UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
| Ohio | 34-0451060 | ||||||||||
| (State or other jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 6035 Parkland Boulevard, | Cleveland, | Ohio | 44124-4141 | ||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered | ||||||||||||
| Common Shares, $.50 par value | PH | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of Common Shares outstanding at March 31, 2021: 129,055,945
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 3,746,326 | $ | 3,702,432 | $ | 10,388,771 | $ | 10,534,917 | |||||||||||||||
| Cost of sales | 2,714,773 | 2,766,693 | 7,618,646 | 7,929,199 | |||||||||||||||||||
| Selling, general and administrative expenses | 386,831 | 413,460 | 1,113,254 | 1,303,760 | |||||||||||||||||||
| Interest expense | 60,830 | 80,765 | 189,778 | 233,612 | |||||||||||||||||||
| Other (income), net | (13,460) | (12,643) | (122,066) | (73,713) | |||||||||||||||||||
| Income before income taxes | 597,352 | 454,157 | 1,589,159 | 1,142,059 | |||||||||||||||||||
| Income taxes | 125,619 | 86,788 | 348,212 | 231,051 | |||||||||||||||||||
| Net income | 471,733 | 367,369 | 1,240,947 | 911,008 | |||||||||||||||||||
| Less: Noncontrolling interest in subsidiaries' earnings | 86 | 116 | 585 | 383 | |||||||||||||||||||
| Net income attributable to common shareholders | $ | 471,647 | $ | 367,253 | $ | 1,240,362 | $ | 910,625 | |||||||||||||||
| Earnings per share attributable to common shareholders: | |||||||||||||||||||||||
| Basic | $ | 3.65 | $ | 2.86 | $ | 9.62 | $ | 7.09 | |||||||||||||||
| Diluted | $ | 3.59 | $ | 2.83 | $ | 9.50 | $ | 7.01 | |||||||||||||||
See accompanying notes to consolidated financial statements.
- 2 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income | $ | 471,733 | $ | 367,369 | $ | 1,240,947 | $ | 911,008 | |||||||||||||||
| Less: Noncontrolling interests in subsidiaries' earnings | 86 | 116 | 585 | 383 | |||||||||||||||||||
| Net income attributable to common shareholders | 471,647 | 367,253 | 1,240,362 | 910,625 | |||||||||||||||||||
| Other comprehensive (loss) income, net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | (65,970) | (282,815) | 282,539 | (233,953) | |||||||||||||||||||
| Retirement benefits plan activity | 39,723 | 32,125 | 120,859 | 96,567 | |||||||||||||||||||
| Other comprehensive (loss) income | (26,247) | (250,690) | 403,398 | (137,386) | |||||||||||||||||||
| Less: Other comprehensive (loss) income for noncontrolling interests | (463) | (960) | 813 | (972) | |||||||||||||||||||
| Other comprehensive (loss) income attributable to common shareholders | (25,784) | (249,730) | 402,585 | (136,414) | |||||||||||||||||||
| Total comprehensive income attributable to common shareholders | $ | 445,863 | $ | 117,523 | $ | 1,642,947 | $ | 774,211 | |||||||||||||||
See accompanying notes to consolidated financial statements.
- 3 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
| March 31, 2021 | June 30, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 489,600 | $ | 685,514 | |||||||
| Marketable securities and other investments | 40,270 | 70,805 | |||||||||
| Trade accounts receivable, net | 2,118,437 | 1,854,398 | |||||||||
| Non-trade and notes receivable | 309,568 | 244,870 | |||||||||
| Inventories | 1,898,159 | 1,814,631 | |||||||||
| Prepaid expenses and other | 193,019 | 214,986 | |||||||||
| Total current assets | 5,049,053 | 4,885,204 | |||||||||
| Property, plant and equipment | 5,989,920 | 5,810,681 | |||||||||
| Less: Accumulated depreciation | 3,740,798 | 3,517,946 | |||||||||
| Property, plant and equipment, net | 2,249,122 | 2,292,735 | |||||||||
| Deferred income taxes | 125,382 | 126,839 | |||||||||
| Investments and other assets | 791,221 | 764,563 | |||||||||
| Intangible assets, net | 3,595,182 | 3,798,913 | |||||||||
| Goodwill | 8,031,586 | 7,869,935 | |||||||||
| Total assets | $ | 19,841,546 | $ | 19,738,189 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and long-term debt payable within one year | $ | 186,388 | $ | 809,529 | |||||||
| Accounts payable, trade | 1,551,460 | 1,111,759 | |||||||||
| Accrued payrolls and other compensation | 430,008 | 424,231 | |||||||||
| Accrued domestic and foreign taxes | 204,241 | 195,314 | |||||||||
| Other accrued liabilities | 664,550 | 607,540 | |||||||||
| Total current liabilities | 3,036,647 | 3,148,373 | |||||||||
| Long-term debt | 6,571,908 | 7,652,256 | |||||||||
| Pensions and other postretirement benefits | 1,777,137 | 1,887,414 | |||||||||
| Deferred income taxes | 416,223 | 382,528 | |||||||||
| Other liabilities | 631,702 | 539,089 | |||||||||
| Total liabilities | 12,433,617 | 13,609,660 | |||||||||
| EQUITY | |||||||||||
| Shareholders’ equity: | |||||||||||
| Serial preferred stock, $.50 par value; authorized 3,000,000 shares; NaN issued | 0 | 0 | |||||||||
| Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at March 31 and June 30 | 90,523 | 90,523 | |||||||||
| Additional capital | 374,497 | 416,585 | |||||||||
| Retained earnings | 14,429,912 | 13,530,666 | |||||||||
| Accumulated other comprehensive (loss) | (2,156,290) | (2,558,875) | |||||||||
| Treasury shares, at cost; 51,990,183 shares at March 31 and 52,490,165 shares at June 30 | (5,346,440) | (5,364,916) | |||||||||
| Total shareholders’ equity | 7,392,202 | 6,113,983 | |||||||||
| Noncontrolling interests | 15,727 | 14,546 | |||||||||
| Total equity | 7,407,929 | 6,128,529 | |||||||||
| Total liabilities and equity | $ | 19,841,546 | $ | 19,738,189 | |||||||
See accompanying notes to consolidated financial statements.
- 4 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 1,240,947 | $ | 911,008 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 204,615 | 187,054 | |||||||||
| Amortization | 244,193 | 203,895 | |||||||||
| Share incentive plan compensation | 101,907 | 91,857 | |||||||||
| Deferred income taxes | (12,127) | 9,954 | |||||||||
| Foreign currency transaction gain | (8,239) | (13,040) | |||||||||
| Gain on property, plant and equipment | (108,449) | (5,194) | |||||||||
| (Gain) loss on marketable securities | (8,489) | 434 | |||||||||
| Gain on investments | (6,008) | (1,849) | |||||||||
| Other | 11,149 | 14,303 | |||||||||
| Changes in assets and liabilities, net of effects from acquisitions: | |||||||||||
| Accounts receivable, net | (238,882) | 173,310 | |||||||||
| Inventories | (51,150) | (8,019) | |||||||||
| Prepaid expenses and other | 24,757 | 21,783 | |||||||||
| Other assets | (22,191) | (13,268) | |||||||||
| Accounts payable, trade | 417,196 | (53,875) | |||||||||
| Accrued payrolls and other compensation | (2,645) | (68,091) | |||||||||
| Accrued domestic and foreign taxes | 4,768 | (19,985) | |||||||||
| Other accrued liabilities | 17,396 | (82,896) | |||||||||
| Pensions and other postretirement benefits | 32,418 | 36,229 | |||||||||
| Other liabilities | 40,239 | (92,751) | |||||||||
| Net cash provided by operating activities | 1,881,405 | 1,290,859 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Acquisitions (net of cash of $82,192 in 2020) | 0 | (5,076,064) | |||||||||
| Capital expenditures | (136,064) | (182,502) | |||||||||
| Proceeds from sale of property, plant and equipment | 132,740 | 25,398 | |||||||||
| Purchases of marketable securities and other investments | (30,608) | (191,277) | |||||||||
| Maturities and sales of marketable securities and other investments | 71,225 | 249,306 | |||||||||
| Other | 14,120 | 129,938 | |||||||||
| Net cash provided by (used in) investing activities | 51,413 | (5,045,201) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options | 4,012 | 2,459 | |||||||||
| Payments for common shares | (129,531) | (194,633) | |||||||||
| (Payments for) proceeds from notes payable, net | (539,500) | 362,346 | |||||||||
| Proceeds from long-term borrowings | 2,016 | 1,721,211 | |||||||||
| Payments for long-term borrowings | (1,211,334) | (278,347) | |||||||||
| Dividends paid | (341,333) | (340,291) | |||||||||
| Net cash (used in) provided by financing activities | (2,215,670) | 1,272,745 | |||||||||
| Effect of exchange rate changes on cash | 86,938 | (40,553) | |||||||||
| Net decrease in cash and cash equivalents | (195,914) | (2,522,150) | |||||||||
| Cash and cash equivalents at beginning of year | 685,514 | 3,219,767 | |||||||||
| Cash and cash equivalents at end of period | $ | 489,600 | $ | 697,617 | |||||||
See accompanying notes to consolidated financial statements.
- 5 -
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION
(Dollars in thousands)
(Unaudited)
The Company operates in 2 reportable business segments: Diversified Industrial and Aerospace Systems.
Diversified Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural, and military machinery and equipment and has a significant portion of international operations. Sales are made directly to major original equipment manufacturers ("OEMs") and through a broad distribution network to smaller OEMs and the aftermarket.
Aerospace Systems - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Systems Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 1,758,383 | $ | 1,775,578 | $ | 4,853,371 | $ | 5,016,035 | ||||||||||||||||||
| International | 1,388,999 | 1,182,273 | 3,777,875 | 3,408,207 | ||||||||||||||||||||||
| Aerospace Systems | 598,944 | 744,581 | 1,757,525 | 2,110,675 | ||||||||||||||||||||||
| Total net sales | $ | 3,746,326 | $ | 3,702,432 | $ | 10,388,771 | $ | 10,534,917 | ||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 336,589 | $ | 279,628 | $ | 887,041 | $ | 766,159 | ||||||||||||||||||
| International | 274,427 | 176,954 | 681,541 | 499,343 | ||||||||||||||||||||||
| Aerospace Systems | 102,303 | 127,440 | 279,798 | 371,459 | ||||||||||||||||||||||
| Total segment operating income | 713,319 | 584,022 | 1,848,380 | 1,636,961 | ||||||||||||||||||||||
| Corporate general and administrative expenses | 48,089 | 48,342 | 123,544 | 132,904 | ||||||||||||||||||||||
| Income before interest expense and other expense | 665,230 | 535,680 | 1,724,836 | 1,504,057 | ||||||||||||||||||||||
| Interest expense | 60,830 | 80,765 | 189,778 | 233,612 | ||||||||||||||||||||||
| Other expense (income) | 7,048 | 758 | (54,101) | 128,386 | ||||||||||||||||||||||
| Income before income taxes | $ | 597,352 | $ | 454,157 | $ | 1,589,159 | $ | 1,142,059 | ||||||||||||||||||
- 6 -
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts or as otherwise noted)
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.
1. Management representation
In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2021, the results of operations for the three and nine months ended March 31, 2021 and 2020 and cash flows for the nine months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2020 Annual Report on Form 10-K.
The novel coronavirus ("COVID-19") pandemic is having, and will likely continue to have, an adverse effect on our business, and its future impacts remain unpredictable. Therefore, accounting estimates and assumptions may change over time in response to the impacts of COVID-19. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
The Company has evaluated subsequent events that occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to or disclosure in these financial statements.
2. New accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. We adopted ASU 2016-13 on July 1, 2020. The adoption of this guidance, using the modified retrospective method, did not result in a cumulative-effect adjustment to retained earnings and did not have a material impact on the consolidated financial statements or related disclosures.
3. Revenue recognition
Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.
Diversified Industrial Segment revenues by technology platform:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Motion Systems | $ | 820,514 | $ | 778,840 | $ | 2,197,971 | $ | 2,297,961 | ||||||||||||||||||
| Flow and Process Control | 1,081,570 | 1,015,430 | 2,955,643 | 2,969,033 | ||||||||||||||||||||||
| Filtration and Engineered Materials | 1,245,298 | 1,163,581 | 3,477,632 | 3,157,248 | ||||||||||||||||||||||
| Total | $ | 3,147,382 | $ | 2,957,851 | $ | 8,631,246 | $ | 8,424,242 | ||||||||||||||||||
- 7 -
Aerospace Systems Segment revenues by product platform:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Flight Control Actuation | $ | 174,067 | $ | 175,871 | $ | 499,432 | $ | 529,553 | ||||||||||||||||||
| Fuel, Inerting and Engine Motion Control | 129,866 | 159,837 | 384,937 | 471,525 | ||||||||||||||||||||||
| Hydraulics | 75,430 | 114,763 | 222,193 | 333,523 | ||||||||||||||||||||||
| Engine Components | 145,819 | 181,173 | 436,119 | 454,572 | ||||||||||||||||||||||
| Airframe and Engine Fluid Conveyance | 49,190 | 83,555 | 141,737 | 247,356 | ||||||||||||||||||||||
| Other | 24,572 | 29,382 | 73,107 | 74,146 | ||||||||||||||||||||||
| Total | $ | 598,944 | $ | 744,581 | $ | 1,757,525 | $ | 2,110,675 | ||||||||||||||||||
Total Company revenues by geographic region based on the Company's selling operation's location:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| North America | $ | 2,354,251 | $ | 2,507,566 | $ | 6,598,238 | $ | 7,107,655 | ||||||||||||||||||
| Europe | 788,498 | 726,577 | 2,087,030 | 2,018,301 | ||||||||||||||||||||||
| Asia Pacific | 561,274 | 430,500 | 1,586,375 | 1,292,054 | ||||||||||||||||||||||
| Latin America | 42,303 | 37,789 | 117,128 | 116,907 | ||||||||||||||||||||||
| Total | $ | 3,746,326 | $ | 3,702,432 | $ | 10,388,771 | $ | 10,534,917 | ||||||||||||||||||
The majority of revenues from the Aerospace Systems Segment are generated from sales to customers within North America.
Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
Total contract assets and contract liabilities are as follows:
| March 31, 2021 | June 30, 2020 | |||||||||||||
| Contract assets, current (included within Prepaid expenses and other) | $ | 35,616 | $ | 30,827 | ||||||||||
| Contract assets, noncurrent (included within Investments and other assets) | 2,089 | 1,497 | ||||||||||||
| Total contract assets | 37,705 | 32,324 | ||||||||||||
| Contract liabilities, current (included within Other accrued liabilities) | (52,834) | (51,278) | ||||||||||||
| Contract liabilities, noncurrent (included within Other liabilities) | (3,910) | (3,232) | ||||||||||||
| Total contract liabilities | (56,744) | (54,510) | ||||||||||||
| Net contract liabilities | $ | (19,039) | $ | (22,186) | ||||||||||
At March 31, 2021, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the nine months ended March 31, 2021, approximately $29 million of revenue was recognized that was included in the contract liabilities at June 30, 2020.
Remaining performance obligations
Our backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at March 31, 2021 was $6,185 million, of which approximately 87 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
- 8 -
4. Earnings per share
The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2021 and 2020.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 471,647 | $ | 367,253 | $ | 1,240,362 | $ | 910,625 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic - weighted average common shares | 129,085,563 | 128,289,720 | 128,935,696 | 128,383,549 | |||||||||||||||||||
| Increase in weighted average common shares from dilutive effect of equity-based awards | 2,292,370 | 1,456,827 | 1,690,904 | 1,479,266 | |||||||||||||||||||
| Diluted - weighted average common shares, assuming exercise of equity-based awards | 131,377,933 | 129,746,547 | 130,626,600 | 129,862,815 | |||||||||||||||||||
| Basic earnings per share | $ | 3.65 | $ | 2.86 | $ | 9.62 | $ | 7.09 | |||||||||||||||
| Diluted earnings per share | $ | 3.59 | $ | 2.83 | $ | 9.50 | $ | 7.01 | |||||||||||||||
For the three months ended March 31, 2021 and 2020, 133 and 753,028 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended March 31, 2021 and 2020, 589,364 and 516,067 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
5. Share repurchase program
The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized for repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During fiscal 2021, the Company reinitiated the share repurchase program and began repurchasing shares under the program in February 2021. During the three and nine months ended March 31, 2021, we repurchased 169,814 shares at an average price, including commissions, of $294.44 per share.
6. Trade accounts receivable, net
Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. We evaluate the collectibility of our receivables based on historical experience and current and forecasted economic conditions based on management's judgment. Additionally, receivables are written off to bad debt when management makes a final determination of uncollectibility. Allowance for credit losses was $12,734 and $11,644 at March 31, 2021 and June 30, 2020, respectively.
7. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2021 | June 30, 2020 | |||||||||||||
| Notes receivable | $ | 141,333 | $ | 97,370 | ||||||||||
| Accounts receivable, other | 168,235 | 147,500 | ||||||||||||
| Total | $ | 309,568 | $ | 244,870 | ||||||||||
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8. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2021 | June 30, 2020 | |||||||||||||
| Finished products | $ | 715,218 | $ | 694,577 | ||||||||||
| Work in process | 944,378 | 881,104 | ||||||||||||
| Raw materials | 238,563 | 238,950 | ||||||||||||
| Total | $ | 1,898,159 | $ | 1,814,631 | ||||||||||
9. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in the first nine months of fiscal 2021 and 2020. During fiscal 2021, business realignment charges primarily consisted of actions taken to address the impact of COVID-19 on our business. In both fiscal 2021 and 2020, business realignment charges included severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity as well as plant closures. A majority of the business realignment charges were incurred in North America and Europe. We believe the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.
Business realignment charges presented in the Business Segment Information are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Diversified Industrial | $ | 4,139 | $ | 12,720 | $ | 31,247 | $ | 27,112 | |||||||||||||||
| Aerospace Systems | 1,306 | 613 | 6,643 | 658 | |||||||||||||||||||
| Corporate general and administrative expenses | 156 | 71 | 954 | 193 | |||||||||||||||||||
| Other expense | 1 | 50 | 1,226 | 50 | |||||||||||||||||||
Workforce reductions in connection with business realignment charges in the Business Segment Information are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Diversified Industrial | 65 | 336 | 741 | 1,154 | |||||||||||||||||||
| Aerospace Systems | 41 | 34 | 326 | 50 | |||||||||||||||||||
| Corporate general and administrative expenses | 1 | 3 | 19 | 8 | |||||||||||||||||||
The business realignment charges are presented in the Consolidated Statement of Income as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cost of sales | $ | 3,056 | $ | 10,201 | $ | 29,389 | $ | 21,225 | |||||||||||||||
| Selling, general and administrative expenses | 2,545 | 3,203 | 9,455 | 6,738 | |||||||||||||||||||
| Other (income), net | 1 | 50 | 1,226 | 50 | |||||||||||||||||||
During the first nine months of fiscal 2021, approximately $43 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $19 million, a majority of which are expected to be paid by March 31, 2022, 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 actions described above, the timing and amount of which are not known at this time.
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We also incurred the following acquisition integration charges related to the fiscal 2020 acquisitions of LORD Corporation ("Lord") and Exotic Metals Forming Company ("Exotic"):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Diversified Industrial | $ | 2,631 | $ | 8,364 | $ | 9,495 | $ | 18,503 | |||||||||||||||
| Aerospace Systems | 24 | 486 | 699 | 1,570 | |||||||||||||||||||
These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.
10. Equity
Changes in equity for the three months ended March 31, 2021 and 2020 are as follows:
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 90,523 | $ | 385,049 | $ | 14,072,152 | $ | (2,130,506) | $ | (5,311,236) | $ | 16,322 | $ | 7,122,304 | |||||||||||||||||||||||||||
| Net income | 471,647 | 86 | 471,733 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | (25,784) | (463) | (26,247) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($0.88 per share) | (113,887) | (218) | (114,105) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (10,552) | 14,796 | 4,244 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 90,523 | $ | 374,497 | $ | 14,429,912 | $ | (2,156,290) | $ | (5,346,440) | $ | 15,727 | $ | 7,407,929 | |||||||||||||||||||||||||||
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 90,523 | $ | 455,862 | $ | 13,094,252 | $ | (1,945,732) | $ | (5,364,730) | $ | 12,326 | $ | 6,342,501 | |||||||||||||||||||||||||||
| Net income | 367,253 | 116 | 367,369 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | (249,730) | (960) | (250,690) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($0.88 per share) | (113,214) | (52) | (113,266) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (3,705) | 11,978 | 8,273 | ||||||||||||||||||||||||||||||||||||||
| Acquisition activity | 7 | 7 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (46,767) | (46,767) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 90,523 | $ | 452,157 | $ | 13,348,291 | $ | (2,195,462) | $ | (5,399,519) | $ | 11,437 | $ | 6,307,427 | |||||||||||||||||||||||||||
Changes in equity for the nine months ended March 31, 2021 and 2020 are as follows:
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | 90,523 | $ | 416,585 | $ | 13,530,666 | $ | (2,558,875) | $ | (5,364,916) | $ | 14,546 | $ | 6,128,529 | |||||||||||||||||||||||||||
| Net income | 1,240,362 | 585 | 1,240,947 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 402,585 | 813 | 403,398 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($2.64 per share) | (341,116) | (217) | (341,333) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (42,088) | 68,476 | 26,388 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 90,523 | $ | 374,497 | $ | 14,429,912 | $ | (2,156,290) | $ | (5,346,440) | $ | 15,727 | $ | 7,407,929 | |||||||||||||||||||||||||||
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| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | 90,523 | $ | 462,086 | $ | 12,777,538 | $ | (2,059,048) | $ | (5,309,130) | $ | 6,183 | $ | 5,968,152 | |||||||||||||||||||||||||||
| Net income | 910,625 | 383 | 911,008 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | (136,414) | (972) | (137,386) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($2.64 per share) | (339,872) | (419) | (340,291) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (9,929) | 56,378 | 46,449 | ||||||||||||||||||||||||||||||||||||||
| Acquisition activity | 6,262 | 6,262 | |||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (146,767) | (146,767) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 90,523 | $ | 452,157 | $ | 13,348,291 | $ | (2,195,462) | $ | (5,399,519) | $ | 11,437 | $ | 6,307,427 | |||||||||||||||||||||||||||
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the nine months ended March 31, 2021 and 2020 are as follows:
| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2020 | $ | (1,193,937) | $ | (1,364,938) | $ | (2,558,875) | |||||||||||
| Other comprehensive income before reclassifications | 281,726 | 0 | 281,726 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | 0 | 120,859 | 120,859 | ||||||||||||||
| Balance at March 31, 2021 | $ | (912,211) | $ | (1,244,079) | $ | (2,156,290) | |||||||||||
| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2019 | $ | (1,011,656) | $ | (1,047,392) | $ | (2,059,048) | |||||||||||
| Other comprehensive (loss) before reclassifications | (232,981) | 0 | (232,981) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | 0 | 96,567 | 96,567 | ||||||||||||||
| Balance at March 31, 2020 | $ | (1,244,637) | $ | (950,825) | $ | (2,195,462) | |||||||||||
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and nine months ended March 31, 2021 and 2020 are as follows:
| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| March 31, 2021 | March 31, 2021 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (1,304) | $ | (3,542) | Other (income), net | |||||||||||||||
| Recognized actuarial loss | (51,212) | (156,240) | Other (income), net | |||||||||||||||||
| Total before tax | (52,516) | (159,782) | ||||||||||||||||||
| Tax benefit | 12,793 | 38,923 | ||||||||||||||||||
| Net of tax | $ | (39,723) | $ | (120,859) | ||||||||||||||||
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| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| March 31, 2020 | March 31, 2020 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (1,385) | $ | (4,152) | Other (income), net | |||||||||||||||
| Recognized actuarial loss | (41,154) | (123,342) | Other (income), net | |||||||||||||||||
| Total before tax | (42,539) | (127,494) | ||||||||||||||||||
| Tax benefit | 10,414 | 30,927 | ||||||||||||||||||
| Net of tax | $ | (32,125) | $ | (96,567) | ||||||||||||||||
11. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the nine months ended March 31, 2021 are as follows:
| Diversified Industrial Segment | Aerospace Systems Segment | Total | |||||||||||||||
| Balance at June 30, 2020 | $ | 7,267,573 | $ | 602,362 | $ | 7,869,935 | |||||||||||
| Acquisitions | 3,738 | 0 | 3,738 | ||||||||||||||
| Foreign currency translation and other | 157,900 | 13 | 157,913 | ||||||||||||||
| Balance at March 31, 2021 | $ | 7,429,211 | $ | 602,375 | $ | 8,031,586 | |||||||||||
The acquisitions line represents adjustments to the Lord goodwill allocation during the measurement period subsequent to its acquisition date. The impact of these adjustments during the first six months of fiscal 2021 was immaterial to our results of operations and financial position. At December 31, 2020, purchase price allocations for both Lord and Exotic were complete.
Goodwill is tested for impairment at the reporting unit level annually and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. At December 31, 2020, the Company performed its fiscal 2021 annual goodwill impairment test, which indicated 0 impairment existed. We did not identify any events or circumstances during the first nine months of fiscal 2021 that required performance of an interim goodwill impairment test.
Intangible assets are amortized using the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:
| March 31, 2021 | June 30, 2020 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Patents and technology | $ | 999,364 | $ | 203,391 | $ | 991,596 | $ | 162,528 | |||||||||||||||
| Trademarks | 760,437 | 321,399 | 748,326 | 285,197 | |||||||||||||||||||
| Customer lists and other | 3,857,368 | 1,497,197 | 3,791,505 | 1,284,789 | |||||||||||||||||||
| Total | $ | 5,617,169 | $ | 2,021,987 | $ | 5,531,427 | $ | 1,732,514 | |||||||||||||||
Total intangible amortization expense for the nine months ended March 31, 2021 was $244,193. The estimated amortization expense for the five years ending June 30, 2021 through 2025 is $323,846, $307,704, $297,652, $288,337 and $274,208, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the nine months ended March 31, 2021.
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12. Retirement benefits
Net pension benefit expense recognized included the following components:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Service cost | $ | 21,016 | $ | 20,967 | $ | 63,215 | $ | 61,965 | |||||||||||||||
| Interest cost | 25,661 | 36,389 | 76,833 | 106,233 | |||||||||||||||||||
| Expected return on plan assets | (67,201) | (68,058) | (200,410) | (198,836) | |||||||||||||||||||
| Amortization of prior service cost | 1,294 | 1,411 | 3,583 | 4,229 | |||||||||||||||||||
| Amortization of net actuarial loss | 51,094 | 41,200 | 156,254 | 123,540 | |||||||||||||||||||
| Amortization of initial net obligation | 4 | 4 | 13 | 13 | |||||||||||||||||||
| Net pension benefit expense | $ | 31,868 | $ | 31,913 | $ | 99,488 | $ | 97,144 | |||||||||||||||
During the three months ended March 31, 2021 and 2020, we recognized $141 and $169, respectively, in expense related to other postretirement benefits. During the nine months ended March 31, 2021 and 2020, we recognized $911 and $1,136, respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other (income), net in the Consolidated Statement of Income.
13. Debt
During the first nine months of fiscal 2021, we repaid the remaining $890 million and $320 million balances related to the $925 million and $800 million term loans, respectively.
14. Income taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), a significant tax-and-spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act did not result in a material impact on our effective tax rate.
On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law. In addition to providing funding for the government, this law provides further COVID-19 economic relief, and extends certain expiring tax provisions. This act did not result in a material impact on our effective tax rate.
We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment on our U.S. federal income tax returns by the Internal Revenue Service for fiscal years after 2013, and our state and local returns for fiscal years after 2013. We are also open to assessment for significant foreign jurisdictions for fiscal years after 2008. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.
As of March 31, 2021, we had gross unrecognized tax benefits of $102,739, all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amount above, is $17,215. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $40,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.
15. Financial instruments
Our financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments, as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income. Unrealized gains and losses related to equity investments were not material as of March 31, 2021 and 2020.
- 14 -
The carrying value of long-term debt, which excludes the impact of net unamortized debt issuance costs, and estimated fair value of long-term debt are as follows:
| March 31, 2021 | June 30, 2020 | |||||||||||||
| Carrying value of long-term debt | $ | 6,637,164 | $ | 7,809,541 | ||||||||||
| Estimated fair value of long-term debt | 7,307,181 | 8,574,401 | ||||||||||||
The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
We utilize derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
| Balance Sheet Caption | March 31, 2021 | June 30, 2020 | ||||||||||||||||||
| Net investment hedges | ||||||||||||||||||||
| Cross-currency swap contracts | Other liabilities | $ | 73,144 | $ | 30,860 | |||||||||||||||
| Cash flow hedges | ||||||||||||||||||||
| Forward exchange contracts | Non-trade and notes receivable | 8,042 | 5,311 | |||||||||||||||||
| Forward exchange contracts | Other accrued liabilities | 4,364 | 3,474 | |||||||||||||||||
| Costless collar contracts | Non-trade and notes receivable | 490 | 2,250 | |||||||||||||||||
| Costless collar contracts | Other accrued liabilities | 1,916 | 661 | |||||||||||||||||
The cross-currency swap, forward exchange, and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.
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.
Derivatives not designated as hedges are adjusted to fair value by recording gains and losses through the cost of sales caption in the Consolidated Statement of Income.
Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We assess the effectiveness of the €359 million and ¥2,149 million cross-currency swap hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.
Net (losses) of $(3) million and $(48) million relating to forward exchange contracts were recorded within cost of sales in the Consolidated Statement of Income for the three months ended March 31, 2021 and 2020, respectively. Net gains (losses) of $21 million and $(41) million relating to forward exchange contracts were recorded within cost of sales in the Consolidated Statement of Income for the nine months ended March 31, 2021 and 2020, respectively. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and nine months ended March 31, 2021 and 2020 were not material.
- 15 -
Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) on the Consolidated Balance Sheet are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cross-currency swap contracts | $ | 5,188 | $ | 5,821 | $ | (33,675) | $ | 12,372 | |||||||||||||||
| Foreign denominated debt | 25,636 | 9,574 | (26,200) | 17,898 | |||||||||||||||||||
During the first nine months of fiscal 2021, the periodic interest settlements related to the cross-currency swaps were not material. No portion of these financial instruments were excluded from the effectiveness testing during the nine months ended March 31, 2020.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2021 and June 30, 2020 are as follows:
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| March 31, 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | 17,358 | $ | 17,358 | $ | 0 | $ | 0 | ||||||||||||||||||
| Derivatives | 8,532 | 0 | 8,532 | 0 | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | 79,424 | 0 | 79,424 | 0 | ||||||||||||||||||||||
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| June 30, 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | 7,901 | $ | 7,901 | $ | 0 | $ | 0 | ||||||||||||||||||
| Derivatives | 7,561 | 0 | 7,561 | 0 | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | 34,995 | 0 | 34,995 | 0 | ||||||||||||||||||||||
The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
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.
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PARKER-HANNIFIN CORPORATION
FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2021
AND COMPARABLE PERIODS ENDED MARCH 31, 2020
OVERVIEW
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
Our order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. We believe the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:
•Purchasing Managers Index ("PMI") on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;
•Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and U.S. Department of Defense spending for military aerospace markets; and
•Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.
A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. Recent PMI levels for some regions around the world were as follows:
| March 31, 2021 | June 30, 2020 | March 31, 2020 | |||||||||||||||
| United States | 64.7 | 52.6 | 49.1 | ||||||||||||||
| Eurozone countries | 61.9 | 47.4 | 44.5 | ||||||||||||||
| China | 50.6 | 51.2 | 50.1 | ||||||||||||||
| Brazil | 52.8 | 51.6 | 48.4 | ||||||||||||||
At March 31, 2021, global aircraft miles flown decreased by approximately 59 percent and available revenue passenger miles decreased by approximately 70 percent from their comparable prior-year period. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year 2021 will be approximately four percent lower than the comparable fiscal 2020 level.
Housing starts in March 2021 were approximately 37 percent higher than housing starts in March 2020 and approximately 47 percent higher than housing starts in June 2020.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Given the unpredictable nature of COVID-19's impact on the global economy, the statistics included above may not be reflective of recent or future activity.
We continue to monitor the impact of the COVID-19 pandemic, which has negatively impacted demand and continues to create economic uncertainty. Disruption within the aerospace industry, which is facing the consequences of travel restrictions and considerably lower demand, was significant and is expected to continue. The ultimate extent to which our business and results of operations will be impacted by the pandemic will depend on future developments that cannot be accurately predicted at this time. These developments include the availability, acceptance, distribution and effectiveness of vaccines; new information concerning the severity and spread of COVID-19 and its variants; and actions by government authorities to contain the pandemic or mitigate its economic, public health and other impacts.
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We continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented rigorous prevention, screening and hygiene protocols. Additionally, we are strategically managing costs through reductions in discretionary spending. We continue to prioritize capital expenditures related to safety and strategic investments. At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.
In the long-term, we believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:
•Serving the customer and continuously enhancing its experience with the Company;
•Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
•Maintaining a decentralized division and sales company structure;
•Fostering a safety first and entrepreneurial culture;
•Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;
•Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;
•Acquiring strategic businesses;
•Organizing around targeted regions, technologies and markets;
•Driving efficiency by implementing lean enterprise principles; and
•Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.
Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. Additionally, we will continue to assess our existing businesses and may initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.
The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segment Information, Consolidated Balance Sheet and Consolidated Statement of Cash Flows. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.
CONSOLIDATED STATEMENT OF INCOME
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| (dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net sales | $ | 3,746 | $ | 3,702 | $ | 10,389 | $ | 10,535 | ||||||||||||||||||
| Gross profit margin | 27.5 | % | 25.3 | % | 26.7 | % | 24.7 | % | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 387 | $ | 413 | $ | 1,113 | $ | 1,304 | ||||||||||||||||||
| Selling, general and administrative expenses, as a percent of sales | 10.3 | % | 11.2 | % | 10.7 | % | 12.4 | % | ||||||||||||||||||
| Interest expense | $ | 61 | $ | 81 | $ | 190 | $ | 234 | ||||||||||||||||||
| Other (income), net | $ | (13) | $ | (13) | $ | (122) | $ | (74) | ||||||||||||||||||
| Effective tax rate | 21.0 | % | 19.1 | % | 21.9 | % | 20.2 | % | ||||||||||||||||||
| Net income | $ | 472 | $ | 367 | $ | 1,241 | $ | 911 | ||||||||||||||||||
| Net income, as a percent of sales | 12.6 | % | 9.9 | % | 11.9 | % | 8.6 | % | ||||||||||||||||||
Net sales for the current-year quarter remained relatively flat when compared to the prior-year quarter and decreased slightly during the first nine months of fiscal 2021. Lower volume in the Aerospace Systems Segment and Diversified Industrial North American businesses, partially offset by higher volume in the Diversified Industrial International businesses, was the primary driver for the change in net sales in both periods. The effect of currency rate changes increased net sales by approximately $81 million and $146 million in the current-year quarter and first nine months of fiscal 2021, respectively. These increases were primarily due to a $76 million and $147 million increase in the Diversified Industrial International businesses during the
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current-year quarter and first nine months of fiscal 2021, respectively. Acquisitions contributed approximately $394 million in net sales during the first nine months of fiscal 2021.
Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter and first nine months of fiscal 2021 primarily due to higher margins in all businesses. Gross profit margin in the current-year and prior-year quarter included a net foreign currency transaction gain of $8 million and $20 million, respectively, and $8 million and $13 million for the first nine months of fiscal 2021 and 2020, respectively. Gross profit margin also benefited from the absence of acquisition-related expenses, which were included in cost of sales in the prior-year quarter and first nine months of fiscal 2020, of $18 million and $69 million, respectively. Cost of sales for the current-year and prior-year quarter also included business realignment and acquisition integration charges of $3 million and $11 million, respectively, and $31 million and $22 million for the first nine months of fiscal 2021 and 2020, respectively.
Selling, general and administrative expenses ("SG&A") decreased during the current-year quarter and first nine months of fiscal 2021 primarily due to benefits from lower discretionary spending and wage and salary expense resulting from actions taken in response to business conditions resulting from the COVID-19 pandemic. During the first nine months of fiscal 2021, SG&A benefited from the absence of acquisition-related expenses of $115 million, which were incurred in the first nine months of fiscal 2020. These benefits were partially offset by higher intangible amortization expense related to prior-year acquisitions and higher stock compensation expense. SG&A included business realignment and acquisition integration charges of $5 million and $12 million for the current-year and prior-year quarter, respectively, and $19 million and $26 million for the first nine months of fiscal 2021 and 2020, respectively.
Interest expense for the current-year quarter decreased from the prior-year quarter primarily due to lower average debt outstanding. Interest expense decreased in the first nine months of fiscal 2021 due to both lower interest rates and lower average debt outstanding.
Other (income), net included the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (dollars in millions) | March 31, | March 31, | ||||||||||||||||||||||||
| Expense (income) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Income related to equity method investments | $ | (11) | $ | (23) | $ | (30) | $ | (67) | ||||||||||||||||||
| Non-service components of retirement benefit cost | 11 | 11 | 37 | 36 | ||||||||||||||||||||||
| Gain on disposal of assets | (6) | (1) | (108) | (5) | ||||||||||||||||||||||
| Interest income | (2) | (3) | (5) | (29) | ||||||||||||||||||||||
| Other items, net | (5) | 3 | (16) | (9) | ||||||||||||||||||||||
| $ | (13) | $ | (13) | $ | (122) | $ | (74) | |||||||||||||||||||
Gain on disposal of assets for the first nine months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.
Effective tax rate for the current-year quarter and first nine months of fiscal 2021 was higher than the comparable prior-year periods primarily due to an overall decrease in discrete tax benefits. The fiscal 2021 effective tax rate is expected to be approximately 22.5 percent.
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BUSINESS SEGMENT INFORMATION
Diversified Industrial Segment
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| (dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| North America | $ | 1,758 | $ | 1,776 | $ | 4,853 | $ | 5,016 | ||||||||||||||||||
| International | 1,389 | 1,182 | 3,778 | 3,408 | ||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| North America | 337 | 280 | 887 | 766 | ||||||||||||||||||||||
| International | $ | 274 | $ | 177 | $ | 682 | $ | 499 | ||||||||||||||||||
| Operating margin | ||||||||||||||||||||||||||
| North America | 19.1 | % | 15.7 | % | 18.3 | % | 15.3 | % | ||||||||||||||||||
| International | 19.8 | % | 15.0 | % | 18.0 | % | 14.7 | % | ||||||||||||||||||
| Backlog | $ | 2,850 | $ | 2,384 | $ | 2,850 | $ | 2,384 | ||||||||||||||||||
The Diversified Industrial Segment operations experienced the following percentage changes in net sales in the current-year period versus the comparable prior-year period:
| Period Ending March 31, 2021 | ||||||||||||||
| Three Months | Nine Months | |||||||||||||
| Diversified Industrial North America – as reported | (1.0) | % | (3.2) | % | ||||||||||
| Acquisitions | — | % | 3.7 | % | ||||||||||
| Currency | 0.2 | % | — | % | ||||||||||
| Diversified Industrial North America – without acquisitions and currency | (1.2) | % | (6.9) | % | ||||||||||
| Diversified Industrial International – as reported | 17.5 | % | 10.8 | % | ||||||||||
| Acquisitions | — | % | 4.0 | % | ||||||||||
| Currency | 6.4 | % | 4.2 | % | ||||||||||
| Diversified Industrial International – without acquisitions and currency | 11.1 | % | 2.6 | % | ||||||||||
| Total Diversified Industrial Segment – as reported | 6.4 | % | 2.5 | % | ||||||||||
| Acquisitions | — | % | 3.8 | % | ||||||||||
| Currency | 2.7 | % | 1.8 | % | ||||||||||
| Total Diversified Industrial Segment – without acquisitions and currency | 3.7 | % | (3.1) | % | ||||||||||
The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.
Sales in the Diversified Industrial North American businesses decreased 1.0 percent and 3.2 percent during the current-year quarter and first nine months of fiscal 2021, respectively. The effect of acquisitions increased sales by approximately $188 million in the first nine months of fiscal 2021. The effect of currency exchange rates did not have a significant impact on sales. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial North American sales decreased in the current-year quarter primarily due to lower demand from distributors and end users in various markets, including the oil and gas, power generation, industrial machinery, and material handling markets, partially offset by an increase in end-user demand in the life sciences, refrigeration, farm and agriculture, and cars and light truck markets. In the first nine months of fiscal 2021 sales decreased primarily due to lower demand from distributors and end users in various markets, including the oil and gas, construction equipment, heavy-duty truck, industrial machinery, and material handling markets, partially offset by an increase in the life sciences, refrigeration, farm and agriculture, and semiconductor markets.
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Sales in the current-year quarter and first nine months of fiscal 2021 for the Diversified Industrial International operations increased 17.5 percent and 10.8 percent from the prior-year quarter and first nine months of fiscal 2020, respectively. The effect of acquisitions increased sales by approximately $136 million in the first nine months of fiscal 2021. The effect of currency exchange rates increased sales by approximately $76 million and $147 million in the current-year quarter and first nine months of fiscal 2021, respectively. Excluding the effects of acquisitions and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter increased 11.1 percent and 2.6 percent from the prior-year quarter and first nine months of fiscal 2020, respectively. During the current-year quarter, the Asia Pacific region and Europe accounted for approximately 75 percent and 15 percent, respectively, of the increase in sales, while Latin America contributed to the remainder of the change. During the first nine months of fiscal 2021, the increase in sales is attributable to higher sales in both the Asia Pacific and Latin America regions, partially offset by a decrease in sales in Europe.
Within Europe, the increase in sales in the current-year quarter was primarily due to higher demand from distributors and end-user demand in various markets, including the construction equipment, power generation and machine tool markets, partially offset by a decrease in end-user demand in the industrial machinery and oil and gas markets. During the first nine months of fiscal 2021, the decrease in sales was primarily due to lower demand from distributors and end-user demand in various markets, including the industrial machinery, construction equipment, machine tool, and oil and gas markets, partially offset by an increase in end-user demand in the power generation market.
Within the Asia Pacific region, the increase in sales in the current-year quarter and first nine months of fiscal 2021 was primarily due to an increase in demand from distributors and end-user demand in various markets, including the construction equipment, semiconductor, cars and light truck, engine, and industrial machinery markets, partially offset by a decrease in end-user demand in the oil and gas and mining markets.
Within Latin America, the increase in sales in the current-year quarter and the first nine months of fiscal 2021 was primarily due to higher demand from distributors and end-user demand in various markets, including the farm and agriculture, construction equipment, and life science markets, partially offset by a decrease in end-user demand in the oil and gas market.
Diversified Industrial Segment operating margins increased in the current-year quarter and first nine months of fiscal 2021 within both the North American and International businesses primarily due to benefits from overall cost reductions, including lower discretionary spending, wage and salary reductions, restructuring actions in response to business conditions resulting from the COVID-19 pandemic, the absence of acquisition-related expenses, and productivity improvements. In the first nine months of fiscal 2021, these benefits were partially offset by higher intangible asset amortization expense and higher business realignment charges.
The following business realignment and acquisition integration charges are included in Diversified Industrial North American and Diversified Industrial International operating income:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| (dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Diversified Industrial North America | $ | 2 | $ | 10 | $ | 11 | $ | 23 | ||||||||||||||||||
| Diversified Industrial International | 5 | 12 | 30 | 23 | ||||||||||||||||||||||
During the first nine months of fiscal 2021, business realignment charges primarily included actions taken to address the impact of COVID-19 on our business. The business realignment charges also consisted of severance costs related to actions taken under the Company's simplification initiative implemented by operating units throughout the world as well as plant closures. Acquisition integration charges relate to the fiscal 2020 acquisition of LORD Corporation ("Lord"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We anticipate that cost savings realized from the workforce reduction measures taken in the first nine months of fiscal 2021 will not materially impact operating income in fiscal 2021 and will increase operating income by approximately one percent in fiscal 2022 for both the Diversified Industrial North American and International businesses. We expect to continue to take actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment. We currently anticipate incurring approximately $12 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2021. However, continually changing business conditions could impact the ultimate costs we incur.
Diversified Industrial Segment backlog as of March 31, 2021 increased from the prior-year quarter due to orders exceeding shipments in both the International and North American businesses. Backlog in North America and Europe accounted for approximately 45 percent and 30 percent of the change, respectively, while the remaining 25 percent related to the Asia Pacific region.
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As of March 31, 2021, Diversified Industrial Segment backlog increased compared to the June 30, 2020 amount of $2,117 million due to orders exceeding shipments in both the International and North American businesses. The International and North American backlog each accounted for approximately 50 percent of the change. Within the International businesses, Europe and the Asia Pacific region accounted for approximately 55 percent and 40 percent of the increase, respectively.
Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Aerospace Systems Segment
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| (dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net sales | $ | 599 | $ | 745 | $ | 1,758 | $ | 2,111 | ||||||||||||||||||
| Operating income | $ | 102 | $ | 127 | $ | 280 | $ | 371 | ||||||||||||||||||
| Operating margin | 17.1 | % | 17.1 | % | 15.9 | % | 17.6 | % | ||||||||||||||||||
| Backlog | $ | 3,335 | $ | 3,159 | $ | 3,335 | $ | 3,159 | ||||||||||||||||||
The decrease in net sales in the Aerospace Systems Segment for the current-year quarter and first nine months of fiscal 2021 was primarily due to lower volume in the commercial aftermarket and original equipment manufacturer ("OEM") businesses due to the market conditions as a result of COVID-19. This decrease was partially offset by higher military OEM and aftermarket volume as well as a $71 million increase in sales from prior-year acquisitions in the first nine months of fiscal 2021.
Operating margin decreased during the current-year quarter and first nine months of fiscal 2021 primarily due to lower sales volume in the commercial OEM and aftermarket businesses, lower aftermarket profitability and higher business realignment charges primarily due to current economic conditions resulting from COVID-19, partially offset by lower engineering development expenses and benefits from prior-year restructuring actions.
The disruption in the aerospace industry due to the COVID-19 pandemic has been significant and we have taken actions necessary to structure appropriately the operations of the Aerospace Systems Segment. We do not currently intend to incur significant additional business realignment and acquisition integration charges in the remainder of fiscal 2021. However, continually changing business conditions could impact the ultimate costs we incur. We anticipate that cost savings realized from the workforce reduction measures taken in the first nine months of fiscal 2021 will increase operating income by approximately two percent and three percent in fiscal 2021 and 2022, respectively.
The increase in backlog from the prior-year quarter and from the June 30, 2020 amount of $3,021 million is primarily due to orders exceeding shipments in the military OEM business, partially offset by shipments exceeding orders in the military aftermarket, commercial OEM and aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Corporate general and administrative expenses
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (dollars in millions) | March 31, | March 31, | ||||||||||||||||||||||||
| Expense (income) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Corporate general and administrative expense | $ | 48 | $ | 48 | $ | 124 | $ | 133 | ||||||||||||||||||
| Corporate general and administrative expense, as a percent of sales | 1.3 | % | 1.3 | % | 1.2 | % | 1.3 | % | ||||||||||||||||||
Corporate general and administrative expenses remained flat in the current-year quarter and decreased during first nine months of fiscal 2021 primarily due to benefits from lower discretionary spending and wage and salary expense as a result of actions taken in response to business conditions resulting from the COVID-19 pandemic. During the first nine months of fiscal 2021, these benefits were partially offset by an increase in deferred compensation expense and charitable contributions.
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Other expense (income) (in the Business Segment Information) included the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (dollars in millions) | March 31, | March 31, | ||||||||||||||||||||||||
| Expense (income) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Foreign currency transaction | $ | (8) | $ | (20) | $ | (8) | $ | (13) | ||||||||||||||||||
| Stock-based compensation | 8 | 7 | 54 | 45 | ||||||||||||||||||||||
| Pensions | 6 | 6 | 16 | 23 | ||||||||||||||||||||||
| Acquisition expenses | 1 | — | 1 | 115 | ||||||||||||||||||||||
| Gain on disposal of assets | (6) | (1) | (108) | (5) | ||||||||||||||||||||||
| Interest income | (2) | (3) | (5) | (29) | ||||||||||||||||||||||
| Other items, net | 8 | 12 | (4) | (8) | ||||||||||||||||||||||
| $ | 7 | $ | 1 | $ | (54) | $ | 128 | |||||||||||||||||||
Foreign currency transaction primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions.
Gain on disposal of assets for the first nine months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.
CONSOLIDATED BALANCE SHEET
| (dollars in millions) | March 31, 2021 | June 30, 2020 | ||||||||||||
| Cash | $ | 530 | $ | 756 | ||||||||||
| Trade accounts receivable, net | 2,118 | 1,854 | ||||||||||||
| Inventories | 1,898 | 1,815 | ||||||||||||
| Long-term debt | 6,572 | 7,652 | ||||||||||||
| Shareholders’ equity | 7,392 | 6,114 | ||||||||||||
| Working capital | $ | 2,012 | $ | 1,737 | ||||||||||
| Current ratio | 1.7 | 1.6 | ||||||||||||
Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $505 million and $726 million held by the Company's foreign subsidiaries at March 31, 2021 and June 30, 2020, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.
Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade accounts receivable was 52 days at March 31, 2021, and 54 days at June 30, 2020. We believe that our receivables are collectible and appropriate allowances for credit losses have been recorded.
Inventories as of March 31, 2021 increased by $84 million (which includes an increase of $32 million from the effect of foreign currency translation). After consideration of the effects of foreign currency translation, inventories increased primarily due to an increase in the Diversified Industrial Segment, partially offset by a decrease in the Aerospace Systems Segment. Days supply of inventory on hand was 77 days at March 31, 2021, 89 days at June 30, 2020 and 83 days at March 31, 2020.
Long-term debt decreased by $1,080 million from prior year-end primarily due to the repayment of term loans. Refer to Note 13 to the Consolidated Financial Statements for further discussion.
Shareholders’ equity activity during the first nine months of fiscal 2021 included an increase of approximately $282 million as a result of foreign currency translation.
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CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| (dollars in millions) | 2021 | 2020 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 1,881 | $ | 1,291 | ||||||||||
| Investing activities | 51 | (5,045) | ||||||||||||
| Financing activities | (2,216) | 1,273 | ||||||||||||
| Effect of exchange rates | 88 | (41) | ||||||||||||
| Net decrease in cash and cash equivalents | $ | (196) | $ | (2,522) | ||||||||||
Cash flows from operating activities for the first nine months of fiscal 2021 was higher than the first nine months of fiscal 2020 due to an increase in cash provided by working capital items. We remain focused on managing our inventory and other working capital requirements.
Cash flows from investing activities for the first nine months of fiscal 2020 includes acquisition-related activity of $5,076 million. Additionally, the first nine months of fiscal 2021 includes net proceeds from the sale of land of approximately $111 million.
Cash flows from financing activities for the first nine months of fiscal 2021 includes net commercial paper repayments of $540 million compared to net borrowings of $362 million in the first nine months of fiscal 2020. Cash flows from financing activities in the first nine months of fiscal 2021 also includes term loan repayments of $1,210 million while the first nine months of fiscal 2020 includes proceeds from the issuance of the $925 million and $800 million term loans. Refer to Note 13 to the Consolidated Financial Statements for further discussion.
Our goal is to maintain a strong investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At March 31, 2021, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:
| Fitch Ratings | BBB+ | |||||||
| Moody's Investors Services, Inc. | Baa1 | |||||||
| Standard & Poor's | BBB+ | |||||||
We continue to actively monitor our liquidity position and working capital needs and prioritize capital expenditures related to safety and strategic investments. The Company remains in a stable overall capital resources and liquidity position that is adequate to meet its projected needs. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During fiscal 2021, the Company reinitiated the share repurchase program and repurchased shares totaling $50 million during the three months ended March 31, 2021.
At March 31, 2021, the Company had a line of credit totaling $2,500 million through a multi-currency revolving credit agreement with a group of banks, of which $2,316 million was available. The credit agreement expires in September 2024; however, we have the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.
As of March 31, 2021, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of March 31, 2021, $184 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $610 million.
The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at March 31, 2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At March 31, 2021, the Company's debt to debt-shareholders' equity ratio was 0.48 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.
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Forward-Looking Statements
Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may impact the Company's tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.
Among other factors which may affect future performance are:
•global economic and political factors, including the impact of the global COVID-19 pandemic and governmental and other actions taken in response, manufacturing activity, air travel trends, currency exchange rates and monetary policy, trade policy and tariffs, as well as 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 integrations of Lord and EMFCO Holdings Incorporated, parent company of Exotic; and our ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
•our ability to effectively manage expanded operations from the acquisitions of 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and undertakes no obligation to update them unless otherwise required by law.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 15 to the Consolidated Financial Statements. Derivatives that are not designated as hedges are adjusted to fair value by recording gains and losses through the Consolidated Statement of Income. Derivatives that are designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. For cross-currency swaps measured using the spot method, the periodic interest settlements are recognized directly in earnings through interest expense. 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. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates.
As discussed elsewhere in this report, the COVID-19 pandemic is having, and likely will continue to have, an adverse effect on our business, and its future impacts remain unpredictable. As we cannot anticipate the ultimate duration or scope of the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2021. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of March 31, 2021, the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. In response to the COVID-19 pandemic, many of our team members have been working remotely. While there were no material changes in our internal control over financial reporting during the quarter ended March 31, 2021, we are continually monitoring and assessing the changing business environment resulting from COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
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PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
From time to time we are involved in matters that involve governmental authorities as a party under federal, state and local laws that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. We will report such matters that exceed, or that we reasonably believe may exceed, $1.0 million or more in monetary sanctions.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)Unregistered Sales of Equity Securities. Not applicable.
(b)Use of Proceeds. Not applicable.
(c)Issuer Purchases of Equity Securities.
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| January 1, 2021 through January 31, 2021 | — | $ | — | — | 10,028,239 | |||||||||||||||||||||
| February 1, 2021 through February 28, 2021 | 65,000 | $ | 276.75 | 65,000 | 9,963,239 | |||||||||||||||||||||
| March 1, 2021 through March 31, 2021 | 104,814 | $ | 305.38 | 104,814 | 9,858,425 | |||||||||||||||||||||
| Total: | 169,814 | 169,814 | ||||||||||||||||||||||||
(1)On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a fiscal year. There is no expiration date for this program. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During fiscal 2021, the Company reinitiated the share repurchase program and began repurchasing shares under the program in February 2021.
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ITEM 6. Exhibits.
The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:
| Exhibit No. | Description of Exhibit | |||||||
| 3(a) | ||||||||
| 10(a) | ||||||||
| 31(a) | ||||||||
| 31(b) | ||||||||
| 32 | ||||||||
| 101.INS | Inline XBRL Instance Document.* | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. * | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
| 104 | Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). | |||||||
| * | Submitted electronically herewith. | ||||
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three and nine months ended March 31, 2021 and 2020, (ii) Consolidated Statement of Comprehensive Income for the three and nine months ended March 31, 2021 and 2020, (iii) Consolidated Balance Sheet at March 31, 2021 and June 30, 2020, (iv) Consolidated Statement of Cash Flows for the nine months ended March 31, 2021 and 2020, and (v) Notes to Consolidated Financial Statements for the nine months ended March 31, 2021.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PARKER-HANNIFIN CORPORATION | ||||||||
| (Registrant) | ||||||||
| /s/ Todd M. Leombruno | ||||||||
| Todd M. Leombruno | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| Date: | May 6, 2021 | |||||||
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