# Parker-Hannifin Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [Parker-Hannifin Corp](/companies/ph.md) (CIK 76334)
- Form: 10-Q
- Filed: 2020-11-06
- Accepted by EDGAR: Nov 6, 2020, 08:27 ET
- Period: 2020-09-30
- Accession: 0000076334-20-000131
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/76334/000007633420000131/ph-10qxq19302020.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/76334/000007633420000131/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $3.23bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $2.38bn | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $369.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $505.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $66.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $93.6m | us-gaap:IncomeTaxExpenseBenefit |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $2.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $2.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 130,294,223 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-07-01 to 2020-09-30 | $737.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-07-01 to 2020-09-30 | $42.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-07-01 to 2020-09-30 | $113.5m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2020-07-01 to 2020-09-30 | $22.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $742.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $4.87bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $19.79bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $3.33bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $13.24bn | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $7.06bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $884.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $6.53bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-09-30 | 128,800,244 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 32,338 characters.

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020

### AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 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:

|  | September 30, 2020 | June 30, 2020 | September 30, 2019 |
| --- | ---: | ---: | ---: |
| United States | 55.4 | 52.6 | 51.1 |
| Eurozone countries | 53.5 | 47.4 | 45.7 |
| China | 53.0 | 51.2 | 51.4 |
| Brazil | 64.9 | 51.6 | 53.4 |

At September 30, 2020, global aircraft miles flown decreased by approximately 55 percent and available revenue passenger miles decreased by approximately 64 percent from their comparable prior-year period. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year 2021 will be flat compared the fiscal 2020 level.

Housing starts in September 2020 were approximately 11 percent higher than housing starts in September 2019 and approximately 19 percent higher than housing starts in June 2020.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Given the unpredictable nature of COVID-19's impact on the global economy, the statistics included above may not be reflective of recent or future activity.

We are actively monitoring the impact of the COVID-19 pandemic, which has negatively impacted, and we expect will continue to negatively impact, our business and results of operations. Disruption within the aerospace industry, which is facing the consequences of travel restrictions and considerably lower demand, was significant and is expected to continue. The ultimate extent to which our business and results of operations will be impacted by the pandemic will depend 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 pandemic and actions by government authorities to contain the pandemic or mitigate its economic, public health and other impacts.

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We continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented rigorous prevention, screening and hygiene protocols. Additionally, we are preserving cash and reducing costs through elimination of discretionary spending and targeted restructuring. Salary reductions and reduced work schedules remain in effect where warranted based on local business conditions. We continue to prioritize capital expenditures related to safety and strategic investments. At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.

In the long-term, we believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

- Serving the customer and continuously enhancing its experience with the Company;
- Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;
- Maintaining a decentralized division and sales company structure;
- Fostering a safety first and entrepreneurial culture;
- Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;
- Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;
- Acquiring strategic businesses;
- Organizing around targeted regions, technologies and markets;
- Driving efficiency by implementing lean enterprise principles; and
- Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.

Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. Additionally, we will continue to assess our existing businesses and may initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segment Information, Consolidated Balance Sheet and Consolidated Statement of Cash Flows. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.

### CONSOLIDATED STATEMENT OF INCOME

*(dollars in millions)*

|  | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net sales | $3,231 | $3,335 |
| Gross profit margin | 26.2% | 25.6% |
| Selling, general and administrative expenses | $370 | $399 |
| Selling, general and administrative expenses, as a percent of sales | 11.4% | 12.0% |
| Interest expense | $66 | $70 |
| Other (income), net | $(5) | $(48) |
| Effective tax rate | 22.5% | 21.7% |
| Net income | $322 | $339 |
| Net income, as a percent of sales | 10.0% | 10.2% |

**Net sales** for the current-year quarter decreased compared to the prior-year quarter due to lower volume in all segments, partially offset by an increase in sales from acquisitions made within the last 12 months of $305 million. The effect of currency rate changes increased net sales by approximately $26 million in the current-year quarter, which was primarily comprised of a $30 million increase in the Diversified Industrial International businesses, partially offset by a decrease in the North American businesses.

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**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 the Aerospace Systems Segment was more than offset by an increase in both the Diversified Industrial North American and Diversified Industrial International businesses. Cost of sales for the current-year and prior-year quarter included business realignment and acquisition integration charges of $12 million and $3 million, respectively.

**Selling, general and administrative expenses** ("SG&A") decreased during the current-year quarter primarily due to lower discretionary spending and wage and salary expense resulting from actions taken in response to current business conditions resulting from the COVID-19 pandemic. SG&A also benefited from the absence of acquisition-related expenses of $15 million, which were incurred in the prior-year quarter. These benefits were partially offset by higher intangible amortization expense related to prior-year acquisitions and higher stock compensation expense. SG&A included business realignment and acquisition integration charges of $7 million and $5 million for the current-year and prior-year quarter, respectively.

**Interest expense** for the current-year quarter decreased from the comparable prior-year period primarily due to lower average interest rates.

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

*(dollars in millions)*

| Expense (income) | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Income related to equity method investments | $(9) | $(24) |
| Non-service components of retirement benefit cost | 13 | 12 |
| (Gain) on disposal of assets | — | (10) |
| Interest income | (2) | (18) |
| Other items, net | (7) | (8) |
|  | $(5) | $(48) |

**Effective tax rate** for the current-year quarter was higher than the comparable prior-year period primarily due to an overall decrease in discrete tax benefits for the first three months of fiscal 2021. The fiscal 2021 effective tax rate is expected to be approximately 23 percent.

### BUSINESS SEGMENT INFORMATION

### Diversified Industrial Segment

*(dollars in millions)*

| Net sales | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| North America | $1,528 | $1,625 |
| International | 1,129 | 1,079 |
| Operating income |  |  |
| North America | 269 | 275 |
| International | $187 | $169 |
| Operating margin |  |  |
| North America | 17.6% | 16.9% |
| International | 16.6% | 15.6% |
| Backlog | $2,201 | $1,880 |

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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 September 30, 2020 Three Months |
| --- | ---: |
| Diversified Industrial North America – as reported | (5.9)% |
| Acquisitions | 8.5% |
| Currency | (0.3)% |
| Diversified Industrial North America – without acquisitions and currency | (14.1)% |
| Diversified Industrial International – as reported | 4.7% |
| Acquisitions | 9.1% |
| Currency | 2.9% |
| Diversified Industrial International – without acquisitions and currency | (7.3)% |
| Total Diversified Industrial Segment – as reported | (1.7)% |
| Acquisitions | 8.7% |
| Currency | 1.0% |
| Total Diversified Industrial Segment – without acquisitions and currency | (11.4)% |

The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Sales in the Diversified Industrial North American businesses decreased 5.9 percent during the current-year quarter. The effect of acquisitions increased sales by approximately $138 million in the current-year quarter, while the effect of currency exchange rates did not have a significant impact on sales. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial North American sales for the current-year quarter decreased 14.1 percent from prior-year levels primarily due to lower demand from distributors and end users in various markets, including the oil and gas, construction equipment, heavy-duty truck, engines, and cars and light truck markets, partially offset by an increase in end-user demand in the life sciences and semiconductor markets.

Sales in the current-year quarter for the Diversified Industrial International operations increased 4.7 percent from the prior-year quarter. The effect of acquisitions and changes in currency exchange rates increased sales from the prior-year quarter by approximately $99 million and $30 million, respectively. Excluding the effects of acquisitions and changes in currency exchange rates, Diversified Industrial International sales for the current-year quarter decreased 7.3 percent from prior-year levels. Europe and Latin America contributed to the decrease in sales, which was partially offset by an increase in sales within the Asia Pacific region.

Within Europe, the decrease in sales in the current-year quarter was primarily due to lower demand from distributors and end users in most markets, including construction equipment, general industrial machinery, machine tool, cars and light truck and material handling markets.

Within Latin America, the decrease in sales for the current-year quarter was primarily due to lower demand from distributors and end users in the mining, cars and light truck and oil and gas markets, partially offset by higher demand from end users in the life sciences market.

Within the Asia Pacific region, the increase in current-year quarter sales was primarily due to higher demand from end users in the engine, semiconductor, cars and light truck and construction equipment markets, partially offset by lower demand from distributors and end users in the oil and gas market.

Diversified Industrial Segment operating margins increased in the current-year quarter within both the North American and International businesses primarily due to a favorable product mix and benefits from overall cost reductions, including lower discretionary spending, wage and salary reductions and prior-year restructuring actions in response to current business conditions resulting from the COVID-19 pandemic. These benefits were partially offset by overall lower sales volume, higher intangible asset amortization expense and higher business realignment and acquisition integration costs.

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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 September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Diversified Industrial North America | $4 | $5 |
| Diversified Industrial International | 10 | 3 |

During fiscal 2021, business realignment charges primarily included actions taken to address the impact of COVID-19 on our business. The business realignment charges also consisted of severance costs related to actions taken under the Company's simplification initiative implemented by operating units throughout the world as well as plant closures. Acquisition integration charges relate to the fiscal 2020 acquisition of Lord. Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We anticipate that cost savings realized from the workforce reduction measures taken in the first three months of fiscal 2021 will not materially impact operating income in fiscal 2021 or 2022. 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 $57 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2021, a majority of which relate to actions to be 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 September 30, 2020 increased from the prior-year quarter primarily due to the addition of the Lord backlog and orders exceeding shipments in the International businesses, partially offset by shipments exceeding orders in the North American businesses. Within the International businesses, the Asia Pacific region and Europe accounted for approximately 70 percent and 25 percent of the increase, respectively.

As of September 30, 2020, Diversified Industrial Segment backlog increased compared to the June 30, 2020 amount of $2,117 million due to orders exceeding shipments in both the International and North American businesses. The International and North American backlog accounted for approximately 70 percent and 30 percent of the change, respectively. Within the International businesses, Europe and the Asia Pacific region accounted for approximately 55 percent and 30 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 September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net sales | $573 | $631 |
| Operating income | $87 | $123 |
| Operating margin | 15.1% | 19.5% |
| Backlog | $2,863 | $3,142 |

The decrease in net sales in the Aerospace Systems Segment for the current-year quarter was primarily due to lower volume in the commercial aftermarket and original equipment manufacturer ("OEM") businesses due to the current market conditions as a result of COVID-19. This decrease was partially offset by higher military OEM and aftermarket volume as well as a $68 million increase in sales from prior-year acquisitions.

Operating margin decreased during the current-year quarter compared to the prior-year period primarily due to lower sales volume in the commercial OEM and aftermarket businesses, lower aftermarket profitability and higher business realignment charges primarily due to current economic conditions resulting from COVID-19, partially offset by lower engineering development expenses and benefits from prior-year restructuring actions. The significantly reduced production rate of the Boeing 737 MAX also contributed to lower operating margin.

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As a result of the disruption in the aerospace industry due to the COVID-19 pandemic, we expect to continue to take the actions necessary to structure appropriately the operations of the Aerospace Systems Segment. These actions are expected to result in approximately $3 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2021. However, continually changing business conditions could impact the ultimate costs we incur. We anticipate that cost savings realized from the workforce reduction measures taken in the first three months of fiscal 2021 will increase operating income by approximately two percent in fiscal 2021 and 2022.

The decrease in backlog from the prior-year quarter and from the June 30, 2020 amount of $3,021 million is primarily due to shipments exceeding orders in the commercial OEM and aftermarket businesses, partially offset by orders exceeding shipments in the military OEM and aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

### Corporate general and administrative expenses

*(dollars in millions)*

| Expense (income) | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Corporate general and administrative expense | $37 | $49 |
| Corporate general and administrative expense, as a percent of sales | 1.1% | 1.5% |

Corporate general and administrative expenses decreased during the current-year quarter primarily due to a net benefit related to the Company's deferred compensation plan and related investments. Additionally, corporate general and administrative expenses benefited from lower discretionary spending and wage and salary expense as a result of actions taken in response to current business conditions resulting from the COVID-19 pandemic.

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

*(dollars in millions)*

| Expense (income) | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Foreign currency transaction | $(5) | $(1) |
| Stock-based compensation | 37 | 29 |
| Pensions | 4 | 9 |
| Acquisition expenses | — | 15 |
| (Gain) on disposal of assets | — | (10) |
| Interest income | (2) | (18) |
| Other items, net | (9) | (9) |
|  | $25 | $15 |

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)*

|  | September 30, 2020 | June 30, 2020 |
| --- | ---: | ---: |
| Cash | $776 | $756 |
| Trade accounts receivable, net | 1,860 | 1,854 |
| Inventories | 1,796 | 1,815 |
| Long-term debt | 7,058 | 7,652 |
| Shareholders’ equity | 6,529 | 6,114 |
| Working capital | $1,541 | $1,737 |
| Current ratio | 1.5 | 1.6 |

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**Cash** (comprised of cash and cash equivalents and marketable securities and other investments) includes $720 million and $726 million held by the Company's foreign subsidiaries at September 30, 2020 and June 30, 2020, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.

**Trade accounts receivable, net** are receivables due from customers for sales of product. Days sales outstanding relating to trade accounts receivable was 53 days at September 30, 2020, and 54 days at June 30, 2020. We believe that our receivables are collectible and appropriate allowances for credit losses have been recorded.

**Inventories** as of September 30, 2020 decreased by $19 million (which includes an increase of $21 million from the effect of foreign currency translation). After consideration of the effects of foreign currency translation, inventories decreased primarily due to a decrease in both the Aerospace Systems Segment and Diversified Industrial Segment. Days supply of inventory on hand was 88 days at September 30, 2020, 89 days at June 30, 2020 and 79 days at September 30, 2019.

**Long-term debt** decreased by $595 million from prior year-end primarily due to the repayment of term loans. Refer to Note 12 to the Consolidated Financial Statements for further discussion.

**Shareholders’ equity** activity during the first three months of fiscal 2021 included an increase of approximately $130 million as a result of foreign currency translation.

### CONSOLIDATED STATEMENT OF CASH FLOWS

*(dollars in millions)*

| Cash provided by (used in): | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | $737 | $449 |
| Investing activities | 4 | (1,853) |
| Financing activities | (693) | 1,838 |
| Effect of exchange rates | 9 | (27) |
| Net increase in cash and cash equivalents | $57 | $407 |

**Cash flows from operating activities** for the first three months of fiscal 2021 was higher than the first three months of fiscal 2020 due to an increase in cash provided by working capital items. We remain focused on managing our inventory and other working capital requirements.

**Cash flows from investing activities** for the first three months of fiscal 2020 includes acquisition-related activity of $1,696 million. Additionally, the first three months of fiscal 2021 includes net maturities of marketable securities of $38 million compared to net purchases of $134 million in prior-year quarter.

**Cash flows from financing activities** for the first three months of fiscal 2021 includes net commercial paper borrowings of $114 million compared to $1,104 million in the first three months of fiscal 2020. Cash flows from financing activities in the current-year quarter also includes term loan repayments of $672 million while prior-year quarter includes proceeds from the issuance of a $925 million term loan. Refer to Note 12 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 September 30, 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+ |

We have taken several meaningful measures to strengthen our liquidity position in light of the COVID-19 pandemic, including the suspension of our share repurchase program and other cost reduction efforts. We continue to prioritize capital expenditures related to safety and strategic investments. Although we cannot reasonably estimate the duration of the pandemic or its ultimate 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.

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At September 30, 2020, the Company had a line of credit totaling $2,500 million through a multi-currency revolving credit agreement with a group of banks, of which $1,662 million was available. The credit agreement expires in September 2024; however, we have the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.

As of September 30, 2020, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of September 30, 2020, $838 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $874 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 September 30, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At September 30, 2020, the Company's debt to debt-shareholders' equity ratio was 0.55 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.

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### Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company's ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretations thereof on future performance and earnings projections may impact the Company's tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

- global economic and political factors, including the impact of the global COVID-19 pandemic and governmental and other actions taken in response, manufacturing activity, air travel trends, currency exchange rates and monetary policy, trade policy and tariffs, 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 the filing of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and undertakes no obligation to update them unless otherwise required by law.

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## Market risk

As filed, 2,256 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 14 to the Consolidated Financial Statements. Derivatives that are not designated as hedges are adjusted to fair value by recording gains and losses through the Consolidated Statement of Income. Derivatives that are designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. For cross-currency swaps measured using the spot method, the periodic interest settlements are recognized directly in earnings through interest expense. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.

The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates.

As discussed elsewhere in this report, the COVID-19 pandemic has negatively impacted and we expect it to continue to negatively impact our business and results of operations. As we cannot predict the ultimate duration or scope of the COVID-19 pandemic, the ultimate negative financial impact to our results cannot be reasonably estimated, but could be material.

## Controls and procedures

As filed, 1,181 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 September 30, 2020. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of September 30, 2020, the Company’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. In response to the COVID-19 pandemic, many of our team members have been working remotely. While there were no material changes in our internal control over financial reporting during the quarter ended September 30, 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.

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Filed Nov 6, 2020.
Source: SEC EDGAR, the filing index for accession 0000076334-20-000131. Last ingested by Listed: Nov 5, 2026, 16:36 ET. No prices; not investment advice.