# Parker-Hannifin Corp: Form 10-Q for the period ended Mar 31, 2020

- Company: [Parker-Hannifin Corp](/companies/ph.md) (CIK 76334)
- Form: 10-Q
- Filed: 2020-05-06
- Accepted by EDGAR: May 6, 2020, 08:41 ET
- Period: 2020-03-31
- Accession: 0000076334-20-000052
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/76334/000007633420000052/ph-10qxq33312020.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/76334/000007633420000052/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $3.70bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-07-01 to 2020-03-31 | $10.53bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-01-01 to 2020-03-31 | $2.77bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-07-01 to 2020-03-31 | $7.93bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $413.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-07-01 to 2020-03-31 | $1.30bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $535.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-07-01 to 2020-03-31 | $1.50bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $80.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-07-01 to 2020-03-31 | $233.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $86.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-07-01 to 2020-03-31 | $231.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 9 months, 2019-07-01 to 2020-03-31 | $911.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $2.83 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-07-01 to 2020-03-31 | $7.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $2.86 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-07-01 to 2020-03-31 | $7.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 129,746,547 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-07-01 to 2020-03-31 | 129,862,815 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-07-01 to 2020-03-31 | $1.29bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-07-01 to 2020-03-31 | $182.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-07-01 to 2020-03-31 | $340.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2019-07-01 to 2020-03-31 | $194.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $697.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $5.48bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $20.37bn | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $3.67bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $14.06bn | us-gaap:Liabilities |
| Long-term debt | at 2020-03-31 | $8.10bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-03-31 | $1.04bn | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2020-03-31 | $949.0m | us-gaap:CommercialPaper |
| Shareholders' equity | at 2020-03-31 | $6.30bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-03-31 | 128,217,414 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 40,546 characters.

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2020

### AND COMPARABLE PERIODS ENDED MARCH 31, 2019

### 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, 2020 | June 30, 2019 | March 31, 2019 |
| --- | ---: | ---: | ---: |
| United States | 49.1 | 50.6 | 55.3 |
| Eurozone countries | 44.5 | 47.6 | 47.5 |
| China | 50.1 | 49.4 | 50.8 |
| Brazil | 48.4 | 51.0 | 52.8 |

As of March 31, 2020, global aircraft miles flown decreased by approximately three percent and available revenue passenger miles decreased by approximately five percent from their comparable fiscal 2019 levels. 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 2020 will be approximately two percent higher than the comparable fiscal 2019 level.

Housing starts in March 2020 were approximately one percent higher than housing starts in March 2019 and approximately three percent lower than housing starts in June 2019, respectively.

In March 2020, the World Health Organization declared the recent outbreak of novel coronavirus ("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.

While the COVID-19 outbreak did not have a material adverse effect on our reported results for our fiscal third quarter, we are actively monitoring the impact of the COVID-19 outbreak, which we expect will negatively impact our business and results of operations for our fiscal fourth quarter and beyond. For example, April 2020 orders are expected to be significantly down across the Company when compared to April 2019 orders. Disruption within the aerospace industry, which is facing the consequences of travel restrictions and considerably lower demand, is expected to be significant. The extent to which our business and results of operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted at this time, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or mitigate its economic, public health and other impacts.

We have taken immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and are taking measures to preserve cash and reduce costs, including but not limited to, global salary reductions, reduced work schedules, elimination of discretionary spending, targeted restructuring and reducing capital expenditures. 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. During October 2019, we completed the acquisition of LORD Corporation ("Lord") for approximately $3,455 million in cash, including the assumption of debt. We also completed the acquisition of EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash during September 2019. Refer to Note 4 to the Consolidated Financial Statements for further discussion of the acquisitions.

We 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

*(dollars in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $3,702 | $3,688 | $10,535 | $10,639 |
| Gross profit margin | 25.3% | 25.0% | 24.7% | 25.1% |
| Selling, general and administrative expenses | $413 | $361 | $1,304 | $1,152 |
| Selling, general and administrative expenses, as a percent of sales | 11.2% | 9.8% | 12.4% | 10.8% |
| Interest expense | $81 | $48 | $234 | $140 |
| Other (income), net | $(13) | $(18) | $(74) | $(38) |
| Effective tax rate | 19.1% | 22.3% | 20.2% | 22.6% |
| Net income | $367 | $411 | $911 | $1,099 |
| Net income, as a percent of sales | 9.9% | 11.2% | 8.6% | 10.3% |

\- 22 -

**Net sales** for the current-year quarter remained flat compared to the prior-year quarter and decreased slightly during the first nine months of fiscal 2020 compared to the same prior-year period. Lower volume in the Diversified Industrial North American and International businesses and unfavorable changes in foreign currency exchange rates were offset by an increase in sales related to acquisitions. Acquisitions made in the last 12 months contributed approximately $343 million and $651 million in net sales during the current-year quarter and first nine months of fiscal 2020, respectively. The effect of currency rate changes decreased net sales by approximately $56 million in the current-year quarter, which was primarily comprised of a $50 million decrease in the Diversified Industrial International businesses. During the first nine months of fiscal 2020, the effect of currency rate changes decreased net sales by approximately $123 million ($115 million of which was attributable to the Diversified Industrial International businesses).

**Gross profit margin** (calculated as net sales minus cost of sales, divided by net sales) increased slightly in the current-year quarter as a decrease in gross profit margin in both the Aerospace Systems Segment and the Diversified Industrial International businesses was more than offset by an increase in the Diversified Industrial North American businesses and a net foreign currency transaction gain of $20 million in the current-year quarter. Gross profit margin decreased slightly during the first nine months of fiscal 2020 due to lower gross profit margin in the Diversified Industrial North American and International businesses and the Aerospace Systems Segment, partially offset by a net foreign currency transaction gain of $13 million during the first nine months of fiscal 2020. Acquisition-related expenses of $18 million and $69 million decreased gross profit margin in the current-year quarter and first nine months of fiscal 2020, respectively. Cost of sales for the current-year quarter and prior-year quarter included business realignment and acquisition integration charges of $11 million and $3 million, respectively, and $22 million and $11 million for the first nine months of fiscal 2020 and 2019, respectively.

**Selling, general and administrative expenses** ("SG&A") increased during the current-year quarter primarily due to an increase in intangible asset amortization expense related to the Lord and Exotic acquisitions and higher net expense associated with our deferred compensation programs as unfavorable market fluctuations related to investments associated with these programs were partially offset by favorable changes in the related liabilities. SG&A in the current-year quarter benefited from lower research and development spending. During the first nine months of fiscal 2020, SG&A increased primarily due to acquisition-related transaction costs of $115 million and an increase in intangible asset amortization expense associated with the current-year acquisitions. During the first nine months of fiscal 2020, SG&A benefited from lower research and development expense and favorable market fluctuations in deferred compensation program liabilities, partially offset by unfavorable changes in the associated investments. SG&A included business realignment and acquisition integration charges of $12 million and $2 million for the current-year and prior-year quarter, respectively, and $26 million and $10 million for the first nine months of fiscal 2020 and 2019, respectively.

**Interest expense** for the current-year quarter and first nine months of fiscal 2020 increased from the comparable prior-year periods primarily due to higher average debt outstanding.

**Other (income), net** included the following:

*(dollars in millions)*

| Expense (income) | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Income related to equity method investments | $(23) | $(22) | $(67) | $(68) |
| Non-service components of retirement benefit cost | 11 | 9 | 36 | 28 |
| (Gain) loss on disposal of assets and divestitures | (1) | 1 | (5) | 5 |
| Interest income | (3) | (4) | (29) | (11) |
| Other items, net | 3 | (2) | (9) | 8 |
|  | $(13) | $(18) | $(74) | $(38) |

**Effective tax rates** for the current-year quarter and the first nine months of fiscal 2020 were lower than the comparable prior-year periods primarily due to an overall increase in discrete tax benefits primarily related to a favorable resolution of a foreign examination in the current-year quarter and stock-based awards for the first nine months of fiscal 2020.

### BUSINESS SEGMENT INFORMATION

### Diversified Industrial Segment

*(dollars in millions)*

| Net sales | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,776 | $1,751 | $5,016 | $5,064 |
| International | 1,182 | 1,285 | 3,408 | 3,742 |
| Operating income |  |  |  |  |
| North America | 280 | 288 | 766 | 820 |
| International | $177 | $209 | $499 | $604 |
| Operating margin |  |  |  |  |
| North America | 15.7% | 16.4% | 15.3% | 16.2% |
| International | 15.0% | 16.2% | 14.7% | 16.1% |
| Backlog | $2,384 | $2,107 | $2,384 | $2,107 |

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, 2020 Three Months | Nine Months |
| --- | ---: | ---: |
| Diversified Industrial North America – as reported | 1.4% | (0.9)% |
| Acquisitions | 8.9% | 5.4% |
| Currency | (0.4)% | —% |
| Diversified Industrial North America – without acquisitions and currency | (7.1)% | (6.3)% |
| Diversified Industrial International – as reported | (8.0)% | (8.9)% |
| Acquisitions | 6.2% | 3.6% |
| Currency | (4.0)% | (3.1)% |
| Diversified Industrial International – without acquisitions and currency | (10.2)% | (9.4)% |
| Total Diversified Industrial Segment – as reported | (2.6)% | (4.3)% |
| Acquisitions | 7.7% | 4.7% |
| Currency | (1.8)% | (1.4)% |
| Total Diversified Industrial Segment – without acquisitions and currency | (8.5)% | (7.6)% |

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 increased 1.4 percent during the current-year quarter and decreased 0.9 percent during the first nine months of fiscal 2020. The effect of acquisitions increased sales by approximately $155 million and $275 million in the current-year quarter and first nine months of fiscal 2020, respectively. The effect of currency exchange rates did not have a significant impact on sales in the current-year quarter and first nine months of fiscal 2020. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial North American sales for the current-year quarter and first nine months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in virtually all markets, including the construction equipment, engines, heavy-duty truck, cars and light truck, farm and agriculture, general industrial machinery and oil and gas markets.

Sales in the current-year quarter and first nine months of fiscal 2020 for the Diversified Industrial International operations decreased 8.0 percent and 8.9 percent from the prior-year quarter and first nine months of fiscal 2019, respectively. The effect of acquisitions increased sales by approximately $79 million and $135 million in the current-year quarter and first nine months of fiscal 2020, respectively. The effect of currency exchange rates decreased sales by approximately $50 million and $115 million from the prior-year quarter and first nine months of fiscal 2019, respectively. Excluding the effects of acquisitions and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter and first nine months of fiscal 2020 decreased primarily due to lower demand from distributors and end users in both the mobile and industrial markets. During both the current-year quarter and first nine months of fiscal 2020, Europe and the Asia Pacific region accounted for approximately 56 percent and 42 percent, respectively, of the decrease in sales, while Latin America contributed the remainder of the change.

Within Europe, the decrease in sales for both the current-year quarter and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the general industrial machinery, construction equipment, machine tool, heavy-duty truck and material handling markets.

Within the Asia Pacific region, the decrease in current-year quarter sales and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment, railroad equipment, telecommunications and industrial machinery markets. This decrease was partially offset by an increase in end-user demand in the mining, oil and gas and semiconductor markets. The impact of COVID-19 on business conditions in the Asia Pacific region also contributed to lower sales in the current-year quarter.

The decrease in sales in Latin America for the current-year quarter and first nine months of fiscal 2020 was primarily due to lower demand from distributors and end users in the construction equipment and material handling markets, partially offset by an increase in end-user demand in the oil and gas market.

Diversified Industrial Segment operating margins within the North American businesses decreased in the current-year quarter and first nine months of fiscal 2020 primarily due to lower sales volume, acquisition-related expenses, higher intangible asset amortization expense and higher restructuring and acquisition integration charges, partially offset by benefits from simplification, restructuring and acquisition integration activities, favorable product mix, prior-year pricing actions and lower raw material costs.

Diversified Industrial Segment operating margins within the International businesses decreased in the current-year quarter and first nine months of fiscal 2020 primarily due to lower sales volume, acquisition-related expenses, higher intangible asset amortization expense and higher restructuring and acquisition integration charges. Benefits from simplification, restructuring and acquisition integration activities, prior-year pricing actions and favorable product mix partially offset the decrease in margins.

The following business realignment and acquisition integration charges are included in Diversified Industrial North American and Diversified Industrial International operating income:

*(dollars in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Diversified Industrial North America | $10 | $2 | $23 | $10 |
| Diversified Industrial International | 12 | 3 | 23 | 10 |

The business realignment charges primarily consist 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. Current-year acquisition integration charges relate to the Lord acquisition. Prior-year acquisition integration charges relate to the fiscal 2017 acquisition of CLARCOR Inc. ("Clarcor"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We believe the cost savings realized from the workforce reduction measures taken during the first nine months of fiscal 2020 will positively impact our operating income. We expect to continue to take actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment, especially in light of the rapidly changing business conditions resulting from the COVID-19 pandemic. We currently anticipate incurring approximately $25 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2020, a majority of which relates to actions taken in response to business conditions resulting from COVID-19. However, continually changing business conditions could impact the ultimate costs we incur.

Diversified Industrial Segment backlog as of March 31, 2020 increased from the prior-year quarter primarily due to the addition of the Lord backlog in the current fiscal year and orders exceeding shipments in the International businesses, partially offset by shipments exceeding orders in the North American businesses. Within the International businesses, orders exceeding shipments in the Asia Pacific region were partially offset by shipments exceeding orders in Europe and Latin America.

As of March 31, 2020, Diversified Industrial Segment backlog increased compared to the June 30, 2019 amount of $2,011 million primarily due to the addition of Lord backlog during the current fiscal year. Excluding the impact of Lord, backlog in the Diversified Industrial Segment remained flat as as shipments exceeding orders in the North American businesses were offset by orders exceeding shipments in the International businesses. Within the International businesses, the Asia Pacific region and Europe accounted for approximately 85 percent and 15 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

*(dollars in millions)*

|  | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $745 | $652 | $2,111 | $1,833 |
| Operating income | $127 | $135 | $371 | $366 |
| Operating margin | 17.1% | 20.7% | 17.6% | 20.0% |
| Backlog | $3,159 | $2,134 | $3,159 | $2,134 |

The increase in net sales in the Aerospace Systems Segment for the current-year quarter and first nine months of fiscal 2020 was primarily due to acquisitions, which contributed approximately $109 million and $241 million in net sales during the current-year quarter and first nine months of fiscal 2020, respectively. In the current-year quarter, the increase in net sales from acquisitions and higher volume in the military and commercial aftermarket businesses was partially offset by lower volume in the commercial and military original equipment manufacturer ("OEM") businesses. During the first nine months of fiscal 2020, net sales benefited from higher volume in the commercial and military aftermarket and military OEM businesses, partially offset by lower volume in the commercial OEM business. Net sales in the current-year quarter were negatively impacted by the halt in production of the Boeing 737 MAX in January 2020, while the first nine months of fiscal 2020 were impacted by both the production rate reduction and production halt of the aircraft.

Operating margin decreased during the current-year quarter and first nine months of fiscal 2020 compared to the prior-year periods primarily due to acquisition-related expenses, acquisition integration charges and higher intangible amortization expense. Higher engineering development expenses in the current-year quarter and the halt in production of the Boeing 737 MAX also contributed to lower operating margin. Operating margin benefited from higher military and commercial aftermarket volume in both the current-year quarter and first nine months of fiscal 2020 and favorable OEM product mix during the first nine months of fiscal 2020.

As a result of the rapidly changing business conditions due to the COVID-19 pandemic, we expect to take the actions necessary to structure appropriately the operations of the Aerospace Systems Segment. These actions are expected to result in approximately $27 million of additional business realignment charges in the remainder of fiscal 2020. However, continually changing business conditions could impact the ultimate costs we incur.

The increase in backlog from both the prior-year quarter and June 30, 2019 amount of $2,209 million is primarily due to the addition of the Exotic backlog in the first nine months of fiscal 2020. Orders exceeding shipments in the military and commercial OEM and military and commercial aftermarket businesses also contributed to the increase in backlog from the prior-year quarter and June 30, 2019 amounts. While orders exceeded shipments in all businesses, they were heavily weighted to the military businesses during the current-year quarter. 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

Corporate general and administrative expenses were $48 million for the current-year quarter compared to $33 million in the prior-year quarter and were $133 million for the first nine months of fiscal 2020 compared to $147 million for the first nine months of fiscal 2019. Corporate general and administrative expenses were 1.3 percent of sales in both the current year-quarter and first nine months of fiscal 2020 compared to 0.9 percent and 1.4 percent of sales in the prior-year quarter and first nine months of fiscal 2019, respectively. Corporate general and administrative expenses increased in the current-year quarter primarily due to higher net expense associated with the Company's deferred compensation programs. Unfavorable market fluctuations related to investments associated with these programs were partially offset by favorable changes in the related liabilities. During the first nine months of fiscal 2020, corporate general and administrative expenses benefited from favorable market fluctuations in deferred compensation program liabilities, partially offset by unfavorable changes in the associated investments. The current-year quarter and first nine months of fiscal 2020 also experienced lower research and development spending.

***Other expense*** (in the Business Segment Information) included the following:

*(dollars in millions)*

| Expense (income) | Three Months Ended March 31, 2020 | 2019 | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Foreign currency transaction | $(20) | $3 | $(13) | $5 |
| Stock-based compensation | 7 | 8 | 45 | 44 |
| Pensions | 6 | 4 | 23 | 14 |
| Acquisition expenses | — | — | 115 | — |
| (Gain) loss on disposal of assets and divestitures | (1) | 1 | (5) | 5 |
| Interest income | (3) | (4) | (29) | (11) |
| Other items, net | 12 | 9 | (8) | 26 |
|  | $1 | $21 | $128 | $83 |

Foreign currency transaction primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions.

### CONSOLIDATED BALANCE SHEET

*(dollars in millions)*

|  | March 31, 2020 | June 30, 2019 |
| --- | ---: | ---: |
| Cash | $790 | $3,371 |
| Trade accounts receivable, net | 2,174 | 2,131 |
| Inventories | 2,011 | 1,678 |
| Intangible assets, net | 3,882 | 1,783 |
| Goodwill | 7,830 | 5,454 |
| Notes payable and long-term debt payable within one year | 1,035 | 587 |
| Long-term debt | 8,098 | 6,521 |
| Shareholders’ equity | 6,296 | 5,962 |
| Working capital | $1,808 | $4,521 |
| Current ratio | 1.5 | 2.4 |

**Cash** (comprised of cash and cash equivalents and marketable securities and other investments) includes $697 million and $975 million held by the Company's foreign subsidiaries at March 31, 2020 and June 30, 2019, respectively. The Company has determined it will no longer 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 54 days at March 31, 2020, and 53 days at June 30, 2019. We believe that our receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

**Inventories** as of March 31, 2020 increased by $333 million (which includes an increase of $363 million from acquisitions and a decrease of $38 million from the effect of foreign currency translation). After consideration of the effects of acquisitions and foreign currency translation, inventories increased primarily due to an increase in the Aerospace Systems Segment, partially offset by a decrease in the Diversified Industrial Segment. Days supply of inventory on hand was 83 days at March 31, 2020, 69 days at June 30, 2019 and 71 days at March 31, 2019.

**Intangible assets, net and Goodwill** increased from prior year-end primarily due to the current-year acquisitions of Lord and Exotic. Refer to Note 4 to the Consolidated Financial Statements for further discussion.

**Notes payable and long-term debt payable within one year** increased from prior year-end primarily due to higher commercial paper notes outstanding of which a portion was used to finance the purchase of the Lord and Exotic acquisitions.

**Long-term debt** increased by $1,577 million primarily due to outstanding term loans related to the acquisition of Lord and Exotic. Refer to Note 15 to the Consolidated Financial Statements for further discussion.

**Shareholders’ equity** activity during the first nine months of fiscal 2020 included decreases of approximately $147 million and $233 million as a result of share repurchases and foreign currency translation, respectively.

### CONSOLIDATED STATEMENT OF CASH FLOWS

*(dollars in millions)*

| Cash provided by (used in): | Nine Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | $1,291 | $1,093 |
| Investing activities | (5,045) | (116) |
| Financing activities | 1,273 | (690) |
| Effect of exchange rates | (41) | (10) |
| Net (decrease) increase in cash and cash equivalents | $(2,522) | $277 |

**Cash flows provided by operating activities** for the first nine months of fiscal 2020 was higher than the first nine months of fiscal 2019 due to an increase in cash provided by working capital items. In addition, the first nine months of fiscal 2019 includes a $200 million discretionary pension contribution. We continue to focus on managing our inventory and other working capital requirements.

**Cash flows used in investing activities** increased primarily due to acquisition activity in the first nine months of fiscal 2020. It also includes $121 million of proceeds from the redemption of company-owned life insurance investments associated with the Company's deferred compensation programs during the current-year quarter.

**Cash flows provided by financing activities** for the first nine months of fiscal 2020 includes net commercial paper borrowings of $362 million compared to $479 million in the first nine months of fiscal 2019. Cash flows from financing activities in the first nine months of fiscal 2020 also includes proceeds from the $925 million and $800 million term loans related to the acquisition of Exotic and Lord, respectively. Refer to Note 15 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, 2020, 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 Investor Services, Inc. | Baa1 |
| Standard & Poor's | BBB+ |

During the current-year quarter, we have taken several meaningful measures to strengthen our liquidity position in light of the COVID-19 pandemic, including limiting capital expenditures to safety-related issues and strategic investments, the suspension of our share repurchase program and other cost reduction efforts. Although we can not reasonably estimate the duration of the pandemic or its impact on our business, we believe these measures, as well as access to committed credit under our credit agreement, position the Company well to manage through the current economic uncertainty and capitalize on our position as the global leader in motion and control technologies as the economy recovers.

During September 2019, the Company amended and extended its existing multi-currency credit agreement, increasing its capacity to $2,500 million. As of March 31, 2020, the Company had $1,551 million available for borrowing under the credit agreement. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which 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, 2020, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of March 31, 2020, $949 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $1,537 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, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed .65 to 1.0. At March 31, 2020, the Company's debt to debt-shareholders' equity ratio was .59 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.

### CRITICAL ACCOUNTING POLICIES

There were no material changes to our critical accounting policies as disclosed in Part II, Item 7 of our fiscal 2019 Annual Report on Form 10-K, except as follows:

**Impairment of Goodwill -** 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, 2019, the Company performed its fiscal 2020 annual goodwill impairment test for each of its six reporting units, which are equivalent to its operating segments. The results of this test indicated that the fair value substantially exceeded carrying value for all reporting units.

Additionally, we did not identify any events or circumstances during the third quarter of fiscal 2020 that required performance of an interim impairment test. However, the affects of COVID-19 on the global economy, including further market disruption, lack of economic recovery or lower than anticipated customer demand, may require the performance of an interim impairment test in future periods.

### 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 outbreak of COVID-19 and governmental and other actions taken in response, manufacturing activity, air travel trends, currency exchange rates and monetary policy, trade policy and tariffs, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability, as well as uncertainties associated with the timing and conditions surrounding the return to service of the Boeing 737 MAX;
- our ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integrations of Clarcor, 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 Clarcor, 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 this disclosure and undertakes no obligation to update them unless otherwise required by law.

## Market risk

As filed, 2,002 characters.

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 17 to the Consolidated Financial Statements. Gains or losses on derivatives that are not hedges are adjusted to fair value through the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive (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, we expect the recent outbreak of COVID-19 to negatively impact our business and results of operations in the future. As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated, but could be material.

## Controls and procedures

As filed, 1,474 characters.

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, 2020. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of March 31, 2020, the Company’s disclosure controls and procedures were effective.

In response to the COVID-19 pandemic, many of our team members began working from home during the third quarter of fiscal 2020. 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. Management has taken measures to ensure that our disclosure controls and procedures and internal controls over financial reporting remained effective and were not materially affected during this period.

The Company acquired Lord and Exotic during October 2019 and September 2019, respectively, and is currently integrating their processes and internal controls. Except for the Lord and Exotic acquisitions, there were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

## Risk factors

As filed, 2,710 characters.

*The following disclosure modifies the discussion of certain risks and uncertainties previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2019. In addition to the other information set forth in this report, you should carefully consider the other risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2019. The impact of COVID-19 may also exacerbate any of these risks, which could have a material effect on us.*

***The COVID-19 pandemic has disrupted our operations and could have a material adverse effect on our business and financial condition.***

The COVID-19 pandemic, along with the response to the pandemic by governmental and other actors, has disrupted our operations and is expected to continue to negatively impact our operations in the future, which impact may be material. We have experienced, and may continue to experience, mandatory and voluntary facility closures in certain jurisdictions in which we operate. Furthermore, several of our customers have temporarily suspended operations and we have experienced less demand for our products. Disruptions to our customers in the aerospace industry, which is facing the consequences of travel restrictions and severely diminished demand, have been and are expected to continue to be especially acute. Additionally, the COVID-19 outbreak has, and could further, disrupt our supply chain. Facility closures or other restrictions, as well as supply chain disruptions, could materially adversely affect our ability to adequately staff, supply or otherwise maintain our operations. Moreover, because a large number of our employees have transitioned to working from home, we may be subject to increased vulnerability to cyber and other information technology risks. We have modified, and may further modify, our business practices in response to the risks and negative impacts associated with the COVID-19 pandemic. However, there can be no assurance that these measures will be temporary or successful.

The impact of the COVID-19 pandemic continues to evolve and its ultimate duration, severity and disruption to our business, customers and supply chain, and the related financial impact to us, cannot be accurately forecasted at this time. Should such disruption continue for an extended period, the adverse effect on our business, results of operations and financial condition could be more severe than previously anticipated. Additionally, continued weak economic conditions generally could result in impairment in value of our tangible or intangible assets. Furthermore, future public health crises are possible and could involve some or all of the risks discussed above.

Filed May 6, 2020.
Source: SEC EDGAR, the filing index for accession 0000076334-20-000052. Last ingested by Listed: Nov 5, 2026, 16:36 ET. No prices; not investment advice.