NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
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, 2017
, the results of operations for the
three and nine
months ended
March 31, 2017
and
2016
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
2016
Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to these financial statements.
2. New Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost component is eligible for capitalization, when applicable. ASU 2017-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued. ASU 2017-07 should be applied retrospectively for the income statement presentation of net periodic pension cost and net periodic postretirement benefit cost and prospectively, on or after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost. The Company has not yet determined the effect that ASU 2017-07 will have on its financial statements.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of ASU 2017-04 will have a material effect on its financial statements.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16 provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2017. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-16 will have on its financial statements.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides specific guidance on several cash flow classification issues to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-15 will have on its financial statements.
2. New Accounting Pronouncements, cont'd
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." Under ASU 2016-09, all excess tax benefits and deficiencies arising from employee share-based payment awards, and dividends on those awards, will be recognized in the income statement during the period in which they occur. ASU 2016-09 allows companies to make an accounting policy election to estimate forfeitures, as required today, or record them when they occur and allows companies to withhold an amount up to the maximum statutory tax rate without causing the award to be classified as a liability. Within the statement of cash flows, ASU 2016-09 requires excess tax benefits to be classified as an operating activity and cash payments to tax authorities in connection with shares withheld to be classified as a financing activity. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017. In fiscal 2017, the Company applied the recognition of the excess tax benefits and deficiencies requirement on a prospective basis and recognized a discrete income tax benefit, which was recorded as a reduction to income tax expense, of
$13,664
and
$30,763
for the three and nine months ended
March 31, 2017
, respectively. Prior to the adoption of ASU 2016-09, this excess tax benefit was recorded as an increase to additional capital. The cash flow classification requirements of ASU 2016-09 were applied retrospectively. As a result, for the
nine
months ended
March 31, 2016
cash flows from operating activities was increased by
$23,067
and cash flows from financing activities was decreased by
$23,067
. The Company elected to continue to estimate forfeitures expected to occur rather than electing to account for forfeitures as they occur. The other provisions of ASU 2016-09 related to accounting for income taxes and minimum statutory share withholding tax requirements had no impact on the Company's financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases on their balance sheet by recognizing a liability to make lease payments and an asset representing their right to use the asset during the lease term. Lessee recognition, measurement, and presentation of expenses and cash flows will not change significantly from existing guidance. Lessor accounting is also largely unchanged from existing guidance. ASU 2016-02 requires qualitative and quantitative disclosures that provide information about the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-02 will have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Liabilities." ASU 2016-01 requires equity investments (excluding equity method investments and investments that are consolidated) to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost, adjusted for impairment and observable price changes. The ASU also simplifies the impairment assessment of equity investments, eliminates the disclosure of the assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at cost on the balance sheet and requires the exit price to be used when measuring fair value of financial instruments for disclosure purposes. Under ASU 2016-01, changes in fair value (resulting from instrument-specific credit risk) will be presented separately in other comprehensive income for liabilities measured using the fair value option and financial assets and liabilities will be presented separately by measurement category and type either on the balance sheet or in the financial statement disclosures. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has not yet determined the effect that ASU 2016-01 will have on its financial statements.
2. New Accounting Pronouncements, cont'd
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. During the first quarter of fiscal 2017, the Company retrospectively adopted ASU 2015-03 and has revised the following captions within the Consolidated Balance Sheet at June 30, 2016:
|
|
|
|
|
|
|
|
|
|
As Previously
Reported
|
|
Revised
|
Other assets
|
$
|
850,088
|
|
|
$
|
827,492
|
|
Notes payable and long-term debt payable within one year
|
361,840
|
|
|
361,787
|
|
Long-term debt
|
2,675,000
|
|
|
2,652,457
|
|
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing." ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09. The Company has not yet determined the effect that ASU 2014-09 and ASU 2016-10 will have on its financial statements.
3. Acquisitions and divestiture
Acquisitions
- During the first nine months of fiscal 2017, the Company completed
three
acquisitions, including the acquisition of a
100
percent equity interest in CLARCOR Inc ("Clarcor") for approximately
$4,110 million
in cash, including the assumption of debt. The remaining disclosures in Note 3 pertain only to Clarcor as the other two acquisitions completed during the first nine months of fiscal 2017 were deemed immaterial for further disclosure.
Clarcor is a major manufacturer of filtration products under more than a dozen respected brands including CLARCOR, Baldwin, Fuel Manager, PECOFacet, Airguard, Altair, BHA, Clearcurrent, Clark Filter, Hastings, United Air Specialists, Keddeg and Purolator. Clarcor had annual sales of approximately
$1,400 million
for its fiscal 2016. For segment reporting purposes, Clarcor will be part of the Diversified Industrial Segment.
The Company believes that Clarcor is a highly complementary acquisition that provides the Company with additional proprietary media, industrial and process filtration products and technologies, as well as a broad portfolio of replacement filters. The acquisition of Clarcor also offers significant expected operating synergies.
The Clarcor assets acquired and liabilities assumed will be recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The following presents the preliminary estimated fair values of Clarcor's assets acquired and liabilities assumed on the acquisition date. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months, as third-party valuations are finalized, additional information becomes available and as additional analysis is performed. Such revisions may have a material impact on the Company's results of operations and financial position.
3. Acquisitions and divestiture, cont'd
|
|
|
|
|
|
February 28, 2017
|
|
Assets:
|
|
Cash and cash equivalents
|
$
|
145,491
|
|
Accounts receivable
|
249,045
|
|
Inventories
|
278,060
|
|
Prepaid expenses
|
13,903
|
|
Plant and equipment
|
373,698
|
|
Deferred income taxes
|
4,558
|
|
Other assets
|
8,367
|
|
Intangible assets
|
1,497,280
|
|
Goodwill
|
2,649,456
|
|
|
5,219,858
|
|
Liabilities:
|
|
Notes payable
|
20,162
|
|
Accounts payable, trade
|
82,436
|
|
Accrued payrolls and other compensation
|
42,653
|
|
Accrued domestic and foreign taxes
|
4,379
|
|
Other accrued liabilities
|
79,066
|
|
Long-term debt
|
288,336
|
|
Pensions and other postretirement benefits
|
33,928
|
|
Deferred income taxes
|
542,698
|
|
Other liabilities
|
13,878
|
|
Noncontrolling interests
|
1,843
|
|
|
1,109,379
|
|
Net assets acquired
|
$
|
4,110,479
|
|
Goodwill is calculated as the excess of the purchase price over the net assets acquired and is not deductible for tax purposes. With respect to the Clarcor acquisition, goodwill represents cost synergies and enhancements to the Company's existing filtration technologies. See Note 11 for additional information about intangible assets.
The Company's results of operations for the first nine months of fiscal 2017 include Clarcor's results of operations from the date of acquisition, February 28, 2017, through March 31, 2017. Net sales and segment operating (loss) attributable to Clarcor during this period was
$135,986
and
$(13,582)
, respectively.
The following unaudited pro forma information gives effect to the Company's acquisition of Clarcor as if the acquisition had occurred on July 1, 2015 and Clarcor had been included in the Company's results of operations for the first nine months of fiscal 2017 and the twelve months ended June 30, 2016.
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Twelve months ended
|
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
Net sales
|
$
|
9,562,307
|
|
|
$
|
12,772,097
|
|
Net income attributable to common shareholders
|
754,323
|
|
|
780,421
|
|
Diluted earnings per share
|
5.57
|
|
|
5.70
|
|
3. Acquisitions and divestiture, cont'd
The unaudited pro forma financial information in the table above includes adjustments related to amortization expense, depreciation, interest expense and transaction costs incurred as well as adjustments to cost of sales for the step-up in inventory to estimated acquisition-date fair value and related income tax effects and is based on a preliminary purchase price allocation using currently available information. Transaction costs incurred and the adjustment to cost of sales for the step-up in inventory to estimated acquisition-date fair value are considered to be non-recurring. Adjustments for non-recurring items increased pro forma net income attributable to common shareholders by
$72,006
for the nine months ended March 31, 2017 and decreased pro forma net income attributable to common shareholders by
$29,106
for the twelve months ended June 30, 2016. The unaudited pro forma financial information does not give effect to any synergies, operating efficiencies or cost savings that may result from the Clarcor acquisition.
Divestiture
- During the second quarter of fiscal 2017, the Company divested its Autoline product line, which was part of the Diversified Industrial Segment. The operating results and net assets of the Autoline product line were immaterial to the Company's consolidated results of operations and financial position. The Company recorded a net pre-tax gain in the second quarter of fiscal 2017 of approximately
$45 million
related to the divestiture. The gain is reflected in the other (income), net caption in the Consolidated Statement of Income and the other expense caption in the Business Segment Information for the nine months ended March 31, 2017.
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, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
238,673
|
|
|
$
|
187,084
|
|
|
$
|
690,107
|
|
|
$
|
565,044
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic - weighted average common shares
|
133,232,378
|
|
|
134,809,610
|
|
|
133,410,622
|
|
|
135,675,823
|
|
Increase in weighted average common shares from dilutive effect of equity-based awards
|
2,870,596
|
|
|
1,743,159
|
|
|
2,116,573
|
|
|
1,636,025
|
|
Diluted - weighted average common shares, assuming exercise of equity-based awards
|
136,102,974
|
|
|
136,552,769
|
|
|
135,527,195
|
|
|
137,311,848
|
|
Basic earnings per share
|
$
|
1.79
|
|
|
$
|
1.39
|
|
|
$
|
5.17
|
|
|
$
|
4.16
|
|
Diluted earnings per share
|
$
|
1.75
|
|
|
$
|
1.37
|
|
|
$
|
5.09
|
|
|
$
|
4.12
|
|
For the three months ended
March 31, 2017
and
2016
,
717
and
3,087,061
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, 2017
and
2016
,
1,608,245
and
3,062,752
common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earning 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. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury stock. During the three-month period ended
March 31, 2017
, the Company repurchased
332,113
shares at an average price, including commissions, of
$150.55
per share. During the nine-month period ended
March 31, 2017
, the Company repurchased
1,661,459
shares at an average price, including commissions, of
$129.22
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. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was
$15,719
and
$8,010
at
March 31, 2017
and
June 30, 2016
, 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,
2017
|
|
June 30,
2016
|
Notes receivable
|
|
$
|
105,865
|
|
|
$
|
102,400
|
|
Accounts receivable, other
|
|
130,059
|
|
|
129,783
|
|
Total
|
|
$
|
235,924
|
|
|
$
|
232,183
|
|
8. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Finished products
|
|
$
|
616,363
|
|
|
$
|
458,657
|
|
Work in process
|
|
736,697
|
|
|
639,907
|
|
Raw materials
|
|
185,584
|
|
|
74,765
|
|
Total
|
|
$
|
1,538,644
|
|
|
$
|
1,173,329
|
|
9. Business realignment charges
The Company incurred business realignment charges in fiscal
2017
and fiscal
2016
.
Business realignment charges presented in the Business Segment Information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Diversified Industrial
|
$
|
14,605
|
|
|
$
|
24,406
|
|
|
$
|
32,164
|
|
|
$
|
67,405
|
|
Aerospace Systems
|
1,713
|
|
|
624
|
|
|
2,796
|
|
|
2,604
|
|
Corporate general and administrative expenses
|
—
|
|
|
2,049
|
|
|
—
|
|
|
2,129
|
|
Other expense
|
—
|
|
|
—
|
|
|
—
|
|
|
116
|
|
Work force reductions in connection with such business realignment charges in the Business Segment Information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Diversified Industrial
|
312
|
|
|
875
|
|
|
642
|
|
|
2,929
|
|
Aerospace Systems
|
52
|
|
|
15
|
|
|
89
|
|
|
81
|
|
Corporate general and administrative expenses
|
—
|
|
|
50
|
|
|
—
|
|
|
52
|
|
The charges primarily consist of severance costs related to actions taken under the Company's Simplification initiative aimed at reducing organizational and process complexity, as well as plant closures, with the majority of the charges incurred in Europe and North America. The Company believes 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.
The business realignment charges are presented in the Consolidated Statement of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of sales
|
$
|
10,342
|
|
|
$
|
21,628
|
|
|
$
|
24,968
|
|
|
$
|
54,559
|
|
Selling, general and administrative expenses
|
5,976
|
|
|
5,451
|
|
|
9,992
|
|
|
17,579
|
|
Other (income), net
|
—
|
|
|
—
|
|
|
—
|
|
|
116
|
|
As of
March 31, 2017
, approximately
$12 million
in severance payments had been made relating to charges incurred during fiscal
2017
, the remainder of which are expected to be paid by
March 31, 2018
. Severance payments relating to prior-year actions are being made as required. Remaining severance payments related to current-year and prior-year actions of approximately
$28 million
are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the realignment actions described above, the timing and amount of which are not known at this time.
10. Equity
Changes in equity for the
three
months ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at December 31, 2016
|
$
|
4,527,709
|
|
|
$
|
3,269
|
|
|
$
|
4,530,978
|
|
Net income
|
238,673
|
|
|
174
|
|
|
238,847
|
|
Other comprehensive income
|
118,311
|
|
|
301
|
|
|
118,612
|
|
Dividends paid
|
(88,171
|
)
|
|
—
|
|
|
(88,171
|
)
|
Stock incentive plan activity
|
(4,383
|
)
|
|
—
|
|
|
(4,383
|
)
|
Acquisition activity
|
—
|
|
|
1,843
|
|
|
1,843
|
|
Shares purchased at cost
|
(50,000
|
)
|
|
—
|
|
|
(50,000
|
)
|
Balance at March 31, 2017
|
$
|
4,742,139
|
|
|
$
|
5,587
|
|
|
$
|
4,747,726
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at December 31, 2015
|
$
|
4,799,406
|
|
|
$
|
3,315
|
|
|
$
|
4,802,721
|
|
Net income
|
187,084
|
|
|
58
|
|
|
187,142
|
|
Other comprehensive income (loss)
|
159,190
|
|
|
(2
|
)
|
|
159,188
|
|
Dividends paid
|
(85,182
|
)
|
|
—
|
|
|
(85,182
|
)
|
Stock incentive plan activity
|
13,114
|
|
|
—
|
|
|
13,114
|
|
Shares purchased at cost
|
(50,000
|
)
|
|
—
|
|
|
(50,000
|
)
|
Balance at March 31, 2016
|
$
|
5,023,612
|
|
|
$
|
3,371
|
|
|
$
|
5,026,983
|
|
|
|
|
|
|
|
10. Equity, cont'd
Changes in equity for the
nine
months ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at June 30, 2016
|
$
|
4,575,255
|
|
|
$
|
3,423
|
|
|
$
|
4,578,678
|
|
Net income
|
690,107
|
|
|
378
|
|
|
690,485
|
|
Other comprehensive income (loss)
|
(65,068
|
)
|
|
281
|
|
|
(64,787
|
)
|
Dividends paid
|
(256,823
|
)
|
|
(338
|
)
|
|
(257,161
|
)
|
Stock incentive plan activity
|
13,360
|
|
|
—
|
|
|
13,360
|
|
Acquisition activity
|
—
|
|
|
1,843
|
|
|
1,843
|
|
Shares purchased at cost
|
(214,692
|
)
|
|
—
|
|
|
(214,692
|
)
|
Balance at March 31, 2017
|
$
|
4,742,139
|
|
|
$
|
5,587
|
|
|
$
|
4,747,726
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at June 30, 2015
|
$
|
5,104,287
|
|
|
$
|
3,282
|
|
|
$
|
5,107,569
|
|
Net income
|
565,044
|
|
|
261
|
|
|
565,305
|
|
Other comprehensive income (loss)
|
13,080
|
|
|
(133
|
)
|
|
12,947
|
|
Dividends paid
|
(256,851
|
)
|
|
(39
|
)
|
|
(256,890
|
)
|
Stock incentive plan activity
|
48,052
|
|
|
—
|
|
|
48,052
|
|
Shares purchased at cost
|
(450,000
|
)
|
|
—
|
|
|
(450,000
|
)
|
Balance at March 31, 2016
|
$
|
5,023,612
|
|
|
$
|
3,371
|
|
|
$
|
5,026,983
|
|
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the
nine
months ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment and Other
|
|
Retirement Benefit Plans
|
|
Total
|
Balance at June 30, 2016
|
$
|
(844,121
|
)
|
|
$
|
(1,383,644
|
)
|
|
$
|
(2,227,765
|
)
|
Other comprehensive (loss) before reclassifications
|
(169,883
|
)
|
|
—
|
|
|
(169,883
|
)
|
Amounts reclassified from accumulated other comprehensive (loss)
|
(1,032
|
)
|
|
105,847
|
|
|
104,815
|
|
Balance at March 31, 2017
|
$
|
(1,015,036
|
)
|
|
$
|
(1,277,797
|
)
|
|
$
|
(2,292,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment and Other
|
|
Retirement Benefit Plans
|
|
Total
|
Balance at June 30, 2015
|
$
|
(641,018
|
)
|
|
$
|
(1,097,600
|
)
|
|
$
|
(1,738,618
|
)
|
Other comprehensive (loss) before reclassifications
|
(71,989
|
)
|
|
—
|
|
|
(71,989
|
)
|
Amounts reclassified from accumulated other comprehensive (loss)
|
(470
|
)
|
|
85,539
|
|
|
85,069
|
|
Balance at March 31, 2016
|
$
|
(713,477
|
)
|
|
$
|
(1,012,061
|
)
|
|
$
|
(1,725,538
|
)
|
10. Equity, cont'd
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the
three and nine
months ended
March 31, 2017
and
2016
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, 2017
|
|
March 31, 2017
|
|
|
Retirement benefit plans
|
|
|
|
|
|
|
Amortization of prior service cost and initial net obligation
|
|
$
|
(1,735
|
)
|
|
$
|
(5,202
|
)
|
|
See Note 12
|
Recognized actuarial loss
|
|
(53,727
|
)
|
|
(159,946
|
)
|
|
See Note 12
|
Total before tax
|
|
(55,462
|
)
|
|
(165,148
|
)
|
|
|
Tax benefit
|
|
19,950
|
|
|
59,301
|
|
|
Income taxes
|
Net of tax
|
|
$
|
(35,512
|
)
|
|
$
|
(105,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
March 31, 2016
|
|
|
Retirement benefit plans
|
|
|
|
|
|
|
Amortization of prior service cost and initial net obligation
|
|
$
|
(1,842
|
)
|
|
$
|
(5,528
|
)
|
|
See Note 12
|
Recognized actuarial loss
|
|
(42,714
|
)
|
|
(128,538
|
)
|
|
See Note 12
|
Total before tax
|
|
(44,556
|
)
|
|
(134,066
|
)
|
|
|
Tax benefit
|
|
16,134
|
|
|
48,527
|
|
|
Income taxes
|
Net of tax
|
|
$
|
(28,422
|
)
|
|
$
|
(85,539
|
)
|
|
|
11. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the
nine
months ended
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Industrial
Segment
|
|
Aerospace
Systems
Segment
|
|
Total
|
Balance at June 30, 2016
|
$
|
2,804,403
|
|
|
$
|
98,634
|
|
|
$
|
2,903,037
|
|
Acquisitions
|
2,677,271
|
|
|
—
|
|
|
2,677,271
|
|
Divestitures
|
(22,618
|
)
|
|
—
|
|
|
(22,618
|
)
|
Foreign currency translation and other
|
(48,966
|
)
|
|
(12
|
)
|
|
(48,978
|
)
|
Balance at March 31, 2017
|
$
|
5,410,090
|
|
|
$
|
98,622
|
|
|
$
|
5,508,712
|
|
Acquisitions represent the original goodwill allocation and final adjustments to purchase price allocations during the measurement period subsequent to the applicable acquisition dates (see Note 3 for further discussion).
Divestitures primarily represent goodwill associated with the sale of a product line during the first nine months of fiscal 2017 (see Note 3 for further discussion).
11. Goodwill and intangible assets, cont'd
Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
$
|
258,979
|
|
|
$
|
94,826
|
|
|
$
|
150,914
|
|
|
$
|
95,961
|
|
Trademarks
|
588,978
|
|
|
188,117
|
|
|
340,805
|
|
|
179,156
|
|
Customer lists and other
|
2,477,945
|
|
|
704,595
|
|
|
1,362,521
|
|
|
656,552
|
|
Total
|
$
|
3,325,902
|
|
|
$
|
987,538
|
|
|
$
|
1,854,240
|
|
|
$
|
931,669
|
|
Total intangible amortization expense for the
nine
months ended
March 31, 2017
was
$87,724
. The estimated amortization expense for the five years ending
June 30, 2017
through
2021
is
$138,099
,
$220,921
,
$214,725
,
$207,500
and
$199,525
, respectively.
The following is a summary of the identifiable intangible assets acquired as part of the Clarcor acquisition, the fair values of which were determined using an income valuation approach. The weighted-average life is based on the Company's historical experience. The fair value of the identifiable intangible assets is subject to change upon completion of the final valuation, some of which may be material.
|
|
|
|
|
|
|
|
Fair value
|
|
Weighted-Average Life
|
Patents
|
$
|
113,760
|
|
|
18 years
|
Trademarks
|
251,600
|
|
|
12 years
|
Customer lists and other
|
1,131,920
|
|
|
11 years
|
Total
|
$
|
1,497,280
|
|
|
12 years
|
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No such events or circumstances occurred during the
nine
months ended
March 31, 2017
.
12. Retirement benefits
Net pension benefit cost recognized included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
23,632
|
|
|
$
|
23,680
|
|
|
$
|
70,971
|
|
|
$
|
71,199
|
|
Interest cost
|
31,734
|
|
|
45,138
|
|
|
93,202
|
|
|
136,872
|
|
Special termination cost
|
—
|
|
|
—
|
|
|
—
|
|
|
7,088
|
|
Expected return on plan assets
|
(59,480
|
)
|
|
(55,418
|
)
|
|
(177,277
|
)
|
|
(166,633
|
)
|
Amortization of prior service cost
|
1,702
|
|
|
1,868
|
|
|
5,101
|
|
|
5,606
|
|
Amortization of net actuarial loss
|
52,805
|
|
|
42,573
|
|
|
158,557
|
|
|
127,841
|
|
Amortization of initial net obligation
|
4
|
|
|
4
|
|
|
14
|
|
|
12
|
|
Net pension benefit cost
|
$
|
50,397
|
|
|
$
|
57,845
|
|
|
$
|
150,568
|
|
|
$
|
181,985
|
|
During the three months ended
March 31, 2017
and
2016
, the Company recognized
$1,034
and
$1,001
, respectively, in expense related to other postretirement benefits. During the
nine
months ended
March 31, 2017
and
2016
, the Company recognized
$3,266
and
$7,696
, respectively, in expense related to other postretirement benefits.
12. Retirement benefits, cont'd
During the nine months ended March 31, 2016, the Company provided enhanced retirement benefits in connection with a plant closure, which resulted in an increase in net pension benefit cost of $
7,088
and an increase in expense related to other postretirement benefits of
$4,521
.
Beginning in fiscal 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant cash outflows. Previously, these costs were determined using a single-weighted average discount rate. The change does not affect the measurement of the Company's benefit obligations. The new method provides a more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the discrete spot yield curve rates and is accounted for as a change in estimate prospectively beginning the first quarter of fiscal 2017. As a result of the method change, net pension benefit cost for the current-year quarter and first
nine
months of fiscal 2017 is lower than the prior-year quarter and first
nine
months of fiscal 2016 by approximately
$8 million
and
$25 million
, respectively,
13. Debt
During the current-year quarter, the Company issued the following long-term debt:
|
|
|
|
|
|
|
|
Notional Amount
|
|
Senior notes 3.25%, due 2027
|
|
$
|
700,000
|
|
Senior notes 4.10%, due 2047
|
|
$
|
600,000
|
|
Term loan Libor plus 100 bps, due 2020
|
|
$
|
500,000
|
|
Senior notes 1.125%, due 2025
|
|
€
|
700,000
|
|
Term loan Libor plus 150 bps, due 2022
|
|
€
|
100,000
|
|
Interest payments are paid semi-annually for the Senior notes due 2027 and 2047, paid annually for the Senior notes due 2025 and are generally paid quarterly for the term loans. Total debt issuance costs were approximately
$27,515
and will be amortized over the respective debt terms. The Company primarily used the net proceeds from all debt issuances for the Clarcor acquisition (see Note 3 for further discussion).
14. Income taxes
The Company and its subsidiaries file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is open to assessment of its federal income tax returns by the U.S. Internal Revenue Service for fiscal years after 2011, and its state and local returns for fiscal years after 2011. The Company is also open to assessment for foreign jurisdictions for fiscal years after 2007. 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, 2017
, the Company had gross unrecognized tax benefits of
$141,931
. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$85,293
. If recognized, a significant portion of the gross unrecognized tax benefits would be offset against an asset currently recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, is
$14,770
. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately
$100,000
as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.
15. Financial instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits, which are recorded at cost, and investments classified as available-for-sale, which are recorded at fair value with unrealized gains and losses recorded in accumulated other comprehensive (loss). Gross unrealized gains and losses were not material as of
March 31, 2017
and
June 30, 2016
. All of the available-for-sale investments in an unrealized loss position have been in that position for less than 12 months. There were no facts or circumstances that indicated the unrealized losses were other than temporary.
The contractual maturities of available-for-sale investments at
March 31, 2017
and
June 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Less than one year
|
$
|
325
|
|
|
$
|
327
|
|
|
$
|
29,960
|
|
|
$
|
29,990
|
|
One to three years
|
7,870
|
|
|
7,917
|
|
|
144,100
|
|
|
144,625
|
|
Above three years
|
2,018
|
|
|
2,024
|
|
|
34,276
|
|
|
34,275
|
|
Actual maturities of available-for-sale investments may differ from their contractual maturities as the Company has the ability to liquidate the available-for-sale investments after giving appropriate notice to the issuer.
The carrying value of long-term debt and estimated fair value of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Carrying value of long-term debt
|
|
$
|
5,327,952
|
|
|
$
|
2,733,140
|
|
Estimated fair value of long-term debt
|
|
5,517,317
|
|
|
3,133,989
|
|
The fair value of long-term debt was determined based on observable market prices in the active market in which the security is traded and is classified within level 2 of the fair value hierarchy.
The Company utilizes derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company’s Senior Notes due 2025, Euro bonds, which matured in November 2015, and Japanese Yen credit facility, which matured in March 2017, have each been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025, Euro bonds and Japanese Yen credit facility into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.
15. Financial instruments, cont'd
The following summarizes the location and fair value of significant derivative financial instruments reported in the Consolidated Balance Sheet as of
March 31, 2017
and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Caption
|
|
March 31,
2017
|
|
June 30,
2016
|
Net investment hedges
|
|
|
|
|
|
|
Cross-currency swap contracts
|
|
Other assets
|
|
$
|
30,775
|
|
|
$
|
24,771
|
|
Cash flow hedges
|
|
|
|
|
|
|
Costless collar contracts
|
|
Non-trade and notes receivable
|
|
670
|
|
|
—
|
|
Costless collar contracts
|
|
Other accrued liabilities
|
|
5,786
|
|
|
8,368
|
|
The cross-currency swap and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The Company has not entered into any master netting arrangements.
Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.
Cross-currency swap contracts have been designated as hedging instruments. Costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains (losses) on derivative financial instruments that were recorded in the Consolidated Statement of Income for the
three and nine
months ended
March 31, 2017
and
2016
were not material.
Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) in the Consolidated Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cross-currency swap contracts
|
$
|
(1,278
|
)
|
|
$
|
10,934
|
|
|
$
|
3,741
|
|
|
$
|
3,140
|
|
Foreign denominated debt
|
(11,009
|
)
|
|
(2,131
|
)
|
|
(11,005
|
)
|
|
2,202
|
|
There was
no
ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor was any portion of these financial instruments excluded from the effectiveness testing, during the
nine
months ended
March 31, 2017
and
2016
.
15. Financial instruments, cont'd
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at
March 31, 2017
and
June 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair
|
|
|
In Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Value at
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
March 31, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
2,302
|
|
|
$
|
2,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
5,587
|
|
|
5,587
|
|
|
—
|
|
|
—
|
|
Asset-backed and mortgage-backed securities
|
|
4,680
|
|
|
—
|
|
|
4,680
|
|
|
—
|
|
Derivatives
|
|
34,799
|
|
|
—
|
|
|
34,799
|
|
|
—
|
|
Investments measured at net asset value
|
|
6,599
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
9,600
|
|
|
—
|
|
|
9,600
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair
|
|
|
In Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Value at
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
June 30, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,296
|
|
|
$
|
1,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Government bonds
|
|
15,764
|
|
|
15,764
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
184,380
|
|
|
184,380
|
|
|
—
|
|
|
—
|
|
Asset-backed and mortgage-backed securities
|
|
8,746
|
|
|
—
|
|
|
8,746
|
|
|
—
|
|
Derivatives
|
|
25,303
|
|
|
—
|
|
|
25,303
|
|
|
—
|
|
Investments measured at net asset value
|
|
361,770
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
13,028
|
|
|
—
|
|
|
13,028
|
|
|
—
|
|
The fair values of the equity securities, government bonds, corporate bonds and asset-backed and mortgage-backed securities are determined using the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are traded in an active market.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis. Fair values are transferred between levels of the fair value hierarchy when facts and circumstances indicate that a change in the method of estimating the fair value of a financial asset or financial liability is warranted.
PARKER-HANNIFIN CORPORATION
FORM 10-Q