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, 2018
, the results of operations for the
three
and
nine
months ended
March 31, 2018
and
2017
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
2017
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. In April 2018, the Company completed the divestiture of certain of its aerospace filtration businesses, which were part of the Diversified Industrial Segment. The operating results and net assets of the businesses divested were immaterial to the Company's consolidated results of operations and financial position. The Company expects to recognize an after-tax loss on the divestiture of approximately
$48 million
during the fourth quarter of fiscal 2018. A significant portion of the loss is attributable to tax expense resulting from a tax gain recognized with this transaction.
2. New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (TCJ Act) reduction of the U.S. federal corporate income tax rate. The amendments also require certain disclosures about stranded tax effects. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any period after the issuance of the update. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act is recognized. The Company has not yet determined the effect that ASU 2018-02 will have on its financial statements.
In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 provides targeted improvements to Topic 815 accounting for hedging activities by expanding an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early application is permitted in any interim period after issuance of the update. ASU 2017-12 should be applied using a modified retrospective approach for cash flow and net investment hedge relationships that exist on the date of adoption, and prospectively for presentation and disclosure requirements. The Company has not yet determined the effect that ASU 2017-12 will have on its financial statements.
In May 2017, the FASB issued ASU 2017-09, "Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: (1) the fair value of the modified award is the same as fair value of the original award; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. During the first quarter of fiscal 2018, the Company adopted ASU 2017-09. The adoption of ASU 2017-09 did not affect the Company's financial statements as there were no modifications of any share-based awards during the first nine months of fiscal 2018.
2. New Accounting Pronouncements, cont'd
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 also provides that only the service cost component is eligible for capitalization, when applicable. ASU 2017-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. 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. During the first quarter of fiscal 2018, the Company adopted ASU 2017-04. The adoption of ASU 2017-04 did not affect the Company's financial statements as there were no instances of a reporting units carrying value exceeding its fair value for any goodwill impairment tests performed during the first nine months of fiscal 2018.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16 provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2017. Early adoption is permitted. The Company currently estimates that the adoption of ASU 2016-16 will eliminate a
$58 million
income tax deferred charge recorded in the Consolidated Balance Sheet as of March 31, 2018.
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 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-15 will have on its financial statements.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect that ASU 2016-13 will have on its financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases 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
2. New Accounting Pronouncements, cont'd
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.
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 currently anticipates using the modified retrospective method to adopt ASU 2014-09. The Company is still in the process of quantifying the impact of the adoption of ASU 2014-09, but at this time the Company does not expect the adoption to have a material impact on its financial statements.
3. 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, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
365,989
|
|
|
$
|
238,673
|
|
|
$
|
707,545
|
|
|
$
|
690,107
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic - weighted average common shares
|
133,032,431
|
|
|
133,232,378
|
|
|
133,107,321
|
|
|
133,410,622
|
|
Increase in weighted average common shares from dilutive effect of equity-based awards
|
2,735,849
|
|
|
2,870,596
|
|
|
2,554,064
|
|
|
2,116,573
|
|
Diluted - weighted average common shares, assuming exercise of equity-based awards
|
135,768,280
|
|
|
136,102,974
|
|
|
135,661,385
|
|
|
135,527,195
|
|
Basic earnings per share
|
$
|
2.75
|
|
|
$
|
1.79
|
|
|
$
|
5.32
|
|
|
$
|
5.17
|
|
Diluted earnings per share
|
$
|
2.70
|
|
|
$
|
1.75
|
|
|
$
|
5.22
|
|
|
$
|
5.09
|
|
For the three months ended
March 31, 2018
and
2017
,
197,560
and
717
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, 2018
and
2017
,
471,008
and
1,608,245
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.
4. 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. During the three-month period ended
March 31, 2018
, the Company repurchased
263,179
shares at an average price, including commissions, of
$189.98
per share. During the
nine
-month period ended
March 31, 2018
, the Company repurchased
839,717
at an average price, including commissions, of
$178.63
per share.
5. 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
$10,879
and
$14,336
at
March 31, 2018
and
June 30, 2017
, respectively.
6. 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,
2018
|
|
June 30,
2017
|
Notes receivable
|
|
$
|
163,814
|
|
|
$
|
118,351
|
|
Accounts receivable, other
|
|
164,297
|
|
|
136,636
|
|
Total
|
|
$
|
328,111
|
|
|
$
|
254,987
|
|
7. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
Finished products
|
|
$
|
719,902
|
|
|
$
|
642,788
|
|
Work in process
|
|
811,898
|
|
|
723,133
|
|
Raw materials
|
|
200,959
|
|
|
183,573
|
|
Total
|
|
$
|
1,732,759
|
|
|
$
|
1,549,494
|
|
8. Business realignment charges
The Company incurred business realignment charges in fiscal
2018
and fiscal
2017
. The Company also incurred acquisition integration costs in fiscal
2018
related to the fiscal
2017
acquisition of CLARCOR, Inc.
Business realignment charges and acquisition integration costs presented in the Business Segment Information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Diversified Industrial
|
$
|
15,643
|
|
|
$
|
14,605
|
|
|
$
|
53,590
|
|
|
$
|
32,164
|
|
Aerospace Systems
|
1,815
|
|
|
1,713
|
|
|
3,270
|
|
|
2,796
|
|
Work force reductions in connection with such business realignment charges and acquisition integration costs in the Business Segment Information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Diversified Industrial
|
110
|
|
|
312
|
|
|
1,375
|
|
|
642
|
|
Aerospace Systems
|
65
|
|
|
52
|
|
|
121
|
|
|
89
|
|
The business realignment 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 and acquisition integration costs are presented in the Consolidated Statement of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
9,511
|
|
|
$
|
10,342
|
|
|
$
|
32,283
|
|
|
$
|
24,968
|
|
Selling, general and administrative expenses
|
7,723
|
|
|
5,976
|
|
|
24,353
|
|
|
9,992
|
|
Other (income), net
|
224
|
|
|
—
|
|
|
224
|
|
|
—
|
|
As of
March 31, 2018
, approximately
$23 million
in severance payments had been made relating to business realignment charges incurred during fiscal
2018
, the remainder of which are expected to be paid by
March 31, 2019
. Severance payments relating to prior-year business realignment actions are being made as required. Remaining severance payments related to current-year and prior-year business realignment actions of approximately
$27 million
are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment actions described above, the timing and amount of which are not known at this time.
9. Equity
Changes in equity for the
three
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at December 31, 2017
|
$
|
5,513,401
|
|
|
$
|
5,809
|
|
|
$
|
5,519,210
|
|
Net income
|
365,989
|
|
|
141
|
|
|
366,130
|
|
Other comprehensive income
|
118,690
|
|
|
95
|
|
|
118,785
|
|
Dividends paid
|
(88,030
|
)
|
|
(115
|
)
|
|
(88,145
|
)
|
Stock incentive plan activity
|
10,303
|
|
|
—
|
|
|
10,303
|
|
Shares purchased at cost
|
(50,000
|
)
|
|
—
|
|
|
(50,000
|
)
|
Balance at March 31, 2018
|
$
|
5,870,353
|
|
|
$
|
5,930
|
|
|
$
|
5,876,283
|
|
|
|
|
|
|
|
|
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
|
|
Changes in equity for the
nine
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at June 30, 2017
|
$
|
5,261,649
|
|
|
$
|
5,697
|
|
|
$
|
5,267,346
|
|
Net income
|
707,545
|
|
|
442
|
|
|
707,987
|
|
Other comprehensive income (loss)
|
275,166
|
|
|
(64
|
)
|
|
275,102
|
|
Dividends paid
|
(264,217
|
)
|
|
(115
|
)
|
|
(264,332
|
)
|
Stock incentive plan activity
|
40,210
|
|
|
—
|
|
|
40,210
|
|
Acquisition activity
|
—
|
|
|
(30
|
)
|
|
(30
|
)
|
Shares purchased at cost
|
(150,000
|
)
|
|
—
|
|
|
(150,000
|
)
|
Balance at March 31, 2018
|
$
|
5,870,353
|
|
|
$
|
5,930
|
|
|
$
|
5,876,283
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
9. Equity, cont'd
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the
nine
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment and Other
|
|
Retirement Benefit Plans
|
|
Total
|
Balance at June 30, 2017
|
$
|
(925,342
|
)
|
|
$
|
(998,862
|
)
|
|
$
|
(1,924,204
|
)
|
Other comprehensive income before reclassifications
|
194,900
|
|
|
—
|
|
|
194,900
|
|
Amounts reclassified from accumulated other comprehensive (loss)
|
—
|
|
|
80,266
|
|
|
80,266
|
|
Balance at March 31, 2018
|
$
|
(730,442
|
)
|
|
$
|
(918,596
|
)
|
|
$
|
(1,649,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the
three
and
nine
months ended
March 31, 2018
and
2017
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, 2018
|
|
March 31, 2018
|
|
|
Retirement benefit plans
|
|
|
|
|
|
|
Amortization of prior service cost and initial net obligation
|
|
$
|
(1,608
|
)
|
|
$
|
(5,291
|
)
|
|
See Note 11
|
Recognized actuarial loss
|
|
(35,606
|
)
|
|
(110,566
|
)
|
|
See Note 11
|
Total before tax
|
|
(37,214
|
)
|
|
(115,857
|
)
|
|
|
Tax benefit
|
|
11,996
|
|
|
35,591
|
|
|
Income taxes
|
Net of tax
|
|
$
|
(25,218
|
)
|
|
$
|
(80,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 11
|
Recognized actuarial loss
|
|
(53,727
|
)
|
|
(159,946
|
)
|
|
See Note 11
|
Total before tax
|
|
(55,462
|
)
|
|
(165,148
|
)
|
|
|
Tax benefit
|
|
19,950
|
|
|
59,301
|
|
|
Income taxes
|
Net of tax
|
|
$
|
(35,512
|
)
|
|
$
|
(105,847
|
)
|
|
|
10. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the
nine
months ended
March 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Industrial
Segment
|
|
Aerospace
Systems
Segment
|
|
Total
|
Balance at June 30, 2017
|
$
|
5,488,236
|
|
|
$
|
98,642
|
|
|
$
|
5,586,878
|
|
Acquisitions
|
36,715
|
|
|
—
|
|
|
36,715
|
|
Foreign currency translation and other
|
122,742
|
|
|
23
|
|
|
122,765
|
|
Balance at March 31, 2018
|
$
|
5,647,693
|
|
|
$
|
98,665
|
|
|
$
|
5,746,358
|
|
Acquisitions represent adjustments to purchase price allocations during the measurement period subsequent to the applicable acquisition dates. The impact of purchase price allocation adjustments made during the first nine months of fiscal 2018 on the Company's results of operations and financial position were immaterial.
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, 2018
|
|
June 30, 2017
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
$
|
269,935
|
|
|
$
|
116,041
|
|
|
$
|
254,049
|
|
|
$
|
100,860
|
|
Trademarks
|
562,788
|
|
|
226,902
|
|
|
553,691
|
|
|
200,413
|
|
Customer lists and other
|
2,561,179
|
|
|
916,300
|
|
|
2,566,983
|
|
|
765,966
|
|
Total
|
$
|
3,393,902
|
|
|
$
|
1,259,243
|
|
|
$
|
3,374,723
|
|
|
$
|
1,067,239
|
|
Total intangible amortization expense for the
nine
months ended
March 31, 2018
was
$167,317
. The estimated amortization expense for the five years ending
June 30, 2018
through
2022
is
$215,358
,
$205,011
,
$196,150
,
$187,346
and
$151,183
, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No such events or circumstances occurred during the
nine
months ended
March 31, 2018
.
11. Retirement benefits
Net pension benefit cost recognized included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
20,711
|
|
|
$
|
23,632
|
|
|
$
|
62,011
|
|
|
$
|
70,971
|
|
Interest cost
|
36,027
|
|
|
31,734
|
|
|
107,851
|
|
|
93,202
|
|
Expected return on plan assets
|
(64,437
|
)
|
|
(59,480
|
)
|
|
(192,963
|
)
|
|
(177,277
|
)
|
Amortization of prior service cost
|
1,575
|
|
|
1,702
|
|
|
5,190
|
|
|
5,101
|
|
Amortization of net actuarial loss
|
36,278
|
|
|
52,805
|
|
|
110,428
|
|
|
158,557
|
|
Amortization of initial net obligation
|
4
|
|
|
4
|
|
|
14
|
|
|
14
|
|
Net pension benefit cost
|
$
|
30,158
|
|
|
$
|
50,397
|
|
|
$
|
92,531
|
|
|
$
|
150,568
|
|
During the three months ended
March 31, 2018
and
2017
, the Company recognized
$(100)
and
$1,034
, respectively, in (income) expense related to other postretirement benefits. During the
nine
months ended
March 31, 2018
and
2017
, the Company recognized
$2,080
and
$3,266
, respectively, in expense related to other postretirement benefits.
12. Income taxes
On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, establishing a flat corporate income tax rate of
21 percent
and creating a territorial tax system (with a one-time transition tax imposed on previously unremitted foreign earnings and profits).
The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118, and based on the information available as of December 31, 2017, the Company recorded a net provisional discrete income tax cost of
$225 million
as a result of the TCJ Act being enacted during the second quarter of fiscal 2018.
The reduction in the U.S. corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and liabilities to reflect their value at the reduced corporate tax rate of
21 percent
, which resulted in a decrease in income tax expense for the nine months ended March 31, 2018 of approximately
$62 million
. The one-time transition tax on previously unremitted foreign earnings and profits resulted in an increase in income tax expense for the nine months ended March 31, 2018 of
$287 million
. The Company intends to make the election to pay the one-time transition tax over
eight years
. The amounts recorded for both the revaluation of certain tax-related assets and liabilities and the one-time transition tax on previously unremitted foreign earnings and profits have been recorded as reasonable estimates based on the Company's analysis. No incremental adjustments have been made to these estimates during the three months ended March 31, 2018, as available information has not significantly changed. The Company continues to gather additional information and interpret the law to complete the accounting for these items.
Certain provisions of the TCJ Act will impact the Company starting in fiscal 2019. These provisions include, but are not limited to, the creation of the base erosion anti-abuse tax, a general limitation of U.S. federal income taxes on dividends from foreign subsidiaries, a new provision designed to tax global intangible low-taxed income, and the repeal of the domestic production activities deduction. The Company continues to evaluate the future impacts of these provisions and, as of March 31, 2018, has not recorded any impact of the TCJ Act aside from those previously mentioned.
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, 2018
, the Company had gross unrecognized tax benefits of
$156,978
. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$102,871
. 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
$19,076
. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately
$120,000
as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.
13. 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, 2018
and
June 30, 2017
. There were no facts or circumstances that indicated the unrealized losses were other than temporary.
13. Financial instruments, cont'd
The contractual maturities of available-for-sale investments at
March 31, 2018
and
June 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Less than one year
|
$
|
1,121
|
|
|
$
|
1,122
|
|
|
$
|
690
|
|
|
$
|
693
|
|
One to three years
|
8,736
|
|
|
8,806
|
|
|
7,865
|
|
|
7,924
|
|
Above three years
|
466
|
|
|
467
|
|
|
2,108
|
|
|
2,113
|
|
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,
2018
|
|
June 30,
2017
|
Carrying value of long-term debt
|
|
$
|
5,437,267
|
|
|
$
|
5,383,343
|
|
Estimated fair value of long-term debt
|
|
5,619,917
|
|
|
5,645,529
|
|
The fair value of long-term debt was determined based on observable market prices in the active market in which the security is traded and is classified within level 2 of the fair value hierarchy.
The Company utilizes derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company’s EUR
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 following summarizes the location and fair value of significant derivative financial instruments reported in the Consolidated Balance Sheet as of
March 31, 2018
and
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Caption
|
|
March 31,
2018
|
|
June 30,
2017
|
Net investment hedges
|
|
|
|
|
|
|
Cross-currency swap contracts
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
15,135
|
|
Cross-currency swap contracts
|
|
Other liabilities
|
|
10,403
|
|
|
—
|
|
Cash flow hedges
|
|
|
|
|
|
|
Costless collar contracts
|
|
Non-trade and notes receivable
|
|
1,850
|
|
|
430
|
|
Costless collar contracts
|
|
Other accrued liabilities
|
|
3,557
|
|
|
2,027
|
|
The cross-currency swap and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The Company has not entered into any master netting arrangements.
13. Financial instruments, cont'd
Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.
The cross-currency swap contracts have been designated as hedging instruments. The costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the
three
and
nine
months ended
March 31, 2018
and
2017
were not material.
Gain (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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cross-currency swap contracts
|
$
|
(13,374
|
)
|
|
$
|
(1,278
|
)
|
|
$
|
(22,672
|
)
|
|
$
|
3,741
|
|
Foreign denominated debt
|
(15,423
|
)
|
|
(11,009
|
)
|
|
(43,150
|
)
|
|
(11,005
|
)
|
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, 2018
and
2017
.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at
March 31, 2018
and
June 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair
|
|
|
In Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Value at
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
March 31, 2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
3,682
|
|
|
$
|
3,682
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
6,026
|
|
|
6,026
|
|
|
—
|
|
|
—
|
|
Asset-backed and mortgage-backed securities
|
|
4,369
|
|
|
—
|
|
|
4,369
|
|
|
—
|
|
Derivatives
|
|
2,098
|
|
|
—
|
|
|
2,098
|
|
|
—
|
|
Investments measured at net asset value
|
|
7,614
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
15,495
|
|
|
—
|
|
|
15,495
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Fair
|
|
|
In Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Value at
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
June 30, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
3,008
|
|
|
$
|
3,008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
5,968
|
|
|
5,968
|
|
|
—
|
|
|
—
|
|
Asset-backed and mortgage-backed securities
|
|
4,762
|
|
|
—
|
|
|
4,762
|
|
|
—
|
|
Derivatives
|
|
16,496
|
|
|
—
|
|
|
16,496
|
|
|
—
|
|
Investments measured at net asset value
|
|
7,073
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
16,064
|
|
|
—
|
|
|
16,064
|
|
|
—
|
|
13. Financial instruments, cont'd
The fair values of the equity securities, corporate bonds and asset-backed and mortgage-backed securities are determined using the closing market price reported in the active market in which the fund is traded or the market price for similar assets that are traded in an active market.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis. Fair values are transferred between levels of the fair value hierarchy when facts and circumstances indicate that a change in the method of estimating the fair value of a financial asset or financial liability is warranted.
PARKER-HANNIFIN CORPORATION
FORM 10-Q