30, 2018
Foreign Currency
Translation
Adjustment and
Other
Retirement
Benefit Plans
$
$
$
(844,121) $
(80,189)
(1,032)
(925,342) $
(10,141)
(7,994)
(943,477) $
(1,383,644) $
242,414
142,368
(998,862) $
76,417
102,836
(819,609) $
Total
(2,227,765)
162,225
141,336
(1,924,204)
66,276
94,842
(1,763,086)
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2018:
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
Income (Expense) Reclassified
from Accumulated Other
Comprehensive (Loss)
Consolidated Statement of
Income Classification
$
$
(6,467) See Note 10
(147,611) See Note 10
(154,078)
51,242
(102,836)
Income taxes
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2017:
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
Income (Expense) Reclassified
from Accumulated Other
Comprehensive (Loss)
Consolidated Statement of
Income Classification
$
$
(8,014) See Note 10
(214,284) See Note 10
(222,298)
79,930
(142,368)
Income taxes
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 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
2018
2017
2016
1,738,234
1,976,778
5,121,051
Average price per share including commissions
$
172.59
$
133.90
$
108.87
58
12.
Stock Incentive Plans
The Company's 2016 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 2016
Omnibus Stock Incentive Plan is 16 million. At June 30, 2018, 11.6 million common shares were available for future issuance.
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, or through the issuance of
previously unissued common stock.
SARs - 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. 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 SAR award granted in 2018, 2017 and 2016 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
2018
1.9%
5.2 years
2.0%
23.4%
2017
1.4%
5.3 years
2.0%
28.5%
2016
1.9%
5.4 years
1.9%
28.7%
$
29.71
$
27.39
$
26.88
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.
SAR activity during 2018 is as follows (aggregate intrinsic value in millions):
Outstanding June 30, 2017
Granted
Exercised
Canceled
Outstanding June 30, 2018
Exercisable June 30, 2018
Number of
Shares
Weighted-
Average Exercise
Price
$
6,533,406
907,626
$
(1,351,120) $
(43,031) $
$
6,046,881
4,168,672
$
94.18
158.79
78.61
146.84
106.98
92.74
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
5.8 years
4.6 years
$
$
298.1
263.1
A summary of the status and changes of shares subject to SAR awards and the related average price per share follows:
Nonvested June 30, 2017
Granted
Vested
Canceled
Nonvested June 30, 2018
59
Number of
Shares
Weighted-
Average Grant
Date Fair Value
$
1,947,569
$
907,626
(933,955) $
(43,031) $
$
1,878,209
27.80
29.71
28.33
28.34
28.44
At June 30, 2018, $13,458 of expense with respect to nonvested SAR awards has yet to be recognized and will be amortized
into expense over a weighted-average period of approximately 17 months. The total fair value of shares vested during 2018,
2017 and 2016 was $26,461, $33,094 and $34,706, respectively.
Information related to SAR awards exercised during 2018, 2017 and 2016 is as follows:
Net cash proceeds
Intrinsic value
Income tax benefit
2018
2017
$
3,682
$
2,202
$
136,000
28,701
153,908
31,193
2016
126
40,612
7,188
During 2018, 2017 and 2016, the Company recognized stock-based compensation expense of $27,422, $28,535 and $28,129,
respectively, relating to 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 income tax benefit was credited to income tax expense
in 2018 and 2017 and to additional capital in 2016.
Shares surrendered upon exercise of SARs: 2018 - 269,670; 2017 - 371,246; 2016 - 158,808.
RSUs - RSUs constitute an agreement to deliver shares of common stock to the participant at the end of a vesting period.
Generally, the RSUs granted to employees vest and the underlying stock is issued ratably over a three-year graded vesting
period. Nonvested RSUs may not be transferred and do not have dividend or voting rights. For each nonvested 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 2018, 2017 and 2016 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 for employees and
the related average price per share follows:
Nonvested June 30, 2017
Granted
Vested
Canceled
Nonvested June 30, 2018
Number of
Shares
Weighted-Average
Grant Date Fair
Value
$
394,329
$
157,086
(176,855) $
(13,949) $
$
360,611
120.92
159.26
116.94
139.61
138.85
During 2018, 2017 and 2016, the Company recognized stock-based compensation expense of $24,073, $23,025 and $21,190
respectively, relating to RSU awards for employees. At June 30, 2018, $18,627 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 21
months. The total fair value of RSU awards vested during 2018, 2017 and 2016 was $20,681, $21,576 and $21,173,
respectively. The Company recognized an income tax benefit of $2,451, $939 and $870 relating to the issuance of common
stock for RSU awards that vested during 2018, 2017 and 2016, respectively.
During 2018, 2017 and 2016, 9,900, 12,430 and 14,404 RSU awards, respectively, with a one-year vesting period were granted
to non-employee members of the Board of Directors. Although nonvested shares do not have dividend or voting rights,
recipients receive a dividend equivalent payable in common shares, equal to the cash dividend per share paid to common
shareholders. In 2018, 2017 and 2016, the Company recognized stock-based compensation expense of $1,697, $1,560, and
$824, respectively, relating to these awards. At June 30, 2018, $596 of expense with respect to 9,845 nonvested RSU awards
granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-average period
of approximately four months. During 2018 and 2017, the Company recognized an income tax benefit of $270 and $105,
respectively, related to the vesting of 12,639 and 13,740 RSU awards, respectively, issued to the Board of Directors.
60
LTIP - 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 three-year performance period. No dividends or dividend equivalents are paid on
unearned shares.
Stock issued for LTIP
LTIP three-year plan
Number of shares issued
Share value on date of issuance
Total value
2018
2017
2016
2015-16-17
2014-15-16
2013-14-15
308,278
227,707
$
$
176.39
54,377
$
$
157.07
35,766
$
$
175,291
113.91
19,967
Under the Company's 2016-17-18 LTIP, a payout of unrestricted stock will be issued in April 2019.
The fair value of each LTIP award granted in 2018, 2017 and 2016 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, 2017
Granted
Vested
Canceled
Nonvested June 30, 2018
Number of
Shares
Weighted-
Average Grant
Date Fair Value
$
734,744
$
191,986
(256,071) $
(12,388) $
$
658,271
119.56
206.99
122.11
128.63
143.90
During 2018, 2017 and 2016, the Company recorded stock-based compensation expense of $65,640, $27,219 and $21,150,
respectively, relating to the LTIP. During 2018, 2017 and 2016, the Company recognized an income tax benefit of $3,893,
$1,701 and $3,119, respectively, relating to the LTIP.
Shares surrendered in connection with the LTIP: 2018 - 139,918; 2017 - 113,074; 2016 - 78,173.
Restricted Shares - Prior to 2016, the Company issued restricted shares to non-employee members of the Board of Directors.
The fair value of the restricted shares was based on the fair market value of the Company's common stock on the date of grant.
During 2016, the Company recognized expense of $468 and tax cost of $(32) related to restricted shares.
13.
Research and Development
Research and development costs amounted to $327,877 in 2018, $336,675 in 2017 and $359,796 in 2016. 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 $40,823 in 2018, $65,292 in 2017 and $57,999 in 2016. These costs are included in the total research
and development cost for each of the respective years.
14.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities and other
investments, accounts receivable and long-term investments as well as obligations under accounts payable, trade, notes payable
and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable,
accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits, 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). Gross unrealized gains and losses were not material as of June 30, 2018 and 2017. There were no facts
or circumstances that indicated the unrealized losses were other than temporary.
61
The contractual maturities of available-for-sale investments were predominantly one to three years at June 30, 2018 and 2017.
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.
The carrying value of long-term debt and estimated fair value of long-term debt at June 30 are as follows:
Carrying value of long-term debt
Estimated fair value of long-term debt
2018
$
4,460,402
$
4,548,796
2017
5,383,343
5,645,529
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 €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the
Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is
recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or
substantially liquidated.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are
measured at fair value.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
Net investment hedges
Cross-currency swap contracts
Cash flow hedges
Costless collar contracts
Costless collar contracts
Balance Sheet Caption
2018
2017
Other assets
$
7,614
$
15,135
Non-trade and notes receivable
Other accrued liabilities
932
236
430
2,027
The cross-currency swap and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The
Company has not entered into any master netting arrangements.
Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated
Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other
comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.
The cross-currency swap contracts have been designated as hedging instruments. The costless collar contracts have not been
designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income during 2018,
2017 and 2016 were not material.
(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
$
2018
(9,209) $
(9,543)
2017
(6,003)
(16,175)
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 2018, 2017 and 2016.
62
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2018 and 2017 are
as follows:
Assets:
Equity securities
Corporate bonds
Asset-backed and mortgage-backed securities
Derivatives
Investments measured at net asset value
Liabilities:
Derivatives
Assets:
Equity securities
Corporate bonds
Asset-backed and mortgage-backed securities
Derivatives
Investments measured at net asset value
Liabilities:
Derivatives
Quoted Prices
In
Active
Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2018
$
2,956
$
2,956
$
5,331
3,911
14,110
7,208
5,315
5,331
—
—
—
— $
—
3,911
14,110
5,315
—
—
—
—
—
Quoted Prices
In
Active
Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2017
$
$
3,008
5,968
4,762
16,496
7,073
16,064
$
3,008
5,968
—
—
— $
—
4,762
16,496
—
16,064
—
—
—
—
—
The fair values of the equity securities, corporate bonds and asset-backed and mortgage-backed securities are determined using
the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are
traded in an active market.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are
calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The
calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been
adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at
fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value
hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis. Fair values are
transferred between levels of the fair value hierarchy when facts and circumstances indicate that a change in the method of
estimating the fair value of a financial asset or financial liability is warranted.
63
15.
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.
As of June 30, 2018, the Company had an accrual of $18,024 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 $18.0 million to a maximum of
$81.0 million. The largest range for any one site is approximately $9.5 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.
16.
Quarterly Information (Unaudited)
2018
1st
2nd
3rd
4th
Total
Net sales
Net income attributable to common
shareholders
Diluted earnings per share
$
3,364,651
$
3,370,673
$
3,749,591
$
3,817,477
$ 14,302,392
285,397
2.10
56,159
0.41
365,989
2.70
353,256
2.62
1,060,801
7.83
2017
1st
2nd
3rd
4th
Total
Net sales
Net income attributable to common
shareholders
Diluted earnings per share
$
2,743,131
$
2,670,804
$
3,119,139
$
3,496,238
$ 12,029,312
210,129
1.55
241,305
1.78
238,673
1.75
293,305
2.15
983,412
7.25
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.
64
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
ITEM 9A. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s principal executive officer and principal financial
officer, of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2018. Based on this evaluation,
the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2018, the Company’s
disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting during the quarter ended June 30,
2018 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
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, 2018. 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, 2018.
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, 2018,
which is included in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 9B. Other Information. None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance. Information required with respect to the
Directors of the Company is set forth under the caption "Item I – Election of Directors" in the definitive Proxy Statement for
the Company’s 2018 Annual Meeting of Shareholders, to be held October 24, 2018 (the "2018 Proxy Statement"), and is
incorporated herein by reference. Information with respect to the executive officers of the Company is included in Part I,
Item 1C of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant."
The information set forth under the caption "Other Governance Matters - Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2018 Proxy Statement is incorporated herein by reference.
The Company has adopted a Global Code of Business Conduct that applies to its Chief Executive Officer, Chief Financial
Officer and Controller. The Global Code of Business Conduct is posted on the Company’s investor relations internet website at
www.phstock.com under the Corporate Governance page. Any amendment to, or waiver from, a provision of the Company’s
Global Code of Business Conduct that applies to its Chief Executive Officer, Chief Financial Officer or Controller will also be
posted at www.phstock.com under the Corporate Governance page.
The information set forth under the captions "Committees of Our Board of Directors - The Audit Committee" and
"Report of the Audit Committee" in the 2018 Proxy Statement is incorporated herein by reference.
ITEM 11. Executive Compensation. The information set forth under the captions "Compensation Discussion and
Analysis," "Compensation Committee Report," and "Compensation Tables" in the 2018 Proxy Statement is incorporated herein
by reference.
65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information set forth under the captions "Principal Shareholders" in the 2018 Proxy Statement is incorporated herein by
reference.
Equity Compensation Plan Information. The following table sets forth certain information regarding the Company's
equity compensation plans as of June 30, 2018, unless otherwise indicated.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
Equity compensation plans
7,754,599(1)
—
7,754,599
$108.89
—
$108.89
21,597,846(2)
—
21,597,846
(1)Includes the maximum future payouts of common stock that may be issued under the calendar year 2016-17-18, 2017-18-19
and 2018-19-20 long term incentive performance awards (LTIP awards). For these LTIP awards, payouts will be determined
based on our achieving an average return on average equity of 4% or an average free cash flow margin of 4%. If these
performance measures are achieved, the participants will be eligible to receive the maximum payout of 200%. The Human
Resources and Compensation Committee will then compare our performance to that of a group of our peers and, if appropriate,
apply its discretion to reduce the final payouts based on any performance measures that the Committee determines to be
appropriate.
(2)The maximum number of shares of our common stock that may be issued under the 2016 Omnibus Stock Incentive Plan is
16 million shares, of which approximately 11.6 million shares are available for future issuance. The maximum number of
shares that may be issued under the Global Employee Stock Purchase Plan is 10 million shares, of which approximately 9.9
million shares are still available for future issuance.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The information set forth
under the captions "Other Governance Matters - Review and Approval of Transactions with Related Persons" and "Corporate
Governance: Board of Directors - Director Independence" in the 2018 Proxy Statement is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services. The information set forth under the captions "Audit Fees," "Audit-
Related Fees," "Tax Fees," "All Other Fees" and "Audit Committee Pre-Approval Policies and Procedures" in the 2018 Proxy
Statement is incorporated herein by reference.
66
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
a. The following are filed as part of this report:
1. Financial Statements
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Business Segment Information
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Equity
Notes to Consolidated Financial Statements
2. Schedule
II - Valuation and Qualifying Accounts
Page Number
in Form 10-K
32
33
34
36
37
38
39
73
3. Exhibits
Exhibit No.
(2)(a)
(3)(a)
(3)(b)
(4)(a)
(4)(b)
(10)(a)
(10)(b)
Description of Exhibit
Agreement and Plan of Merger among Parker-Hannifin Corporation, CLARCOR, Inc. and Parker Eagle
Corporation dated as of December 1, 2016, incorporated by reference to Exhibit 2.1 of Registrant's Form
8-K filed with the SEC on December 1, 2016 (Commission File No. 1-4982). +
Articles of Incorporation and By-Laws:
Amended Articles of Incorporation, incorporated by reference to Exhibit 3(a) to Registrant's Report on
Form 10-K for the fiscal year ended June 30, 2016 (Commission File No. 1-4982).
Code of Regulations, as amended, incorporated by reference to Exhibit 3(b) to Registrant’s Report on
Form 10-Q for the quarterly period ended September 30, 2016 (Commission File No. 1-4982).
Instruments Defining Rights of Security Holders:
Registration Rights Agreement, dated February 24, 2017, among Registrant and Morgan Stanley & Co.
LLC and Citigroup Global Markets Inc., as Representatives of the Initial Purchasers, incorporated by
reference to Exhibit 4.1 of Registrant's Current Report on Form 8-K filed with the SEC on February 28,
2017 (Commission File No. 1-4982).
Registration Rights Agreement, dated February 24, 2017, among Registrant and the Initial Purchasers (as
defined therein), incorporated by reference to Exhibit 4.2 of Registrant's Current Report on Form 8-K
filed with the SEC on February 28, 2017 (Commission File No. 1-4982).
The Registrant is a party to other instruments, copies of which will be furnished to the Commission upon
request, defining the rights of holders of its long-term debt identified in Note 9 of the Notes to
Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on Form 10-K.
Material Contracts:
Form of Parker-Hannifin Corporation Amended and Restated Change in Control Severance Agreement
entered into by Registrant and its executive officers, incorporated by reference to Exhibit 10(a) to
Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2008 (Commission File
No. 1-4982).
Form of Parker-Hannifin Corporation Change in Control Severance Agreement for Executive Officers
elected after September 1, 2015 at or above Grade 29, incorporated by reference to Exhibit 10(c) to
Registrant's Report on Form 10-K for the fiscal year ended June 30, 2016 (Commission File No. 1-4982).
67
(10)(c)
(10)(d)
(10)(e)
(10)(f)
(10)(g)
(10)(h)
(10)(i)
(10)(j)
(10)(k)
(10)(l)
Form of Parker-Hannifin Corporation Change in Control Severance Agreement for Executive Officers
dated after September 1, 2015 below Grade 29, incorporated by reference to Exhibit 10(d) to Registrant's
Report on Form 10-K for the fiscal year ended June 30, 2016 (Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated Change in Control Severance Plan, incorporated by
reference to Exhibit 10(b) to Registrant’s Report on Form 10-Q for the quarterly period ended September
30, 2008 (Commission File No. 1-4982).
Form of Indemnification Agreement entered into by the Registrant and its directors and executive officers,
incorporated by reference to Exhibit 10(c) to Registrant’s Report on Form 10-K for the fiscal year ended
June 30, 2003 (Commission File No. 1-4982).
Description of the Parker-Hannifin Corporation Officer Life Insurance Plan, incorporated by reference to
Exhibit 10(h) to Registrant’s Report on Form 10-K for the fiscal year ended June 30, 2005 (Commission
File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated Supplemental Executive Retirement Benefits
Program, effective July 1, 2014, incorporated by reference to Exhibit 10(a) to Registrant’s Report on
Form 10-Q for the quarterly period ended March 31, 2016 (Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated Defined Contribution Supplemental Executive
Retirement Program, effective January 22, 2015, incorporated by reference to Exhibit 10(c) to
Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2015 (Commission File
No. 1-4982).
Summary of the Parker-Hannifin Corporation Executive Disability Insurance Plan, incorporated by
reference to Exhibit 10(j) to Registrant's Report on Form 10-K for the fiscal year ended June 30, 2016
(Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated 2003 Stock Incentive Plan, incorporated by reference
to Exhibit 10(b) to Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010
(Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated 2009 Omnibus Stock Incentive Plan, incorporated by
reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the Commission on
September 24, 2012 (Commission File No. 1-4982).
Parker-Hannifin Corporation 2016 Omnibus Stock Incentive Plan, incorporated by reference to Annex B
to Registrant's Definitive Proxy Statement on Schedule 14A, filed with the SEC on September 26, 2016
(Commission File No. 1-4982).
(10)(m)
Parker-Hannifin Corporation First Amendment to 2016 Omnibus Stock Incentive Plan, effective April 1,
2017, incorporated by reference to Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarterly
period ended March 31, 2017 (Commission File No. 1-4982).
(10)(n)
(10)(o)
(10)(p)
(10)(q)
(10)(r)
(10)(s)
Parker-Hannifin Corporation 2010 Performance Bonus Plan, incorporated by reference to Annex A to
Registrant’s Definitive Proxy Statement filed with the Commission on September 27, 2010 (Commission
File No. 1-4982).
Parker-Hannifin Corporation 2015 Performance Bonus Plan incorporated by reference to Appendix B to
Registrant’s Definitive Proxy Statement filed with the Commission on September 28, 2015 (Commission
File No. 1-4982).
Form of 2007 Notice of Grant of Stock Options with Tandem Stock Appreciation Rights for executive
officers, incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form 8-K filed with the SEC
on August 22, 2006 (Commission File No. 1-4982).
Form of 2008 Notice of Grant of Stock Options with Tandem Stock Appreciation Rights for executive
officers, incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K/A filed with the
SEC on September 5, 2007 (Commission File No. 1-4982).
Form of 2009 Notice of Stock Options Award with Tandem Stock Appreciation Rights for Executive
Officers, incorporated by reference to Exhibit 10(d) to Registrant’s Report on Form 10-Q for the quarterly
period ended September 30, 2008 (Commission File No. 1-4982).
Form of 2010 Notice of Stock Options with Tandem Stock Appreciation Rights for Executive Officers,
incorporated by reference to Exhibit 10(d) to Registrant’s Report on Form 10-Q for the quarterly period
ended September 30, 2009 (Commission File No. 1-4982).
68
(10)(t)
(10)(u)
(10)(v)
(10)(w)
(10)(x)
(10)(y)
(10)(z)
(10)(aa)
(10)(bb)
(10)(cc)
(10)(dd)
(10)(ee)
(10)(ff)
(10)(gg)
(10)(hh)
(10)(ii)
(10)(jj)
Form of 2011 Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement for executive
officers, incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form 8-K filed with the SEC
on August 17, 2010 (Commission File No. 1-4982).
2011 Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions for executive
officers, incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K filed with the SEC
on August 17, 2010 (Commission File No. 1-4982).
Form of Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement for executive officers,
incorporated by reference to Exhibit 10(a) to Registrant’s Report on Form 10-Q for the quarterly period
ended September 30, 2011 (Commission File No. 1-4982).
Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions for executive officers,
incorporated by reference to Exhibit 10(b) to Registrant’s Report on Form 10-Q for the quarterly period
ended September 30, 2011 (Commission File No. 1-4982).
Parker-Hannifin Corporation Target Incentive Plan, incorporated by reference to Exhibit 10(d) to
Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010 (Commission File
No. 1-4982).
Parker-Hannifin Corporation Target Incentive Plan Subject to Performance Bonus Plan, incorporated by
reference to Exhibit 10(e) to Registrant’s Report on Form 10-Q for the quarterly period ended September
30, 2010 (Commission File No. 1-4982).
Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan,
incorporated by reference to Exhibit 10(a) to Registrant’s Report on Form 10-Q for the quarterly period
ended March 31, 2013 (Commission File No. 1-4982).
Form of Parker-Hannifin Corporation Long-Term Incentive Performance (LTIP) Award Under the
Performance Bonus Plan, incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form 8-K
filed with the Commission on February 1, 2011 (Commission File No. 1-4982).
Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan,
as amended and restated, effective January 20, 2016, incorporated by reference to Exhibit 10(aa) to
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (Commission file No.
1-4982).
Form of Notice of Award under the Parker-Hannifin Corporation Long-Term Incentive Performance Plan
Under the Performance Bonus Plan, as amended and restated, incorporated by reference to Exhibit 10(bb)
to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (Commission file
No. 1-4982).
Parker-Hannifin Corporation Restricted Stock Unit Award Agreement dated August 17, 2016 for Lee C.
Banks, incorporated by reference to Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarterly
period ended September 30, 2014 (Commission File No. 1-4982).
Parker-Hannifin Corporation Restricted Stock Unit Terms and Conditions for Lee C. Banks, incorporated
by reference to Exhibit 10(b) to Registrant's Report on Form 10-Q for the quarterly period ended
September 30, 2014 (Commission File No. 1-4982).
Parker-Hannifin Corporation Profitable Growth Incentive Plan, incorporated by reference to Exhibit 10(c)
to Registrant's Report on Form 10-Q for the quarterly period ended September 30, 2014 (Commission File
No. 1-4982).
Form of Notice of RONA Bonus Award Under the Parker-Hannifin Corporation Performance Bonus Plan,
incorporated by reference to Exhibit 10(h) to Registrant’s Report on Form 10-Q for the quarterly period
ended September 30, 2009 (Commission File No. 1-4982).
Parker-Hannifin Corporation RONA Plan Subject to Performance Bonus Plan, incorporated by reference
to Exhibit 10(f) to Registrant’s Report on Form 10-Q for the quarterly period ended September 30, 2010
(Commission File No. 1-4982).
Parker-Hannifin Corporation Summary of RONA Bonus Awards in Lieu of Certain Executive Perquisites,
incorporated by reference to Exhibit 10(h) to Registrant’s Report on Form 10-Q for the quarterly period
ended September 30, 2008 (Commission File No. 1-4982).
Parker-Hannifin Corporation amended and restated Savings Restoration Plan, as of September 1, 2004,
incorporated by reference to Exhibit 10(t) to Registrant’s Report on Form 10-K for the fiscal year ended
June 30, 2004 (Commission File No. 1-4982).
69
(10)(kk)
(10)(ll)
Parker-Hannifin Corporation Amended and Restated Savings Restoration Plan, effective January 1, 2016,
incorporated by reference to Exhibit 10(d) to Registrant’s Report on Form 10-Q for the quarterly period
ended December 31, 2016 (Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated Pension Restoration Plan, effective July 1, 2016,
incorporated by reference to Exhibit 10(mm) to Registrant's Report on Form 10-K for the fiscal year
ended June 30, 2016 (Commission File No. 1-4982).
(10)(mm)
Parker-Hannifin Corporation amended and restated Executive Deferral Plan, as of September 1, 2004,
incorporated by reference to Exhibit 10(v) to Registrant’s Report on Form 10-K for the fiscal year ended
June 30, 2004 (Commission File No. 1-4982).
(10)(nn)
(10)(oo)
(10)(pp)
(10)(qq)
(10)(rr)
(10)(ss)
(10)(tt)
(10)(uu)
(12)
(21)
(23)
(24)
(31)(a)
(31)(b)
(32)
Parker-Hannifin Corporation Amended and Restated Executive Deferral Plan, effective September 2,
2015, incorporated by reference to Exhibit 10(pp) to Registrant's Report on Form 10-K for the fiscal year
ended June 30, 2016 (Commission File No. 1-4982).
Parker-Hannifin Corporation Global Employee Stock Purchase Plan, incorporated by reference to
Appendix A to Registrant's Definitive Proxy Statement filed with the SEC on September 22, 2014
(Commission File No. 1-4982).
Parker-Hannifin Corporation Claw-back Policy, incorporated by reference to Exhibit 10.2 to Registrant’s
Report on Form 8-K filed with the SEC on August 18, 2009 (Commission File No. 1-4982).
Parker-Hannifin Corporation Amended and Restated 2004 Non-Employee Directors’ Stock Incentive
Plan, incorporated by reference to Exhibit 10(aa) to Registrant’s Report on Form 10-K for the fiscal year
ended June 30, 2009 (Commission File No. 1-4982).
Form of Parker-Hannifin Corporation Non-Employee Directors' Restricted Stock Unit Award Agreement,
incorporated by reference to Exhibit 10(g) to Registrant's Report on Form 10-Q for the quarterly period
ended December 31, 2015 (Commission File No. 1-4982).
Parker-Hannifin Corporation Non-Employee Directors' Restricted Stock Unit Award Terms and
Conditions, incorporated by reference to Exhibit 10(h) to Registrant's Report on Form 10-Q for the
quarterly period ended December 31, 2015 (Commission File No. 1-4982).
Amended and Restated Deferred Compensation Plan for Directors of Parker-Hannifin Corporation,
effective January 22, 2015, incorporated by reference to Exhibit 10(i) to Registrant's Report on Form 10-
Q for the quarterly period ended December 31, 2015 (Commission File No. 1-4982).
Summary of the Compensation of the Non-Employee Members of the Board of Directors, effective
October 26, 2016, incorporated by reference to Exhibit 10(c) to Registrant’s Report on Form 10-Q for the
quarterly period ended September 30, 2016 (Commission File No. 1-4982).
Computation of Ratio of Earnings to Fixed Charges as of June 30, 2018.*
List of subsidiaries of Registrant.*
Consent of Independent Registered Public Accounting Firm.*
Power of Attorney.*
Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant
to §302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to
§302 of the Sarbanes-Oxley Act of 2002.*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act
of 2002.*
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.*
70
+
copy of any omitted exhibits and schedules upon request.
Certain schedules have been omitted and the Company agrees to furnish supplementally to the Commission a
*
Submitted electronically herewith.
Attached as Exhibit 101 to this Annual Report are the following formatted in XBRL (Extensible Business Reporting
Language): (i) Consolidated Statement of Income for the years ended June 30, 2018, 2017 and 2016, (ii) Consolidated
Statement of Comprehensive Income for the years ended June 30, 2018, 2017 and 2016, (iii) Consolidated Balance Sheet
at June 30, 2018 and 2017, (iv) Consolidated Statement of Cash Flows for the years ended June 30, 2018, 2017 and
2016, (v) Consolidated Statement of Equity for the years ended June 30, 2018, 2017 and 2016, and (vi) Notes to
Consolidated Financial Statements.
Shareholders may request a copy of any of the exhibits to this Annual Report on Form 10-K by writing to the Secretary,
Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141.
Individual financial statements and related applicable schedules for the Registrant (separately) have been omitted
because the Registrant is primarily an operating company and its subsidiaries are considered to be wholly-owned.
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
PARKER-HANNIFIN CORPORATION
By:
/s/ Catherine A. Suever
Catherine A. Suever
Executive Vice President - Finance &
Administration and Chief Financial Officer
August 24, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Signature and Title
THOMAS L. WILLIAMS, Chairman of the Board of Directors and Principal Executive Officer; TODD M. LEOMBRUNO,
Principal Accounting Officer; LEE C. BANKS, Director; ROBERT G. BOHN, Director; LINDA S. HARTY, Director;
ROBERT J. KOHLHEPP, Director; KEVIN A. LOBO, Director; KLAUS-PETER MÜLLER, Director; CANDY M. OBOURN,
Director; JOSEPH SCAMINACE, Director; WOLFGANG R. SCHMITT, Director; ÅKE SVENSSON, Director; JAMES R.
VERRIER, Director; and JAMES L. WAINSCOTT, Director.
Date: August 24, 2018
/s/ Catherine A. Suever
Catherine A. Suever, Executive Vice President –
Finance & Administration and Chief Financial
Officer (Principal Financial Officer and
Attorney-in-Fact)
72
PARKER-HANNIFIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED June 30, 2016, 2017 and 2018
(Dollars in Thousands)
Column A
Description
Allowance for doubtful accounts:
Year ended June 30, 2016
Year ended June 30, 2017
Year ended June 30, 2018
Deferred tax asset valuation allowance:
Year ended June 30, 2016
Year ended June 30, 2017
Year ended June 30, 2018
Column B
Balance at
Beginning
Of Period
Column C
Additions
Charged to
Costs and
Expenses
Column D
Column E
Other
(Deductions)/
Additions (A)
Balance
At End
Of Period
$
$
$
$
$
$
9,284
8,010
14,336
330,006
332,708
684,079
$
$
$
$
$
$
1,419
3,559
2,861
2,702
349,803
10,778
$
$
$
$
$
$
(2,693) $
2,767
$
(7,525) $
1,568
— $
$
— $
8,010
14,336
9,672
332,708
684,079
694,857
(A)
For allowance for doubtful accounts, net balance is comprised of deductions due to divestitures or uncollectible
accounts charged off, additions due to acquisitions or recoveries, and currency translation adjustments. For deferred
tax asset valuation allowance, the balance primarily represents adjustments due to acquisitions.
73
Exhibit 31(a)
CERTIFICATIONS
I, Thomas L. Williams, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Parker-Hannifin Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the
periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant’s internal control over financial reporting.
Date: August 24, 2018
/s/ Thomas L. Williams
Thomas L. Williams
Chief Executive Officer
Exhibit 31(b)
CERTIFICATIONS
I, Catherine A. Suever, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Parker-Hannifin Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and
for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant’s internal control over financial reporting.
Date: August 24, 2018
/s/ Catherine A. Suever
Catherine A. Suever
Executive Vice President – Finance &
Administration and Chief Financial Officer
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in
connection with the filing of the Annual Report on Form 10-K of Parker-Hannifin Corporation (the “Company”) for the fiscal
year ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the
undersigned officers of the Company certifies, that, to such officer’s knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of the dates and for the periods expressed in the Report.
Dated: August 24, 2018
/s/ Thomas L. Williams
Name: Thomas L. Williams
Title: Chief Executive Officer
/s/ Catherine A. Suever
Name: Catherine A. Suever
Title: Executive Vice President-Finance &
Administration and Chief Financial Officer
“Conditions such as we have successfully
encountered and waded through during the
existence of this business, are an inspiration…
let everyone look forward to greater responsibilities
and actively enter into our group activities and
contribute their share to the success thereof.”
- Art Parker on the importance of culture, 1934
2018 Annual Report Back Page.indd 87
8/29/18 7:57 AM
With Appreciation
Executive Management
Robert W. Bond
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of Robert
W. Bond after 40 years of dedicated service. As Vice President and President - Fluid Connectors
Group for more than a decade, he successfully led the group to achieve record-setting growth
and financial performance. More recently, Mr. Bond was responsible for expanding Parker’s global
service offering and establishing a foundation for the company’s Internet of Things initiatives.
He is noted for his transformational leadership and for the lasting impact his contributions have
left on Parker and those around him.
Michael Chung
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of
Michael Chung, Vice President - eBusiness, IoT and Services, after 32 years of dedicated service.
Mr. Chung made significant contributions as Vice President and President - Automation Group,
with responsibility for the global development, manufacturing and marketing of pneumatic
and electromechanical technologies. He also led the Asia Pacific Group during a period of
considerable growth and development. Mr. Chung will be remembered for his positive outlook and
for building and transforming our Asia Pacific business.
Board of Directors - As of October 24, 2018
Robert J. Kohlhepp
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of
Robert J. Kohlhepp, retired President of Xamass Partners LLC and Chairman and Chief Executive
Officer of Cintas Corporation, who served on Parker Hannifin’s Board of Directors for 16 years.
Mr. Kohlhepp leveraged his extensive experience leading a global industrial company to provide
expert guidance to Parker in driving shareholder value.
Klaus-Peter Müller
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of
Klaus-Peter Müller, retired Chairman of the Supervisory Board of Commerzbank AG, who served
on Parker Hannifin’s Board of Directors for 20 years. Mr. Müller made a meaningful impact in
maximizing the value Parker delivers to shareholders by applying decades of service in senior
financial leadership positions.
Wolfgang R. Schmitt
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of
Wolfgang R. Schmitt, retired Chief Executive Officer of Trends 2 Innovation and Rubbermaid, who
served on Parker Hannifin’s Board of Directors representing shareholders for 26 years. Mr. Schmitt
provided Parker valuable leadership and strategic insights through his experience as a strategic
growth consultant, helping to drive Parker shareholder value for nearly three decades.
2018 Annual Report Back Page.indd 88
9/7/18 1:07 PM
FISCAL YEAR 2018
RECORDS
#1 Motion & Control Company
Billion
OPERATING MARGIN
$14.3 TOTAL NET SALES
15.7%TOTAL SEGMENT
$7.83 EARNINGS PER SHARE
$1.6 CASH FLOW FROM
OPERATIONS
Billion
Product Groups
Motion Systems
Key Markets
Agriculture
Construction
Distribution
General machinery
Machine tool
Marine
Material handling
Military
Mining
Oil & gas
Power generation
Semiconductor
Transportation
Truck & bus
Turf
Aerospace
Fluid Connectors
Instrumentation
Filtration
Engineered Materials
Key Markets
Aftermarket services
Commercial transports
Engines
General & business 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
Pneumatic control components
Power conditioning & management
systems
Thermal management
Wheels & brakes
Key Markets
Aerial lift
Agriculture
Bulk chemical handling
Construction
Food & beverage
Fuel & gas delivery
Industrial machinery
Life sciences
Marine
Mining
Mobile
Oil & gas
Renewable energy
Transportation
Key Products
Check valves
Diagnostic equipment
Hose couplings
Industrial hose
Low pressure fittings & adapters
Polytetrafluoroethylene (PTFE)
hose & tubing
Quick couplings
Rubber & thermoplastic hose
Tube fittings & adapters
Tubing & plastic fittings
Key Products
Accumulators
Air preparation (FRL) & dryers
Cartridge valves
Clusters
Controllers & human machine
interfaces (HMI)
Coolers
Cylinders
Drive controlled pumps
Drives (AC/DC Servo)
Electric actuators & positioners
Electric motors & gearheads
Electrohydraulic actuators
Electrohydraulic pumps
Electronic displays & HMI
Fan drives
Gerotor pumps & motors
Grippers
Helical actuators
Integrated hydrostatic transmissions
Industrial valves
IO link controllers
IoT
Joysticks
Mobile valves
Piston pumps & motors
Pneumatic cylinders
Pneumatic valves
Power take-offs
Rotary actuators
Screw pumps
Sensors
Software
Vane pumps & motors
Key Markets
Air conditioning
Alternative fuels
Analytical
Chemical
Diesel engine
Food & beverage
Industrial machinery
Life sciences
Microelectronics
Oil & gas
Packaging
Refining
Refrigeration
Transportation
Key Products
Accumulators
Analytical instruments & sample
conditioning systems
Compressed natural gas dispensers
Cryogenic valves
Electronic valves
Emissions
Filter driers
Fluid system & control fittings, meters,
valves, regulators & manifold valves
Fluoropolymer chemical delivery
fittings, valves & pumps
High-pressure fittings, valves,
pumps & systems
High-purity gas delivery fittings,
valves & regulators
Miniature valves & pumps
Natural gas on-board fuel systems
Pressure regulating valves
Refrigeration & air conditioning
electronic controls & monitoring
Solenoid valves
Key Markets
Agriculture
Aerospace & defense
Construction
Food & beverage
Heating, ventilation & air conditioning
(HVAC)
Industrial machinery
Life sciences
Marine
Mining
Oil & gas
Power generation
Renewable energy
Transportation
Water purification
Key Products
Aerospace filters & systems
Air pollution control & dust collection
systems & filters
Compressed air & gas treatment
solutions
Engine fuel, oil, air & closed crankcase
ventilation filtration systems
Filtration & purification systems
Fluid condition monitoring systems
Gas turbine air inlet filters
HVAC filters
Hydraulic & lubrication filters & systems
Industrial & analytical gas generators
Instrumentation filters
Membrane, fiber & sintered metal
filters
Natural gas filters
Process liquid, air & gas filters
Sterile air filters
Water purification filters & systems
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
Electromagnetic interference 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
© 2018 PARKER HANNIFIN CORPORATION
UNMATCHED BREADTH OF
TECHNOLOGY & ENGINEERING EXPERTISE
2018 Annual Report Cover.indd 2
8/31/18 6:56 AM
FISCAL YEAR 2018
RECORDS
#1 Motion & Control Company
Billion
OPERATING MARGIN
$14.3 TOTAL NET SALES
15.7%TOTAL SEGMENT
$7.83 EARNINGS PER SHARE
$1.6 CASH FLOW FROM
OPERATIONS
Billion
Product Groups
Motion Systems
Key Markets
Agriculture
Construction
Distribution
General machinery
Machine tool
Marine
Material handling
Military
Mining
Oil & gas
Power generation
Semiconductor
Transportation
Truck & bus
Turf
Aerospace
Fluid Connectors
Instrumentation
Filtration
Engineered Materials
Key Markets
Aftermarket services
Commercial transports
Engines
General & business 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
Pneumatic control components
Power conditioning & management
systems
Thermal management
Wheels & brakes
Key Markets
Aerial lift
Agriculture
Bulk chemical handling
Construction
Food & beverage
Fuel & gas delivery
Industrial machinery
Life sciences
Marine
Mining
Mobile
Oil & gas
Renewable energy
Transportation
Key Products
Check valves
Diagnostic equipment
Hose couplings
Industrial hose
Low pressure fittings & adapters
Polytetrafluoroethylene (PTFE)
hose & tubing
Quick couplings
Rubber & thermoplastic hose
Tube fittings & adapters
Tubing & plastic fittings
Key Products
Accumulators
Air preparation (FRL) & dryers
Cartridge valves
Clusters
Controllers & human machine
interfaces (HMI)
Coolers
Cylinders
Drive controlled pumps
Drives (AC/DC Servo)
Electric actuators & positioners
Electric motors & gearheads
Electrohydraulic actuators
Electrohydraulic pumps
Electronic displays & HMI
Fan drives
Gerotor pumps & motors
Grippers
Helical actuators
Integrated hydrostatic transmissions
Industrial valves
IO link controllers
IoT
Joysticks
Mobile valves
Piston pumps & motors
Pneumatic cylinders
Pneumatic valves
Power take-offs
Rotary actuators
Screw pumps
Sensors
Software
Vane pumps & motors
Key Markets
Air conditioning
Alternative fuels
Analytical
Chemical
Diesel engine
Food & beverage
Industrial machinery
Life sciences
Microelectronics
Oil & gas
Packaging
Refining
Refrigeration
Transportation
Key Products
Accumulators
Analytical instruments & sample
conditioning systems
Compressed natural gas dispensers
Cryogenic valves
Electronic valves
Emissions
Filter driers
Fluid system & control fittings, meters,
valves, regulators & manifold valves
Fluoropolymer chemical delivery
fittings, valves & pumps
High-pressure fittings, valves,
pumps & systems
High-purity gas delivery fittings,
valves & regulators
Miniature valves & pumps
Natural gas on-board fuel systems
Pressure regulating valves
Refrigeration & air conditioning
electronic controls & monitoring
Solenoid valves
Key Markets
Agriculture
Aerospace & defense
Construction
Food & beverage
Heating, ventilation & air conditioning
(HVAC)
Industrial machinery
Life sciences
Marine
Mining
Oil & gas
Power generation
Renewable energy
Transportation
Water purification
Key Products
Aerospace filters & systems
Air pollution control & dust collection
systems & filters
Compressed air & gas treatment
solutions
Engine fuel, oil, air & closed crankcase
ventilation filtration systems
Filtration & purification systems
Fluid condition monitoring systems
Gas turbine air inlet filters
HVAC filters
Hydraulic & lubrication filters & systems
Industrial & analytical gas generators
Instrumentation filters
Membrane, fiber & sintered metal
filters
Natural gas filters
Process liquid, air & gas filters
Sterile air filters
Water purification filters & systems
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
Electromagnetic interference 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
© 2018 PARKER HANNIFIN CORPORATION
UNMATCHED BREADTH OF
TECHNOLOGY & ENGINEERING EXPERTISE
2018 Annual Report Cover.indd 2
8/31/18 6:56 AM
Parker Hannifin Corporation
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
216 896 3000 www.parker.com
BOARD OF
DIRECTORS
EXECUTIVE
MANAGEMENT
INVESTOR
INFORMATION
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
Parker-Hannifin Corporation
LEE C. BANKS
President and Chief Operating Officer
Parker-Hannifin Corporation
ROBERT G. BOHN
Former Chairman and Chief Executive Officer
Oshkosh Corporation (specialty vehicles)
LINDA S. HARTY
Former Treasurer
Medtronic plc (medical technology)
ROBERT J. KOHLHEPP*
Former Chairman
Cintas Corporation (uniform rental)
KEVIN A. LOBO
Chairman, Chief Executive Officer
and President
Stryker Corporation (medical technologies)
KLAUS-PETER MÜLLER*
Chairman of the Supervisory Board
Commerzbank AG (international banking)
CANDY M. OBOURN
Chairman
Isoflux Incorporated (coatings technologies)
JOSEPH SCAMINACE
Former Chairman and Chief Executive Officer
OM Group, Inc. (metal-based specialty
chemicals)
WOLFGANG R. SCHMITT*
Former Chief Executive Officer
Trends 2 Innovation (strategic growth
consultants)
ÅKE SVENSSON
Chairman
Swedavia AB (transport infrastructure)
JAMES R. VERRIER
Former President, Chief Executive Officer
and Director
BorgWarner Inc. (powertrain solutions)
JAMES L. WAINSCOTT
Former Chairman, Chief Executive Officer
and President
AK Steel Holding Corporation (steel producer)
* Retired from the Board of Directors as of
October 24, 2018.
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
LEE C. BANKS
President and Chief Operating Officer
CATHERINE A. SUEVER
Executive Vice President - Finance &
Administration and Chief Financial Officer
MARK J. HART
Executive Vice President - Human Resources
and External Affairs
WILLIAM “SKIP” BOWMAN
Vice President and President -
Instrumentation Group
ROBIN J. DAVENPORT
Vice President - Corporate Finance
WILLIAM G. ELINE
Vice President - Chief Information Officer
THOMAS C. GENTILE
Vice President - Global Supply Chain
JOACHIM GUHE
President - Europe, Middle East and Africa
(EMEA) Group
KURT A. KELLER
Vice President
TODD M. LEOMBRUNO
Vice President and Controller
JOSEPH R. LEONTI
Vice President, General Counsel
and Secretary
CANDIDO LIMA
President - Latin America Group
ROBERT W. MALONE
Vice President and President -
Filtration Group
M. CRAIG MAXWELL
Vice President - Chief Technology
and Innovation Officer
MICHAEL J. O’HARA
Vice President - Global Sales and Marketing
JENNIFER A. PARMENTIER
Vice President and President -
Engineered Materials Group
ANDREW D. ROSS
Vice President and President -
Fluid Connectors Group
ROGER S. SHERRARD
Vice President and President -
Aerospace Group
MICHAEL WEE
President - Asia Pacific Group
ANDREW M. WEEKS
Vice President and President -
Motion Systems Group
ANNUAL MEETING
The 2018 Annual Meeting of Shareholders
will be held on Wednesday, October 24, 2018,
at Parker-Hannifin Global Headquarters,
6035 Parkland Blvd., Cleveland, Ohio 44124-4141,
at 9:00 a.m. EDT.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche, LLP, Cleveland, Ohio
TRANSFER AGENT & REGISTRAR
Equiniti Trust Company
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
STOCK INFORMATION
New York Stock Exchange
Ticker symbol: PH
www.phstock.com
PARKER CORPORATE HEADQUARTERS
Parker-Hannifin Corporation
6035 Parkland Boulevard
Cleveland, Ohio 44124-4141
216 896 3000
INVESTOR CONTACT
ROBIN J. DAVENPORT
Vice President - Corporate Finance
216 896 2265
rjdavenport@parker.com
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
$250
200
150
100
50
6/13
6/14
6/15
6/16
6/17
6/18
2013
2014
2015
2016
2017
2018
Parker-Hannifin Corporation 100.00
S&P 500
100.00
100.00
S&P Industrials
133.96
124.61
128.58
126.37
133.86
131.62
120.22
139.20
140.89
181.16
164.11
172.26
179.50
187.70
181.46
*$100 invested on 6/30/13 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.
PARKER
HANNIFIN
ANNUAL
REPORT
8
1
0
2
2018 Annual Report Cover.indd 1
8/31/18 6:13 AM
Parker Hannifin Corporation
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
216 896 3000 www.parker.com
BOARD OF
DIRECTORS
EXECUTIVE
MANAGEMENT
INVESTOR
INFORMATION
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
Parker-Hannifin Corporation
LEE C. BANKS
President and Chief Operating Officer
Parker-Hannifin Corporation
ROBERT G. BOHN
Former Chairman and Chief Executive Officer
Oshkosh Corporation (specialty vehicles)
LINDA S. HARTY
Former Treasurer
Medtronic plc (medical technology)
ROBERT J. KOHLHEPP*
Former Chairman
Cintas Corporation (uniform rental)
KEVIN A. LOBO
Chairman, Chief Executive Officer
and President
Stryker Corporation (medical technologies)
KLAUS-PETER MÜLLER*
Chairman of the Supervisory Board
Commerzbank AG (international banking)
CANDY M. OBOURN
Chairman
Isoflux Incorporated (coatings technologies)
JOSEPH SCAMINACE
Former Chairman and Chief Executive Officer
OM Group, Inc. (metal-based specialty
chemicals)
WOLFGANG R. SCHMITT*
Former Chief Executive Officer
Trends 2 Innovation (strategic growth
consultants)
ÅKE SVENSSON
Chairman
Swedavia AB (transport infrastructure)
JAMES R. VERRIER
Former President, Chief Executive Officer
and Director
BorgWarner Inc. (powertrain solutions)
JAMES L. WAINSCOTT
Former Chairman, Chief Executive Officer
and President
AK Steel Holding Corporation (steel producer)
* Retired from the Board of Directors as of
October 24, 2018.
THOMAS L. WILLIAMS
Chairman and Chief Executive Officer
LEE C. BANKS
President and Chief Operating Officer
CATHERINE A. SUEVER
Executive Vice President - Finance &
Administration and Chief Financial Officer
MARK J. HART
Executive Vice President - Human Resources
and External Affairs
WILLIAM “SKIP” BOWMAN
Vice President and President -
Instrumentation Group
ROBIN J. DAVENPORT
Vice President - Corporate Finance
WILLIAM G. ELINE
Vice President - Chief Information Officer
THOMAS C. GENTILE
Vice President - Global Supply Chain
JOACHIM GUHE
President - Europe, Middle East and Africa
(EMEA) Group
KURT A. KELLER
Vice President
TODD M. LEOMBRUNO
Vice President and Controller
JOSEPH R. LEONTI
Vice President, General Counsel
and Secretary
CANDIDO LIMA
President - Latin America Group
ROBERT W. MALONE
Vice President and President -
Filtration Group
M. CRAIG MAXWELL
Vice President - Chief Technology
and Innovation Officer
MICHAEL J. O’HARA
Vice President - Global Sales and Marketing
JENNIFER A. PARMENTIER
Vice President and President -
Engineered Materials Group
ANDREW D. ROSS
Vice President and President -
Fluid Connectors Group
ROGER S. SHERRARD
Vice President and President -
Aerospace Group
MICHAEL WEE
President - Asia Pacific Group
ANDREW M. WEEKS
Vice President and President -
Motion Systems Group
ANNUAL MEETING
The 2018 Annual Meeting of Shareholders
will be held on Wednesday, October 24, 2018,
at Parker-Hannifin Global Headquarters,
6035 Parkland Blvd., Cleveland, Ohio 44124-4141,
at 9:00 a.m. EDT.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche, LLP, Cleveland, Ohio
TRANSFER AGENT & REGISTRAR
Equiniti Trust Company
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone 800 468 9716
www.shareowneronline.com
STOCK INFORMATION
New York Stock Exchange
Ticker symbol: PH
www.phstock.com
PARKER CORPORATE HEADQUARTERS
Parker-Hannifin Corporation
6035 Parkland Boulevard
Cleveland, Ohio 44124-4141
216 896 3000
INVESTOR CONTACT
ROBIN J. DAVENPORT
Vice President - Corporate Finance
216 896 2265
rjdavenport@parker.com
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
$250
200
150
100
50
6/13
6/14
6/15
6/16
6/17
6/18
2013
2014
2015
2016
2017
2018
Parker-Hannifin Corporation 100.00
S&P 500
100.00
100.00
S&P Industrials
133.96
124.61
128.58
126.37
133.86
131.62
120.22
139.20
140.89
181.16
164.11
172.26
179.50
187.70
181.46
*$100 invested on 6/30/13 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.
PARKER
HANNIFIN
ANNUAL
REPORT
8
1
0
2
2018 Annual Report Cover.indd 1
8/31/18 6:13 AM