PARKER
HANNIFIN
ANNUAL
REPORT
9
1
0
2
Enabling
Engineering
Breakthroughs
that Lead
to a Better
Tomorrow
FISCAL YEAR 2019
RECORDS
TOTAL
NET SALES
OPERATING MARGIN
Billion
$14.32
17.0%TOTAL SEGMENT
$11.48
$1.73 CASH FLOW FROM
OPERATIONS
Billion
EARNINGS
PER SHARE
LETTER TO
SHAREHOLDERS
Parker had an outstanding year in
fiscal 2019. It was our best year ever
for sales, segment operating margin,
earnings per share and cash flow
from operations. It builds on the record
financial performance we had in
fiscal year 2018.
The results we are producing reflect
the dedication of our global team
members in executing The Win Strategy™,
which is our business system, and our
unrelenting focus on driving continuous
improvement. While we believe we
can take our performance to even
higher levels, it is important for us to
take time to reflect on the remarkable
transformation Parker has made.
The actions we have taken over the past
five years have strengthened Parker.
We have improved our operations by
executing the Win Strategy and
deployed capital effectively, including
three transformative acquisitions, to
strengthen our portfolio and drive
returns. As a result, we are better
positioned than ever to deliver record
results, perform at a higher level over
macro-economic cycles and serve our
customers.
Thomas L. Williams, Chairman and Chief Executive Officer (L)
Lee C. Banks, President and Chief Operating Officer (R)
We have introduced some new
• EBITDA margin was 17.9%,
• In fiscal year 2019, we continued
changes to the Win Strategy, which
as reported, and 18.2% on an
investing in robotics and additive
is now in its third version, and we
adjusted basis.1
are also launching a new purpose
manufacturing capabilities
and technology centers for
statement, which is shown on the
• Net income increased 43% to
cross-business development.
cover of this report. These are further
a record $1.51 billion, or $11.48
steps toward building a best-in-class
business that adds value for all our
stakeholders.
per share. Adjusted earnings per
• We continued our consistent
share were $11.85,1 an increase of
approach to repurchasing shares
14% compared with the prior year.
through a 10b5-1 program,
RECORD
PERFORMANCE IN
FISCAL YEAR 2019
Parker benefited significantly from
the impact of the Win Strategy
implementation across our operations
in fiscal year 2019, enabling us to
achieve several records for financial
performance.
• Safety continues to be our highest
priority and we are making great
progress toward our goal of zero
safety incidents. Our recordable
incident rate dropped by 24%
in fiscal year 2019.
purchasing $200 million in Parker
• Cash flow from operations also was
shares. We also repurchased
a record at $1.73 billion, or 12.1%
a discretionary amount of $600
of sales, compared with $1.60 billion,
million in Parker shares.
or 11.2% of sales, in the prior year
period. This is the 18th consecutive
• The most significant capital
year that Parker has generated
deployment decision was our
cash flow from operations, before
agreements to make two
discretionary pension contributions,
transformative acquisitions
greater than 10% of sales.
that strengthen our portfolio of
CAPITAL
DEPLOYMENT
DRIVING
SHAREHOLDER
VALUE
Parker continues to focus on being
a great generator and deployer of
high growth, high margin businesses
in target growth areas of engineered
materials and aerospace. In April
2019, we announced an agreement
to acquire LORD Corporation for
$3.675 billion in cash and in July
2019, we agreed to acquire Exotic
Metals Forming Company LLC for
$1.725 billion in cash.
• Total net sales were a record
cash to produce long-term returns
• LORD Corporation is a diversified
at $14.32 billion, compared with
for shareholders.
$14.30 billion the previous year.
Organic growth of 2.6%1 outpaced
• In fiscal year 2019, we used cash
the growth rate of global industrial
to extend our record of increasing
production, but was offset
by currency translation and
a prior-year divestiture.
annual dividends paid to 63
consecutive fiscal years. We
increased our annual dividend
payout by 13%, aligned with
• Total segment operating margin
our goal of maintaining a dividend
reached 17.0%, as reported, for the
payout in the range of 30-35%
first time in our history, a full year
of net income.
ahead of our original five-year target.
1 Non-GAAP Financial Information: These non-GAAP measures have been reconciled to the comparable GAAP
measures within a table immediately following the Form 10-K incorporated in this Annual Report.
manufacturer of advanced
adhesives, coatings and specialty
materials as well as vibration and
motion control technologies that are
used in mission-critical applications
in the aerospace, automotive and
industrial markets. The transaction
is expected to add approximately
$1.1 billion in annual sales to our
Engineered Materials Group and
be accretive to Parker’s organic
growth, EBITDA margin, cash flow
and earnings per share.
• Exotic Metals Forming Company
THE WIN STRATEGY 3.0
designs and manufactures innovative
and technically demanding, high
temperature, high pressure air and
exhaust management solutions for
aircraft and engines. The transaction
will add approximately $450 million
in expected annual sales to our
Aerospace Systems Segment to
bolster our already strong aerospace
offering and is also expected to be
accretive to Parker’s organic growth,
EBITDA margin, cash flow and
earnings per share.
Th e Win Strategy TM
Our Vision: Engineering Your Success
Goals
Engaged
People
STRATEGIES
Customer
Experience
STRATEGIES
Profitable
Growth
STRATEGIES
Financial
Performance
STRATEGIES
• Environmental, Health
• Quality Solutions On Time
• Strategic Positioning
• Simplification
& Safety
• Ownership –
Entrepreneurial
• High Performance
Teams & Leaders
• Digital Leadership
• Market-Driven Innovation
• Lean Enterprise
• Ease of Doing Business
• System Solutions
• Strategic Supply Chain
• Strong Distribution
• Value Pricing
These actions are expected to drive
• Continuous
Improvement – Kaizen
• Grow Share
• Acquisitions
consistent returns for our shareholders
as we build our capability to drive higher
growth, margin and cash through the
business cycle.
BUILDING ON
RECORD
PERFORMANCE
Looking ahead, we see many
opportunities to build on the
transformation we have made.
In fiscal year 2020, moderating market
conditions are anticipated to result
in negative-to-flat organic sales.
Through the benefits of ongoing
Win Strategy initiatives, we are
forecasting further segment operating
margin expansion, strong cash flow
and another record earnings year.
Our Culture & Values
SEPTEMBER 2019
#1 Motion & Control Company
Goals
Engaged
People
Customer
Experience
Profi table
Growth
Financial
Performance
MEASURES
MEASURES
MEASURES
MEASURES
• Zero Safety Incidents
• Composite Likelihood to
• Organic Growth 150 bps
• Top Quartile Performance
• Speed & Agility
• 80%+ in High
Performance Teams
• Engagement > 75%
• Inclusive Environment
• 98%+ On-Time Delivery
Recommend
> Market
• Customer Dashboards
• 20%+ Market Share
• Zero Defects
• #1, #2 Position Each
Business
• Year-over-Year Growth in:
• DNE
• EBIT
• EPS
• Cash Flow
• Grow Global Distribution
• 19% Operating Income
• Best-in-Class Lead Times
& Services
50% DIST
50% OEM
• 30% MROS
• 21.4% RONA
• 17% ROIC
• Increasing New Product
Vitality & Gross Margins
• >100% FCF Conversion
Enabling Engineering Breakthroughs
that Lead to a Better Tomorrow
PS-2049
The Win Strategy and our recent
Key highlights of the changes
delivery, and customer/distributor
transformational acquisitions to
to The Win Strategy 3.0 include:
experience, within each of our divisions.
strengthen our portfolio give us
confidence in achieving our fiscal
year 2023 targets. Doing so would put
Parker in the top quartile of financial
performance compared with our
diversified industrial proxy peers.
Engaged People
By establishing high performance
Throughout our operations, we still
see tremendous opportunity to design
teams and driving an ownership culture,
manufacturing processes that are
we have improved safety performance
more consistent and reliable and have
and reduced our recordable incident
been designed for zero defects. These
Our fiscal year 2023 targets include:
rate by 61% over the past five years.
opportunities will not only drive cost
Applying that same, successful
advantages but will also meaningfully
• Organic sales growth at 150 basis
approach to quality, cost and delivery
impact our customer experience
points greater than the Global
will allow us to make significant
performance in delivering products
Industrial Production Index.
improvements to the business
on time and to the highest standards
while driving higher levels of
of quality.
• Profitability as measured by
engagement among our team
segment operating margins
of 19% and EBITDA margins
members.
Profitable Growth
While the Win Strategy continues
of 20%.
In fiscal year 2019, we reinvigorated
to be our enterprise business system,
• Free cash flow conversion of
to engage team members at all levels
opportunity to clarify each businesses’
greater than 100%.
in rapid improvement initiatives.
strategic positioning to prioritize product
the use of Kaizen events designed
at the division level we have an
• Greater than 10% compound
annual growth rate in adjusted
earnings per share.
The spirit of continuous improvement
and technology development, channel
through Kaizen will generate positive
selection and market segmentation.
business results and increase the
This sharpened strategic focus on
engagement of our people. Going
each business will drive improved
forward, Kaizen will be a way of life at
division performance.
We rarely make changes to the Win
Strategy, but we are doing so now to
Parker.
include these targets, direct our focus
on key areas of opportunity, and
reinforce the importance of leading
with purpose to help make a better
tomorrow.
Customer
Experience
To better meet the expectations
As we leverage the strength and
interconnectivity of Parker’s technologies
to better drive commercial success,
we have adopted more rigor in our
of today’s customer, we are making
measures of new product vitality and
investments to be the digital leader
the impact of new products on gross
in motion and control technologies
margin performance relative to the
and improve the power, reliability
base business. This year, our best
and versatility of our digital platforms.
products included: a custom manifold
We are also updating our Likelihood-
for battery cooling on all-electric ferries;
to-Recommend customer experience
a miniature pump for medical diagnostic
metric to a composite score, equally
equipment; a patented coupling that
representing our performance on
allows rapid changing of oxygen tanks
on self-contained breathing apparatus;
continuum of a product, approximately
It took more than a day for us to
an electro-hydrostatic actuation
70% of the costs are associated
discover our purpose, but we will
system for the F-35 fighter jet primary
with product design, while 30%
spend every day living up to
flight controls; and a hot shift power
of the cost is labor and overhead.
it. We are proud to stand alongside
takeoff for use on work trucks. These
Historically, most of our focus has
all our team members and
products are a snapshot of the value
been on the 30% portion. Simple
to thank them for everything they do.
our innovations bring to customers as
by Design will utilize new business
We would also like to thank our
85% of our portfolio today enjoys some
processes and tools to design
shareholders for sharing our confidence
level of intellectual property protection.
products that address the 70%
in Parker’s long-term success, and we
portion of costs and deliver an even
look to the future guided by our purpose.
better product to our customers.
Sincerely,
Thomas L. Williams
Chairman and Chief Executive Officer
Lee C. Banks
President and Chief Operating Officer
August 2019
LEADING WITH
PURPOSE
Our new purpose statement – Enabling
Engineering Breakthroughs that Lead
to a Better Tomorrow – was crafted
through extensive input from our team
members. The statement does not
mean we are changing our direction,
we are simply defining it. By aligning
around a common purpose today,
we will be better positioned for the
challenges and opportunities of
tomorrow.
Our purpose defines why we are
in business, provides inspiration
and direction for our team members,
and highlights how we can strengthen
our communities and have a positive
impact on the world.
Financial
Performance
At the heart of our financial performance
initiatives is our strength in lean
enterprise, strategic supply chain
and value pricing. We will continue
to be leaders and drive continuous
improvement in these key initiatives.
With the introduction of the new Win
Strategy in 2015, we embarked on a
Simplification initiative. Designed to
reduce complexity across the organization,
this initiative has enabled a better
customer experience, increased speed
and reduced cost. The Win Strategy
3.0 expands and strengthens our
Simplification initiative to focus on three
broad areas, including organizational
structure, reducing operational
complexity through the use of the
80/20 rule and a concept we are
calling Simple by Design™.
Opportunities to refine our
organizational structure and reduce
operational complexity are still in
the early days of implementation.
Simple by Design is a new element
of Simplification. Across the cost
The actions we have taken over the past five years have
strengthened Parker. We have improved our operations
by executing the Win Strategy and deployed capital
effectively, including three transformative acquisitions,
to strengthen our portfolio and drive returns. As a result,
we are better positioned than ever to deliver record
results, perform at a higher level over macro-economic
cycles and serve our customers.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C.
Information about our Executive Officers
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.
Financial Statements and Supplementary Data
Item 9.
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
8
14
15
16
16
16
17
17
18
28
29
68
68
68
68
68
69
69
69
70
75
1
PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 2019
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. Our 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 terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its
subsidiaries, and the term "year" and references to specific years refer to the applicable fiscal year.
Our investor relations website address is www.phstock.com. We make available free of charge on or through our website
our 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 those reports electronically with the Securities and Exchange Commission. The
information contained on or accessible through our website is not part of this Annual Report on Form 10-K.
The Board of Directors has adopted a written charter for each of its committees. These charters, as well as our Global
Code of Business Conduct, Corporate Governance Guidelines and Independence Standards for Directors, are posted and
available on our investor relations website 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.
Our manufacturing, service, sales, distribution and administrative facilities are located in 37 states within the United
States and in 49 other countries. We sell our products as original and replacement equipment through sales and distribution
centers worldwide. We market our products through direct-sales employees, independent distributors and sales representatives.
We supply products to approximately 459,000 customers in virtually every significant manufacturing, transportation and
processing industry.
We have two reporting segments: Diversified Industrial and Aerospace Systems. During 2019, our technologies and
systems were used in the products of these two reporting segments. For 2019, the Company's net sales were $14.3 billion.
Diversified Industrial Segment products accounted for 82% and Aerospace Systems Segment products accounted for 18% of
those net sales.
Markets
Our technologies and systems are used throughout various industries and in various applications. The approximately
459,000 customers who purchase Parker products are found in almost every significant manufacturing, transportation and
processing industry. No single customer accounted for more than 3% of our total net sales for the year ended June 30, 2019.
2
Diversified Industrial Segment. Our Diversified Industrial Segment sells products 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 served by our Diversified Industrial Segment are listed below by group:
Engineered Materials
Group:
• Aerospace
• Military
• Oil & gas
• Agriculture
Filtration
Group:
• Chemical processing
• Construction
• Information technology
• Life sciences
• Microelectronics
• 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
• Power generation
• Renewable energy
• Telecommunications
• Transportation
• Truck & bus
• 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
• 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. Our Aerospace Systems Segment sells products 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
We offer hundreds of thousands of individual products, and no single product contributed more than 1% to our total net
sales for the year ended June 30, 2019. Listed below are some of our principal products.
Diversified Industrial Segment. Our Diversified Industrial Segment products 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 products fabrication & assembly
• Electromagnetic interference shielding
• Metal & plastic composite bonded seals
• Extrusion & fabricated seals
• High-temperature metal seals
• Precision-cut seals
• Thermal management
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 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 and IoT sensors
• Hose couplings
• Hose crimpers
• 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 flow control solutions that are critical to a wide range of applications involving
extreme corrosion resistance, temperatures, pressures and precise flow, 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-offs
• Fan drives
• Electrohydraulic pumps
• Drive controlled pumps
• Screw pumps
• Integrated hydrostatic transmissions
Hydraulic and 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 OEM specifications for application to particular end products. Standard and custom products are also used in the
replacement of original products. We market our Diversified Industrial Segment products primarily through field sales
employees and approximately 15,500 independent distributor locations throughout the world.
Aerospace Systems Segment. Our Aerospace Systems Segment products are used in 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
We market our Aerospace Systems Segment products through our regional sales organizations, which sell directly to
OEMs and end users throughout the world.
6
Competition
Parker operates in highly competitive markets and industries. We offer our products over numerous, varied markets
through our divisions operating in 50 countries. Our global scope means that we have hundreds of competitors across our
various markets and product offerings. Our competitors include U.S. and non-U.S. companies. These competitors and the
degree of competition vary widely by product lines, end markets, geographic scope and/or geographic locations. Although each
of our segments has numerous competitors, given our market and product breadth, no single competitor competes with the
Company with respect to all the products we manufacture and sell.
In the Diversified Industrial Segment, Parker competes on the basis of product quality and innovation, customer service,
manufacturing and distribution capability, and price competitiveness. We believe that we are one of the market leaders in most
of the major markets for our most significant Diversified Industrial Segment products. We have comprehensive motion and
control packages for the broadest systems capabilities. While our 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 or product in our Diversified Industrial
Segment.
In the Aerospace Systems Segment, we have developed alliances with key customers based on our advanced
technological and engineering capabilities, superior performance in quality, delivery, and service, and price competitiveness.
This has enabled us to obtain significant original equipment business on new aircraft programs for our systems and components
as well as the follow-on repair and replacement business for these programs. Further, the Aerospace Systems Segment utilizes
low-cost manufacturing techniques and best cost region strategies to achieve a lower cost producer status. Although we believe
that we are one of the market leaders in most of the major markets for our most significant Aerospace Systems Segment
products, primary global competitors for these products include Eaton Corporation plc, Honeywell International, Inc., Moog
Inc., Triumph Group, Inc., UTC Collins Aerospace, Woodward, Inc. and Safran S.A.
We believe that our platform utilizing eight core technologies, which consist of electromechanical, filtration, fluid
handling, hydraulics, pneumatics, process control, refrigeration, and sealing and shielding, is a positive factor in our ability to
compete effectively with both large and small competitors. For both of our segments, we believe that the following factors also
contribute to our ability to compete effectively:
•
•
•
•
•
•
•
decentralized business model;
technology breadth and interconnectivity;
engineered products with intellectual property;
long product life cycles;
balanced OEM vs. aftermarket;
low capital investment requirements; and
great generators and deployers of cash over the cycle.
Patents, Trademarks, Licenses
We own a number of patents, trademarks, copyrights and licenses related to our products. We also have exclusive and
non-exclusive rights to use patents, trademarks and copyrights 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. We do not depend on any
single patent, trademark, copyright or license or group of patents, trademarks, copyrights or licenses to any material extent.
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
value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale. Our 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. Our backlog was $4.2 billion at June 30, 2019 and $4.1 billion at June 30, 2018. Approximately 90
percent of our backlog at June 30, 2019 is scheduled for delivery in the succeeding twelve months. Because of the breadth and
global scope of our business, our overall business is generally not seasonal in nature.
7
Environmental Regulation
Certain of our operations require 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, we are
subject to the United States federal "Superfund" law, under which we have 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, 2019, Parker was involved in environmental remediation at various U.S. and non-U.S. manufacturing
facilities presently or formerly operated by us and as a "potentially responsible party," along with other companies, at off-site
waste disposal facilities and regional sites.
We believe that our 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, we believe, will not have in the future, a material adverse effect on our capital
expenditures, earnings, or competitive position.
Our reserve for environmental matters is discussed in Note 16 to the Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.
Energy Matters and Sources and Availability of Raw Materials
Our primary energy source for both of our business segments is electric power. While we 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 coal
and natural gas reserves available to electric utilities. We are subject to governmental regulations in regard to energy supplies
in the United States and elsewhere. To date, we have not experienced any significant disruptions of our operations due to
energy curtailments.
We primarily use steel, brass, copper, aluminum, nickel, rubber and thermoplastic materials and chemicals as the principal
raw materials in our products. We expect these materials to be available from numerous sources in quantities sufficient to meet
our requirements.
Employees
We employ approximately 55,610 persons as of June 30, 2019, of whom approximately 28,500 were employed by foreign
subsidiaries.
Acquisitions
The Company made no material acquisitions in 2019. During 2019, we entered into a definitive agreement under which
we expect to acquire LORD Corporation ("Lord"). The proposed Lord acquisition and prior-year acquisitions are discussed in
Note 3 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. On July 29, 2019, the Company announced that it had entered into a definitive agreement to
acquire EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic"). The proposed
Exotic acquisition is discussed in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K and is incorporated herein by reference.
ITEM 1A. Risk Factors.
The following "risk factors" identify what we believe to be the risks that could materially adversely affect our 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.
8
Risks arising from uncertainty in worldwide and regional economic conditions may harm our business and make it
difficult to project long-term performance.
Our business is sensitive to global macro-economic conditions. Future macroeconomic downturns may have an adverse
effect on our business, results of operations and financial condition, as well as our distributors, customers and suppliers, and on
activity in many of the industries and markets we serve. 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 and monetary policies, and general economic conditions such as inflation, deflation, interest
rates and credit availability. These factors may, among other things, negatively impact our level of purchases, capital
expenditures, and creditworthiness, as well as our distributors, customers and suppliers, and, therefore, the Company’s
revenues, operating profits, margins, and order rates.
We cannot predict changes in worldwide or regional economic conditions and government policies, as such conditions are
highly volatile and beyond our control. If these conditions deteriorate or remain at depressed levels for extended periods,
however, our business, results of operations and financial condition could be materially adversely affected.
As a global business, we are exposed to economic, political and other risks in different countries in which we operate,
which could materially reduce our sales, profitability or cash flows, or materially increase our liabilities.
Our net sales derived from customers outside the United States were approximately 39% in 2019, 41% in 2018 and 40%
in 2017. In addition, many of our 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. Our non-U.S.
operations are subject to risks in addition to those facing our domestic operations, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates and/or changes in monetary policy;
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 our ability to enforce legal rights and remedies;
potentially adverse tax consequences; and
difficulties in implementing restructuring actions on a timely basis.
If we are unable to successfully manage the risks associated with expanding our global business or adequately manage
operational fluctuations internationally, the risks could have a material adverse effect on our business, results of operations or
financial condition.
We are 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") and the proposed acquisitions of
Lord and Exotic.
We expect to continue our strategy of identifying and acquiring businesses with complementary products and services,
and entering into joint ventures, which we believe will enhance our operations and profitability. However, there can be no
assurance that we will be able to continue to find suitable businesses to purchase or joint venture opportunities, or that we will
be able to acquire such businesses or enter into such joint ventures on acceptable terms. Furthermore, there are no assurances
that we will be able to avoid acquiring or assuming unexpected liabilities. If we are unable to avoid these risks, our results of
operations and financial condition could be materially adversely affected.
For example, although we expect to realize certain benefits as a result of our proposed acquisitions of Lord and Exotic,
there is the possibility that we may not complete these proposed acquisitions or that following our acquisitions of Lord and
Exotic we may be unable to successfully integrate those businesses in order to realize the anticipated benefits of the
acquisitions or to do so within the intended timeframe. Uncertainties associated with our proposed acquisitions of Lord and
Exotic may also cause a loss of management personnel and other key employees, which could adversely affect our future
business, operations and financial results.
9
The risks and uncertainties of our proposed acquisitions of Lord and Exotic include, among others:
•
•
•
•
•
•
•
•
the occurrence of any event, change or other circumstances that could delay the closing of the proposed transactions;
the possibility of non-consummation of the proposed transactions and termination of the acquisition agreements;
the failure to satisfy any of the conditions to the proposed transactions set forth in the acquisition agreements; the
possibility that a governmental entity may prohibit the consummation of the proposed transactions or may delay or
refuse to grant a necessary regulatory approval in connection with the proposed transactions or that in order for the
parties to obtain any such regulatory approvals, conditions are imposed that adversely affect the anticipated benefits
from the proposed transactions or cause the parties to abandon the proposed transactions;
adverse effects on our common stock or other securities because of the failure to complete the proposed transactions;
business disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain
relationships with employees, business partners or governmental entities;
the possibility that the expected synergies and value creation from the proposed transactions will not be realized or
will not be realized within the expected time period;
the parties being unable to successfully implement integration strategies; and
and significant transaction costs related to the proposed transactions.
In addition, we may not be able to integrate successfully any businesses that we purchase into our existing business and it
is possible that any acquired businesses or joint ventures may not be profitable. For example, we have devoted significant
management attention and resources to integrating the business and operations of Clarcor. We may encounter or have
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 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 our ability to manage these
new businesses and cut excess costs. If we are unable to avoid these risks, our results of operations and financial condition
could be materially adversely affected.
Our results may be adversely affected if expanded operations from the acquisition of Clarcor or the proposed
acquisitions of Lord and Exotic are not effectively managed.
Our acquisition of Clarcor greatly expanded the size and complexity of our business. The proposed acquisitions of Lord
and Exotic would further expand the size and complexity of our business. Our 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 we will
realize the expected benefits of the acquisition of Clarcor or the proposed acquisitions of Lord and Exotic.
The Company may be subject to risks relating to organizational changes.
We regularly execute organizational changes such as acquisitions, divestitures and realignments to support our growth
and cost management strategies. We also engage in initiatives aimed to increase productivity, efficiencies and cash flow and to
reduce costs. The Company commits significant resources to identify, develop and retain key employees to ensure
uninterrupted leadership and direction. If we are 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 our results of operations and
financial condition could be materially adversely affected. We cannot offer assurances that any of these initiatives will 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.
10
Increased cybersecurity threats and more sophisticated and targeted computer crime could pose a risk to our
information technology systems.
We rely extensively on information technology systems to manage and operate our 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, 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 we suffer any resulting interruption in our
ability to manage and operate our business or if our products are effected, our results of operations and financial condition
could be materially adversely affected. In addition to existing risks, any adoption or deployment of new technologies via
acquisitions or internal initiatives may increase our exposure to risks, breaches, or failures, which could materially adversely
affect our 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 our 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, competitiveness or customers, or other negative consequences resulting in adverse impacts to our results of
operations or financial condition.
Changes in the demand for and supply of our products may adversely affect our financial results, financial condition
and cash flow.
Demand for and supply of our products may be adversely affected by numerous factors, some of which we 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 our products;
increased competition in the markets we serve;
declines in the general level of industrial production;
•
•
•
•
• weakness in the end-markets we serve;
•
•
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 our products could suffer, which could materially adversely
affect the Company’s results of operations.
The development of new products and technologies requires substantial investment and is required to remain
competitive in the markets we serve. If we are unable to successfully introduce new commercial products, our
profitability could be adversely affected.
The markets we serve are characterized by rapidly changing technologies and frequent introductions of new products and
services. Our ability to develop new products based on technological innovation can affect our competitive position and often
requires the investment of significant resources. If we cannot develop, or have difficulties or delays developing new and
enhanced products and services, or if we fail to gain market or regulatory acceptance of new products and technologies, our
revenues may be materially reduced and our competitive position could be materially adversely affected. In addition, we 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.
11
Price and supply fluctuations of the raw materials used in our production processes and by our suppliers of component
parts could negatively impact our financial results.
Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Furthermore,
recently implemented changes to United States 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 our results of operations and profit margins. Our efforts
to manage these fluctuations by, among other things, passing along price increases to our customers, may be subject to a time
delay between the increased raw material prices and our ability to increase the price of our products, or we may be unable to
increase the prices of our products due to pricing pressure, contract terms or other factors. Any such inability to manage
fluctuations could adversely impact our results of operations and cash flows.
Our 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, we may not be able to increase our prices
commensurately with our increased costs. Consequently, our results of operations or financial condition could be materially
adversely affected.
Changes in the competitive environment in which we operate may eliminate any competitive advantages that we
currently have, which could adversely impact our business.
Our operations are subject to competition from a wide variety of global, regional and local competitors, which could
adversely affect our results of operations by creating downward pricing pressure and/or a decline in our margins or market
shares. To compete successfully, we must excel in terms of product quality and innovation, technological and engineering
capability, manufacturing and distribution capability, delivery, price competitiveness, and customer experience.
Litigation and legal and regulatory proceedings against the Company could decrease our liquidity, impair our financial
condition and adversely affect our results of operations.
From time to time, we are subject to litigation or other commercial disputes and other legal and regulatory proceedings
relating to our business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory
proceedings, we cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An
unfavorable outcome could materially adversely impact our business, financial condition and results of operations.
Furthermore, as required by U.S. generally accepted accounting principles, we establish reserves based on our assessment of
contingencies, including contingencies related to legal claims asserted against us. Subsequent developments in legal
proceedings may affect our assessment and estimates of the loss contingency recorded as a reserve and require us to make
payments in excess of our reserves, which could have an adverse effect on our results of operations.
We are 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 our business and our employees. Despite our policies, procedures
and compliance programs, our internal controls and compliance systems may not be able to protect the Company from
prohibited acts willfully committed by our employees, agents or business partners that would violate such applicable laws and
regulations. Any such improper acts could damage the Company's reputation, subject us to civil or criminal judgments, fines or
penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact our business,
financial condition and results of operations.
Further, our operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our
business, in particular the United States and Europe. These laws prohibit, among other things, anticompetitive agreements and
practices. If any of our commercial agreements or practices are found to violate or infringe such laws, we may be subject to
civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe antitrust
and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and
enforceable. Accordingly, any violation of these laws could harm our reputation and could have a material adverse effect on
our earnings, cash flows and financial condition.
12
Additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities could adversely
impact our financial condition and cash flow.
Parker is subject to income taxes in the U.S. and various non-U.S. jurisdictions. Our domestic and international tax
liabilities are dependent upon the location of earnings among these different jurisdictions. Our future results of operation could
be adversely affected by changes in effective tax rate as a result of changes in tax laws and judicial or regulatory interpretation
thereof, 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. 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.
Due to the nature of our business and products, we may be liable for damages based on product liability claims.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our
products and the products of third-party vendors that we use or resell. Significant product liability claims could have a material
adverse effect on the Company’s financial condition, liquidity and results of operations. Although we currently maintain what
we believe to be suitable and adequate product liability insurance, there can be no assurance that we will be able to maintain
our insurance on acceptable terms or that our insurance will provide adequate protection against all potential significant
liabilities.
Failure to protect our intellectual property and know-how could reduce or eliminate any competitive advantage and
reduce our sales and profitability, and the cost of protecting our intellectual property may be significant.
Protecting our intellectual property is critical to our innovation efforts. We own a number of patents, trade secrets,
copyrights, trademarks, trade names and other forms of intellectual property related to our products and services throughout the
world and the operation of our business. We also have exclusive and non-exclusive rights to intellectual property owned by
others. Our intellectual property may be challenged or infringed upon by third parties or we 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 our business increases the risk that our intellectual property may be subject to infringement or other
unauthorized use or disclosure by others. In some cases, our ability to protect our 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 our intellectual property rights or our inability to preserve existing intellectual property rights
could adversely impact our competitive position and results of operations.
Our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial
flexibility.
We have incurred significant indebtedness, and may incur additional debt for acquisitions, operations, research and
development and capital expenditures. Our ability to make interest and scheduled principal payments and meet restrictive
covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or
changes in our credit ratings or our outlook. These changes could increase our cost of financing and limit our debt capacity,
thereby limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital
needs, which may place us at a competitive disadvantage.
We carry goodwill on our balance sheet, which is subject to impairment testing and could subject us to significant non-
cash charges to earnings in the future if impairment occurs.
We have goodwill recorded on our balance sheet. Goodwill is not amortized, but is tested for impairment annually in the
second quarter or more often if events or changes in circumstances indicate a potential impairment may exist. Factors that
could indicate that our goodwill is impaired include a decline in our stock price and market capitalization, lower than projected
operating results and cash flows, and slower growth rates in our industry. Declines in our stock price, lower operating results
and any decline in industry conditions in the future could increase the risk of impairment. Impairment testing incorporates our
estimates of future operating results and cash flows, estimates of allocations of certain assets and cash flows among reporting
units, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating
results and cash flows. If we determine at a future time that further impairment exists, it may result in a significant non-cash
charge to earnings and lower stockholders’ equity.
13
We may be required to make material expenditures in order to comply with environmental laws and climate change
regulations, or incur additional liabilities under these laws and regulations.
Our operations necessitate the use and handling of hazardous materials and, as a result, subject us 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, we are subject to the U.S. federal "Superfund" law, under which we have
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. We 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 us to additional costs and restrictions,
including increased energy and raw material costs. Until definitive regulations are adopted, we are not able to predict how such
regulations would affect our business, operations or financial results.
We 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 our business, results of operations and financial
condition.
Increasing costs of certain employee and retiree benefits could adversely affect our liability for such benefits.
The funding requirements and the amount of expenses recorded for our 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 our results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and we
continue to absorb the majority of these costs, these increasing costs may adversely impact our future results of operations.
As a provider of products to the U.S. government, we are subject to additional risks related to future government
spending as well as unusual performance conditions and enhanced compliance risks.
In addition to the risks identified herein, doing business with the U.S. government subjects us 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 our failure to perform, or other unsatisfactory performance under the
applicable contract. We are subject to government investigations of our 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 we 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
our results of operations.
ITEM 1B. Unresolved Staff Comments. None.
14
ITEM 1C. Information about our Executive Officers.
Our executive officers as of August 15, 2019, were as follows:
Position
Officer
Since(1)
Age as of
8/15/2019
Name
Thomas L. Williams
Lee C. Banks
Catherine A. Suever
Chairman of the Board, Chief Executive Officer and Director
President, Chief Operating Officer and Director
Executive Vice President – Finance & Administration and
Chief Financial Officer
Mark J. Hart
William R. "Skip" Bowman
Executive Vice President – Human Resources & External Affairs
Vice President and President - Instrumentation Group
Thomas C. Gentile
Todd M. Leombruno
Joseph R. Leonti
Robert W. Malone
M. Craig Maxwell
Dinu J. Parel
Jennifer A. Parmentier
Andrew D. Ross
Roger S. Sherrard
Andrew M. Weeks
Vice President – Global Supply Chain
Vice President and Controller
Vice President, General Counsel and Secretary
Vice President and President – Filtration Group
Vice President – Chief Technology and Innovation Officer
Vice President and Chief Information Officer
Vice President and President – Motion Systems Group
Vice President and President – Fluid Connectors Group
Vice President and President – Aerospace Group
Vice President and President – Engineered Materials Group
2005
2001
2010
2016
2016
2017
2017
2014
2014
2003
2018
2015
2012
2003
2015
60
56
60
54
61
47
49
47
55
61
39
52
52
53
56
(1) Executive officers 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. Leonti, Maxwell, and Sherrard have served
in the executive capacities indicated above 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 Goodyear Tire & Rubber Company.
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. She is also a director of Hexcel Corporation.
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.
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.
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.
15
Mr. Parel has been Vice President and Chief Information Officer since October 2018. He was Vice President and Chief
Information Officer at Dover Corporation from May 2016 through October 2018. Prior to Dover, he held several IT leadership
roles at Baker Hughes from March 2010 to May 2016, including IT Integration Leader and Senior Director, IT North America.
Ms. Parmentier has been Vice President and President of the Motion Systems Group since February 2019. She was Vice
President and President of the Engineered Materials Group from September 2015 to February 2019. 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 Engineered Materials Group since February 2019. He was Vice
President and President of the Motion Systems Group from September 2015 to February 2019. He was Vice President -
Operations of the Aerospace Group from April 2013 to September 2015.
ITEM 2. Properties. Our corporate headquarters is located in Cleveland, Ohio, and, at June 30, 2019, the Company
maintained approximately 290 manufacturing plants. We also maintain various sales and administrative offices and distribution
centers throughout the world. None of these plants, administrative offices or distribution centers are individually material to
our operations. The facilities are situated in 37 states within the United States and in 49 other countries. We own the majority
of our manufacturing plants, and our leased properties primarily consist of sales and administrative offices and distribution
centers.
We believe that our properties have been adequately maintained, are in good condition generally and are suitable and
adequate for our business as presently conducted. The extent to which we utilize our properties varies by property and from
time to time. We believe that our restructuring efforts have brought capacity levels closer to present and anticipated needs.
Most of our manufacturing facilities remain capable of handling volume increases.
ITEM 3. Legal Proceedings. None.
ITEM 4. Mine Safety Disclosures. Not applicable.
16
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". As of July 31, 2019, the number of shareholders of record of the
Company was 3,464.
(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, 2019 through April 30, 2019
May 1, 2019 through May 31, 2019
June 1, 2019 through June 30, 2019
Total
(a) Total
Number
of Shares
Purchased
91,600
103,000
96,283
290,883
(b) Average
Price Paid
Per Share
$
$
$
182.97
168.89
164.50
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
91,600
103,000
96,283
290,883
(d) Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased
Under the Plans or
Programs
11,046,103
10,943,103
10,846,820
(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)
Net sales
Net income attributable to common shareholders
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Total assets
Long-term debt
$
2019
14,320,324
1,512,364
11.63
11.48
3.16
17,576,690
6,520,831
$
2018
14,302,392
1,060,801
7.98
7.83
2.74
15,320,087
4,318,559
$
2017
12,029,312
983,412
7.37
7.25
2.58
15,489,904
4,861,895
$
2016
11,360,753
806,840
5.96
5.89
2.52
12,034,142
2,652,457
$
2015
12,711,744
1,012,140
7.08
6.97
2.37
12,254,279
2,698,957
17
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 changes in tax laws in the United States and
foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may
impact the Company's tax calculations. A change in the economic conditions in individual markets may have a particularly
volatile effect on segment performance.
Among other factors which may affect future performance are:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
global economic and political factors, including manufacturing activity, air travel trends, currency exchange rates and
monetary policy, trade policy and tariffs, difficulties entering new markets and general economic conditions such as
inflation, deflation, interest rates and credit availability;
our 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") and the
proposed acquisitions of LORD Corporation ("Lord") and EMFCO Holdings Incorporated, parent company of Exotic
Metals Forming Company LLC ("Exotic"); ability to successfully divest businesses planned for divestiture and realize
the anticipated benefits of such divestitures;
our ability to effectively manage expanded operations from the acquisition of Clarcor or the proposed acquisitions of
Lord and Exotic;
the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the
ability to complete such activities and realize the anticipated cost savings from such activities;
increased cybersecurity threats and sophisticated computer crime;
business relationships with and purchases by or from major customers, suppliers or distributors, including delays or
cancellations in shipments;
the development of new products and technologies requiring substantial investment;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be
recovered in product pricing;
disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue
estimates for new development programs, and changes in product mix;
uncertainties surrounding the ultimate resolution of outstanding legal and regulatory proceedings, including the
outcome of any appeals;
additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
potential product liability risks;
our ability to enter into, own, renew and maintain intellectual property and know-how;
our leverage and future debt service obligations;
potential impairment of goodwill;
compliance costs associated with environmental laws and climate change regulations;
our ability to manage costs related to insurance and employee retirement and health care benefits;
compliance with federal rules, regulations, audits and investigations associated with being a provider of products to
the United States government; and
our ability to implement successfully the Company's capital allocation initiatives, including timing, price and
execution of share repurchases.
The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended
June 30, 2019, and undertakes no obligation to update them unless otherwise required by law.
18
Overview
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing
precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
Our order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and
future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is
received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day
to 18 months for aerospace orders. We believe the leading economic indicators of these markets that have a 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, 2019
March 31, 2019
June 30, 2018
United States
Eurozone countries
China
Brazil
50.6
47.6
49.4
51.0
55.3
47.5
50.8
52.8
60.2
54.9
51.0
49.8
Global aircraft miles flown increased by approximately four percent and global revenue passenger miles increased
approximately five percent from their comparable 2018 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 2019 will
increase by approximately four percent from its fiscal 2018 level.
Housing starts in June 2019 were 10 percent higher than housing starts in March 2019 and six percent higher than housing
starts in June 2018.
We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business
opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation.
We believe we can meet our strategic objectives by:
•
•
Serving the customer and continuously enhancing its experience with the Company;
Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience,
profitable growth and financial performance;
• Maintaining a decentralized division and sales company structure;
•
Fostering a safety first and entrepreneurial culture;
• Engineering innovative systems and products to provide superior customer value through improved service, efficiency
and productivity;
• Delivering products, systems and services that have demonstrable savings to customers and are priced by the value
they deliver;
• Acquiring strategic businesses;
• Organizing around targeted regions, technologies and markets;
• Driving efficiency by implementing lean enterprise principles; and
• Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.
19
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, we will continue to assess our 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. Discussion of the
2017 financial statements is included in Part II, Item 7 of the Company's 2018 Annual Report on Form 10-K.
CONSOLIDATED STATEMENT OF INCOME
The Consolidated Statement of Income summarizes the Company's operating performance over the last three years. The
discussion below compares the operating performance in 2019 and 2018.
(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) expense, net
Loss (gain) on disposal of assets
Effective tax rate
$
$
$
$
$
$
2019
14,320
25.3%
1,544
10.8%
190
(61)
11
21.7%
2018
14,302
24.9%
1,640
11.5%
214
13
(4)
37.7%
Net income attributable to common shareholders
$
1,512
$
1,061
Net sales in 2019 increased slightly from the 2018 amount. This change was a result of an increase in volume, primarily in the
Aerospace Systems Segment, partially offset by the effect of currency rate changes. The effect of currency rate changes
decreased net sales in 2019 by approximately $305 million, of which $285 million was attributable to the Diversified Industrial
International operations.
Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2019 primarily due to higher
margins in the Aerospace Systems Segment driven by increased aftermarket and original equipment manufacturer ("OEM")
volume and profitability and lower engineering development costs. Lower operating costs in the Diversified Industrial
Segment resulting from prior-year business realignment and acquisition integration activities and the Company's simplification
initiative also contributed to higher margins in 2019. Foreign currency transaction loss included in cost of sales for 2019 and
2018 was $5.9 million and $7.3 million, respectively. Included in cost of sales in 2019 and 2018 were business realignment
charges of $14.7 million and $44.9 million, respectively.
Selling, general and administrative expenses decreased 5.9 percent in 2019 primarily due to the benefits from prior-year
business realignment and acquisition integration activities and the Company's simplification initiative, lower amortization
expense and lower incentive compensation. These benefits were partially offset by an increase in acquisition-related expenses
and higher net expense associated with the Company's deferred compensation program and related investments. Included in
selling, general and administrative expenses in 2019 and 2018 were business realignment charges of $13.2 million and $36.8
million, respectively.
Interest expense in 2019 decreased primarily due to lower weighted-average interest rates, partially offset by higher weighted-
average borrowings.
20
Other (income) expense, net included the following:
(dollars in millions)
Expense (income)
Income related to equity method investments
Non-service components of retirement benefit cost
Sale and writedown of investments
Interest income
Other items, net
2019
(93) $
40
—
(18)
10
(61) $
$
$
2018
(50)
42
41
(15)
(5)
13
Loss (gain) on disposal of assets in 2018 includes a loss of $20 million on the sale of a business and a gain of $28 million on
the sale of real estate.
Effective tax rate in 2019 was lower than 2018 primarily due to the net impact of one-time adjustments that were recorded in
the prior year as a result of the U.S. Tax Cuts and Jobs Act ("TCJ Act") and the reduced U.S. income tax rate in the current year
resulting from enactment of the TCJ Act.
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
2019
2018
$
6,809
5,001
1,139
805
6,727
5,260
1,076
765
16.7%
16.1%
2,011
$
16.0%
14.5%
2,167
$
$
21
The Diversified Industrial Segment operations experienced the following percentage changes in net sales:
Diversified Industrial North America – as reported
Divestitures
Currency
Diversified Industrial North America – without divestitures and currency
Diversified Industrial International – as reported
Divestitures
Currency
Diversified Industrial International – without divestitures and currency
Total Diversified Industrial Segment – as reported
Divestitures
Currency
Total Diversified Industrial Segment – without divestitures and currency
2019
1.2 %
(0.3)%
(0.3)%
1.8 %
(4.9)%
(0.6)%
(5.4)%
1.1 %
(1.5)%
(0.5)%
(2.5)%
1.5 %
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 divestitures made within the
prior four fiscal quarters as well as the effects of currency exchange rates (a non-GAAP measure). The effects of 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 2019 for the Diversified Industrial North American operations increased 1.2 percent from 2018. Divestitures and the
effect of currency exchange rates decreased sales by approximately $21 million and $17 million, respectively. Excluding
divestitures and the effect of currency rate changes, sales in 2019 for the Diversified Industrial North American operations
increased 1.8 percent from prior-year levels reflecting higher demand from distributors and end users in the heavy-duty truck,
engine, and construction equipment markets, partially offset by lower demand from end users in the oil and gas, marine,
semiconductor and power generation markets.
Sales in the Diversified Industrial International operations decreased 4.9 percent in 2019. Divestitures contributed
approximately $31 million to the decrease in sales in 2019. The effect of currency rate changes decreased sales by $285
million, reflecting the strengthening of the U.S. dollar primarily against currencies in the Eurozone countries, China and Brazil.
Excluding divestitures and the effect of currency rate changes, sales in 2019 for the Diversified Industrial International
operations increased 1.1 percent from 2018 levels due to slightly higher volume in the Asia Pacific and Latin America regions,
partially offset by a decrease in sales in Europe. Within the Asia Pacific region, the increase in sales was primarily due to
higher demand from distributors as well as end users in the construction equipment, oil and gas and engine markets, partially
offset by lower end-user demand in the semiconductor, cars and light truck and industrial machinery markets. In Europe,
higher demand from distributors and end users in the construction equipment, forestry and heavy-duty truck markets was offset
by lower end-user demand in the general industrial machinery, cars and light truck, mills and foundries, machine tool and oil
and gas markets. Within Latin America, distributors and end users in the farm and agricultural equipment and heavy-duty truck
markets contributed to the increase in sales, partially offset by lower end-user demand in the power generation market.
Operating margins in 2019 increased in both the Diversified Industrial North American and International operations primarily
due to lower operating expenses resulting from prior-year business realignment and acquisition integration activities and the
Company's simplification initiative, lower current-year business realignment expenses and lower intangible amortization
expense, partially offset by higher warehouse and shipping costs. Higher manufacturing and materials support costs also
impacted the Diversified Industrial North American operating margins.
22
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
$
2019
13
15
$
2018
37
41
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. The Company anticipates that cost savings realized from the work force reduction measures taken
during 2019 will increase 2020 operating income by approximately two percent in both the Diversified Industrial North
American and Diversified Industrial International operations. In 2020, the Company expects to continue to take actions
necessary to structure appropriately the operations of the Diversified Industrial Segment. These actions are expected to result
in approximately $20 million in charges in 2020.
The Company anticipates Diversified Industrial North American sales for 2020 will range between a decrease of 2.8 percent
and an increase of 0.2 percent from the 2019 level and Diversified Industrial International sales for 2020 will decrease between
6.2 percent and 3.2 percent from the 2019 level. Diversified Industrial North American operating margins in 2020 are expected
to range from 16.8 percent to 17.2 percent and Diversified Industrial International margins are expected to range from 15.4
percent to 15.9 percent.
The decrease in total Diversified Industrial Segment backlog in 2019 was primarily due to shipments exceeding orders in both
the North American and International businesses, with each business accounting for 50 percent of the change. Within the
Diversified Industrial International business, the decrease in backlog was split evenly between Europe and the Asia Pacific
region. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders,
only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar
value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Aerospace Systems Segment
(dollars in millions)
Sales
Operating income
Operating income as a percent of sales
Backlog
2019
2,511
$
488
19.4%
2018
2,316
398
17.2%
2,209
$
1,954
$
$
Sales in 2019 were higher than the 2018 level primarily due to higher volume in the commercial and military aftermarket
businesses as well as in the commercial and military original equipment manufacturer (OEM) businesses.
The higher margin in 2019 was primarily due to a favorable product mix resulting from higher aftermarket and OEM volume
and profitability, higher joint venture earnings, lower engineering development and the absence of business realignment
expenses in the current year.
The increase in backlog in 2019 was primarily due to orders exceeding shipments in the military OEM and aftermarket
businesses and in the commercial aftermarket business, partially offset by shipments exceeding orders in the commercial OEM
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 value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
For 2020, sales are expected to increase between 3.0 percent and 5.6 percent from the 2019 level and operating margins are
expected to range from 20.4 percent to 21.0 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.
23
Corporate general and administrative expenses were $195 million in 2019 compared to $201 million in 2018. As a percent of
sales, corporate general and administrative expenses in both 2019 and 2018 were 1.4 percent. The lower expense in 2019 is
primarily due to lower incentive compensation, partially offset by higher net expense associated with the Company's deferred
compensation program and related investments.
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, net
Sale and writedown of investments
Acquisition expenses
Other items, net
2019
6
$
$
52
20
11
—
17
7
$
113
$
2018
7
51
26
(4)
41
5
(4)
122
Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities
and other investments and intercompany transactions. 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. The acquisition expenses
incurred in 2019 primarily relate to the proposed acquisition of Lord.
CONSOLIDATED BALANCE SHEET
The Consolidated Balance Sheet shows the Company's financial position at year end, compared with the previous year end.
This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.
(dollars in millions)
Cash
Trade accounts receivable, net
Inventories
Long-term debt
Shareholders' equity
Working capital
Current ratio
$
$
2019
3,371
2,131
1,678
6,521
5,962
4,521
2.4
$
$
2018
855
2,146
1,621
4,319
5,860
1,888
1.6
Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $975 million and
$836 million held by the Company's foreign subsidiaries at June 30, 2019 and 2018, 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 5 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 53 days in 2019 and 51 days in 2018. The Company believes that its receivables are
collectible and appropriate allowances for doubtful accounts have been recorded.
24
Inventories increased $57 million from 2018 primarily due to a $59 million increase in inventories in the Aerospace Systems
Segment and an increase of $12 million in the Diversified Industrial Segment, partially offset by a decrease of $15 million
related to the effect of foreign currency translation. Within the Diversified Industrial Segment, an increase in inventories in the
North American operations was partially offset by a decrease in the International operations. Days supply of inventory on hand
was 69 days in 2019 and 64 days in 2018.
Long-term debt increased $2,202 million from 2018 primarily due to issuance of new debt related to the proposed acquisition
of Lord. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for
further discussion.
Shareholders' equity activity during 2019 included a decrease of $800 million related to share repurchases, a decrease of $228
million related to pensions and postretirement benefits resulting from net actuarial losses due to a decrease in discount rates and
a decrease of $66 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 increase (decrease) in cash and cash equivalents
2019
2018
1,730
(219)
902
(16)
2,397
$
$
1,597
24
(1,682)
(1)
(62)
$
$
Cash flows from operating activities in 2019 reflects an increase in net income of $452 million and an increase of $144
million from cash provided by working capital items. The Company also made a discretionary cash contribution to the
Company's domestic qualified defined benefit plan of $200 million in 2019.
Cash flows from investing activities includes net (purchases) maturities of marketable securities and other investments of
$(107) million and $3 million in 2019 and 2018, respectively. It also includes $195 million and $248 million of capital
expenditures in 2019 and 2018, respectively. During 2018 cash flows from investing activities benefited from proceeds related
to the sale of the global Facet filtration business.
Cash flows from financing activities includes issuance of long-term debt of $2,337 million in 2019 primarily related to the
proposed acquisition of Lord. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K for further discussion. Cash flows from financing activities during 2018 included the repayment of long-
term debt of approximately $945 million. The Company repurchased 4.8 million common shares for $800 million during 2019
compared to the repurchase of 1.7 million common shares for $300 million in 2018.
Dividends have been paid for 276 consecutive quarters, including a yearly increase in dividends for the last 63 years. The
current annual dividend rate is $3.52 per common share.
The Company's goal is to maintain a strong investment-grade credit profile. At June 30, 2019, 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
The rating agencies periodically update the Company's credit ratings as events occur. On July 29, 2019, Standard & Poor's
downgraded the Company's credit rating to A- reflecting the additional debt that will be used to fund the recently announced
acquisitions.
As of June 30, 2019, 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 $1,414 million was available at June 30, 2019. Refer to Note 9 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 $586
million outstanding commercial paper notes as of June 30, 2019, and the largest amount of commercial paper notes outstanding
during the last quarter of 2019 was $1,000 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.
During 2019, the Company entered into a definitive agreement under which it expects to acquire Lord for approximately
$3,675 million in cash. The Company intends to finance the purchase price for the Lord acquisition with the net proceeds from
the Senior Notes due 2024, 2029 and 2049, the delayed-draw term loan and certain commercial paper proceeds. Refer to Note
10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. On
July 29, 2019, the Company announced that it had entered into a definitive agreement to acquire Exotic for approximately
$1,725 million in cash and intends to finance the purchase price for this acquisition with new debt. These acquisitions remain
subject to certain closing conditions.
Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions
was $166 million at June 30, 2019. 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 5)
$
187
$
— $
— $
59
$
Long-term debt (Note 10)
Interest on long-term debt
Operating leases (Note 10)
Retirement benefits (Note 11)
Total
6,596
3,681
143
119
—
227
46
82
—
454
53
10
875
436
21
9
128
5,721
2,564
23
18
$
10,726
$
355
$
517
$
1,400
$
8,454
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.
26
Revenue Recognition - Revenues are recognized when control of performance obligations, which are distinct goods or
services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the
use of and obtain the benefits from the goods or services. A majority of the Company’s revenues are recognized at a point in
time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of the
Company’s revenues are recognized over time if the customer simultaneously receives control as the Company performs work
under a contract, if the customer controls the asset as it is being produced, or if the product being produced for the customer has
no alternative use and the Company has a contractual right to payment.
For contracts where revenue is recognized over time, the Company uses the cost-to-cost, efforts expended or units of delivery
method depending on the nature of the contract, including length of production time. The estimation of these costs and efforts
expended 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 these 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.
When there are multiple performance obligations within a contract, the transaction price is allocated to each performance
obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price
observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the
individual performance obligations is transferred to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that may
affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to
reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of
revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the
contract and the Company’s best judgment at the time.
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, reporting units are equivalent to its operating segments. As quoted market prices are
not available for the reporting units, determining whether an impairment has occurred requires the valuation of the respective
reporting unit, which was estimated using both income-based and market-based valuation methods. The income-based
valuation method utilized a discounted cash flow model, which required 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 in the discounted cash
flow analysis. Within the discounted cash flow models, the Company also used a discount rate, commensurate with its cost of
capital, but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation method
included an analysis, for each reporting unit, consisting of market-adjusted multiples based on key data points for guideline
public companies. The Company also reconciled the estimated aggregate fair value of its reporting units resulting from these
procedures to its overall market capitalization.
The results of the Company's 2019 annual goodwill impairment test performed as of December 31, 2018 indicated that no
goodwill impairment existed. 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 Company may need to conduct additional goodwill impairment tests, and the estimated fair value of
certain reporting units could fall below their carrying value.
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 2019, the Company did not record any material
impairment related to long-lived assets.
27
Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are
determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of
return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are
determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans'
measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and
losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial
statements.
For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on
plan assets is estimated to have a $15 million effect on annual pension expense and a 50 basis point decrease in the discount
rate is estimated to increase annual pension expense by $23 million. As of June 30, 2019, $1,064 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. Any
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 11 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form
10-K.
Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax
positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting
and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing
deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over
which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the
balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will
be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a
taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is
not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial
Statements. Further information on income taxes is provided in Note 5 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 designated as hedges are adjusted to fair value through the
Consolidated Statement of Income. Gains or losses on derivatives that are designated as 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, 2019 by approximately $9 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
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, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and
cash flows, for each of the three years in the period ended June 30, 2019, 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, 2019, 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 financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended June 30, 2019, 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, 2019, 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 error or fraud, 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.
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 controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
30
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - Refer to Notes 1 and 8 to the financial statements
Critical Audit Matter Description
The Company tests goodwill 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 year
ended June 30, 2019, the Company’s reporting units are the same as its operating segments. Prior to fiscal year 2019, the
Company’s reporting units were one level below the operating segment level.
We identified the determination of reporting units for goodwill as a critical audit matter due to the changes in the
composition of reporting units made by the Company during the year ended June 30, 2019 and the significant judgments
made by management to conclude that the Company’s reporting units are the same as its operating segments. This, in turn,
required a high degree of auditor judgment and an increased extent of effort to evaluate management’s conclusions
regarding the changes to the composition of reporting units.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of reporting units for goodwill included the following, among others:
• We tested the effectiveness of the control over management’s determination of goodwill reporting units for goodwill.
• We evaluated the following significant judgments made by management:
–
Identification of reporting units including the consideration of discrete financial information that was
available and level of review of the operating results for each reporting unit.
– The aggregation of single reporting units based on similar economic characteristics.
• We performed a retrospective review of select reporting units identified at one level below the operating segment level
to evaluate the potential existence of any impairment indicators prior to the change in the determination of reporting
units at the operating segment level.
/s/ DELOITTE & TOUCHE, LLP
Cleveland, Ohio
August 23, 2019
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) expense, net
Loss (gain) on disposal of assets (Note 3)
Income before income taxes
Income taxes (Note 5)
Net Income
Less: Noncontrolling interest in subsidiaries' earnings
Net Income Attributable to Common Shareholders
For the years ended June 30,
2019
$ 14,320,324
2018
2017
$ 14,302,392
$ 12,029,312
10,703,484
10,737,745
1,543,939
190,138
(61,247)
10,585
1,933,425
420,494
1,512,931
567
1,639,989
213,873
12,991
(4,483)
1,702,277
640,962
1,061,315
514
9,119,029
1,412,820
162,436
49,647
(43,261)
1,328,641
344,797
983,844
432
$
1,512,364
$
1,060,801
$
983,412
Earnings per Share Attributable to Common Shareholders (Note 6)
Basic earnings per share
Diluted earnings per share
$
$
11.63
11.48
$
$
7.98
7.83
$
$
7.37
7.25
The accompanying notes are an integral part of the consolidated financial statements.
32
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the years ended June 30,
(Dollars in thousands)
Net Income
Less: Noncontrolling interests in subsidiaries' earnings
$
2019
1,512,931
567
Net income attributable to common shareholders
1,512,364
1,060,801
2018
2017
$
1,061,315
$
983,844
514
432
983,412
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment and other (net of tax of
$709, $16,964 and $40,935 in 2019, 2018 and 2017)
Retirement benefits plan activity (net of tax of $71,821, $(82,506)
and $(218,590) in 2019, 2018 and 2017)
Other comprehensive (loss) income
Less: Other comprehensive income (loss) for noncontrolling interests
Other comprehensive (loss) income attributable to common
shareholders
Total Comprehensive Income Attributable to Common
Shareholders
(66,392)
(18,575)
(80,865)
(227,783)
(294,175)
53
179,253
160,678
(440)
(294,228)
161,118
384,784
303,919
358
303,561
$
1,218,136
$
1,221,919
$
1,286,973
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
2019
2018
2017
6,808,948
$
6,726,900
$
5,000,599
2,510,777
5,259,793
2,315,699
5,366,809
4,377,776
2,284,727
14,320,324
$
14,302,392
$
12,029,312
1,138,586
$
1,076,021
$
804,890
487,757
2,431,233
194,994
2,236,239
190,138
112,676
765,188
397,970
2,239,179
200,901
2,038,278
213,873
122,128
873,552
579,207
337,496
1,790,255
172,632
1,617,623
162,436
126,546
1,933,425
$
1,702,277
$
1,328,641
13,189,204
$
13,368,619
$
13,366,981
1,546,053
2,841,433
1,446,745
504,723
1,412,707
710,216
17,576,690
$
15,320,087
$
15,489,904
172,348
$
196,469
$
20,748
1,993
15,225
35,973
195,089
$
247,667
$
203,144
$
211,648
$
16,268
6,263
16,737
9,421
225,675
$
237,806
$
148,765
16,929
38,054
203,748
176,823
17,484
8,561
202,868
$
$
$
$
$
$
$
$
$
$
34
(Dollars in thousands)
By Geographic Area (b)
Net Sales:
North America
International
Long-Lived Assets:
North America
International
2019
2018
2017
$
$
$
$
9,318,195
$
8,978,490
$
7,585,689
5,002,129
5,323,902
4,443,623
14,320,324
$
14,302,392
$
12,029,312
1,052,263
$
1,103,308
$
1,145,127
716,024
752,929
792,165
1,768,287
$
1,856,237
$
1,937,292
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 (2019 - $234,703; 2018 - $235,665; 2017 - $240,182).
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 7)
Prepaid expenses
Total Current Assets
Plant and equipment (Note 1)
Less: Accumulated depreciation
Plant and equipment, net
Deferred income taxes (Notes 1 and 5)
Investments and other assets (Note 1)
Intangible assets, net (Notes 1 and 8)
Goodwill (Notes 1 and 8)
Total Assets
2019
2018
$
3,219,767
$
150,931
2,131,054
310,708
1,678,132
182,494
7,673,086
5,186,730
3,418,443
1,768,287
150,462
747,773
1,783,277
5,453,805
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
2,015,520
5,504,420
$
17,576,690
$
15,320,087
Liabilities and Equity
Current Liabilities
Notes payable and long-term debt payable within one year (Notes 9 and 10)
$
587,014
$
Accounts payable, trade
Accrued payrolls and other compensation
Accrued domestic and foreign taxes
Other accrued liabilities
Total Current Liabilities
Long-term debt (Note 10)
Pensions and other postretirement benefits (Note 11)
Deferred income taxes (Notes 1 and 5)
Other liabilities
Total Liabilities
Equity (Note 12)
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 2019 and 2018
Additional capital
Retained earnings
Accumulated other comprehensive (loss)
Treasury shares at cost: 52,566,086 in 2019 and 48,632,105 in 2018
Total Shareholders' Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
1,413,155
426,285
167,312
558,007
3,151,773
6,520,831
1,304,379
193,066
438,489
11,608,538
—
90,523
462,086
12,777,538
(2,059,048)
(5,309,130)
5,961,969
6,183
5,968,152
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
$
17,576,690
$
15,320,087
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,
2019
2018
2017
$
1,512,931
$
1,061,315
$
983,844
Depreciation
Amortization
Stock incentive plan compensation
Deferred income taxes
Foreign currency transaction loss
Loss (gain) on sale of plant and equipment
Loss (gain) on sale of businesses
(Gain) loss on sale and impairment of investments
Loss (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 (net of cash acquired of $690 in 2019 and $157,426 in 2017)
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 (used in) provided by 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 provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) 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
225,675
210,514
104,078
32,537
5,888
5,091
5,854
(16,749)
7,563
2,452
(51,817)
(33,335)
2,677
(12,397)
2,088
(30,593)
16,698
(168,368)
(90,647)
1,730,140
(2,042)
(195,089)
46,592
19,678
(181,780)
74,908
19,223
(218,510)
2,475
(860,052)
48,828
2,336,749
(213,226)
(412,468)
902,306
(16,306)
2,397,630
822,137
237,806
228,279
118,831
(41,412)
7,284
(24,422)
19,666
41,219
(2)
(301,978)
(92,209)
(16,206)
(16,880)
125,907
(4,614)
44,019
(5,567)
31,239
184,425
1,596,700
—
(247,667)
81,881
177,741
(80,607)
83,905
8,424
23,677
3,682
(381,041)
4,115
1,189
(944,629)
(365,288)
(1,681,972)
(1,154)
(62,749)
884,886
3,219,767
$
822,137
$
202,868
152,361
80,339
37,024
8,060
1,494
(41,285)
—
(1,032)
(95,347)
(73,673)
2,410
(5,795)
174,761
5,922
18,165
(59,738)
(103,866)
14,051
1,300,563
(4,069,197)
(203,748)
14,648
85,610
(465,666)
1,279,318
(4,205)
(3,363,240)
2,202
(338,078)
230,499
2,614,463
(381,078)
(345,380)
1,782,628
(56,718)
(336,767)
1,221,653
884,886
169,378
$
454,699
$
200,860
408,765
131,937
268,127
$
$
The accompanying notes are an integral part of the consolidated financial statements.
37
CONSOLIDATED STATEMENT OF EQUITY
(Dollars in thousands)
Balance June 30, 2016
Net income
Other comprehensive income
Dividends paid ($2.58 per share)
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
Balance June 30, 2017
Net income
Other comprehensive income (loss)
Dividends paid ($2.74 per share)
Stock incentive plan activity
Acquisition activity
Shares purchased at cost
Balance June 30, 2018
Impact of adoption of accounting
standards
Net income
Other comprehensive (loss) income
Dividends paid ($3.16 per share)
Stock incentive plan activity
Shares purchased at cost
Balance June 30, 2019
Common
Stock
Additional
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Treasury
Shares
Noncontrolling
Interests
Total
$
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
983,844
303,919
(338)
(345,380)
1,822
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
51,603
1,512,364
(412,404)
(1,734)
(294,228)
(34,506)
81,007
(799,999)
567
53
(64)
49,869
1,512,931
(294,175)
(412,468)
46,501
(799,999)
$
90,523
$ 462,086
$
12,777,538
$
(2,059,048) $ (5,309,130) $
6,183
$
5,968,152
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 - Revenues are recognized when control of performance obligations, which are distinct goods
or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct
the use of and obtain the benefits from the goods or services. When revenue is recognized at a point in time, control generally
transfers at time of shipment. Revenues are recognized over time if the customer simultaneously receives control as the
Company performs work under a contract, if the customer controls the asset as it is being produced, or if the product produced
for the customer has no alternative use and the Company has a contractual right to payment.
For contracts where revenue is recognized over time, the Company uses the cost-to-cost, efforts expended or units of
delivery method depending on the nature of the contract, including length of production time. The estimation of these costs and
efforts expended 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 these 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.
39
A contract’s transaction price is allocated to each distinct performance obligation. When there are multiple
performance obligations within a contract, the transaction price is allocated to each performance obligation based on its
standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone
sales to customers of the same product or service. Revenue is recognized when control of the individual performance
obligations is transferred to the customer.
The Company considers the contractual consideration payable by the customer and assesses variable consideration that
may affect the total transaction price. Variable consideration primarily includes prompt pay discounts, rebates and volume
discounts and is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including
whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These
estimates are based on historical experience, anticipated performance under the terms of the contract and the Company’s best
judgment at the time.
Payment terms vary by customer and the geographic location of the customer. The time between when revenue is
recognized and payment is due is not significant. The Company’s contracts with customers generally do not include significant
financing components or noncash consideration.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and
handling costs are treated as fulfillment costs and are included in cost of sales. The costs to obtain a contract where the
amortization period for the related asset is one year or less are expensed as incurred.
There is generally no unilateral right to return products. The Company primarily offers an assurance-type standard
warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery.
This type of warranty does not represent a separate performance obligation.
Cash - Cash equivalents consist of short-term, highly liquid investments with a three-month or less maturity. These
investments are carried at cost plus accrued interest and are readily convertible into cash.
Marketable Securities and Other Investments - Consist of short-term, highly liquid investments with stated
maturities of greater than three months from the date of purchase, which are carried at cost plus accrued interest. Marketable
securities and other investments also includes investments in equity securities and available-for-sale debt securities, which are
carried at fair value. Changes in fair value related to equity securities are recorded in net income. Unrealized gains and losses
related to available-for-sale debt securities are recorded in accumulated other comprehensive (loss). Gains and losses on
available-for-sale debt securities are calculated based on the first-in, first-out method. The Company has the ability to liquidate
these 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 $8,874 and $9,672 at June 30, 2019 and 2018, 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
2019
147,719
162,989
310,708
$
$
2018
149,254
179,145
328,399
$
$
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.
40
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
$
2019
281,040
1,567,130
3,223,585
114,975
2018
$
289,686
1,578,701
3,218,639
128,227
$
5,186,730
$
5,215,253
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 $316,728 and $304,389 at June 30, 2019 and 2018, 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 $93,239, $50,473 and $42,352 in 2019, 2018 and 2017, 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. Income tax effects resulting from adjusting temporary differences recorded in accumulated other comprehensive
(loss) are released when the circumstances on which they are based cease to exist.
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 accumulated other comprehensive (loss). Such
adjustments will affect net income only upon sale or liquidation of the underlying foreign investments. Exchange losses 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 $5,888, $7,284 and $8,060, in 2019, 2018 and 2017, 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, 2019. On July 29, 2019, the Company announced that it had
entered into a definitive agreement to acquire EMFCO Holdings Incorporated, parent company of Exotic Metals Forming
Company LLC for approximately $1,725 million in cash. The Company intends to finance the purchase price for the
acquisition with new debt. The acquisition remains subject to certain customary closing conditions.
Recent Accounting Pronouncements - In August 2018, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2018-14, "Compensation--Retirement Benefits--Defined Benefit Plans--General." ASU
2018-14 aims to improve disclosure effectiveness by adding, removing or clarifying certain disclosure requirements related to
defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15,
2020. Early adoption is permitted. The Company adopted ASU 2018-14 on June 30, 2019. The adoption of ASU 2018-14 did
not materially impact the Company's financial statements or related disclosures.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement." ASU 2018-13 aims to improve disclosure
effectiveness by adding, modifying or removing certain disclosure requirements for both recurring and nonrecurring fair value
measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15,
2019. Early adoption is permitted upon issuance of the ASU for any removed or modified disclosure. Adoption of additional
disclosures may be delayed until their effective dates. The Company adopted ASU 2018-13 on April 1, 2019. The adoption of
ASU 2018-13 did not materially impact the Company's financial statements or related disclosures.
41
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJ Act") reduction of the U.S.
federal corporate income tax rate. The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is
permitted in any period after the issuance of the update. The amendments in this update should be applied either in the period
of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in
the TCJ Act is recognized. The Company adopted ASU 2018-02 on April 1, 2019 and elected not to reclassify the tax effects
resulting from the TCJ Act. As a result, the adoption of ASU 2018-02 did not affect the Company's 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 adopted ASU
2017-12 on April 1, 2019. The adoption of ASU 2017-12 did not materially impact the Company's financial statements or
related disclosures.
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item
or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other
components of net benefit cost are required to be presented in the income statement separately from the service cost component
and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost
component is eligible for capitalization, when applicable. ASU 2017-07 should be applied retrospectively for the income
statement presentation of net periodic pension cost and net periodic postretirement benefit cost and prospectively, on or after
the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic
postretirement benefit cost. On July 1, 2018, the Company retrospectively adopted ASU 2017-07 and reclassified prior-year
amounts using a practical expedient that permits the usage of amounts previously disclosed in the retirement benefits note. As
a result, $25,096 and $17,163 of expense was reclassified from cost of sales and selling, general and administrative expenses,
respectively, to other (income) expense, net for 2018. Expense of $69,933 and $41,115 was reclassified from cost of sales and
selling, general and administrative expenses, respectively, to other (income) expense, net for 2017.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16
provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory
when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of
an asset other than inventory. The Company adopted ASU 2016-16 on July 1, 2018 and recorded a cumulative effect adjustment
to increase retained earnings by approximately $32 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. On July 1, 2018, the Company adopted ASU 2016-15 and retrospectively
adjusted its Consolidated Statement of Cash Flows. These retrospective adjustments were not material.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13
requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected
to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the
financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses
relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is
permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.
42
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. The
Company adopted ASU 2016-02 on July 1, 2019 using the optional transition method and will not restate prior periods. The
Company elected to use the package of practical expedients permitted under the transition guidance of the new standard. The
Company is executing a project plan to guide the implementation of this standard and is identifying and implementing
appropriate changes to its business processes and controls to support the accounting and disclosure requirements under the new
guidance. Upon adoption, the Company recorded a right-of-use asset and lease liability related to its operating leases of less
than one percent of total assets.
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. The Company adopted ASU 2016-01 on
July 1, 2018 and reclassified approximately $2 million of unrealized gains from accumulated other comprehensive (loss) to
retained earnings.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue
recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company
expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps
including identifying the contract with a customer, identifying the performance obligations in the contract, determining the
transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the
company satisfies the performance obligations. The Company adopted ASU 2014-09 on July 1, 2018 using the modified
retrospective method and recorded a cumulative effect adjustment to increase retained earnings by approximately $5 million.
See Note 2 for further discussion.
2.
Revenue recognition
Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of
the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over
time.
Disaggregation of revenue
Revenue from contracts with customers is disaggregated by technology platforms for the Diversified Industrial Segment, by
product platforms for the Aerospace Systems Segment and by geographic location for the total Company.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid
power system components for builders and users of various types of manufacturing, packaging, processing, transportation,
agricultural, construction, and military vehicles and equipment. Contracts consist of individual purchase orders for standard
product, blanket purchase orders and production contracts. Blanket purchase orders are often associated with individual
purchase orders and have terms and conditions which are subject to a master supply or distributor agreement. Individual
production contracts, some of which may include multiple performance obligations, are typically for products to be
manufactured to the customer's specifications. Revenue in the Diversified Industrial Segment is typically recognized at the
time of product shipment, but a portion of revenue may be recognized over time for installation services or in situations where
the product being manufactured has no alternative use and the Company has an enforceable right to payment.
43
Diversified Industrial Segment revenues by technology platform:
Motion Systems
Flow and Process Control
Filtration and Engineered Materials
Total
$
$
2019
3,485,068
4,293,393
4,031,086
11,809,547
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which
are utilized on virtually every domestic commercial, military and general aviation aircraft and which also perform a vital role in
naval vessels and land-based weapon systems. Contracts generally consist of blanket purchase orders and individual long-term
production contracts. Blanket purchase orders, which have terms and conditions subject to long-term supply agreements, are
typically associated with individual purchase orders. Revenue in the Aerospace Systems Segment is typically recognized at the
time of product shipment, but a portion of revenue may be recognized over time in situations where the customer controls the
asset as it is being produced or the product being manufactured has no alternative use and the Company has an enforceable
right to payment.
Aerospace Systems Segment revenues by product platform:
Flight Control Actuation
Fuel and Inerting
Hydraulics
Engines
Fluid Conveyance
Other
Total
Total revenues by geographic region based on the Company's selling operation's location:
North America
Europe
Asia Pacific
Latin America
Total
$
$
$
$
2019
750,311
634,658
461,554
285,292
299,035
79,927
2,510,777
2019
9,318,195
2,968,971
1,855,831
177,327
14,320,324
The majority of revenues from the Aerospace Systems Segment is generated from sales to customers within North America.
Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized
and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in
advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms
established in the contract with the customer.
44
Total contract assets and contract liabilities are as follows:
Contract assets, current (included within Prepaid expenses and other)
Contract assets, noncurrent (included within Investments and other assets)
Total contract assets
Contract liabilities, current (included within Other accrued liabilities)
Contract liabilities, noncurrent (included within Other liabilities)
Total contract liabilities
Net contract (liabilities)
$
$
2019
22,726
1,301
24,027
(64,668)
(421)
(65,089)
(41,062)
At June 30, 2019, net contract liabilities increased $3 million from July 1, 2018 net contract liabilities of $38 million. The
increase in net contract liabilities was primarily due to advance payments from customers exceeding revenue recognized during
the period. During 2019, approximately $37 million of revenue was recognized that was included in the contract liabilities at
July 1, 2018.
Remaining performance obligations
The Company’s backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase
orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. The
Company believes its backlog represents its unsatisfied or partially unsatisfied performance obligations. Backlog at June 30,
2019 was $4,220 million, of which approximately 90 percent is expected to be recognized as revenue within the next 12
months and the balance thereafter.
Adoption of ASU 2014-09
On July 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The provisions of ASU
2014-09 were applied only to contracts that were not completed as of July 1, 2018. Comparative prior-period financial
information has not been restated and continues to be reported under the accounting standards in effect for the comparative
prior-year period.
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of July 1, 2018 related to the
adoption of ASU 2014-09 is as follows:
Assets:
Trade accounts receivable, net
Inventories
Prepaid expenses and other
Investments and other assets
Liabilities:
Other accrued liabilities
Other liabilities
Deferred income taxes
Equity:
Retained earnings
Balance as of
Cumulative Effect
Balance as of
June 30, 2018
of Adjustments
July 1, 2018
$
2,145,517
1,621,304
$
134,886
801,049
(11) $
23,205
14,575
2,020
$
502,333
$
28,288
$
526,089
234,858
5,160
1,560
2,145,506
1,644,509
149,461
803,069
530,621
531,249
236,418
$
11,625,975
$
4,781
$
11,630,756
The adoption of ASU 2014-09 had an immaterial impact on the Company’s net sales, results of operations and financial
position in 2019.
45
3.
Acquisitions and Divestitures
Acquisitions - On April 26, 2019, the Company announced that it had entered into a definitive agreement under which it
expects to acquire LORD Corporation ("Lord") for approximately $3,675 million in cash. Acquisition-related transaction and
integration costs totaled $17,146 in 2019. These costs are included in selling, general, and administrative expenses in the
Consolidated Statement of Income. The acquisition remains subject to certain closing conditions. The Company intends to
finance the purchase price for the Lord acquisition with the net proceeds from the Senior Notes due 2024, 2029 and 2049, the
delayed-draw term loan and certain commercial paper proceeds. See Note 10 for further discussion.
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.
The results of operations for completed 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 purchase price allocation for acquisitions in 2017 is 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
$
2017
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
1,101,065
$
4,069,197
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 3 pertain only to the Clarcor acquisition as the other two acquisitions completed during 2017
were immaterial.
46
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.
Net sales
Net income attributable to common shareholders
Diluted earnings per share
$
2017
12,935,834
1,027,693
7.58
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. 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 loss (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 loss (gain) on disposal of assets caption in the Consolidated Statement of Income
and the other expense caption in the Business Segment Information.
47
4.
Charges Related to Business Realignment
The Company incurred business realignment charges and acquisition integration costs in 2019, 2018 and 2017. The acquisition
integration costs relate 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
Other expense
$
2019
27,830
—
305
2018
$
78,558
$
3,428
1,009
2017
52,939
2,674
784
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
2019
598
—
2018
1,757
265
2017
1,102
89
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. 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
Loss (gain) on disposal of assets
$
2019
14,650
13,180
305
2018
$
44,949
$
36,813
1,233
2017
35,932
19,681
784
As of June 30, 2019, approximately $14 million in severance payments have been made relating to business realignment and
acquisition integration charges incurred during 2019, the remainder of which are expected to be paid by June 30, 2020.
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 $13 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.
48
5.
Income Taxes
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
2019
1,124,933
808,492
1,933,425
$
$
2018
963,843
738,434
1,702,277
$
$
2017
722,925
605,716
1,328,641
2019
2018
2017
160,858
14,903
$
453,821
(23,876)
$
132,420
37,316
206,167
3,202
210,385
(17,454)
20,932
14,432
420,494
$
18,168
(82)
640,962
$
157,518
(5,319)
17,835
5,027
344,797
$
$
$
$
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
Foreign derived intangible income deduction
Research tax credit
Share-based compensation
Other
Effective income tax rate
2019
21.0%
1.7
2.9
0.8
(0.9)
(0.1)
0.1
(1.0)
(0.5)
(1.7)
(0.6)
21.7%
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%
The Company made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income ("GILTI") as a
current period expense when incurred. The tax rate impact of GILTI is included with tax related to international activities in
the table above.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118, which provided guidance on
accounting for the tax effects of the TCJ Act. SAB 118 provided a measurement period that should not extend beyond one year
from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with
SAB 118 and based on the information available, the Company recorded additional tax expense of $14,485 to the estimated
one-time transition tax during 2019 prior to the close of the measurement period. This adjustment is a result of the Company's
analysis of related proposed regulations that were issued subsequent to the recording of the previous provisional amount. The
Company considers its provisional accounting for the effects of the TCJ Act, which includes the remeasurement of deferred tax
balances and related valuation allowances, the one-time transition tax and the repatriation of undistributed foreign earnings, as
being complete and as meeting the recognition guidance under Topic 740.
49
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
Undistributed foreign earnings
Depreciation and amortization
Valuation allowance
Net deferred tax (liability)
Change in net deferred tax (liability):
Provision for deferred tax
Items of other comprehensive income (loss)
Acquisitions and other
Total change in net deferred tax
$
2019
368,269
104,850
22,241
38,730
792,914
27,034
5,540
1,726
(16,762)
(589,454)
(797,692)
(42,604) $
2018
340,480
112,935
17,496
38,535
679,880
27,228
6,696
—
(16,308)
(689,320)
(694,857)
(177,235)
(32,537) $
72,530
94,638
134,631
$
41,412
(65,542)
32,628
8,498
$
$
$
$
As of June 30, 2019, the Company recorded deferred tax assets of $792,914 resulting from $3,057,386 in loss carryforwards. A
valuation allowance of $779,733 related to the loss carryforwards has been established due to the uncertainty of their
realization. Of this valuation allowance, $745,293 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 $17,959 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.
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 $219 million that are
no longer permanently reinvested outside of the U.S., the Company has recorded a deferred tax liability of $11 million. The
remaining undistributed foreign earnings of approximately $3,000 million remain permanently reinvested outside the U.S. at
June 30, 2019. Of these undistributed earnings, we have recorded a deferred tax liability of $6 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.
50
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
2019
153,091
2,272
45
—
(927)
(832)
(9,388)
(3,599)
140,662
$
$
2018
2017
$
147,506
$
139,907
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
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $140,662, $153,091
and $95,460 as of June 30, 2019, 2018 and 2017, respectively. If recognized, a significant portion of the gross unrecognized
tax benefits as of June 30, 2017, 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 $25,214,
$21,737 and $15,432 as of June 30, 2019, 2018 and 2017, respectively.
It is reasonably possible that, within the next 12 months, the amount of gross unrecognized tax benefits could be reduced by up
to approximately $100,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the
examination process or the closure of tax statutes. Any increase in the amount of unrecognized tax benefits within the next 12
months is expected to be insignificant.
The Company and its subsidiaries file income tax returns in the United States and in various foreign jurisdictions. In the
normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is
open to assessment of its U.S. federal income tax returns by the Internal Revenue Service for years after 2013, and its state and
local tax returns for years after 2013. The Company is open to assessment for significant foreign jurisdictions for years after
2009.
6.
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
2019
2018
2017
$
1,512,364
$
1,060,801
$
983,412
129,997,640
133,004,613
133,377,547
1,783,977
2,422,221
2,182,217
131,781,617
135,426,834
135,559,764
$
$
11.63
11.48
$
$
7.98
7.83
$
$
7.37
7.25
For 2019, 2018 and 2017, 0.9 million, 0.5 million and 1.4 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.
51
7.
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 both 2019 and 2018. The
current cost of these inventories exceeds their valuation determined on the LIFO basis by $222,715 in 2019 and $203,192 in
2018. Progress payments of $25,026 in 2018 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
8.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
Balance June 30, 2017
Acquisitions
Divestitures
Foreign currency translation and other
Balance June 30, 2018
Acquisitions
Foreign currency translation and other
Balance June 30, 2019
$
$
2019
663,068
850,778
164,286
2018
673,323
765,835
182,146
$
1,678,132
$
1,621,304
Diversified
Industrial
Segment
Aerospace
Systems Segment
Total
$
5,488,236
$
98,642
$
5,586,878
37,489
(138,541)
18,587
5,405,771
2,940
(53,546)
5,355,165
$
$
$
$
—
—
7
98,649
—
(9)
98,640
$
$
37,489
(138,541)
18,594
5,504,420
2,940
(53,555)
5,453,805
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
(see Note 3 for further discussion).
The Company's annual impairment tests performed in 2019, 2018 and 2017 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
2019
2018
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
265,644
$
130,233
$
265,423
$
542,573
2,435,461
252,388
1,077,780
546,905
2,482,079
117,440
227,580
933,867
$
3,243,678
$
1,460,401
$
3,294,407
$
1,278,887
52
Total intangible asset amortization expense in 2019, 2018 and 2017 was $205,164, $221,494 and $145,128, respectively.
Estimated intangible asset amortization expense for the five years ending June 30, 2020 through 2024 is $177,239, $172,522,
$166,398, $155,437 and $149,798, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows
to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value.
No material intangible asset impairments occurred in 2019, 2018 or 2017.
9.
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 $1,414,000 was available at June 30, 2019. 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, 2019 and 2018 were $586,000 and $533,800, respectively.
In addition to commercial paper notes, notes payable includes short-term lines of credit and borrowings from foreign banks. At
June 30, 2019 and 2018, the Company had $48,751 and $48,338, respectively, in lines of credit from various foreign banks,
none of which were outstanding at June 30, 2019 and 2018. Most of these agreements are renewed annually. The Company
had borrowings from foreign banks of $786 and $4,255 at June 30, 2019 and 2018, respectively. The weighted-average interest
rate on notes payable during 2019 and 2018 was 2.8 percent and 1.8 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,
2019, 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, 2019, the Company's debt to debt-shareholders' equity ratio was 0.55 to 1.0. The Company is in
compliance with all covenants.
53
10.
Debt
June 30,
Domestic:
Fixed rate medium-term notes, 3.30% to 6.25%, due 2023 - 2045
Senior Notes, 2.70% to 4.10%, due 2024 - 2049
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
2019
2018
$
2,125,000
$
2,225,000
3,675,000
1,300,000
796,040
—
340
(75,321)
6,521,059
228
817,810
116,830
762
(41,432)
4,418,970
100,411
$
6,520,831
$
4,318,559
During 2019, the Company issued $575,000 aggregate principal amount of 2.70 percent Senior Notes due 2024, $1,000,000
aggregate principal amount of 3.25 percent Senior Notes due 2029, and $800,000 aggregate principal amount of 4.00 percent
Senior Notes due 2049 (collectively, the "Senior Notes"). Interest payments are due semi-annually. The net proceeds received
from the issuance of the Senior Notes are intended to finance a portion of the purchase price for the proposed acquisition of
Lord. If either the acquisition of Lord does not occur on or before April 27, 2020, or if the Company notifies the trustee that it
will not pursue the acquisition of Lord, the 2024 Senior Notes and the 2049 Senior Notes (collectively, the "SMR Notes") will
be subject to a special mandatory redemption. The special mandatory redemption price will be equal to 101 percent of the
aggregate principal amount of the SMR Notes, plus accrued and unpaid interest. If the acquisition of Lord does not occur, the
net proceeds from the 2029 Senior Notes will be used for general corporate purposes.
During 2019, the Company also entered into a delayed-draw term loan with an aggregate principal amount of $800,000. The
draw on the term loan is subject to the closing of the proposed acquisition of Lord, and the related proceeds will be used solely
to finance a portion of the purchase price. The Company anticipates that the term loan will bear an interest rate of LIBOR plus
112.5 bps. Interest payments are due quarterly.
Debt issuance costs related to both the Senior Notes and delayed-draw term loan were approximately $39,322 and will be
amortized over the respective debt terms.
Principal amounts of long-term debt payable in the five years ending June 30, 2020 through 2024 are $228, $32, $11, $300,006
and $575,006, 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, 2019, under non-cancelable operating leases,
which expire at various dates, are as follows: 2020-$45,920; 2021-$31,115; 2022-$21,625; 2023-$13,228; 2024-$7,591 and
after 2024-$22,723.
Rental expense in 2019, 2018 and 2017 was $126,752, $126,940 and $118,723, respectively.
11.
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.
54
A summary of the Company's defined benefit pension plans follows:
Benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of unrecognized actuarial loss
Amortization of transition obligation
Net periodic benefit cost
2019
2018
2017
$
76,647
$
82,993
$
94,356
160,542
(251,072)
6,655
121,823
18
144,339
(258,490)
6,570
147,387
18
126,131
(239,537)
8,116
212,433
18
$
114,613
$
122,817
$
201,517
Components of net pension benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated
Statement of Income.
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Divestiture
Actuarial loss (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
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
2019
2018
$
5,033,997
$
5,217,857
76,647
160,542
7,719
—
491,792
(237,080)
(46,043)
5,487,574
$
$
82,993
144,339
2,932
(9,535)
(182,588)
(216,169)
(5,832)
5,033,997
$
3,915,889
$
3,896,001
318,809
—
284,965
(237,080)
(37,614)
4,244,969
$
(1,242,605) $
174,951
(12,231)
81,518
(216,169)
(8,181)
3,915,889
(1,118,108)
(8,396) $
(1,234,209)
(1,242,605) $
(11,333)
(1,106,775)
(1,118,108)
1,510,901
19,602
44
$
1,216,612
18,900
61
$
$
$
$
$
$
1,530,547
$
1,235,573
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.
55
The increase in the benefit obligation in 2019, largely reflected in the net actuarial loss component, is primarily due to the
decrease in the discount rate used to measure the obligation across all pension plans. Additionally, the benefit obligation
increased slightly as a result of updated census data for the domestic qualified defined benefit plan due to delayed retirements
and higher than anticipated compensation increases.
The decrease in the benefit obligation in 2018, which is also largely reflected in net actuarial loss component, is primarily due
to the increase in the discount rates for all plans as well as updated mortality assumptions for the domestic qualified defined
benefit plan.
The increase in the fair value of plan assets in 2019 is attributable to a $200 million discretionary contribution made during
2019 into the domestic qualified defined benefit plan and investment gains. The increase in the fair value of plan assets in 2018
is predominantly due to the favorable investment returns of plan assets.
The accumulated benefit obligation for all defined benefit plans was $5,184,637 and $4,751,111 at June 30, 2019 and 2018,
respectively. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $5,094,129 and $4,140,395, respectively, at June 30, 2019, and $4,665,272 and
$3,807,859, respectively, at June 30, 2018. The projected benefit obligation and fair value of plan assets for pension plans with
projected benefit obligations in excess of plan assets were $5,427,084 and $4,175,871, respectively, at June 30, 2019, and
$4,970,120 and $3,842,539, respectively, at June 30, 2018.
The Company expects to make cash contributions of approximately $77 million to its defined benefit pension plans in 2020, the
majority of which relate to its non-U.S. plans. Estimated future benefit payments in the five years ending June 30, 2020
through 2024 are $235,709, $249,814, $306,446, $266,915 and $274,452, respectively, and $1,482,681 in the aggregate for the
five years ending June 30, 2025 through June 30, 2029.
The assumptions used to measure net periodic benefit cost for the Company's significant defined benefit plans are:
U.S. defined benefit plan
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
2019
2018
2017
4.01%
3.65%
7.00%
3.64%
3.89%
7.50%
3.33%
5.02%
7.50%
0.30 to 3.37% 0.30 to 7.57% 0.23 to 7.75%
1.75 to 5.5%
2.0 to 5.5%
2.0 to 5.5%
1.0 to 5.75% 1.0 to 5.75%
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 plan
Discount rate
Average increase in compensation
Non-U.S. defined benefit plans
Discount rate
Average increase in compensation
2019
2018
3.28%
3.60%
4.01%
3.65%
0.20 to 2.96% 0.30 to 3.37%
1.75 to 3.9% 1.75 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.
56
The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:
Equity securities
Debt securities
Other investments
2019
43%
54%
3%
100%
2018
44%
49%
7%
100%
The weighted-average target asset allocation as of June 30, 2019 is 42 percent equity securities, 46 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 plan account
for approximately 75 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 plan 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 strategies)
and income generating assets (primarily consisting of high quality bonds, both domestic and global) to an allocation more
heavily weighted toward liability-hedging assets. Over time, the Company will continue to add long duration fixed income
assets to the portfolio and eliminate hedge funds. These securities are highly correlated with the Company's pension liabilities
and will be managed in a liability framework.
The fair values of pension plan assets at June 30, 2019 and at June 30, 2018, by asset class, are as follows:
June 30, 2019
Quoted Prices In
Active Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
Equity securities
U.S. based companies
Non-U.S. based companies
Fixed income securities
Corporate debt securities
Government issued securities
Mutual funds
Equity funds
Fixed income funds
Mutual funds measured at net asset value
Common/Collective trusts
Equity funds
Common/Collective trusts measured at net asset value
Limited Partnerships measured at net asset value
Miscellaneous
Total at June 30, 2019
—
—
—
—
—
—
—
—
—
—
$
111,520
$
117,823
$
(6,303) $
226,027
16,385
137,227
367,518
266,240
183,732
84,790
—
—
564,615
160,876
—
—
—
—
$
1,399,742
$
(291,741)
427,447
$
226,027
16,385
701,842
528,394
266,240
183,732
304,504
84,790
1,872,473
240,803
(291,741)
4,244,969
$
57
Cash and cash equivalents
Equity securities
U.S. based companies
Non-U.S. based companies
Fixed income securities
Corporate debt securities
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
$
—
—
—
—
—
—
—
—
—
—
—
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 Parker stock with a fair value of $226,027 and $207,202 as of June 30, 2019 and 2018,
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 total pension plan assets.
Common/Collective trusts primarily consist of equity, fixed income and real estate 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 total pension plan assets.
58
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 total pension plan
assets.
Miscellaneous primarily includes 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 plan. 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
2019
6,134,280
2018
2017
6,476,154
6,911,436
$
72,032
$
65,262
$
57,766
In addition to shares within the ESOP, as of June 30, 2019, employees have elected to invest in 1,777,467 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 $30,603, $29,023 and $29,309 in expense related to the
RIA in 2019, 2018 and 2017, 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 $1,838, $2,755 and $4,357 in expense related to other postretirement benefits in 2019, 2018 and
2017, respectively. Components of net other postretirement benefit cost, other than service cost, are included in other (income)
expense, net in the Consolidated Statement of Income.
59
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
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 (gain) loss
Prior service credit
Net amount recognized
2019
2018
$
66,521
$
205
2,043
(3,235)
(4,536)
60,998
$
(60,998) $
79,933
320
2,003
(11,259)
(4,476)
66,521
(66,521)
(5,308) $
(55,690)
(60,998) $
(6,180)
(60,341)
(66,521)
(1,713) $
(194)
(1,907) $
1,232
(314)
918
$
$
$
$
$
$
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 decrease in the benefit obligation in 2019, largely reflected in the net actuarial gain component, is primarily due to updated
census data resulting from a different mix of benefit selections and actuarial assumptions reflecting lower benefit claims offset
by decreases in the discount rates. The decrease in the benefit obligation in 2018, which is also primarily reflected in the net
actuarial gain component, is due to increases in the discount rates, updated census data related to coverage elections and
actuarial assumption changes.
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
2019
3.92%
7.47%
7.87%
4.50%
2026
2018
3.46%
8.19%
9.79%
4.50%
2025
2017
3.15%
7.35%
8.68%
4.50%
2025
The discount rate assumption used to measure the benefit obligation was 3.15 percent in 2019 and 3.92 percent in 2018.
Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2020 through 2024 are
$5,308, $5,051, $4,675, $4,401 and $4,212, respectively, and $18,271 in the aggregate for the five years ending June 30, 2025
through June 30, 2029.
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 2019, 2018 and 2017, the
Company recorded expense relating to these programs of $5,916, $13,420 and $20,400, 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.
60
12.
Equity
Changes in accumulated other comprehensive (loss) in shareholders' equity by component:
Balance June 30, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive (loss)
Balance June 30, 2018
Impact of adoption of ASU 2016-01
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive (loss)
Balance June 30, 2019
Foreign Currency
Translation
Adjustment and
Other
Retirement
Benefit Plans
$
$
$
(925,342) $
(10,141)
(7,994)
(943,477) $
(1,734)
(70,023)
3,578
(1,011,656) $
(998,862) $
76,417
102,836
(819,609) $
—
(325,213)
97,430
(1,047,392) $
Total
(1,924,204)
66,276
94,842
(1,763,086)
(1,734)
(395,236)
101,008
(2,059,048)
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2019:
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
$
$
(6,552) Other (income) expense, net
(121,534) Other (income) expense, net
(128,086)
30,656
(97,430)
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) Other (income) expense, net
(147,611) Other (income) expense, net
(154,078)
51,242
(102,836)
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
2019
4,755,273
2018
2017
1,738,234
1,976,778
Average price per share including commissions
$
168.23
$
172.59
$
133.90
61
13.
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, 2019, 8.7 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 12, 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 2019, 2018 and 2017 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
2019
2.8%
2018
1.9%
2017
1.4%
5.1 years
5.2 years
5.3 years
1.9%
24.2%
2.0%
23.4%
2.0%
28.5%
$
35.09
$
29.71
$
27.39
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 2019 is as follows (aggregate intrinsic value in millions):
Outstanding June 30, 2018
Granted
Exercised
Canceled
Outstanding June 30, 2019
Exercisable June 30, 2019
Number of
Shares
6,046,881
$
$
748,901
(983,205) $
(63,122) $
$
$
5,749,455
4,088,257
Weighted-
Average Exercise
Price
106.98
166.49
77.28
154.93
119.29
105.15
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
5.8 years
4.8 years
$
$
291.6
265.2
A summary of the status and changes of shares subject to SAR awards and the related average price per share follows:
Nonvested June 30, 2018
Granted
Vested
Canceled
Nonvested June 30, 2019
62
Number of
Shares
Weighted-
Average Grant
Date Fair Value
$
1,878,209
748,901
$
(905,842) $
(60,070) $
$
1,661,198
28.44
35.09
28.00
31.15
31.58
During 2019, 2018 and 2017, the Company recognized stock-based compensation expense of $26,568, $27,422 and $28,535,
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.
At June 30, 2019, $11,817 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 16 months. The total fair value of shares vested during 2019,
2018 and 2017 was $25,365, $26,461 and $33,094, respectively.
Information related to SAR awards exercised during 2019, 2018 and 2017 is as follows:
Net cash proceeds
Intrinsic value
Income tax benefit
$
2019
2,475
95,502
15,584
2018
$
3,682
$
136,000
28,701
2017
2,202
153,908
31,193
Shares surrendered upon exercise of SARs: 2019 - 158,610; 2018 - 269,670; 2017 - 371,246.
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 2019, 2018 and 2017 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, 2018
Granted
Vested
Canceled
Nonvested June 30, 2019
Number of
Shares
Weighted-Average
Grant Date Fair
Value
$
360,611
$
184,913
(156,079) $
(15,365) $
$
374,080
138.85
166.47
131.18
154.22
155.07
During 2019, 2018 and 2017, the Company recognized stock-based compensation expense of $25,258, $24,073 and $23,025
respectively, relating to RSU awards for employees. At June 30, 2019, $21,933 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 24
months. The total fair value of RSU awards vested during 2019, 2018 and 2017 was $20,475, $20,681 and $21,576,
respectively. The Company recognized an income tax benefit of $1,548, $2,451 and $939 relating to the issuance of common
stock for RSU awards that vested during 2019, 2018 and 2017, respectively.
During 2019, 2018 and 2017, 8,047, 9,900 and 12,430 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 2019, 2018 and 2017, the Company recognized stock-based compensation expense of $1,345, $1,697, and
$1,560, respectively, relating to these awards. At June 30, 2019, $414 of expense with respect to 8,003 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 2019, 2018 and 2017 the Company recognized an income tax (cost) benefit of $(82),
$270 and $105 respectively, related to the vesting of 9,889, 12,639 and $13,740 RSU awards, respectively, issued to the Board
of Directors.
63
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.
Stock issued for LTIP
LTIP three-year plan
Number of shares issued
Share value on date of issuance
Total value
2019
2016-17-18
2018
2017
2015-16-17
2014-15-16
293,136
308,278
$
$
183.00
53,644
$
$
176.39
54,377
$
$
227,707
157.07
35,766
Under the Company's 2017-18-19 LTIP, a payout of unrestricted stock will be issued in April 2020.
The fair value of each LTIP award granted in 2019, 2018 and 2017 was based on the fair market value of the Company's
common stock on the date of grant. Beginning January 2019, the Company changed the terms of the LTIP plan allowing newly
granted LTIP awards to earn a dividend equivalent unit payable in common shares, equal to the cash dividend per share paid to
common shareholders. These dividend equivalent units do not have dividend or voting rights and are subject to the same
performance goals as the initial award granted. Any nonvested LTIP awards granted prior to January 2019 will continue not
earning dividends or dividend equivalent units. A summary of the status and changes of shares relating to the LTIP and the
related average price per share follows:
Nonvested June 30, 2018
Granted
Vested
Canceled
Nonvested June 30, 2019
Number of
Shares
Weighted-
Average Grant
Date Fair Value
658,271
$
$
198,737
(232,842) $
(23,449) $
$
600,717
143.90
157.20
86.51
174.05
169.36
During 2019, 2018 and 2017, the Company recorded stock-based compensation expense of $50,908, $65,640 and $27,219,
respectively, relating to the LTIP. During 2019, 2018 and 2017, the Company recognized an income tax benefit of $14,101,
$3,893 and $1,701, respectively, relating to the LTIP.
Shares surrendered in connection with the LTIP: 2019 - 134,169; 2018 - 139,918; 2017 - 113,074.
14.
Research and Development
Research and development costs amounted to $294,852 in 2019, $327,877 in 2018 and $336,675 in 2017. 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 $44,484 in 2019, $40,823 in 2018 and $65,292 in 2017. These costs are included in the total research
and development cost for each of the respective years.
15.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities and other
investments, accounts receivable and long-term investments as well as obligations under accounts payable, trade, notes payable
and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable,
accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits, equity investments and available-for-sale debt securities.
Deposits are recorded at cost, and equity investments and available-for-sale debt securities are recorded at fair value. Changes
in fair value related to available-for-sale debt securities are recorded in accumulated other comprehensive (loss). Upon the
adoption of ASU 2016-01 on July 1, 2018, changes in fair value of equity investments are recognized in net income. Prior to
the adoption of ASU 2016-01, these changes in fair value were recognized in accumulated other comprehensive (loss).
64
Gross unrealized gains and losses related to both equity investments and available-for-sale debt securities were not material as
of June 30, 2019 and 2018. There were no facts or circumstances that indicated the unrealized losses were other than
temporary.
There were no investments in available-for-sale debt securities at June 30, 2019. The contractual maturities of available-for-
sale investments were predominantly one to three years at June 30, 2018. 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
$
2019
6,596,380
7,012,641
$
2018
4,460,402
4,548,796
The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
The Company utilizes derivative and non-derivative financial instruments, including forward exchange contracts, costless
collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to
manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major
investment grade financial institutions and the Company does not anticipate any material non-performance by any of the
counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the
Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is
recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or
substantially liquidated.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are
measured at fair value.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
Net investment hedges
Cross-currency swap contracts
Cash flow hedges
Forward exchange contracts
Forward exchange contracts
Costless collar contracts
Costless collar contracts
Balance Sheet Caption
2019
2018
Other assets
$
24,545
$
7,614
Non-trade and notes receivable
Other accrued liabilities
Non-trade and notes receivable
Other accrued liabilities
13,242
2,578
457
1,934
5,564
5,079
932
236
The cross-currency swap, forward exchange contracts 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 designated as 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 designated as hedges are adjusted to fair value
through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in
earnings.
The cross-currency swap contracts have been designated as hedging instruments. The forward exchange and costless collar
contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted
transactions.
Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income during 2019,
2018 and 2017 were not material.
65
Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive
(loss) in the Consolidated Balance Sheet are as follows:
Cross-currency swap contracts
Foreign denominated debt
$
2019
13,723
16,458
$
2018
(9,209)
(9,543)
No portion of these financial instruments were excluded from the effectiveness testing during 2019, 2018 and 2017.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2019 and 2018 are
as follows:
Assets:
Equity 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, 2019
$
7,533
$
7,533
$
— $
38,244
9,728
4,512
—
—
38,244
4,512
—
—
—
Quoted Prices
In
Active
Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2018
$
$
2,956
5,331
3,911
14,110
7,208
$
2,956
5,331
—
—
— $
—
3,911
14,110
5,315
—
5,315
—
—
—
—
—
The fair values of the equity securities, corporate bonds and asset-backed and mortgage-backed securities are determined using
the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are
traded in an active market.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are
calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The
calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been
adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at
fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value
hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis.
66
16.
Contingencies
The Company is involved in various litigation matters arising in the normal course of business, including proceedings based on
product liability claims, workers' compensation claims and alleged violations of various environmental laws. The Company is
self-insured in the United States for health care, workers' compensation, general liability and product liability up to
predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of
these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage and the
established accruals for liabilities. While the outcome of pending proceedings cannot be predicted with certainty, management
believes that any liabilities that may result from these proceedings will not have a material adverse effect on the Company's
liquidity, financial condition or results of operations.
Environmental - The Company is currently responsible for environmental remediation at various manufacturing facilities
presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other
companies, at off-site waste disposal facilities and regional sites.
As of June 30, 2019, the Company had an accrual of $16,070 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 $16.1 million to a maximum of
$80.1 million. The largest range for any one site is approximately $8.2 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.
17.
Quarterly Information (Unaudited)
2019
Net sales
Net income attributable to common
shareholders
Diluted earnings per share
1st
3,479,294
$
2nd
3,472,045
$
3rd
3,687,518
$
4th
3,681,467
Total
$ 14,320,324
$
375,711
2.79
311,737
2.36
411,248
3.14
413,668
3.17
1,512,364
11.48
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
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.
67
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, 2019. Based on this evaluation,
the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2019, 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,
2019 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, 2019. 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, 2019.
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,
2019, 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 2019 Annual Meeting of Shareholders, to be held October 23, 2019 (the "2019 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 "Delinquent Section 16(A) Reports" in the 2019 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 2019 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 2019 Proxy Statement is incorporated herein
by reference.
68
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 2019 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, 2019, 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
7,347,772(1)
—
7,347,772
$121.51
—
$121.51
18,673,701(2)
—
18,673,701
(1)Includes the maximum future payouts of common stock that may be issued under the calendar year 2017-18-19,
2018-19-20 and 2019-20-21 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 8.7 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 2019 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 2019
Proxy Statement is incorporated herein by reference.
69
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
76
3. Exhibits
Exhibit No.
(2)(a)
(2)(b)
(2)(c)
(3)(a)
(3)(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). +
Agreement and Plan of Merger among Parker-Hannifin Corporation, Erie Merger Sub, Inc., LORD
Corporation and Shareholder Representative Services LLC as the shareholders' representative, dated as of
April 26, 2019, incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K filed with the SEC on
April 29, 2019 (Commission File No. 1-4982). +
Share Purchase Agreement, among Parker-Hannifin Corporation, EMFCO Holdings Incorporated, the
shareholders of the Company, and Fortis Advisors LLC, as the Sellers' representative, dated as of July 26,
2019, incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K filed with the SEC on July 29,
2019 (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).
Regulations, Amended and Restated as of January 24, 2019, incorporated by reference to Exhibit 3(a) to
Registrant’s Report on Form 10-Q for the quarterly period ended December 31, 2018 (Commission File
No. 1-4982).
Instruments Defining Rights of Security Holders:
(4)(a)
Description of Parker-Hannifin's Securities.*
Material Contracts:
(10)(a)
(10)(b)
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).
70
(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)
(10)(t)
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 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).
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).
Form of 2018 Parker-Hannifin Corporation Stock Appreciation Rights Award Agreement, incorporated by
reference to Exhibit 10(d) to Registrant's Report on Form 10-Q for the quarterly period ended December
31, 2018 (Commission File No. 1-4982).
71
(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)
(10)(kk)
2018 Parker-Hannifin Corporation Stock Appreciation Rights Terms and Conditions, incorporated by
reference to Exhibit 10(e) to Registrant's Report on Form 10-Q for the quarterly period ended December
31, 2018 (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,
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).
Form of Notice of Award under the Parker-Hannifin Corporation Long-Term Incentive Plan Under the
Performance Bonus Plan (as Amended and Restated), effective as of January 23, 2019, incorporated by
reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-Q for the quarterly period ended
December 31, 2018 (Commission file No. 1-4982).
Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan
(as Amended and Restated), effective as of January 23, 2019, incorporated by reference to Exhibit 10(g)
to the Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2018 (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).
Form of Parker-Hannifin Corporation Restricted Stock Unit Award Agreement, incorporated by reference
to Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2018
(Commission file No. 1-4982).
Form of Parker-Hannifin Corporation Restricted Stock Unit Award Agreement, incorporated by reference
to Exhibit 10(b) to Registrant's Report on Form 10-Q for the quarterly period ended December 31, 2018
(Commission File No. 1-4982).
Form of Parker-Hannifin Corporation Restricted Stock Unit Terms and Conditions for Awards Granted,
incorporated by reference to Exhibit 10(c) to Registrant's Report on Form 10-Q for the quarterly period
ended December 31, 2018 (Commission File No. 1-4982).
Form of 2018 Parker-Hannifin Corporation Restricted Stock Unit Award Agreement to Certain Executive
Officers, incorporated by reference to Exhibit 10(b) to Registrant's Report on Form 10-Q for the quarterly
period ended September 30, 2018 (Commission File No. 1-4982).
Parker-Hannifin Corporation 2018 Restricted Stock Unit Terms and Conditions for Certain Executive
Officers, incorporated by reference to Exhibit 10(c) to Registrant's Report on Form 10-Q for the quarterly
period ended September 30, 2018 (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).
72
(10)(ll)
(10)(mm)
(10)(nn)
(10)(oo)
(10)(pp)
(10)(qq)
(10)(rr)
(10)(ss)
(10)(tt)
(10)(uu)
(10)(vv)
(21)
(23)
(24)
(31)(a)
(31)(b)
(32)
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).
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).
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).
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).
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 24, 2018, incorporated by reference to Exhibit 10(a) to Registrant’s Report on Form 10-Q for the
quarterly period ended September 30, 2018 (Commission File No. 1-4982).
Credit Agreement among Parker-Hannifin Corporation, the lenders party thereto and KeyBank National
Association, as Administrative Agent, dated as of May 22, 2019, incorporated by reference to Exhibit 10.1
to Registrant's Report on Form 8-K filed with the SEC on May 24, 2019 (Commission File No. 1-4982).
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
The instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document.*
101.SCH
Inline XBRL Taxonomy Extension Schema Document.*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104
Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension
information contained in Exhibits 101).
73
+
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 Inline XBRL (Extensible Business
Reporting Language): (i) Consolidated Statement of Income for the years ended June 30, 2019, 2018 and 2017, (ii)
Consolidated Statement of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017, (iii) Consolidated
Balance Sheet at June 30, 2019 and 2018, (iv) Consolidated Statement of Cash Flows for the years ended June 30, 2019,
2018 and 2017, (v) Consolidated Statement of Equity for the years ended June 30, 2019, 2018 and 2017, 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.
74
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 23, 2019
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; KEVIN
A. LOBO, Director; CANDY M. OBOURN, Director; JOSEPH SCAMINACE, Director; ÅKE SVENSSON, Director;
LAURA K. THOMPSON, Director; JAMES R. VERRIER, Director; and JAMES L. WAINSCOTT, Director.
Date: August 23, 2019
/s/ Catherine A. Suever
Catherine A. Suever, Executive Vice President –
Finance & Administration and Chief Financial
Officer (Principal Financial Officer and
Attorney-in-Fact)
75
PARKER-HANNIFIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2017, 2018 AND 2019
(Dollars in Thousands)
Column A
Description
Allowance for doubtful accounts:
Year ended June 30, 2017
Year ended June 30, 2018
Year ended June 30, 2019
Deferred tax asset valuation allowance:
Year ended June 30, 2017
Year ended June 30, 2018
Year ended June 30, 2019
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
$
$
$
$
$
$
8,010
14,336
9,672
332,708
684,079
694,857
$
$
$
$
$
$
3,559
2,861
2,034
349,803
10,778
102,835
$
$
$
$
$
$
2,767
$
(7,525) $
(2,832) $
1,568
$
— $
— $
14,336
9,672
8,874
684,079
694,857
797,692
(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.
76
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 23, 2019
/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 23, 2019
/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, 2019, 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 23, 2019
/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
This Page is Not Part of Parker-Hannifin Corporation's Form 10-K Filing
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
To supplement the financial information presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in this Annual Report,
certain non-GAAP financial measures as defined by the SEC rules are used. The non-GAAP measures included in this Annual Report have been
reconciled to the comparable GAAP measures within the tables shown below:
RECONCILIATION OF NET SALES GROWTH TO ORGANIC SALES GROWTH
(Unaudited)
Net sales growth
Adjustments:
Divestitures
Currency
Organic sales growth
RECONCILIATION OF EBITDA TO ADJUSTED EBITDA
(Unaudited)
(Dollars in thousands)
Net sales
Earnings before income taxes
Depreciation and amortization
Interest expense
EBITDA
Adjustments:
Business realignment charges
Clarcor costs to achieve
LORD acquisition and integration costs
Adjusted EBITDA
EBITDA margin
Adjusted EBITDA margin
2019
0.1 %
(0.4)%
(2.1)%
2.6 %
2019
$ 14,320,324
$ 1,933,425
436,189
190,138
2,559,752
15,677
12,458
17,146
$ 2,605,033
17.9 %
18.2 %
RECONCILIATION OF EARNINGS PER DILUTED SHARE TO ADJUSTED EARNINGS PER DILUTED SHARE
(Unaudited)
(Amounts in dollars)
Earnings per diluted share
Adjustments:
Business realignment charges
Clarcor costs to achieve
LORD acquisition and integration costs
Loss on sale and writedown of assets, net
U.S. Tax Reform one-time impact, net
Adjusted earnings per diluted share
2019
$ 11.48
2018
$ 7.83
0.09
0.07
0.10
-
0.11
$ 11.85
0.26
0.20
-
0.41
1.72
$ 10.42
These non-GAAP measures are not measures of financial performance under U.S. GAAP and should not be considered as an alternative to the U.S.
GAAP measures. Parker-Hannifin's calculation of these non-GAAP measures may not be comparable to the calculations of similarly titled measures
reported by other companies.
Our purpose defines why we are in business,
provides inspiration and direction for our team
members, and highlights how we can strengthen our
communities and have a positive impact on the world.
It took more than a day for us to discover our purpose,
but we will spend every day living up to it.
With Appreciation
Executive Management
William G. Eline
The Board of Directors and Management of Parker Hannifin acknowledge the retirement of
William G. Eline after 40 years of dedicated service. Elected as Vice President – Chief Information
Officer in 2002, he established a center-led strategy to improve efficiency and expand the
capabilities of the Information Technology function to align with the needs of Parker’s operations.
Prior to his most recent role, in 1996, as Vice President, Business Systems International, he
worked with IT professionals in Europe to establish a Technology Center providing enterprise
system support for Parker’s international operations. Mr. Eline will be remembered for his
extensive knowledge, skillful leadership and strong character.
Kurt A. Keller
The Board of Directors and Management of Parker Hannifin acknowledge the retirement
of Kurt A. Keller after 38 years of dedicated service. Mr. Keller made significant contributions
as Vice President and President – Seal Group with responsibility for the global development,
manufacturing and marketing of Parker’s Engineered Materials technologies. More recently,
as Vice President and President – Asia Pacific Group, with Mr. Keller’s commitment to the Win
Strategy, its implementation and his hands-on approach to engaging team members, the Asia
Pacific region experienced a period of tremendous growth. He will be remembered for his
enthusiasm, strong leadership and an ownership and performance mindset that continues to
serve as a solid foundation in the region that is well-positioned for continued success.
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)
KEVIN A. LOBO
Chairman, Chief Executive Officer
and President
Stryker Corporation (medical technologies)
CANDY M. OBOURN
Chairman
Isoflux Incorporated (coatings technologies)
JOSEPH SCAMINACE
Former Chairman and Chief Executive Officer
OM Group, Inc. (metal-based specialty
chemicals)
ÅKE SVENSSON
Chairman
Swedavia AB (transport infrastructure)
LAURA K. THOMPSON
Former Executive Vice President
and Chief Financial Officer
The Goodyear Tire and Rubber Company
(tire manufacturing)
JAMES R. VERRIER
Former Chairman and Chief Executive Officer
BorgWarner Inc. (powertrain solutions)
JAMES L. WAINSCOTT
Former Chairman, Chief Executive Officer
and President
AK Steel Holding Corporation (steel producer)
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
THOMAS C. GENTILE
Vice President – Global Supply Chain
JOACHIM GUHE
President – Europe, Middle East and Africa
(EMEA) Group
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
DINU J. PAREL
Vice President – Chief Information Officer
JENNIFER A. PARMENTIER
Vice President and President –
Motion Systems 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 –
Engineered Materials Group
ANNUAL MEETING
The 2019 Annual Meeting of Shareholders
will be held on Wednesday, October 23, 2019,
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
6/14
6/15
6/16
6/17
6/18
6/19
2014
2015
2016
2017
2018
2019
Parker-Hannifin Corporation 100.00
S&P 500
100.00
S&P Industrials
100.00
94.34
107.42
102.37
89.74
111.71
109.58
135.24
131.70
133.97
134.00
150.64
141.13
148.91
166.33
155.85
*$100 invested on 6/30/14 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.
The Global Leader in Motion and Control Technologies
Aerospace
Fluid Connectors
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 & IoT sensors
Hose couplings
Hose crimpers
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
Hydraulic valves
Industrial valves
Integrated hydrostatic transmissions
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
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
© 2019 PARKER HANNIFIN CORPORATION
Instrumentation
Filtration
Engineered Materials
Key Markets
Aerospace
Agriculture
Chemical processing
Construction
Information technology
Life sciences
Microelectronics
Military
Oil & gas
Power generation
Renewable energy
Telecommunications
Transportation
Truck & bus
Key Products
Dynamic seals
Elastomeric o-rings
Electromagnetic interference shielding
Extrusion & fabricated seals
High-temperature metal seals
Homogeneous & inserted
elastomeric shapes
Medical products fabrication
& assembly
Metal & plastic composite
bonded seals
Precision-cut seals
Thermal management
Key Markets
Air conditioning
Alternative fuels
Analytical
Chemical
Diesel engine
Food & beverage
Industrial machinery
Life sciences
Microelectronics
Oil & gas
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
Aerospace & defense
Agriculture
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
UNMATCHED BREADTH OF
TECHNOLOGY & ENGINEERING EXPERTISE
Parker Hannifin Corporation
6035 Parkland Boulevard, Cleveland, Ohio 44124-4141
216 896 3000 www.parker.com